Crypto Revisited (Part Two)

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Sam was surrounded by the elite of the academic elite. Effective altruism is about using your.

time and money as effectively as possible to make the world a better place. Sam set up a.

cryptocurrency trading company. He'd eventually call it Alameda Research. We want a bank account,

and if we're a Bitcoin arbitrage trading shop founded by a bunch of 20-year-olds, if that's the name of our company, we're knocking their bank account.

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A problematic behavior was initiated. Sam's band of crypto novices began exploiting a Bitcoin price difference between the Asian and American markets, where they purchased Bitcoin in the United States and resold it at a higher price in countries like Japan. Sam would eventually move Alameda Research out of the United States.

At this point, where is most of crypto happening? It's not in the States, it's in Asia.

That's Sam Bankman Freed explaining his company's move.

And so it also kind of became clear that, you know, if we really want to have relationships with our customers, the place to be was, well, at least somewhere in Asia. Sam chose Hong Kong. And then why Hong Kong? Well, we thought about a bunch of different things here, including like what's centrally located, where is the bulk of crypto happening, what's the relationship of the country like to the important jurisdictions in crypto, and how easy is it for foreigners to get to set up shop there? And sort of all.

of those bind together. Foreign markets like Hong Kong also didn't have the tight regulations that were in place. in the United States. Sam's Alameda Research was at times shifting as much as $25 million a day. But the good times didn't last for long.

Be wary of fast-growing financial services companies, because ultimately anybody could grow a financial services company quickly if you just give away a lot of stuff.

That's a representative from Doomberg, one of the most widely read finance newsletters on subscription-based platform Substack. We'll be hearing more from Doomberg throughout this series.

I was the one that hired our early lawyers.

That's Sam's father, Joe Bankman, in an August 2022 podcast discussing his early work with his son. According to Joe, Sam had been asking him for help in the early days of his cryptocurrency.

ventures. I wanted to make sure that I could do it and be useful. But I think from the start, whenever I was useful, I lend a hand. And it was clear at the start that on things like law, I mean, the company didn't have any lawyers. So I think my utility there was pretty obvious.

From the beginning, there was a problem with Alameda Research's business model. To make big money in the trading business of buying low and selling high, you need to be right practically every time. If you're wrong, if you instead buy high and sell low, you can lose everything in one day, especially if you're using algorithms to trade. in the volatile ecosystem of crypto. The smart money in the world of finance typically tries to go a different route.

of crypto.

After we close today, I'm going to visit one of my sons, who has a startup in Berkeley.

That's again Sam Bankman-Fried's father, Joe Bankman, in early 2018.

It's a business, and my father was a businessman, and while I'm not, quite evidently, I feel my father jumping into my skin a little bit and appreciating the intricacies of the business he's built.

Joe was a law professor at Stanford, but in the early days of Sam's CryptoVentures, Joe had a side hustle helping his son. While Sam was busy trying to grow Alameda Research, his father, Joe, was exploring some of the legal issues surrounding cryptocurrency.

Welcome to Stanford Legal, where we look at the cases, questions, conflicts, and legal stories that affect us all every day. I'm Pam Carlin, along with Joe Bankman.

Joe co-hosted a Stanford Legal podcast. Just as hundreds of new cryptocurrencies flooded the market, Joe and his co-host were introducing the industry to his audience.

So, Joe, suppose that you and I decide to go in on a gift certificate to send a beloved friend to a day spa, and I owe you a bunch of money for it. I could hand you the cash, as I did, or I could write you a check. You could tell me your bank account, please, and then I could make a deposit or else maybe a withdrawal. I could use a credit card if I was buying the gift certificate from.

the spa itself, or I could use PayPal, although I wouldn't. Those aren't the only ways to pay.

people these days. That's right. You could also use blockchain technology. Blockchain's kind of a master electronic ledger that records transactions. It's often used with a cryptocurrency like Bitcoin, and supporters say that blockchain technology is actually faster and cheaper as a.

way of sending money. By September 2018, most people had already heard of Bitcoin, far less knew about the alternative crypto tokens flooding the market. Joe Bankman asked two crypto experts about some of the growing oddities within the industry.

