Episode 98 – FTX and Alameda are dead, long live cryptocurrency

FTX and Alameda are dead, long live cryptocurrency Crypto Critics' Corner

Today Bennett and Cas are talking about the collapse of FTX, one of the largest cryptocurrency exchanges, and its sister trading firm, Alameda Research.

Cas Piancey and Bennett Tomlin discuss the collapsing FTX exchange, its links to Alameda Research and it’s acquisition by Binance.

This episode was recorded on November 8th, 2022.

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English Transcript:

00:00:00:18 - 00:00:07:09
Cas Piancey
Welcome back, everyone. I'm Cas Piancey. I'm joined, as usual, by my partner in crime, Mr. Bennett Tomlin. How are you?

00:00:07:22 - 00:00:11:21
Bennett Tomlin
Oh, I'm doing well. It's a date. Today's today's been wild. How are you?

00:00:11:21 - 00:00:30:08
Cas Piancey
Guess I'm. I'm doing. I'm doing well. I woke up to a shitstorm. I think it has been an insane and insane two days and insane one day and insane week. I don't even really know how to express how crazy this has all been.

00:00:30:08 - 00:00:36:14
Bennett Tomlin
It's been really, really like an absurd like 3 to 4 days. Like it was the weekend. The weekend broke everything.

00:00:38:00 - 00:01:07:15
Cas Piancey
Yeah, yeah. Let's go ahead and get started. I obviously we are talking about Alameda. As I've stated, we didn't get a chance to. We did. We recorded an episode on this. We didn't get a chance to put it out there because this all unraveled too fast. But but we previously were talking about this and I specifically said as an Alameda, ah, the same company, as far as I'm concerned, they are not separate.

00:01:07:15 - 00:01:23:22
Cas Piancey
I know that this is a a buyout from finance. We're talking about a buyout from finance for for FTI. That is not Alameda. Alameda as a separate company. But let's let's get into the let's get into the weeds here. So so what's happening?

00:01:24:11 - 00:02:07:17
Bennett Tomlin
Well, let's go back to the beginning. The thing we already recorded in episode I last week that I haven't been able to edit yet because now everything's collapsing which is that Alameda Research the same bankman-fried founded quantitative trading venture capital and market making crypto investment fund had part of their balance sheet end up in the hands of Coindesk, who ran a report that showed that a huge portion of the assets on Alameda Research's balance sheet were FDX token and that not only that, but the amount of FDX token on their balance sheet, they were valuing at 130% of what coin market cap had as the market cap for all of FDX token.

00:02:07:22 - 00:02:40:07
Bennett Tomlin
So not only did they have their balance sheet dominated by this one asset, which is from this exchange founded by their co-founder, like it was also overvalued. They thought their supply was worth more than the rest of oat, worth more than all of fdx token in existence, which is an absurd place to be. It. The other thing it revealed that was that as of June 30th, Alameda Research had about $7.4 billion in loans out and that much of their other assets was also relatively illiquid.

00:02:40:07 - 00:03:12:23
Bennett Tomlin
They had $2 billion in equity securities of unknown liquidity and like $100 million in cash and cash equivalents, along with $3 billion of crypto held, which was broken out from the FTT because FDX token obviously isn't crypto. It's a security wait but continuing. Yeah, so this report came out last week and then things got gradually worse. S.E.C. announced that Binance was going to be selling their supply of FDX.

00:03:13:08 - 00:03:35:11
Cas Piancey
Well, hold on. You're skipping one step here because I actually want to get some credit to a previous guest of ours, Mike Burger's Berg, who came on to talk with us about Celsius, put out a piece that basically questioned the solvency of of FCX and Alameda that basically said, look, they've got all this collateral, they've got all this all these liabilities and and it's against their own token.

00:03:35:11 - 00:03:52:04
Cas Piancey
All of this is illiquid. If they try to sell any of it, they're screwed. And basically the response to this from whether it was SBF or the other Sam who used to work there.

00:03:52:15 - 00:03:53:02
Bennett Tomlin
Tobacco.

00:03:53:18 - 00:04:35:11
Cas Piancey
Tobacco, Tabasco, their everyone at Alameda was basically writing this off Alameda and FDX writing this off or former employees writing this off as nonsense and saying like, oh, gosh, this is there's zero research done on this. It's baloney. Well, turns out Mike was right. And yeah, everyone had a good reason to question the solvency, clearly, because what we saw today is that and I want to caveat this because we aren't sure what we saw today, but from what we can tell, what we saw today is that there was really some funny business going on at FedEx in Alameda.

00:04:35:11 - 00:04:43:04
Cas Piancey
And we'll get deeper into that. But now that I pushed that sorry, I want to I just want to go back. Yes, that's a good name. Mike. Mike Burgers work?

