21 votes

At least $1 billion of client funds missing at failed crypto firm FTX, sources say

61 comments

  1. skybrian
    Link
    There is extensive discussion elsewhere but we don’t have a topic for this, so here’s a summary article. Another crypto firm, another fraud, so why is this interesting? Though there are obvious...

    There is extensive discussion elsewhere but we don’t have a topic for this, so here’s a summary article.

    At least $1 billion of customer funds have vanished from collapsed crypto exchange FTX, according to two people familiar with the matter.

    The exchange's founder Sam Bankman-Fried secretly transferred $10 billion of customer funds from FTX to Bankman-Fried's trading company Alameda Research, the people told Reuters.

    A large portion of that total has since disappeared, they said. One source put the missing amount at about $1.7 billion. The other said the gap was between $1 billion and $2 billion.

    Another crypto firm, another fraud, so why is this interesting? Though there are obvious warning signs in retrospect, FTX had a reputation for being somewhat better managed and more ethical than most. The founder also donated a lot of money to effective altruism causes.

    11 votes
  2. [5]
    skybrian
    Link
    Someone at Vox did a very weird interview with Bankman-Fried, in which he basically says he was lying a lot about what he believes, suggesting a fairly criminal mentality all along, with the usual...

    Someone at Vox did a very weird interview with Bankman-Fried, in which he basically says he was lying a lot about what he believes, suggesting a fairly criminal mentality all along, with the usual justification that everyone does it. I don’t see why any of it should be trusted, but there is this bit:

    like, “oh, FTX doesn’t have a bank account, I guess people can wire to Alameda to get money to FTX”

    … 3 years later …

    ‘oh fuck it looks like people wired $8 billion to Alameda and oh god we basically forgot about that stub account that corresponded to that and so it was never delivered to FTX.’

    This doesn’t make any sense, but it suggests that the money never got to FTX. And then what? Alameda gambled it away?

    8 votes
    1. streblo
      Link Parent
      Wow, what a remarkable interview for that reporter to have scored. It definitely appears that way, although I liked this tweet: There's a bunch of ways you can read that interview -- although none...

      Wow, what a remarkable interview for that reporter to have scored.

      suggesting a fairly criminal mentality all along

      It definitely appears that way, although I liked this tweet:

      it's very, very plausible — even likely! — that all the philanthropic stuff was always a front for some kind of pseudo-nietzscehean bid for mastery and wealth, but it's also possible that he's trying to assert some degree of agency over a situation that's completely escaped him

      thers's a certain "better to reign in hell than serve in heaven" vibe from asserting, at this late stage, that actually everyone who believed in you are the real idiots and naifs, while you are clearheaded and just had some cards turn up wrong to the tune of $8 billion dollars

      There's a bunch of ways you can read that interview -- although none of them are very flattering.

      5 votes
    2. [3]
      Wolf
      Link Parent
      I was gonna make a separate post about Scam Bankrun Fraud admitting that this entire EA/charity act was a front, but I guess it makes sense to keep it in this thread. He's definitely lying about...

      I was gonna make a separate post about Scam Bankrun Fraud admitting that this entire EA/charity act was a front, but I guess it makes sense to keep it in this thread.

      And then what? Alameda gambled it away?

      He's definitely lying about what happened with the money. But Alameda definitely gambled it all away, most likely lost a good chunk of it in the Luna crash. They also lost their trading edge, even though they were frontrunning and trading against their customers. I would not be surprising though if a couple billion found it's way to some unmarked bank accounts.

      1 vote
      1. [2]
        rosco
        Link Parent
        Yeah, the whole conversation felt like spin. Be "brutally honest" about the moral things to frame himself as a trustworthy person and lie about the illegal stuff. I wasn't too bothered by Holmes...

        Yeah, the whole conversation felt like spin. Be "brutally honest" about the moral things to frame himself as a trustworthy person and lie about the illegal stuff. I wasn't too bothered by Holmes but I hope BF has the book thrown at him.

        1 vote
        1. Wolf
          Link Parent
          Agreed. This scammer deserves nothing less than life at ADX Florence.

          Agreed. This scammer deserves nothing less than life at ADX Florence.

  3. [3]
    skybrian
    Link
    In the effective altruism community, there is a lot of uncertainty. Do they need to give the money back? Here is a FAQ.

    In the effective altruism community, there is a lot of uncertainty. Do they need to give the money back? Here is a FAQ.

    6 votes
    1. Ephemere
      Link Parent
      That FAQ is absolutely fascinating, so thank you for posting it. It's been hard avoiding about the EA community one way or another over the past few years, but this was the first time I saw their...

      That FAQ is absolutely fascinating, so thank you for posting it. It's been hard avoiding about the EA community one way or another over the past few years, but this was the first time I saw their material directly. I knew Yudkowsky was a major figure, but I didn't expect to see his face quite so many times in a simple FAQ.

      My personal favorite part is the link to a betting market weighing the odds that "leaders in EA" knew that FTX was engaging in fraud. It seems silly both ways, whether it's "Obviously we didn't know, people don't think we do" or "Maybe we did? People seem to think so."

      2 votes
    2. skybrian
      Link Parent
      Here is an explainer by a lawyer about what might happen during the bankruptcy process for the people who received money from FTX.

      Here is an explainer by a lawyer about what might happen during the bankruptcy process for the people who received money from FTX.

      1 vote
  4. [3]
    skybrian
    Link
    From Matt Levine's column today, apparently FTX had no accounting department and didn't really have bookkeeping. They approved expenses using emojis in a chat room, according to the new CEO who...

    From Matt Levine's column today, apparently FTX had no accounting department and didn't really have bookkeeping. They approved expenses using emojis in a chat room, according to the new CEO who took over to handle the bankruptcy.

    Imagine being the new CEO of a giant investing firm, and coming in to work your first day and asking your employees: “So, what investments have we invested in?” And they answer: “I don’t know, why don’t you Google it, maybe there are some newspaper articles about the investments we made.” “Reviewing various third-party sources to locate investments”! FTX/Alameda made investments and didn’t write them down, but maybe somebody else kept track of what they own.[3] What.

    But all this stuff about FTX barely keeping track of its assets is somehow less bad than the stuff about FTX not keeping track of its liabilities at all.

