Hello, and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway and I'm Joe wisn't Tracy? Obviously, the big story, which we haven't talked about yet, is the collapse of the crypto Exchange ft X and the broader empire, which was built by Sam Bankman Freed, which includes a trading shop alimeter research. That's right. It has been really a stunning two weeks for the industry, in part because Sam Bankman Freed, or SPF as he's frequently referred to, had become arguably the face of crypto. He was highly influential in d C, he was a donor to numerous nonprofits and politicians, wildly rich, and of course we have interviewed him a number of times on this very podcast, right, so the last time we interviewed him it had already become something of an infamous episode. We're joined by our colleague Matt Levine, and during that conversation that he described much of defy or at least the concept of yield farming in a matter that sounded a lot like a Ponzi scheme. And of course he didn't describe f t X or l AMDA his own business as a ponzi exactly. We're still learning details about how it all collapsed. Nonetheless, in the wake of this implosion, I don't think there's any doubt that those comments are seen as just a massive red flag, right, And as you mentioned, this is all moving very very fast. It is a gigantic, really sprawling story that ranks up there with some of the biggest corporate disasters and potentially frauds of all time. And given its size and speed, it's a little tough to do a complete overview of the story right now. There's already been a lot that's been written about it and reported on at multiple media outlets, So we're going to try to do things a little bit differently. We're going to try to break things up a bit. First, today, we are going to be speaking with a market participant who used f t X and was caught out in the scandal. And then we'll be speaking to a whistleblower who was among the first to sound the alarm at something actually being wrong at f t X and Alameda, right, And then we're going to be doing a follow up episode tomorrow with Matt Levine where we'll try to understand more about what's happened and what is currently going on right now in the wake of the collapse. But for now we want to start with the gunny guy. Avoid here's the founder and CEO of Winter Mute, which is the largest crypto market making operation. It had been very active on f t X and he's going to help us understand a little bit more about f t X and Alameda's role in crypto market structure. So if Jenny, thank you so much for coming on the Odd Lots podcast. What do you tell us? What do you do and what is Winter Mute? Yeah, Hi, thanks for having me. Um, Yeah, I guess very quickly about the Wintermute one of the largest crypto market makers. We've been at since the Southern suventeen and I think at this stage basically is the largest the native market maker after Salamat's device. It's it's an interesting way to have to grow the ranks with all the with all that's going on, but basically we our businesses across centralized exchanges, decentralized exchanges have been active and defie since two thousand nineteen, and of course or to see as well. So it's a lot of different diversified activities. We are training billions dollars per per day on all kinds of venues and in general very deeply intertwined with the crypt taker system. Can you explain that a little bit further? What does a market maker in crypto actually do? And what is your business relationship with the various exchanges like f TX. Yeah, on centralized exchanges, that's fairly similar to how it works and traditional finance. We basically provide bits and offers all great nuclear so that people get access to liquidity. When it kin comes to like how we work with different exchanges, There's are no formal contracts as such. It's basically us creating an account just like everyone else, institutional accounts of like everyone else, and and then effectively sent orders via APIs that exchanges proved, so you mentioned they. You know, you've sort of grown in market share since the collapse of Lamet, which was a competitor. Can you talk about prior to the implosion of f t X and elmet, which of course will discuss, what was your understanding and what was your view of the f t X L meter relationship. I guess yeah, I mean alla meta part was pretty shocking because basically pretty much everyone in the industry, including myself, assumes that Alometer has been writing running a pretty big and successful operation across centralized and decentralized exchanges. For example, we've seen them being very active on Serum, the Solana Native decks. We suspected that they have a pretty decent market share on ft act itself, despite actually not being able to confirm it or denied, simply because one of the great things that was about FC access that they had a leaderboards for volumes and they were pretty public being there and saying that they have InterMute is whatever number it or number three or like whatever depends on the months, but you will would never see lamed in there, which was kind of annoying. But yeah, we kind of got that, and not everyone wants to show the presence his publicly is with it. And now I'm thinking, okay, probably the market chair was either very big or maybe potentially very small, but more likely very big because like one of the main because like I guess the main question is given the size of the whole that f t X faces and that they lend money to al Ameter, somehow they managed to lose those those billions, and one of the one of the ideas that's traveling around crypto Twitter is basically they were just very bad market maker, I guess because they were kind of forced to probably quit it an f t X and they basically lost of money over the years supporting that liquity. What was your experience of last week, Like when did you first think, oh, something is happening here. I saw you were quite early about pulling your money out of FTX dot US, but some of it is stuck in f t X, the international exchange. Like what exactly was your experience of the past ten days or so? Yeah, I guess when it all started with the z twits and when like the first withdrawals started in f t X, we basically withdrew roughly half of our capital simply because we basically our initial assessment was exchange is going to be fine, but it might be struggling with withdrawals for sometimes. So it's just not smart to look so much so much of our capital over there, because like the way we operate, we have a number of exchanges that we consider to be safe. That's where like we basically