Unchained - Did the Bahamian Government Direct SBF and Gary Wang to Hack FTX? - Ep. 422

Episode Date: November 18, 2022

Wassielawyer, a lawyer specializing in restructuring and insolvency, explains the first declaration from new FTX CEO John Ray in the company’s bankruptcy case.  Show highlights: why CEO Ray said there's been a complete failure of corporate controls in FTX how there was no separation of accounts between Alameda and FTX whether FTX US customers are in a better position to recuperate their assets why FTX's Bahamas unit is seeking protection under chapter 15 of the US bankruptcy code why there's a jurisdictional battle, according to Wassie whether the Bahamian government is responsible for letting deposits out of the platform how former CEO Sam Bankman-Fried is trying to save the company  Take Unchained's 2022 survey!   Unchained is doing its annual survey. Tell us how you think we’re doing and how we could improve, whether it be on the podcast, in the newsletter, or in our premium offering. Looking forward to hearing your thoughts!  Thank you to our sponsors!Crypto.com Ava Labs DeFi Saver Wassielawyer: Twitter Thread on community buyout Previous Unchained episodes: Will FTX Customers Ever Recover Their Assets? Two Insolvency Experts Weigh In Why the Messy 3AC, Celsius, and Voyager Bankruptcies Will Drag on for Years Three Crypto Bankruptcies: 3AC, Celsius and Voyager. What Happens Now? Episode Links Previous coverage of Unchained on FTX: The Chopping Block: Why Lenders Didn’t Liquidate Alameda When It Was Underwater  Erik Voorhees and Cobie on Why FTX Loaned Out Customers’ Assets The Chopping Block: FTX: The Biggest Collapse in the History of Crypto? Sam Bankman-Fried on How to Prevent the Next Terra and 3AC FTX Collapse: First declaration document FTX filed for Chapter 11 bankruptcy protection. FTX Wasn’t Authorized to File for US Bankruptcy: Bahamas Liquidators Vox interview with SBF Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey everyone, just a quick note before we begin. Unchained is doing its annual survey. Head to SurveyMonkey.com slash R slash Unchained 2020 to tell us how you think we're doing and how we could improve, whether it be on the podcast, in the newsletter, or in our premium offering. Looking forward to hearing your thoughts. Again, the link is surveymonkey.com slash R slash Unchained 2022. And you can also check the show notes for the link. Hi, everyone. Welcome to Unchained. Unchained, you're a no-hype resource for all things crypto. I'm your host, Laura Shin, author of The Cryptopians. I started covering crypto seven years ago and as a senior editor of Forbes was the first Main Tree Media

Reporter to cover cryptocurrency full-time. This is an November 18th, 2020 episode of Unchained. Unchained Daily is now on Substack for your recap of news and market updates. Plus, you can now upgrade to Unchained Premium, which includes new perks directly through Substack. Visit Unchained Crypto.com to subscribe. With the crypto.com app, you can buy, earn, and spend crypto in one place. Download and get $25 with the code Laura. Link in the description. Avalanche was built to provide a robust web-3 infrastructure with flexible tools, so you can build anything you want, any way you want. Visit avox.network to discover how you can. DefiSaver is an all-in-one management app with unique automation options for top lending protocols such as Ave, Maker, Liquid

and compound. Check them out on Ethereum Mainnet, Arbitrum, and Optimism. Today's guest is Wasey Lawyer, a lawyer specializing and restructuring and insolvency. Welcome again, Wassie. Hi, Laura. I'm glad to be back. It's unusual to have a guest back right after their last appearance, but after the first declaration from new FTX CEO, John Ray, in the company's bankruptcy case, we definitely need to unpack this. For listeners who didn't get to read or hear about this yesterday, here is the section that set the tone for the rest of the document. Ray starts by saying, I have over 40 years of legal and restructuring experience,

and he references his participation as the chief structuring officer and what he calls several of the largest corporate failures in history. And here he mentions a few, including most famously Enron. Then he says that almost all of these situations were, quote, characterized by defects of some sort of internal controls, regulatory compliance, human resources, and systems integrity. Now here's the money quote. Never in my career have I seen such a complete failure of corporate controls

and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad to the concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals, this situation is unprecedented. Wasi, when you read the document, did you have the same reaction? Is the F2x bankruptcy quite possibly worse than many of the most notorious bankruptcy cases in history? I mean, can you really blame Z from walking away from trying to buy this dumps the file out? Yeah, no, this, it's kind of insane, right?