00:04:43:13 - 00:05:15:14
Bennett Tomlin
No. And yeah, Mike definitely does deserve that recognition. And I think it's valuable to point out here that one of the things he revealed about Celsius, which has since been confirmed during the bankruptcy hearings, is that they were using the cell token as like this important acid on their balance sheet in order to keep them solvent. Well, they were in the market manipulating the price of cell token to maintain their solvency and the amount of FDX token that Alameda has in the amount of trading Alameda does against FDX token puts you in a position where you start to wonder if they could be doing that same kind of thing.

00:05:15:18 - 00:05:36:07
Bennett Tomlin
And I think there is reason to be suspicious of that today. But Coindesk published this excellent report going over some of almeida's balance sheet. Carolyn Ellison, the CEO of Alameda Research, tweeted out, That was only part of our balance sheet. We've got a bunch of secret hedges you can't see. And also $10 billion in assets that also you can't see.

00:05:36:12 - 00:05:58:09
Bennett Tomlin
And also we've repaid a bunch of those loans and we can't show them to you. And so and then Sam came out and said kind of a similar thing where he went after X isn't insolvent, which is when everyone went, everyone was talking about Alameda. Sam, why are you bringing up FCX? And then he goes, fcx is the most profitable exchange per employee you will ever find.

00:05:58:16 - 00:06:09:10
Bennett Tomlin
And we have gap audits. We have generally accepted accounting, audit, accounting practices, audits with $1 billion in cash is what he claimed just a couple of days ago.

00:06:09:20 - 00:06:44:21
Cas Piancey
I and I again, you're skipping one pivotal tweet, which I think is super important is Carolyn Ellison said, basically trying to replicate there's a famous cryptocurrency moment. Oh, is that after this? Yes. Okay. So after this, after what you just discussed, Carolyn Ellison in what I assume was essentially a shit post. We don't know. But I know a while it showed Sam, some trader was saying Salon is going to I think it was to $3 or so I was going to go to nothing was going to go to zero.

00:06:44:21 - 00:07:04:07
Cas Piancey
And Sam said something along the lines of all by all the salon that you have right now for $3, this was this was when it was below $3. Ultimately, Salon went away. I think it's still trading far above that. But regardless, Sam basically completely destroyed this guy's argument, saying, like, I'll just buy it from you right now and then you'll feel bad.

00:07:04:07 - 00:07:27:05
Cas Piancey
And it seemed like Caroline was doing something similar where she said, in response to two C's saying, I'm going to sell, I'm going to sell on all. I'm going to unwind. Months of liquidity, months worth of liquidity is how he specified it. He said he can't unwind this position for months, which, by the way, if you actually are trying to unwind this position, you do not tell publicly.

00:07:27:15 - 00:07:57:05
Cas Piancey
It's going to take you months to unwind your illiquid position. You don't do that, period. So I think CC was definitely seizing the moment and trying to cause a run, and it worked. And in response, Carolyn, Carolyn said, all by all the FTT you have right now for $22, unfortunately, that it didn't work the way it worked. When Sam said it about Solana and said it to a random trader, Carolyn was saying this to her.

00:07:57:05 - 00:08:30:19
Cas Piancey
Caroline, Caroline. Caroline was saying this to the largest, the owner of the largest cryptocurrency exchange period. So who has hundreds of millions of dollars of FTT. And so the question was, why did she specify $22 instead of everyone thinking, oh, she's just shit posting and this is funny. Everyone was like, So what's going on with the $22? And suddenly it seemed like maybe that was specific because it was trading above 22 at that moment.

00:08:30:19 - 00:08:50:01
Cas Piancey
I believe her like right around 22. And it was like, well, if you're so confident, why wouldn't you offer 25 or 30 or something like, right? You're offering right where it's at right now. And everyone is like, this seems odd because she's in charge of trading at Alameda and and the head of Alameda and this didn't feel right so can yeah.

00:08:50:01 - 00:08:51:07
Cas Piancey
Can we talk about why?

00:08:51:07 - 00:09:12:22
Bennett Tomlin
Oh, I think we absolutely need to talk about that. So as you mentioned, CC announced that he was going to be liquidating the FTT token position. He had this massive position that he still had from back when Binance was an equity investor in FDX because Binance was like the first equity investor in FDX and they had now decided We need to de-risk everyone.

00:09:12:22 - 00:09:33:04
Bennett Tomlin
This is a risky thing we're holding is what they told the market. We're going to be selling all of it, just dumping it all, which again, like you said, is not what you do. If you actually want to like quietly and gently exit that position because he wanted violence. So what ended up happening is he announced he was going to liquidate this like he said, Carolyn is like we want to purchase it at $22.

00:09:33:04 - 00:09:54:08
Bennett Tomlin
We'll make sure you don't have an impact on the market if that's really what you want, because that's clearly not what he wanted. Right? Like he was signaling he wanted to have an impact on the market. Will saying he didn't. So Carolyn's like if you actually don't here's your out and instead he started dumping in Alameda didn't have enough liquidity to keep it above 22 and so it ended up plummeting.