have a pool of capitals that we keep rebalancing across different exchanges. And also decentralized exchanges, so block chains, and we have a number of exchanges which considered safe and we basically park excess capital there every nouncer because it's quite easy, like an fc X was one of them, like great things that was about. Another great thing that was about fc access that you could actually like very different stable coins again versus each other. So it was it was a very neat exchange to park the cash on. But once we realized that, yeah, it might be that they may be close withdrawals for a bit, maybe maybe they just be super swamped with withdrawal requests, so it's just not great to have our capital on it. So we kind of stopped doing that and we decreased it. But the initial assessment was, yeah, we want to keep some capital on because it's going to be great, great trading with all this moilutility, Yeah, which turned out to be not not very great. I want to go back to something you said about maybe l meter or just bad market makers, or maybe they were bad market makers because they were the official or the unofficial in house, like did the provider at f t X. I believe and correct me if I'm wrong. I believe that prior to all of this, say like prior to this month or whatever, there was a perception that LAMA had an unfair advantage in its trading by dint of its relationship with f t X. In other words, that it was very profitable but only because it had some sort of relationship with f t X. Did you have that perception beforehand that it gave an advantage, and now do you sort of view this other side that essentially the relationship actually made it harder for ELMA to make money. I guess my perception was that Alameda was not really market making an f t X to make the liquid it's bigger simply because like, there's enough market makers and ft X like. It was probably the second biggest exchange in primitives at some point, and honestly, there was no need for somebody to well, some for some internal market making desk to provide this liquidity too. So I was always thinking, okay, if they would be losing money and that they would just pull off and let others do their job, because yes, there is there are enough crypto market makers to fill in, and so my assumption was barely the advantage that would be getting would be from basically realizing some synergies between like ft X listings for example, like especially I think it was especially apparent on Slana where alamido ft X with investing the protocols and then protocol would pretty much immediately get listed an f t X and basically, since Alameda would have well hising inventory of tokens or barely better knowledge about like how all this stuff works, they would be just better position to make money out of it. And that that to me sounded like a pretty good money making machine, and that that was one of the reasons I kind of expected them to print billions last year and maybe you know, just losing some of the venture positions this year, and that's a so one of the criticisms that's come out about this whole thing, and my gosh, there are a lot of things that you could say here, but one of them is that this is all about centralized finance because f t X was a centralized exchange, it wasn't actually decentralized like a lot of other ones are, like Newna Swap being the primary example. What do you say to that criticism? Is that fair? I think it's very fair. Basically, I I really disagree that this is a failure of Crypta. I think it's, if anything, it's a vindication of everything Crypta is standing for, which is basically being completely decentralized, being committed, transparent, and basically, yeah, people have an access to their own assets, self study, and basically not relying on anything really because like, if you look at all the failures of this year, like even Terror, even though it was a decentralized protocol, the only reason Terror blew up to such a massive proportions was well, I think, in my opinion at least, the main reason was that this crazy twenty percent yield was repackaged by centralized institutions in the very opaque way it was repackaged to the retail, and so retail would not get ten percent guild on their account. Those centralized entities would get like ten percent spread over the Terror, and everyone was happy unless until until basically everything blew up. The three arrow blob exactly the same thing, like everyone lent to three arrows, but nobody knew what the combined value of the loans was, and then when they blew up, Yeah, all the centralized landers got hurt simply because it was just centralized and transparent. And finally f t X exactly the same thing they lent Alamida. Nobody knew about it because it was yeah, it was not public. It was like somewhere on the internal ledger, not even most of the place knew about it, I think. And again it blew up in a very centralized fation. So to me, the crypto kind of solves it. And it's quite unfortunate toward a trip to exchange, but it's a to me, it's an indication of all the cryptoe ideals. So I want to go back to the experience of trading on f t X specifically, you mentioned that your perception prior to this was that f t X was a high quality exchange, a safe place to park capital when it wasn't in a in a trade. What was good about f t X. It does seem to me like when I've talked to professional crypto traders, they liked this site. And I think part of the reason maybe people are so blindsided by this collapse is the fact that by all accounts, the f t X platform seemed to be a good one that people really like the experience that had a lot of uptime, People like the way the liquidations worked on ft X, can you talk about your experience just being a traitor on it and in your view why f t X got the prominence that it did. I think it's very much linked to SBF to be honest, Like, yes, sure it was a good platform to trade, especially because they were pretty yeah there's a pretty quick about listen ussets, they're pretty quick about well. Basically I guess that perhaps were great and there were like a lot of different products products. One sense it wasn't great about f t X and everyone knows about it as well, is this throughput was pretty a bit small, like a number of others you can send per second. Like all those limits, they kept increasing them by I don't know. Sometimes it would come and say, oh, good, great news for increased but they needed like a two th increase. And one of the reasons I think, and yeah, I don't know, I have no idea, like I haven't looked through the code base, but I