The Crypto Currier 17th October

It’s been another week of the FTX trial and it’s becoming clearer how FTX got to where it did (that is, bankrupt, having used and lost multiple billion dollars of its customers’ money). Here’s some context that has come out in the trial, explained in the way and order that makes the most sense to me. One key thing that has come out is the domineering role its founder Sam Bankman-Fried (SBF) played. Here goes:

Also:

SBF’s utilitarian / Effective Altruist philosophy - - SBF comes across as having a low EQ and not really caring about people - - How SBF treated his subordinate and on/off girlfriend Caroline Ellison, who was also CEO of Alameda Research - - Ellison’s testimony: her explanation of her actions - - The EIGHT balance sheets - - Why FTX’s FTT token made up such a large part of Alameda’s balance sheet - - The 75-minute recorded confession: Alameda had been using FTX customer funds - - Alameda ultimately took $14 billion of FTX customer money - - Alameda also lost at least $190 million to avoidable scams - - How FTX led to BlockFi’s bankruptcy - - How FTX led to Genesis Lending Unit’s bankruptcy - - SBF thought there was a 5% chance he might be US president one day - - Elsewhere in crypto - - A false tweet causes temporary 10% Bitcoin spike and $105 million in liquidation losses - - Binance UK stops new users from registering to comply with new FCA regulations - - Ferrari to accept crypto for cars in the US - - China could use its CBDC to control interest rates, and more

SBF’s utilitarian / Effective Altruist philosophy

Part of what explains SBF's actions is his claimed adherence to being a strict utilitarian, linked to his Effective Altruist movement philosophy. In short, in his case, lying, using customer funds, making bets with customer funds, losing customer funds and bribing politicians were deemed by him to be okay because these things were all part of a bigger movement. This bigger aim, in his case, was to make as much money as possible in any way, then give it to causes he deemed worthy (compared to true EA where it's meant to be about making the world a better place).

SBF's stated philosophy doesn't quite sync up with his actions, which included also using customer funds for multiple trips by private jet, funding the purchase of a yacht, and living in a $35 million penthouse, amongst other things.

Until FTX's crash, SBF had been somewhat of the poster boy for Effective Altruism. Soon after the crash, he admitted the "ethics stuff" was "mostly a front", adding, "I mean that's not all of it," he wrote. "But it's a lot."

SBF comes across as having a low EQ and not really caring about people

One of the challenges SBF faced was mediating between his on-off girlfriend and another of his exes, who both ran two of his companies. Caroline Ellison, his then-current on/ off girlfriend was CEO of Alameda and reported directly to him. Xiaoyun "Lily" Zhang, a previous ex, ran Modulo Capital, and also reported to him. For whatever reason, the two exes didn't seem to want to work smoothly together as BFFs (best female friends) for the greater good.

SBF didn't really seem to understand this. He thought they—and everyone—should just be utilitarian and work together in one big happy relationship for his bigger picture. To this end, he wrote out a memo, which he and his lawyers hoped wouldn't get leaked. It did. The memo doesn't show so much about their leadership as it shows a low EQ on his part. SBF believed that if his two ex-girlfriends indicated on a document which of his points they agreed with, everything could all work out nicely. It couldn't. The memo is totally nuts, but 100% worth a read to get an eye into the inner world of SBF. It’s shared here by Molly White

How SBF treated his subordinate and on/off girlfriend Caroline Ellison, who was also CEO of Alameda Research

We know from Michael Lewis' book on SBF, Going Infinite, that SBF was hardly a diehard romantic. He told a fellow employee that he'd slept with Caroline and asked if it was a good idea to date her. He was told no, and thought this was ok. He then, in 2018, wrote a list of 'pros' and 'cons' of her dating him, which included niceties like the following, which were included in Lewis’ book:

"In a lot of ways I don't really have a soul", "There's a pretty decent argument that my empathy is fake, my feelings are fake, my facial reactions are fake. I don't feel happiness. What's the point in dating someone who you physically can't make happy?"

SBF clearly also didn't respect Ellison's emotions or privacy; he leaked her diaries to the New York Times. This action got him sent back to prison, which he presumably wasn't expecting.