How about these things that are called ICOs? There's thousands of crypto currencies. I don't know if you'd call those digital assets. Tell us about those. ICOs are at the next level of.

complexity. An ICO is an abbreviation for initial coin offering. It's probably not an accident that ICO sounds a lot like IPO, or initial public offering, when a private company issues shares of its stock to the public for the first time. The expert went on. Generally, ICOs describe a.

system that's going to use something like blockchain technology at some point in the future to do something that isn't done now, and you most frequently pay for these ICOs by using crypto. Now, in my own personal opinion, the large majority of these ICOs are frauds or they're.

going to fail. I totally agree with that, by the way. According to these experts, a new type of fraud was entering the crypto community, and it was entering through these initial coin offerings. These new digital tokens may have used blockchain technology, but in many ways, they were controlled by the companies that created them. The cryptocurrency world was taking a detour away from the ethos of Bitcoin, where Bitcoin was about freedom, and used the blockchain to create a decentralized digital cash that bypassed the central banking system.

Can you give me a, for instance of like? what is it they promised to do?

Sure. Let me use one that the SEC sued. It was called Munchies, all right? That if you sent crypto to the people who are going to issue these Munchie tokens, you would, in the future, get a token or a coin or a bit of code that would allow you to get discounts at restaurants, and, in return for that, you would Instagram photos of the food, you'd write reviews of the food. So it would be a mini economy built around food and restaurants and the like, and the currency that you would use would be these Munchies.

In essence, these new types of cryptocurrencies looked more like vehicles to invest in a company rather than a form of digital cash. At least that's what the Security Exchange Commission thought.

The SEC wasn't thrilled with this, and they actually went and they sued the people that were launching the Munchies. They said you had to register these, you didn't register them, and they settled and they withdrew the plan to raise crypto for the Munchies.

Sam Pickman-Fried's father seemed dumbfounded by this scheme.

You know, it's so outlandish that I'm tempted to accuse you of just making that up. How many of these have been sold? Who's buying them?

In calendar year 2017, there was about $3 billion raised through ICOs. This year, in 2018 year to date, you've already had $10 billion raised through ICOs. So it's actually increased a lot. And I don't see it slowing down anytime real soon, in part because I think we haven't seen as many regulators get as aggressive as I think they probably should in regulating what is a little bit of a chaotic market. Joe Bankman concluded the discussion.

with an obvious question. Let me maybe close by covering something a lot of people are wondering about, which is how do we value these assets? I mean, Bitcoin goes from nothing to $15,000 to $6,000.. However useful they are,

how do we know what they're worth? The short answer is who the hell knows? There are all sorts of theories. I don't think a single one of them actually works. I have profound concerns about the reliability of information in the market.

These ICO tokens sounded outlandish to Joe Bankman, but this new genre of digital token was clearly making money, big money, with very little regulatory oversight. People were, in essence, issuing company stock in the form of a private cryptocurrency token without having to undergo much of the oversight of an initial public offering.

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of making money. It was a great way to start a company. I highly recommend it.

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So by 2018, the cryptocurrency world was quietly undergoing an evolution. Bitcoin was monopolizing the headlines, but new types of cryptocurrencies were entering the market. Unlike Bitcoin, where computers had to work hard solving mathematical problems, to mine a limited number of Bitcoin, some of these new crypto tokens were just created at will. They looked less like digital cash and more like an initial public offering of a stock. In fact, they were even called by a similar name, Initial Coin Offering, or ICO.

We also recently launched a derivatives exchange in crypto called FTX.

