Welcome to tech Stuff, a production from I Heart Radio. Hey there, and welcome to tech Stuff. I'm your host, Jonathan Strickland. I'm an executive producer with I Heart Radio. And how the tech are you? So recently I mentioned in a tech News episode of tech Stuff that cryptocurrency exchange f t X was in deep trouble, which honestly was putting it lightly, and I mentioned that the founder of that exchange, or co founder I should say, a guy named Sam Bankman Freed but more commonly referred to as s b F was making the rounds, taking responsibility for the whole thing. He subsequently resigned as CEO of f t X. That happened on Friday, last Friday today, by the way, being November twenty two. So for those of you listening from the future you can you're gonna be referring to that calendar a lot. Anyway, Uh, that catastrophe, the f t X catastrophe, is far larger than I could cover in a typical tech News segment, so I thought I would explain it in greater detail here, so much detail, and we'll also talk about the ripple effect we're seeing as ft X goes through this existential crisis, which I think even that is being generous. I think ft X is is just uh seeing the end of its days. But first, let's talk about cryptocurrency and exchanges in general so that we can understand the foundation of what's going on before we get into the details of what happened at f t X. So let's think back way back to the origin of bitcoin. In two thousand eight, someone using the name Satoshi Nakamoto published a white paper that was titled Bitcoin, a Peer to Peer Electronic Cash System. That white paper laid out the details for Bitcoin's operation. That this was going to be a decentralized digital currency, that it would have a community of participants who would track transactions through a shared ledger that was on top of a blockchain. That this community would compete against one another to validate blocks of transactions, and the winner would take uh some newly minted bitcoin as a reward. That the supply of bitcoin itself would be finite, That eventually all bitcoin that will ever exist will be on the market, and that every couple of years, the number of bitcoins that are awarded to the successful system that verifies a block of transactions will be cut down by half, that the system itself would adjust the difficulty of the verification task based on the amount of computational power dedicated to solving it. This is called proof of work. It's a version of UM cryptocurrency validation and minting that is used not exclusively but by a lot of different cryptocurrencies, including bitcoin. And that's the thing that feeds into people making increasingly powerful computer systems to attempt to mine bitcoin. But what wasn't really laid out was how people were going to get bitcoin outside of just mining it. The peer to peer nature would allow one bitcoin holder to transfer bitcoin to someone else via some form of forum such as bitcoin talk. That was one that Satoshi Nakamoto founded in early two thousand nine. Two thousand nine is also when bitcoin officially launched. The white paper came out a year earlier, or early a few months earlier, at the end of two thousand eight. In January two nine, was when bitcoin became something that people could actually participate in. Now you could use bitcoin in a personal transaction peer to peer, but that was really about it. And the peer to peer method worked, but it was also risky because there was no guarantee that the person with whom you were trading was on the up and up, or that whomever held the bitcoin would actually transfer the bitcoin at the conclusion of the transaction. However, bitcoin at the time was also virtually worthless. It would take thousands and thousands of bitcoin to amount to enough money to buy a pizza, for example, and it would take a year before bitcoin was worth even thirty nine cents per single bitcoin. So what I'm saying is that while it was technically risky to engage in a peer to peer bitcoin transaction, the value of the currency was so low that even a bad experience would likely result in the loss of at most a few bucks. Now today, a bitcoin is worth around sixteen hundred bucks as of the recording of this episode. That is, that level of risk is a bit too steep for most folks to just trust a peer to peer transaction, though those can still happen. But by late we started to see the first exchanges. So in exchange does what it says on the ten. It's an entity that can exchange one form of currency for another. One of the first exchanges was Bitcoin Market, and here's how it would work. Let's say you wanted some bitcoin, but you weren't interested in mining for it. You just wanted to purchase some You want to exchange some let's say U S dollars for the equivalent value in bitcoin. Well, you could arrange to purchase bitcoin from someone else who has it in their own digital wallet to do the peer to peer transaction, but again that's risky. The other ways you could go with a bitcoin market exchange approach, where the bitcoin owner would place the appropriate amount of bitcoin in escrow and it would sit there in escrow until your payment of the equivalent in U S dollars or whatever currency you're using cleared and got to the seller. Once the seller received the money, the bitcoin would be released from scrow to your digital wallet, whether that was on the market or your own personal digital wallet. That's you know, that can be pulled offline if you want, and the transaction is concluded. One bit that is important to remember cryptocurrency exchanges typically require a transaction fee to cover this process. The reason that's important is that there's really no incentive to use cryptocurrency for very small transactions because you end up paying more in transaction fees than you would for whatever the actual purchase was. This would be like if you walked into a store and you wanted to buy some gum and you had a credit card, so you buy it. You know, you got a pack of gum that's I don't know, a dollar, and you want to pay with your credit card, but the merchant charges a five dollar minimum for any credit card purchase. So do you really want the gun where you're gonna pay five bucks for a one dollar pack of gum? I mean, alternatively, I guess you could buy a bunch of other stuff so that you at least feel like you're getting value for your money. But that's the point, right, Like, you're not going to use a cryptocurrency if there's a if the transaction fee amounts to a significant percentage of whatever you're purchasing in the first place. Well. Another early cryptocurrency exchange that launched was uh Mount Cox. It launched in Mount Cox was empty period g o X, and that name was actually an initialism for magic. The gathering exchange is referencing the the trading card fantasy game. This name is one of the most infamous in cryptocurrency history because not only did it become the dominant exchange in the crypto world, handling something like sevent of all