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ALTIF Transcripts: The Last Days of Crypto

The sudden collapse of Sam Bankman Fried’s $16bn crypto trading empire has caused even the most bored of apes to sit up and take notice. Investors in these digital currencies have exhibited an incredible stoicism, soaking up their punishment and “HODL-ing” through past crypto collapses, but could this be the end of Satoshi’s children? Neil and Jonathan talk to crypto expert Izabella Kaminska about why crypto exchanges are like 19th century prairie banks, whether the newbies will keep coming and what currencies might survive the turmoil.

Presented by Jonathan Ford and Neil Collins.

With Izabella Kaminska.

Produced and edited by Nick Hilton for Podot.

Sponsored by Briefcase.News

Hosted on Acast. See acast.com/privacy for more information.

Jonathan Ford 00:06

Hello and welcome to a long time in finance with Jonathan Ford and Neil Collins, in partnership with briefcase dot news, the service that brings intelligent curation and analysis to your media monitoring. As listeners will know, a long time in finance has been a puzzled spectator of the great crypto phenomenon. Neil still thinks there’s something not quite right about paper currency, and would prefer to go back to the gold sovereigns or perhaps even coloured stones.

Neil Collins 00:38

Very difficult to exchange a gold sovereign for a bunch of fries.

Jonathan Ford 00:43

So at the risk of eliciting a volley of I told you so’s, from my neighbour here, we’re going to have a look at the latest crypto drama. And it’s a sad tale. Until last week, Sam Bankman Fried was one of the big beasts of the crypto world with a fortune estimated at $16 billion. Most of it tied up in FTX, a large crypto exchange he founded, and a derivatives trading company. Now the 130 companies are all valueless. His own fortune has vaporised and his honesty is openly being questioned. He’s considered a flight risk in the Bahamas where his empire is headquartered and was rumoured at the weekend to be planning to flee to Dubai in his private jet. The main virtue of this destination; the UAE has no extradition treaties with the US.

Neil Collins 01:33

Presupposes he’s still got his private jet. Of course,

Jonathan Ford 01:37

I know. Yeah, I agree. I agree. It depends on who owns it? I think so. A bit of a moment. I think we’ll all agree. And it comes at a time when a number of crypto exchanges have been crashing and some currencies also have collapsed. So I thought we’d ask what does it all mean and where does it leave the crypto world? And to discuss all this we’re joined by crypto expert digital entrepreneur, an all-round financial guru, and an old friend of the show; Izabella Kaminska.

Izabella Kaminska 02:05

Hello, greetings.

Jonathan Ford 02:07

So Izzie, where do we start?

Izabella Kaminska 02:10

Where do we start? I mean, it’s all a big mess. It’s such a fast-moving story that I’m sure by the time this podcast goes out there’ll be new twists and tales. By and large, we’re at an existential point in the crypto narrative. Sam Blankman Fried known as SBF.

Jonathan Ford 02:28

So we call him SBF.

Neil Collins 02:31

Can’t we call him Mr. Fried by name.

Jonathan Ford 02:35

Drop in the Fried’s but we’re going to go with SBF

Izabella Kaminska 02:38

Bank Man Fried. I think that’s quite clear.

Neil Collins 02:42

It’s nominative determinism.

Izabella Kaminska 02:44

So yes, there’s loads of conspiracy theories travelling around the crypto space but very briefly, FTX came almost out of nowhere and became one of the dominant derivative exchanges. SBF founded it in 2019. And I think it was in May 2022, that Mr. SBF was even hosted for an FT lunch. Right. So that was the pinnacle moment, I think.

Jonathan Ford 03:09

It’s often when it all goes downhill.

Neil Collins 03:13

Could I just ask question, this is a crypto exchange?

Izabella Kaminska 03:15


Neil Collins 03:18

It’s not very much like say the London Stock Exchange, is it?

Izabella Kaminska 03:22

What is an exchange in the crypto world? There are all sorts of flavours. I mean, you might remember Mt. Gox. That was the original high profile collapse back in 2014. It was an exchange ran out of Japan supposedly hacked, we never got to the bottom of it. It collapsed in similar murky circumstances. But it was early on. And at the time, I thought that was an existential issue for crypto. But it turns out, it wasn’t warning enough. And there were continuous exchanges coming up to take over the market share the ones that collapsed, left behind, but around I would say 2017-2018 the big innovation in exchanges was that derivative exchanges started to become a thing. All the exchanges before that were mainly focused on spot exchange, which was very complex.

