Crypto After FTX — With Kate Rooney

Kate Rooney is a star reporter at CNBC who covers crypto. She's reported deeply on crypto exchange FTX's collapse and spent time with its disgraced ex-CEO — Sam Bankman-Fried — in the Bahamas. Rooney joins Big Technology Podcast for a discussion about what happens to crypto now that its promise of 'trustless' finance has crumbled. Join us for a deep discussion of the industry's future, the responsibility for journalists covering it, and the lessons from the collapse. If you're enjoying Big Technology Podcast, please rate us five stars ⭐⭐⭐⭐⭐ in your podcast app of choice. For weekly updates on the show, sign up for the pod newsletter on LinkedIn: https://www.linkedin.com/newsletters/6901970121829801984/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Alex Kantrowitz?

  This episode is brought to you by Genesis. What does it actually take to put Agentic AI to work across an entire enterprise? I recently spoke with Genesis chairman and CEO Tony Bates about why orchestration is emerging as a competitive advantage in customer experience and what companies need to get right in the AI era. Then I sat down with Adam Mitchell, head of enterprise business solutions at Voya Financial, to go inside a large-scale Agentic CX transformation, including the business decisions, trade-offs, and lessons along the way. You can watch both conversations now on my YouTube channel today. It's never been more challenging to get frontier compute. How do you know where to look, who to trust, or how much to pay?

• 0:43Alex Kantrowitz?

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• 1:03Speaker 01

  LinkedIn Presents.

• 1:18Alex Kantrowitz?

  Welcome to Big Technology Podcast, a show for cool-headed, nuanced conversation of the tech world and beyond. Now cryptocurrency's big promise was that it would be trustless. Instead of putting your faith in the faceless banks that didn't have your best interests in mind, you could just use a system that worked on the blockchain, where all your transactions were recorded in plain sight for everyone to see. But all that came crashing down through a very nasty back half of 2022, and really, fully and deeply, when Sam Bankman-Fried's FTX was exposed as a house of cards. It turns out that you still needed to trust him, and if you did, it didn't end well. So what exactly is left of crypto after this? That's what we're going to find out in this week's episode. My guest today is Kate Rooney.

• 2:03Alex Kantrowitz?

  She is a star reporter at CNBC, and she's been all over the story and even spent time with SBF down in the Bahamas. She's going to talk about that. Now, few people have followed this story so closely, so I think you're going to love hearing from Kate. Here's our conversation.

• 2:20Alex Kantrowitz?

  Kate, welcome to the show.

• 2:22Speaker 02

  Alex, good to be here. Thanks for having me.

• 2:24Alex Kantrowitz?

  Great to have you. We're going to talk a lot about FTX and other crypto companies that might be in trouble. But first, what I really want to do is get a little philosophical. Everybody seems to know the details of the case, right? It's working its way through the legal system. SBF Sam Bankman-Fried has pleaded innocent or not guilty, and it's going to work its way through. What I really want to know is, by the time we leave here, I really want to know, how healthy is the crypto industry after this? And how did this happen in the first place? And there's a Ponzi scheme element to it, but also, the fundamental question has to be, why would anyone put their money into a firm like FTX?

• 3:10Alex Kantrowitz?

  They had something like 10, maybe 8 to 10 billion dollars of funds that they were holding, and it wasn't regulated the way that the normal financial industry is. So that's a pretty big risk. What brings people to say, I'm going to put a lot of my money into a company like this, and at the risk that it could all go away, which eventually, it seems like that's what's going to happen?

• 3:36Speaker 02

  Yeah, well, let's definitely dive into some of this stuff. It's exciting to be able to, like we were saying, talk for more than 90 seconds that we sometimes get on broadcast. I think this topic definitely merits a longer form, format here. So, I mean, as far as the, it's the industry, you were saying, what has this done? And why would anybody put their money in crypto? I think that's sort of the, the next step of all this. It is undoubtedly injured. Some estimates, I mean, it's hard to really quantify, but some people have said it's taken it back, you know, two years, if you think about even just the regulatory side of things. And then, this, this industry, and a lot of the, in

• 4:20Speaker 02

  tech in general, in the past few years, has been fueled by a little bit of FOMO, by low rates, and that froth has really come out of, of crypto, and crypto in general has been the poster child for that. So if that's gone away in the market in general, crypto is the extreme example of that. It's really drying up. And even if you look at something like Bitcoin, which is really seen as the, the safer Boring side of this whole industry, it's completely flat. There's almost no volatility. There's not a lot of trading activity. So people are either sitting on their hands and waiting for the right time to buy more. There's just almost no trading activity. So it's in this

• 5:02Speaker 02

  sort of holding pattern. And you've got the eternal optimists in crypto and tech that will say, this is actually a good thing. You know, some of the grifters are out. Sam Bankman-Fried, Do Kwon, the guys from Three Arrows.

• 5:15Alex Kantrowitz?

  Right, right.

• 5:16Speaker 02

  These, they, they.

• 5:17Alex Kantrowitz?

  But why would it?

• 5:18Speaker 02

  Yeah.

• 5:18Alex Kantrowitz?

  But why would anyone put money in, in the first place? So put us, take us into like the, the minds of a retail investor, or even an investor who's responsible for client funds? What is going to make me put my money into an FTX? Maybe is, is it, I mean, to buy the coins, you know, the $10 billion is a lot of money. So what was the promise there that they came to initially?

