The Crypto Thread

It works great until it doesn’t.

He addressed that

People on Twitter now are like “he admitted that FTX is a Ponzi!” but of course that’s not true. He conceded a certain validity to my claim that some crypto businesses — not his — are Ponzis. He is just in the business of trading their tokens.

In fact, I came away from that conversation bullish on FTX and Bankman-Fried. My view was, and is, that if you talk to a crypto exchange operator and he is like “crypto is changing the world, your old-fashioned economics are just FUD, HODL,” then that’s bad. A wild-eyed crypto true believer is not the person to operate an exchange. The person you want operating an exchange is a clear-eyed trader. You want someone whose basic attitude to financial assets is, like, “if someone wants to buy and someone wants to sell, I will put them together and collect a fee.” You want someone whose perspective is driven by markets, not ideology, who cares about risk, not futurism. A certain cynicism about the products he is trading is probably healthy.

That said, knowing what we know now, this seems prophetic:

But on the other hand, if everyone kind of now thinks that this box token is worth about a billion dollar market cap, that’s what people are pricing it at and sort of has that market cap. Everyone’s gonna mark to market. In fact, you can even finance this, right? You put X token in a borrow lending protocol and borrow dollars with it. If you think it’s worth like [not] less than two thirds of that, you could even just like put some in there, take the dollars out. Never, you know, give the dollars back.

A popular theory about what happened to FTX — the one I wrote about above, and yesterday — is that FTX issued its FTT token, and it had a market price, and Alameda got a lot of it, and FTX loaned Alameda money against it, and then Zhao was “the guy calling and saying, no, this thing’s actually worthless,” and Alameda could “never, you know, give the dollars back,” and that was the end of FTX.

People don’t fall fall for pyramid schemes because they don’t understand the how the pyramid functions. They just don’t realize how close to the bottom they are.

But of course SBF wasn’t just in the business of trading other people’s tokens: he, too, was in the magic bean production business himself with FTT. He also owned Alameda. None of that was ever a secret, and the mischief you could get into with owning those three ingredients is pretty obvious, especially in the wild west of crypto.

What Levine seems to be saying is that, even though in that interview SBF clearly had no belief in the core value of his own business, he, Levine, couldn’t imagine SBF doing anything shady with it. Which is, ahhh, not thinking very clearly.

Though not perhaps surprising: all good con artists have an A mode - “Here is the glistening vision of the glorious future that I offer!” for the ordinary rubes - and a B mode - “Ah, so you’re skeptical? Absolutely right, you should be. I can tell you’re intelligent! Let me let you in on some of my little secrets!” - for a different type of rube, the kind that has been taught to be skeptical but is afraid to admit to themselves that deep down they want to believe.

Levine falls into the second category. Not that he’d ever admit it. (Arguably we all fall into that second category, if we come up against a con artist good enough to read us.)

Want to know who puts up the most resistance when you prosecute a ponzi?

The investors. The poor greedy souls just can’t let go.

Most of them when faced with literally a room full of subpoenaed bank docs showing where the money actually went still blame you for causing it to fail.

The description in the interview was specifically about yield harvesting - the practice of getting people to park their (your) tokens in a black box which magically generates double digit yields for the depositors without any source of actual income other than hoping the value of the token increases (in practice, hoping the value of some other token increases). Luna — the context for the interview — was at its heart a yield harvesting ponzi, wrapped in a stablecoin. As far as I’m aware, there was no yield harvesting mechanism with FTT - the thing that ostensibly gave it value was that FTX committed (not sure it was a formal commitment, but it at least had the practice of doing this) to buying it back on a regular basis. Now, sure, this is also magic beans to a degree, but it’s not a Ponzi in the same way as yield harvesting, because there’s an actual business — a functioning exchange — with actual revenues underpinning the value. A horrifically managed, seemingly fraudulent business, as it turns out, but a business nonetheless.

That’s really not what he’s saying, partly for the reasons above, namely SBF wasn’t describing his own business, and partly because what he’s actually saying is that for the actual business part of FTX or an operation like it you want somebody going into crypto open-eyed, not somebody who thinks practices like yield harvesting are magically creating real value. Of course, there’s plenty of ways to run an exchange badly/fraudulently without it being a ponzi.