guess one of the reasons for this was basically what was promoting very much is that the matching engine was combined with their risk engine, because you could use all those assets on margin as collateral to trade all this perpetual products, like every time you send another and it gets matched. It would need to do both matching and their risk calculation, which I would imagine would slow it quite considerably. And I was always like very curious how much you can leverage that, like how much how much you can expand that, because honestly, like none of the centralized cryptic exchanges are close to strouput to even like the worst I know European Stock Exchange for example, they just all really really bad, like even violence, and ft X was quite worse than violence in the throughput twice even though it was smaller volume wis. So to me, it was always a question like how is it going to grow? Like how is it gonna continue making this throutput, especially because like if as a bitcoin in the studium, that's fine. But the idea I was I think was like expanded the stocks, expanded, the commodities, expanding everything. Also, I don't know, maybe maybe it was all the facade, but to me, it was always securious saying like, yeah, you mentioned engine clearing, it's not great that you actually should it. It's physically possible to maintain this model. So just to be clear, your perception was that there was this trade off that the throughput in terms of total volume at f t X was not say what you could get it binance, but that was because it had this superior matching engine and ability to cross margin assets. Can you just explain what that means for the listener, that the matching engine, the cross margining asset, and what is the advantage of that as a professional trader. Yeah, so basically if you go if you go on binance and trade binance features, you need to post b U, s D or some I think there's a cross margin was also stable quins as well now, and but that's that's just one instrument. If you if you would trade on ft X, you could use your bitcoin, you can use an e Syria, and you can use like a dozens of other different tokens for which the price would be quite volatile. Right, So let's say you have one million works of bitcoin and one million works of dollars. You could use both of those positions too as a margin to enter delative contracts, which is very handy because you like you trade sport, you trade perpet you trade perpetuals. You can do it all on one account. And yeah, it's it's very convenient from the capital perspective because you, for example, like what if you only have bitcoin then just parking bitcoin and still get margin on on FTX. That's great, but that also means that you're met that the matching engine continuously had to keep in its mind what the price of bitcoin is, because maybe if bitcoin fALS, you'll need to liquidate this guy, because really if his positions are you know, like his his unrealized profit as like THEO low, and so maybe we need to liquidate his bitcoin line and then initiate like the whole liquidation process, which which is basically way more complex than for binus futures, which is just yeah, we just take your perpetual exposure. It's it's generous dollars bn L and you only have dollars and your accounts. It's very easy. This actually leads into something I wanted to ask you, which is a sort of I guess fundamental criticism about defy, which is, even if you're dealing with decentralized exchanges or you know, you hold your own keys or whatever, because you don't actually know who you're lending to, DEFY often places a lot of emphasis on the underlying collateral. The quality of the collateral and the price of it, and so if it starts to go down, you do get these big margin calls because you don't really know who your counterparty is. That seems like a potential vulnerability for defy, particularly in an environment where we're seeing the collateral price, you know, be extremely volatile. Well, I think that like defy challenges potentially is they don't stem from the fact that you don't know who your counterpart is. They're primarily stemming from two things. One is just a quality of collectal like you mentioned, and basically the fact that in extreme market moves it might not be possible to liquidated quick enough on the access and that basic basically the quality of the collateral can drop so quickly, is that there will be no incentive for anyone to do liquidations, and that can create gaps and products like whole wholes and protocol treasuries for example, which which happened after Lunar with with some protocols. And the second second issue is it's also related to just potential manipulation vectors and that that has to do with oracles because you like what we what we've seen with malgo markets. So a few weeks ago, for example, was that yeah, if you manipulate the oracle price, you can potentially create sort of run the bank for those sounds of slending protocols as well. Honestly, I think it's all like both of those issues are solvable. Basically most most of the time issues with descentralized protocols were caused by just the quality of a collateral, which works both on like a float level, so if if it's just some old coin which has a very low float yet it just wouldn't be able to liok at it fast enough, but also on the oracle level as well, if it's like a very small talk and it's very easy to manipulate surprise, just like the service Mango. But overall, like the defied protocols over the last I know, nine twelve months worked perfectly well in terms of stress. Like you haven't seen any issues with other you haven't seen any issues with Compound. They worked just like they intended to be. People are doing liquidations at all. It was all very much elderly, so I think from that perspective, I think it's still pretticol system to look at. Are you going to change the way you think about counterparty risk and keeping money on exchanges, any exchanges in the wake of this, how are you changing your business up rations? We're basically playing it very safe. So there are like very small number of exchanges that we considered to be safe, and we have is drawing from a lot of like what we call t S three exchanges at the moment, and even some of the tear too exchanges. We basically and I cannot really name names because we actually have a pretty good relationship with most of them. And like if I say it Withdrew from Exchange, why it does mean that we think the bankrupt. It just means that we are We're just waiting for our due diligence. We're waiting for them to provide financials. We're just