Ellison's take on the situation on trial:

"The whole time we were dating, he was also my boss, so that created some awkward situations"

That’s probably an understatement, given how volatile their relationship was. She testified in numerous ways about how the relationship affected her.

Ellison’s testimony: her explanation of her actions

I've gone into this relative depth about the relationship between Ellison and SBF because it explains at least part of her actions. 

A large part of Ellison's testimony centred on her doing what SBF told her to do, her being subordinate to him (which caused problems at work as well as in their personal relationship), that she was hugely stressed, wasn't happy, wanted to leave but felt she couldn't, and how his influence rubbed off on her.

There are two parts to this. Firstly, initially at least, Ellison still willingly did pretty much whatever SBF told her to, or for the benefit of FTX over FTX's customers. In her testimony, she commented that SBF's influence made her "more willing to do things like lie and steal".

"When I started working at Alameda I don’t think I would have believed if you told me I would be sending false balance sheets to our lenders or taking customer money, but over time it was something I felt more comfortable with." 

A lot was what she'd done at the direction of Sam.

The second part is that she says often how stressed and unhappy she was but felt she couldn't leave lest it all come collapsing down. She says, “I felt trapped,” adding, “I was in sort of a constant state of dread . . . Every day I was worrying about the possibility of customers withdrawing from FTX . . . the possibility of this getting out . . . and the people who would be hurt by that.” 

The EIGHT balance sheets

Ideally, a company would have one balance sheet. FTX had eight. The real one (less of a real balance sheet than numbers on a spreadsheet), and then seven alternative versions they had to show lenders and investors. The jury was shown two versions side by side, showing clearly where Ellison had removed a reference to stolen customer funds, entitled “FTX borrows”, as well as loans made to FTX insiders and how almost $4.6 billion was funnelled to FTX execs. Molly White shared the spreadsheets here.  

Per Ellison's testimonial, she was doing what SBF told her to do.

"He suggested I should prepare some alternative ways of presenting the information and send it to him" she said. “I understood him to be directing me to come up with ways to conceal things in our balance sheet we both agreed would look bad.” 

“I was mostly concerned that if anyone would find out everything would come crashing down,” she said.

"I sent balance sheets at the direction of Sam that made Alameda's balances look less risky to investors," Ellison said

Ellison said SBF told her to create the seven “alternative” balance sheets for Alameda in June 2022. She claims she was ordered to cover up how the business was funding FTX execs, and how Alameda was “borrowing $10bn from FTX customers”.

Why FTX’s FTT token made up such a large part of Alameda’s balance sheet

Caroline's testimony also explains why FTX’s exchange token, FTT, made up such a large portion of the Alameda balance sheet, the same one that news outlet CoinDesk obtained and shared last November which ultimately led to the unraveling and subsequent collapse of the whole show. 

Per Ellison's testimonial: “Sam had said that he wanted to buy more (FTT) ... because he didn’t want to put any of our loans in danger,” adding “It was a little potentially misleading to put the FTT tokens on” the balance sheet. 

The 75-minute recorded confession: Alameda had been using FTX customer funds

After Ellison, former Alameda Research software developer Christian Drappi was called up to testify. Drappi hasn't been charged with anything, and the piece of evidence he brought to the trial isn't going to do SBF any favours.

Three days before FTX collapsed, a new employee started working there. As the collapse became public knowledge, with Binance tweeting that it was going to buy the exchange, Ellison admitted to a group of Alameda traders that Alameda had been using FTX customer funds for its trades, which it now couldn't repay. The smart new employee turned up on day four and secretly recorded a 75-minute clip of Ellison telling a room of employees what had happened and implicating SBF. The new employee sent the recording to Drappi. Drappi played it for the prosecution. 

Here's a part of it, as shared by Molly white

Ellison: I mean, the basic story here is that starting last year, Alameda was kind of borrowing a bunch of money via open-term loans and use that to make various illiquid investments. So, like, a bunch of FTX and FTX US equity. A bunch of like other ventures, investments, et cetera. Then with crypto being down, the crash, the — like, credit crunch this year, most of Alameda's loans got called. And in order to, like, meet those loan recalls, we ended up like borrowing a bunch of funds on FTX which led to FTX having a shortfall in user funds. And so, with the — once there started being, like FUD about this and users started withdrawing funds, they kind of eventually were realizing that they were unable to — not going to be able to meet, like, the continued withdrawal pressure.

