The MacGuffin, Part 2: The Story Arc of SBF and FTX

Download a PDF of The MacGuffin, Part 2: The Story Arc of SBF and FTX (paid subscribers only)

Download or listen to an audio recording of The MacGuffin, Part 2: The Story Arc of SBF and FTX.

Also available at:

The MacGuffin, as Alfred Hitchcock famously put it, is the object of desire.

It is Prince Charming. It is the Princess Bride. It is the Way Out. It is the Way In. It is the Secret. It is the Answer to the Question. It is the Ring of Power. It is the Alien Technology. It is the Map. It is the Treasure. It is Whodunit.

It is the thing or emotion or idea or state of being around which the plot of a story revolves, and every movie you have ever seen, every scripted TV show you have ever watched, they all have a MacGuffin.

So does your life. Your life has MacGuffins, too.

One of the oldest and most powerful MacGuffins is the Magical Money Machine.

The Magical Money Machine is Draupnir of Norse mythology, the golden ring of Odin that would make eight perfect copies of itself every nine days. The Magical Money Machine is the straw-into-gold spinning wheel of Rumpelstiltskin, an evil protagonist in a story that dates back 4,000 years. The Magical Money Machine is the genie of the lamp, the purse that has a few gold coins in it every morning, the goose that lays golden eggs. The Magical Money Machine is a reasonably common MacGuffin in today’s movies, like the supercomputer of Westworld and the superintelligence drug of Limitless. But the best place to find this MacGuffin today isn’t in Hollywood but on Wall Street. Because once you start looking for the Magical Money Machine in financial media and financial advertising and, most prominently, in the stories that we financial professionals tell ourselves, you will find it EVERYWHERE.

Oh sure, we citizens of Wall Street know full well that of course there’s no such thing as a Magical Money Machine, and when we talk with each other in public we laugh at the idea of a Magical Money Machine, like ‘oh, haha, get a load of these rubes who believe in this nonsense‘. But in private we whisper our heart’s truth, that there is such a device. Because the human truth is that deep down in every single one of us who makes our living in the financial world, we believe that there IS a Magical Money Machine and that if we just look hard enough or get lucky enough we will find it. I know that I do. Intellectually I know that the Magical Money Machine doesn’t exist, that it can’t exist, and yet … this is the MacGuffin that has driven the story arc of my professional career. Actually, that’s not completely true. The truth is that I’ve been searching for the Magical Money Machine for as long as I can remember, ever since I was a child. It is the MacGuffin of my life.

Once upon a time, Sam Bankman-Fried found a Magical Money Machine he called Alameda Research.

Or at least he thought he had found a Magical Money Machine. I’ve known that feeling (briefly!), and it’s the best feeling in the world if that’s your life’s MacGuffin, as I suspect it is with SBF. Not for the money itself, mind you, but for what you can DO with it. And not even for what you can do with it, but just for knowing that YOU solved the biggest puzzle in the world.

But the feeling doesn’t last because, alas, you did not actually find a Magical Money Machine. It does not actually exist. Most likely it never existed, and what you thought was a Magical Money Machine was just an artifact of luck and circumstance. Like being a private equity guy and mistaking cheap capital and infinite leverage for skill. Or like being a public markets guy and mistaking a bull market for brains. Then again, maybe it did exist, kinda sorta, for a couple of years until other really smart Wall Street types figured out your secret and they end up – in the lingo – ‘arbing away’ your edge.

I think SBF had a Magical Money Machine hedge fund for a couple of years, and then it stopped being magical as more experienced Wall Street professionals got into the crypto world.

SBF was early to the professional crypto trading world (he launched Alameda in 2017), and there were plenty of persistent informational asymmetries in that early market for a smart guy like SBF to skin with a portfolio of systematic quant strategies. Also, and the importance of this really shouldn’t be underestimated, commodity trading in general and crypto trading in particular has a much laxer regulatory framework, especially when it comes to what would be considered insider trading and ‘material, non-public information’ in the stock market and the bond market. Basically, there’s no such thing as insider trading when it comes to commodities, and let’s just say there’s a reason that all of these crypto trading shops are based in Asia and the Caribbean. So I think SBF and Alameda probably killed it in 2018 and 2019, but by the time Covid hit, Alameda was just one of many crypto hedge funds competing with each other over an increasingly difficult-to-navigate market.

Here’s the thing, though: Alameda had no outside investors who would know that performance had declined from Magical Money Machine levels to non-magical levels! See, Alameda did not take on outside investors the way that most hedge funds take on outside investors, with an annual management fee (1-2% of the amount invested) and a performance fee (10-30% of the profits) on the capital account established for the investor within a limited partnership vehicle. No, Alameda didn’t take investors (LPs) in their fund at all. Instead, you lent money to Alameda and they promised you at least a 15% annual return on your loan. Also, they promised that you could cancel your loan and get your money back anytime they had even a slightly bad month.

It’s both a really interesting and really troubling offer! On the one hand, it creates an enormous mystique and reputation as a Magical Money Machine (nope, we’re going to make crazy consistent profits with your money, so much so that we’ll promise at least 15% annual returns, but we’re not going to share more than 15% with you because you’re lucky we’re even talking with you). On the other hand, this IS the recipe for a Ponzi operation (oops, we didn’t cover the 15% this year, but we can cover it with new client loans and some fudged accounting and no one will ever know) and most troubling of all, they are selling themselves as a Magical Money Machine. I mean, if the words “HIGH RETURNS WITH NO RISK” don’t give you the heebie-jeebies as a potential investor (not to mention that this sort of language would be outright illegal for a US-registered or EU-registered investment vehicle) … well, I don’t really know what to tell you. Actually I do know what to tell you. If you ‘invested’ money with Alameda on the basis of this deck, you allowed a MacGuffin to take over your decision making, and all of the bad things that are happening to you now stem from your failure to recognize and control your MacGuffins. I’m sorry, but you should not be responsible for managing other people’s money.