    Also, they don't know who the employees are or what the terms of employment were for previous employees.

    Also, there are two bankruptcies in progress and it's not clear which one will get jurisdiction.

    Also, I don't know what this means, but supposedly Alameda Research bought $36 billion in Tether. Seems like a lot. I guess that's where the real money went, and the next step is to figure out where the Tether went?

    5 votes
    1. MimicSquid
      Link Parent
      That's so awful it's beautiful. It's like C'thulhu rising from the depths. A sight so beyond your ability to comprehend that you might go mad, but can't look away.

      That's so awful it's beautiful. It's like C'thulhu rising from the depths. A sight so beyond your ability to comprehend that you might go mad, but can't look away.

      2 votes
    2. skybrian
      Link Parent
      Some speculation: From the point of view of someone who thinks Tether is magic beans, who cares where the Tether went? The FTX fraud is basically a feeder fund for the Tether fraud, and that's...

      Some speculation:

      From the point of view of someone who thinks Tether is magic beans, who cares where the Tether went? The FTX fraud is basically a feeder fund for the Tether fraud, and that's where the money was lost.

      I think the new CEO of FTX has to try to find and return the Tether, though, to pay back the creditors? This might be difficult. In a bankruptcy court filing they allege that the digital assets of FTX were transferred to the Bahamas authorities. "Not your keys, not your coin." We'll see.

      It would be interesting if there were a lawsuit to try to get money out of Tether even without returning their coins.

      (There's also the possibility that FTX was getting Tether on credit and hadn't paid for them yet. You generally assume that companies operate "at arms length" so sweetheart deals like that don't happen, but if they were co-conspirators, anything could happen.)

      1 vote
  5. [22]
    Wolf
    Link
    A summary of thoughts from crypto twitter, coming from someone who is very involved with crypto: Their reputation was a ruse. Sam Bankrun Fraud stole client funds from FTX to bailout his "quant...

    A summary of thoughts from crypto twitter, coming from someone who is very involved with crypto:

    Their reputation was a ruse. Sam Bankrun Fraud stole client funds from FTX to bailout his "quant trading firm" Alameda Research. His effective altruism nonsense was just a ploy to justify hoarding money. He also tried buying off Democrats by being the second largest donor to their campaigns. There's also a side story here where their entire executive team apparently spent a lot of time in Sam's Bahamas mansion having orgies and abusing stimulants. There's only one girl out of 11 executives.

    Needless to say, crypto has been immensely damaged by this. There's a lot of speculation about what really happened, and the leading theory is that Alameda blew up when Luna crashed, but Sam used client funds from FTX to bail them out. There's a branching theory that Sam also used those funds to push bitcoin prices low enough to liquidate Three Arrows Capital, the biggest competitor to Alameda.

    A lot of people on crypto twitter also believe Sam was a government agent. That's definitely a stretch but he did have connections with Gary Gensler and met with him a few times. Gensler supposedly wanted to offer FTX help with legal loopholes so that FTX would be spared from regulatory scrutiny but their competitor, Binance, would be targeted. Gensler has a connection with the father of Caroline Elisson, Alameda's CEO.

    Anyway, a lot of speculation going on. Crypto people are losing hope. But that's just how it is. There's going to be a contagion effect with FTX going down, they have a $10 billion hole in the balance sheet. But crypto natives are no stranger to this. People are already thinking about how to take advantage of what happens after the contagion effect wears off and all the big funds are liquidated.

    4 votes
    1. [19]
      streblo
      Link Parent
      I don’t really think this is the case. Maybe I’ll have time to elaborate further, but from what I’ve read SBF seemed pretty well known on EA circles well before he was a billionaire. My read...

      Their reputation was a ruse. Sam Bankrun Fraud stole client funds from FTX to bailout his "quant trading firm" Alameda Research. His effective altruism nonsense was just a ploy to justify hoarding money.

      I don’t really think this is the case. Maybe I’ll have time to elaborate further, but from what I’ve read SBF seemed pretty well known on EA circles well before he was a billionaire. My read between the lines is he let the utilitarian undertones of EA unchecked, and together with a slight god complex, saw what he was doing as maximizing his ability to do good. Slightly related Twitter thread: https://twitter.com/willmacaskill/status/1591218014707671040?s=46&t=5Y5aqAjZ_ihJWp7ypBEOAw

      There's also a side story here where their entire executive team apparently spent a lot of time in Sam's Bahamas mansion having orgies and abusing stimulants. There's only one girl out of 11 executives.

      Can we leave unconfirmed gossip rag material off Tildes?

      3 votes
      1. [17]
        Wolf
        Link Parent
        He stole 10 billion dollars and built a backdoor into FTX so auditors wouldn't be alerted. It's a huge stretch to say this was his version of doing good, especially from someone who is known to be...

        as maximizing his ability to do good

        He stole 10 billion dollars and built a backdoor into FTX so auditors wouldn't be alerted. It's a huge stretch to say this was his version of doing good, especially from someone who is known to be a ruthless mercenary.

        Can we leave unconfirmed gossip rag material off Tildes?

        Sure the orgies thing is out there. But him and his team abusing stimulants is pretty well known. And it's important to establish his character as an exploiter.

        8 votes
        1. [16]
          streblo
          Link Parent
          I don’t think he had an intention of running away with the 10 billion. He was gambling with it and lost. Not legally distinct from stealing mind you, but I think it makes sense in a very sick...

          I don’t think he had an intention of running away with the 10 billion. He was gambling with it and lost. Not legally distinct from stealing mind you, but I think it makes sense in a very sick sense of maximizing your ‘earn to give’ potential.

          Just to be clear, I’m not defending what he did and I’m not a huge fan of EA either, but I find the tenor of the conversation coming out of the crypto community right now to be hyperbolic and conspiratorial. He probably belongs in jail, but all the nonsense surrounding his ‘meteoric rise’ or his political donations seems extremely contrived.

          3 votes
          1. [9]
            Wolf
            Link Parent
            I take issue with the assumption that he was a misguided good actor just because he was involved with EA before going to crypto. It's more likely than not that he was a conman from the start. I...

            but I think it makes sense in a very sick sense of maximizing your ‘earn to give’ potential.