because like two weeks ago, like genuinely everyone looked at FTX and Lumita as, you know, untouchable, and you kind of thought that they were just gig a geniuses, arming every inefficiency, making billions of dollars, stop hunting us, etc. But they are not. And the controls are terrible. There's a quote I kind of want to pick out here when he, when John Ray goes through every single balance sheet of the sort of four silos that he's, that he's identified. and in every single one of those financial statements, he says, however, because this balance sheet

was produced what a debt is were controlled by Mr. Banking freed, I do don't have confidence in it, and therefore the information therein may not be accurate as of the date stated. So effectively, for large bits of this filing, is basically telling us this is what we've been told, this is not audited, this is what SBF gave me, I have no faith in this whatsoever. Yeah, that line stuck out at me. as well. I mean, it's sort of a more bureaucratic and polite way of saying, do not trust this person. And another thing that shocked me was, you're right, so for people who haven't read it, basically, he divides the enterprise that's going into bankruptcy into kind of what he calls four silos,

and it's like some of the different corporate entities. Then what he does is he breaks out the assets and liabilities of each. Interestingly, I noticed every time he presents, those balances, he will write, balances of customer crypto assets deposited were not recorded as assets on the balance sheet and are not presented. And it would be in bold and underlined. So yes, can you break that down from listeners? What does that mean? It means that when SBF said, oh, we have more than enough assets to cover all the liabilities and all the customer deposits. He didn't even know what the customer deposits were because he just straight up wasn't recording them.

So when you deposit money into the FTX, deposit anti-FTX, it should have recalled an FTCS, it just wasn't. So he was literally just talking about his ass. Yeah, and, you know, this puts comments around things like internally poorly labeled Fiat account

in New Light, because essentially, as we saw in his text messages with a Vox reporter, there were no separate of accounts when it came to Alameda and FTCS. When customers deposited money into FTX, they were actually literally just putting it right into Alameda's bank account, which, I mean, that,

like that just absolutely blows my mind. There was no attempt whatsoever to keep customers money safe and some notion that they might give the money back to them. At least, you know, I mean, granted, I'm not in SDF's head, but based on that, that would, be maybe a logical conclusion? Yeah, I think that's right. I mean, just to start a backtrack a bit, the four different silos which can identify is essentially for a layman's terms, FTX US, FTCN international, the Ventures portfolio, and Alameda. So that's the four silos that

is identified. And he's still in the process of actually figuring out what's going on. He has shown us the balance sheets, which he says is not reliable whatsoever, but that's probably a starting point. Interesting point to know. is in the US balance sheet, which are told are unreliable or whatever, there's still a line got customer custodial funds, which is probably good for customers if there's certain funds that are being kept in custody, whereas you don't see the same in the FTX International balance sheet, which, again, we've been told is not reliable.

Okay, so are you saying the FTCS customers have a greater chance, or even that it's very likely that they'll have a better claim on their assets and maybe even Yeah, I think it's, I think it is my view. It has been from the start that FTX US is in a probably much better state, strangely enough because of regulations than FDX international because like we discussed previously, Laura, all the DGEN stuff was happening, all the DGYN stuff was happening between international and Alameda. Okay.

And so for some of those other groups, Alameda, Alameda research, though, anybody I guess, who had loaned money to them or the ventures silo or the dot-com group, what would you say are more likely outcomes for those creditors? To be honest, we still don't know. It's obviously not looking good. FTX, the dot-com silo we're referring to is obviously the FTX International silo. apparently there's 2.2 billion of assets, which is reasonable amount of assets. We have no idea what the customer liabilities are.