Jonathan Ford 04:08

Just, just an exchange, when Neil talks about the stock exchange: the stock exchange is simply a venue where people turn up and trade these things.  FTX or other things, like binance or all the other ones. They are venues where you can trade it, but they’re also custodians, where they keep your bid or your token or your coin or whatever it is. Now that’s this very simple model because let’s say I’ve put $100 into bitcoin I buy from somebody else a Bitcoin and stick it in FTX, it’s in FTX. It just moves into my account, and Bitcoin goes to zero next Thursday. I’ve lost my 100 quid. It may be if all crypto goes to zero FTX has a problem in that it’s can’t take fees from nothing to pay its wages and salaries. But it doesn’t seem that what we’re seeing at the moment is very much like that very simple model. It’s like everything is collapsing almost like a bank, and having runs and confidence crises and huge losses.

Izabella Kaminska 05:14

Because these exchanges are effectively broker dealer models. So the murkiness comes in the fact that crypto as an asset is very difficult to manage. And so they pool the funds. And de facto, even though you’ve heard so much propaganda about being your own bank, and being in control of your own crypto, the reality is, is that if everyone had to operate out of a segregated wallet, there would be no liquidity. So actually, when you take out a account at any of these exchanges, you are de facto funding that exchange and putting your money into a pooled account from which they manage margins, whatever, depends on the model of the specific exchange. So the original ones were all focused on spot. And there wasn’t very much leverage in the early days, but then the derivative exchanges came on the scene around 2017-2019.

Jonathan Ford 06:03
But what’s the purpose of a derivatives exchange to a spot which just means buying and selling at the price prevailing at the time? What’s a derivative exchange?

Izabella Kaminska 06:12

So like, with the CME or any other you know, commodities are tough to trade physically. So derivatives give you advantage in the sense of liquidity in the sense of transaction capacity and speed. Crypto is no different because it’s really hard to actually, despite all the propaganda, it’s actually really hard to exchange because it comes with lots of counterparty risk and hacking risk. So if you’re doing a lot of exchanges, and it costs money. So there is an efficiency from using derivatives because you then don’t have the exposure on the counterparty basis. And you can be sure that whichever exchange is honouring the trades can step in as an intermediary, or, you know, in the case of Bitcoin and crypto, they would do these forced liquidation events, if any one of the parties was too much out of the money.

Jonathan Ford 06:59

But when you talk about leverage, that implies that there’s also lending going on here, people are not just paying $1 for a Bitcoin and then storing it, there’s some sort of lending activity going on. So is that, is that right?

Izabella Kaminska 07:14

It’s no different to say how CFDs operate. So the leverage is – in any kind of closed system, you can defacto engineer leverage, providing you can settle these things quickly enough, and ensure that things don’t go out of the money too much in a market that moves. And the other issue is really the exchanges themselves. Conventionally, you have two models, you have one where you’re an agent, where the broker-dealer is just matching the counterparties together and getting a commission for that match. And the alternative is one where they operate as the principal and to encourage liquidity they step in between the counterparties. So the counterpart is trading with the exchange. And they operate as a sort of quasi-market maker. And of course, in that case, in that model, the broker is also taking risk. Why would they be inclined to do that, because it adds liquidity and it creates the illusion of tight spreads.

Neil Collins 08:04

They can trade on margin, which gives them a huge new toy to play with.

Jonathan Ford 08:10

That makes it very exciting. I just thought it was pretty exciting. Judging by what happens to the price of Bitcoin, it’s pretty exciting to begin with, but then again, I’m not the kind of excitable person they’re going after. I still don’t figure; how is it that… so they are doing a little bit of CFD, like leverage introducing it into the game to make it more attractive to trade, make it easier and quicker to trade? How then do you end up with these enormous losses? Because people are talking about, you know, and I don’t want to go into the details of SBF’s little woopsie on the carpet, but people are talking about it having 9 billion of claims and 900 million of assets. I mean, aside from that dread word fraud, how could you possibly end up with such enormous losses?

Izabella Kaminska 08:59

Well, number one, the clue is in the fact that SBF started his own hedge fund Alameda research and that this was a prominent like liquidity provider to the exchange itself, right. So remember, the Volcker Rule, remember what it is determined? It determined that banks should not be prop trading in their own proprietary systems, right, because there’s a conflict of interest. Now, if you are de facto, I mean – there’s no proof I don’t want I want to emphasise that this is speculation on my part – but the conflict of interest is obvious. And so if you are not only the counterpart to your customers, but you are prop trading, you might be inclined to take risk, but the market might move too quickly, or there might be some sort of a Nick Leeson moment where you decide to keep doubling down just to recover a small loss and before you know it becomes a massive loss.

