Speaker 1: It's FTX. It's a safe and easy way to get into crypto.
Speaker 2: I don't think so. I'm never wrong about this stuff. Never.
Matt Katz: Remember that commercial? It played during the 2022 Super Bowl earlier this year, Larry David, Tom Brady, Steph Curry, and Shaq were some big names attached to the world's second-biggest cryptocurrency exchange. Now they've been named in a class action lawsuit for encouraging people to invest in the company.
The cryptocurrency exchange known as FTX filed for bankruptcy two weeks ago after it was revealed that the company mishandled user funds leading to the crypto world's equivalent of a bank run. The company says it owes its top 50 creditors more than $3 billion. Here to talk about the importance of this massive crypto scandal is Vicky Ge Huang, Markets Reporter covering crypto and retail investing at The Wall Street Journal. Vicky, thanks so much for being with us today.
Vicky Ge Huang: Thank you for having me.
Matt Katz: Let's start with the basics of this controversy. The crypto world can seem a little nebulous to folks who aren't familiar with it. It certainly intimidates me, to be honest. Tell us about FTX and its connection to Alameda Research.
Vicky Ge Huang: Yes, so FTX is this crypto exchange founded by, up until two weeks ago, this brilliant trader and charismatic billionaire by the name of Sam Bankman-Fried. It was founded in 2019 and grew really rapidly in recognition and scale and it quickly became one of the largest crypto exchanges in the world. Over the years, there has always been this skepticism from market participants in the crypto space that FTX has a conflict of interest with its sister company called Alameda Research, which is the crypto trading firm founded by Mr. Bankman-Fried in 2017.
The reason why there is a lot of doubt and skepticism about the close relationship between these two companies is because Alameda Research is a market maker which is supposed to provide liquidity to crypto exchanges, and FTX is a crypto exchange. That aroused a lot of doubt and criticism about these two companies. Then what we learned from the past two weeks is that these two companies are essentially, one, saying there's never been any Chinese firewall between these two companies, even though in the past, Mr. Bankman-Fried has repeatedly said that these two companies are separate entities.
Matt Katz: How did we learn this? How did these practices come to light?
Vicky Ge Huang: It started with this article from crypto trade publication Coin Desk on November 2nd. This article revealed a leaked balance sheet of Alameda Research and this balance sheet showed that like a huge chunk of Alameda Research's balance sheet is made up of this token called FTT. FTT is a cryptocurrency that's created out of thin air by FTX. It's like a stock of FTX but not really. When people see that billions of dollars of Alameda Research's balance sheet is made up of this token created by sister company FTX, it, again, aroused a lot of skepticism and doubt about why this trading company that's supposed to be a separate entity have so much of your sister company's token.
Matt Katz: The CEO Sam Bankman-Fried resigns, the company files for bankruptcy. The company's new CEO John Ray helped manage Enron after its collapse. After taking over FTX, John Ray says that he had never seen such a complete failure of corporate control. How bad did things get inside this company?
Vicky Ge Huang: That really says something, when the person overseeing the wind-down of Enron is saying that this is the worst he's seeing in his 40 years of career. There's still a lot that we don't know right now but what has emerged from what a lot of sources have been telling us in the bankruptcy filing is that there is little internal controls within the company. There is a little accounting, a lot of funds were commingled between FTX and Alameda. Even basic things like human resources wasn't really up to the standards of what you would think of one of the largest crypto exchanges in the world. Some of the employees that work at FTX, their names, they don't even have a comprehensive employment agreement with FTX.
Matt Katz: Tell us about former CEO Sam Bankman-Fried, also known as SBF, his initials. What kind of influence did he have in the cryptocurrency landscape?
Vicky Ge Huang: He was one of the most influential figures in the crypto market. He made himself the face of crypto in Washington DC. He's always on the Capitol Hill trying to lobby for the interests of the industry and he's always cultivated this public image as this brilliant, nerdy trader who was able to make a lot of money in 2017 by exploiting the pricing differences of Bitcoin between Western crypto exchanges and Asian crypto exchanges. That's how he was able to start this crypto trading firm, Alameda. Then after he founded FTX he's spent a lot of money on marketing, as we heard from the Superbowl commercial starring Larry David.
He's also paid for the naming rights of a stadium in Miami, where the Miami Heats play. Then he's also got a lot of celebrities like Tom Brady and Gisele Bündchen to advocate and promote for cryptocurrency adoption.
Matt Katz: Do we know where he is now and what's happening with him?
Vicky Ge Huang: It seems like there's been a lot of reports saying that he's still in The Bahamas trying to still raise funds and make customers whole, but the official FTX new management has said that they don't really have anything to do with him anymore.
Matt Katz: We've got to take a quick break but Stay with us. When we come back, we'll talk about SBF's enormous influence on American politics.
Matt Katz: Welcome back to The Takeaway. I'm Matt Katz in for Melissa Harris-Perry. We've been talking about the collapse of the Cryptocurrency Exchange FTX. The company's charismatic founder and CEO Sam Bankman-Fried frequently appeared before Congress lobbying for crypto and hobnobbing with politicians. According to opensecrets.org, which tracks political donations, he gave 40 million to candidates and outside groups this election cycle, making him the second-largest donor to Democrats and the sixth-biggest donor overall in the 2022 midterms.
For more on this influence I'm back with Vicky Ge Huang, Markets reporter covering crypto and retail investing at The Wall Street Journal. Vicky, how important was SBF to Democrats and to American politics in general? Was he really this major player?
Vicky Ge Huang: Yes, he was really giving multimillion-dollar donations to Democratic politicians and trying to steer a lot of the crypto bills that are being proposed on Capitol Hill. Because he was actually this follower of this philosophical movement called Effective Altruism, which is about doing the greatest good for the greatest number of people. He was founding causes like combating climate change and curing tropical diseases and things like that. He was frequently seen in Washington DC rubbing shoulders with politicians and also testifying in Congress about crypto regulation. He was definitely becoming a bigger and more influential figure in politics.
Matt Katz: He was pushing for regulation on cryptocurrencies but then he apparently told Vox last week that his push for crypto regulation was all just PR. Do you think that's true and where does this lead us in terms of the kind of regulation that he was pushing for now that his reputation has been tarnished? Will it just drive conversations about the insipid nature of what happened here or might it help to push for more regulation?
Vicky Ge Huang: I think nobody really knows what he's thinking right now. He was definitely one of the biggest advocates for crypto regulation, but then we found out that he's been doing all these things that's very much against regulation. I think after this big and sudden collapse of one of the most trustworthy crypto exchanges before we learned about what's really been going on inside the company and seeing how the fears of contagion has spread across the crypto market, and there's this broad-based erosion of trust amongst customers. There is going to be heavier regulatory scrutiny of crypto companies and crypto markets in general.
A lot of the regulatory progress that some of these crypto companies have been making in Washington, DC could be delayed or set back a few years.
Matt Katz: A few years/ The conversations about regulation could be set back a few years?
Vicky Ge Huang: That's my prediction. Just given how badly some of these customers and also retail customers, everyday people who really can't afford to lose so much money in crypto, have been hurt in this widespread collapse. That's my prediction.
Matt Katz: Vicky Ge Huang is a Markets Reporter covering crypto and retail investing at The Wall Street Journal. Vicky, thanks so much for your time.
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