• 5:42Speaker 02

  So a lot of people were just chasing yields. I think at this point, you know, the bar is extremely high to take any of that risk. But if you flash back to, you know, a year ago and two years ago, there was a lot of FOMO going on. And some of these, FTX allowed some of the riskier side of crypto trading in general. So it's very much a global platform, but they would allow you to trade derivatives that you can't really access as easily here in the US. It allowed you to take on more margin, more risk, and they actually lowered the amount of margin. But at one point, it was 100 to one. So you could really gamble on this platform in a way that you couldn't with others. So that was one

• 6:24Speaker 02

  side of it. It also catered to what they called sort of a power trader. So they were looking for the person, maybe the hedge fund, the high net worth individual who is trading more than $100,000 per trade versus your average retail trader. So that's been one thing with the FTX fallout in general. It hasn't necessarily been as many of the smaller mom and pops. It's actually hit some of the high net worth hedge funds harder. And, you know, it's hard to feel bad for some of these guys because that's supposed to be the smart money here. But they were the ones really using FTX and Sam Bankman-Fried started his career on Wall Street, really was a quant trader, and designed this platform for somebody like him and said, hey, I couldn't access the things that I wanted to get.

• 7:07Speaker 02

  And it wasn't, there were no crypto exchanges out there built for really the pro trader. So those were the people on there. I think, I think to sum it up, it's, it's chasing yield and it's chasing upside. And that has blown up in people's faces and also the venture capitalists that, that invested here. There was the party round effect where this company continued to raise money. And Sam Bankman Freed himself had this persona of being sort of this seemingly humble, self-deprecating genius in a lot of ways. And I think that was attractive to a lot of venture capitalists that you talk to now who say he fit the mold.

• 7:46Speaker 02

  We, we thought he was sort of a Zuckerberg. We thought he was this wonderkin who you wanted to bet on. And a lot of them did, and obviously have gotten burned as a result.

• 7:57Alex Kantrowitz?

  And this kind of gets to the core of the issue, right? Because at its core, crypto is, especially crypto financial products are set up the promise. And the reason why they got any money in the first place was that they would be trustless. So you didn't have to rely on some opaque entity. You could know where your money was due to the blockchain. That's the whole premise. So how does it then happen that these big players have, who've, who've built their companies on the back of this new trustless revolution in finance? Were all based on trust and still convince the people, it doesn't, it doesn't seem to add up in my mind.

• 8:37Alex Kantrowitz?

  Still convince the people responsible for putting, making smart investments, you know, to trust them. It, it's a total contradiction, isn't it?

• 8:47Speaker 02

  It is. The irony here is ridiculous. If you think about what this industry was built on, why it was created in the first place. It came out of, you know, oh, eight, oh, nine, the financial crisis. And part of the upside and what's great about this technology, if you talk to anyone who's been early in the space is pointed to that exactly. That you don't need an intermediary. You don't need any sort of.

• 9:12Speaker 02

  Banks, you know, Mastercard and Visa were supposed to be disrupted by this. The problem here is even if the technology is perfect, even if it's this great thing that has this amazing upside, you've got to trust the onramps. And unless you're a hardcore software engineer, I think the average person doesn't necessarily know how to go out and use blockchain and they need to trust the people that are letting them in the door. And they don't right now. And Sam Bank, McFried and FTX were the ones that were the most trusted in the industry in DC and just had built this reputation of really being a poster child for consumer protection.

• 9:53Speaker 02

  And that, the trust that's lacking now in what's supposed to be a trustless technology is extremely ironic. And I think it also takes away from, from what a lot of people, the reasons people were attracted to this technology and industry in the first place has sort of blown up. So I think that's going to take a long time for people to feel comfortable. And FTX aside, there's a lot of these, I won't get too into the weeds, but decentralized exchanges. So the idea that you could go, you and I could be trading, making a trade with each other and we wouldn't need, you know, a fidelity or somebody on the brokerage side and then you wouldn't need a New York Stock Exchange. They, the ideal for a lot of these people, who a lot of them left Wall Street and said,

• 10:37Speaker 02

  oh, this technology could actually be really useful. Those are among the platforms that have seen the biggest hacks this year. So there's cybersecurity has been a huge risk aside from the FTX stuff. So the people that, the irony of going and saying, you know what, I'm going to use a decentralized exchange because I don't trust the banks and then getting ripped off by a hacker to the tune of hundreds of millions at this point. And that last year was a record year for hacks is another part of it. But I think until we can trust and consumers especially can trust the onramps and the middlemen that still have to exist in order to make this technology mainstream, I just don't see how it takes off.

• 11:16Alex Kantrowitz?

  Yeah. And that, I mean, you noted exactly the irony here, right? The whole pitch was stay away from the mainstream financial system. You have to trust banks. Banks are bad. It's all opaque. And I'm not here to stand up for the bank, but it's unbelievable. If anything, they made the case to be in the centralized financial system because at least there are protections in place. And how does crypto recover? If in its iteration where it got all these billions of dollars, it could not live out its promise, how is it going to rebound from this and actually start to deliver on it?

• 11:53Speaker 02

  That is the million billion dollar question right now. I think again, back to to the optimist point of view, you talk to some investors and people that have kind of hung on and their take would be this has been a healthy flushing out of leverage. A lot of lending was part of the issue here that you had these daisy chains of one person lends to the other person. It's backed by some made up coin. They said, okay, that's that's flushed out. Then you've got some of these players that are being accused of fraud and Celsius is another company with the CEO was sued yesterday by the AG. Some of these big characters in crypto are now getting accused of fraud and going down for various financial crimes. So they've said, okay, this is maybe a

• 12:38Speaker 02

  good thing. If they can get through this period of craziness, then the industry might make it out on the other side stronger. I mean, so that would be the ultimate optimist point of view. And then the more pessimistic take is that, yeah, this was your shot. You had endless money, free money and zero interest rates at a time when people were getting stimulus checks, wanted to take on risk. You had this influx of users and you kind of blew it. And I think there's people that are frustrated that have done a lot of work or left their career in various big tech companies or Wall Street and are pissed because they did see the upside, but

• 13:17Speaker 02

  then traditional financial crimes, like what FTX and Sam Bankman Fried are being accused of, have really tainted the reputation here. So insane uphill battle for this to really take off. And it may end up being, like you said, in terms of the making the point on, you know, this, it's kind of proving the point that you might need banks or middlemen like Visa, Mastercard have spent a ton of money on partnerships in some of the banks. So it the outcome here that's probably not ideal for anybody who's a purist when it comes to Bitcoin or blockchain, is that maybe the banks just use it and it's just kind of a boring backend.