Ultimately, I believe, Alameda became a Ponzi, using new funds to cover the returns they promised on client loans, all while maintaining a reputation as a Magical Money Machine.

The thing about people who slip over time into outright fraud, like Bernie Ebbers and Jeff Skilling and Elizabeth Holmes and Bernie Madoff and (IMO) Sam Bankman-Fried, is that they don’t start off doing outright fraud. They have a couple of bad lab results (Holmes) or a couple of bad quarters (Ebbers and Skilling and Madoff), and they decide to fudge the data or the payments as a temporary thing. You know, just until we get back on track. Just until the Magical Money Machine starts being magical again. It’s for the greater good! My god, what a tragedy it would be for the world if all the good we’ve accomplished and – more importantly – will accomplish in the future gets blown up over some bad luck we had. No, no … the right and ethical thing is to fudge the data and the accounting. Not for me, mind you. For humanity!

Now smart guys like SBF (who I really do think is really smart) don’t want to leave this recovery from a temporary setback to chance. No, they’re looking for a new Magical Money Machine or an evolved Magical Money Machine to replace the not-so-magical-anymore machine.

SBF found an evolved Magical Money Machine in FTX, where he could channel the dark magic of FLOW.

There is so much more money to be made in financial markets, with so much less risk, by being in the Flow business rather than the Price business.

The Price business is the hedge fund business. It is buying low and selling high. It is being right time after time and being timely time after time and being effective time after time in all that buying and selling. It’s really hard! Especially if you don’t have a Magical Money Machine that’s right and timely and effective all the time.

The Flow business is the exchange business. It’s the market-maker business, where you take a small transaction fee for being the middleman and bringing together a willing buyer and a willing seller. You don’t have to be right to make money in Flow, because you’re not expressing a buy/sell opinion. You don’t have to be timely and you don’t have to be effective, again those terms don’t really have much meaning in an opinion-less Flow business. All you have to do to make a Flow business work – and when it works it really works – is to be there. You have to be the market-maker that people use. You need to provide ‘liquidity’ (being the buyer or seller temporarily if there’s no buyer or seller you can match with the seller or buyer knocking on your door). You need marketing and you need reputation.

Fortunately for SBF, he’s already got all of the ingredients here. Alameda can provide the liquidity. They can be on the other side of any trades that need to be made, and then hold the exposure on the hedge fund books until it makes sense to get out of the trade. Certainly SBF can provide the reputation. He’s got a Magical Money Machine, after all, and is the smartest guy in crypto. Plus he really wants to do good in the world, give his money away to worthy causes and all that. Marketing is easy … just need to spend some money for that, and there’s no shortage of blue chip investors like Sequoia, Ontario Teachers and Tiger Global willing to give SBF money for FTX at enormous valuations ($17-25 billion in 2021, $32 billion in 2022). So here we go!

Okay, let’s spend some time describing this chart. The big green lines show how cash flows between the different boxes. SBF loves the big green lines! The SBF box and the Alameda hedge fund we already know – that’s Sam personally and his originally-but-not-so-much-anymore Magical Money Machine. The is the new market-maker and flow business entity, but you’ll see that I call it an exchange + broker. That’s because while it acts as a market-maker for crypto trades and calls itself an “exchange”, it is also a brokerage, meaning that it maintains or custodies the actual trading accounts that people would use to make those crypto trades.

Being a brokerage is a big source of revenue for SBF, as he can provide lots of services to those accounts, the most important one being margin – a loan that brokerages can extend to clients so that they can trade more. Not only does a brokerage charge you interest on that loan, but also once you take a loan from a brokerage, they typically have the ability to rehypothecate some or all of your assets, meaning that they can take the assets that you pledged to them as collateral for your loan and use them as collateral that they pledge for a loan they are taking. If they default on this loan that they have taken, their lender gets to keep your assets for a loan that you never received. Crazy right? Lots of institutional investors learned this lesson the hard way when Lehman declared bankruptcy and assets people thought were safe had been pledged away from underneath them. Anyway, hold this thought about rehypothecation because we’ll come back to it later.

There are lots of new magic tricks that SBF can try now that he’s got two boxes to play with – and Alameda – instead of just the one.

The first new trick that SBF pulls is to make Alameda a ‘client’ of FTX. Why? Because now all of the Alameda problems can be papered over sooooo much more easily. Need some cash over at Alameda? No problem, just increase the ‘margin’ that the brokerage extends to Alameda the ‘client’, which Alameda can use for whatever it wants. This is what’s called a related-party transaction, and it wouldn’t last a second in a US-regulatory set-up (or at least it wouldn’t in an effective US-regulatory set-up), but no one is looking at this too hard in the Bahamas.