            I take issue with the assumption that he was a misguided good actor just because he was involved with EA before going to crypto. It's more likely than not that he was a conman from the start. I also think EA is full of god-complex money hoarders, but that's a conversation for another day.

            2 votes
            1. [8]
              streblo
              Link Parent
              Why do you assume that? I think this piece from today gets to the overall point I've been trying to make a bit better.

              It's more likely than not that he was a conman from the start.

              Why do you assume that?

              I think this piece from today gets to the overall point I've been trying to make a bit better.

              But for a utilitarian who plans to give away all of their money, the utility of wealth is roughly linear for all plausible sums one person could earn. There are 700 million people who earn less than $2/day. Suppose you decide to top them all up by $1. You need $25bn each year to accomplish that. And if providing for the poor is a) good, and b) good in proportion to how much you provide if you're spending at a smaller scale than major governments, then you should make all the positive-EV bets you can, even if most of them will not pay off!

              Was the utilitarianism stuff just bluster to defend a sociopathic moneymaking scheme? Probably not. SBF was writing about utilitarianism for years before he started Alameda, and before he was even working in finance. So it's reasonable to treat this belief system as action-guiding.

              So SBF had a principled reason to bet big, even if there were high odds of failure. He also had a reason to think that the odds of failure were not that high—Alameda was printing money, and it was also clearly aware that some crypto exchanges operated suboptimally.

              2 votes
              1. [3]
                skybrian
                (edited )
                Link Parent
                I think that argument is still leaning on a simplified utilitarianism framework too much. It suggests that he considered all the possibilities and was okay with that risk. There are a lot of...

                I think that argument is still leaning on a simplified utilitarianism framework too much. It suggests that he considered all the possibilities and was okay with that risk.

                There are a lot of criminals who are just straightforwardly out to try to take someone's money. Elderly people get phone calls from them all the time. There are plenty of those types in cryptocurrency too. But it seems like a different thing from the tragic villain character arc.

                Even with something like Theranos, the CEO already had lots of character flaws, but the plan doesn't seem to have been "I'm going to create a high-profile startup to make a fraudulent medical device and sell it." It was more a "fake it until you make it" kind of thing. They ended up there because they were arrogant and careless and their plans were unrealistic and making the device for real turned out to be impossible, and they refused to do the honorable thing and shut it down. Startups fail all the time and you barely hear from them.

                We don't know what happened, but it seems unlikely that SBF had a plan to leave Jane Street, hire all his friends, and then secretly bet their life savings, with the downside being becoming a notorious criminal. It's a lot easier to imagine that you can make a lot of money by starting a successful business and not have to do anything unethical at all - it's not like there weren't a lot of apparent opportunities to get rich semi-legitimately. People in that situation probably imagine that if they lose the big bet, it will just be an ordinary business failure. Perhaps underestimating how painful that will be?

                The utilitarian framework assumes you consider all the possibilities in advance and put probabilities on them, and I doubt they considered the crazier alternatives until they were already under a lot of financial pressure. Some people under financial pressure can't accept the pain of failure, so they dig in deeper. It's not a philosophy.

                5 votes
                1. streblo
                  Link Parent
                  But we already know that part's true! Take this interview with SBF from April: SBF: Or this interview with Tyler Cowen: So to your closing thought: I think to a normal person this seems...

                  I think that argument is still leaning on a simplified utilitarianism framework too much. It suggests that he considered all the possibilities and was okay with that risk.

                  But we already know that part's true! Take this interview with SBF from April:

                  SBF:

                  There’s eight billion people. Government budgets run in the tens of trillions per year. It’s a really massive scale. You take one disease, and that’s a billion a year to help mitigate the effects of one tropical disease. So it’s unclear exactly what the answer is, but it’s at least billions per year probably, so at least 100 billion overall before you risk running out of good things to do with money. I think that’s actually a really powerful fact. That means that you should be pretty aggressive with what you’re doing, and really trying to hit home runs rather than just have some impact — because the upside is just absolutely enormous.

                  So, if your goal is to maximize the expected value of the impact that you have, then I think it implies interesting things about how you should behave. And in particular, the expected value of how much impact you have, I think, is going to be a function sort of weighted towards upside tail cases. That’s what I think my prior would be. And if your impact is weighted towards upside tail cases, then what’s that probability distribution of impact probably look like? I think the odds are, it has decent weight on zero. Maybe majority weight.

                  So I think there are really compelling reasons to think that the “optimal strategy” to follow is one that probably fails — but if it doesn’t fail, it’s great. But as a community, what that would imply is this weird thing where you almost celebrate cases where someone completely craps out — where things end up nowhere close to what they could have been — because that’s what the majority of well-played strategies should end with. I don’t think that we recognize that enough as a community, and I think there are lots of specific instances as well where we don’t incentivize that.

                  Or this interview with Tyler Cowen:

                  COWEN: Okay, but let’s say there’s a game: 51 percent, you double the Earth out somewhere else; 49 percent, it all disappears. Would you play that game? And would you keep on playing that, double or nothing?

                  BANKMAN-FRIED: With one caveat. Let me give the caveat first, just to be a party pooper, which is, I’m assuming these are noninteracting universes. Is that right? Because to the extent they’re in the same universe, then maybe duplicating doesn’t actually double the value because maybe they would have colonized the other one anyway, eventually.

                  So to your closing thought:

                  The utilitarian framework assumes you consider all the possibilities in advance and put probabilities on them, and I doubt they considered the crazier alternatives until they were already under a lot of financial pressure.

                  I think to a normal person this seems self-evident. But I think the evidence for SBF suggests otherwise.

                  2 votes
                2. Wolf
                  Link Parent
                  Exactly. Scam & Co ran one of the biggest exchanges in crypto. They saw all the order flow and stop-losses of all of their clients. It was already common knowledge they were trading against their...

                  it's not like there weren't a lot of apparent opportunities to get rich semi-legitimately.

                  Exactly. Scam & Co ran one of the biggest exchanges in crypto. They saw all the order flow and stop-losses of all of their clients. It was already common knowledge they were trading against their customers and people still traded on FTX. They even hunted down their biggest client, Three Arrows Capital, to insolvency. They had a legitimate money printer with Alameda and FTX, not to mention their venture arm fleecing retail with low float, high FDV scams like Serum and Ray.