bitcoin transactions by early but that same year saw Mount Cox go under, so like they were on top of the heat, and in that same year they went extinct. Is not that different from what we're going to talk about with ft X, At least the outcome is not that different. The actual events that led to it were a little different. The exchange, which again was the dominant entity on the crypto market, found for bankruptcy and we would learn that Mount Cox had been hacked, with assets stolen and hundreds of millions of dollars worth of bitcoin disappearing from the exchange. In fact, at the time, the thefts amounted to seven percent of the total supply of bitcoin in the world. Like when you can when you can look at a bank robbery and you can contextualize that as a percentage of all the money in the world. That's a big bank robbery. And most of the the money that was stolen didn't belong to the exchange itself. It belonged to customers who were keeping their money on digital wallets that were on exchange accounts. Again, not a good look when a bunch of people lose their money, not through any fault of their own but because the exchange that held their accounts got hacked. Now, Mount Gox's implosion sent a shock way through the bitcoin community and the value of the currency dropped more than But despite the massive and public collapse of this exchange, cryptocurrency was able to stick it out and recovered Alright. So there's a lot more to the history of cryptocurrency as well as cryptocurrency exchanges. But that really gives us a foundation that we can work from. So we're not gonna dive into that anymore. Let's talk about f t X in particular. Now, that story begins with Sam Bankman Freed or SBF. This young man had worked for a while on Wall Street, and in sen he co founded a company called Alameda Research. This was a quantitative trading firm. And that phrase, will we have at least some of you say in what now? If you didn't say what, you should at least know that I did say what when I encountered it, Because the world of investment is one that I'm not particularly well versed in, but I'll give it a shot. Generally speaking, a quantitative trading firm relies heavily on math, statistics, and probability. Estimations to determine where markets are most likely heading, So you can sort of think of it as feeding a whole bunch of variables into a computer model and then projecting out what will happen from there. This, of course, is predicated on the assumption that financial markets will generally behave according to the value of these variables, which is an assumption that not everyone agrees with. This quantitative approach is heavily disputed in the investment world. I personally think it might be somewhat unreliable, but again, I hadn't even heard about this approach until today, so you could very legitimately argue that this is just my skeptical nature coming out, and I don't know what I'm talking about when it comes to validity of the theory. Anyway, Alameda Research specialized in cryptocurrencies, so the firm would leverage cryptocurrency markets to make itself and its clients money. So that could include stuff like arbitrage. This is where you attempt to leverage a difference in price for something like a commodity or some asset and you try to make a profit. So if you wanted, like an oversimplified example, let's say you know that apples are super cheap near you at the supermarket, like you can buy them for super super cheap, but you also happen to know that apples are twice as expensive across town. So you might buy up a bunch of cheap apples near you and then go across town and sell them for a profit, you know, lower than what the local markets are selling, but higher than what you paid for them. That kind of thing is what arbitrage is about, except you know, with crypto, and in much larger amounts than a few apples. So yeah, crypto apples. Alimator Research did more than arbitrage deals, however, but we can really think of it as a company that relied on computer models to make market based decisions related to cryptocurrency. Alimator Research is going to play a huge part in our story moving forward. So SPF founds Alimator Research. In two years later, twenty nineteen, SPF partners with Gary Wong, who used to be a Googler. He worked for Google. Uh. They in turn founded the ft X Cryptocurrency Exchange. So now they've got a company that is an investment company that's entrenched in cryptocurrency and a cryptocurrency exchange, so two very closely related entities here they do different things, but it's all in the world of crypto now. F d X, like a lot of cryptocurrency exchanges, had its own exchange token. This is a type of cryptocurrency that's created by the exchange itself, and it's meant to be used in all sorts of transactions and as an award and an incentive. So exchanges often use these tokens to encourage users to cover transaction costs and that kind of thing, or they might do it to raise the company's liquidity in the exchange. It may also be used to hold a stake in the exchange, so users can purchase exchange tokens in order to have kind of a seat at the table when it comes to blockchain governance. This is kind of the decentralized approach of crypto, the idea that governance does not fall to some centralized entity, but instead is made up of the community itself. So by putting a stake in, you have a seat. It's kind of like owning stock in a company. Right. If you own stock, that gives you the right to vote in various um stockholder meetings. Throughout the year. So yeah, that's kind of what these tokens are used for in general. And the f t X exchange token is the f t T And yes, I apologize, we're getting into alphabet suit territory here, right because we've got SPF the guy, the human being who co founded this company, and then you've got f t X the company, and then f t X meants the f t T token. Yeah, you know me, I'm down with f t T. Not really, I'm not down with f t T at all. F t T is down though. Um, we're not done with initialisms. We're going to have more before this is done. But you know, this is kind of the way that the crypto community communicates. They do it in a lot of like idioms and initialisms and acronyms, and it gets to a point where you start to wonder if anyone knows what they're talking about, or can even you know, explain the content of their sentences. I don't know, it's all Greek to me. Before everything went pear shaped, you could buy f t T on f t X, but there were also other cryptocurrency exchanges that bought and sold f t T, so it was available on exchanges across the crypto world, not just f t X is and I mentioned ft T because that's also going to play a very important part in our story later. Okay, we've been going for a bit. Let's take a quick break, and when we come back, we'll talk more about what went down at f t X. All right, So SBF and Wong co founded f t X in two thousand nineteen. One early investor in the company was a rival cryptocurrency exchange, the