The second new trick that SBF pulls is to make FTX a ‘licensee’ of Alameda, where FTX pays a fee (I’ve seen $400 million as the total amount paid to Alameda by for the ‘technology’ that Alameda provided FTX the exchange. Again, related party and again, wouldn’t be tolerated in an effectively regulated industry. More importantly, all of these related party transactions shouldn’t be tolerated by anyone considering an equity investment into FTX. I mean, it is INSANE that the lead investors in – Sequoia (one of the most blue chip of all blue chip venture capitalists) and Ontario Teachers (one of the most blue chip of all blue chip pension funds) – either knew about these related party transactions and didn’t care or didn’t know about them in the first place. I’m not sure which possibility is more damning, frankly, but these are the only possibilities.

But wait, there’s more!

Remember how I said pretty much anything goes in commodities-world, at least from an insider information perspective? Well, imagine if you just invented a new commodity, called … I dunno … ‘Serum’ or ‘FTT’, and told the world “hey, this is a governance token for decentralized exchanges” or “hey, this is the token of an FTX affinity program, kinda like a tracking stock in our company but we’re never going to use the words ‘stock’ or ‘security’ because haha”, and everyone thinks “wow, that’s pretty cool, especially the affinity program thing”, and you dribble a few out so that people can start trading them back and forth and you watch the price of your newly created commodities go up and up. Which is great, because your new commodity is just basically entry lines in an Excel spreadsheet, and for every one of these tokens you dribble out for the crypto accounts to play with, you give yourself a bazillion of the tokens and use them as collateral for loans or as an asset for acquiring real stuff. Like, why not ‘pay” Alameda their $400 million ‘technology licensing fee’ with FTT exchange tokens that Alameda can then ‘trade’ on for the real(er) money in FTX client accounts, or lend out for yield or use as collateral for bigger loans or otherwise use to buy real things like equity stakes in real companies? Who cares that these made-up tokens are obviously unregistered securities and it’s illegal for US entities to transact in them when they can be washed through Alameda and client accounts?

I am not making this up.

I mean, I know it seems like I’m making this up, because obviously this cannot happen in the real world. And yet it did. When SBF filed for bankruptcy on, Serum was the largest “asset” listed at $2.2 billion, because they had a bajillion of these coins stashed away. The tradable market cap of Serum? $60-something million as of when I’m writing this (probably lower now), because only a minute fraction of a bajillion of these coins (~3%) were actually real, as in they were actually exchanged for value in the real world. A value, of course, that plummeted once this sleight of hand was revealed. That’s the thing about Magical Money Machines and magic tricks alike, they’re not nearly so impressive once you show everyone the trick.

But anyhoo, all of these magic tricks get revealed much later. Right now it’s 2019 and everything is going much better for SBF now that he’s got his flow business established. As a brokerage AND a market-maker AND a hedge fund, his situation is 1,000% better than just being a hedge fund.

There’s just one problem. Accounts. Up to now it’s been fantastic setting up all these companies in the Bahamas. No SEC or other pesky US regulators. We can say whatever we like in our marketing documents, like “HIGH RETURNS WITH NO RISK” in all caps. We can issue unregistered bullshit securities like FTT to our heart’s content. But the downside for the crypto exchange/brokerage is that they can’t take US accounts. The Big Kahuna of capital and liquidity – the United States – is largely cut off to them. So SBF has gotta do something about that if he’s going to make some real money.

The answer is to set up a brand new crypto exchange/brokerage in the United States, named FTX US (not to be confused with the mothership,, oh no we wouldn’t want any confusion about the names! LOL) and subject to US regulatory authority through the Commodity Futures Trading Commission (CFTC). FTX US was launched concurrently with a massive Super Bowl/Larry David/Tom Brady-centered ad campaign in Jan/Feb 2022.

FTX US is an “affiliate” of, meaning that they have overlapping but not identical ownership and management structures (SBF is the largest shareholder and CEO of both entities), but for regulatory purposes they are entirely separate entities, with FTX US subsidiaries holding the necessary commodity market-making licenses from the CFTC to operate in the US. Importantly, custody of the FTX US client accounts can’t (easily) be transferred to and neither can the client money.

This is why there’s just a thin green line of cash between FTX US and SBF, and no green line at all (still) linking US crypto accounts and the mothership SBF entities, and Alameda. Yes, FTX got funded at an $8 billion valuation and SBF is a significantly richer guy because of that, but he hasn’t yet achieved his primary goal: get US crypto account flow into the loosely regulated entity so that he can keep funding the Alameda Ponzi and the FTT/Serum/etc. token scams.

There are two tried and true methods for getting flow across that big bright line regulatory barrier between SBF’s Bahamas-regulated entities ( and Alameda) and his affiliated US-regulated entity (FTX US):

  1. Cozy up to your US regulator and get a special dispensation.
  2. Acquire cut-outs to transfer the cash out of the US without anyone noticing.

SBF pursued both of these paths with gusto.

On the regulatory front, SBF went on a hiring spree for former CFTC commissioners and general counsels, and began an intense lobbying campaign on current commissioners. For example, that’s current CFTC commissioner Caroline Pham tweeting a post-meeting selfie with SBF and former CFTC commissioner (now FTX chief lobbyist) Mark Wetjen. Pham would delete this tweet soon after posting, telling the NY Times that it had “become a distraction” and that the criticism leveled at her was unfair because a) she took fun-loving selfies with senior management from lots of big companies that she regulates, and b) SBF met with all the other commissioners, too.

Haha! I’m not sure that Commissioner Pham is making a particularly effective defense against accusations of regulatory capture here, but whatever.

What was SBF looking for, both in these CFTC meetings and in subsequent SEC meetings with Chair Gary Gensler’s staff and Gensler himself?