                  And he still gambled it away trying to bailout Alameda because they got greedy during the Luna fiasco.

                  1 vote
              2. [4]
                Wolf
                Link Parent
                Because there's more bad actors that want to hoard money than good actor that want to hoard money. And if he cared so much about actually helping the poor, he wouldn't have bailed out Alameda when...

                Why do you assume that?

                Because there's more bad actors that want to hoard money than good actor that want to hoard money. And if he cared so much about actually helping the poor, he wouldn't have bailed out Alameda when it went bust after the Luna fiasco. There was no reason to sacrifice client funds from FTX to bail out Alameda, other than to help out his friends and protect his reputation. There's no utility in eating bad debt.

                3 votes
                1. [3]
                  streblo
                  Link Parent
                  I think a lot of people with lots of different motives want money. Not sure what your point is here? I don't think anyone thought they were literally incinerating their customers' funds, although...

                  Because there's more bad actors that want to hoard money than good actor that want to hoard money.

                  I think a lot of people with lots of different motives want money.

                  There was no reason to sacrifice client funds from FTX to bail out Alameda, other than to help out his friends and protect his reputation. There's no utility in eating bad debt.

                  Not sure what your point is here? I don't think anyone thought they were literally incinerating their customers' funds, although as I've tried to point out they probably assumed it was a possible or likely result.

                  1. Wolf
                    Link Parent
                    My point is that bailing out Alameda was the same as burning cash. There was no upside to bailing them out other helping out his friends. He did it for personal reasons and altruistic reasons.

                    Not sure what your point is here?

                    My point is that bailing out Alameda was the same as burning cash. There was no upside to bailing them out other helping out his friends. He did it for personal reasons and altruistic reasons.

                    2 votes
                  2. rosco
                    Link Parent
                    If you're defrauding people to help other people is it really altruism? Sam just gets to decide where the funds go and that shouldn't be his prerogative. It's still a form of power and influence....

                    If you're defrauding people to help other people is it really altruism? Sam just gets to decide where the funds go and that shouldn't be his prerogative. It's still a form of power and influence. Charity is bullshit. If you pay your workers fairly, don't gouge your customers, and sell a legitimate product it's hard to hoard that level of wealth.

                    1 vote
          2. [6]
            AugustusFerdinand
            Link Parent
            Can I ask why?

            I’m not a huge fan of EA either

            Can I ask why?

            1. [4]
              streblo
              Link Parent
              I think the discussion linked by @Akir raises some valid points, but to me the central issue is that it's married to utilitarianism which I find rather ugly when applied in real life situations....

              I think the discussion linked by @Akir raises some valid points, but to me the central issue is that it's married to utilitarianism which I find rather ugly when applied in real life situations. Moral calculus is highly uncertain, and trying to determine which levers will affect that best future is a fool's errand. And even if you could make some predictions with high probabilities, there are many other problems. This is a great article that sums up some of my thoughts: https://erikhoel.substack.com/p/why-i-am-not-an-effective-altruist

              Sidenote: This little nugget from that article is rather interesting, given today:

              My worry is that such a guideline will lead trivial or inconsequential criticisms, since asking for suggestions means restricting it to constructive criticism. But why I am not an effective altruist is because, from what I’ve seen, the issues go beyond what’s fixable via constructive criticism. While plenty of academic papers try to address the repugnant conclusion (often, in my opinion, making the mistake of it being some overly-specific problem involving only population and “mere addition”), the main result in the literature has been that repugnant conclusions are basically impossible to avoid when using the utilitarian approach writ broadly. In fact, plenty of the leading proponents of effective altruism write entire papers about these problems and arrive at very pessimistic conclusions. E.g., here’s the conclusion to an academic paper on how poorly utilitarianism does in extreme scenarios of low probability but high impact payoffs, written in 2021 by the the CEO of the effective altruist FTX Foundation, the very organization giving out the $20,000 criticism prize for this contest:

              "In summary, as far as the evaluation of prospects goes, we must be willing to pass up finite but arbitrarily great gains to prevent a small increase in risk (timidity), be willing to risk arbitrarily great gains at arbitrarily long odds for the sake of enormous potential (recklessness), or be willing to rank prospects in a non-transitive way. All options seem deeply unpalatable, so we are left with a paradox."

              Note this is not a paper by SBF, but by the CEO of it's EA foundation. Still, it's a rather timely observation given that SBF seems to have fallen victim to something very similar.

              6 votes
              1. [3]
                skybrian
                Link Parent
                I don't think we have good evidence of what SBF was really thinking when he decided to commit fraud? Connecting this to an academic philosophy paper that he might not have even read seems kind of...

                I don't think we have good evidence of what SBF was really thinking when he decided to commit fraud? Connecting this to an academic philosophy paper that he might not have even read seems kind of weak. I doubt any philosophers were asked when it was ethically okay to commit fraud.

                Going by past frauds (which is also not direct evidence, but suggestive) this tends to happen gradually, where they cheat just this once and plan to make it back, and then things get worse and they have to cheat some more.

                And it seems unlikely that his charity foundation was advising him on how to run his business. They were making decisions about money that he had decided to give away, and probably not looking very closely at where the money came from. If anything, it's "not my job" syndrome.

                Maybe more evidence will come out later, though? There's very likely going to be a trial and that should be interesting.

                3 votes
                1. [2]
                  streblo
                  Link Parent
                  I think you're misunderstanding me, so I'll try and clarify. I don't think there is a direct link to the paper and Sam's actions. I think that, faced with a massive loss, he essentially went...

                  I think you're misunderstanding me, so I'll try and clarify.

                  I don't think there is a direct link to the paper and Sam's actions. I think that, faced with a massive loss, he essentially went "double or nothing" with other people's money. From what we know about his roots in the EA community and how seriously he seems to treat the concept, e.g. starting a foundation, political donations to other EAs etc., I think it's fair to say this occupies a fair bit of his world. This now-removed article from Sequoia is a profile on SBF that also describes how utilitarianism is something he has been using as a guiding principle for a long time.