FTX was an exchange where people could trade and store different cryptocurrencies. With Gary's knowledge of writing code, and Sam's experience working as a Wall Street trader, the two could create a cryptocurrency exchange that had the look and feel of a legitimate stock exchange platform. A platform so sleek that it could attract the traditional trading community. As Sam and Gary were developing, FTX, alternative cryptocurrencies got a jolt of credibility.

Facebook announcing a new digital currency called Libra, and Facebook says this digital currency aims to make it as easy to send money around the world as it is to send a photo.

With Facebook entering the race, the crypto gold rush expanded. No doubt seeing the opportunity, Sam quickly jumped in the game.

Now, in my own personal opinion, the large majority of these ICOs are frauds or they're going to fail. I totally agree with that, by the way.

Sam called his new cryptocurrency FTT. It may have been a digital token like Bitcoin, but unlike Satoshi Nakamoto's brainchild, FTT was not mined by computers performing massive amounts of computational work. Sam just made FTT tokens himself, out of thin air. These tokens functioned kind of like a stock in his company, FTX. He now just needed investors to put their money into that stock.

It was around this time that a man entered Sam's life.

So I was born in China, and then I moved to Canada when I was 12.

That's Chongpeng Chow, that goes by the moniker CZ.

And then, in 2005,, I returned to Shanghai to do a startup together with five other funders.

While at this startup, CZ began to hear about something called Bitcoin. And at the time, in 2013,, many people from traditional Wall Street were, let's just say, they weren't too fond of this new cryptocurrency.

I just had to get your thought on Bitcoin.

Famed investor and vice chairman of Berkshire Hathaway, Charlie Munger, was asked for his thoughts on Bitcoin.

This digital currency. that's out there, that people say, oh, it might be the next big thing. What do you think?

I think it's rat poison.

Do you understand what they're trying to do with it?

No, but I regard it as deeply flaky.

CZ, coming from a traditional Wall Street firm like Bloomberg, may have taken Charlie Munger's words on the matter as gospel. But then he attended an event.

But the thing that turned for me was the Vegas conference in December 2013.

Do you recommend it to other people?

I'm going to recommend it to everybody.

By far the best conference I've ever been to. InsideBitcoin's 2013 was one of the industry's first large-scale Bitcoin conferences.

So I went there, I went to Vegas to learn about Bitcoin and met a bunch of people.

It was really a group of nice people. They're not money-driven. They're very nice.

CZ understood the blockchain technology behind Bitcoin and thought it worked.

So after that conference, I said, OK, if this is the community that's around, I'm very happy to join this industry. And I know that it will be the future. So I know. basically it's like discovering the internet in 1989..

By the end of the conference, CZ decided to leave the startup he was working at.

And I decided to jump full into crypto. Back then it was called the Bitcoin industry.

So I worked at a couple of other crypto exchanges first. And then by 2017, we thought the timing was about right. We want to take a shot at it.

CZ launched Binance, a cryptocurrency exchange.

We just said, well, let's take a shot and see if it works. When we started in 2017, most of the exchanges are unusable on half of the days. Because of the volumes too high. So we thought we could improve that.

So by the time Sam Bankman-Fried was developing FTX in 2019, CZ was its veteran as they come in the cryptocurrency industry. He was running a wildly successful crypto exchange himself and was just the type of man that Sam needed to put his crypto exchange FTX on the map.

2019, Sam and I actually talked about potentially collaborating our futures exchange together. Somehow, it didn't pan out, but we actually ended up investing in FTX.

By the end of 2019, CZ became one of the first major investors in FTX. And in return for his investment, Sam gave CZ a bundle of FTT tokens. To get others to invest in his venture, Sam offered FTX users rewards and discounts if they stored their funds in his FTT tokens. In a way, Sam was getting people to buy a kind of stock in his company. But all they really owned were bits of computer code that Sam created out of thin air.