According to multiple reports, SBF was looking for permission to clear and settle his crypto futures trading in-house at FTX.

You know, I work with words for a living, and it is difficult for me to communicate what a TERRIBLE idea this is. But I’ll try anyway. The entire “we’re going to use The Blockchain! TM and smart contracts and aLgoRItHms to make securities clearing and settlement more efficient” argument is just complete bollocks. There’s a good reason that clearing and settlement is less than perfectly efficient, that all the back-office work of delivering securities and confirming exactly who bought and sold what and how they are paying for it takes a day or two, and that’s to make sure that there are multiple sets of eyes on each stage of the process. You do not want clearing and settlement to be instantaneous. You do not want clearing and settlement to occur in someone else’s code. You do not want clearing and settlement to be handled in-house by the same firm that serves as market-maker and broker. Why not? Because it is a license to steal and defraud at a massive scale.

Clearing his own trades is exactly how Bernie Madoff was able to hide his Ponzi scheme for as long as he did!

You will never be able to convince me that SBF did not know this was Madoff’s superpower. You will never be able to convince me that SBF was not seeking self-clearing and settlement authority from the SEC and CFTC in order to further his own Ponzi scheme. If SBF had gotten this waiver and been allowed to clear and settle trades in-house at FTX, I don’t think he would ever have been caught. I think this would have made him bulletproof against any sort of effective oversight and regulation.

Now this next part is really important.

SBF was unsuccessful in getting the regulatory relief he was looking for, which is to the great credit of the CFTC and SEC.

All of these regulators have gotten a lot of heat from everyone looking at this debacle, including from me. And maybe they were about to cave and give SBF the no-action letter he was looking for.

But they didn’t.

I understand the withering criticism that Gensler at the SEC and the entire cast of characters at the CFTC have received. I think that the regulatory capture that has occurred around both of those institutions (and the Fed, too) over the past decade-plus is pathetic and (should be) criminal. In particular, I think that the hiring of regulators by the regulated for a client-facing or lobbying position is no less an act of corruption than an outright bribe. Ditto for speaking fees.

But in this case both the SEC and the CFTC did the right thing.

Or at least they did not actively do the wrong thing. Small victories, amirite?

By the way, I think that SBF’s political donations (and GOP donations by other FTX employees) were all in service to this lobbying effort to create an impregnable regulatory moat around FTX US and support the mothership vehicles of and Alameda. I mean, SBF spent about 3 times his DNC donation total on the naming rights for the Miami Heat stadium ($135 million vs. $40 million), but I don’t see anyone claiming that this was a money laundering operation for Micky Arison. Political donations … stadium naming rights … Super Bowl commercials … conference sponsorships … it’s all one big marketing effort, that’s all.

EVERYTHING about SBF was an act, a virtuoso performance in effective cartoon construction, from the curated sneakers and the tee-shirts carefully arranged on individual hangers in his Bahamian penthouse now on the market for $40 million.

SBF didn’t ‘get away with it’ because he had a patron in the White House.

SBF got away with it because everyone knew that everyone knew that Sam Bankman-Fried was a Boy Genius who had discovered a Magical Money Machine and was intent on doing a certain kind of Democratic-leaning, woke-ish Good in the World with his riches. It was common knowledge.

Sam Bankman-Fried was himself a MacGuffin to left-leaning establishment media and political powers-that-be.

And he knew it.

And he used it.

You don’t need to create some sort of Ukrainian – White House money laundering scheme that makes zero sense and (if true) would be the most ineffective, worst yielding, idiotic money laundering scheme in the history of mankind in order to make this a tale of utter corruption and elite buffoonery. It’s already there all on its own!

Besides, SBF’s crowning achievement in fraud isn’t in some White House money laundering scheme that never happened or in some regulatory agency corruption that he had not yet succeeded in achieving. No, what actually happened is much more evil than that, much more damaging to real people with real money and real hopes and dreams. This is Act III of the SBF story, and it’s the acquisition of BlockFi.

BlockFi (and you can insert Voyager Digital, another SBF acquisition, in here, too) is a crypto trading company that operates legally in the United States. It’s like FTX US, but without the market-making ‘exchange’ functionality. Its pitch (and it has been pitched hard by people like Anthony ‘Pomp’ Pompliano and Anthony ‘Mooch’ Scaramucci and Mark ‘#Edge’ Yusko) is that you open an ‘interest account’ with your crypto assets on BlockFi, and you can ‘earn’ a nice return on your money even if it just sits there. You know, just like a savings account at a bank! Except it’s not a bank at all, of course, no matter how much its pumpers use the language of banking to describe what it does. No, BlockFi and Voyager (and Gemini Earn and all the other programs like this) are investment firms that are selling you an investment product. They take your money and they lend it out to market-maker/brokers like FTX and to hedge funds like Alameda, all of whom will promise a higher rate of return on those loans than BlockFi is promising you. The spread between the interest rate that BlockFi pays you and the interest rate that BlockFi gets paid is their profit. What could possibly go wrong?

Well, what went wrong was the collapse in May of the Terra/Luna crypto coin ecosystem, and the subsequent bankruptcy of some of the firms that BlockFi and Voyager (and FTX and Alameda!) had extended loans to, particularly a Singapore-based crypto trading firm named 3 Arrows Capital. When 3AC went belly-up, they were no longer good for paying back the billions (!) in loans they had taken out, and the collateral they had posted was worth nothing if it was Terra or Luna, and was worth a whole lot less if it was any other crypto asset. As a result, BlockFi and Voyager and all of these other crypto “banks” had to figure out what to do with their poorly underwritten loan losses. That’s what went wrong.