• 13:59Speaker 02

  Banking technology and that's all it is. We'll see.

• 14:03Alex Kantrowitz?

  Yeah. And even the optimistic take that you lay out, the optimists sound delusional because again, what are they talking about? They're talking about leverage. They're talking about the end of these crimes. The whole system was set up to, you know, it's the system, it's the actual fundamental system. It's not the leverage, right? It's the system because, you know, even if you, at the end of the day, the collapse of FTX wasn't the leverage. It was the Ponzi scheme element. And that just completely negates this whole idea of your funds are safer because they're on this blockchain ledger and the hacks, same thing. So.

• 14:41Speaker 02

  A lot of people clearly use that as sort of a marketing gimmick to say, I mean, back to the example of Celsius. So Alex Mashinsky, who I mentioned, who's the CEO, former CEO and founder there, their whole pitch was banks are not your friends. He used to wear this T-shirt that said that. And they, they've got people who didn't trust the banks and who didn't trust the traditional financial system, but you know, maybe didn't understand the technology or didn't do the diligence or read the fine print. And you talked to some of these customers and it's awful to hear, but these are a lot of people who saw the headline 19, 20% yield, thought it was essentially safe and the same thing

• 15:24Speaker 02

  as depositing their money at a bank. But what was really happening on the backend was a lot of sketchy lending that ended up blowing up. And that, the whole trust thing, I think is a huge, huge part of this, that depending on, it's hard to speak to their motives, but is a reason why people got it in the first place, because they don't trust traditional finance. So it's a, that's a huge theme of this that regardless, I can think going forward, the rebuilding of trust will take a while.

• 15:56Alex Kantrowitz?

  Yeah, if, if ever. And.

• 15:58Speaker 02

  Yeah.

• 15:58Alex Kantrowitz?

  At least my perspective.

• 15:59Speaker 02

  Interesting too, in terms of blockchain that I, when I started covering this, I was thinking the same thing. Like you, oh yeah, you can just track it and you can see where everything goes. When you've got one of these companies, say it's FTX or Coinbase or whichever exchange, the way that it shows up. On a blockchain is essentially a blob. So you can see money moving on and off, but you can't really see what happens within the blob. So they they might say, oh, well, you can track it and you can see some of the outflows and inflows. But whatever happens internally in that blob, you can't really track. And it has nothing to do with blockchain or trust. You've just got to trust whatever private company or exchange or wherever you're holding your crypto.

• 16:41Alex Kantrowitz?

  But here's the thing, without that trustless element, what is this at the end of the day? Right? It's not, it's nothing. It's speculation on coins that may or may not be worth worth something, anything. There's nothing, there's no cream filling without that element.

• 16:59Speaker 02

  So that's exactly right. One of the things too, that there's been interesting ideas, whether it's some of these, so take gaming as an example. This has been one of the big things the VCs have pointed to to say, oh, well, this is actually a great idea. You know, if you, if you had a Roblox example that you could take your Robux or your, your money that you make on Roblox and you could take it off and that could actually be a real tangible currency. That's a good idea, right? Like, I mean, that seems, that seems interesting. But until somebody builds one of these games that's better than what's already out there and people actually start using it and don't think, oh, I'm just using this because it's a

• 17:41Speaker 02

  gimmicky blockchain video game. They're using it because they actually genuinely think it's better. That, that has yet to be proven. There aren't things out there that consumers look to, to say, oh, great, this decentralized social network or this decentralized video game is, is way more fun to play. I don't really care what the tech is. That seems to be what they were waiting for and it just hasn't happened. So, again, back to the optimist's point of view, maybe it's just too early. Maybe this is,

• 18:08Alex Kantrowitz?

  Right.

• 18:09Speaker 02

  You know, a decade from really taking off. But you could also say they, they had a solution looking for a problem in a lot of cases that there's a lot of things that just don't need to live on a blockchain that are just working perfectly fine right now. And that might've been part of the issue.

• 18:23Alex Kantrowitz?

  Exactly. And it, we, you know, you think about NFTs, for instance, and it's like, well, do you need NFTs? Or could you just buy like the new skin on Fortnite? And that's your digital, you know, good transaction? That oftentimes can be good enough.

• 18:40Speaker 02

  The board ape example, I think was like the height of

• 18:42Alex Kantrowitz?

  Yeah, let's go into that.

• 18:44Speaker 02

  And it's just human nature. It's like you go, there's so many examples of this over history, but that gets back to the sort of the FOMO effect and the free money effect that that just to me was like the crystallized example of people paying a million dollars for a JPEG of it.

• 19:04Speaker 02

  So who knows? But yeah, the NFT examples were great. Like I think you could rationalize and you could see, you could see a use case and kind of, okay, I could see how maybe that would make sense. But in order for it to work, you have to have full buy-in. And in order for, I mean, it's the same with any currency. In order for people to think that it's valuable, you just all have to agree that it's valuable. Same with gold or the US dollar. And now that the trust and confidence in crypto is drying up a bit, that's going to be a lot harder to achieve, especially for things outside of Bitcoin and, you know, NFTs in general, that

• 19:43Alex Kantrowitz?

  Exactly.

• 19:43Speaker 02

  market is completely collapsed.

• 19:46Alex Kantrowitz?

  Last week, we had Elliot Brown on from the Wall Street Journal, and we talked about the end of froth in tech and a lot of the recession, receding hype that's happening after zero interest rates are gone. And this seems like it may be the ultimate example. And I think there might be some positive uses for this technology down the line, but this entire industry of decentralized finance that emerged around trustless trading and the blockchain, that seems to be done for and unwinding. And FTX was sort of like the prime example. And it was almost like the perfect arrow to the heart, where you have someone like Sam, who you spoke about.

• 20:27Alex Kantrowitz?

