Unchained - Sam Bankman-Fried on How to Prevent the Next Terra and 3AC - Ep. 403

Episode Date: October 4, 2022

Sam Bankman-Fried, founder and CEO of FTX, discusses his views on crypto regulation, macroeconomics, and the role of FTX in a decentralized industry.    Show highlights: whether the market has already bottomed and the influence of macroeconomics why Sam thinks regulation could have a significant impact on the crypto industry the impact of the Terra collapse, Sam’s thoughts on stablecoins, and the importance of disclaimers what the industry can do to prevent high leverage from crypto companies like Three Arrows Capital how crypto lenders should manage risk in a sustainable way whether the crypto collapses affected the opinion of lawmakers and regulators the topics and proposals that Sam is discussing with regulators and his philosophy on financial regulation what Sam thinks about building a centralized entity in a decentralized space what it would take for FTX to move back to the United States why Sam’s political donations more commonly support Democrats, among which are some prominent critics of crypto whether he makes political donations based solely on candidates’ crypto stances the role of FTX in the TradFi market and whether crypto and TradFi will evolve toward or away from each other concerns about potential conflict of interests between FTX and Alameda Research the impact of the Merge, the value proposition of Ethereum and whether it affects the narrative of Bitcoin as digital gold how FTX is positioning itself in this macroeconomic environment  the type of acquisitions FTX is interested in   Thank you to our sponsors! Crypto.com a16z Chainalysis   Episode Links Sam: Twitter    Bailouts and Acquisitions FTX raising $1 billion in funding FTX’s acquisitions had ‘mixed results’ Voyager Digital Auction Celsius Possible Acquisition   Stablecoins and Regulation Bankman-Fried Says He’s ‘Surprisingly Optimistic’ U.S. Will Devise Crypto Rules Within A Year Stablecoin Draft Bill Yellen cites UST stablecoin risk after it loses its dollar peg Previous Coverage of Unchained on Stablecoins and Regulation: Why Senator Pat Toomey Thinks SEC Chair Gary Gensler Is Wrong About Crypto Why Terra Collapsed and Whether an Algo Stablecoin Can Ever Succeed Donations and Politics Giant crypto exchange founder Sam Bankman-Fried promises to give away most of his $21 billion fortune Political donations Sam Bankman-Fried is Democrats' largest donor in May   Alameda Research Concerns Crypto Quant Shop With Ties to FTX Powers Bankman-Fried's Empire   Collapse of Crypto Companies Celsius bankruptcy filing Voyager Digital bankruptcy filing Three Arrows Capital bankruptcy filing   FTX proposal to clear derivatives New method of clearing Previous coverage on Unchained:  FTX Wants to Compete with CME – Here’s Why It’s a Big Deal   Interest in buying Twitter Text messages reveal Sam Bankman-Fried's guru told Elon Musk the crypto billionaire was 'potentially interested' in buying Twitter Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey all, for this week's show, I talked to Sam Bigman-Fried, founder and CEO of FTC, who, as I'm sure you're aware, spends more time in Washington, D.C. than most crypto entrepreneurs. He had some surprising things to say about crypto regulation. First, he's actually pretty sanguine about the prospect for regulatory clarity to come soon in the U.S. Second, he also said, and this was a big shocker to me, that the implosions of Three Arrow's Capital and Terra haven't changed the conversation about crypto very much in Washington. Given that he's so active in talking to regulators and lawmakers, plus a huge political donor, I asked him a bit about his views on that, how much of his giving is driven by his belief in effective altruism, and how much of it is driven by his interest

in helping the crypto industry grow. What I enjoyed about this part of the conversation is the nuance with which Sam spoke. We also cover some of the big line top news in crypto, the bear market, the merge, stable coins, etc. And I asked him the vision for FTCX as a centralized company in a decentralized space. Just FYI, we recorded before news broke that he'd reached out to Elon Musk expressing interest in potentially buying Twitter as part of a joint effort, and before FTX had won Voyager's assets, and before it was reported that FTX was considering purchasing Celsius' assets. However, I've put links to all these developments in the show notes. This was a super fun conversation, and I hope you enjoy it as much as I did.

Now, on to the show. Hi, everyone. Welcome to Unchained, your 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 at Forbes was the first Main Tree Meteor reporter to cover cryptocurrency full-time. This is the October 4th, 2022 episode of Unchained. 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.

Whether you're Crypto Curious or a C-suite decision maker, you have to check out Web3 with A16Z, the chart-topping technology podcast about the future of the next internet. Listen to Web3 with A16Z on Apple Podcasts, Spotify, or wherever you get your podcasts. Chainalysis demystifies cryptocurrency by providing industry-leading compliance, market intelligence, investigation support for all crypto assets for organizations like Gemini, crypto.com, and BlockFi. Maximize your potential with the leading blockchain data platform by visiting chainalysis.com slash unchained.

Today's guest is Sam Thankfenfried, founder and CEO of FTX. Welcome, Sam. Thanks for having me. Right now, the crypto markets are in a major slump, the total global crypto markets are only a bit above where they were at the peak of the ICA craze in January 2018. And the day that we're recording, Bitcoin, is where it was at that time, around $19,000. And this is also true for Ethereum, which basically dropped hard after its very successful merge. So I was wondering, do you think, is this the bottom or, you know, what do you think needs to

happen to turn this bear market around? Yeah, totally. So, you know, the first thing is that it's going to be responsive to general macro environments. And that's the position we're in. And the big reason really is that, you know, what we're seeing driving markets is changes in interest rates, which is leading to the strengthening and weakening of fiat currencies. And so whenever you have the dollar moving, right, if the dollar strengthens, it's going to strengthen against Exxon. It's going to strengthen against Amazon. And it's going to strengthen against Bitcoin.

And when you have it weakened, you're going to see the inverse. So because, you know, a lot of macros being driven by moves in currencies, that's going to move the sort of, you know, crypto. prices against dollars. So one sort of boring answer to the question is, well, you know, if, if markets go up, probably crypto will go up. If markets go down, it'll go down. But let's maybe factor that out for a second and sort of talk about, you know, relative to whatever happens to stock markets. And from that perspective, I think we've more or less stabilized. You know, we're not seeing sort of continuous outflows. We're not seeing, you know, acute pain in the same way that we were for, you know, with a week to month after sort of, you know, Tara Luna and the Three Arrow's incident.