                  So maybe he's just an immoral person but I think its at least somewhat likely he would have rationalized his recklessness. Risking billions of dollars of his clients' money can still be +EV (in the moral sense, if you subscribe to utilitarianism) if the outcome is good enough. Which is somewhat ironic because that exact trap is identified in the paper written by his foundation.

                  1 vote
                  1. skybrian
                    Link Parent
                    Thanks for clarifying! Looks like there's a fair amount of discussion and soul-searching about what this means for effective altruism and utilitarianism. Scott Alexander has a blog post where he...

                    Thanks for clarifying!

                    Looks like there's a fair amount of discussion and soul-searching about what this means for effective altruism and utilitarianism. Scott Alexander has a blog post where he discusses it and links to posts where prominent rationalists have condemned this sort of thing.

                    Thought this was interesting:

                    True, there are also other people outside of finance who are also supposed to look out for this kind of thing. Investigative reporters. Congress. The SEC. But the leading US investigative reporting group took $5 million from SBF. Congressional Democrats took $40 million from SBF in midterm election money. The SEC was in the process of allying with SBF to anoint him as the face of legitimate well-regulated crypto in America. You, a random AI researcher who tried Googling “who are these people and why are they giving me money” before accepting a $5,000 FTX grant, don’t need to feel guilty for not singlehandedly blowing the lid off a conspiracy that all these people missed. This is true even if a bunch of pundits who fawned over FTX on its way up have pivoted to posting screenshots of every sketchy thing they ever did and saying “Look at all the red flags!”

                    (That last link is kind of dubious; it's a Fortune columnist talking about rumors of Washington ties.)

                    1 vote
      2. skybrian
        Link Parent
        I don't know if this counts as a gossip rag, but that seems to be a distortion of what's reported here: [...] [...]

        I don't know if this counts as a gossip rag, but that seems to be a distortion of what's reported here:

        [A luxury penthouse in the Bahamas] is where 30-year-old Bankman-Fried is roommates with the inner circle who ran his now-struggling crypto exchange FTX and trading giant Alameda Research.
        Many are former co-workers from quantitative trading firm Jane Street, others he met at the Massachusetts Institute of Technology, his alma mater. All 10 are, or used to be, paired up in romantic relationships with each other. That includes Alameda CEO Caroline Ellison, whose firm played a central role in the company's collapse – and who, at times, has dated Bankman-Fried, according to people familiar with the matter.

        CoinDesk spoke to several current and former FTX and Alameda employees who agreed to talk on the condition of anonymity, citing ongoing harassment and death threats due to the exchange’s solvency issues. And they said essentially this: It’s a place full of conflicts of interest, nepotism and lack of oversight.

        [...]

        Among his nine housemates are FTX co-founder and Chief Technology Officer Gary Wang, FTX Director of Engineering Nishad Singh and Ellison of Alameda, Bankman-Fried’s trading business that’s at the center of the current chaos and on which the Wall Street Journal reported got $10 billion of FTX customer money. The remaining six are also FTX employees.

        “Gary, Nishad and Sam control the code, the exchange's matching engine and funds,” the first person familiar with the matter said. “If they moved them around or input their own numbers, I'm not sure who would notice."

        [...]

        “Some employees kept their life savings on FTX,” the second anonymous employee told CoinDesk. “We trusted that everything was fine.”

        1 vote
    2. [2]
      AugustusFerdinand
      Link Parent
      So is there literally anything to back any of that up, or is it randos spouting nonsense that is the typical case for anything and everything involving crypto?

      So is there literally anything to back any of that up, or is it randos spouting nonsense that is the typical case for anything and everything involving crypto?

      2 votes
      1. Wolf
        Link Parent
        In terms of the conspiracies, the Gensler meeting has evidence behind it. Gensler is said to have offered FTX a "no-action relief" deal. The stuff about SBF abusing stimulants is pretty well...

        In terms of the conspiracies, the Gensler meeting has evidence behind it. Gensler is said to have offered FTX a "no-action relief" deal. The stuff about SBF abusing stimulants is pretty well known, and Caroline has bragged about it in the past. All the stuff regarding where the money went is educated guesses for now, but it's not by randoms. There's a lot of very smart people looking into what happened with the money, and the leading theory that they bailed out Alameda has the most evidence backing it. The backdoor that he built into the system was reported by Reuters. The $10 billion hole is true, it's in their bankruptcy filing.

        2 votes
  6. skybrian
    Link
    Matt Levine has things to say about the FTX balance sheet: [...] [...] [...] [...] He goes on to write about other possibilities. There are some interesting quotes in there where SBF was talking...

    Matt Levine has things to say about the FTX balance sheet:

    [B]ad as all of this is, it can’t prepare you for the balance sheet itself, published by FT Alphaville, which is less a balance sheet and more a list of some tickers interspersed with hasty apologies.

    [...]

    If you try to calculate the equity of a balance sheet with an entry for HIDDEN POORLY INTERNALLY LABELED ACCOUNT, Microsoft Clippy will appear before you in the flesh, bloodshot and staggering, with a knife in his little paper-clip hand, saying “just what do you think you’re doing Dave?” You cannot apply ordinary arithmetic to numbers in a cell labeled “HIDDEN POORLY INTERNALLY LABELED ACCOUNT.” The result of adding or subtracting those numbers with ordinary numbers is not a number; it is prison.

    [...]

    And then the basic question is, how bad is the mismatch. Like, $16 billion of dollar liabilities and $16 billion of liquid dollar-denominated assets? Sure, great. $16 billion of dollar liabilities and $16 billion worth of Bitcoin assets? Not ideal, incredibly risky, but in some broad sense understandable. $16 billion of dollar liabilities and assets consisting entirely of some magic beans that you bought in the market for $16 billion? Very bad. $16 billion of dollar liabilities and assets consisting mostly of some magic beans that you invented yourself and acquired for zero dollars? WHAT? Never mind the valuation of the beans; where did the money go? What happened to the $16 billion? Spending $5 billion of customer money on Serum would have been horrible, but FTX didn’t do that, and couldn’t have, because there wasn’t $5 billion of Serum available to buy. FTX shot its customer money into some still-unexplained reaches of the astral plane and was like “well we do have $5 billion of this Serum token we made up, that’s something?” No it isn’t!