number one cryptocurrency exchange in the world, called Binance. So yeah, the biggest cryptocurrency exchange out there. Now, this story is going to unfold a little bit like a superhero and their arch nemesis kind of both coming of age at the same time. You know, they start off as friends, the old Clark Kent and Lex Luthor or buddies at first, but then things take a turn and one of them wants to see the end of the other. You've got your supervillain. So if ft X is our superhero, Binance is our supervillain, or if we want to talk about founders, SBF is our superhero. And Chong Peng Zhao also known as c Z because again more initialisms, is our supervillain, and spoiler alert, and this superhero story, the bad guy wins. Now, for the record, I actually don't want to cast Binance or c Z as the villain, partly because the more we learn about fd X and SBF, the less heroic those seem as well. And I think this is more of a story of a bunch of supervillains working against each other in a way. Alright, So Finance puts in a significant investment into this young f t X cryptocurrency exchange company. Two years later in fd X is ready to pay back Binances investment. You know, the whole point of an investment is to get a return. So this is ft X saying, okay, we've made our money. We're paying you off. Here's what you gave us plus more. Finance was essentially cashing out and ft X paid Binance in ft T. Again, that's the exchange currency for f t X, right we talked about just a minute ago. So in all, Finance received twenty three million f t T tokens and it had a value around that time of five nine million dollars. So Binance has a big old stash of FTT sitting in the exchange in June, f d X holds a round of funding that accumulates nearly one billion dollars in investments. That's billion with a B. The company's value is projected at eighteen billion bucks. Not bad to go from being founded in twenty nineteen two hitting nearly twenty billion dollars in value in just two years. That's crazy. But hold onto your proverbial hats because we're about to get crazier. In fact, hold onto your hats and since your socks tight, because I'm gonna knock both of them off if you're not careful. So in October of twenty twenty one, just a few months after being valued at eighteen billion dollars, f t X went up to being valued at twenty five billion dollars, a boost of seven billion dollars in just a few months, and f t X was leveraging this valuation to raise even more money from investors. That's one of the reasons why you want to tout your valuation, as you're telling investors, hey, look at how quickly we are growing. You want to get in on this, so pour your money into it. So you might wonder, well, what is f t X doing with all the money it's making, you know, because I mean, obviously a lot of it's going into the operation of the exchange itself. But f t X was getting so much cash, so what was it doing with it? Well, one thing he was doing was promoting f t X in various extravagant ways. For example, in September one, ft X signed a sponsorship deal with a Formula One racing team, so they started putting the logo on the cars. And in April one, ft X signed a sponsorship deal with the home arena for the Miami Heat basketball team, calling it the f t X Arena. And this was a nineteen year deal to have that naming rights. But f t X wouldn't last nineteen years. And if I remember to come back to this, I'll give you an update on what's going on at the home of the Miami Heat and also that Formula one team spoiler alert. I will remember because I know I wrote it down. Meanwhile, f t X is operating as a cryptocurrency exchange and becomes the second largest crypto exchange, only behind Binance. So Binance helped f t X get started, and now f t X is number two behind Finances number one and SPF started to make some really big moves, some of which would sour his relationship with Binance and its CEO c z you know, Chong Pang Zhao. Alright, so first let's talk about SPFS moves to help companies that were affected by the collapse of cryptos value. Now, I'm pretty sure in a recent news episode I talked about cryptos value crashing a couple of years ago. But that was my brain misfiring, Like it hit me later that day that I said something that was wrong, because I think I said, you know, a couple of years ago when bitcoin was worth sixty dollars. That wasn't a couple of years ago. That was this year. That crash actually happened earlier this year, in the spring of this year. It just feels to me like this year has lasted five years, which I guess I could say about the last couple of years have felt that way. But anyway, so this past spring, and again that's the Spring of two for any of you listening from the future, we saw crypto values in sharp decline. In a May two article titled Cryptocurrencies melt down in a perfect storm of fear and panic, The New York Times reporter team spelled it all out, all right. So towards the beginning of the Panto back back in, there was a spike in cryptocurrency adoption. This increase in demand caused cryptocurrency values to increase. You know, the more people want something, the more expensive it gets. And these included not just your regular old folks dipping their toes into doge coin or whatever. You had these massive financial companies, including banks and hedge funds that were purchasing large amounts of cryptocurrency and a bet that those coins would continue to increase in value to the moon. As the crypto bros would say. Um side note, crypto bro is a pretty common, somewhat dismissive term for cryptocurrency enthusiasts, but obviously anyone of any gender can be interested in crypto, so crypto bro, as far as I'm concerned, should be considered a non gendered term. But whether you agree with that or not, it is the term that a lot of folks use, all right. So the value for cryptocurrencies in general goes up and up. Bitcoin reached a peak of around sixty grand for a single unit of bitcoin. In turn, the rising value of cryptocurrencies had lots of other consequences. Proof of work cryptocurrencies like bitcoin, you know, those are the ones that require participants to dedicate enormous amounts of compute power to have even a hope of mining a block of transactions. Well, that meant that collectively, people were spending the same amount of electricity just to mind cryptocurrency as certain countries would use in an entire year. That in turn has an impact not just on electrical grids, but on carbon dioxide emissions. So for any coal powered power plants out there, I mean that increased demand just meant we were dumping more CEO two in the atmosphere because people wanted to mine Bitcoin. Then, for less valuable cryptocurrencies like Ether, a lot of the miners were scooping up powerful graphics cards like Bitcoin at this point had graduated well beyond graphics cards. You could have the best graphics cards on the market and not even make a dent in the sophisticated bitcoin mining systems out there. But