And so things are in a little bit of a holding pattern. And I think the sort of thing that I, you know, could potentially see on the horizon that would have the biggest impact would be if we saw basically regulatory, you know, regulatory regimes, clarity, and particularly in the United States, regulatory regimes come out that sort of allowed the industry to operate with clarity in the country while protecting consumers. That's been sort of the biggest white whale for years. And I think we might be close. Wow.

Wait for what type of legislation, like something more sweeping or just the stable coins aspect or what? It's interesting. It's a lot of aspects separately, but at a similar time. And so over the last, you know, let's say six to nine months, all of a sudden, after a whole lot of dormancy. Progress is starting being, you know, to be made on a lot of different fronts here. And so you have Stapnow Bozeman, which, you know, if that bill passed, it would provide clarity for non-security token spot markets. You have, you know, pending actions from the SEC that might provide clarity around spot markets for security tokens. You have a stable coin bill,

which could provide, you know, a regulatory framework for stable coins. You have pending, you know, registration, including ours, with the CFTC for Crypto Futures. And so sort of simultaneously, each different piece of this is actually in line to potentially get clarity. Okay. So I'm going to circle back to you in a little bit on policy because I have a number of questions about that. But let's keep talking about these recent months, because obviously it's been a historically unprecedented time in crypto. As you mentioned, it started with the Terra Luna collapse. I wanted to know, what's your takeaway from that debacle? Is it that algorithmic, stable coins, will never work, or that maybe it might have they'd gotten that Bitcoin backstop in place,

or that the ecosystem wasn't decentralized enough, or Anchor had too high a yield or something else entirely or all of it, or what? Right. I mean, there's a lot of things going on that all contributed at least a little bit to this that, you know, had impact on how much exactly there was a crash. But, you know, let's just sort of, the way I think about it really is I divide stable points to kind of board different categories. On the one hand, you have fully 100% totally cleanly backed stable coins.

This is like USDC, USDP, you know, tokens that are just backed one to one by the US dollar by treasuries in a US bank account. And those, you know, if you're seeing a crash in those currencies, something really bad has happened because those should not ever have any volatility. The second category is if you look at things which are backed by, you know, kind of like debt instruments, but like maybe not always exactly treasuries, right? Historically, I think Tether had been in that category, although I think it's transitioning more to the first category. When you see that, you know, I sort of think of that as being, you know, look, in volatile times, maybe it drops to 98 cents on the dollar, right? Like maybe there's some worry that, you know, 10% of its portfolio has just dropped 20% in in value or something like that. So, you know, maybe it's not perfectly tied to the dollar one to one. But it's going to kind of wobble around that dollar.

So, you know, the first version is sort of the optimal version from many perspectives. The second version is a totally fine product. Now, it should be properly disclosed. Like, people should understand that there's a little bit of risk inherent in that. But it's not like an inherently evil product or anything. like that. Now you get to the third category, and these are the sort of like traditional algorithmic stable coins, things like Maker, not what Maker is today, which is largely backed by USDC, but Maker when it was backed entirely by Ethereum, let's say. And, you know, that is

only somewhat stable. And, you know, what I mean by that basically is, well, Maker was supposed to be one to the dollar. And the thing back in was that you could reduce. And the thing back in was that you could redeem it out for a dollar worth of Ethereum. And it was back like, you know, $1.3 of Ethereum or something like that. And so, you know, in a big market crash, right? If Ethereum went down 50%, right, then you could see sort of in extreme cases maker ultimately being worth 60 cents on the dollar. Although, you know, in theory, you could be redeeming it along the way.

Now, it probably only would happen in extreme circumstances, but extreme times happen. That is traditionally what algorithmic stable coins are. And, you know, it's, again, I don't want to sort of give like a moral judgment on the product idea because it's kind of cool. But it should definitely have really fucking heavy disclaimants, right? Because we're no longer talking about like a risk of a 2% depiging, right? We're now saying in a really extreme case, there might be a 20% depiging of it. And that's not what people are usually expecting when they see a stable coin, right? So, okay, so that's sort of like traditional stable points, and then you get to Luna.

And Luna is actually a bridge further. If you look at what Luna actually is, it is, well, okay, so you start out with a bunch of Luna tokens, you know, UST, which are paid in $3.1.20 to the dollar. And a common misconception is that they're backed by tarot tokens, which would be sort of the maker model. They're actually not backed by terror tokens exactly. They're backed by the ability to mint new terra tokens. If you were to redeem out Luna, what happened is the treasurer just go mint a bunch of terra and give it to you.

And this is even less stable, right? Because the problem with this is that it's not like there's sort of like a going market, well, there was a going market price for terror tokens, right? But that was with the old supply of terror, right? When you redeem it, that old supply is not the new supply. All of a sudden, you're introducing new terror. And in fact, in sort of a death spiral, right? you're hyperinflating terror because as Tara falls, you need to mint more and more Terra tokens every time that you want to be, you know, redeeming Luna and people are going to be redeeming more and more Luna. And so that, that that that that's a death spiral. And that's what can happen when you're dealing with something like Terra in particular.

And in fact, that that is exactly what happened with Tara and Luna on the time of crash. And so that is, again, it's even less stable than a traditional algorithmic stable coin is. And again, without necessarily making a moral judgment on whether such a thing ought to have a right to exist, you know, that to say that it's volatile as an understatement, that is the kind of thing that might go to zero to actual literal zero, not just down 20 percent or something like that in a crash. And that is in fact what happened. And so at the very least, such a thing should be sort of backed by a really extreme number of disclaimers, shall we say. And you really have to be holding yourself to a high standard to think that that's the kind of thing that customers should understand. So, okay, as a backdrop, Luna was always at risk of hyperinflate. And, you know, that's what happened.