  If he can't be trusted and his firm is Ponzi scheme or something close to that, we'll see in court, right?

• 20:34Speaker 02

  Then Yeah.

• 20:35Alex Kantrowitz?

  then what's the story with the rest? So let's talk a minute about about Sam. You were down in the Bahamas, speaking with him, what, three months ago? And I've been in touch with him a bunch. What is, what is your, we won't spend the whole podcast on him, but I'm just kind of curious, like having, having sat down with him, having heard his mission, and then having, having seen what was actually going on at FTX and Alameda. Are there any lessons to be learned there?

• 21:02Speaker 02

  A hundred percent. I have thought about this a lot and a lot of his, I mean, feel duped. There's things, we interviewed him multiple times. I said, we did a profile on him, which is pretty rare also for CNBC. A lot of these print articles and Forbes has covered him, but it's really rare that we would take the time to go down and do something and like we're so breaking news oriented. And that was in a scenario where he was newsworthy enough that we thought it was worth it to go down and really find out who this guy is. And a lot of the things about him made this story even more interesting. The idea

• 21:42Speaker 02

  that he was giving, he signed the giving pledge was set to give away 99% of his wealth. He had the whole effective altruism thing that we now know he's admitted is a front that he didn't believe in. And he was a compelling, interesting, very bright CEO. And so at the time, you know, you, we'd asked him questions about Alameda. He, in a lot of those interviews, if what they're saying and the prosecutors are saying is true about this being a fraud of epic proportions, you know, he lied to our faces. So we've asked him questions on conflicts of interest, Alameda, the revenue that they were bringing in. He was estimating

• 22:24Speaker 02

  a billion dollars in revenue for FTX. That's clearly untrue. We, you know, asked him directly about some of this stuff and he lied about it. If, you know, if what, again, allegedly fraud, I don't want to throw him under the bus until, obviously, there's a lot wrong there, but legally we'll let the courts figure that out. But he, you know, had, he bold faced told us when he was bailing out these other companies and spending hundreds of millions of dollars to do it, in hindsight, we now know that it was to cover up other stuff at his other companies. But he was saying that he was doing it to really be the white knight of this industry and to go in and save other companies and be the

• 23:05Speaker 02

  good guy. And, you know, you, as a journalist, it's an awful feeling to feel like we didn't catch it early that. We didn't, you know, see some of the red flags that now in hindsight, it's easy to go back and say, okay, that some of this stuff didn't add up. I would also point to, there's been a lot of analogies to Theranos, to Bernie Madoff. One of the interesting things about this is how quickly it unwound and how quickly the rise and fall of FTX happened. So we, you know, had been covering this company probably for a year and a half. He's only been around for two years. So he was not really on anybody's radar until I would say

• 23:49Speaker 02

  12 or 16 months ago. And the company went bankrupt in a matter of four days. So in order to, there were things that we were looking into that probably would have taken years to report in the way that Theranos, John Kerry, who is the gold standard for investigative reporting, and he reported on that story for years and years. And it didn't unravel, you know, as quickly as FTX did. So a lot of lessons to be learned.

• 24:17Alex Kantrowitz?

  Is there something about crypto that, because they don't have this, crypto firms don't have the same rules as modern financial firms?

• 24:25Speaker 02

  Yeah.

• 24:25Alex Kantrowitz?

  Is there something about them that allows them to lie more easily? And if there is, does that change the way that the public and journalists covering this space need to approach these companies?

• 24:40Speaker 02

  One of the things that's quite different is the global nature of this asset class. So they had a portion of the company was in the US, but it was only about 5%, 95% of this company operated overseas, where the regulations are different, to put it lightly, but there's certain places where there's almost no regulation that they were likely operating in, and it's a private company. So covering, you know, covering private companies in general can be extremely

• 25:09Alex Kantrowitz?

  It's a challenge.

• 25:10Speaker 02

  difficult because they can cherry pick on their financials. They don't have to disclose anything to the same level as a public company that's filing quarterly. So that's part of it, that it's a private company. It's a global company. And you just don't, that level of opacity makes it hard. And a lot of times you're taking somebody at their word. So you don't have access to some of the financials. You don't have access to the documents that might have shown this. And not to mention, talking to VCs. There's been questions over diligence and how did this happen? And, you know, some of the big soft bank Sequoia, everybody that invested. If this is traditional financial fraud and none of this was living on the balance sheets,

• 25:54Speaker 02

  they have explained it as they, what they were shown and the financial documents in the data rooms, um, you know, look legit. So if it is traditional financial fraud, you can see a world in which it's not that they did no diligence and signed to the dotted line without looking. Um, and there's, there's lessons for Silicon Valley too, but it does make it inherently difficult. And it also, as a journalist in crypto, I've struggled with this for a long time, but if you're, if you're a skeptic, uh, you're sort of, you know, you're a hater, you're, it's really hard to be in the room with hundreds of crypto people and keep that level of skepticism. So it's a reminder that I luckily have great editors and a team around me that you, if

• 26:38Speaker 02

  you bring them a scoop or something, there's always the level of like, what? Like there, there's this hype that goes on that you just have to remind yourself that yeah, you're not a part of the industry. You're there to hold these people accountable and, uh, to get certain information to your audience. So being at these conferences and being in, um, just covering this, this industry in general, I would say of any tech sector of any industry, I, this to me is one of the hardest to, uh, to be a, a healthy critic and skeptic of because of some of the hype that was going on.

• 27:14Alex Kantrowitz?

  But there's so much, yeah. So much Kool-Aid, uh, and, and the, the animosity towards the people that weren't believing. And it's almost, it, it does feel like, okay, if you're going to have a cult, this is sort of how do you do it? You have this big, you know, benefit at the top and then you, you, um, otherize the outside, right? You say have fun being poor. You don't, they don't do, they don't do the GM on Twitter.

• 27:37Speaker 02

  The tagline of have fun being poor is like.

