Today, Explained - Crypto’s crown prince in court

Episode Date: October 3, 2023

FTX founder Sam Bankman-Fried’s trial begins today; a guilty verdict could represent the final nail in crypto’s coffin. Bloomberg’s Zeke Faux, who spent two years chronicling SBF’s downfall, explains. This episode was produced by Amanda Lewellyn, edited by Amina Al-Sadi with help from Matt Collette, fact-checked by Serena Solin with help from Laura Bullard, engineered by Patrick Boyd, and hosted by Sean Rameswaram. Disclosure: In August 2022, Sam Bankman-Fried’s philanthropic family foundation, Building a Stronger Future, awarded Vox’s Future Perfect a grant for a 2023 reporting project. That project is now on pause. Transcript at vox.com/todayexplained Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

If the Today Explained court calendar is correct, the trial of Sam Bankman-Fried, the crown prince of crypto, begins today. Jury selection starts today in the New York federal trial of Sam Bankman-Fried. The 31-year-old is accused of defrauding investors and customers out of billions of dollars. You remember Sam, right? People call him SBF and he ran the crypto exchange FTX. These are real things that are going to transform the economy. There were commercials. Fortune favors the brave. No, no, not that one. The one with Larry David. Brother David, behold, it's a fork. I got 10 forks right here, baby.

Am I right? We're going to talk about SBF's meteoric rise and his lightning fast fall, what it means for you and me, and whether crypto could ever make a comeback. I don't think so. And I'm never wrong about this stuff. Never. The all-new FanDuel Sportsbook and Casino is bringing you more action than ever. Want more ways to follow your faves?

Check out our new player prop tracking with real-time notifications. Or how about more ways to customize your casino page with our new favorite and recently played games tabs? And to top it all off, quick and secure withdrawals. Get more everything with FanDuel Sportsbook and Casino. Gambling problem? Call 1-866-531-2600. Visit connectsontario.ca. I call it Today Explained.

I don't think so. Rameshwaram here with Zeke Fox. Zeke's an investigative reporter at Bloomberg and the author of the new book, Number Go Up, Inside Crypto's Wild Rise and Staggering Fall. I asked him to remind us just how up number go. When I started working on this book, one Bitcoin cost $69,000 and the total market value of all cryptocurrencies was $3 trillion. During the pandemic, we're all on lockdown. We're all bored. We're on the internet all day.

And it felt like crypto was inescapable. Not only was it something you'd read about in the paper, you're hearing about it from your friends. One of my friends friends particularly annoyingly started telling me that i should buy something that he called doggy coin yeah i being a financial reporter was like i know about this stuff it's called dogecoin it's dumb don't buy it and he was right it went up he made enough to fund a trip to disney then he texted me i am freaking nostradamus you should have bought some of this dogecoin too and first off i'm annoyed because i like being right but second i'm thinking

what like how could this happen dogecoin doesn't do anything. There's no reason for it to go up other than people buying it because they think other people might buy it. And I'm looking around, I'm seeing all these random coins are going up. A new crypto inspired by the Netflix hit Squid Games is taking flight at this hour. It's a small step for Bitcoin, but it's a giant step and a giant leap for humanity. I remember watching the Super Bowl that year and seeing ad after ad, each with the underlying message that crypto in some vague way is the future. And if you don't go gamble on it right now, you're a loser and we're all going to get rich without you.

Fortune favors the brave. It felt like the logic of the financial world was broken, and the kind of work I had done for years as a financial journalist meant nothing. And where did Sam Bankman-Fried fit into that world? Sam was a schlubby guy. His uniform was cotton shorts, an FTX t-shirt, and then really messy curly hair. He acted like he had no respect for the traditional institutions of whether that was Washington or the venture capital world or Wall Street. And yet, all the people in these various worlds

were obsessed with him and competing to hand him billions of dollars. You know, the U.S. Senate were inviting him to D.C. Real good produced by... So Mr. McAfee, I'm going to interrupt you because I've only got 30 seconds left. And I'm offended that you have a much more glorious Afro than I once had.

So really quick. So he created this image that he was the guy who understood it all, kind of like the only honest guy in crypto, if you can believe it. He worked at a Wall Street trading firm called Jane Street. And it's a very successful trading firm. And his pedigree and background at Jane Street is part of what helped him get to the level that he got to. Well, what SBF did was he operated under this philosophy of effective altruism. It basically says you make money to give away money.