And it's not what people were expecting. So you can say, well, was the yield too high on anchor? Like, yeah, it was. That was definitely a problem. There was not a good part of this story, right? It exacerbated things. There was already a problem. There's always a potential problem there.

Like, that did make it worse. Like, you know, each one of these things does make it worse. Yeah, so, but do you think that type of algorithmic stable coin could ever work? Or do you think that pretty much they're always going to end up with this downward spiral effect? That depends on could work. I mean, it was kind of a cool thing, right? It's like a cool concept, but it's super fucking risky. And I think it's always going to be super risky, right?

You're not going to escape that part of it. And so I think just like, I just wouldn't even think of it as a stable coin. Like I don't know whether it's the kind of thing that like, if you wanted it to exist, you would have to exist in such a way that was not really being branded as a stable point. It's being branded as an algorithmic weird kind of thing in the jigger, you know? that was like not all that stable. And like, you know, it should be thought of as an investment, not as a store of wealth that is, you know, kind of safe.

I like that weird kind of thing in a jigger. We'll add that to the crypto dictionaries. So as you mentioned, three arrows capital also, you know, was a huge story these past few months. And a lot of people were shocked, of course, to find out how much the firm had borrowed. And then, you know, interestingly, after the meltdown, there were a number of people that came out of the woodwork and said they'd seen red flags with 3AC, but they hadn't spoken up. One person noted that they had seen 3A tried to sell an equity investment by wildly inflating the valuation to prospective buyers. Someone else saw, this is a multi-billion dollar fund. Why are they taking on a small investor of $20 million? It doesn't seem worth the hassle for, you know, a firm of that size.

I did also see you told New York Magazine that you now suspect that. firm even tried to pledge the same piece of collateral for multiple firms. So what do you think the industry could do going forward so that people either more comfortable picking up about red flags or just to prevent this type of, you know, insane sort of borrowing happening again? Yeah, it's a really good question. And, you know, one more thing that I'll add to this, is if you look at Voyager, which ended up, you know, it's going through bankruptcy right now, right? It's going through bankruptcy because of unpaid debt from three hours capital. But if you look at when it took that debt on, when it started that debt on, it was like three weeks before

it's collapsed. So this is not like a very long-running engagement. This is like yet another thing that happened right before at the end, it probably not as a coincidence. These are reminiscent to some extent of some of what you saw in 2008, you know, where you basically have non-transparent systems. And, you know, you have people who are putting on an amount of leverage that was not well understood. And I, you know, ultimately came back to bite them. And so I think what I would say here is like, you know, that first of all, one of the reasons that crypto wasn't hit harder for all of this, that it didn't get even worse.

Is that like it was, you know, despite all of these problems that were introduced by, you know, three arrows, when you looked at some of the core infrastructure in the space, it was actually uniquely resilient. to this, right? Like, on-chain protocols don't have this sort of problem because there's transparency about the borrowing and lending. So that's one part of an answer here, which is like, you know, crypto was sort of built in some ways to solve this. And in some ways, it was the parts of the ecosystem, which were least crypto-like, which came back to bite people here. That's only a partial answer. But that is a piece of it. You know, having more transparency around borrowers

and loans can be a piece of the answer here. Having people, People better understand the risks that they're taking when they put capital in something like a Voyager. And I think Voyager is sort of a clean example of this where more or less they did exactly what they said they do. Like the core thing here is not that they were recklessly gambling customer assets in a way no one anticipated they might even consider doing. but that there was quite a bit more of a risk to that, you know, semi-expected behavior than I think their customer is understood. And so I think that, like, you know, having disclosures, having transparency there, having more diligence on the places that are being lent to in this space. I think all of those would help. None of those are perfect.

There should be a big distinction made between that and like EQC-staking, which is a really different type of, you know, thing that one could be doing to get yield. Yeah, so at this time, it looks like BlockFi may be acquired by FTX. This is going to happen at a pittance compared to its previous valuation. But now that FTCS will be running a crypto lender, how do you plan to manage risk? So without explicitly commenting on whether that acquisition would happen, what I'll say is we're working closely with the BlockFi team on figuring out like what is an appropriate way to understand and measure and manage risk? risk here. And I think there are a lot of things that you can do that help quite a bit. And I think

that like, you know, one piece of this is, you know, understanding the nature of the counterparties and other is distributing the risk between many of them. A big piece of this is taking actual collateral and being careful about what that means, right? And so like one thing that was sort of odd that came up in this whole process around taking collateral is a lot of people thought that they had taken collateral from three arrows. Some of those had actually taken. being collateral. Others of those, although they believed that they had, in fact, they had taken the same GBTC as collateral, but six other people had taken. And it was not really meaningfully their GBT in any sense. And so that's another piece of this. Having policies in place, and that's sort of like

a sort of land way of saying it, but being ready to actually, you know, I margin call people in, in a hurry if that's what's necessary. I think all of those are pieces to, you know, managing it in a more sustainable way. So as you just mentioned, you, I mean, we kind of veered in this direction about how, you know, you think a lot about policy. You spend a lot of time in Washington. And I wondered what effect you've seen these crypto collapses have on the opinion that lawmakers and regulators have of crypto or how it's affected your conversations with them. Yeah, so it's had surprisingly little impact on the conversations. And the reason for that, because that was not at all inevitable, the reason for that is prior to, you know, this happening, the conversations that we're having in D.C. were already centered around how can we bring regulatory oversight to the space.

Like that was already the focus. And, you know, when that's the focus, well, what's the. right response to seeing, you know, these happen. The right response is getting more regulatory oversight in the space. And, and so I think that to a decent extent, you know, as a space, we're actually already working on the important things in D.C. And I think that's something that, you know, lawmakers are well aware of. And, you know, at the end of the day, I think the biggest response that we've gotten from people is, you know, roughly speaking, like, yeah, this probably just makes it, if anything, more urgent that we get some regular.

regime out for crypto in the United States. And so I think it's added more impetus to the calls for, you know, regulatory oversight and clarity, you know, from federal regulators in a way that, you know, there had not been as much of before, which is all just to say that's had surprisingly little impact just given the nature of what the conversations were going in. And earlier when you were talking about how the parts of the crypto universe that got wiped out were the ones that look the least crypto-like, meaning they're more. centralized, they look more like the traditional financial institutions that went down during the

GFC. Are you seeing that regulators understand that distinction as well or not, or in lawmakers? I would say like some do. Like I definitely wouldn't say that none of them do, but I also think that, you know, I wouldn't say that this is like commonly understood. I think is the kind of thing that like, those who are particularly plugged into the crypto ecosystem in the policy space do, and those who are less plugged in don't. So I would say a fraction, but not a trivial fraction. So you also have this proposal up with the CFTC about changing the way that derivatives are traded.