for stuff like either where it wouldn't make financial sense to go so hard on your mining rig. You know, GPUs were a big asset, and it made it very hard for anyone else to get hold of those graphics processing cards, which really irritated a lot of gamers. Anyway, this trend could not continue indefinitely, and eventually values began to dip a bit. Now there were a lot of external forces that would have a big impact as well. The world began to enter into economic uncertainty. I guess I still can't say recession. Um. You started to have issues with inflation, you had interest rates going up, investments and stuff like crypto started to look increasingly risky. Then you know, Russia invaded Ukraine, which may economic uncertainty even worse, and that led to some folks pulling out of the crypto market. So they were selling off their crypto so that they could walk away with a nice little profit, and then the value would dip a bit. Then you had folks getting nervous, So some folks began to sell off their's because they're like, well, it's starting to go down and I don't want to be left holding the bag, so I'm getting out too. Now, arguably these cryptocurrencies were overvalued, so there was a need for a market correction. But this actually became a casscade because more and more folks began to try and claw back their money, and crypto in general saw a really tough decline that meant that some companies in crypto got into financial difficulty. They had extended deeply into the crypto market. The crypto market drops out from under them and they are drowning and in sweeps. SBF, who may or may not be a superhero or supervillain now SPF really believed in his vision of crypto, and he has an altruistic streak, a sile wide. I mean he genuinely has talked a big talk and put a lot of money towards philanthropy. But for crypto to succeed, you know, he felt we really needed these various crypto companies to stick around or else all confidence is going to go out of crypto and the whole thing dies. So rather than let these companies go out of business while companies like Alameda, ft X and Binance may or may not be able to weather the storm, he directed his companies, which he owned like seventy of them, to acquire and bail out some of the smaller crypto companies that were in trouble. For example, this past July July of two thousand twenty two, ft X signed a deal with a company called Block five, which was a crypto lender company. That deal had an option to buy Block five at reportedly around two hundred forty million dollars, but the actual deal involved providing a four hundred million dollar credit facility for Block five to use. We'll get back to that at the end of this episode. Later in July, f t X reached out to a different crypto lender, one that was in the throes of bankruptcy, so this one wasn't just teetering it was in chapter eleven. This one was called Voyager Digital, so the offer was for a partial bailout. The Voyager Digital dismissed the offer as a low ball bid, but the bankruptcy proceedings continued, and eventually Voyager Digital essentially went up on the auction block and f t X ended up winning the auction, so it outbid all other competitors and f t X was expected to bring Voyager Digital out of bankruptcy, which is not going to happen. Spoiler alert. F t X started to run into trouble later in the summer of two for one thing, UH the f d i C a U S Bank regulator issued a stern warning to ft X, claiming the company had made misleading statements regarding whether it's funds were ensured by the US government. Specific the f d i C called out a tweet by Brett Harrison, who was a leader at f t X. The f d i C argued that Harrison's tweet made it sound like customers who held funds at f t X and who were purchasing stocks through f t X had the benefit of those transactions being f d I C ensured, which was not the case. Harrison would subsequently delete the tweet, and folks assume that the whole thing was a poorly worded message in the first place that was intended to reassure people that crypto really isn't as risky as some folks were saying. Keep in mind, this is happening in the wake of the crypto market decline that began back in the spring. Then we get to early November. Now, for those listening from the future, I'm recording and publishing this in mid November two. So everything I'm going to talk about next happened in the last two weeks, and a whole bunch of things happened in rapid succession. On November two, the crypto news site coin Desk posted an article about Elite balance sheet regarding Alimator Research, and the implications were troubling, to say the least. According to the balance sheet, Alimator Research was taking assets from ft X, the cryptocurrency exchange, and then using those assets to fund trades that Alimator Research was was making Those f t X assets belonged to f t X customers, So one of sbfs companies was essentially dipping into one of his other companies in order to fund trades. And moreover, it was doing this without the consent of f t X customers. Okay, that's a lot to take in, but we've got so much more. We're going to take another break, and when we come back, I'm going to talk about some of the really crazy stuff that's happened in the last two weeks. But first let's take a break. Okay, So Alimator Research is taking ft X money, which is provided by f t x is customers who are part of this cryptocurrency exchange. It's taking money out of those accounts in order to fund investments. You might be thinking that doesn't sound like it should be legal, and in most places it's not. US securities law requires that companies be very transparent about this sort of thing, and that they secure the consent of customers before doing anything like this with those customers funds. This practice actually even goes against f t x is own terms of service, So even if it weren't illegal, it would be against the company's own policy. And yet, according to this leaked document, this is what was happening. The balance sheet showed the Alimator Research had a lot of assets in f t t that's that exchange coin that's used by f t X. Now by itself, that's not immediately a problem necessarily, but it brings up some red flags because if your investment firms assets are made up mostly of a cryptocurrency that you also happen to have invented, it begins to sound a little bit like you're printing up your own money and you're trying to live like Emperor Norton of San Francisco. If you don't know who Emperor Norton was, look him up. Because it's a crazy story that's genuinely entertaining. There's some tragedy there there, but it's it's got a lot of quirky fun stuff in it. You should look that up anyway. The biggest asset held by Alameda Research was a whopping three point six six billion dollars worth of quote unquote unlocked f t T. Third place, the third biggest asset was another two point one six billion dollars of f t T collateral. And then much further down you had another two million