    [...]

    I am not saying that all of FTX’s assets were made up. That desperation balance sheet lists dollar and yen accounts, stablecoins, unaffiliated cryptocurrencies, equities, venture investments, etc., all things that were not created or controlled by FTX. And that desperation balance sheet reflects FTX’s position after $5 billion of customer outflows last weekend; presumably FTX burned through its more liquid normal stuff (Bitcoin, dollars, etc.) to meet those withdrawals, so what was left was the weirdo cats and dogs.

    [...]

    Where did the money go?

    I don’t know, but the leading story appears to be that FTX gave the money to Alameda, and Alameda lost it. I am not sure about the order of operations here. The most sensible explanation is that Alameda lost the money first — during the crypto-market meltdown of this spring and summer, when markets were crazy and Alameda spent money propping up other failing crypto firms — and then FTX transferred customer money to prop up Alameda. And Alameda never made the money back, and eventually everyone noticed that it was gone.

    He goes on to write about other possibilities. There are some interesting quotes in there where SBF was talking generally about the crypto business, and I think that probably is better evidence for his state of mind at the time than the other stuff.

    (Also, separately terrible stuff about Musk.)

    2 votes
  7. skybrian
    Link
    Other people involved aren't looking great either. From a Poker news site: Now there's someone who has a history in the fraud business. Knowingly hiring a crooked lawyer (as Chief Regulatory...

    Other people involved aren't looking great either. From a Poker news site:

    Friedberg played a prominent and infamous role in the coverup of the insider-cheating scandal at UltimateBet in the mid-2000s, and he helped orchestrate some of the questionable legal moves that allowed the Portland, Oregon-based site evade U.S. law enforcement efforts throughout its existence. Those business and legal moves included the creation of a false-front office in Canada which in turn allowed for an IPO on the London Stock Exchange, a faked sale of the company to Tokwiro Enterprises (an entity created by the former chief of the Kahnawake nation, Joseph Tokwiro Norton), licensing in various offshore “rubber stamp” jurisdictions, and ultimately, a shadowy merger with another online-poker company, Absolute Poker, which was also riddled with insider fraud and crippled by its own cheating scandal.

    Friedberg, who served as FTX’s general counsel before taking on the company’s regulatory role, was recently described by Coingeek’s Steven Stradbrooke as being “almost comically inappropriate” for the job. The description appears apt, given Friedberg’s long history of not complying with various jurisdictions’ regulations, but rather, evading them.

    Now there's someone who has a history in the fraud business. Knowingly hiring a crooked lawyer (as Chief Regulatory Officer!) would seem to indicate a certain state of mind. I wonder what he put it on his resume?

    Also:

    Friedberg isn’t even the only former UB lawyer to have found a home with a major crypto firm. Stuart Hoegner, another former UB lawyer, holds a similar regulatory-compliance post with rival crypto firm Tether, which is one of numerous trading exchanges that suffered a hit this week due to FTX’s ongoing “Alameda” problem. And a third former UB lawyer, Sanford “Sandy” Millar, operates a boutique California law firm specializing in crypto issues.

    2 votes
  8. skybrian
    (edited )
    Link
    There’s speculation based on circumstantial evidence that Alameda was simply bad at trading and gambled it away. From Matt Levine’s column today: […] I guess that’s how you turn something that...

    There’s speculation based on circumstantial evidence that Alameda was simply bad at trading and gambled it away. From Matt Levine’s column today:

    Basically if you read these accounts, not necessarily focusing too much on specific hard-to-verify claims, the sense you will get is something like:

    1. Alameda Research did a ton of trading on FTX. If you — a regular person or a crypto hedge fund — came to FTX to trade, there’s a good chance you were trading against Alameda.
    2. Alameda was not very good at trading. If you traded against Alameda on FTX, there’s a good chance you made money.

    What exactly No. 2 means can vary. It could mean, like, on a market microstructure level, Alameda did not have the best view of crypto prices, and so sophisticated high-frequency crypto traders could reliably make money trading against it. (Colkitt: “Crypto trading firms had the illusion they were skilled. Instead all they were doing was winning against the Washington Generals.”) But it could also be a story about FTX’s liquidation engine: Customers could make levered bets on cryptocurrencies on FTX and be automatically liquidated if the bets moved against them, and this liquidation seems to have consisted largely of Alameda buying their positions. This was a good experience for customers — it made betting on FTX more predictable and less risky — and possibly good for Alameda, if it bought stuff that went down and then the stuff went up again. But when the Luna token collapsed earlier this year, Alameda would (on this theory) have been buying tons of Luna all the way down, leaving it with a huge stash of worthless Luna and a big loss.

    But never mind the details; the point of this theory is that FTX offered a very good customer experience to traders — if you traded on FTX, you made money — at the expense of Alameda constantly losing money to those traders. And when money got too tight at Alameda, the theory goes, FTX dipped into customer money to keep Alameda afloat.

    […]

    When you have a business that takes money from some customers and uses it to generate trading gains for other customers, that’s just, I am sorry, a Ponzi scheme. I am not sure it’s worse than any other explanation of what happened — in any case, the customer money is missing! — but it’s not good.

    I guess that’s how you turn something that wasn’t originally a ponzi scheme into a ponzi scheme? When you run out of money, take the customer money and keep going.

    2 votes
  9. skybrian
    Link
    Previously, Sam Bankman-Fried funded the campaign of a House candidate in Oregon. The candidate lost. Discussed here.

    Previously, Sam Bankman-Fried funded the campaign of a House candidate in Oregon. The candidate lost. Discussed here.

    1 vote
  10. [5]
    Bullmaestro
    Link
    BTC is currently at the lowest point it's been since November 2020. Don't know whether to laugh or cry at this. Never owned cryptocurrency to large degrees and given the state of the current...

    BTC is currently at the lowest point it's been since November 2020. Don't know whether to laugh or cry at this. Never owned cryptocurrency to large degrees and given the state of the current market I likely never will. Also think that blockchain technology and the metaverse are flawed ideas.