Sam made his first money in crypto with this one weird trick. Back in 2017, Bitcoin on a Japanese Bitcoin exchange where Japanese people traded cost $11,000. And in the United States, you could buy one for $10,000. So this is something that's unheard of in mainstream finance. But in theory, you could buy one Bitcoin on an American app, zap it over to a Japanese app, and make a thousand bucks right there. So not only did he do it, but he immediately figured out how to the tune of something like 20 million bucks in profit. This profit seeded his crypto trading hedge fund, which he named Alameda Research. Sam picked the name Alameda Research because it sounds innocuous. Banks at the time did not want to be involved in crypto. We just knew that was going to be a thing. And that if we named our company like Shitcoin Day Traders Inc.,

like they'd probably just reject us. But I mean, no one doesn't like research. Alameda Research was a hedge fund that traded all kinds of cryptocurrencies and in theory, exploited, you know, cool arbitrages like this Japanese one. After a couple years of doing that, he, as he tells the story, realized that many of the crypto exchanges where Alameda did business were pretty subpar compared to the ones that he was familiar

from, from his time on Wall Street. And that's when he decided to start FTX. Why create an exchange when there were already so many big global players out there? Yeah, I mean, the basic answer is that we didn't think any of them had nailed it. FTX, which was a crypto exchange, which basically just means it's an app where you can trade all these crypto coins, similar to E-Trade or Robinhood or something like that. His app wasn't even the most popular one. But so many people were trading crypto that venture capitalists had valued FTX at $32 billion. Today, your valuation is? It's $32 billion internationally and $8 billion. Today, your valuation is? It's $32 billion internationally and eight in the U.S.

How old is your company? About two and a half years. Two and a half years. Okay, let's talk about... When do we start to see cracks? FTX's downfall began with a sarcastic tweet. One of Sam's lieutenants had written something nice on Twitter about Sam's biggest rival, CZ, the head of Binance, which was the biggest crypto exchange. Under this nice post, Sam wrote sarcastically,

Excited to see him repping industry in D.C. going forward. He is still allowed to go to D.C., right? The joke is that he's an international fugitive, which is not entirely untrue, but also not a very nice thing to joke about on Twitter. A couple weeks after this tweet, an article came out in the crypto news site Coindesk that was kind of confusing, but it revealed that Sam's hedge fund, Alameda, owned quite a lot of a token called FTT, which was essentially stock in Sam's exchange FTX huh then also on Twitter Sam's rival CZ tweeted that he would be selling off his FTT tokens he wrote we won't pretend to make love after divorce we're not against anyone but we we won't support people who lobby against other industry players behind their backs.

I mean, this wouldn't necessarily seem like a big deal that, you know, a rival company is selling its stock in your company. But it kind of set off a run on FTX where other people who owned FTT tokens started to sell them too. And as the price went down, it made people start to worry about the stability of FTX. And investors who had sent money to FTX to use it to bet on other cryptocurrencies started taking their money out. In theory, this shouldn't be a problem. If people have sent money to FTX to gamble with, then FTX should have no problem giving the money back. Sam went on Twitter and told people, FTX is fine. Assets are fine.

But it turned out FTX did not have the money that it needed to repay clients. And after more and more tried to ask for their money back, eventually it was revealed that FTX did not have this money. In fact, $8 billion had somehow disappeared and FTX had to file for bankruptcy. Where was all that money? It turned out that when you sent a thousand bucks to FTX to buy some dogecoin, and then you saw on the app that you now owned 2,000 dogecoins, in fact, what was really going on is that that thousand dollars that you had sent in was being lent to sam's hedge fund alameda research which was taking it

to other exchanges to make all sorts of crazy bets is that legal zeke no after ftx declared bankruptcy i contacted sam and said I'd like to talk about what had happened and hear his side of it. So I flew down to the Bahamas and we spent 11 hours basically trying to answer that question. many of the people who traded on FTX were these hedge funds like Alameda. And that part of the deal was that FTX would give them loans that were secured by assets. And since this is a crypto world, the security was not gold or real estate or something like that. It was random coins. So his explanation was that the borrowing was permitted, the customers should have been aware of it, and that he did not realize how out of hand it got. Some part of it was just literal distraction. I really should have spent some time each day