dollars of locked f t T. And this got a lot of folks saying, huh, it kind of looks like you're robbing Peter to pay Paul that Alimator Research. This, this quantitative investment firm, was leaning heavily on the funds within f t X, a cryptocurrency exchange, in order to pay for investments. Now, if this balance sheet had not been leaked, and f t X customers remained unaware that their money was being used to fuel Alimator Research, maybe everything would have remained more or less stable, or at least not obviously unstable. Maybe f t X would still be operating just fine today. But Coin Desks report changed all of that. For one thing, it showed that Alimated Research had billions of dollars of debt. So that is a big risk if this organization is in debt to the tune of around eight billion dollars, and if it's dependent upon funds from a totally different company, that other company as at risk too. So a few days later, on November six, Binances CEO ol c z Chong peng Zhao said his company would liquidate their FTT holdings. Now do you remember those because Binance was an early investor into f t X. Then fd X paid off Binances investment with twenty three million f t T s. Well, now Binance was saying, yeah, we're gonna cash those out. We would like to cash out our ft T holdings for you know some other form of currency. Well, if you flood a market with any asset, you typically see that assets value drop. Right in the example I gave early on, if you were to buy a bunch of cheap apples and you were going across town and selling your cheap apples at a profit, eventually you had flood the market on the other side of town with apples, and they wouldn't be valuable anymore, right they would, they would the prices would be closer to evening out. So you flood the market, the value drops. Well, finance dropping all of its f t T was about to flood the exchange with f t T tokens. So then you had all these other people who owned f t T tokens and they said, well, I don't want to be left holding the bag. I don't want my f t T tokens to be valueless. I'm going to cash out too. Well, now, f t X was in a bind because it had been apparently funneling money over to Alimta Research, and it didn't have enough cash to cover all the requests as people were trying to cash out. It was a liquidity crisis, and f t X didn't have enough to cover all of these requests. So the company ends up being in serious trouble. Like if people here, hey, there's not enough money in the bank to cover everyone, then there's often a run on the bank. That's exactly what happened. There was a run on the bank, except in this case, the bank is a cryptocurrency exchange. Now, before I explain what happened next, I need to talk a little bit about CZ and his ongoing feud with SBF. Yes, it's the War of the initials. Now, as we learned, CZ's company was one of the earliest investors in SPFS company. So what the heck happened to turn these two collaborators into bitter rivals. Well, no one has really documented the whole thing, but my guess is one really big reason comes down to the concept of government regulation. See, governments around the world have been debating on how or if to regulate the crypto market, and of course, the crypto market was set up in a large part as a way to sidestep stuff like government regulation. SPF testified before US Congress about do and even worked with them to sort of draft recommendations for regulations that would end up affecting the crypto industry, and c Z just wasn't having any of that. C Z definitely does not want regulation entering into the conversation at all. It's a four letter word in his mind. Now, you could argue that SBF saw that regulations are on the horizon and that by becoming part of the conversation he could help draft regulations that would have a relatively light touch on the crypto market, so he could kind of steer the government's approach to crypto. But his involvement in even talking about regulations made him persona non grata to folks like c Z who just don't want to even entertain the thought of it, whether it's you know, somewhat favorable to crypto or not. Now, did c Z see an opportunity to go for SPF's jugular by selling off to any three million f T T tokens and tanking and overextended cryptocurrency exchange? Moreover, it's a cryptocurrency exchange that is second only to his own, right, It's it's one that's run by a guy who's working to draft crypto regulations with the US government. So you could say that c Z has a whole bunch of access to grind against s BF. Like, you've got the number two cryptocurrency exchange out there, so it's the biggest competitor. You've got this whole potential regulations thing looming on the horizon. Uh, you know, all these sort of ideas. But according to c Z, none of that even factored into his decision. He said that Finance was divesting itself of f T T tokens because of quote unquote recent revelations, which he did not elaborate upon, but folks took it to mean that balance sheet stuff that leaked on coin desk. Now, I get the feeling some of this decision may have in fact been personal and not just business. But again, that's just my opinion. I don't have anything to back that up apart from you know, various tweet streams that came out, so you can't really call that evidence. It's just the feeling I get. Anyway, whatever the motivation was, finances move of selling off this f t t directly led to a financial crisis for f t X, the cryptocurrency exchange. And then two days later, because I told you this stuff moved so fast, c Z and Finance announced an intent to acquire f t X. So now the number one cryptocurrency exchange says it's gonna buy the number two cryptocurrency exchange because the number two one is in trouble. The following day, so at this point we're at November nine, c Z says, yeah, no thanks, I'm good and backed away from the deal. And that was, you know, legally fined because the two entities had not entered into any sort of binding agreement. So Binance said it was going to acquire fd X and the next day said you know what, no, we're not, and they walked away and things got even uglier at f t X, and some wonder if that was in fact the point, like if Finance ever actually intended to acquire f t X, And I don't know the answer to that either. So f t X halted withdrawals on November ten, so people could not take their money out of f t X starting November ten. They also stopped accepting new clients so they wouldn't let anyone else get a get an account with the exchange, and SPF indicated he was seeking alternative saviors now that Binance had bailed out of the bailout, so SPF needed more than nine billion dollars to stop f t X from collapsing, along with Alimta Research. He did not get his nine billion dollars. He reached out to coin base CEO Brian Armstrong among others, and no lifelines were thrown. So on November eleven, which was last Friday, f t X entered into Chapter eleven bankruptcy proceedings here in the United States. SBF also