    I don't know what the purpose of Bitcoin even is. Critics claim it helps people launder money but the entire blockchain by design is a public ledger of every BTC transaction that has ever been made. Forensic accountants would be all over that shit like a litter of kittens to catnip.

    Cryptocurrencies aren't really decentralised when a select few miners and investors control a vast majority of the whole supply. Because the big shocker is that in order to make any money from this, you need a whole server farm of ASICs.

    1 vote
    1. Octofox
      Link Parent
      Bitcoin may as well be a religion at this point. My ex turned in to a bitcoin cultist shortly before we broke up. He would go on about how bitcoin can solve pretty much every single problem in...

      Bitcoin may as well be a religion at this point. My ex turned in to a bitcoin cultist shortly before we broke up. He would go on about how bitcoin can solve pretty much every single problem in humanity. The most recent one was that bitcoin will solve the single use plastics problem as plastic is a creation of the fiat economy. They are all convinced the world governments and financial systems are on the brink of collapse and that bitcoin will replace them both, making everyone currently holding massively rich.

      There is no logic or debating this kind of thing. You'd have more luck debating a Catholic or Muslim about the bible.

      5 votes
    2. skybrian
      Link Parent
      If you're curious about how cryptocurrencies actually get used, there's an interesting article about black-market currency exchanges in Argentina that I shared back in August.

      If you're curious about how cryptocurrencies actually get used, there's an interesting article about black-market currency exchanges in Argentina that I shared back in August.

      2 votes
    3. [2]
      cfabbro
      (edited )
      Link Parent
      https://en.wikipedia.org/wiki/Cryptocurrency_tumbler

      Critics claim it helps people launder money but the entire blockchain by design is a public ledger of every BTC transaction that has ever been made.

      https://en.wikipedia.org/wiki/Cryptocurrency_tumbler

      1 vote
      1. Octofox
        Link Parent
        There has been an increasing effort to make tumblers ineffective recently. There is now a concept of tainted coins, which I believe is even enforced by governments, where if a coin can be traced...

        There has been an increasing effort to make tumblers ineffective recently. There is now a concept of tainted coins, which I believe is even enforced by governments, where if a coin can be traced back to a tumbler or a particular crime, it becomes impossible to cash out, making it worthless.

        I'm not entirely sure how they trace particular coins since they are fungible. Possibly the whole wallet address becomes tainted and taints anything passing through.

        2 votes
  11. [6]
    skybrian
    Link
    Speaking of rumors: a vague warning that financial damage isn't over yet. (Patrick McKenzie is, among other things, a consistent cryptocurrency critic who's been predicting that Tether will fail...

    Speaking of rumors: a vague warning that financial damage isn't over yet. (Patrick McKenzie is, among other things, a consistent cryptocurrency critic who's been predicting that Tether will fail for years.)

    1 vote
    1. skybrian
      Link Parent
      This seems to be the thing he was hinting at: Binance proposes fund to save crypto from future failures. Meanwhile: Crypto Exchange AAX Halts Withdrawals but Denies It Had Exposure to FTX

      This seems to be the thing he was hinting at:

      Binance proposes fund to save crypto from future failures.

      NEW YORK (AP) — Cryptocurrency exchange giant Binance is proposing the creation of a rescue fund that would save otherwise healthy crypto companies from failure, aiming to stave off the cascading effects of last week’s implosion of FTX, the world’s third-largest crypto exchange.

      Binance founder and CEO Changpeng Zhao posted on Twitter Monday that his company would create “an industry recovery fund, to help projects who are otherwise strong, but in a liquidity crisis.”

      Meanwhile: Crypto Exchange AAX Halts Withdrawals but Denies It Had Exposure to FTX

      AAX, which reportedly has over 2 million users in 100 countries, according to a press release, claims that it’s suffered “multiple malicious attacks” and is limiting services like withdrawals because, “the technical team has had to manually proofread and restore the system to ensure maximum accuracy of all users’ holdings.”

      1 vote
    2. [4]
      skybrian
      Link Parent
      Another vague warning of doom today.

      Another vague warning of doom today.

      1 vote
      1. [3]
        Amarok
        Link Parent
        He's probably right. Tether is the main doorway between crypto and fiat. It uses its own bullshit tokens just like FTX - it's just another unregulated ponzi. When it goes, crypto value goes back...

        He's probably right. Tether is the main doorway between crypto and fiat. It uses its own bullshit tokens just like FTX - it's just another unregulated ponzi. When it goes, crypto value goes back to 2010. There's no easy way out for the people left holding after that door closes, so they'll get to eat the losses.

        After the dust settles it'll be a perfect time to buy in at fire sale prices. People will never learn their lesson, and this market is forever beyond regulation, so the boom-bust cycle is going to be with us for the foreseeable future.

        3 votes
        1. [2]
          MimicSquid
          Link Parent
          You don't think that people will avoid buying into crypto again? Or is the expectation that people will assume for a second time that someone else will be holding the bag when it collapses?

          You don't think that people will avoid buying into crypto again? Or is the expectation that people will assume for a second time that someone else will be holding the bag when it collapses?

          1 vote
          1. Amarok
            Link Parent
            People never learn. There's always a new shiny token on the market, and everyone gets greedy enough to ignore the obvious lessons. I think people will buy right back in once some time passes and...

            People never learn. There's always a new shiny token on the market, and everyone gets greedy enough to ignore the obvious lessons. I think people will buy right back in once some time passes and gives them selective amnesia. There will be new crypto creations to buy, same as the old ones, just with a better marketing team. Perhaps someday one will be invented that is actually useful for something.

            3 votes
  12. skybrian
    Link
    From the Nassau Guardian, which is the largest newspaper in the Bahamas: [...]

    From the Nassau Guardian, which is the largest newspaper in the Bahamas:

    Many Bahamians uprooted their lives to help build out FTX’s cryptocurrency exchange in The Bahamas.

    The company promised to introduce many Bahamians to the world of cryptocurrency and educate the next generation in the nascent fintech mechanism.

    Many companies have come to rely on FTX for their operations.

    It is understood that the company sometimes ordered as much as $10,000 worth of food per week from local vendors.

    FTX has also amassed property holdings in the tens of millions, also breaking ground in April on a $60 million headquarters complex in western New Providence that was to be the envy of any internet-based company.