Are you also talking with regulators about other hot button policy topics that the crypto communities focused on, such as the Trinado Cash Sanctions slash privacy, or how the SEC and CFTC divide up regulating crypto or reporting requirements around self-custody, et cetera? you know, what else are you talking about with them? Yeah, we're talking about a bunch of things. And, you know, to some extent, this is when you give someone your number, you should expect to get called.

And we do. And we're comfortable with that. But yeah, we're having a lot of conversations with lawmakers. You know, a lot of them are constructive. And the core of it is basically like, we want to be helpful any way we can here. And there are a bunch of places where lawmakers have pretty reasonable questions about how to think about the crypto ecosystem. And so, you know, we've been talking with them.

through all of those. And yeah, I think it's been like super constructive. I think it's been, you know, helpful that we've been doing it. You know, I think that more than anything else, it really is the case that like what lawmakers really want here is like straightforward constructive engagement, you know, they want to, you know, make sure that they're well informed. They want to make sure they're having the important conversations that they don't mess this up, that they sort of like make intelligent decisions. And so, you know, that's been sort of the core of how we've been think about this, which is anything in crypto that we have sort of information on, you know, we're happy to engage on with with lawmakers. And amongst those topics that I listed or any

others, would you say that certain of them are more prioritized by your team than others? So I think the biggest, you know, a lot of this is looking like, what are the priorities in general, you know, in D.C. and for for the industry and for consumers. And, you know, I think we think the biggest things there are stable coin, you know, regulation is a big one. Um, marketplace, basically stablecoin regulation, marketplace regulation, and token registration. I think are sort of like the three big pillars of this. And so, you know, stable coin regulation is talking with the lawmakers, the lawmakers the lawmakers is the most and to some extent with the regulators, you know, with the markets piece, it's a combination of the regulators who might

regulate them and lawmakers looking at passing legislation to entry that. And with token registration, it's been primarily with the regulators. So as I mentioned, you have this proposal to change the way derivatives are cleared and you would like to do so using FTCS's technology. And of course, this setup would eliminate the role of several existing Tradfai intermediaries. I was wondering, did you have an expectation when you'll get an update on that? So, you know, we don't know. At the end of the day, this is a, you know, we'll see when the regular reserve have updates for us on various parts. But, you know, I can say I think we're optimistic about it. I think, you know, It's been a long, long, very thorough process.

You know, we've submitted thousands of documents. It has been much more intense grilling than I think any other regulator we've seen has put people through. And, you know, the CFTC is certainly one of the hardest, you know, and most thorough regulators in the financial ecosystem. They're not an easy regulator, but they're a very knowledgeable one. And, you know, we appreciate sort of what they've been doing. So, you know, optimistically, I think that, like,

like we've done a lot of what we need to do here and sort of, you know, aren't the final stretch here of working through any last details with, you know, regulators and making sure everyone's on the same page, but we'll have to see. Earlier this year during a discussion at the CFTC about this proposal, I noticed that you mentioned that some of the other invited experts were purporting to protect investors that actually the traders knew more than they did. and what I found interesting is, you know, on the other hand, so that sort of kind of has this maybe sort of libertarian feel to it. On the other hand, you are a huge political donor and the

vast majority of your money tends to go to Democratic candidates. And as I'm sure you're aware, the Democratic Party tends to be the party that is more likely to support the need to protect consumers via financial regulation. So I was wondering like, what's your overall philosophy on financial regulation? Is it something that neatly fits into one of these categories? or something totally different. There's a lot going on there. And there are a lot of interesting, you know, tangents there. In general, very few of my policies are very neatly fit into buckets.

And this is included. I think what I would say, the core way that I think about it is the following. I think people get distracted talking about more regulation versus less regulation. And I think that that's just not the most important access at the end of the day. I think the most important axis here is, is the regulation fit for purpose? Is, you know, does the regulation successfully narrow in on the parts that are most important to have oversight with? And if it does, then the more the merrier, right?

Like to the extent that it's addressing really big existing concerns that, that like are, you know, potentially causing real problems if they go on and address, then I'm all for having, you know, a really robust system there. And if it's not, if it's focusing on dumb things that don't matter, then in some sense, the less, the better, but more meaningfully, like, you got to redirect it to like be better protected. And the big thing here is like, is it protecting customers? Is it actually protecting customers, right? Is it focusing on the things where the biggest risk exists? And is it doing that in a way which will help mitigate that risk? And that serves the core of how I think about it. And I do really think that a lot of these debates just miss that. When people are debating,

you know, an agency versus another agency or, you know, philosophically what the right approach is for regulating crypto, I sort of feel like a lot of those conversations. I'm just like, come on guys. Like, can we focus on like, you know, looking at reserves of stable coins? Like on that part, yeah, be really thorough, you know? I want regulators to be able to dive really deep into the number of and or treasuries in the bank account of a stable coin issuer. Right? Like sort of like as much transparency as possible, right? Like they want to enforce minute to minute transparency published in real time by the

stable coin issuers with hefty fines if like they materially mistake things and don't promptly correct it and very hefty, you know, action. If it drops below the number of tokens issued, yeah, absolutely. Right. Like that means something wrong has happened with with the stable coin. And like we like, you know, the. more we can do to prevent and to alert around that, the better. If you look at, like, having real disclosures around how, you know, a product that someone is trading works. Yeah,

I think like the more transparency you can get there, the better. Like, you know, totally in favor of that. And, you know, and on the other hand, I think when you, when, when you're saying, like, what if we introduce three more intermediaries? I'm kind of like, okay, you could if regulatory mandate that, I agree, it would be strict in that it would make it harder to operate in this space. But like, is that protecting customers? Like, is there a way in which, like, what's the theory for how that makes the world better than the world before then? And sometimes there's an answer, right? Sometimes you have a specific answer.