00:09:54:15 - 00:10:32:12
Bennett Tomlin
It was like it dropped like what like $14.14 this morning? Yeah. Massive plummet. And the reason this is important and the reason the $22 was important is because part of the FTT on Alameda is balance sheet. Even on the reports coindesk got was FTT collateral meaning it was being used to collateralized loans and so $22 or thereabouts was probably the liquidation point for Alameda Research or FDX or someone or someone had a liquidation point that got a little uncomfortable there.

00:10:32:20 - 00:10:54:15
Bennett Tomlin
And so they spent much of the night moving a whole bunch of assets all over, trying to get themselves in a position where they wouldn't be liquidated. And they seem to have gotten in at that point. They let the price plummet from $22 down to 14 or whatever the fuck it is. And since then, a bunch of withdrawals got shut down it.

00:10:54:15 - 00:11:15:23
Bennett Tomlin
FCX That's the next stage at 10:59 a.m. UTC this morning. Erc20 Solana withdrawals and TRON withdrawals were all shut off at FCX for no clear reason, then a few hours later.

00:11:15:23 - 00:11:38:23
Cas Piancey
So I just want to for anyone who's this is anyone who's not trading or hasn't been here for years. This is always the fear. This is always the fear on any exchange is when they halt withdrawals without saying like, Oh, we're taking it down because we're going to do maintenance or we're taking it down temporary, like announcing it ahead of time, whatever, right?

00:11:39:02 - 00:12:05:21
Cas Piancey
Like that's fine. What's not fine is suddenly you can't withdraw anything. And this has happened. You and I have seen this happen a lot because we've been following this space for a while. This is always what you fear. And when this happens, the right the right question is why? And I think this is this is boiling. We're getting right to this right now, which is the funny business.

00:12:06:10 - 00:12:10:02
Cas Piancey
Seems like it had to do with customer funds.

00:12:10:02 - 00:12:24:20
Bennett Tomlin
Yes. So I think we need to be very explicit here. It should be impossible for there to be a run on the bank for an exchange. Customer assets should always be held 1 to 1 completely in.

00:12:24:20 - 00:12:25:09
Cas Piancey
Stock.

00:12:25:12 - 00:13:00:11
Bennett Tomlin
From your corporate funds. Correct? There should only be lending of customer funds when customers have explicitly opted into lending programs to earn yield. There should be zero lending of any other funds. When Sam FDX, seasoned Financed announced this acquisition, they described it as FCX, reaching out to Binance for help because they had a liquidity crunch. This is the biggest red flag because it should not be possible for where.

00:13:01:13 - 00:13:25:10
Cas Piancey
Yes, it's the money. Something was the money. And this is another one I want to thank Adam Cochran, who's famous for doing his very long Twitter threads. But I want to thank him for calling attention to all of this as well, which was I think a lot of people have been looking at like the ether wallets and wondering, hey, you guys don't seem to have any segregated wallet.

00:13:25:22 - 00:13:38:20
Cas Piancey
What what the hell is up with that? And for anyone who's unfamiliar, let's talk about segregated wallets, cold wallets, hot wallets. The difference between all of those and why that matters in in the case of FCX and Alameda.

00:13:38:20 - 00:14:08:20
Bennett Tomlin
So generally an exchange will have a hot wallet that is taking that is sending out withdrawals often this hot well it will also be used to bring in deposits and will then be topped off from the cold wallet, which is air gapped, not connected to the Internet, rarely touched and meant to be secured, often by like multi-signature or things like that, to keep those assets separate the hot wallet because it's being very often used for withdrawals, is connected to the internet.

00:14:09:00 - 00:14:42:15
Bennett Tomlin
Is therefore it somewhat higher risk? I spent several hours yesterday digging through breadcrumbs in ether skin, going through all the known Alameda and EFT addresses, trying to figure out where the cold wallet was for FCX and I was unsuccessful. The wallets we were able to identify between like the ones Adam posted, Larry Samak posted you identified. It turned out that the amount of Etherium represented in those was all basically being offered for sale on the exchange.

00:14:42:22 - 00:15:14:08
Bennett Tomlin
Like 98% of the total Etherium we were able to be found was currently being like asked for an exchange which suggests either a larger portion of the reserves are an identified or not appropriately stored, or there was someone doing a large amount of spoofing on the exchange. Yeah, neither of those are good. The worst case here that like seems to be the implication with the liquidity crunch and with the things going on is that FCX lent customer deposits.

00:15:14:18 - 00:15:28:23
Bennett Tomlin
I think the most likely counterparty for that would be Alameda Research and possibly FDX Ventures. But it's a very troubling implication.

00:15:28:23 - 00:16:04:17
Cas Piancey
It is. This is a I don't I hope that people understand why this is troubling. But I just to be further explicit here, basically the implication and we can't be sure of this, we don't know for sure until we see what happens with this. You know, I also want to mention this there. The purchase agreement is non-binding and yes, that could be really bad for both Tech and SBI.