taking a step back and saying, what are the most important things here? Right? And like, how do I have oversight of those and make sure that I'm not losing track of those? And frankly, I did a pretty incomplete job at that. I spent a lot. The idea that he would just not count his money to the point that $8 billion could just go missing without him knowing. It just seemed really implausible to me. It sounds like he was trying to tell you a story. What do you think the real explanation was in that moment? The amazing thing is that Caroline Ellison, the CEO of Alameda,

she had actually told her version of the story to all of the employees in a way that I found to be more credible. In November 2022, while FTX was in this financial distress, there was a moment where it looked like Sam's rival CZ was actually going to bail out FTX and buy it. So for a couple of days there, the people at FTX kind of thought they were in the clear. And during that time, Caroline Ellison called a meeting of all her employees at Alameda. And at this meeting, she essentially confessed. She said to all the employees, hey, I'm really sorry, but Alameda has taken out all these loans from FTX and we invested it in illiquid, which means hard to sell things. And like, that's why we're in this trouble. But good news is, you know, CZ is bailing us out and hopefully the customers can get all their

money back from him. And the employees were just like floored. And they said, wait, who knew that Alameda was borrowing the customer funds for its crazy crypto bets? And Caroline said, me, Sam, and then two other top lieutenants. And then one of the employees said, well, who decided to do this? And she said, um, Sam, I guess. The prosecutors who are now trying Sam have a recording of this meeting. So this is Caroline, who thinks that no one will ever find out, and they're in the clear, in the moment, admitting to the crime, which I think is pretty strong evidence.

We'll ask Zeke what to expect from the trial of SBF when we're back on Today Explained. They were named the number one digital photo frame by Wirecutter. Aura frames make it easy to share unlimited photos and videos directly from your phone to the frame. When you give an aura frame as a gift, you can personalize it. You can preload it with a thoughtful message, maybe your favorite photos. Our colleague Andrew tried an aura frame for himself. So setup was super simple. In my case, we were celebrating my grandmother's birthday. And she's very fortunate. She's got 10 grandkids.

And so we wanted to surprise her with the AuraFrame. And because she's a little bit older, it was just easier for us to source all the images together and have them uploaded to the frame itself. And because we're all connected over text message, it was just so easy to send a link to everybody. You can save on the perfect gift by visiting oraframes.com to get $35 off Aura's best-selling Carvermat frames with promo code EXPLAINED at checkout. That's A-U-R-A frames.com promo code EXPLAINED. This deal is exclusive to listeners and available just in time for the holidays. Terms and conditions do apply. There's something every NBA fan will love about BetMGM. And no matter your team, your favorite player, or your style, there's something every NBA fan will love about BetMGM.

Download the app today and discover why BetMGM is your basketball home for the season. Raise your game to the next level this year with BetMGM, a sportsbook worth a slam dunk, an authorized gaming partner

of the NBA. BetMGM.com for terms and conditions. Must be 19 years of age or older to wager. Ontario only. Please play responsibly. If you have any questions or concerns about your gambling or someone close to you, please contact Connex Ontario at 1-866-531-2600 to speak to an advisor free of charge. BetMGM operates pursuant to an operating agreement with i gaming ontario

well it's the future of currency it's an unstoppable financial vehicle that's going to take over the world i get that but uh what is it man i keep telling you it's a cryptocurrency you can trade for conventional money oh so it's a hustle. Yeah, it's a hustle. Today Explained is back with Zeke Fox, and Sam Bankman-Fried's trial kicks off today. Zeke, what should we expect? Is this going down fast? Is this going down slow? Are there going to be tears? I would be shocked if there are no tears. The part of the trial that's most fascinating to me is that Sam's top four lieutenants have pleaded guilty

and most of them will probably be testifying against him. That's somebody like Nishad Singh, who I met down in the Bahamas. He was part of that Bahamian penthouse, right? This group of people that lived with Sam Bankman-Fried. He was part of that Bahamian penthouse, right? This group of people that lived with Sam Bankman-Fried. He was really close friends with Sam's brother, Gabe Bankman. He was a friend of Sam's little brother,

a guest at, you know, family dinner when he was a teenager, who went on to work at FTX, became kind of the boss of all the programmers at FTX. A committed, effective altruist, at one point a billionaire on paper like Sam. He's now admitted to fraud. He said that he was directed by Sam. And here he's going to be facing him in court testifying about the crimes that he says

they committed together. Major questions also being raised about Sam Bankman Freed's rumored ex-girlfriend, Caroline Ellison. She was the CEO of sister company Alameda Research. Caroline Ellison, also a longtime friend of Sam's. They dated at times. When I spoke to Sam down in the Bahamas, Sam blamed her for a lot of what happened. I imagine this will come up in court and she's going to have to testify about what she knew when, what Sam told her to do. Even before all this came out that this was a giant fraud, I was just really captivated by this idea

