The FTX Deep Dive

Hello Studio Fam,

We’re doing a deep dive on what might be the biggest story in tech this year: the unraveling of FTX. We know that is a bold claim amidst the Great Tech Reset. Mass layoffs, valuation corrections, and regulatory scrutiny are also big stories. But in just one week, the undoing of FTX has touched upon all of these issues and more.

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FTX is more like Enron than Lehman

The collapse of FTX was so quick that we’ve barely had a week to answer the most basic question of who is at fault. Some have compared this to the collapse of Lehman Brothers: a legitimate business caught in a liquidity trap. But a different failure seems more comparable at this point: Enron. Coinbase CEO Brian Armstrong got straight to the point in last week’s All In Pod: SBF “appears to have done something quite unethical and illegal.”

Understanding financial crimes is hard enough when they just involve dollars. Unfortunately understanding the FTX debacle also involves a bunch of fake dollars. This story is just barely reported, but already we can see the grand strokes of SBF’s protracted battle to cover up serious alleged crimes.

What we know:

• SBF controlled the crypto exchange FTX and the hedgefund Alamedaeta
• SBF “loaned” FTX customer deposits to Alameda
• Alameda lost most of the “loaned” money making bad investments
• The “loans” were actually stolen from customers who never consented
• SBF covered the losses by minting FTT, his own otherwise worthless token

TLDR: FTX didn’t fail like Lehman Brothers because it made bad investments. FTX failed like Enron because it made bad investments with money stolen from its customers and tried to cover it up with fake accounting.

Who Will Play Sam Bankman-Fried?

There are rumors that Michael Lewis, author of The Big Short and Moneyball, was writing a book about Sam Bankman-Fried (SBF) for months before FTX went bankrupt. Presumably Mr. Lewis got involved to tell another inspiring story about outsiders reforming outdated institutions with math. Unfortunately for SBF, Mr. Lewis will now be leveraging his experience investigating financial fraud.

Small Bytes: Who Invested in FTX?

The following investors put at least $100 million into FTX, according to Crunchbase. This reveals a remarkable lack of due diligence in the face of revelations like "FTX doesn't maintain a list of employees."

• Softbank Vision Fund
• Sequoia Capital
• Tiger Global Management
• BlackRock
• Insight Partners
• Lightspeed Ventures
• Ontario Teachers Pension

Regulatory Clarity is Coming Soon

A common refrain among crypto maxis is the need for “regulatory clarity.” Sam said it often. The crypto industry, they argue, is too new and cool and interesting to be governed by securities laws written in the 1930s, so we need new laws taking into account the special properties of crypto finance.

But what they’re really saying is that they don’t want to comply with existing regulations designed to protect retail investors from fraud and exploitation. BlackRock is going to be fine. But the retail investor is not going to see any money for a long time.

These are regular people who saw a superbowl ad or a billboard at a Heat game and then put their life savings into an unregulated financial exchange headquartered in the Bahamas. Nobody stopped them. Pending legislation includes several reforms but deals mostly with dividing responsibilities between agencies and relies on the same consumer protection framework used by banks.

The best advice? If you’re going to hold crypto, do it in cold storage.