waiting for them to kind of prove to us that they're fine. And so the idea for us is just to get this due diligence done and in a week or two we just resume training and all the exchanges that remain. But my unfortunate yeah, understanding of the situation is there might be more exchanges failing, like big and small. So yeah, it's just very good security practice to be very safe in this environment. I think for individual users, I would generally advice to try self custody if you can, or withdraw to like very very high quality exchanges if you cannot. What exactly is the path for contagion here? Like what happens if ft X goes down? Like why should we worry about a Tier three exchange? What's the knock on effect? Um? The knock on effect can be I guess like multiple vectors. First of all, sounds of exchanges like the way they operate with market makers. Some of them they provide letters of credit, so they basically can extend what leverage effectively or just be your free capital to market makers so that the market makers would have better incentive to provide markets. So if any of those history exchanges gave lots of credit Dolometer and Telometer lost money, they could be facing some losses. Second way it can be can be happening is basically a lot of exchanges will be keeping there like some of their capital on FTX. And we've seen like some some exchanges coming forward and meeting that whether it can be for internal market maker in operations, So it can be simply because they just sometimes basically like broadcast liquidity on the exchange via ft X either way, they could potentially keep some of their money on ft X. You know, one of the interesting things that makes crypto distinct from say tread fire the stock market if you do have this separation of the broker and the market. And so if I log into a Schwab account to trade stocks, Schwab is the broker, but Schwab is not the stock market itself. It seems like that different in crypto, where it's like finance or f t X, that's you have your account there, but it also is the market and that has the order book. Would it make sense to separate those? Yeah, it's a very good question. Um, I guess it depends as the right answer. On one hand, like a few exchanges that I think is perfectly fine to do it basically, Okay, let's let's give you this kind of framework. The main like not necessarily cause but like a huge amount of effort for centralized exchanges goes and k I c mL of their customers. So it's a pretty big I'm pretty sure it's a big, pretty big cost. It's a pretty big number of employees who I busited this and that's that's honestly where the biggest regulatory attack vector comes from as well, because yeah, if you do not cave I see properly, like if you kve I see someone, no Korean people or you know whatever, you can get in trouble. So that that's pretty big cost base. Effectively, if if that part is taken away from exchanges, like whoever runs this needs to charge quite a bit for it, because yeah, it's a pretty big cost to run. And so you can argue that the centralized exchanges off setting this course by charge and trading fees from all those people that the cave I see, Like, if you completely separate it, it would be yeah, it would be interesting. I mean it's a kind of a different model again obviously because all those kind of broker's effectively would be would have to do I s instead. But ultimately, yes, they would need to figure out the way to i know, either share revenues or basically find in a different business small around it, because currently all those costs are offset by training fees and whatever the auxiliary profits or exchanges generate. So we talked a little bit about how you know, f t X was generally considered to be a good exchange from a technology perspective. Some of the latent latency issues you describe. Notwithstanding, but like Sam Bankman, Freed overall was generally considered to be this titan of crypto. And we can argue about whether or not that reputation was deserved given that he was running a centralized exchange versus a decentralized exchange. But this seems like a massive, massive deal for the industry as a whole, that this guy who was sort of held up as the face of it was essentially running some sort of fraud. What is the long term impact of all of this on the crypto space? Does institutional capital just dry up at this point? How do you convince people to put money into a space that time and time again seems to either blow up or be the victim of hacks or fraud. On the institutional side, I think it will all come come down to they're just just coming up with a better ways to custody assets because you have one big issue. Obviously, if you store US as an FTX, you basically screwed. But I also there are quite quite a few banks that are actively working on it, like traditional banks. On the cost of the solutions, B and why came up, we came up with one like a month ago or something, right, I think that that will be ultimately the past institutional adoption because they will just need to replicate the same same rails effectively to to operate. Saying the custody has been the major piece that has been missing, and once it's done, it's because like ASBFS failure was not a failure of crypto again, it was a failure of his centralizeddentity. So once you remove custody from it, Okay, it shouldn't really affect you that much because yeah, if you studyr money not on a not an FTX but with extodian for example, or just story yourself, it should be fine. I think, like if you're talking about more longer term impact of this, I think it's safety assume there will be a pretty big regulatory response, because regulators should have fuel day about around this. I kind of hope that, yeah, there there would be like some some of the at least some of the fault will be recognized, like on the SEC side, given just how close those guys were, how this looks like. But overall, yeah, I think I think there are laws that we will see implemented on the U S side of things, and maybe globally as well won't be as favorable as they would have been like a few months ago. For me, the events of the past week kind of proved that we need to go back to the to those ideas of the centralization of But it basically exists in the trust less old whenever it comes to individual users, and I think that's that to me. Is this something that kind of like re rebooted the whole thing for me, I rebooted my whole approach to crypto, rebooted my face and crypt as something that can replace future financial system as well, Like I actually believe even more than before after