Neil Collins 09:49

It seems to me that the temptation to go down that particular route, especially if you think you know better than the market does. You’re a market maker or you’re an exchange and you think, Hmm, these people really don’t know what they’re doing. So we’re actually going to trade against their position on our own margin. That seems to me to be a systemic hazard if they are allowed to trade essentially for their own book, as well as trying to make a market for the world.

Izabella Kaminska 10:22

That’s exactly the conflict of interest. So the question is what was really going on behind the scenes and speculating the big route in April 2022, on the back of the collapse of Terra Luna, which we talked about before, chances are they suffered a loss at that point and they were hoping for a turn in the market that never came it just kept getting worse and worse.

Jonathan Ford 10:45

So Almeida, which is the trading bit, might have invested in a proprietary way in some other coins or tokens, taken losses, and then basically disguise it or whatever might have happened. But that’s how you ended up with the losses in the system.

Izabella Kaminska 10:59

The lack of Chinese walls, or lack of compartmentalization, lots of conflicts of interest, but also the commingling of customer funds.

Jonathan Ford 11:07

What is interesting about the collapse is the fact that the entire legal department – not clear who that was apart from SBF’s cat – resigned, resigned on the day that this whole sort of shit hit the fan. And they obviously, they obviously didn’t want to hang around for the post-mortem. For whatever reason.

I want to pull back from the minutiae of this, to, if you’d like, the wider question, which is, we’ve talked about this before. And you know that for Neil and I probably it’s slightly reminiscent of something else… the SSB, the South Sea Bubble! Is this not the moment in the South Sea Bubble where somebody erects their placard saying, business a great advantage, nobody would know what it is – get their 1000 pounds, leg it to the continent at lunchtime, and it’s so outrageous that the basically the punters suddenly realised they’d been shafted, and they all start selling their South Sea company stock. I know that you’ve taken the view that the investors in Bitcoin are a hardy bunch, and they’re prepared, they’re prepared to take quite a bit of a pasting and keep the faith is this like that and a hinge moment?

Izabella Kaminska 12:20

I think it’s quite an existential moment for the entire industry, because it’s such a spectacular fall. The other aspect of it is that SBF had achieved quite good and favourable coverage in the press. So they’re going to be out to get him now too. Whereas I think all the other failures were in the context.

Neil Collins 12:39

Everybody else does.

Izabella Kaminska 12:43

The other failures have always been like, oh, we told you so. But here because, you know, he had managed to somehow woo the collective intelligence of the press into his little bubble. I think this time might be different. Also, there’s this weird – there’s a lot of conspiracy theories at the moment with respect to why he was allowed to be so successful is it because he was secretly funnelling money, crypto Ponzi scheme money into the Democrats? Because I think he ended up being the second-largest donor after Soros. Then there were other conspiracy theories related to his competitor who is CZ.

Neil Collins 13:19

Well, I was going, I was going to ask – is the structure of CZ a similar one? The structure of his exchange? So if Mr. Fried can melt down, what is stopping CZ following him down the drain?

Izabella Kaminska 13:45

Well, it could be a question of a bigger fish gobbling up a smaller fish or you know…

Neil Collins 13:51

I thought he’d already rejected the smaller fish bones at the customer desk.

Izabella Kaminska 13:55

But the customer flow like you know, there’s still going to be punters out there potentially, who are not prepared to give up. In fact, he put out a tweet today, encouraging the crypto community to you know, build back better again and not to give up. So he’s definitely on the prowl, build back crypto better..

Neil Collins 14:14

A good slogan, I wish somebody else thought of it.

Jonathan Ford 14:17

It’s a long haul. It’s not a get-rich, quick game.

Neil Collins 14:21

But that’s all very well, you can understand him saying, you know, come to me, I’m in great shape, and we’ll all get out of this together. But if the structure is similar, then what is to stop the same thing happening?

Izabella Kaminska 14:36

Well, it’s an offshore exchange, it’s equally opaque, I would say. that I think it’s important to stress that since this has all happened, there’s been this massive movement of transparency. I don’t know if you’ve seen every exchange out there is doing this proof of reserves thing so they’re all voluntarily… but allegedly, it’s also very shades of repo 105 – because they’re supposedly pouring the cash from each other as a hot potato of excess cash going round and they take a snapshot going, look, hey, we’ve got the cash, then the blockchain shows that the money’s flowing on to the next exchange that goes, hey, if we’ve got the cash, who knows if  there’s a giant deficit?