• 27:41Speaker 02

  Just crystallizes a lot of the momentum and feeling of people asking questions and pushing back. So it's a good reminder going forward. And yeah, I mean, it's a tough lesson. Like, I wish I could say we saw all of this coming, but I think Sam to a lot of people did represent an ethical side of this. And clearly, he was, he was lying. And that's not who this guy was.

• 28:08Alex Kantrowitz?

  So Right. And clearly, the investors could have done more diligence and talked about this last week. But when you brag in your blog post that the guy you're funding with a lot of money is playing video games while he's meeting with you, red flag. Speaking of red flags, this last question I'll ask about him, what was the deal with the Bahamas? I mean, was that not like a sort of screaming signal that there was like something weird going on there?

• 28:32Speaker 02

  So his whole pitch about Bahamas.

• 28:36Alex Kantrowitz?

  Better vegan food.

• 28:37Speaker 02

  Yeah, better weather. But was that there wasn't clear regulation in the US. And he had even said in interviews with us, if, if Congress could get something passed, I would think about moving my company back here. It's because it's impossible to operate within this regulatory structure where there's no clarity. And that's the reason we're down there. And Bahamas has done a good job of setting up its securities regulation. And also in crypto, a lot of these companies do operate offshores. And they were, in some ways, Coinbase, it is

• 29:15Speaker 02

  founded here, built here, regulated here. But they were growing faster than Coinbase. They, in a lot of ways, were outdoing some of the smaller exchanges that were more regulated. So from a business perspective, the thought was that he was growing faster and he was able to move faster being abroad. And obviously, he was able to cut corners and pull off a massive alleged financial fraud.

• 29:39Alex Kantrowitz?

  Right.

• 29:39Speaker 02

  As a result. But it always raised questions. There were tax questions, too. Is this a way for him to just avoid paying certain taxes? And that's still a huge open question. But it was Bahamas, Antigua, and then they had global entities in almost every country you can imagine. So they, one of those M and As spree where they would buy up smaller crypto companies that just to get a license in some of these places in Europe and all over the world. So they were really

• 30:09Speaker 02

  All over the place and despite how much money they were spending on Super Bowl ads and stadiums, they really did not have much of a presence here in terms of the overall market.

• 30:22Alex Kantrowitz?

  People, yeah, I do love how the Bahamas in the end were very happy to hand him over to US authorities. And I think they sent out the press release before the American authorities could.

• 30:31Speaker 02

  Yeah, there was this sort of back and forth with the bankruptcy courts there and the regulators, so.

• 30:37Alex Kantrowitz?

  Well, he's an embarrassment to them, so they, of course, wanted him out and wanted to show like they were being proactive. It's not like a great tagline for the Bahamas that you can come here and hang out and do financial crimes and they'll stand by you.

• 30:50Speaker 02

  Definitely, there was a heightened awareness of that on their end. And he, I mean, in terms of his impact on the local economy too, they threw this conference with Salt.

• 30:59Alex Kantrowitz?

  Which is Scaramucci's firm.

• 31:02Speaker 02

  Yeah, exactly. So Anthony Scaramucci's firm, they did crypto Bahamas and I mean, that company was pretty significant to the local economy too. You had events like that, but they also were building this headquarters that they spent, I think, $60 million they'd committed to and not necessarily broken ground up, but they compared it to Google's headquarters. And we're just making it seem like, oh, we're bringing this tech company here, we're driving the local economy. So being down there, I mentioned we were down there in August interviewing him, and then we went back when this whole thing erupted and I mean, it was all over the local papers, everybody knew about it. And there's a sense of disappointment too.

• 31:44Speaker 02

  I think they're gonna, the job creation, the economic stimulation coming from FTX, there are a lot of young people living down there that obviously are not anymore. So there is a sense of disappointment in Nassau, that they're just losing that.

• 32:00Alex Kantrowitz?

  Yeah. And it's again, it's a further, further crime that, that SBF did was to just wave that money in front of them and it was all, well, okay, we don't know if it's a crime yet, but you catch my drift. We have that money in front of them and now it disappears in, in these legal proceedings. So I definitely want to talk about what the broader implications are going to be for crypto, both this loss of trust and then the actual money itself. It was a lot of money. So where it goes and who it's going to impact. We'll do that when we come back right after this. Kate Rooney is here with us. She is the crypto reporter extraordinaire for CNBC. If you've turned on CNBC at all in the last, I don't know, three, four months, you've probably seen her. Okay. We'll be back right after this. This episode is brought to you by App Point. Everyone's racing to roll out AI right now.

• 32:45Alex Kantrowitz?

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• 33:27Alex Kantrowitz?

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• 34:45Alex Kantrowitz?

  And we're back here on the second half of Big Technology Podcast with Kate Rooney from CNBC. Let's quickly talk about where the money from FTX is going to go. So it's a lot of money. And you mentioned at the, in the first half, that a lot of it is going, is coming from bigger investors. What are the chances that these bigger firms and the retail investors that have the money, get the money back?

• 35:13Speaker 02

  So on the bigger investors, well, one thing that the number that they've put out there in terms of the whole or the money that's missing is $8 billion. There's questions over if it was worth $8 billion because they're marking it, it might be marked in some of these FTT tokens. So that's what the team, the new team at FTX, John Ray, who for those who don't know, is in charge of restructuring Enron and is using basically forensic accountants to try to figure out where all the money is. So I think that's step one is they're figuring out how much is missing, if it was there at all, if you deposited your money and it

• 35:53Speaker 02

  was a classic Ponzi scheme, or if there are, there's money out there to make people whole. And they've already said that there are some, I mean LedgerX is one example of a company that FTX had bought that was solvent and they said, oh, we can actually firewall this and this part's okay. And these customer deposits are all right. So I think that's what the team right now is through the bankruptcy court figuring out is where all the money is and how they can actually repay customers. As far as making any of these investors whole, one option is that another company comes in and buys out FTX or the remaining assets. And that would be some way to make customers whole. It might not be.