So if you look at that, in terms of what sort of monies you can get in from Alameda, you know, like we're identified on the structure chart that seems to be in the company loan. You know, maybe you can some recovery there. But again, it's almost too early to say at this point because the sort of new CEO is still going through the books, is still trying to figure out what position is. and he's actually mentioned that the accounts were so poorly capped that they basically give to start from scratch all over again to sort of cite from paragraph if you do because of historical cash management failures, the debtors do not yet know the exact amount of cash that

the FTS group held at the point they felt the chapter 11. Just so I understand this first day declaration, was there some deadline to post this or why wouldn't he just wait until he had some of that information? I mean, it's a first-day declaration, right? So I'm not a U.S. bankruptcy lawyer. I'm a UK bankruptcy lawyer. Done a bit of Chapter 11th. Couldn't recite the actual U.S.

codes to you. But I think generally what happens is that you kind of get a sort of early statement from the new debtor possession is the top of use. Yeah, death in possession. Okay. So let's pull out a few of the other maybe shocking details. I don't know. You can tell me.

But some things. that stuck out at me were, for instance, that the company used an unsecured group email account as the root user to access confidential private keys and critically sensitive data for the FTX group companies around the world. There was the absence of daily reconciliation of positions on the blockchain, the use of software to conceal the misuse of customer funds. That one, to my mind, has alarm bells around it. the secret exemption of Alameda from certain aspects of FtX.com's auto liquidation protocol, which, okay, a bombshell, and then the absence of independent governance between Alameda and FTX.

Do you want to, can you just comment on any of those? I mean, the comment on all of the holes is the same, which is what the fuck. It's like any one of them on your own, you have been like, what the heck is going to be? like what the heck is going on here. But all of them together, Jesus. So Alameda gets to degen and then trade without fear of being liquidated by the engine. Everyone has access to private keys by an unsecured group, you know. You get a back door, although at this point, given how, you know, given how everything's been done,

it looks like he was literally just shuffling cash out of the front door straight into Elameda. But the back door that allows you to co-mingle customer funds, insane. Everything's just insane, right? And that's kind of why it's a burning dumps the fire. I just almost have no words, the more that I learned. One last bit that seemed to raise my eyebrows was referencing two of the audits that he was able to find. One was from a company Arminino, which he said it's a firm that he's professionally familiar with. Then he says that the second audit was by Prager Metis, with which he says he says he

is not familiar. And then he says, quote, whose website indicates that they are the first ever CPA firm to officially open its Metaverse headquarters in the Metaverse platform to Central Land. I mean, I'm sometimes like you asked about what sort of auditor or what sort of accountant should I use, you know, just for people, just for people in the space. And sometimes I tend to say, look, just go for the more legitimate ones. Because when it comes down to it, someone looks at, Because, you know, some people say that, you know, accounting and auditing is an art rather than a science, right? Some people are perhaps more creative than others or perhaps more negligent than others. But it's quite clear here that new CEO, Mr. Ray, clearly does not have any faith in the integrity of financial systems has been provided,

which is why I said, can you really blame Z from walking away with it after looking at the documents for like 30 minutes. All right. So in a moment, we're going to talk about another wrinkle in the bankruptcy case. But first, a quick word from the sponsors who make this show possible. For years, you've heard about the promise of blockchain technology. And yet high fees, security risks, and unreliable chains have been the reality. It doesn't have to be this way.

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Back to my conversation with Wasey Lawyer. Another bit of news that got revealed today is that FTX's Bahamas unit, FTX Digital Markets, is seeking protection from creditors in the U.S. under Chapter 15 of the U.S. bankruptcy code. And the way that Reuters describe it is that this allows a foreign debtor to shield assets in the country. and they say non-U.S. companies use the measure to block creditors who want to file lawsuits or tie up assets in the United States. What would you say is the significance of this move? Right. So this is actually far more interesting to me than the first day declaration. Not because the first declaration isn't interesting. It's got a lot of zingers in there. But in terms of information, there's not that much simply because it's all unverified. But this development is a very big one and a very, very interesting one to me. Because And I can say, look, I've done restructuring to the insolvencies a lot. I've never really seen something like this, especially because of what's in this emergency motion that's been filed by FTX, i.e. the new CEO of FTX.