    Now, those dreams are in limbo along with the company’s assets until the provisional liquidator completes his report on and decides the way forward for FTX.

    [...]

    The future of Crypto Bahamas, which brought speakers like former British Prime Minister Tony Blair and former US President Bill Clinton, now hangs in the balance.

    Crypto Bahamas 2023 has already been announced and organizers planned to fill Baha Mar to capacity with attendees.

    1 vote
  13. [6]
    skybrian
    Link
    Today Matt Levine points out that blockchains were supposed to be a better way to do accounting: And yet (some) crypto firms seem to be bad at accounting: FTX is one example, but he goes into some...

    Today Matt Levine points out that blockchains were supposed to be a better way to do accounting:

    And so, around 2017, there was a huge vogue for blockchain projects at banks, projects to put stock settlement or loan trading or bank accounts “on the blockchain.” The traditional financial system wanted to learn from crypto, to import its technical best practices, so that it could improve how it kept track of the money. As I said, this was in 2017, and since then no one has really heard much about these projects, so I’m not sure there was all that much for the financial industry to learn. Still, a nice effort.

    And yet (some) crypto firms seem to be bad at accounting:

    Meanwhile crypto built its own financial industry, with its own quasi-bank-like institutions, and what is striking about a lot of that industry is that:

    • It uses the same basic processes — keeping centralized secret records of account balances on computers, with a certain amount of sloppy manual reconciliation — as traditional banks; and
    • It is … worse … at it than the banks?

    FTX is one example, but he goes into some detail about how Celsius was also bad at accounting. (At one point they were using Google spreadsheets.)

    One thing that I say a lot around here is that crypto is engaged in re-learning the lessons of traditional finance. The last few weeks have been very educational! There have been some good lessons about the value of things like lenders of last resort and public disclosure and regulation. But I want to say here that one lesson crypto is relearning is about the value of having a good accounting system for keeping track of where the money is. Naively you might have expected crypto to already know that!

    1 vote
    1. [5]
      rosco
      Link Parent
      Why are we giving them the benefit of the doubt that this is "bad accounting" and not just purposeful fraud? If you don't keep "good books" it's easier to hide obvious fraud.

      Why are we giving them the benefit of the doubt that this is "bad accounting" and not just purposeful fraud? If you don't keep "good books" it's easier to hide obvious fraud.

      1 vote
      1. stu2b50
        (edited )
        Link Parent
        Probably the seemingly really bad exit strategy. If it was intended to be fraud you'd expect SBF and co to have a better strategy after the house of cards fall to take their money and hide....

        Probably the seemingly really bad exit strategy. If it was intended to be fraud you'd expect SBF and co to have a better strategy after the house of cards fall to take their money and hide. Apparently SBF was really just at his residence in the Bahamas and got apprehended by Bahamian police. Not much point in having money if you're in jail.

        Do Kwon, the Luna guy, is still out and about, in contrast.

        I'd expect SBF to shut up, get on an unmarked plane or vessel, and disappear before FTX fully collapsed. Apparently he really tried to fundraise with the world's worst balance sheet in the aftermath.

        All that seems to indicate that SBF was more delusional and thought of his companies as temporarily embarrassed Fortune 500s as opposed to enterprises designed purely to rob customers of their money.

        2 votes
      2. [3]
        skybrian
        Link Parent
        I don't think anyone is saying that it's not fraud. But it's also clear that the accounting is remarkably bad.

        I don't think anyone is saying that it's not fraud. But it's also clear that the accounting is remarkably bad.

        1 vote
        1. [2]
          rosco
          Link Parent
          I guess my point is that the poor accounting feels more like a feature than a bug.

          I guess my point is that the poor accounting feels more like a feature than a bug.

          2 votes
          1. cfabbro
            Link Parent
            Reminds me of the famous Upton Sinclair quote: "It is difficult to get a man to understand something, when his salary depends upon his not understanding it."

            Reminds me of the famous Upton Sinclair quote:
            "It is difficult to get a man to understand something, when his salary depends upon his not understanding it."

            1 vote
  14. [3]
    Comment deleted by author
    Link
    1. [2]
      MimicSquid
      Link Parent
      As interesting as this article is, I think it was posted in the wrong thread?

      As interesting as this article is, I think it was posted in the wrong thread?

      2 votes
  15. Fiachra
    Link
    As more and more of these stories come out, even the crypto-curious must be starting to conclude that these issues are systemic.

    As more and more of these stories come out, even the crypto-curious must be starting to conclude that these issues are systemic.

  16. skybrian
    Link
    Supposed $477 million FTX ‘hack’ was actually a Bahamian government asset seizure […] […]

    Supposed $477 million FTX ‘hack’ was actually a Bahamian government asset seizure

    The Securities Commission of the Bahamas has now acknowledged that it was behind the removal of $477 million in crypto assets from the bankrupt exchange on Nov. 12.

    “The Securities Commission of the Bahamas, in the exercise of its powers as regulator acting under the authority of an order made by the Supreme Court of the Bahamas, took the action of directing the transfer of all the digital assets of FTX Digital Markets Ltd. to a digital wallet controlled by the commission, for safekeeping,” the agency said in a statement.

    […]

    The seizure of assets came amid an emerging fight for control over the direction of the bankruptcy proceeding, with officials in the Bahamas filing a separate Chapter 15 bankruptcy petition in federal court in New York on Nov. 15.

    That filing was on behalf of FTX Digital Markets Ltd., a subsidiary that managed significant aspects of the company’s operations from its headquarters in the Caribbean island nation.

    A Chapter 15 filing is used typically in cases involving companies with debtors in multiple countries.

    […]

    The administrators of the Delaware case have accused Bankman-Fried of attempting to undermine their efforts to sort out the mess he left behind by pushing the second bankruptcy case brought by Bahamian officials.

  17. skybrian
    Link
    The New York Times did a live interview with Bankman-Fried, very much against the advice of his lawyers. I didn't watch it, but from a tweet summary, it sounds rather amazingly self-destructive.

    The New York Times did a live interview with Bankman-Fried, very much against the advice of his lawyers. I didn't watch it, but from a tweet summary, it sounds rather amazingly self-destructive.