stepped down as CEO. He was replaced by do you know what? You just can't make this stuff up? He was replaced by John Jay Ray the third This guy was the lawyer who was brought in to oversee the liquidation of the Enron Corporation in the wake of that company's scandalous self destruction. So if I ever do a podcast series about businesses, going to put kind of like business on the BRAINK if I ever did that again, I could spend a full season just covering what happened at Enron. Anyway, I just think it's safe to say that John J. Ray the third is an expert at dismantling companies that have collapsed in on themselves. But wait, it gets worse. So on November twelve, Reuters issued a report saying that f t X was missing money, a lot of money. So we're talking about around a billion dollars of customer funds missing from ft X, maybe as much as two billion, with certainly prompts a question, which is, where the hell is my money? I'm assuming people who had accounts were saying that I don't have an account with them, so but I could just that's what I would be saying if I did, I'll move. On that same day, f t X moved customer funds into offline wallets a k A cold storage, meaning that there's no way for customers to access those funds. They are disconnected from the exchange, but it also means that nothing else happening at the exchange can pull money from those digital wallets. And ft X then announced that there had been a string of quote unquote unauthorized transactions and that these had drained fd X funds. You might wonder, well, how much money was taken, and that depends upon whom you believe. On the low end, we're looking at around four hundred seventy three million dollars that were drained or stolen. It could be as much as six hundred fifty million or maybe even more. That's a huge range right at. F t X definitely did not need this on top of everything else. It really is kind of like beating a dead horse, and it might even be worse because one fd X admin allegedly posted to the company's Telegram accounts saying quote f t X has been hacked. All funds seem to be gone end quote yikes. Immediately there were folks online speculating that perhaps someone within f t X, maybe SPF or one of the ten people that cohabitate with him in the Bahamas, had done this, had siphoned off the cash and they were trying to make a quick getaway, but there have been no reports to suggest that's actually what is going on. Investigations are ramping up. In fact, a few investigations began before f t X even announced the theft. For example, so you have the Royal Bahamas Police Force. That's one entity engaged in investigating ft X. You might wonder, well, why the Royal Bahamas Police Force, And again it's because last year ft X relocated it's HQ to the Bahamas UM. These crypto exchanges frequently choose offshore locations to avoid stuff like those pesky government regulations we keep mentioning. Anyway, the Bahamas Police have stated that they're looking into f t X for any signs of criminal activity in the wake of this collapse. Then the Wall Street Journal reports that the US Department of Justice, as well as the US Securities Exchange Commission or SEC, are also investigating f t X. And in fact, these investigations started before we learned about the theft. Okay, so investigations are ramping up. We'll probably learn more about what was going on and potentially who was responsible. But let's also talk about some of the other effects this fallout has had beyond f t X going into bankruptcy. So just a few months ago, SBF, the co founder, had a personal worth of around twenty six billion dollars billion with a b billionaire. Now, at the beginning of the f t X debacle, that value had plunged by more than nine billion dollars. To lose nine billion dollars instantly is that's got to be a heck of a thing. But obviously things just kept getting worse. So toward the middle of last week, SBF was said to have lost ninety four percent of his wealth. Now, remember he had seventy ownership of his companies of f t X and Alimated Research, so a lot of his wealth was actually tied up into the value of those companies. It's not like he had a Scrooge McDuck style vault filled with cash. So with those companies imploding, his wealth went up in smoke. And this is where we remember that wealth and money are two different things. I'm not sure how SPF is doing now, but on paper, he essentially went from being a billionaire to being broke in just a couple of weeks. I don't know if I could manage that, but I'm willing to give it a try. Someone just has to give me a few billion dollars first, any takers. And yeah, I'm being a little flippant, but we should also remember SPF Diden genuinely want to help others, or at least he said he did. So let's talk about some of the companies that f t X moved to bail out before ft X had its own crisis. There was Block five, which has recently announced it has ceased business as normal. It has cited a lack of clarity regarding the situation at f t X as the reason to put a freeze on withdrawals. In addition, the company had wise customers not to put more money into their digital wallets connected to the company's accounts, So that's a big old ouch. Voyager Digital, the company that f t X purchased at auction, is looking for a new buyer to bail out the bankrupt broker and lending company. So the life preserver that f t X through to Voyager Digital has transformed into an anchor, so they're back at square one. The cryptocurrency called Solana is in free fall at the moment. Salona has connections to SPF, as it is the native token to the Salona blockchain, which in turn has ties to another SPF project called Serum. So arguably because of SPF's association, Serum is in trouble and so Lana's value is plummeting by association. The Miami Heat Arena has now removed the f t X arena name and said it will search for a new name sponsor that we're still seventeen and a half years left on the previous deal, but the arena had only received a small amount of the hundred thirty five million bucks that were said to be part of that deal, so they're done now. Uh. The F one racing team owned by Mercedes that f t X had sponsored, has similarly removed at the ft X logo from their vehicles. Last week, f t X is philanthropic organization, the f t X Foundation and it's f t X Future Fund projects saw a mass resignation as the entire staff quit due to having quote fundamental questions about the legitimacy and integrity of the business operations that we're funding. The f t X Foundation and the future fund end quote. The organization had previously committed to awarding more than a hundred fifty million dollars in grants. And you know, it's rare that I do this these days, because I don't tend to have episodes last quite this long. But we're gonna take one more break, and I'm going to talk a bit about some of the other lasting effects that f t x is destruction has had and will continue to have on the crypto world. But first, let's take