So just to provide a bit of background. Chapter 11 is a bankruptcy proceeding in the US. When you enter into Chapter 11, you get a worldwide moratorium, which says that your creditors around the world can't enforce against you, and you have time to reoccurts. and sort of reorganize your assets, you know, whether it's just to liquidate, whether it's to sell it on, basically to realize value for the stakeholders involved. Good. That's Chapter 11.

What's Chapter 15? Chapter 15 is a recognition proceeding where you recognize a bankruptcy proceeding that's happened in another part of the world. Now, you can have multiple bankruptcy proceedings in different parts of the world, of course, but you can only have one, what they call a main proceeding, which is a main proceeding, which is the main bankruptcy. So what we're having here is a clash. We're having a jurisdictional battle between the U.S. and the Bahamas, because the Bahamas entity has been put into provisional liquidation, which is also a bankruptcy process where professionals have been appointed, professionals taking

control of the company, and their role as provisional liquidators is they're going to preserve the assets to the company to see if there's anything you do with it, how to liquidate it, how to restructure it if possible. So it's happening to Bahamas. But at the same time, the same thing's happening in the U.S. And then what's happened in the Chapter 15 is that the guys in the Bahamas have gone and filed in the U.S., in a different court, the State District of New York, rather than the District of Delaware, which is where the Chapter 11 is held, to recognize the Bahamas proceedings. And if you recognize the Bahamas proceedings, that means that you are saying, all right, all the the Bahamas can be sort of adjudicated according to, you know, the process of the Bahamas.

But that doesn't fly, right? Because, wait, you're kind of trying to educate the same assets in the U.S. at the same time. So that's what I mean by a jurisdictional battle was going on between two jurisdictions as to who gets to control, perhaps not the whole process, but at least part of the process. And from what we can tell, valuable parts of process. Well, okay, wait, so unpack this a little bit because the first filing the chapter 11 deals with certain entities, but this second filing deals with a separate entity, the Bahamas unit. So I don't really understand how there can be a jurisdictional battle when you, so I understand when you say there can only be one main proceeding. But in this case, where it's different

entities, how would that be considered as, you know, them battling each other? Right. So look, you look at the FTX, I think the FDX digital markets, which is the Bahamas entry, entered into provisional liquidation. So you enter into process before the Chapter 11 itself. And it was, it's kind of, I think it sits under the FTAX trading entity, so it's in the FTAX international group.

And what we seem to understand here is that there are sizable assets sitting in this Bahamas entity, allegedly under control of the Kibahman government, but let's go to that later. Now, if you're in FTX, US, and you put a whole group to Chapter 11, right? I think I'm fairly satisfied,

certain the Bahamas entities meant to be to chapter 11 as well. Well, it should be. But assuming you administrating the bankruptcy of the entire group, obviously you want to have all of the assets of the group so that you can run to be structuring in the U.S. Now, if certain assets are, so in a sort of ideal world, what happens is you do a chapter 11, the Bahamas government, the Bahamas legal system recognizes the chapter 11 and says, all right, we're going to cooperate with you in a chapter 11. In a any way, ship and form, right? You're running to chapter 11. You tell us to do a clock, you tell us to go ahead and do all this stuff. We're going to go ahead and force your world to harvest. So that's generally how cross-border Zonzi works. With other jurisdictions,

obviously, I'm very familiar to the UK. You have this thing known as sort of mutual recognition, microdrecognition treaties. And a lot of it starts looking a lot like international diplomacy, right? Because when you're looking at companies that span the entire globe, your insolvencies will spend the entire globe as well. And for insolvency in restructuring to be somewhat sensible, someone has to lead it. And there is, first of all, there's a lot of money in leading it, just for the country itself. And that's why you see certain countries sort of start developing as what you call restructuring hubs. The US is obviously one of them, chapter 11. The UK is another one. Singapore is starting to become more of a restructuring hub as well.

So, so, yeah, there's this issue of cross-border recognition, because it only works. If you all recognize each other's efforts and each other's ability to administer assets, which are within the jurisdiction and also sort of without, because we recognize that, you know, you're the main proceeding, what it calls it's a center of main interests, especially using the sort of UK terminology center of main interests, which means, you get to run, you get to run this insolvency. And so how does it get decided, kind of which one becomes the main one? Good question.