00:16:05:06 - 00:16:05:22
Cas Piancey
It could be.

00:16:06:18 - 00:16:30:00
Bennett Tomlin
I think the implication of Ocz going. FCX reached out to us for this help and described this problem to us is that CCS going FCX had a problem. We now know about it. We're getting them for cheap because of it. And in in exchange we're no longer going to destroy them.

00:16:30:00 - 00:16:59:06
Cas Piancey
But see, that's where I maybe this is non-binding like right here is what I'm trying to make this clear to everybody. This is a non-binding agreement. CVC can walk away from it and FTC's could be absolutely ruined and SPF can be in a lot of trouble. And that depends on what CC and and the due diligence team over at finance find and we have we have no idea what they're going to find you have no idea right now.

00:16:59:12 - 00:17:06:18
Cas Piancey
I am not suggesting that he's not going to buy it. I don't know what's going to happen, but it is non-binding and that means he doesn't have to.

00:17:07:01 - 00:17:28:14
Bennett Tomlin
Yeah, no, it's certainly true. And we've seen even SBF use non-binding letters of intent and like deals with performance guarantees and stuff like it is total exposure way down throughout this crypto bear market. And so it's it's almost expected at this point. I do think that like the type of customers FDX has the name recognition FDX has in the U.S. because of all of their advertising spend.

00:17:28:14 - 00:17:43:23
Cas Piancey
Not the same, not the stadium naming rights. FTSE was not the same as FDX. That is what that is. Specifically what SBF said in that tweet thread. That for sure that there what again, who knows how true any of this is? Who knows what ends up happening?

00:17:44:05 - 00:18:03:10
Bennett Tomlin
But my broader point is I think the customer relationship ups with FDX International, which is way larger than FDX and that customer data that FDX has will be valuable enough to CAC that you will eventually get some kind of deal through. But he has backed out before. He backed out in the Forbes deal after making a big deal out of that.

00:18:03:10 - 00:18:04:02
Bennett Tomlin
So we'll see.

00:18:04:11 - 00:18:23:17
Cas Piancey
I think I think the question really becomes, will it hurt him more to take over FDX or hurt him more to pass on this deal? That that is all that it really that's all this really amounts to. Yeah he's deciding how hard he would get hurt if he passed on this deal and let it just die because it would absolute.

00:18:23:17 - 00:18:42:02
Cas Piancey
These are all systemic risks we're talking about. This is not a new term for us. We've been talking about systemic risk for a long time. We've talked about how these exchanges failing is a serious it's a serious black swan event. This is not this doesn't mean like, oh, okay. Well, it'll it'll be a day everything will be back on track tomorrow.

00:18:42:02 - 00:18:59:07
Cas Piancey
Like the fact SGX was likely using customer funds to fund Alameda. This is no joke. This is no joke. And it's going to have serious ramifications. Sorry. Go ahead.

00:18:59:13 - 00:19:26:19
Bennett Tomlin
No, you're absolutely right. And one of those like serious ramifications that I think is worth drawing attention to is the fact that Sam Bankman-Fried was the second largest by filing donor, was like the second largest donor in the Democratic primaries. And has been so active on Capitol Hill, pushing really poorly thought through legislation, advancing poorly thought through candidates, doing a whole bunch of poorly thought through things.

00:19:27:00 - 00:19:45:04
Bennett Tomlin
But his face has been one of the most recognizable and has become one of the most trusted in DC. And suddenly all of those relationships, everyone in DC who had started to become convinced by SBF that perhaps crypto did deserve some regulatory consideration, some additional.

00:19:45:12 - 00:19:46:03
Cas Piancey
Scrutiny.

00:19:46:15 - 00:20:08:23
Bennett Tomlin
Is now going to look at it and go, Oh, that was purchased by this guy, the guy we're investigating for violating sanctions, the guy we're investigating for that, that that's a little uncomfortable. Anyway, this is the guy who purchased all those lending platforms and tried to purchase all those lending platforms that were failing and hurting people. That's not great.

00:20:09:05 - 00:20:30:01
Bennett Tomlin
So I think that crypto lobbyists and like crypto efforts in DC just reached a serious wall that they were not expecting. As one of the most scrutinized entities in crypto by regulators, Binance is now purchasing what was previously one of the more trusted and legitimate entities in the United States cryptocurrency space.

00:20:30:10 - 00:20:46:06
Cas Piancey
Yeah, there's a couple of things I want to touch on there, but the first one, and I think you'll you might have something to say about this because we've discussed it before, but I think everybody is talking about this like, oh, it's a big W for finance, big F for Sam. And, you know, whatever customers are probably going to get hurt regardless.

00:20:46:06 - 00:20:58:06
Cas Piancey
Right. Okay. But I think people are forgetting that FTT was, like you said, seemingly a security for a fixed rate. The FDX token like pretty much that's what it seems to be.