one more break. Okay, thanks for sticking around. We are in the home stretch. But man, just the the implications of this are so huge, and so many different companies and organizations have been affected. You know, we've already talked about the companies that f t X was trying to bail out and how now they're in as bad or if not worse place than they were before that happened. H f t X, obviously an alimated research, are both totally crumbling. SPF is on the bricks. He's been kicked out or really he resigned after saying that he uh done messed up, but he used more colorful metaphors in his language. But the fallout has also raised concerns that these crypto exchanges lack proper governance. So the concern is that they're being run by people who might be engineers, they might be investors, but they aren't people who necessarily have a deep amount of experience when it comes to running giant financial companies. And when they're on the small scale, it might be manageable, but as they get bigger and bigger, that becomes more difficult to do. And typically these giant financial institutions have a board of directors that pulls from a really diverse group. Uh, maybe not racially diverse, as it turns out the finance world is overwhelmingly staffed with white men, but it would be a diverse from different areas of expertise, so that you would have people who could guide an organization so that it doesn't find itself in real trouble. But again, like cryptocurrency, one of the big things that attracts people to it is that it kind of has this bootstrapped, almost techno anarchist approach to finance. It's certainly and evangelicized as being decentralized. I would argue, effectively, it is not decentralized. It's just kind of surface level decentralized, But effectively you get a core of very powerful entities that control everything, and so it still becomes centralized. It's just centralized in a different way than you would find in traditional financial institutions. Anyway, there's a real lack of governance for a lot of these organizations, so when things go wrong, there's not really anyone there who has the experience to kind of right the course before things just escalate into an uncontrollable situation. Allah F t X, and this has led to renewed calls for regulating the industry. My guess is that any regulations we actually see pasted to handle cryptocurrency and crypto markets are not going to be the light touch approach that SPF was advocating for. Like SPF wrote a a white paper that was essentially crypto regulations for Dummies. In fact, it was titled something similar to that. And you know, his idea was that these are going to happen one way or the other, so it's best if our voice is represented during the formulation of these regulations so that they don't kill the industry, because there's a legit fear that could happen. Um And so now with this spectacular implosion of FTX, along with SBF being revealed to perhaps have been engaged in some uh at least questionable and potentially illegal activities as far as Alimator Research and f t X are concerned, that really means that I think a lot of people who otherwise would have been receptive to his ideas are now going to say no, no, he's he was protecting himself, right. These regulations were meant to allow him to continue to operate in a way where he would benefit most, and so we can't trust it, so we have to make much much more restrictive regulations. Which, Hey, c Z, if in fact any of your motivations tied back to a resentment about SBF arguing for regulation, I got some bad news for you, Bud. Things are gonna be way worse now than they would have been. If in fact, Finance's decision to pull out was just business and there was nothing personal about it. If in fact what c Z said was true that Finance got out because they saw this balance sheet or you know, quote unquote recent revelations and realized that their their investment was unwise and that's why they sold it off, well you could argue that that move acipitated into this escalating effect that has affected the entire cryptocurrency industry, including finance itself and the value of their assets that it may be viewed as a very self destructive business move in the long run. Not that I think SPF and f t X should have just kept getting away with allegedly misusing customer funds either. I don't think that. But again, there are no good guys in this story, y'all. It's all a bunch of supervillains. Speaking of cz, he has also gone on to throw shade at another cryptocurrency exchange called Crypto dot Com. Crypto dot com got pulled into the spotlight when it when it accidentally transferred around three hundred sixty million dollars worth of cryptocurrency that belonged to Crypto customers off of its own exchange and onto another external public exchange. So what they intended to do was transfer those funds into cold storage, in other words, into offline digital wallets, which already was kind of like it raises your bread flags again, like why are you moving money off of your exchange and into cold storage where people can't access it? Why are you doing that? Or are you doing it in a way so that you can protect it because you expect some form of intrusion attack on your exchange, and this way the money is protected from hackers trying to get access to those funds, whatever it may be. It starts to raise concerns and uh, you know crypto dot Com had accidentally moved these funds onto a totally different exchange. Then they wrote to the exchange and essentially said, uh, my bad, would you mind handing that three hundred and sixty million dollars worth of assets back to us please? Which is nice because you know that exchange actually did do that. They returned the money, but it was beyond embarrassing. I mean, you're talking about more than a quarter of a billion dollars accidentally sent to the wrong place. That is not the kind of story you want to tell when you're desperately attempting to reassure people that crypto is not a huge risk. Anyway, c Z appeared to allude to Crypto dot Com and said that if an exchange is moving large amounts quote before or after they demonstrate their wallet addresses, it is a clear sign of problems end quote. Now this also ties into the pressure that a lot of these exchanges are now feeling as governments and as customers are demanding that the exchanges prove they have the liquidity, they have the cash on hand to cover all the assets on the change. So if you think of it like a bank, you want proof that the bank has a dollar for every dollar that clients have put into an account, so that if people wanted to pull their money out of the bank and everyone did it at the same time, the bank would actually be able to cover that. That's what people want exchanges to prove, and because of the lack of governance, that's really hard to do. At least it's really hard to do in a way that will seem legit right, Like there's a real worry that someone might just print out a piece