This has happened before. It's this case called Bahamas, which I tweeted about earlier. There's not want you look at it. Because in this case, Bahamar, we had pretty much, I would say exactly the same thing. It wasn't as much for dumpster fire. But it was a, I think it was a real estate development in the Bahamas. And Chapter 11 was filed. But the Bahamas, Anthony also entered into process in the Bahamas.

And in that case, the Bahamas sort of one jurisdiction. because the US said, look, it's pointless for us to do anything here, because all the assets in the Bahamas, and even if we made any decisions with regards to the assets, the other Bahamas, the Bahamas are not going to recognize us. So we just dismissed the chapter of the violent. Very, very different case, of course, because now we're looking at a completely, completely different situation with a company with assets worldwide, and at least part of it is in the US. perhaps the more interesting thing is that there are certain allegations

being made in this emergency motion regarding the role of the Bahamas government in India. Now if you recall, Sam was saying, look, we're going to let Bahamas people withdraw their money because the Bahamas regulators told me to do so. The Bahamas, I think it was a securities commission,

came on and said, we never said anything like that. but now this is being repeated by the new CEO of FTX that the Bahamian government may have had in all of this. And when you say that, you mean like in the Malfeson said FTX? Is that what you're saying? Yeah. Let me read this out here. In addition, in connection of investigating a hack on Sunday, November 13th,

Mr. Bankman Freedom, Mr. Wang stated in recorded verified text that Bahamun regulated, instructed that post-petition transfers of debtor assets be made by Mr. Wang and Mr. Bangman-Fried, who the debtors understand were both effectively in the custody of Bahamas authorities and that such assets were custodied on fireblocks under control of the Bahamian government. The debtors have credible evidence that the Bahamian government is responsible for directing unauthorized access to the debtor system for the purpose of obtaining digital assets of data that took place after the commencement of these cases, i.e. The appointment of the joint provision of liquidase and recognition of chapter 15th case asked us in serious question. It appears that the automatic stay has been flaunted by a government actor, no less.

This is no time to be arguing over venue. So that's a direct quote from something that the new CUE has filed in the US courts. It's pretty done, isn't it? Wow. Okay. So, but then in that kind of situation, what do they like force? fire blocks to return the money? Or I don't know, like, you know, how once the money's been transferred, what can be done?

I really just couldn't answer this question. Like, it's absolutely wild to me, right? Because if you're saying that, if it's one thing to say that the, to say that someone in the Bahamas or the Bahamas company isn't cooperating, right? Because if they're not cooperating, what do you do? You go ahead, as long as you get it recognized in Bahamas, You do your chapter 11, do what of the hell you want of it. You go to the Bahamas and call the order and you're going to recognize this.

So please carry out on what's been agreed. But now what we're saying is that the Bahamas government is involved. That's a whole different ballgame, man. It's a whole different ballgame. And so what are you actually going to do if you're at the United States bankruptcy court here? Okay, cool. We're going to have the chapter 11 anyway. Fuck your chapter 15.

We're not going to, you know, screw this. We're not going to recognize your thing going on. Bahamas. Wait a minute. The Bahamas isn't going to recognize the thing you have going on in there either. Shit. Where does that leave us? Yeah. And now they have all these assets. Yeah, because they're sitting on the assets, right? Right. So what do you think happens next? I think we grab the popcorn and wait and see, to be honest. It's not something that you can't have like a lot of historical precedent for, right? Where allegedly a government authority seizes assets. and refuses to cooperate with another government or another jurisdiction.

I think, did I say earlier I have no words because I feel like I'm in the same position again? But like in terms of kind of formal procedure type stuff, what would be the next step? They're trying to get it. They're trying to get the sort of Chapter 15 sort of transferred to the Delaware, which is where the Chapter 11 is filed. And then they're probably going to sort of have a bit of a fight over it. And then we'll see what the U.S. court says and all. the circumstances. We wait for a bit more information to come out from the Bahamas. But the interesting bit of take away from us, I think, for sort of listeners, I guess, and just general people, is that