00:20:58:06 - 00:20:59:08
Bennett Tomlin
I'm not a lawyer to be.

00:20:59:08 - 00:21:01:05
Cas Piancey
Cleared by the lawyers.

00:21:01:06 - 00:21:02:00
Bennett Tomlin
It looks like it.

00:21:02:08 - 00:21:27:03
Cas Piancey
Right? It sure does. If it if it looks quacks and feels like a security, it probably is. Which means that the purchaser of FDX, Visa and Binance have their own FTT token and it's called BnB and it trades for a very high value right now. And I think we're talking about the same concept where people go, Oh, but that can't happen to this.

00:21:27:07 - 00:21:35:21
Cas Piancey
I mean, their liquid easy is smart. Is this the number one exchange in the world? What could go wrong? Who knows what could go wrong?

00:21:35:21 - 00:21:37:18
Bennett Tomlin
Does who knows what could go wrong?

00:21:37:20 - 00:22:07:15
Cas Piancey
Maybe nothing. Maybe they're right, but it sure feels like the same exact setup. So we'll see. We'll see. And now everything has gotten centralized, which. Shocking, right? Just absolutely shocking that there could be all the liquidity on one platform. Now, I, I don't know things like this. I start thinking about it and I go, oh, man, this makes it so easy for law enforcement to do whatever they want, right?

00:22:08:08 - 00:22:33:06
Bennett Tomlin
I don't think easy is necessarily right. Like Binance has clearly developed a pretty solid strategy of how to avoid, frustrate and infuriate most law enforcement. Right. They haven't been shut down, things like that. But the number of people you need to go after you after the meaningfully like hurt cryptocurrency did just go down because Binance has been the largest exchange for a while now.

00:22:33:06 - 00:22:52:22
Bennett Tomlin
I think sometimes people don't recognize like how much bigger Binance is, and a lot of these other exchanges like Binance is volume compared to FDX I think was like ten times more or something like that. And we can talk about finances, squash trading and some of the other issues that might affect those numbers. But there is legitimately meaningfully more liquidity on Binance than FDX.

00:22:52:22 - 00:23:09:10
Bennett Tomlin
Regardless of what the official numbers are. And so like yeah, and now he's going to take over FDX Coinbase can't make money and is burning $500 million a quarter Kraken's volumes keep shrinking. Gemini's volumes, I believe, are shrinking.

00:23:09:15 - 00:23:12:19
Cas Piancey
Like, does anyone even think about Gemini anymore? Give me a break.

00:23:12:19 - 00:23:17:16
Bennett Tomlin
I know like legitimately. Yes and Justin Sun bought out will be.

00:23:18:02 - 00:23:19:06
Cas Piancey
And pull up and pull out.

00:23:19:19 - 00:23:49:05
Bennett Tomlin
Yeah Justin Sun did it but definitely did buy will be through the capital management firm we cannot pretend he doesn't but you can tell what he actually did buy what he tweets about and so yeah this puts CC in a now even more powerful place in the cryptocurrency industry. And so you could argue that like going after CC, shutting down Binance and any related subsidiaries and then going after the Tether gang or something like that destroys the liquidity in the system, right?

00:23:49:11 - 00:24:03:01
Bennett Tomlin
And so like if there is a place where if law enforcement, if regulators wanted to, which I've not seen evidence that they do want to, wanted to like seriously try to hamper cryptocurrency, they could and you're right, this does make it easier.

00:24:04:03 - 00:24:34:09
Cas Piancey
Yeah. Yeah. I also want to I know that this is more of a personal statement and a little bit of what we're discussing right now. But I will say that this is now three times like so initially, I would say I don't know, most most skeptics and critics probably weren't huge fans of the so-called supercycle theory proposed by three arrows capital.

00:24:34:09 - 00:24:36:13
Cas Piancey
This was Jesse. He's back. I did tweeted.

00:24:36:13 - 00:24:38:08
Bennett Tomlin
Again. Yeah, he's fucking tweeting.

00:24:38:13 - 00:25:05:01
Cas Piancey
Good morning, GM, everybody. Yeah, well, I mean, what does he have to fear? Who knows where he is? He's either in Switzerland or U.A.E.. I mean, he's fine anyway, I think not many critics and skeptics believe the so-called supercycle, which for anyone that's not familiar. Good, good. I'm happy for you. But the concept was more or less just like it's like the it's like a stock to flow.

00:25:05:01 - 00:25:28:08
Cas Piancey
It's like it can only go up. Bitcoin can only go up it it can never go down that we're entering the new supercycle. I think their prediction was 100 K and so that was baloney. Critics and skeptics were calling it out as baloney years ago. And then we have Joe Klein saying that his algorithmic stablecoin, you know, threw statistics sufficed to treat statistically.