Like, this is why these are necessary players that have to be separate out. But like, it should be motivated by that theory. It's not like all things that are awkward for operators in the industry also protect customers. There are things that are just bad. And similarly, there are things that are just good that protect customers and make the easier operate. That is, like, really at the core, what my belief is. You've said you want to turn FTX into a sort of financial supermarket and the potential

blockfi and Voyager acquisition could help you do that. However, a financial supermarket sounds centralized. And I was wondering why that was the vision when in crypto, the end game is generally decentralization. It's a good question. And to that point, at the end of the day, FTCS is a centralized company, like it is. And, you know, we're not trying to pretend to be a decentralized one. So we're not. We have, you know, a board of directors. We have, like, job titles. We have corporate entities. There's no, like, we're a company. And the product we're building is, you know, it's on AWS. It is a centralized product. But it's in a decentralized space. And the way that I think, think about that and the way that I think about that interfacing is basically that, well, you know, you have a sort of a hub and spokesman where, you know, a lot of things are more efficient if done in a centralized entity. I mean, one good kind of clean example, this is Netflix,

right? If you want to deliver, I don't even know how many bites a day of video content to people. You can't fit that all on a blockchain. Okay, that is what it is. And so, you know, HFT firms are going to want to trade on exchanges that are probably going to require more throughput than blockchains will be easily able to handle. Okay, that is what it is. But while doing that and acting, again, in a centralized company, in a centralized way, we are hooked up by decentralized rails to the rest of the ecosystem, right? And so if you want to send your assets from FTX to anywhere else, you can do it 24-7 instantly

by clicking a button. And that is, you know, that's how we are a part of the crypto ecosystem. And that is something which I think is really important. And it's basically what makes us, you know, a part of a decentralized ecosystem. It's the fact that we integrate with blockchain rails and that we integrate with all the other centralized and decentralized players in the space that way. And I think that's sort of like in general the model that like, and I feel most compelled by, which is some things will be directly on chain, directly decentralized. Other things will be centralized entities done for, you know, computational reasons, you know, in a centralized way, but that then right out to blockchains that interface with them. And, you know, that's how I see us.

In a moment, we're going to talk a little bit more about the direction FTCX is going and some of the policies. See, fractions also the country could move, but first a quick word from the sponsors who make this show possible. Curious about the world of crypto and the future of the next internet? Then check out Web 3 with A16C, the chart-topping technology podcast from the Mines at Andresenhorowitz, the go-to destination for discussions on tech as it changes our world. Whether you're a crypto-curious person looking for signal versus noise in the day's headlines, or a C-suite decision-maker seeking to understand. web 3 as part of your business strategy, Web 3 with A16Z is the podcast for you.

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platform by visiting chainelysis.com slash unchained. Back to my conversation with Sam. As I'm sure you're aware, crypto entrepreneurs in the U.S. have been making noise for years that the U.S. regulatory environment is inhospitable to them. You're one of the top U.S. business people in a generation. Your rise has been meteoric, extremely fast, and yet your firms have operated out of Hong Kong, now at the Bahamas. And at the same time, you're often on capital.

Hill, what would it take for you to move back to the U.S.? Yeah, it's a good question. And, you know, look, we're always going to have to have operations in a lot of countries, right? Like we serve as Japanese clients and we do that through a regulated Japanese entity. And so the boring answer to your question is, well, you know, we'll always have some U.S. operations, some non-U.S. operations. Whatever, let's put that aside and give the real answer, right? And the way that I see the real answer here is, okay, but what would it take for us to be able to offer effectively, you know, something like our full plan in the United States, something that we felt good about. And to be able to do that in a way where we were able to operate

with the U.S. as not just a U.S. headquarters, but as a global headquarters, right? And, you know, morally speaking, like what would it take for us to effectively have the company basically be U.S. instead of basically be foreign? And, you know, to that point, like, I think there's sort of one big thing for us. And again, it's different for different people, right? Like, when you're look at stable coin issuers, obviously the big thing that they're looking at is stable coin regulation and, you know, and bills. For us, the biggest thing is the markets piece, right? Like, the most important thing for us is we operate a marketplace. That's our core product. It's an exchange, the clearing house, the matching engine. You know, it's also a front end. And so the biggest thing is,

you know, well, for both spot and futures, ideally for things that both are and are not securities, we want to be able to offer those from our U.S. entity to Americans. And if we can do that, I think that unlocks, you know, frankly, most of what's remaining here. And so, you know, that is just the core of the answer. It's like, you know, clear, clear answers to how do we operate the futures and spot security and not security token exchange in the United States. that's the thing we've been pushing on the hardest. And that's the thing where, you know, I won't say every country has given clarity on that because they haven't.

A number of countries, it's extremely unclear how one would do that. That being said, even in countries where it's not clear how one would offer those products, there is often an interim answer. Like there's often a sense of like, okay, you know, like there's going to be a forthcoming regime. It's not clear exactly what that regime will be. But, you know, while waiting for that, this is what you can do as a company to effectively offer products. There's not that sense in the United States. You know, we don't have that sense of like, this is how we operate for now.