this somehow, Hey, Jenny, thank you so much for coming out a lots. Yeah, thank you for having it. That was if Jinny guy boy of Winter Mute talking to us about how he had seen f t X is business. Next up, we'll be speaking to James Block. You might know him better from his Twitter handle Mike Burger's Burg. He also writes about crypto and fraud at the Dirty Bubble media sub stacks, So we will be talking to him about what he saw at f t X that raised some initial red flax. So we are back and we're about to speak with James Block. He was one of the initial researchers who sounded the alarm on f t X and Alameda and set some of these events in motion. So James, thanks so much for coming on all thoughts. Hey, it's great to be here. James, tell us who you are, because it seems like you are basically a doctor by day and crypto researcher by night. Is that accurate, that's something like that. Yeah, yeah, I'm trained as a physician scientist. Kind of got interested in this space, if you want to call it that, about a year ago. Just kind of always had a fascination with financial crimes and kind of the oddities of how financial markets work. So crypto seemed like a really interesting place to kind of dive in and learn some stuff. What first got you interested in f t X specifically? So before I was writing about f t X, I was really looking into this Selsia's network scandal, which might have been writing about extensively prior to their collapse. And it turns out that there were extensive ties between Celsia's network and FTX, both financial and other. So that's kind of how I kind of got into it looking at it from that perspective, and then I was able to find out some information about their actual financial condition, and then that's when I wrote an article about Alameda's financial situation that has some impact on the how the events turned out. So one of the things that we hear about crypto quite a lot is that, you know, it's very transparent, you can trace wallet addresses, you can sort of follow the money and figure out what's going on. And yet yet we seem to have um like repetitive frauds in the space. What's your sense of that part of crypto When you're looking at crypto trying to expose potential frauds, is it easier than with traditional finance. I definitely think that it is easier in some respects. I mean, a lot of the information is public and easily legible if you understand how to read the data, which isn't. Honestly, it's not that complicated. The part of it that people forget about is that the vast majority of the economic activity happening in this space doesn't happen on the blockchain. It happens in centralized exchanges and other platforms that don't use the blockchain for any of the transactions. They perform. So, for example, ft x is an exchange, you would deposit your crypto there and then it just sits there. Theoretically it should sit in their wallet, and then all of the trading actually happens on a off off chain like centralized platform. And then eventually, let's say you want to take your crypto back out, then it goes back onto the blockchain and moves back to your wallet. But there's never the trading that happens, any of the market activity that happens. That's totally opaque. To let it we start with the details. You mentioned that you saw there were more links between f t X, you believed in Celsius than perhaps people appreciated. What did you first see there? Yeah, so for people who aren't familiar, Celsius was a lending platform. Basically it allowed you to do was either deposit crypto and earn yield on it kind of like a savings account, or you could borrow against your crypto. You could borrow dollars against a bitcoin, and then what Celsius would do is rehypothecate those assets into various supposed yield yield earning strategies. And it turned out that what they were doing wasn't actually profitable, and they collapsed. And there's a lot of allegations about kind of what was going on in that company that are still being kind of figured out. But what I noticed, among other things, was that in June they froze. They froze withdrawals, so like all their customers could no longer withdraw their funds. And then there was a month period of time between June and July where the company was engaging in a significant number of transactions on the blockchain, and then in July they filed for bankruptcy. And what I found was that they had sent hundreds of millions of dollars worth of assets from their wallets to the ft X exchange, and then in return, it seemed like they had received about a billion dollars in USDC from that exchange and used it to pay off various debts. According to the bankruptcy filing, celsius od ft X about a hundred and eight million dollars, and apparently that loan was also discharged in that time period. So my concern was that there were some very questionable transfers happening that we're within the ninety day period prior to filing for bankruptcy that seemed to me to be preferential transfers, although you know, I'll let the lawyers figure that one out. And additionally, just the opaqueness of what they were doing with those funds. So I started looking into that, and then there's a number of other connections to I mean, Celsius. One of their main shareholders was the Tether stable Coin Company, and that was also very closely tied to ft X and Alimator Research, So there are multiple ties between these companies that go back number of years. It seems like there were a few months between Celsius experiencing problems and all the ft X issues sort of coming home to roost. Why do you think it took a while? Well, I don't think that Celsius was necessarily material to the collapse of Alimta and ft X. They were doing business together and FTX actually got their money back, so for them it probably worked out pretty well. Um. I think Elma was a party to the bankruptcy and is own something like ten or eleven million dollars from Celsius, But relatively the amount of money that they apparently got paid back, it's not very significant. What appears what happened with Alameda, and we don't actually know. I mean, honestly, I don't want to speculate at this point. I still can't imagine how they managed to lose the amount of money that they're saying that they lost. I mean, eight to ten billion dollars is a lot of money. Celsius by comparison, is maybe three billion dollars to four billion dollars in the whole. So it's this is a it's a it's a massive loss, and nobody, I think it knows entirely yet where the where the money went in terms of FDx. Right, So just on this note, I mean, this was