00:25:28:08 - 00:26:13:19
Cas Piancey
How do I say it's sophisticated language? Joe Klein basically just fooled people into thinking that he created a perpetual motion machine. And lo and behold, the critics and skeptics said, that's bullshit and it failed. And now a lot of critics and skeptics and others calling out SBF, calling out these exchanges. And for a long time it's not new, like calling these guys out for trading against customers, saying it sure does seem like an Alamitos are super close and tight and that's weird and other critics criticisms and have been told how stupid we are have been told like well these these guys are super rich, you guys are fucking dumb.

00:26:14:16 - 00:26:21:10
Cas Piancey
You guys don't have money like they do. You're just you're just talking you're just commentators.

00:26:21:10 - 00:26:51:05
Bennett Tomlin
So so just pausing for a moment. And just to be clear, there's Alameda Research, which is a cryptocurrency market maker, quantitative trading and venture capital funds. There's also FDX Ventures, which also supposedly operates independently, FDX, FTSE, now Binance's, Binance, U.S., the rest of Binance's subsidiaries across a bunch of other countries, Binance Ventures and Binance Labs, like the conflicts of interest, are so blatant and so obvious and like we've talked about before with like tether as well.

00:26:51:07 - 00:27:11:05
Bennett Tomlin
One Carlo, David, Simeon, Silvana de Stefano, the CFO and CIO of Tether respectively are partners in a cryptocurrency hedge fund, Blue Bet Capital J. L Vanderbilt. The CEO of both Bitfinex and Tether, is the executive director of a Hong Kong based venture capital firm. All of these idiots are conflicted. All of these idiots are trading against you. All of these idiots are trying to take advantage of you.

00:27:11:05 - 00:27:18:23
Bennett Tomlin
Idiots and idiots. Our audience, the idiots in cryptocurrency, the people listening to us so unique and smart.

00:27:18:23 - 00:27:38:21
Cas Piancey
I also want to say I don't want to give credit to the person because I don't know if he would be comfortable with it. But we had a friend of ours reach out to us a while ago and suggest that market makers and Alameda and other people were basically insolvent insofar as they were taking equity in a bunch of low cap, illiquid garbage.

00:27:39:00 - 00:27:59:13
Cas Piancey
And he and he was telling us, like, if anything happens, there's going to be serious issues with their liquidity like this. This is I think this was two years ago, something like that. Two or three years ago. And again, I'm not going to name him, but this is somebody who like is familiar with trading firms and was interacting with them, trying to get market makers to work with the company he was working for.

00:27:59:18 - 00:28:23:11
Cas Piancey
And he was saying they were all offering they were saying, sure, we'll market make for you. You give us 20% equity. If you give us 30% equity like absurd numbers, obscene numbers for a completely illiquid company like you're you're banking on something going awfully right in the situations. And I think he he ended up not using them because he didn't trust those those numbers.

00:28:23:11 - 00:28:45:14
Cas Piancey
He thought they were insane. But like this is not new. This shouldn't surprise, I think, people who have been we're not we don't trade, we don't talk to these chop shops and trading firms like that. That's not we don't do that. But plenty of people in the industry do. And I don't think they're that surprised by this, to be quite honest with you.

00:28:45:14 - 00:28:55:12
Bennett Tomlin
I don't know. I think that this and three Arrows Capital were both pretty surprising. If you'd asked people two weeks before they ended up happening.

00:28:55:17 - 00:29:17:12
Cas Piancey
He was three. He was I think that I think that did surprise people because I think they made themselves sound so smart that everyone in the industry actually believed it. I think this if you're trading and you're asking questions and you're following stuff on chain, you should have questions about about FDX and Alameda like this shouldn't be a 100% surprise.

00:29:17:16 - 00:29:24:23
Cas Piancey
I think this is the discussion has been going on for over a week now. And if anyone was just utterly shocked by this, they weren't paying any attention.

00:29:24:23 - 00:29:47:06
Bennett Tomlin
Well, sure. But two weeks ago, two weeks ago, if you took a poll of like. Sure. Large traders, other hedge funds, other trading firms and said, do you believe that in three weeks FCX will be sold to another exchange because they'll have they won't have sufficient liquidity to cover their withdrawal? Sure, most people would say no, of course not in the best exchanges.

00:29:47:12 - 00:30:13:01
Bennett Tomlin
And so even if there is still an undercurrent of anyone can fail at any time in cryptocurrency, I don't think anyone was really expecting FCX to be the next exchange to fail. And especially since it's funny when I say a couple of months ago was saying like some exchanges are secretly insolvent already and that if we end up growing as we're growing, we could buy Goldman Sachs oxy.

00:30:13:01 - 00:30:34:22
Cas Piancey
Yeah. Well, I mean, and I pointed this out a few days ago, I said there is a difference between insolvency and bankruptcy. And that is true. I want I'm not backtracking on that. But someone said, well, that's true, but you can't be insolvent for very long. The longer you're insolvent, the likelihood of your bankruptcy goes up exponentially. And I think we're seeing that play out today.