And so that is to some extent the big thing that I guess has been missing here is, is, you know, a sense of like, you know, either as a permanent matter or even just as a temporary matter pending. you know, further license, you know, licensure opportunities. What is the way that one operates these venues? But, you know, we're doing what we can here, right? Like we have, you know, pending application with the CFTC, you know, or I guess an amendment to our existing application to offer, you know, crypto futures. You know, we're working with the SEC on new security tokens. We're, you know, working with Congress on getting, you know, legislation for for spot

market oversight. And I really do think a lot of progress is being. made at all of these fronts. Wow. So it sounds like your, yeah, like your roadmap is, you're kind of working on multiple areas of the roadmap all at once. Yep. That's certainly true. Okay. So it seems like if you're successful, then you're saying that you might just move back here. It's that, you know, if that's on the, it's on the table. It's something that like, you know, we have conversations periodically about what it would mean, what it would take. And, you know, every time we have the conversations, they seem like a little bit less fanciful. And,

and a little bit more like, you know, like, you know, the pieces that would have to be in place to make that happen, many of them are coming in place. I wanted to ask you one more kind of political question, which is I'm sure you're aware that the loudest cryptos, critics of crypto and Congress have tended to be Democrats. And yet that's the party that you've mostly supported with your political donations. Why do you think it is that you seem aligned politically with them, but then disagree on crypto with them? Yeah, it's a good question. is the first thing I'll say, you know, it's I have given to both sides. And, you know, at the end of the day, it's policy, not politics that I care about. And I'm totally happy to support, you know, whatever side and whatever people and politicians are supporting good policy.

You know, that could go either way. So that, anyway, that's a boring answer to your question. But I do think that's worth noting that, like, I don't see myself as, like, having been born with a big D on my chest or something like that. Right. Like it's, this is just a question of, you know, wanting to just work good lawmakers and that that can cut across the aisle. But the other thing that I would say is that there are a lot of issues. I agree with, you know, different people on different issues. I think that, like, you know, one of the issues I care about the most is pandemic preparedness.

That's actually something which has cut across the aisle to some extent. But, you know, I think that, like, you know, no one issue is going to give a really clear readout. as to, you know, where my overall politics lies. That's another piece of this. And the last thing that I would say there is, you know, I think that crypto has been somewhat surprisingly to me a somewhat bipartisan issue. It's been an issue where both sides, I think, have had constructive things to say. And where there's a, I think both sides are looking for ways to bring the industry onshore

and to, you know, provide customer oversight. Obviously, there are some differences in execution and in the exact vision that people have for it, which is what it is. And there are certainly some people who I disagree moderately strongly with on the right way I do this. But that's how politics is. You agree on some things. You disagree on others. You learn to live with it. And, you know, I think in this case, like, there are going to be places where I, you know, disagree with a few members of, you know, both, very certainly with the Democratic Party on crypto.

I actually agree with how a number of the members are seeing it. And, you know, hopefully we could have a constructive debate about it. I was also curious about those political donations. You know, obviously, it's kind of well known that your motivation for the wealth that you've built and your career is to eventually give the vast majority of it away. You're an effective altruist. And you are very interested in where each dollar will kind of have the greatest impact for the betterment of humanity. It's a very kind of rational way of looking at this. And so I was wondering when you make those political donations and you mentioned, you know, you were looking for people who have good positions on policy, are you looking to support politicians with that rational lens? Or are you looking

to support politicians who you think are supportive of crypto in ways that you think will be good for the industry? So the biggest thing is just looking for politics. who are in general doing, you know, good policy work. Some of this could be on crypto, but most of it is not. You know, most of what I'm looking at is, you know, more generally like, you know, how are they viewing the most important issues before us? And so I think the basic answer to your question is that it's not a crypto-specific thing. And, you know, it is a much more general one. And, you know, it's one where I, you know, think that, you know, how they respond to pandemics, how they look at future technology. how they, you know, try to have sort of rational economic policy, you know, those are all sort of among the most important things for me. And, yeah, I think at the end of the day, it's, you know, there may come a

point at which there exists a single issue, which is so important that, you know, no other issues really matter. I don't think we're at that point. I think we're at a point where it is a much broader swath of things that matter and where, you know, I try and take a somewhat holistic view of, you know, how a policymaker, you know, approaches what policy they ultimately support and ultimately actually really fight for. You know, I have to say it sort of reminds me of like the kind of Michael Bloomberg technocratic view. Is that, am I getting that right? Yeah, I think that's pretty fair. I think that like, obviously he's had different views at different points in his life too. So, you know, won't hold off on being too, you know,

too dogmatic about, you know, exactly where he has been at various points. But yeah, I think it has a lot in common with how he has sort of often viewed these things. So in addition to your main crypto businesses and also, you know, working on this proposal with the CFTC, you, in addition, have a 7.6% stake in Robin Hood. You've also invested in IEX. And I was curious to hear how you thought the crypto and tradfai markets will either evolve toward or away from each other and what role FTCX will play and all that. Totally. Obviously, I don't know for sure.

We'll see what happens. But my guess is that they will evolve towards each other. That would definitely be my guess here. And I think, you know, the core reason is that, you know, when you look at where some of the first real applications of blockchain are, you know, frankly, I think that some of the most compiling applications of blockchain are in market structure. And what I mean by that is if you look at what happened to, you know, mobile brokers on the day that meme stocks went wild, right? You know, what sort of is obvious is something bad happened, right? Like, you know, somehow that didn't end the way people thought it was going to end. Lots of retail got basically liquidated, which is actually fucking weird because they didn't have leverage on, right?

Like somehow, despite having like unlevered positions, their positions were, you know, in some cases closed. And at the very least, they're not able to add to them. They're often just locked out at the app. Like, what happened there? Why did markets break down so much? Well, at the end of the day, I think there is basically, as it turns out, a limit to the amount of money that retail is allowed to make with current market structure. And what do I mean by that? Well, eventually, you know, retail bought a lot of AMC, a lot of game stop.

Eventually, they'd made, you know, $10 billion in a one day period, mark to market. it takes two days to settle any equity's transaction in the United States. So they're sitting there having quote unquote made this money. But it's going to be two days until that money is actually delivered to them. And in the meantime, they're sitting there with marked market gains. Well, what happens if a day and a half later? The other side comes as this, ha ha, just kidding. I don't happen to AMC.

I know I said they sold you some AMC. Like, interesting, you bought that joke. I never did. It didn't happening, right? What happens then? Well, it's a mess, is part of the answer to that question. What happens then is, well, either retail didn't actually make the money they thought they'd made there, right? Either it's all kind of an illusion because they're, you know, the trade.

just get canceled, or if that's not what happened, then I guess that somehow someone else has got to fund that, right? Someone else has got to pay retail the $10 billion they think they made. So what you have is a world world where every single broker, every intermediary separately has to be sitting there with like billions of dollars in regulatory capital in case there's a failure to deliver. And we're just talking about the stock side here. In fact, it's even worse if you look at the cash side, where it takes a month, realistically speaking, for cash to definitely, definitely settle.