I wrote about the Terra/Luna collapse here, in The MacGuffin, Part 1, and you’ll see that SBF features prominently in that discussion. SBF’s ‘solution’ to what he described to Matt Levine as arguably a Ponzi scheme in non-FTX crypto world was two-fold.

First, the crypto industry obviously needed stronger regulation from his friends at the CFTC, and SBF had a lot of good ideas on what that regulation should look like. Now, of course, we know what those good ideas were – self-clearing and algorithmic settlement – and that they were not good ideas at all.

Second, the crypto industry needed a white knight, a savior with unlimited resources to ride in and bail out these crypto brokerages. After all, they had failed Through No Fault Of Their Own TM, and it was important for the owners of Magical Money Machines to step up for the greater good. Noblesse oblige and all that.

A not inconsequential amount of hilarity ensued.

Yep, you can always count on Cramer to have the precisely wrong opinion about everything, not just stocks. It’s a gift, really, and I’m not even joking.

Anyway, the acquisition of BlockFi and Voyager by FTX US created a new corporate structure chart that looks something like this.

Look at all those new thick green lines!

BlockFi and Voyager were sources of funding for SBF. They still had a lot of cash in them, despite the Terra/Luna/3AC collapse, and SBF was intent on getting every bit of that cash into the hands of – not just FTX US, which for now at least still had some sticky US rules to abide by – but and Alameda. As importantly, SBF could also use BlockFi and Voyager as cut-outs to move money out of the regulated FTX US entity and into the non-regulated entity. Neat, huh?

Here’s how that works. I’m going to focus on BlockFi because I’ve got the numbers and the company statements, but I am highly confident that the same thing happened with Voyager

First we have to loot the company.

It’s a not small amount of loot, as you can see from this September presentation showing BlockFi’s June 30, 2022 numbers. Not all of this can be sucked into the FTX/Alameda vortex all at once, of course, but over time there’s $1.8 billion in “Institutional and Retail Loans” that needs to come over. There’s ~$400m in collateral that BlockFi can hand over in exchange for loans from (heck, maybe we can lend them one of our tokens), and once that collateral is posted it can be used freely by SBF as collateral for whatever borrowing and Alameda want to do, through the magic of rehypothecation. And last but not least, why not just hand over the client accounts altogether to and FTX US as “3rd Party Custodians”, even though they aren’t arms-length 3rd parties at all and hardly even custodians.

But that’s not all! We still have to figure out a way to use BlockFi as a conduit for all the ‘clean’ assets in FTX US that we’d really like to get into the Bahamas. For that, we can use the $400 million line of credit that FTX US made available to BlockFi as part of the acquisition. BlockFi just needs to draw down the line, and then they’ve got $400 million in ‘clean’ money from FTX US that they can use for anything that’s allowed by their keen underwriting standards. Hey, I know, how about a loan to Alameda? Or maybe we just go ahead and make that loan before we actually draw down the line of credit? We know that SBF and crew are good for it!

Now, how do I know that BlockFi did all this? Loans to Alameda, custodied accounts at, the full monte of blowing out the company for the SBF mothership? Because they told us.

On the top is BlockFi’s initial announcement that they were freezing client accounts and suspending all withdrawals. It’s so weird that they say how disappointed they are in Alameda, some Bahamian hedge fund that had nothing to do with their acquisition. I mean, it was FTX US that did the actual change of control transaction, extending the line of credit and all that, so I can see how any sort of status question regarding FTX US would be of concern to BlockFi. But it’s so weird that they say they need more clarity on and Alameda before they can resume operations, especially because at the time BlockFi released this announcement, SBF was tweeting that FTX US was perfectly fine. So weird.

Next is BlockFi’s last update before they filed for bankruptcy. Here they say it is not true, categorically false, in fact, and how dare you (in their best Greta Thunberg voice), to say that a majority of BlockFi assets are custodied at FTX. And … it is undeniably true that 35% (the June 30, 2022 number) is less than 50%. Unassailable, really. 35% is less than 50%. Case closed. Rumors put to rest. Pay no mind to the “obligations owed to us by Alameda” and the “assets held at”.

Bah! This company was looted, and hundreds of thousands of Americans lost billions of dollars to these “obligations” and transfers of custody.

Yep, hundreds of thousands of Americans. BlockFi had 650,000 funded accounts, mostly in the US. Voyager Digital had 1.6 million funded accounts, mostly in the US. Interestingly enough, no one really knows how many funded FTX US accounts there are, as those numbers haven’t been disclosed since FTX US launched.

Ultimately, millions of Americans will have seen their uninsured investment accounts go poof because of SBF’s outright fraud and the pumpers’ deniable fraud. The money is gone. Maybe a few pennies on the dollar will ultimately be recovered, but I doubt even that, frankly.

The money is gone. Lost to shitcoins and shitcos. Lost to $1 billion spent on advertising and marketing and political donations. Lost to bad loans and bad trades. Lost to Bahamian real estate. Lost to shell corporations set up by SBF personally. There’s a reason that the top box in my charts is Sam Bankman-Fried himself!

The story, though … well, the story still has a ways to go. We must have a resolution to Act 3.

Let the show trials begin!