00:30:34:23 - 00:31:04:13
Cas Piancey
Like that is exactly what happened. And they were right, though. There is a difference between insolvency, which means you don't have enough assets to cover your liabilities. If that doesn't change somehow, then you are bankrupt and there you go. FCX is bankrupt and we, like you said, we know why. Whether we know exactly why, we don't we don't know exactly why, but we do know why and I think there shouldn't even be much question about that.

00:31:04:13 - 00:31:30:17
Cas Piancey
And the question, though, for people now should be how much do you trust your exchange and how do you know they're not doing the exact same thing? You'd hope. You'd hope not. You'd hope Coinbase and Kraken and these other and these other, you know, Binance, etc. would know better.

00:31:30:17 - 00:32:10:10
Bennett Tomlin
I know we have a lot of issues with Bitcoin Maximalists in general, but I think like the key day thing they came up with in their emphasis on like self-custody and trying to teach people like not your keys, not your coins, giving them to these custodial services and whatever is at risk. Regardless of the hypocrisy of many Bitcoin Maxis who then go on to endorse custodial services and give all their bitcoins, etc. I think that message is still a useful one and it does hammer home that when you're trusting these barely regulated, unregulated bucket shops, you are at serious risk of losing your assets and that regardless of what the terms of service say, at

00:32:10:10 - 00:32:16:12
Bennett Tomlin
some fundamental level, you're giving an unsecured loan to this third party and hoping that you'll be able to get it back out.

00:32:17:03 - 00:32:40:01
Cas Piancey
Yes. And a comment on that as well, which is that all of this started I mean, when I started learning about cryptocurrency and Bitcoin, I the whole the mantra in 2017 and 2018, everybody was saying was, don't trust, verify, don't trust, verify, don't trust, verify. We don't hear it as much anymore. But, you know, constantly, constantly, everybody telling us we had to do that.

00:32:40:19 - 00:33:00:20
Cas Piancey
That's how that teaches you to look on chain. That teaches you to be like, okay, I guess if I am going to be invested in this industry, then I need to abide by those rules and regulations. Your personal rules and regulations, not real rules and regulations, your own of being like, I need to look and see if this is legit or not.

00:33:01:05 - 00:33:25:16
Cas Piancey
And I think this proves time and time again that human laziness gets in the way of that. And most people just don't have the time to check and verify every single thing. It's like such a discrepancy from where cryptocurrency started to where we are now, where people are like, I can't believe that. Sam Bankman-Fried and Three Arrows Capital Lead you us.

00:33:25:21 - 00:33:45:11
Cas Piancey
How could they? What do you mean? Like, we've been hearing this for four decades now. Like, this is the same thing people said about Enron. They're one of the biggest oil companies in America. Why would they be fraudulent? I don't know. I don't know what to tell you. They are, though. WorldCom is the second biggest telephone company in America.

00:33:45:12 - 00:34:00:00
Cas Piancey
Why would they do fraud? I don't know. Maybe that's how they got to number two. You know, like it's it's just it's just mind boggling to me that people still use the idea of like, well, they have money. They must be smarter than you.

00:34:00:16 - 00:34:27:14
Bennett Tomlin
Well, and a point you made there, like the difference between insolvency and bankruptcy and like we saw with Celsius with them trying to kind of hide the insolvency first by I mean, well, by manipulating sell token and with the large loan from tether to keep the show going is that like often the decision to begin committing fraud is because you're in a situation where for whatever reason, you don't have the cash, the asset, the whatever that you expected to.

00:34:27:20 - 00:34:45:16
Bennett Tomlin
And you think you're going to be able to take this one time action, just this one time. We're going to do this. We're going to get through it in next quarter. Don't worry, it'll be fixed. Things will be back on track and then the problem will be solved. However, that's not normally how it goes once you take that first step.

00:34:45:16 - 00:35:13:17
Bennett Tomlin
For most people, the analysis of white collar fraud says you're going to continue to take more steps. And so often if you are insolvent, bankruptcy is not the worst option. Bankruptcy is your chance to negotiate with the people that you owe money to and try to find a fair and equitable solution for everyone involved. It's often the actions taken to avoid that are materially worse.

00:35:13:17 - 00:35:42:02
Cas Piancey
Right, right. And let's I also want to mention this is not just been this is not the only news story going on right now. The government announced that last year they seized 51,000 plus Bitcoin, which your size is not size that size and that they had basically that this gentleman had stupidly called the police to report a burglary and said they stole a lot of bitcoin.

00:35:42:07 - 00:36:06:00
Cas Piancey
And so the IRS decided to investigate him. And lo and behold, he had stolen these 51,000 plus Bitcoin from the Silk Road in 2012, over a decade ago, or almost a decade ago at the time of his seizure and arrest. But people are talking about this because ultimately, what do you think's going to happen with those bitcoin? They're going to get auctioned off.