And so, okay, so you're sort of like starting from that position. Well, then, you know, what happens when marks a dip volatile? The answer is like the risk just overwhelms the system. How'd you fix that? You fix that with clean, clear, unambiguous settlement that's fast and cheap. And that's what blockchain does. That's like it's core, you know, most obvious use case. And so, you know, one of the first things that I think blockchain may really help quite a bit is settlement, is financial settlement.

And, you know, excited to see that happen in, you know, in traditional finance. And, you know, I think that, like, we're going to start to see bleed over from that, if nothing else, you know, in the not too distant future. And, you know, outside of that, like, I think there's a lot else that can happen here. And, you know, I think we're just going to see this sort of intersection increase and increasing increase over time. But, yeah, I think we're going to see things bleeding together. And that's obviously one of the reasons that we've been, you know, doing what we can to build out our tried-five presence. Because we think we have something to offer there using crypto rails. And we think it's also an area that obviously there's a lot of customer demand for.

It's so funny to hear you talk about this because the way I got into covering all of this was in 2015. That was the era of blockchain, not Bitcoin. And I think it was my very first big article on all this. And it was about how Wall Street was going to use this technology. And then all these years on it, it felt like I was wrong. And yet here you are again talking about this as the future dream. I wanted to ask you about an article that Bloomberg published a few weeks ago. A number of people in crypto have expressed concerns about the fact that you both own a major exchange

and that you own almost all of Alameda, which is one of the largest market makers. Although the article did point out there's no evidence of any preferential treatment, obviously this is something that a number of people in the crypto industry have observed. And I was wondering what your response is to them. Yeah. So, you know, first of all, I think it's a totally reasonable thing to bring out. and a totally reasonable thing to have some concern over. You know, at its core, like, it is really important that marketplaces act in a responsible manner here

and that they act in an agnostic manner. And I think that, like, there have to be controls in place. There has to be oversight of that. You know, what it says we do have those controls. We do have that oversight that, you know, and we're regulated in a large number of jurisdictions. This isn't news to regulators. It's not like they sort of read that and say, oh, shit, we forgot about that. You know, we have a lot of policies in place for this.

We've gone over this with a number of regulators. And, you know, at its core, sort of in line with the statement about there's, it's also mostly theoretical. There aren't sort of like specific instances. Like, you know, I think one of the core things we value the most is that, you know, our marketplace is totally agnostic. And what I mean by that by agnostic here is that, you know, we don't care who sends an order, right? Sorry, the FBKYC on the exchange, right? We care about that part, right?

But, you know, from like a matching engine priority perspective, from a latency perspective, right? Like the way we think about it is like our job as an exchange is to facilitate orders hitting the exchange. And, you know, to make sure that that happens in exactly the way that we say that'll happen, which is say, you know, Bob has an order to send, you know, great. Bob can send the order straight to the venue. And if anyone else has an order, they'll send it straight to the venue, right? everyone's going straight to the exchange here. We don't have sort of preferential treatment on that. And then it's just standard orderable.

You know, we match the best buyer against a best seller. And that does make it quite a bit easier that we don't have like, you know, okay, but like, you know, we try and match it against like a core market maker if we can. And then like,

you know, it's like this group of people. We give them like the access like without the extra bullshit. Like, you know, as much as we can just clarify everything and make it just standard access, that makes it a lot cleaner to make sure that we don't have sort of, you know,

conflict of interest breaches here. And then, you know, the last thing that I'll say is just that, is that, you know, I don't actually work on Alameda anymore. I haven't for years. And, you know, I don't trade for it. And I'm not involved in like Dayday Mansion there either. The Uffieri emerged recently went off without a hitch. And yet obviously the price tanked probably for other reasons.

and, you know, that only, the merge only slightly reduced the problem with scalability. Solana, obviously, is a blockchain that you've been a big proponent of, and it is one that is highly scalable. How do you think the merge affects Ethereum prospects? Yeah, I mean, I think it's an amazing technical feat. Like, it's super exciting that it happened, and it happened pretty cleanly, all things considered, which is also sort of impressive and, you know, really well done by the Ethereum community. I think it helped some, right? Like, like, you know, as you said, it still isn't the fastest blockchain post-merge, but it's a lot faster, right?

And it was kind of out of headroom before this, right? It was at a point where it just like could not support the current level of defy activity. Now it can. And I don't think that it has six orders of magnitude left on top of being able to sell, you know, to support current defy activity. Right. I think it has like, I don't know, a quarter of an order of magnitude left or something like that. But like, it's still a big improvement. And, and so like overall, I'm super excited about it.

Although, you know, I will say sort of in line with what you're saying that like I think it's, you know, this is anticipated. I don't think it changes the core narrative, which is that like, you know, their advantages and, you know, disadvantages to different blockchains. Ethereum's stick is not that it's the fastest blockchain. It's not that it's the most efficient blockchain. You know, it's meant to be a high trust, high sort of track record blockchain. And, you know, now hopefully can be that plus a moderate throughput instead of a low throughput. blockchain, it also obviously, you know, gets rid of almost the entire carbon footprint of Ethereum, which is quite valuable because Ethereum was, I'm pretty, it was a pretty significant

carbon footprint before this, just given the level of demand, you know, on the network from DFI. So, ETH now is likely going to be deflationary, and at least the issuance has been drastically reduced. And in comparison of Bitcoin, obviously, on those scores, it's improved. So I was wondering what you thought this did for Bitcoin's narrative. Yeah. So, you know, Bitcoin is what it is, right?

It's digital gold. At this point, it's not like, it's not the blockchain that you would use for high speed, low cost payments, although you could still use, you know, lightning or layer two or a wrapper on Bitcoin to do it. But it is the most trusted, the most institutional. And, you know, a token that that sort of hasn't changed. It is technically inflationary, but he's very slightly inflationary, right? Like a thing worth noting is that the total amount of inflation ever is capped. And it's capped at like 10%.