I don’t know what will happen to SBF. Will he go to jail? I expect so. Maybe. Eventually. He’ll definitely be arrested, though, and this idea that a mere $40 million in political donations can ‘protect’ him is just ludicrous.

Will the promoters and the pumpers go to jail? LOL. Not a chance. Why, Ben, they are victims here just like everyone else!

No, the promoters and the pumpers are already laughing about it.

They’re already laughing at us.

Will the facilitators like Sequoia and Ontario Teachers be punished in any way, shape or form? LOL. Not a chance. Why, Ben, how can you even suggest such a thing!

No, we’ll have Congressional Hearings TM, where some Sequoia partner will tell us that they were misled and defrauded by this evil genius, by this Lex Luthor and Professor Moriarty all rolled up in one, with machinations that escaped their crack superhero team of investigators.

And at the end of all this, we will get regulatory diktats so that This Can Never Happen Again TM.

And that wraps up this exciting episode of Law and Order, folks! Be sure to stay tuned for the Michael Lewis book and movie, starring Jonah Hill as SBF!

Sorry about your money. You really should be a little more careful next time.


You know, a long time ago I wrote a note about financial ‘innovation’, the too clever by half coyotes who pursue their personal MacGuffins of Magical Money Machines, the con men raccoons who pervert the coyotes’ work and cheat us all with their petty theft, and the inevitable, inexorable government response. It’s the most popular note I ever wrote, and every single thing I wrote there about Bitcoin and crypto has come true.

And here’s the punchline:

The inevitable result of financial innovation gone awry, which it ALWAYS does, is that it ALWAYS ends up empowering the State. 

Yeah, it’s coming. New protections and incentives for the Wall Street incumbents. New barriers and obstacles for anything and everything crypto or Bitcoin or DeFi that wants to live free in the wild.

And yes, I understand that Bitcoin isn’t crypto and CeFi isn’t Defi. Do you understand that this doesn’t make a damn bit of difference in what’s coming? Do you understand that this same struggle has been going on for all of human history, that it has never had a different outcome, and that the most revolutionary guy who ever lived figured out two thousand years ago that His adversaries were trying to trick him into a public fight with Caesar about money?

Render unto Caesar what is Caesar’s was good advice then and it’s even better advice today.

It’s time for Bitcoin to go underground.


The very good news about SBF and his crypto fraud is that this will set back institutional investment in all things Bitcoin and crypto-related for a decade. Last week this was just a bad investment for the big pools of capital that rule our world. This week it’s a fraud. And that means that this week there is career risk for the managers of those big pools of capital. They are OUT.

I say that’s very good news because it’s terrible news for Number Go Up. It’s terrible news for Bitcoin! TM, the Wall Street securitization of OG Bitcoin that’s nothing more than just another casino table, one that’s fully visible to the Eye of Sauron, aka the US Treasury.

Forget the Saylors and the Novogratzs and the Winklevii and all the other SBF-esque charter members of the Bitcoin! TM crew. Forget the trading accounts and the tokens and the stablecoins. Forget you ever knew the difference between a Bitcoin futures contract and a spot Bitcoin ETF. Forget all that.

And remember who you are.

We can choose our life’s MacGuffin, and let me tell you, the Magical Money Machine is a poor choice. For the past ten years, not coincidentally as long as I’ve been writing Epsilon Theory, I’ve been catching glimpses of a new MacGuffin to pursue, a MacGuffin of belonging in the present and difference-making in the (very) long-term future. Haha! Sounds a little like Effective Altruism, I guess. But not really. Also sounds a little like the principles of OG Bitcoin, doesn’t it? That’s a lot closer to the truth.

Let us tell ourselves better stories. Let us choose better MacGuffins.

And watch how the story arc of our lives – and our society – will soar.

As Below, So Above.

To learn more about Epsilon Theory and be notified when we release new content sign up here. You’ll receive an email every week and your information will never be shared with anyone else.


  1. Pulling all of that together in a few days! If you need another side hustle, Forensic Accountant would suit you. Thanks for adding meat to the bones we had all started piecing together from Twitter, Bloomberg, and other sources.

    And, for including the link to Part 4 of Things Fall Apart. Can’t read these foundational thoughts enough.

  2. I hope all your readers get to the last handful of paragraphs, which for me are 100x more important than the fraud story. I find that the narratives which can be summed up by Number Go Up have commandeered the living metaverses of detractors of crypto/btc in an equal but opposite way of how it corrupted many of the supporters. “Forget all that” is 100% right, too bad it is so difficult! The slope of enlightenment for distributed trust systems will be applications that marry the digital and real world in communities where trust >>> money. After the last few weeks many people will think that a future which embraces and benefits from this kind of thinking has gotten more nebulous and further away, but as you hint in those concluding paragraphs it is truly the opposite.

  3. Avatar for bhunt bhunt says:

    100%. I hope they get there, too!

  4. Great note Ben!

    I think I’ve quoted your “too clever by half” note a few too many times to my friends and colleagues at this point.

    In tech, I think Crypto (the legal Casino) was seen by a few too many engineers as sort of the “easy way out” to working for yourself.

    For anyone looking for some of the OG blockchain coyotes, they went off to think about things like improved public goods funding or making voting mathematically optimal for the public good.

  5. Avatar for robh robh says:

    Fantastic note Ben. Really well done. Please make a PDF available for easier sharing.