Sam seems to really want the Bahamas to win. He wants for jurisdiction to be in the Bahamas. And this is interesting to me, because it sort of shows you what he seems to have in mind. and Sam does not seem to have given up altogether and he seems to think from some messages that they need or published that he thinks he can still save the company that is likely the reason why I'm not sure if this Chapter 15 thing is being driven by him or being driven by the government

or driven by the provisional liquidators but for him what happened to the Chapter 11 is that he's out because he resigned. He could have stayed on but thank Christ is out so he's out he's got a professional in he's a good professional in who says that you know he's unsophisticated completely out of his depth

and it's a complete shit show right and everything that he's saying is not only out of the company he's completely out that's what john ray has been saying truly speaking in the Bahamas he's kind of in a similar position because you've got a joint profession provision liquidator in there it's a professional it's obviously professional coming in here to

sort of secure the asset company and keep things running along but in a sort of provisional liquidation, it's still not completely over. And it's open if for Sam to suddenly come up with, hey, I've got like $8 billion and I can now take this company out of joint provisional liquidation. And that seems to be what he is trying to do. He seems to be trying to save his company outside of the U.S. Because he's been disenfranchised in the U.S.

Okay. Okay. And wait, and so just to connect the dots, so you're saying that you think the chapter 15 is being driven by Sam. I don't think is, I'm not sure who's driving it. It's been noted here in this statement that, you know, John Ray has spoken with the John Provincial Liquidators. And they didn't tell us they were going to do a chapter 15. So I think it's kind of hit them by surprise as well. And in many ways it's sort of hit everybody by surprise. Like everything else in this story. Yeah, but we can see from the messages that Sam has, the set to come out, right? Which is he said, you know what was the biggest single fuck-up? And the guy, whoever his correspondent, says, oh, and he says, the one thing everyone told me to do, everything would be about 70% fixed right now if I had it.

Chapter 11. And he says, we get there if both either Gary on the shot comes back. Presumably he needs a bit more support on the side right now. And B, we win a jurisdictional battle. versus Delaware. So it looks like he really wants the Bahamas to win because he thinks, rightly or wrongly, that he can somehow fundraise and get a deal done outside of the Chapter 11, which seems to be insane to me. It could well be the case that he's just completely off his rocker. I was going to say, who knows, but it's very unlikely because he was a very successful entrepreneur,

right? His face was on all his magazines, he was being, he was a media darling, etc. For some like that is incredibly easy to raise money. And he probably still has that in his mind because I saw this sort of leaked term sheet that was going around. I think it was on financial times something where it was like pretty amateur kind of crappy terms where he sort of still felt like he was in charge. Because he's just used to that, right? You're used to people throwing money in you when money is cheap, obviously in the previous years, when you're the fastest group, one of the fastest growing business in the world, where you're the face of crypto in the West. essentially, but it's not very, very different. It's a very different ball game when now you're

insolvent. The way you do fundraising is different. The way you structure a deal is different. You can no longer go out, structuring a deal, going promising someone infinite upside, etc. Because they know that you're at trouble. Now there's a whole new balance sheet. The way you fix it, the sort of financing you're looking at, the sort of funding you're looking at is very, very different. Yeah, I commented to someone that when everyone, you know, thought he was the golden boy, he raised $2 billion. So now that his reputation is definitely in a different place, I was like, how does he think he's going to raise $8 billion? But anyway, who knows? There have been so many crazy twists to the story. I'm not going to say it's impossible.

Well, Wasi, this has been such an amazing discussion. I'm assured that you're going to be back soon because apparently there's all kinds of twists and turns with this bankruptcy. Thanks again for coming on Unchained. No worries, happy, happy to chat. And I'm sure we'll speak and see as more information comes up. Yes. Hopefully in like a week and not tomorrow. Don't forget. Next up is the weekly news recap. Stick around for this week in crypto after this short break.

Join over 10 million people using crypto.com. The easiest place to buy, earn and spend over 150 cryptocurrencies. Spend your crypto anywhere using the crypto.com visa card. Get up to 8% cash back instantly. plus 100% rebates for your Netflix, Spotify, and Amazon Prime subscriptions. Download the crypto.com app now and get $25 with the code Laura. Link in the description. Thanks for tuning in to this week's news recap.