Right. Like how many Bitcoin's been mine so far? Is it like $19 million? Just something. I'm not sure. But something like that. And there's, you know, what, $21 million that. So, you know, there's only 10% more inflation over the entire rest of history combined.

I mean, in this environment, that's about annual inflation for a lot of fiat currencies. So, you know, it's basically not. inflationary, you know, on a longer time scale. And, you know, yeah, I think it's going to, you know, continue to play that role. And it's a pretty different role than, you know, the kind of core high trust, smart contract blockchain or than the like high throughput smart contract blockchain does. I think the merge doesn't doesn't change that a ton. If anything, it differentiates Bitcoin a little bit more, these Ethereum is not proof of work

anymore. So Bitcoin is sort of the only remaining, you know, really, really major top coin. that is proof of work. Okay, so you don't feel that Ethereum's, you know, more reduced inflation does anything to change Bitcoin's place as digital gold? I don't think so, no. Okay. So as we mentioned earlier in the show, there's, you know, this kind of wild macro environment right now.

On the day that we're recording, the British pound has dropped to a record low. There's a lot of talk about recession. And I wondered what you thought might happen on a macro level for the next year. what approach you planned to take with FTCS during this period? Yeah. So, you know, at where I mean, FTCS, obviously, we are incredibly exposed to the crypto industry. It's what we are. I'm fine with that, you know, that it would be, you know, weird not to be given the business that we're in.

Well, we do keep our reserves in cash. And, you know, so one of the sort of dumb answers here, again, I don't want to put too much, you know, in front of this answer is not really addressing the question. is, you know, whatever happens, happens, right? Like, but I think the real answer to the question is we want to be in a position where we can offer products that people want, whatever those are, right? And so like, you know, one piece of that is, you know, obviously we've, you know, branched out into equities, you know, internationally, we have tokenized equities in the United States. We have, you know, a broker dealer and clearing firm and they're offering equities, you know,

through that to Americans. we would love to have better FX support. We're working on that. We already have pretty good FX support in a lot of places, but that's obviously something that is going to be in demand, given what you're talking about. And so I think the core thing that I think about above everything else is being positioned to offer the products people are going to want,

given a highly volatile and uncertain macro environment. And it's recently been a report in that FTCS is raising funds for more dealmaking. So what types of acquisitions would you like to make? Yeah, so I think what I'd say without explicitly, you know, confirming or denying that is that, you know, what are the things that would make the most sense for us as a company? Well, you know, one thing that would make a lot of sense would be, you know, when you look at sort of the regulatory space, right, we've done a number of acquisitions that have been aimed at companies that have really impressive regulatory, I sort of know-how knowledge-standing relationships. licensure. Obviously, LedgerX is a big example of that. Now I have to XAOS derivatives, but there are a number more as well. So that's one piece of this. You know, a second piece of this. But frankly, that, well, has historically been a big piece. You know, I'm not sure it will be as big of a piece going forward just because we've already done a lot of the acquisitions we want to do on that space.

I think that acquiring great teams is always a thing we're excited about, right? I think with Storybook for All that was a part of the story. And then the last thing, and maybe the biggest is looking at businesses that have, you know, really, really great user bases where we can potentially help, you know, round out the products suite or the licensing suite for them. And so that's going to be something we're up our eye on both in the United States and abroad. there are a number of companies that, you know, we have been in talks with at some point or that we have analyzed. And, you know, I think a big thing from our perspective is thinking about like what would actually be a positive sum pairing.

What would be a place where, you know, we think that that sort of like, you know, would be worth more together than a part and that, you know, it sort of makes sense to join forces. And so, you know, we have been, have been, you know, digging around at a number of those. we will always be, but this is certainly a time that we are paying particular attention to that. So as we've mentioned in the show, the guiding principle behind all the work that you do is to just make as much money as possible in order to give as much possible away, you know, so that it'll have the greatest impact in the world. However, I'm sure you're very well aware that there's a number of critics of crypto who say that they believe it's a net, you know, negative for various reasons. And I was wondering kind of what your thoughts were on that and whether

you thought there was any kind of conflict in the way you were making the money and your ultimate goal or not? So, you know, ultimately I would not want to be doing something I thought was like, you know, strongly destructive with my day job. And I don't think I am. I think, you know, look, there are good parts of crypto, there are bad parts of crypto. That's true of everything that there are good and bad parts. You know, maybe it's a little bit more true, frankly, in both directions. Because of the, you know, newness of the field, the dynamicness of it, you know, it means that you get a lot of really exciting new innovation. That means you get a lot of bullshit.

Those come hand in hand. But, and, you know, hopefully we can move more in one direction, you know, rather than the other. But, you know, at its core, I think that like, you know, crypto and blockchain have the potential to, you know, make settlement a lot cleaner for people both domestically and internationally. I think it is, you know, the potential to help empower a lot of people economically, you know, to give them real financial access. Like, you know, one of our fastest growing jurisdictions this year has been Ukraine.

because there's a place where people are really desperate for global financial access and we're excited to help provide that. And so, you know, I feel good about a lot of the impact that, you know, I think we're going to be able to have. Also think that, you know, a piece of this is making sure that we are trying to, you know, to the extent that we can move the industry in a constructive direction here, you know, which hopefully can simultaneously protect consumers and, you know, do some good. All right. Well, it has been such a pleasure having you, Sam. Thanks so much. much, where would you like to direct people who want to learn more about you or FTX? You know, I think like I'm most active on Twitter, so you can always find me there at SBF underscore

FTX. You know, FJX.com or FJUS to learn more about us. You know, yeah, I think that's the core answer. Perfect. Thanks for coming on Unchained. Of course. Thanks so much for joining us today. To learn more about Sam and FTX, check out the show notes for this episode. Unchained is produced by me, Laura Shin, with help from Anthony Youen, Matt Pilchard,

Fonda Ivanovanovich, Pamajimdar, Shashank, and CLK transcription. Thanks for listening.