Jonathan Ford 15:12

The purpose of the cash is that they have made some sort of promise to their customers, that they can sell back their Bitcoin or whatever it is to the exchange, which is going to act as some sort of principle, so therefore has some capital, which it can send out to buy back, and they do move the price, obviously, if they think it’s going to be a disaster for them. But anyway, sorry.

Izabella Kaminska 15:36
Yeah so the clients will have deposits at these exchanges, and they expect to be made good at any time, and they don’t have sort of any lockups.

Jonathan Ford 15:44
When you say being made good, you mean…

Izabella Kaminska 15:47

The capacity to withdraw – to retrieve what they put in…

Neil Collins 15:49

In real dollars.

Izabella Kaminska 15:53

It could be in crypto, in whatever.

Jonathan Ford 15:55

They can get crypto in there, they can turn it into dollars if they want to.

 Izabella Kaminska 15:59

You can have accounts in crypto denomination or in dollar denomination, but dollars would be tether dollars, right?

Jonathan Ford 16:05

So it would be the stablecoins. Anyway, but I want to come back I want to come back to I’m a customer, I’m a customer of FTX. And I’ve been trading away quite happily with my little stack of bitcoins or whatever. And all of a sudden all this thing happens – what do I do now? Am I gonna get anything back? Am I just gonna have to write off to the administrator brackets, the man who runs the bankruptcy of Enron. So that’s encouraging. So I presumably have to put my claim before the administrator and hope there’s something left at the bottom of the bucket when it could take years.

Neil Collins 16:44

Oh, you might get 10 cents in tether dollars.

Jonathan Ford 16:48

Haven’t we just proved that all the regulations that these guys were trying to evade – all
the banking and other know your client, boring regulations – would actually serve some purpose in the first place, making it less likely that you’re going to end up in this unhappy situation rather like a mid 19th century bank loan, but whose bank has just gone bust?

Neil Collins 17:10

I would look at it, I would look at it from the other end from the

Jonathan Ford 17:15

You don’t want a point of bailout from the government

Izabella Kaminska 17:17

That would be terrible optics!

Jonathan Ford 17:20
Order… order…

Neil Collins 17:23

From the regulators and the regulator might say, I really don’t want to be able to regulate thi because if I start regulating somebody further down the line, if it all goes wrong, they’ll say, why didn’t you stop this, and I want compensation. The great advantage for the regulators by having no regulation is that there’s no way that the (inaudible) bounce back on the regulator and I think that’s quite a powerful incentive.

Izabella Kaminska 17:49

And that’s one reason the regulators have been hesitating for a long time. And there have been these regulatory uncertainties.

Jonathan Ford 17:56

Fried was trying to get them to rally around.

Izabella Kaminska 18:00

That’s one of the conspiracy theories is that he was basically creating a Concorde with the regulators, a gate as they say, so now that he’s big regulations go up so that new players can’t come in to challenge him and that’s why Binance might have had a motivation to go in…

Neil Collins 18:17

It’s not quite the same thing as the regulator’s saying, if this goes belly up, we are going to find ourselves on the wrong end of those famous American lawsuits. As long as they hold out against regulating it, there’s no way they can be got at.

Jonathan Ford 18:33

The next thing I want to pick your brains about is which is sort of attached to this is they’ve proved that you can create in the modern world, a mid 19th Century Bank in some frontier American state which basically can go bust in an afternoon and everyone sits around looking rather sad with singed fingers, but this whole thing right, this whole crypto thing surely it must depend on a stream of newbies coming along who think this looks like a good idea I’m going to blow my inheritance from Auntie Ada on some bitcoin and aren’t they’re going to now be a little bit more anxious about whether that’s a particularly good idea? And what happens if you don’t get… because the whole idea of this industry which is why I suppose everyone always thinks of it as a bit of a Ponzi scheme, is that it basically requires an ever wider funnel of money to come in to validate all the iffy bets that have been taken up till now.

Neil Collins 19:32

But to some extent, it depends on whether Aunt Ada has given you the money or if you’ve stolen it. If you’ve stolen it, you might…

Jonathan Ford 19:40

But in unregulated markets, that’s entirely irrelevant!

Neil Collins 19:45

My serious point here is that a lot of the money is essentially black money in the state. It comes from crime, it comes from arms.

Izabella Kaminska 19:57

Well Neil’s not wrong, but actually there is some evidence to say that the crime volumes have now been crowded out by the speculative volumes, I think because quite rightly… this evidence comes from agencies like chain analysis who spent ages scrutinising the blockchain and figuring out where all the flows are going.