Alameda CEO confesses to using customer funds and SBF may have used a backdoor. The New York Times reported that Caroline Ellison, the CEO of Alameda Research, declared in a company-wide meeting, that the trading firm used customer funds from the now bankrupt FDX to repay its loans. Ellison stated that the earlier crypto collapses caused some of Alameda's loans to be recalled. According to her, the firm didn't have enough money to repay those loans, so it agreed with FTCS executives to transfer FTCS customer funds to repay them. Reuters reported that Sam Bankman-Fried, the founder of both Alameda and FTCS,

built a back door to FDX to change financial records and move funds to Alameda without triggering internal compliance checks. The news agency said that SBF could also use the tool to modify records so the state of affairs wouldn't be visible to external auditors. Bankman Freed denied the allegations. In an interview with Vox, SBF blamed messy accounting and margin exchange for the collapse of FTCS. Based on the first declaration in the bankruptcy and SPF's admission to Vox,

the customer deposits went straight to Alameda, the co-mingling may have begun far earlier. than several months ago. FTCX failure sparks crypto lending contagion. FtX's collapse quickly spread to the rest of the crypto lending market. Genesis Global Capital, the lending arm of Genesis Global Trading, paused withdrawals, citing unprecedented market turmoil. Genesis is one of the largest institutional lending companies that services crypto platforms

offering yields to retail investors. If Genesis fails, customer funds held on these platforms could be at risk. For that very reason, Gemini, one of the more well-regulated crypto exchanges in the U.S. warned its customers that they might suffer delays when withdrawing their assets from its earned product, which lets users earn yields on their crypto. However, Gemini reassured customers

that all funds on the exchange are safe. Retail crypto lender BlockFi paused withdrawals and deposits after FTC filed for bankruptcy, and it's preparing to file for bankruptcy proceedings on its own, according to the Wall Street Journal. The lender received a $400 million line of credit, it from FTCS U.S. in July. The block revealed that back in July, crypto lender Nexo, disclosure, a former sponsor, made an offer to acquire BlockFi and a deal worth $850 million.

Contagion spreads across the globe. Japanese crypto exchange, Liquid Global, which is owned by FTX, halted fiat and crypto withdrawals from the platform. Salt lending, a crypto lender also paused withdrawals and banks of the future scrapped its deal to buy the company. Plenty of major investors in FTCS including Paradigm, Sequoia, and Tommossack, have written down their investments in some cases to zero. Others affected include hedge fund, multi-coin capital, which held a $25 million stake in FTCS through its $430 million venture fund, bankrupt crypto under Celsius, whom Alameda owes $12 million, and troubled crypto exchange, Vald, which had $10 million of funds in FTCS. The Ontario Teachers' pension plan also held $95 million in FTCS but said it will have a limited impact.

House to call hearing on FTCS as regulators announced investigations. Lawmakers and regulators haven't ignored the exchanges startling collapse. The House Financial Services Committee calls on Bankman Free to testify about the fallout of FTCS in a hearing to take place in December. The hearing will examine how FTCS blew up and to work out the broader consequences for the digital asset ecosystem. California's Department of Financial Protection and Innovation also announced an investigation into the failure of FTCS, as did prosecutors from the Department of Justice.

U.S. authorities are also investigating the role Binance played in the collapse of FTCS. Changpeng Xiao, or CZ, the CEO of Finance, triggered a liquidity crisis on FTX when he announced that he would sell the company's holdings of FTT, FTC's exchange token. Finance is reportedly cooperating with authorities on the case. Lawmakers use FTCS. example to regulate the industry. In addition to tanking the markets, the implosion of FTCS grabbed the attention of American lawmakers, who said that it proves that the industry needs stricter regulations to protect retail investors. The anti-crypto U.S. Senator Elizabeth Warren said that the collapse of

FTCS must be a wake-up call for Congress and financial regulators to hold this industry and its executives accountable. Additionally, Warren, together with Senator Dick Durbin, sent a letter to SBF demanding information on its shocking collapse. U.S. Treasury Secretary Janet Yellen, known for her hardline stance against crypto, also called for more effective oversight over the crypto markets. Senator Pat Toomey, a former guest on Unchained who has been vocal about his opposition to the SEC's enforcement actions on crypto, said that the crypto industry has been operating with ambiguity because regulators don't provide a proper framework and lawmakers refuse to act.