When you study the history of frauds in the middle of manias, again, there's sort of, I think there's two categories of frauds. There's frauds that happen all the time. There's con games and conference schemes. But then there's people who are attracted to manias with the, maybe not the intent originally to commit fraud, but very early on fraud occurs. And we wrote about this in one of our pieces, sort of incrementalism.

Alameda Research may have had an unsustainable business model, but with FTX, Sam's crypto ventures began to stabilize. Just long enough for Sam to catch a ride on a crypto tsunami.

We begin tonight with the growing concern, as the toll from that deadly coronavirus now grows, spreading from Wuhan, China. And tonight, that first case here in the U.S., the patient in isolation now being treated by that robot.

The coronavirus outbreak may be battering stock prices, but it's boosting the fortunes of Bitcoin. The value of the cryptocurrency is now hovering at around $9,300.. That's up nearly 10% over just the last week.

As the price of Bitcoin rose in 2020, Sam Bankman-Fried began to explore his effect of altruism. But in practice, the philosophy looked familiar.

When you think about how much impact something like the presidency can have on the world, I mean, whatever you think about it, you know, whoever you think would be good or bad at it, it clearly matters.

Alameda Research donated $5 million to Joe Biden's 2020 campaign, making Sam the second largest donor to Biden's campaign. Sam's brand of effective altruism looked a lot like old-fashioned political lobbying.

You know, you could look at like the budget, you know, and like how much impact does the president have on the budget? You know, I think we're up to like $20 trillion over a term or something like that.

He'd spread his effective altruism donations to other politicians as well, on both sides of the aisle. After Biden's win, Sam's business exploded along with the price of Bitcoin.

You know, we have low volumes between Christmas and New Year's. Yet Christmas Eve to Sunday, it rose over 20%, breaching that $28,000.. I mean, can this actually last?

So the next level we're kind of looking at here is the $30,000 level, which is really astonishing, thinking about from where we started at the beginning of the year.

Bitcoin, it broke through the $50,000 level just a short time ago.

It's now up more than 70% since January 1st.

The price of Bitcoin has passed $60,000 for the first time this weekend.

But take a look at this, to the moon.

As Bitcoin's price rose, the price of Sam's FTT token skyrocketed along with it. FTT tokens went from roughly $3.50 on Election Day 2020 to nearly $60 a token just six months later. At the time, no one quite understood why FTT's price rose. Sam and his inner circle looked like geniuses that could do no wrong. An idea that they started buying into.

And talking with them. You know, I think they've been interested in crypto for a while. And they're obviously extremely impressive people.

It was when Bitcoin was at $65,000.

How did you do this so quickly? I mean, your company is two years old. And you're doing something like $400 billion worth of volume per month.

And having been around a few of these market cycles, like I'm sure you have, I just couldn't believe what I was seeing. Now, of course, it was way too early. And, you know, Bitcoin did its thing. But from the moment I saw the man, it stunk to me.

But the finance world was buying into Sam's sloppy persona, literally. Sequoia Capital, one of Silicon Valley's most storied venture capitalist firms, jumped in line to give Sam money. I mean, this was a firm that invested in Google, PayPal, Instagram, Zoom, and Apple. But Sam seemed unimpressed by their track record. When he pitched the firm, he was playing the video game League of Legends.

In the history of financial manias, at their apex, they all suffer from the same characteristic, which is fear of missing out. So we've been asked, how is it that $1.8 billion of VC money from the most prestigious venture capital firms in the world would find its way into Sam Bankman-Fried's scheme? If you can convince the world that you're the hot deal, you can get away with anything. And he did. And I do think this is sort of a universal trait of humans.

Sequoia eventually forked over $210 million to Sam Bankman-Fried. And Sam was just getting started.

And if you look, literally the terms of those investments, that's Sequoia and SoftBank and the Ontario Pensions Fund and Dan Loeb, and pick your favorite big name investor who has fiduciary obligations to their own investors to do some semblance of due diligence in this regard. Literally, the terms of engagement were, here's the price. Here's the timing. You fund by Friday or you're not in the deal. And they just said, I'm in the deal.