one of the things that I think was surprising for a lot of people, which is, you know, we all listen to Sam Bankman Freed when he was on this podcast describe yield farming as the sort of magical money box, but he was describing the business of crypto and we sort of thought, well, you know, he's operating an exchange where people are trading these things and that's how he's making his money, and that must be incredibly profitable, And it turns out it wasn't. Where do we actually think the money went? Well, I mean, we know for a fact at this point, we know that a large portion of user assets ended up going to Sam Bankment Fred's trading firm, which was Elevated Research. Where it goes from there is, uh, the eight to ten billion dollar question. I guess they were doing a number of different things with the funds. We know that they were investing in a lot of different venture opportunities, you can call them various crypto projects that never seemed to work out. I think five million went to some AI research nonprofit. You know, obviously they weren't spending a lot of money on advertising and on political contributions. So I mean, I don't think anyone's come close to accounting for the amount of money that's apparently missing here, but we know at least where some of it went. The question is, yeah, I mean, so were they profitable? I mean, you can look at coin bases earnings and that just as a disclosure, I am shortcoin based, so my opinions about that company are colored by that position. But I mean, coin bay has been losing a substantial amount of mine in the last year. Were they actually profitable? As a very good question, and you know, the thing to remember too, is that FTX always build themselves as sort of the the exchange for institutional institutional traders. Like there was retail involved, but a lot of the volume was supposedly these institutional people who are playing on there, and so they're their actual revenue from that would have been much lower than what somebody with primarily a retail customer base would make. So's it's actually very questionable if they were ever really making money or not. That's a really interesting observation, and it's just, you know, it's something that come up with coin based specifically. Obviously, as you know, if you're short it, this idea that institutional clients are way less profitable than retail clients is something that Jim Chanos has talked a lot about. So the fact that f t X was to institutionally focused would be a suggestion that, you know, it's margins even in the best case scenario, we're pretty slim. Let's go back to just La Meta for a can. I think the perception was that, you know, it was a profitable market making firm and that maybe it had some leg up by dint of its relationship with f t X. What is it that first cut your attention and get you thinking that maybe it wasn't all sound with Alameda specifically. I'm a very skeptical person when it comes to crypto. I agree, I view most of these things is very very very questionable operations, that many of them, most of them are probably losing money and engaging in things that aren't very savory. But of all the people, I actually didn't think that maybe if anybody was making money, it was Alameda, because everybody always said they were the smartest guys in the room. To make a reference to my favorite documentary of all time. When I really started thinking there was something wrong was when all of these firms started failing, like block fi Um and Voyager and f t X was suddenly stepping in and Alameda was stepping in and bailing these companies out. And I knew enough about how these firms operated and how how big the holes were to just think there was no reason for them to do that would make any sense. I mean, these companies, like the names of these companies are worthless now because they've shown that they did a very poor job of handling people's money. It's not somebody's gonna want to invest again in Block Fight once they find out that they went in solvent because they were lending to what as allegedly at ponzi scam, the three three year olds capital, So it wasn't like he was getting any kind of advantage by doing that, And so my question was was he just trying to get ahold of the user assets or was he trying to cover up debt that Alimada had to those to those platforms. And it seems like it's the latter case. That both of those platforms held large amounts of these liquid tokens that Alameda owned and that FTX had issued, and that basically they were trying to protect themselves from getting liquidated on all of that. So basically it was in protecting himself and that's what kind of initially made me think there's something wrong here. I didn't know how bad it was until I saw their balance sheet, though. Sorry just to be clear on that last point, because I think that's really key, This idea that some of these other firms held on their books assets that Almada didn't want liquidated. Was that public? Yes, that's public, that's in that's in the Voyager. I can't remember what doc at number, but it is in the Voyage of bankruptcy filing is part of the There was an agreement for FTS two or elimated to receive their collateral back and payback the loans that they had taken out, and it was all F T T and serum tokens, which are the tokens that I and coin does showed were kind of the albatrosses around their neck on their balance sheet. So the Coin Desk report sort of kicked all of this into high gear. And there was you know, speculation and research before then, including some of the work that you did. But when that came out, I mean, things happened very very quickly after that. What's been your just personal experience of the past ten days or so. So Coin Desk grew at their article, I believe. On the second I had my own information that suggested basically the same thing they had said, and I had a little bit more information about exactly how much of the other holdings they had, which was interesting to find out. And so on the fourth I published my article which basically just showed took it took the acquaintance article step further and said instead of just saying they have this much in these tokens, my question was how much of these tokens actually worth and it's pretty easy to show that they were in all practical senses worthless because nobody else owned them except Alameda, and the market was entirely controlled by this company, and they were basically faking an entire market. So that came on the fourth it kind of went viral, which was kind of cool. And then a couple of days after that was when the head