After spending months talking to regulators and lawmakers, SPF told Vox, Fuck them, they make everything worse. He later apologized for his comments and said that some regulators command impressive knowledge. Finance forms a recovery fund as exchanges rush to prove reserves. Exchange giant finance announced it will form a recovery fund to stem the contagion from FTX's implosion. Crypto Exchange OKX plans to fill another fund with $100 million to provide struggling projects with liquidity. CZ said the exchange also plans to implement a new proof of reserves protocol developed by Ethereum creator Vitalik Bouturin. Last Friday, Binance disclosed that it held $69 billion in assets, but it didn't use Boudarin's protocol to prove the figures.

Nine other exchanges announced similar plans after Zhao published his proposal. The effort should bring more transparency to exchanges, but proof of reserves only shows how much an exchange holds, not how much it owes to other people. Without that information, it's impossible to know whether the exchange has enough liquidity to back customer assets. Speaking of exchange, CoinDisk reported that Binance U.S. is preparing to bid for bankrupt crypto lender Voyager. After the news broke, Voyager's token VGX jumped by over 50%. Audit provides transparency on LFG and TFL funds. The Luna Foundation Guard, or LFG, the nonprofit created to develop the Terra ecosystem, published an audit on how the foundation and Terraform Lab, fought to defend the U.S. TPEG during terrorist crash in May.

According to the report from auditor JAS held, LFG spent $2.8 billion, mostly in Bitcoin, to defend the U.S. teapag. The audit showed that Terraform Labs spent $613 million of its own money in its field attempt to prevent U.S.T from falling into a death spiral. The founder, Do Kwan, said, It is natural to suspect fraud when something goes wrong, but if we sweep all failures in crypto-as-scams and say there are some bad apples, everything else is fine, then we never have opportunities to learn from our mistake.

FTX Hacker becomes a whale. Last Friday night, after FTX announced his bankruptcy, an unknown person that money suspect as an FTX insider hacked the exchanges systems. The wallet tied to the attack on FTX swapped some B&B tokens and stable coins for ETH. The hack doesn't appear to have been well thought out. The attacker lost significant amounts of their holdings on several transactions. They've hastily tried to do whatever they can with the funds, seemingly without much of a plan. Miguel Morel, CEO of Arkham, a crypto-intelligence firm, Toltecoyne desk.

Despite that, they became the 31st largest Ethereum holder, currently holding 241,000 ether, worth about $300 million at press time. Was Defi the only winner? Chaos is the latter used to say famous Games of Thrones character Littlefinger. Even though the effects of FTX have been catastrophic for many, there were also someone. winners. This week, Decentralized Exchange Uniswap beat Coinbase and became the second largest venue for ETH trading. And Ledger, a hardware wallet provider, saw its biggest sales day ever following the collapse of FtX. Both achievements perhaps signal that users are finally moving to non-custodial and decentralized platforms. Time for fun bits. In a morning brew video on TikTok, the tale of SPF and

FDX, he plays every character from SPF himself to an everyday investor to a crypto bro named Captain Laser, who snorts ice crystals. To bolster his credentials to the investor, SPF sets himself apart from Captain Laser by saying, now take a look at me, I don't sleep or bathe. The investor is increasingly confused as he watches numerous investors put money into FTX, and he's absolutely baffled when he hears Sam's pitch for face tissue tokens, or FTT. As the frenzy increases until SPF is seen testifying in front of Congress, saying, I and only I can save crypto, a shadowy figure appears. And it's Binance, saying, oh, only you, I created you. And the hooded Binance figure lights his face tissue tokens on fire. All right, thanks so much for joining us today.

To learn more about Wasey lawyer and the first declaration of FTX's bankruptcy case, check out the showtons for this episode. Give us your input on Unchained. We want to hear your feedback on the podcast, our premium offering, and more. Visit SurveyMonkey.com slash R slash Unchained Unchained is produced by me, Laura Shin, without from Anthony Yun, Matt Peltcher, Juan Oranavich, Sam Shri-Ram, Pamma Jim Dar, Shashank, and CLK transcription. Thanks for listening.