He pitched us in that $17 billion round.

That's famed Canadian-American venture capitalist Chamath Paliapatiya. Recalling the time, Sam and his team pitched his firm in the summer of 2021..

And I did a Zoom with him. And after the Zoom, I'm like, this doesn't make much sense, but I'll have my team do some work. We did some work and we sent him a two-page deck. And we said, here are our recommendations for taking the next step. One was the formation of a board.

transactions.

And the person that worked there called us back and literally, I'm not kidding, you, said, go, f**k yourself, was quote-unquote the response to us.

The finance world was throwing so much money at Sam, with no questions asked, that he could tell investors like Chamath to go pound sand. When he was done with his fundraising tour, FTX raked in an industry record $900 million. FTX, a company that created their FTT tokens out of thin air, was now valued at $18 billion.

Can I talk to you about something? Yeah, we talked about it. I got another 10 years left, maybe 15..

Not bad. This is big.

With his windfall, Sam began running ads for FTX with celebrity endorsements like Tom Brady and Giselle.

FTX is the safest and easiest way to buy and sell crypto.

It's the best way to get in the game.

By September 2021, Sam moved his companies from Hong Kong to the Bahamas. And when he stated his reason for the move, he hinted at a plan that was in motion.

What was pushed you over the edge to need to move the company away from Hong Kong?

Yeah, so I think the biggest thing that we're thinking, we'd never had a single sort of formal headquarters before. And we were really excited about establishing one in the Bahamas. I think the biggest thing is, first of all, they passed a really progressive, forward looking bill regulating the crypto industry there. It's one of the only countries in the world that has a comprehensive licensing regime for crypto exchanges. That's really exciting.

Sam appeared to have something up his sleeve. By the end of 2021, a plan was in motion, a plan to take out his biggest competitor, Binance, owned by his friend, CZ. You see, a few months earlier, Sam decided to distance himself from CZ by buying out his stake in FTX. He then proceeded to badmouth CZ's effort in complying with government regulators.

How have you viewed what's been happening with Binance throughout the world in recent months or weeks? Yeah, it's been quite the barrage. I guess, you know, something I'll say is that, you know, we try really hard to be as cooperative as we can with regulators. We try to be proactive about doing what we think is not just compliant, but also, you know, within the intentions of where regulators want to go. When you don't do that and when you sort of appear less flexible or responsive, I think that's more likely to lead to cases where regulators might feel like, you know, they have no choice but to start, you know, bringing the hammer.

It appeared that Sam was trying to position himself as regulator-friendly, while his primary competitor, CZ, was not. As the end of 2021 approached, Sam was openly talking about the need for regulations in the cryptocurrency industry.

And I think, you know, you've heard Chair Gensler say, you know, again and again, look, we would love to see crypto platforms come in and register.

Gary Gensler is the chairman of the Security and Exchange Commission, the federal commission that sets and polices stock market regulations.

If I had to guess, I would guess that, you know, he and the SEC have been thinking about what a regime like that might look like. I would not be surprised to see developments over the next year on that.

If Sam could influence the industry's U.

Hi, everyone. It's me, Katie Couric. If you follow me on social media, you know I love to cook, or at least try, especially alongside some of my favorite chefs and foodies, like Benny Blanco, Jake Cohen, Leidy Hoyt, Alison Roman, and, of course, Ina Garten and Martha Stewart. So I started a free newsletter called Good Taste that comes out every Thursday, and it's serving up recipes that will make your mouth water. Think a candied bacon, Bloody Mary, tacos with cabbage slaw, curry, cauliflower with almonds and mint, and cherry slab pie with vanilla ice cream.

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and hundreds of times a day.

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We didn't have a particular technology. We didn't have a way of making money.

It was a great way to start a company.