of finance announced that he was going to liquidate all of their assets in this ft T token, which was some five sixty million or more worth of it. And that's that's the point when it really kicked off the bank rund on FTX. And then the thing was that they were fighting a battle on two fronts, right, They had to simultaneously pay people back their money, and then they also had to keep the price of this token up because they had levered themselves on this totally a liquid asset, so they couldn't win that. Here's the thing, Like I, like I said, I'm a very suspicious person by nature. When I saw their balance sheet, I knew, I knew based on the information I had, I knew that they were in very serious trouble. Sorry, when you say they just to be clear, do you mean Alimata, Speciflimta and FTX. Yeah. And the thing to remember for people listening is that for years, Sam bankman Fried and others have always alleged or stated that Alimta and FTX were totally separate entities, despite the fact that they were owned by the same person. The argument was that their leadership is different, they don't share information, they don't share assets, they are separate companies. And clearly that was not the case because they actually filed for bankrupcy together a couple of days ago, so they were one and the same. But yeah, so they were fighting a battle on two fronts. And I mean, like I was saying before, I knew that they were in trouble based on looking at their financials, but I didn't realize the extent to which they had lost customer assets and the whole that they were in. I didn't think they would go down as quickly as they did, for sure, But very shortly after that they were insolvent and froze froze withdrawals, and from there on we kind of know what happened. And I guess we're gonna find out who else has a lot of exposure to this thing. Just on that note, you kind of touched on this already. But one of the big walking points now is that, well, this isn't a failure of crypto. This is a failure of a centralized exchange. And you know, real crypto is decentralized, and you should own your own keys and run your own node and you know, only trade through unite swap or whatever. Is that a valid argument to make? Here is the problem the centralized entities who act badly, or is the problem something fundamental about crypto and it's tech. So here's my answer to that question. I've I've had to answer that question a few times in the last week. My opinion about crypto is I'm fairly negative. I'm fairly skeptical. But I think arguments about whether or not the blockchain technology or bitcoin has any intrinsic value can be set to one side because the fact is that regardless of whether or not it's cryptos fault or centralized exchanges fault, the fact of the matter is most of the people involved in this ecosystem at this point are transacting through centralized exchanges. All the prices are determined by centralized exchanges. Centralized exchange hold most of the assets and are controlling the entire market. So regardless of whatever is good or bad about the crypto, in its essence, there's a very very very very big problem here that defines the industry. In my opinion, I don't think there's you know how many people. The number of people who own crypto on these exchanges and don't even know how to pull them pull the assets off into their own wallet is unbelievable. It's unbelievable. So to say it's a specific problem, it's only Sam, it's only Uh, it's only this one exchange, it's only this one lending platform. I think we're going to find out that it is a an industry ride problem because ultimately none of these things produce anything of value. All they do is they trade money in a circle, and that money has to leave the system eventually. And what we're going to find out is that there is much less money in the system now than there was when it started, and a lot of people are not gonna be able to exit the system without losing a lot of their money. I'm so glad you said that, because I keep seeing these discussions on Twitter and alto the solution is decentralized exchanges or just holding your own keys to etcetera. And the main chain auditing is the new one, and maybe there's some truth to that, but I'm also surprised how rarely I hear what you said is like, why don't you make a product of the point And you would not have these same problems if there were sort of like coins and platforms that solved real problems, that had revenue that wasn't tied to speculation, that had real businesses. And so to my mind, it almost doesn't matter centralized decentralized if there is no naturally natural pull and revenue. I want to ask another question, though, which is why couldn't in your view, f t X have just let element to go. Okay, it was like blowing up. The balance sheet was wrecked. Could FTX have just say, you know what this are trading arm blew up, but we still have an exchange. No, because they were trading with their customers money. They took their customers assets. You could literally watch as as as they were paying out withdrawals, you could watch the fun is returning. Through Elimator research addresses. This is confirmed by multiple individuals. They had taken the funds. I mean, they've essentially admitted to that at this point. That's why there's a hole there, I mean, because you have to remember, part of the reason that crypto is is what it is, is that people are so against the traditional banking system and fractional banking and all that stuff, and these exchanges are supposed to operate as fully capitalized. They're not supposed to be playing around with their customers assets, and that's exactly what they were doing. And you know, mean FTX is offering yield on their customer's assets as well, which is I mean obviously a red flag that they're doing something more than just holding onto the assets and keeping them there for for safe keeping. Just to be clear, your perception or your view is that the transference of customer assets to elimated, which going on for a very long time, that is what everything points to. I think there's been a fair amount of reporting at that point that I mean, I saw it myself, but yeah, there's been a lot of other reporting as well that shows that the money came back through their wallets, and if you look at where the money went, it went to their wallets, what they did with it after that nobody's figured out yet. That's a very massive problem to figure out, probably far beyond my abilities. But yeah, I mean they absolutely were. There's no there's no excuse. Again, there's no excuse. If you look