  6. Ben,

    I have been following your tweets on the topic and although you have pounded into me the importance of narrative and narrative control, looking at the tweets that are coming out I am constantly thinking back to the novel 1984 vs. the law of identity in philosophy. In philosophy the basic law of identity is A = A. In 1984 we are told not to believe what our eyes tell us and that 2 + 2 = 5…Big Brother told us…it’s common knowledge. The audacity of some of these guys that AFTER the fact are still trying to spin a controlled narrative of hey I’m the good guy amazes me.

    Thank you for bringing some clarity to this muddy puddle of crypto for me.


    I am blessed with dyslexia, and as God is my witness, this is how my brain actually read that sentence.

    Another great post, Ben!

  8. Soooo blockchain voting by 2024 to stop the widening gyre and trustless elections from turning into Civil War 2.0? Or is that mere apophenia?

  9. Avatar for Bangi Bangi says:

    I’ve been around long enough to have personally witnessed this very similar scam.

    Mark Ross Weinberg would borrow money from investors at usuries rates and speculate in commodities. His claim to fame was that he got advance notice of Jimmy Carters grain embargo on Russia from a relative (who I seem to remember worked at the White House, may have been his father) and made a small fortune. When the “rube” who invested would want his money back, Mark would claim that the investor was a “loan shark” and that Mark would sue for treble damages. It all when wrong when he borrowed from the mob who were, indeed, loan sharks. Years later he ran another scheme involving gold.

  10. Avatar for bhunt bhunt says:

    What a story! Had not heard of Weinberg before.

  11. Another first-rate post, Ben - and an excellent account of another extraordinary, and yet depressingly familiar, episode in finance.

    For those that are interested (and hat-tip to the FT for this link), here is a breathless paean to SBF and FTX (and, of course, by reflection, those clever partners at Sequoia) published on the Sequoia website in September (yes, 2022). No longer available on the site but the interwebs still oblige:

  12. I’ve seen the Magic Money Machine before, too.

    It was the “The Circle Of Gold” in my hometown of Pelham, NH. In the summer of 1978, I was 13 years old, and for a few months, I watched this thing spiral out of control until it nearly consumed our whole town and eventually imploded.

    Some of you might remember around that time there were these chain letters that went around where you paid $100 to make $100,000. The gist was that you’d buy the letter with a list of names for $100 - $50 going to whoever sold you the letter, and $50 would get mailed to the name on the top of the list. You’d cross the top name off and add your name to the bottom. Then make 10 copies and sell those to other people.

    The Circle of Gold was different. But it was close.

    Our Magic Money Machine was started by a local police detective named Arthur Heneault.

    Arthur short-circuited the process of mailing the money and recruiting new people. He handled all the backend himself. People would buy one of these Circle of Gold certificates for $100. In 7 days, you could cash it in for $1,000. Or, you could let it ride and roll that over to the “Circle of Platinum” for $1,000 and then get $10,000 in a week.

    My parents heard about it through our neighbors, the Fishers. They were friends with Arthur and had been in for a few rounds. They made enough to get an inground pool and take a family vacation to Florida. Rumor has it the Fishers pulled $34,000 out of The Circle of Gold. And they weren’t the only ones.

    The story spread through the area like wildfire.

    With “The Circle of Gold,” there was no need to recruit. People were literally begging to get in. People were showing up at the police station asking for Arthur and trying to hand him cash. That didn’t last very long before the chief put the kybosh on doing it while on duty.

    Arthur, was a respectable police officer. So he set up shop in the barn at a local farm with open hours a few days a week. Our little one-stoplight town was flooded with people from all over New England. The police had to set up special traffic control to deal with it.

    I saw all of this first-hand. My mother was one of about a dozen people he hired to type the certificates. A couple of times, I would go hang out with my mother after football practice and watch the insanity.

    This thing got so big that Arthur had to hire six bodyguards. I remember his sleeves rolled up, hair matted with sweat, surrounded by burly off-duty cops with guns at their hips, counting stacks and stacks of cash.

    Reporters from the local papers and TV were there reporting the whole thing. I remember my mom was in a photo on the front page of the local paper. (An honor that turned out to be ignominious, when the shit eventually hit the fan.)

    The scene was like a revial. Hundreds of people jammed into this rustic New England barn on top of Kimball Hill Rd to throw their cash at Arthur. I remember Arthur answering questions from the crowd. “How does this work? Is it a pyramid scheme?” And Arthur tells the crowd, “No, I’m investing this money and making it grow for you. You’re guaranteed to get your money back. But if you leave it with me, it will grow. Do you want your money back now?” HELL NO!

    The atmosphere was like a casino when the table is hot or a racetrack when your horse comes it. I still remember the poorly lite barn, filled with cigarette smoke and sweat on humid New England evening. The energy was palpable.

    Of course, my parents were investors in the Circle of Gold. They were not early investors like our neighbors, the Fishers. But they were in early enough that they got a payout. And what do you think they did? LET IT ROLL! They re-upped and put it right back in.

    It went on like this getting bigger and bigger for about a month. The barn with folding tables and string lights exceeded capacity. I remember Arthur telling my mother he was going buy a bigger building to run the business. It was exciting. We were gonna be rich!

    Then, suddenly everything came to an stretching halt.

    Later, we heard that Arthur got the tap on the shoulder from the Attorney General and was found guilty of securities fraud. Anyone who was waiting to get their money back, never saw a dime. There were a few people got in and out early. But a lot of them rolled that money right back in.

    Arthur lost his job at the police department but somehow as able to buy a sucessful grocery store, a couple of towns away. He did pretty well for himself.