00:36:06:10 - 00:36:11:01
Cas Piancey
The U.S. government is going to auction those 51,000 plus Bitcoin off. And like you.

00:36:11:01 - 00:36:12:15
Bennett Tomlin
Say, it's going to buy them.

00:36:12:15 - 00:36:16:13
Cas Piancey
Right? It'll be Tim again, I'm sure. I don't even know how much money he has left anyway.

00:36:16:17 - 00:36:17:21
Bennett Tomlin
More than should be.

00:36:18:18 - 00:36:41:12
Cas Piancey
Absolutely true anyway, when that happens, it's. It's going to be a sight to behold. It will probably in some way we'll see how or if. But I mean, it's not a good thing for price action. I assume they weren't going to sell it on exchanges. So, you know, it'll be an auction. It will be essentially an OTC sale.

00:36:41:12 - 00:36:47:11
Cas Piancey
But still, it's an insane amount of money. It's over valued at over a billion right now.

00:36:48:23 - 00:37:15:02
Bennett Tomlin
Well, yeah. And so you've got those. I think it's likely that Heather Morgan and Duch are likely going to plead guilty. So eventually those Bitfinex coins could hit the market too. And someday, someday, Mt. Gox is going to finish returning Queens to creditors. Right. Like it's been years. At some point they maybe have to send those coins. Don't know when that's going to happen, but these coins will eventually return to the market.

00:37:15:10 - 00:37:53:22
Bennett Tomlin
Yeah. Yeah. And you're right. This isn't even the only wild news like there was the SCC when a case against the library token finding its security and finding that like basically if you keep some of your premium for yourself, then anyone who buys it has a reasonable expectation that there's an expectation of profit because that's why you're keeping it, which is like a potentially massively large decision that puts a lot more cryptocurrencies in the crosshairs, which gets back to I think it's important that like the friendly face to regulators is now being bought out by the least friendly face to regulators, because now regulators may go, Oh, okay, let's go.

00:37:54:15 - 00:38:22:10
Cas Piancey
Yeah, yeah. I mean, who as as someone stated, it's not even clear who owns finance. I mean, this is it's no one knows where it's located, who owns it, what's going on with it. So it is a shadowy organization, let's say, and nobody nobody is clear what's going on with it. Not the best for that to be the number one liquidity provider and exchange in the cryptocurrency.

00:38:22:10 - 00:38:35:21
Cas Piancey
Do we is there are there any other have we gone over most of this? Is there more that we should discuss in regard to? Is there any question? Do we? I haven't checked in on the YouTube. Is there any questions or anything?

00:38:35:21 - 00:38:56:18
Bennett Tomlin
This this has been a crazy couple of days. I think we've hit most of the important notes in terms of like what effect this is going to have, but don't piss off cc. I think a month ago Sam tweeted at CC saying, yeah, but at least I'm allowed in DC and a month later CC owns it.

00:38:58:17 - 00:39:23:08
Cas Piancey
It is wild. It is a wild turn of events. As you said a few weeks ago, nobody could have seen this company coming. And yeah, I'm grateful that people wanted to hear us chat about it for a while. I suspect there's a lot more to this story. The story isn't over yet. We're going to be dealing with this in the weeks and months to come.

00:39:23:08 - 00:39:30:07
Cas Piancey
And jeez, I don't know. It seems like I don't make price predictions, but down only feels very real right now, doesn't it?

00:39:31:01 - 00:39:37:15
Bennett Tomlin
Okay. I also make price predictions, but I also sleep comfortably knowing I have no exposure to cryptocurrencies.

00:39:38:10 - 00:39:43:04
Cas Piancey
Yeah. Free outflow treasury direct gov. Right. The the opposite.

00:39:43:14 - 00:39:51:22
Bennett Tomlin
But anyway get some inflation adjusted bonds. Those things are awesome. Great. Not financial advice.

00:39:51:23 - 00:39:52:19
Cas Piancey
Not financial advice.

00:39:52:19 - 00:39:57:05
Bennett Tomlin
Thank you. I just bought a small, but I just personally loved the bonds.

00:39:57:23 - 00:40:20:04
Cas Piancey
I mean, it was a great it was a great a great thing for us to get turned on to by Elmer Fudd. But anyway, I yeah, I think that, I think that kind of covers it. It's been it's been wild. I appreciate everybody joining us to hear us discuss this. I guess if there are any questions that we missed or something, maybe we can address them on our Twitter or something like that.

00:40:20:05 - 00:40:41:03
Cas Piancey
I, I still have in fact, to use here. I'm, I'm just here. I got it. But anyway. Yeah. Thanks, everyone. Well, we'll talk soon. Make sure that, you know, we've said that. We said this before. Cash point is fine. Cash for an exchange is fine.

00:40:41:03 - 00:40:43:21
Bennett Tomlin
Okay. And did.

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