• 36:36Speaker 02

  A dollar, a dollar, it might be 50 cents on the dollar. The, a couple analogies to look to, I mean, so Mount Gox was one of the big early crypto exchanges, went bankrupt, suffered a hack and customers got repaid about a decade later. So I think the expectation is that even if people get repaid, there's not a lot of hope that it's going to happen soon. So I, I think people that have lost money are, are writing that off as a loss.

• 37:09Alex Kantrowitz?

  Right.

• 37:09Speaker 02

  It's hard to handicap, you know, if they'll get their money back, how much they'll get back. And there's certain tranches too of investors, a lot of people are now, there's class action lawsuits. There's the VCs themselves who may have some sort of claim here. And so it's, it's messy and I think it's probably too soon to tell with any certainty if and when anybody's getting their money back.

• 37:34Alex Kantrowitz?

  Sam had something like 450 million dollars of his own cash. Put quotes around that, right? Quote unquote, his own.

• 37:41Speaker 02

  Yeah.

• 37:41Alex Kantrowitz?

  In Robinhood.

• 37:42Speaker 02

  In Robinhood, exactly.

• 37:43Alex Kantrowitz?

  Is he gonna be forced to give that up?

• 37:45Speaker 02

  So they've been.

• 37:45Alex Kantrowitz?

  That's a big deal.

• 37:46Speaker 02

  Yeah.

• 37:47Alex Kantrowitz?

  Part of it, he needs to defend himself.

• 37:49Speaker 02

  It's about 7% of Robinhood. So he had bought on the open market, well, through this shell company, Emergent Technologies. And at the time, it was seen as him potentially trying to get a toehold on Robinhood to make some sort of acquisition. And so when people thought they were solvent, the thought again was that he was going after Robinhood or one of these US trading apps to try to get customer deposits. And so that's sort of the backstory of how he invested in the first place. There has been some infighting on who has claim to that. There's LockFi, which is another company that Sam Bankman-Fried and FTX bailed out that said in bankruptcy court,

• 38:33Speaker 02

  okay, well, we should, that's part of. FTX, we get, have rights over that. An entity in Antigua is saying the same thing and then FTX, the company, is saying the same thing and saying, wait a minute, this is part of our whole bankruptcy proceeding. And then on top of that, same bankruptcy itself is saying, wait a minute. I, that's, yeah, that's mine. I, I bought it separately. It's not a part of FTX.

• 38:54Alex Kantrowitz?

  Yeah.

• 38:55Speaker 02

  And that's a total mess.

• 38:56Alex Kantrowitz?

  That's my money.

• 38:57Speaker 02

  This week, the prosecutor said they were seizing that, or they got approval to do that, they were going to seize that and then figure it out. And he seemingly doesn't have access to it right now. He told Andrew Ross Sorkin, my colleague at CNBC, and he's also the Times, that, that Dealbook interview, that he had $100,000 in, in liquid assets. So it does beg the question of how is he able to

• 39:21Alex Kantrowitz?

  Paying for his legal defense.

• 39:23Speaker 02

  Some of the top lawyers in the country. And he's got to have more out there, but I think that, that's one of the things that came out of the bankruptcy court, or no, sorry, that, what was his, there's a million different proceedings going. There is, his arraignment this week was there was an update to his bail hearing where they said he's not allowed to access any FTX or Alameda funds. And so there's certain freezes on what he can actually get to and, and move around. And he needs approval to get a loan or to spend anything other than, or over $1,000. So it seems like he's being monitored pretty closely, but that is a significant portion of wealth.

• 40:06Speaker 02

  Maybe not when we thought he was a multi-billionaire, but at this point, you know, it could be significant and there's about three or four parties fighting over who actually gets that. And it's been hurting Robinhood stock, as you can imagine.

• 40:18Alex Kantrowitz?

  Oh, I can imagine. It's not good to have any FTX or SBF money in your business right now. And there's a lot of businesses, some have returned the money, some haven't. But the bigger question here really is what happens? And to go back to what we were talking about at the top, what happens to the rest of this trustless?

• 40:39Alex Kantrowitz?

  Financial industry that you really had to trust a lot. It's not only the money that came from FTX, although there is some, we will cover that, but it's also the loss of people's faith that this is actually something that is worth investing in because of all the holes that have just been shown in this one instance. I want to ask you about Binance, because they are sort of the, I don't know, have a love hate, maybe more hate relationship with FTX, or I have had it, and almost set a bunch of this in motion. They had a serious withdrawal issue where I think people withdrew like, what, something like a billion dollars in a week, a day, something along that lines. Can Binance survive this?

• 41:21Speaker 02

  So that, again, I think, open question. And they're now trying to prove that they, they have the amount of reserves that they say.

• 41:30Alex Kantrowitz?

  Right, and sorry, they're another big crypto exchange.

• 41:32Speaker 02

  Yeah, exactly. So if people know they're, they're now, now that FTX is off, off the group, I mean, insolvent, bankrupt, gone away, they, some estimates put them at 80% of global trading volume for crypto. So it's hard to understand how big of a player they are now in the global industry. And so CZ, the CEO, also was involved early on in, in revealing some of the issues that FTX, and they were, they're a big competitor, but they also were an early investor. So there's, there's a lot of background there. But now that FTX

• 42:14Speaker 02

  has gone under, there's a lot more scrutiny on exchanges in general, and Binance now being the biggest globally by far. So they have tried to come out with, they call them proof of reserve. So they're not a full financial audit that you would think about in the traditional sense, but they're a way to at least Try to show that they've got the amount of deposits that they say they have, and then they can meet customer withdrawals. If you deposit a Bitcoin, there's one Bitcoin sitting there. There were a ton of questions around that. They came out with this proof of reserves report, and they had an auditor do this report. So it wasn't an audit, but it was by an auditing firm, and they came out and said, hey,