Drappi: I'm sure, like, this wasn't just like a YOLO thing, right? Like, you know —

Ellison: Yeah, I mean, I guess I talked about it with, like, Sam, Nishad, and Gary, I think.

A different employee asked, “Who made the decision on using user deposits?” Ellison replied, “Um… Sam, I guess.”

This is bigger than Ellison admitting what happened. She didn't know she was being recorded, and this was before she'd signed a plea deal. That she said the same on this recording—when she didn't know she was being recorded—as she said the day prior to this being played on the trial indicates that the whole use of FTX customer deposits was premeditated by SBF.

When asked how long Alameda had been using FTX customers’ funds to prop up Alameda, Ellison responded,

“FTX basically always allowed Alameda to borrow user funds, as far as I know.”

It’s clear this was news to the team. Alameda Research engineer Aditya Baradwaj said the room was “extremely tense” and that this was information that had “never been discussed internally”.

“It became pretty clear that there was no future for the company and that we all had to leave. And we did that right after,” said Baradwaj.

Alameda ultimately took $14 billion of FTX customer money

"Alameda took several billion dollars from FTX customers and used it to make our own investments and pay off lenders who we owed," Ellison testified. "He was the one who told us to use customer money to repay our loans".

"We ultimately took $14 billion, some of which we were able to pay back," she added 

Ellison said what SBF told her to do with customer funds. SBF reportedly “said to use FTX funds but to keep money on FTX” to meet customer withdrawal requests. A lot went to loans to FTX execs, and to “investments and political donations".

Ellison claims SBF thought his political donation strategy was “highly effective,” offering “very high returns in terms of political influence” at a modest cost.

Alameda also lost at least $190 million to avoidable scams

Alameda Research lost at least $190 million to avoidable scams. Engineer turned whistleblower Aditya Baradwaj claimed the fund’s fast decision-making led to “major security incidents” as often as every few months. In one example, Alameda lost $40 yield farming on a new blockchain of “questionable legitimacy”, in another, as per his tweet, ‘An Alameda trader got phished while trying to complete a DeFi transaction by accidentally clicking a fake link that had been promoted to the top of Google Search results Cost: $100M+’. Baradwaj said there were ‘many more’ such incidents. Some of the quotes that came out of this. More at Cointelegraph

“This meant virtually no code testing and incomplete balance accounting. Safety checks for trading would only be added on an as-needed basis,” wrote Baradwaj.

“Blockchain private keys and exchange API keys were stored in plaintext in a file that several employees could access.”

How FTX led to BlockFi’s bankruptcy

Crypto lender BlockFi had its share of challenges before FTX collapsed. Trusting SBF was what finished it off. Crypto lenders struggled in 2022. Crypto hedge fund 3AC (Three Arrows Capital)'s implosion and its subsequent default on BlockFi loans didn't help. The general market angst affecting crypto lenders didn't help either. In June, competing crypto lenders Voyager and Celsius collapsed, causing yet more worries about crypto lending. Lots of users withdrew their funds from BlockFi. By late June 2022, BlockFi needed capital. FTX extended a $400 million credit line with an agreement to acquire the lender as soon as July 2023. All would have been good, except that BlockFi had trusted FTX, Alameda, and SBF.

When FTX collapsed in November 2022, BlockFi had $650 million in loans outstanding to Alameda and $350 million of its customer funds stuck on FTX. In short, when FTX collapsed, it had over $1 billion of BlockFi's money tied up on it. When news of FTX's problems started to leak, SBF and Ellison reportedly tried to convince BlockFi to not recall their loans, putting up some extra collateral in the form of pledged shares. Unfortunately for BlockFi, the legal ownership of that collateral has been in dispute ever since. BlockFi filed for bankruptcy within weeks of FTX. 

How FTX led to Genesis Lending Unit’s bankruptcy

One version of the 'spreadsheets' was made to make its “assets look larger”. This version (spreadsheet 7) was what was provided to crypto lenders, including Genesis, which was trying to call in its loans. This version crucially didn't show FTX taking money from its customers and showed Alameda’s liabilities as $10 billion and not the real $15 billion.