of paper say yes, we have all the moneys and not actually have to prove that they in fact have all the moneys. So fd X did not have this right that that company had funneled its assets to alimator research, at least allegedly. And people want to know if they decide they want to withdraw their money that the exchange is actually going to have the money to pay them. That's what it really boils down to, and it's it's a real crisis for cryptocurrency exchanges right now that have been operating fast and loose for a few years. Now. Some analysts are even warning that Binance could fall into a similar situation down the line, because like f t X, Finance is also an offshore exchange with very little governance. So there's not a whole lot of uh confidence that finances being run on the up and up. It might be, but the lack of governance creates suspicion. So there's this fear that Finance could be engaged in, you know, similar activities that f t X was engaged in, and that it could be gambling with user funds. Now, maybe that gamble will pay off and everyone will be fine, or maybe it could come all crashing down, which would be a real, super hard blow to the crypto industry as a whole. So we've seen crypto take a hit in vow you with ft X as fall. I'll talk about that again in the second. So if Finance, the number one cryptocurrency exchange, went down, it would be true chaos, and that's what a lot of people are worried about. Now. Maybe Finance isn't gambling at all. Maybe these suspicions that some analysts have are completely misguided. You know, maybe it's totally fine, it's just impossible to say because it's offshore exchange that has very little governance and there's no transparency. So with that comes this suspicion that cannot be allayed. Right unless you change the operation of the organization, people are just going to continue to be suspicious. Now, maybe nothing goes wrong and everything's fine, or maybe someone goes really wrong and nothing's fine. Uh. I don't know how legit those suspicions are, Like, I don't know how well founded they are, because I would need to look much more deeply into Finance to give my opinion. Maybe I'll do a full episode on Finance Leader and kind of say what at least the experts are thinking, because obviously this is above my pay grade. But I will say cz the CEO of Finance strikes me as a little bit of a bully. Um. That doesn't necessarily mean that the organization is rotten or anything like that. Uh, it just it doesn't help the case because sees these very good at getting people's hackles up, and that I think feeds into this suspicion. Finally, let's talk about f t x is collapse and it's broader impact on crypto in general. So in one week, the market cap for crypto fell around twenty as f t X smoldered and then collapsed and just became a burning trash fire. So again, if finance sold off its f t T stock as a business decision, like it was solely for business, and they thought ft T is not safe. H f t X is in trouble. We want to get out of this before it goes bad. This is just business, there's nothing personal about it. Well, that decision did precipitate a series of events that saw binances overall investments decrease in value by about a fifth. So again, if it's a business decision, it's a business decision that costs them a huge amount of wealth um. And maybe it was just purely a business decision. Maybe it in fact was the best out of a bunch of bad possible choices. Again, it's hard for me to say. I will say that f t X and its collapse and that drop, it's pretty much in line with what we saw with Mountain Cox years ago. Now, mount Gox was the number one cryptocurrency exchange when it went under, and that ended up being a thirty percent drop in the crypto market. The crypto market in general was way way smaller than what it is today, but yeah, it was the number one dropped in value. Now the number two goes down, we see a twenty value drop. It's rough. I don't know what's on the horizon for crypto. I don't know if and when it will have a turnaround. I suspect there will be a turnaround at some point. Not every cryptocurrency is gonna make it. I don't think. I think some other cryptocurrencies are going to completely fold before we see the end of this year, maybe definitely before we get too far into next year. But I don't know that they're all going to go away. And certainly, Bitcoin has had periods where its value has dropped significantly only for it to return to being even stronger than it was before, so it's entirely possible it will be able to do that again. But as events like this happen and people begin who lose confidence in the crypto market overall, um, it's bad news for everyone in the crypto game, because, as some people have put it, the real value in crypto comes in people's belief in crypto, and if people stop believing in crypto, then it stops having value because there's nothing else to back up the value of the cryptocurrency except people's belief that it has value. Uh. It strikes me kind of as similar to the way Terry Pratchett treated gods in his Discworld series. The gods of Discworld have a presence and power that is equal to the amount of belief that is placed in those gods. So as as people stop believing in God's those gods become less and less powerful until they're barely there at all. The same thing could be said about cryptocurrencies, because there's nothing else underneath them. Two dampen the effect of people losing confidence in the currency. So we'll have to see how or if the cryptocurrency market in general recovers from the f t X scandal. I'm sure we're still really in the early stages of those consequences. I mean, like I said, most of the stuff I talked about in this episode happened over the last two weeks. Who knows what's going to happen in the next two weeks. Besides Thanksgiving America. Thanksgiving is going to happen in the next two weeks, so you know, have a slice of turkey for me if you eat turkey. If you don't, then don't eat turkey for me. That would just be selfish on my part. Okay, that's it for this epic long episode of tech Stuff. I hope you enjoyed it. I hope this has given you insight into what was going on with f t X, with its co founder SPF, with its arch nemesis c Z and finance and uh the token f t T you know me. So we're done with all that for now. I'm sure I'll have to follow up on this story as more develops, but I wanted to get this down while it was all very fresh. If you have suggestions for future episodes of tech Stuff, there are a couple of ways you can reach out to me. One is that you can download and install and use the I Heart Radio app. It is free to download, free to use. You can navigate over to tech Stuff by typing it into the little search bar. You can listen to episodes that way. You can also leave me a message. There's a little microphone icon. If you click on that, you can record a voice message up to thirty seconds in length. 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