• 42:58Speaker 02

  good news, guys. We're going to show you some of our books, and this should give the market confidence. There were more questions than answers, I think, by that report. No kidding. Part of it was that it was only Bitcoin, and there's hundreds of other assets that are traded on there. It didn't seem to be one for one. And then about a week later, the auditing firm that was working on this basically quit and said, they deleted the report, said that they were no longer working with any crypto firms. And CZ had also said in an interview that none of the big four auditors, so the Deloitte's of the world, KPMG and those guys, wouldn't work with crypto firms in general. And I had talked to a ton of people that week

• 43:43Speaker 02

  who said, no, no, no, we work with Deloitte, or in crypto, some of the bigger US companies here. They work with Deloitte, they work with Grand Thornton, and say it's not an issue of they don't understand crypto, and it's so complex. It's an issue of your company's not auditable, and you're not in a position where you have enough financial statements to make them comfortable. So there's still a lot of questions because their auditor quit. These proof of reserves, to most people, don't tell the whole picture. It's also sort of cherry picking of, it's only a snapshot in time of how many assets they have. And Binance has some of the same potential issues as FTX.

• 44:23Speaker 02

  There's an exchange token that was part of the reason FTX at least started to crumble. There clearly were bigger issues there. But a lot of what the lending that was going on and accounting was backed by this FTT token that was Created by FTX and

• 44:43Alex Kantrowitz?

  No, it was fake.

• 44:44Speaker 02

  Whatever they said it was worth. The same thing, exactly. It existed by then. So they have an exchange token. That's one thing people pointed to as a potential vulnerability. And the onus is now on them. I mean, their CEO has been quite vocal about saying,

• 44:59Alex Kantrowitz?

  Right.

• 45:00Speaker 02

  We're good, we're good. But that has been the famous last word of a crypto CEO in 2020.

• 45:05Alex Kantrowitz?

  Every single one.

• 45:06Speaker 02

  We are fine.

• 45:07Alex Kantrowitz?

  Yeah, it's like the last thing you want to hear. What happens if Binance goes down?

• 45:12Speaker 02

  That would just would not be a good thing. And that's what I I that honestly, a lot of crypto investors I'm talking to, it's hard to get people to talk about it because they are so worried about what what it would mean for the rest of the industry. And so I think they it would be huge. And that's really, I mean, other Coinbase, obviously, there's other exchanges. But on a global stage, that is the last man standing. And if that exchange goes down, I think the damage it does again to trust, what global regulators say about it is just is massive. And and people within the industry who are still holding on and think it's valuable

• 45:55Speaker 02

  almost don't want to talk about it because they, I think there's a sense, huge sense of fear about what it does in terms of contagion and dragging down other companies. I mean, it's again, too soon to say. And they may well be perfectly solvent and fine. But it goes back to the same issue that it's a company domiciled abroad and doesn't really technically have a global headquarters. It was originally in Hong Kong. It's sort of one of these distributed decentralized companies. But there's a lot of worries around it. And it may very well be good. But I think there's there's more questions now because of FTX. And it's up to Binance to prove to global regulators, to customers.

• 46:38Speaker 02

  And to everyone out there that is a potential investor that they are, you know, a safe platform where you can store your money and that it's not going to vanish overnight.

• 46:46Alex Kantrowitz?

  There's this kind of global waterfall of, of other companies that have been hit by FTX that are starting to either fall apart or struggle with some serious losses where they might not be directly hit. But you're talking, I'm talking about Genesis, Gemini, Silver Lake Capital, Silver Gate Capital Corporation. How big is the fallout of this? Is this all snowball effect from FTX failing? And is it going to be a set of dominos that ends up taking out a good chunk of this industry also? Because it does seem like we talked in the beginning about leverage, right? And this gambling on margin that's potentially going to create some bigger problems here.

• 47:28Speaker 02

  So it's, it's partially FTX, but it actually, it goes back to even earlier last spring when there was a collapse of this Luna Terra cryptocurrency that we won't get to in the weeds with, but it was supposed to be what they call a stable coin. It was supposed to be pegged to the price of the dollar. That thing collapsed. It brought down a bunch of hedge funds, which started sort of this lending domino effect. And a lot of people got hit by that. And FTX at the time appeared to be immune. But what we know now is that Alameda, which is the sister company of FTX, had actually taken a massive hit. And part of what FTX was doing was trying to plug the hole there. And so while it seemed like a relatively quiet time over the summer, because some of that had happened and, and

• 48:13Speaker 02

  people pointed to that saying, oh, well, crypto survived this. So this is actually a good thing. It made it through this lending crisis and the worst is over. And meanwhile, it was the tip of the iceberg and under the surface there was FTX happening. So that, that was sort of the, the onset of all of this. Flash forward to FTX is in the lending market and just in crypto in general, a huge counterparty to some of these. So Genesis had already been hit and Genesis, by the way, is one of, it was really the first lending desk in crypto. So they were a market maker, did a lot of the lending that went on there. And again, were one of the more trusted names, had been around the longest, had already

• 48:55Speaker 02

  been hit by what I mentioned earlier in the spring. They, when FTX goes under, said that they had, I think it was about a billion dollars in exposure. Blows up their lending operations and that started another domino effect. Uh, so Genesis is that one company lending company I mentioned Gemini is another consumer.

• 49:17Alex Kantrowitz?

  That's the Winklevoss twins, right?

• 49:19Speaker 02

  Winklevoss twins of Facebook fame.

• 49:21Alex Kantrowitz?

  Of course, of course, Winklevoss twins are involved.

• 49:25Speaker 02

  Exactly, of course. Um, they started a consumer crypto exchange. One product that they had was called this earn product that you can get higher yield. Uh, you can deposit your money and on the back end it would get lent out and you get higher yield. It was inherently more risky, but that was happening at Genesis. So when the lending dried up there, Gemini had a bunch of customer money that was locked up. And now they're getting sued. There's class action lawsuits. They're up against the ropes, uh, because their customers are pissed who are saying, well, wait a minute. Well, now we can't access our money. So the Winklevoss twins are now going after the parent company of the lending company.