of this small group of nerdy kids who took these crazy risks to rise to the top of the crypto world and seeing what they have to say now that it's all collapsed. That's what I'm most interested to see. Tell me about the charges. What exactly does the government say was illegal? This morning, we unsealed an eight count indictment charging Samuel Bankman Freed, FTX's founder, with a series of interrelated fraud schemes that contributed to FTX's collapse. There are a lot of charges, each of which could put Sam in jail for years, but the main one boils down to fraud. That's like at the center of the case that this $8 billion is missing and was

misappropriated by Alameda. Bankman Freed and his co-conspirators stole billions of dollars from FTX customers. He used that money for his personal benefit, including to make personal investments and to cover expenses and debts of his hedge fund, Alameda Research. FTX is now bankrupt and a new CEO has been appointed to clean up the mess. This new CEO, John Ray, he had also handled the Enron bankruptcy after that giant fraud was revealed. What he said is that this is really old fashioned embezzlement. This is just taking money from customers and using it for your own purpose. Not sophisticated at all. And that's also kind of the gist of the government's case.

What do you know about what Sam Bankman Freed's defense is going to be? I think his defense will likely be kind of similar to that 11-hour defense he gave me in the Bahamas. He's going to have to make the case that he didn't know what was going on. He can't even really deny that Alameda had access to the customer money and spent it on other things, gambled it away. You can't deny what happened. He's got to say that either that was somehow permitted or that it happened without his knowledge or without his permission. So it's going to be Sam pointing the finger at his business partner slash ex-girlfriend, and it's going to be his business partner slash ex-girlfriend pointing the finger at Sam. Yes. And in the run-up to the trial, Sam actually was jailed for leaking

his ex-girlfriend's diaries to the New York Times. Classy. Yeah. The reason is not that there's some law against leaking diaries, although that's not very nice. It's that the judge decided that this was an attempt to intimidate and discredit a potential witness. By leaking the diaries, Sam was sending a message to other witnesses that if they testified against him, maybe he would release embarrassing material on them. And the selections that were published by the Times created this image that Caroline was in over her head. She wasn't able to run Alameda effectively. And Sam's own diaries have been

leaked to the New York Times. These were written mostly while he was on house arrest, and he's making all kinds of efforts to justify himself. One of the things he wrote about Caroline was, she continually avoided talking about risk management, dodging my suggestions until it was too late. Every time that I reached out with suggestions, it just made her feel worse. I'm sure that being exes didn't help. To me, this suggests that he's going to say, I told her there was something was up with Alameda and to take care of it. I was so distracted by being, you know, a billionaire celebrity on top of the world

that I wasn't really paying attention. And it's her fault that Alameda collapsed. And I was not aware that Alameda was taking out these huge loans from customer funds. Not looking good for Sam Bankman-Fried. What happens if he's found guilty? Presumably prison? Yes, and because the financial losses were so great, his sentence could be quite long, like decades in prison.

What about all the people around him? What about these friends of his who are testifying against him? These friends who are testifying against Sam, they've pleaded guilty to serious crimes. They're likely all facing years in prison too. Damn. In some way, is crypto going down

with Sam Bankman-Fried and FTX and Alameda and all his buddies? Or does this stop at FTX and Alameda and all his buddies? Or does this stop at FTX and Alameda? For my book, I spent two years traveling all over the world trying to answer this question of why are all these coins going up and up and what are they good for anyway? And what I found was that if they're good for one thing, it's gambling. And now Sam's discredited that by running a giant fraud

at what people believe to be the best crypto casino, FTX. So it's really hard for me to imagine that a whole new crop of people are going to send in billions of dollars to some new crypto app to bet on some new version of Dogecoin. I just really can't see it. Zeke Fox, his book is Number Go Up. I was pleased to see Amazon made number go up in editor's pick in the history section. I think that's completely appropriate. Our show today was produced by Amanda Llewellyn

and edited by Amna Al-Sadi. We were fact-checked by Serena Solon and Laura Bullard and mixed by Patrick Boyd. Full disclosure, when Sam Bankman-Fried was on top of the world giving all of his money away, he gave some of his money to Vox's future perfect. The project he was funding is now on pause. This is Today Explained. you