at f t X as user agreements, they weren't supposed to be doing that with the customer's assets. They were supposed to hold onto the assets and keep them safe and if the customers wanted to leave. And that's the thing now is there's a lot of other exchanges facing very big withdrawal pressure. The fact is all of them should be able to give back all of the money and be fine. They shouldn't have any problem with that. And if they do have a problem with that, that means they were doing something with the money that they weren't supposed to be doing. Right. So, if it is true, if you look at the f t X user agreement, like it says specifically, we will not lend out the cryptocurrency that we custody. So okay, two quick questions. One, overall, how damaging is this for crypto given that you know part of Crypto's raised on Dutch I guess was to reform the financial system in a way that would avoid a lot of these problems. And then secondly, what are you watching out for in terms of contagion. So I'm going to disagree with you a little bit. I think that that's the narrative for crypto is that it's there to change the financial system and offer individual responsibility alternative to the central banking world, and you know, inflation free alternative, and that's like gold or something in practical terms. Most of the people that have gotten involved in crypto in the last year and a half or so are not people who care about that narrative. They're people who just want to get rich. It's just like any of the gambling that's going on the stock market is the same thing. Mostly people don't really care about that narrative. The number of people in this in this space they actually care about that narrative is relatively small. I think that this is going to have a tremendous impact, and we're just starting to see that because a couple of reasons. Number One, f t X, because of Sam's spending on advertising, is one of the most recognizable firms in the entire I hate calling an industry because it's not productive, but I'll call it into straight He had his name on the I mean, I swear I can't get over it. He had his name of ft X on the umpire uniforms for the Major League Baseball I mean he literally had his name on the regulators. You know, he has his name on one of the most famous stadiums in the country. He had one of the most popular athletes in the world advertising for him and apparently invested in him. So yeah, everybody knows who f t X is, which is why obviously the story is getting as much pressed as it is. So them failing number one is going to have a massive psychological impact both on the people who already owned crypto, who are realizing now that maybe they can't trust any of these exchanges. It's also going to have a massive effect on anyone who hasn't invested yet, because ultimately this space depends entirely on new money coming in in order to drive prices up. So that's gonna that alone is gonna have a massive impact. And then secondly, Sam was very close to regulators, He was very close to a lot of politicians. He donated. I think he was the second largest donor to the Democratic Party this year. This election cycle, there's been a lot of politicians who are going to have to explain why did I take money from somebody who may have been running something that was you know, very very very questionable. Let's just put it that way. I think that there's gonna be a lot more impetus for the regulators and for lawmakers to act on what's happening in crypto, and I don't think they're going to act in a way that the industry is going to enjoy very much. And then in terms of contagion, oh uh yeah, everybody, there is no no But I mean I mean realistically, I mean number one, this system again, like we talked about a little bit earlier, this is not a productive system. Ultimately, this is a destructive system. There is no money created by what they're doing. There is no value created by what they are doing. So it's it's a closed system that only gets new money from people who believe in in in crypto and one invest more so that once has cut off, everybody has to fight over whatever liquidity has left. And if it turns out other exchanges we're playing the same games as Sam was, which it appears that at least some of them were doing those playing the same games and moving money around in ways that they shouldn't have been doing, and people start withdrawing, it's game over. Anybody who lent money to Alameda is in trouble. All of the VC firms that invested in Alameda and in f t X just got burned to the tune of billions of dollars. So are they going to be investing any more on crypto firms that don't generate income and need constant infusions the capital in order to stay afloat. I don't think so. I mean, if any exchange going down could have had like a systemic effect on on crypto, ft X is probably one of the biggest candidates for that. So it's gonna be interested to see what happens in the next couple of weeks. Yeah, for sure. And it does seem problematic when your your use cases basically predicated on speculation if you don't get influence anymore. James, thank you so much for joining us. Really appreciate it. Hey, no problems if I'm talking to you guys, Tracy. I found that conversation to be helpful both in terms of understanding how f t X had been perceived prior to the collapse, the relationship between f t X l AMDA, and of course what those early signs were in terms of collapse. And it really did materialize at lightning speed once fears of its insolvency started to percolate up right, And I do think it's worth noting that within the industry there is still this furious discussion about whether the fault was crypto itself or whether it was more traditional trad five structures that actually imploded. But on some level the debate seems really philosophical and one that we will probably be talking about for a long time. Right. So in the meantime, tomorrow we're going to be going over some of these topics, further zooming out of it with our past guest Matt Levine. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway, and I'm Joe Wisenthal following me on Twitter at the Stalwart. Follow our guests if Guinny Guy Boy He's at Guinny Guy Boy, and James Block at Mike Burgersburg, and be sure to follow our producer Kerman Rodriguez at Kerman Arman and check out all of our Bloomberg podcasts unto the handle at podcasts, and for more odd Lots content, go to Bloomberg dot com slash odd Lots, where we post transcripts, we blog, and we even have a weekly newsletter that Tracy and I write that you should subscribe to. Thanks for listening.