“Sam said, ‘Don’t send the balance sheet to Genesis,’” said Ellison, according to reports. “We were borrowing $10 billion from FTX, and we had $5 billion in loans to our own executives and affiliated entities. We thought Genesis might share the info.”

FTX management was reportedly worried that crypto lenders such as Genesis would cease to accept FTT (basically money it had printed out of thin air, now worthless) as collateral.  “We were borrowing billions of dollars from Genesis using FTT as collateral on our loans,” Ellison testified. 

Genesis could have recalled all its loans to Alameda if it were aware of Alameda’s true financial status, as well as damage its reputation. “I didn’t want Genesis to know that,” she stated about Alameda’s multibillion-dollar liability toward FTX.

As per the prosecutors’ evidence, Ellison worked on at least seven alternative spreadsheets for Genesis. Alameda sent Genesis a spreadsheet in June that listed $10.3 billion in total liabilities, but the actual sum was closer to $15 billion at the time.

Genesis’s lending unit went bankrupt in January 2023, owing its own creditors more than $3 billion.

SBF thought there was a 5% chance he might be US president one day

Literally. Ellison testified about SBF: "He said there was a 5% chance he might be president someday".

There’s a lot of resources on the FTX trial so far for further reading. CoinDesk have done good coverage here, as has the excellent Molly White here.

Elsewhere in crypto

A false tweet causes temporary 10% Bitcoin spike and $105 million in liquidation losses

A false tweet on X yesterday caused a $105 million liquidation of crypto assets. The false, now-deleted message said "BREAKING: SEC APPROVES ISHARES BITCOIN SPOT ETF." A Bitcoin ETF has been long-awaited. The message, shared by news outlet Cointelegraph sent markets going crazy as crypto knows best. Bitcoin briefly shot up by 10% before crashing back down much of the way after it was confirmed that the ETF is still under review by the SEC. Cointelegraph followed up with an apology, saying they were currently investigating. It isn't yet known if the X (message) was a mistake or an attempt at market manipulation. The value lost included $73 million in shorts and $32 million in longs. (IB Times) and (Business Insider)

Binance UK stops new users from registering to comply with new FCA regulations

Binance UK has stopped new UK users from registering on its platform in response to the UK's new FCA regulations around financial promotions. Binance had initially partnered with Rebuildingsociety.com in an attempt to have the site approve its promotional materials and advertisements in a bid to comply with the new advertising regulations that came into effect on October 8. The FCA is hot on Binance's case, and promptly declared that Rebuildingsociety.com wasn't authorised to approve crypto-related ads. UK users who have already passed Binance UK’s "Investor Declaration and Appropriateness Test" can continue to access the platform's services but won't be permitted to explore or engage with any new products or services introduced during this period. For now, at least. (Finance Magnates)

Ferrari to accept crypto for cars in the US

Ferrari will start accepting crypto payments in the US, according to a Reuters report. "Some of our clients are young investors who have built their fortunes around cryptocurrencies," Chief Marketing and Commercial Officer Enrico Galliera said, adding "Some others are more traditional investors, who want to diversify their portfolios." Ferrari won't receive crypto itself but will get payments automatically converted into fiat via BitPay. Lambos have typically been the symbolic car of so-called 'crypto bros'. (CoinDesk)

China could use its CBDC to control interest rates, and more

China could potentially use its central bank digital currency to influence and control interest rates, according to a suggestion made in a speech by Lu Lei, the deputy director of China’s State Administration of Foreign Exchange (SAFE), a division of the People’s Bank of China. He also discussed how the eCNY could be used in financial supervision to increase the effectiveness of China’s regulatory authorities. He explained how the central bank could achieve “full-process monitoring and penetrating supervision” by using “payment and accounts as the core” of oversight. 

This is as scary as anything about a CBDC. All CBDCs, by their core definition, aim to give governments and central banks greater control and insight over citizens. To a degree, however, governments already have extensive oversight and control over individuals' private finances. In China, the former head of the digital yuan project previously observed that China can already track its citizens payments and doesn’t need a CBDC to do so. From what we've seen of CBDCs however, they give greater potential to track and block payments. (Ledger Insights)

Image source- CoinMarketCap with Canva edits

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