It’s important to bear in mind Levine’s general approach and tone, which is to take a vey wry look at frauds and financial fuckups. One of his most common aphorisms is something to the effect that if you’re going to commit bribery, don’t call the bribes something like chickens in your accounts, call them performance fees. This is not him endorsing bribery.

But… that wasn’t the case here. They bankrupted because they weren’t a trader who just would connect seller and buyer, but because they issued their own tokens and they participated in the whole crypto ‘money out of nothing’. And eventually values were down.
edit: oh I’m late to this argument.

The trick with FTT is that there were the circulating tokens, and then there was a huge vault of internal tokens. The market was acting as if these tokens didn’t exist, and Alameda/FTX couldn’t actually sell them, but they could use them to make it look like internal loans were arbitrarily well collateralized.

They banrupted because Alameda lost a shitload of money, and then they borrowed customer funds from FTX in order to cover. FTX was insolvent from that point, and was bankrupted when there was a run on the exchange. They weren’t bankrupted because FTT was suddenly valueless, that was just a way to pretend there was still a financial division between the high risk hedge fund and the exchange, and that they weren’t trading with customer funds.

Well two more things:

  1. Crucially, FTX accepted FTT tokens as collateral on the loans it made to Alameda. I mean, it’s ok to make loans using customer funds (although not ok to do it if you tell customers you won’t and never have). That’s what banks do every day. What was bad here was that the loans were collateralized with FTX’s own token that only had value because FTX was reinvesting its profits into it. FTX couldn’t liquidate Alameda’s loan in order to make its customers good because all it had was FTT tokens, which were losing value right along with FTX. Doom spiral to bankruptcy.

  2. Also, too, the whole point of FTX as an exchange was that it had these triggers that would liquidate leveraged positions as soon as they fell below a certain value. This was supposed to provide some safety to customers: “Yes, we leverage your deposits to make risky investments, but we have automatic safeguards in place that prevent us from losing all of them.” Those automatic triggers apparently didn’t apply to its sister companies, which is like super bad. That’s like paying to add earthquake protection to the buildings next to yours, but not to your own building.

And that’s all aside from the hilarious (I have chuckled at this several times over the last week) idea that FTX was trying to demonstrate solvency by pointing at the distributed capitalization of its own tokens. That’s like writing a number on the back of your hand in sharpie and and sending a picture of it to a credit bureau to beef up your credit rating.

Is there any precedent for holding celebrity endorsers legally liable for a fraudulent product? IANAL but that seems far fetched.

Nothing legally.

But, often times the deep pocketed celebs will settle out of court to make it go away.

I don’t see why they’re upset with Larry. He told them not to do it.

Depends how you define fraudulent I suppose. Several celebrities/influencers have been fined for endorsing shitcoins. But I think usually the formal reason is either an unregistered securities offering (SEC) or unlabelled advertising (FTC).

Yeah, those fines are all about those celebs not being clear that they’re paid for their endorsement. You can’t suggest the same about someone in a television commercial.

Those suits will go nowhere. Tom Brady may be a douche, but he’s not responsible for anyone’s FTX loss.

Ontario Teachers Pension fund was into FTX for $95m USD, though it is a miniscule portion of their holdings.

Not that this applies to Canada, but in the States if I’m reading this right the IRS would expect some level of fiduciary duty along the lines of documenting the investment decision.

Here’s a section of it, italics are mine:

Fiduciary responsibilities cover the process used to carry out the plan functions rather than the results. For example, a plan investment doesn’t have to be a “winner” if it was part of a prudent overall diversified investment portfolio for the plan. Since a fiduciary needs to carry out activities through a prudent process, you should document your decision-making process to demonstrate the rationale behind the decision at the time it was made.

Rationale behind the decision: FOMO and greed.

As an Ontario teacher I’m upset. What the fuck are these people thinking? Whoever is responsible should be lined up against the wall. They’re supposed to be professionals not some dumb dumb who’s just heard of this great get rich quick scheme.

This is an interesting article from Tim Bray about how AWS made the decision to not bet big on Blockchain, back in the early days.