• 50:07Speaker 02

  And they have been trying, from what I'm hearing, to settle all of this outside of a bankruptcy court. So to go back to Genesis for a second, it's owned by this massive holding company in crypto called Digital Currency Group, DCG. They own Genesis. They own the grayscale Bitcoin trust that a lot of people use as a proxy for investing in Bitcoin. It's they applied to become an ETF. They've got a huge venture portfolio. And, uh, when Genesis went under, the thought was that DCG would be able to plug that hole. And at least maybe flows up Genesis without having it hit the rest of the portfolio. The Winklevoss twins come out, or Cameron Winklevoss in particular, uh, puts out this open letter

• 50:53Speaker 02

  accusing Barry Silbert, the head of DCG of.

• 50:58Speaker 02

  Basically, intermingling, co-mingling funds said that he's negotiating in bad faith, really going after him in a big way and sort of shifting the blame from, oh, we got our customer money wrapped up in this lending issue, but actually, at the end of the day, it's Barry Silver's problem, and gave them a January 8th deadline to respond. And so the outcome of this is the genesis, from what I'm hearing, will likely end up in bankruptcy. And that's sort of the, it's kind of priced into this point. That is the expectation. But it might be involuntary, that a lot of times when these crypto companies have filed, it's because they don't have any other option. If there's another counterparty that's saying, wait a minute, you owe us money, and they're not able to negotiate in good faith, then it

• 51:43Speaker 02

  enters sort of this forced bankruptcy, which is a potential outcome, but never say never in crypto. It's like, living in dog ears doesn't even get close to

• 51:53Alex Kantrowitz?

  Right, exactly.

• 51:54Speaker 02

  how quickly things can happen.

• 51:55Alex Kantrowitz?

  So let's, let's just end with, we have like a, maybe a minute or two left. But then on this note, I'm curious, there's something that's, you know, some of this stuff is so ridiculous, it's easy to laugh at, but there is something that's a little bit sad here. Like, there's a downside, right, which is the, the vision of having a more ethical banking system, of providing banking access to people that haven't traditionally had it, to cut down on fees when it comes to sending money, you know, one place to the other. It seems to be, if not, if not killed and extremely delayed and weakened. Is there, is there something sort of sad about seeing that, that vision, you know, however fanciful it

• 52:36Alex Kantrowitz?

  might have been, just take it, you know, I mean, just unbelievable punch to the gut?

• 52:42Speaker 02

  It is really, no, it is awful in a lot of ways. And some of the use cases that we talked about earlier, in terms of not having a middleman, are also remittances and being able to send money abroad.

• 52:54Alex Kantrowitz?

  Right.

• 52:54Speaker 02

  And some of the early use cases, that's where you've seen a lot of upcheck, and also in emerging markets, where people talk about investing in crypto in the US, and say, why would I hold Bitcoin as a store of value when I could just hold my money in a bank account? But if you live in Argentina, or Turkey, or a place for inflation is 70%. You can completely see the value and there's currency controls. And the appeal to invest in crypto is a lot higher for a lot of people in emerging markets. And sometimes in a tougher financial situation where you may be more drawn in to get that 20% yield if you're really struggling versus somebody who says, I'm not going to take the risk, I'm going to hold it in a bank account.

• 53:36Speaker 02

  So some of the really victims of this that have lost money and have it tied up in these exchanges are some of the most vulnerable people out there. And so there really is an awful underside of this whole thing. And especially in those higher yielding products, it's really, really sad to talk to a lot of these everyday investors who put their lifesavings, in some cases, into these platforms. And it's not just, there's a lot of schadenfreude out there and talking about the VCs and some of the wealthy hedge funds that lost money. But there are absolutely average investors, average Americans, and the downside and promise

• 54:17Speaker 02

  of some of the money-saving, good things about remittances and making the financial system more accessible and inclusive have really been put on the back burner. And for regulators, I think that the bar is going to be even higher for them to approve any of these things without having FTX in the front of their mind, saying, we don't want to get burned again. And so instead of taking a risk on a new technology that we don't really know about, and you say it's got this great potential, you know what, we're going to stay a little slow and try to figure it out. So hopefully it ends up in a place where there is some sort of upside and the optimists

• 54:58Speaker 02

  are right in some way and there's, the technology is useful and there's, you know, not total carnage, but yeah, it's been tough for a lot of people.

• 55:08Alex Kantrowitz?

  Kate Rooney, thanks much for joining.

• 55:10Speaker 02

  Thanks, Alex. Great to be here.

• 55:12Alex Kantrowitz?

  And that will do it for us here on Big Technology Podcast. Thank you so much for listening this week. It's great to have you on, Kate. Really was looking forward to this for a long time and finally got a chance to make it happen. That was awesome. Thank you, Nate Guatney for mastering our audio every week. Really appreciate you, Nate. Thanks again. Thank you, LinkedIn, for having me as part of your podcast network. And thanks to all of you, the listeners. A reminder, this show is now bi-weekly. So we do the big interview on Wednesday and then on Fridays at around 2:00 PM Eastern, 11:00 AM Pacific, Ron Janroy and I hop on LinkedIn Live. You can tune in on my LinkedIn page. Just search for my name, Alex Kantrowitz, and we will do 30 to 45 minutes of Q and A and a discussion

• 55:55Alex Kantrowitz?

  of the week's event. And then we will post it on the feed here for you to listen to if you miss it. So again, two shows from now on, a Wednesday marquee show, and then Friday, we talk with you, we talk with each other about the week's news. So we're always timing in on the week's news. It's been pretty fun. Last, last week was awesome. And I think this week is going to be pretty great as well. All right. Well, that will do it for us here on the show. Thanks again for listening. Really appreciate you as always. If you haven't gotten the chance to rate the show, that would always go a long way. So please rate it five stars if you can. And other than that, we'll see you next time on Big Technology Podcast.

• 56:38Speaker 03

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• 57:20Alex Kantrowitz?

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