I highly recommend it. What could go wrong? How do you sell millions of dollars worth of dog ramps for wiener dogs in the middle of a pandemic?

We're working with 400 influencers, and the majority of them are actually not a person, but it's actually a dog.

I can tell you right now, the dog ramp guy has some very interesting problems. Listen to What's Your Problem on the iHeart Radio app, Apple Podcasts, or wherever you get your podcasts. I'm Ben Adafafri, host of the history podcast, The Last Archive, and I want to tell you about a new series we're running in our feed. It's called The Deadline, and it features six essays written and read by Jill Lepore, the New Yorker writer, American historian, and founding host of our show. These are incredible essays on everything from the history of cryogenics to the Silicon Valley gospel of disruption.

This is a crazy origin story. I don't think I've ever told this before.

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Mr. Bankman-Fried, you are now recognized for five minutes to present your oral testimony.

Thank you, Chair Waters, Ranking Member McHenry, and all the members of the committee for having me here today to testify. It's an honor to be here.

Sam testified before Congress about the future of finance, and he argued for the need for more regulations in the cryptocurrency industry.

I think that it is coming, and I think it is important, and I think that it is healthy, that the industry will be regulated. I think it is also already regulated in a number of ways. I think that there are points that need to be addressed to give oversight of various aspects of the industry that do not have sufficient oversight right now. And I also think that it is important to do so in a reasonable and common-sense way that understands the industry.

Well, if you look at the history of FTX, what you'll see is there is a constant need to defeat opponents. Any competitor. to FTX as an exchange or Alameda as a VC arm, they went after their competitors.

That's Ben Armstrong, crypto enthusiast and creator of BitBoyCrypto.

I always say, you know, the easiest way to become the tallest building in town is to tear down all the other buildings. And that was what they were trying to do. They were trying to create a monopoly through tearing other companies down.

It appeared that Sam was making a play to gain monopoly control of the American crypto industry by taking out his primary competitor, CZ's crypto exchange Binance.

When you really look at, you know, CZ versus Sam, for about six months, there was a deterioration of that relationship. And I believe CZ found out more and more about what Sam was doing. And then at some point he found something out that was like, OK, now I can't, I can't look back. I can't turn away at this point. I got to, you know, slam down on this and do something.

Coming up on Red Pilled America.

This guy's just flippantly saying we had people wired to Alameda's bank accounts because FTX, quote, didn't have banking is incredible. Like you're just admitting wire fraud, which is all the more incredible when you consider that his parents are professors at Stanford University.

I think there's been a number of headlines, as you know, about FTX, the company buying a lot of real estate up in the Bahamas. But then there's also reports that your parents signed and were effectively provided with.

what seemed like a vacation home.

I don't know the details of that house for my parents.

And when they needed more money, they would just print more FTT and then they would be able to immediately add value to their balance sheets.

I am no cryptocurrency expert.

I'm no finance expert.

But I don't think you answered my question. I was asking, did you know that FTX deposits were used to pay off Alameda creditors?

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My name is Michael Wolff. Each week, on Fire & Fury, the podcast, I take you deeper into the mind of Donald Trump and his campaign than any other journalist ever goes. I've written three books on Trump, but for some reason, the people around him, they keep on talking to me. To find out what they tell me, listen to Fire & Fury, the podcast, on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.

Hi, everybody. It's Katie Couric. Have you heard about my newsletter called Body & Soul? It has everything you need to know about health and wellness. From skincare and serums to meditation and brain health, we've got you covered.

I'm Ben Nadafafri, host of the history show The Last Archive, and I want to tell you about a new series we're running in our feed. It's called The Deadline. Six essays written and read by Jill Lepore, the New Yorker writer, American historian, and founding host of our show. These are incredible essays on everything from the history of cryogenics to the Silicon Valley gospel of disruption. And at the end of each essay, I interview Jill about her craft as a writer.