Neil Collins 20:16
It’s a wonderful idea that the legitimate investors have crowded out the illegitimate ones.

Izabella Kaminska 20:22

Well, the legitimate ones are focused mainly on speculation and Ponzi dynamics. But it’s an important point because the blockchain, the transparency of the blockchain does actually hinder the criminal elements. So there are all sorts of you know, legitimate forms of transfers as well as illegitimate ones.

Jonathan Ford 20:43

Yeah, I think it’s worth putting in a word for the bravest country on Earth right now, which is our old friends in El Salvador, shout out to El Salvador, sometimes known as El Hodlodor – hodl means hold on for dear life – because they are I think the only country that I’m aware of that accepts tax payments in Bitcoin.

Izabella Kaminska 21:04

As far as I’m aware, yes. I think that’s correct. Yes.

Jonathan Ford 21:07

But, but to come back to the question, if the supply of newbies diminishes as a result of this, and the hopeful for a regulated future, more el Hodlodors coming on stream, who are prepared to basically accept some sort of payment in this currency? If none of that happens – is there not a danger that this could be a hinge moment in the sense that it could all fold up on itself?

Izabella Kaminska 21:32

Well, I do think like 99% of this stuff is going to disappear, because also remember, we’re in a rising interest rate environment, which in this stuff was born out of QE and out of, right, it was easy to have all this crazy, crazy sort of speculation. Crazy speculation when money was cheap, but now that there’s a price on money, this is going to be much harder to sustain.

Jonathan Ford 21:58

So what’s the purpose of the 1% that survived?

Izabella Kaminska 22:01

So I would say it’s less than 1%. It’s probably going to be naught point naught.

Jonathan Ford 22:05

Okay, but what’s it, what’s it doing?

Izabella Kaminska 22:07

At the margins. There are some interesting innovations, but they’re very marginal. It’s, you know, I did get persuaded by a few things like I like the perpetual futures. Perpetual futures are an interesting thing

Neil Collins 22:20

But the future’s always perpetual?

Izabella Kaminska 22:25

These are like trading instruments, but yes sure. You never settle them, but they’re a very interesting innovation.

Neil Collins 22:35

I borrow on that basis.

Izabella Kaminska 22:39

They’re slightly different. But I won’t go into the complexity. Some aspects of NFT’s are interesting in terms of making ownership of certain watches and you know, luxury goods, I can see some minimal aspects in that? It’s gonna be small.

Jonathan Ford 22:56

But what about. Okay, that’s interesting, but your view last time we had you on, you very eloquently explained the kind of incredible amounts of punishment the hodlers were prepared to take a financial taken (inaudible) they’ve taken another pasting thanks to Mr. Fried, SBF. Yeah, you know,  we are now at the point where they are indeed pulling the gag out of their mouths and begging to be cut down.

Izabella Kaminska 23:26
I think we’re nearly there. I think the bitcoiners are gonna be the last drop but all the other crypto guys I think, yeah, they’re at the limits, aren’t they?

Jonathan Ford 23:33
Okay, Bitcoin, the survivor price is currently about 14 grand $14,000 A coin price at the end of the year, up down?

Izabella Kaminska 23:41

Oh, no, I think it’s going down. I think it’s going to go as low as about 6000. Basically back to where we were when the whole pandemic started. So about 5000, 6000, maybe lower. I hate making price predictions because…

Neil Collins 23:55
I think that’s a very unkind question.

Jonathan Ford 23:59
Can I talk a bit about just one, I don’t want to end on the sad news, and therefore, it’s not all doom and gloom.

Izabella Kaminska 24:07

I know what you’re gonna say… Nibblecoin.

Jonathan Ford 24:12

Listeners will remember from earlier episodes, we’ve adopted our own cryptocurrency on this day which is, which is nibblecoin. So I looked it up amazingly, it’s still around, and it has sailed through all this unpleasantness almost untouched and it still has a market value of $45 which is for all the 269,000 nibblecoins in issue so…

Neil Collins 24:42

How does it compare to when you tipped it?

Jonathan Ford 24:43
It’s about the same. It’s like a Rip Van Winkle coin, it just sleeps through all this horror.

Izabella Kaminska 24:49
Youre no Kim Kardashian. That’s all I’m gonna say.

Neil Collins 25:01

That was a long time in finance with Jonathan Ford and Neil Collins. Editing and Production is by Nick Hilton. And our sponsorship partner is briefcase dot news. Join us again next week.

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