    In hindsight, it was obviously a pyramid scheme that was doomed to fail. But in real-time, watching that all unfold, it was hard not to get wrapped up in it.

    People want to believe in that Magical Money Machine.

  13. How can someone so smart, as you say, as SBF spend so much time thinking of so many ways to take people’s money? Corruption of the “system” (society, government, business, ?) has spread so far that there is not enough honest endeavors to physically (financially) support the corruption and it seems as if it will all come crashing down. Soon everyone will just be stealing everyone else’s fake magic money.

  14. Hi Ben,
    It is truly amazing the technical expertise you have about capital markets. The thourough analysis that you offer, and explain in terms I can understand, would be impossible for someone like me (who did not earn a living as part of the financial world, I was a digital engineer), to dig out of articles and books.

  15. Avatar for palmer palmer says:

    Lovely article, Ben. Even if not entirely new information, a wonderful pulling of it all together with wonderful thinking about the disparate parts.

    I want to also thank you for two points you made in earlier articles specifically on Bitcoin:

    1. Bitcoin itself is art. Truly an elegant design. In my mind this gives it a little intrinsic value.
    2. Bitcoin ™ is what we are watching blow up (as most Magic Money Machines do).

    I will gladly give credit to you whenever I mention the two concepts. Wonderful thoughts.

    A couple of thoughts though to add on top:

    1. It won’t die like other fads. As long as we have networks and computers, someone will be mining it. It’s not going to ever fully fade away.
    2. Its elegant design does a very good job of mimicking the properties of gold that made gold a choice of a store of value. Scarcity and permanence.
    3. Gold’s advantage is 6000 years of agreement that it has value.
    4. Bitcoin is a lot cheaper to hold. It has a much cheaper cost of carry. No need for men with guns to guard it.

    Bitcoin really only does one thing. It mimics the properties of gold. Agreed, no revolution here. It’s just an interesting digital form of the properties of gold. As such, I think it’s more likely than not at some point in the future it will share the store of value market with gold. Not any time soon given current Bitcoin™ wreckage, though. But, it’s a better choice in my mind than paying fees to hold a very dense metal. And it’s permanence means there will be many chances for a critical mass of rich people on the planet to all agree it has value like gold and split gold’s market cap with it. However guessing when that happens, that’s the rub… will be listening to the narratives.

  16. Welcome to the Pack, Palmer!

    You left an important aspect of gold off your list of differences. Gold is physical and is used in manufacturing. That inherently establishes a minimum value. That doesn’t exist for Bitcoin. There is no minimum limit to the value.

    Buffett made the comment that he wouldn’t take all the Bitcoin in the world for a dollar. His point is that Bitcoin has value because other people believe that it has value. If you owned it all, there would be no value to other people.

    It is similar to how prisoners establish fiat currency with cigarettes, matchsticks, or postage stamps. They are just tokens, and everyone agrees that they have some value that’s above their minimum intrinsic value. For a fiat system to work, it requires faith and trust.

    It’s the same as Beanie Babies or trading cards. The value comes from what other people put on it. (BTW, there was a good piece in Barron’s this weekend by Jack Hough on Hasbro and Magic: The Gathering trading cards:
    Hasbro Won Big With a Role-Playing Game. Is It Now Diluting the Magic?.

    Is there a reason why Bitcoin couldn’t go to zero?

    It is the same with the USD, for that matter. It’s a matter of faith and trust.

  17. Avatar for palmer palmer says:

    I think less “couldn’t,” more highly unlikely. There will always (ok, maybe 99.99999% chance) be someone in a tinfoil hat mining it somewhere. And it is something that is hard to kill. That hard to kill part means many more opportunities for resurgence, “Hey, remember bitcoin? Oh wow, it’s still around!”. I think the physical is less important than you think. It’s a bit of a virus now that some form of it (if not the original) will be part of our networked eco-system as long as we have networks.

    Though agreed… Beanie Babies and baseball cards keep coming to mind for me, too. It solely is about trust and agreed upon value… have always thought that about gold. But, BTC is something I would want to collect, simply as a collectible because of it’s elegance. If it drops to near nothing, would love to own a bit more. :slight_smile:

  18. Agreed!

    By the way, I “collected” three bitcoins in 2015 when it was sub $300. Yup! Put about $1,000 into Mt.Gox and bought three coins. This was before I understood that you could buy fractions of coins or that you could have an external wallet. Or the need for saving recovery phrases in place so you could find them again.

    Hillarious, right?

    So funny I could cry.

  19. Avatar for naiguy naiguy says:

    Interesting point. I wonder if this trait alone gives BTC some minimal intrinsic value?

  20. Avatar for palmer palmer says:

    Beanie Babies cannot be killed by conventional weapons.

  21. Avatar for 010101 010101 says:

    Where do the different types of people view themselves and others in relation to the MagicMTree?

    Is there a type of person who thinks they can own it, or borrow it?
    Do some believe they can shake it to make it?
    It must be very well hidden. The slightest glimpse of it, gazed on by a multitude could only beset an outcry, a clamour, a surge to grasp its elusive mass.
    Does this tale of SBF and his voyage of self-indulgence reveal any secrets?
    Any deeply hidden, guarded powers, written spell-like on archaic, fossilized wood flotsam, wearing surf-shorts into the public domain?
    It reminds me that real magicians can’t reveal their tricks.

  22. Can anyone think of a magic money machine in the 1980’s?

    I know the whole of society was a magic money machine lol

  23. Avatar for jewing jewing says:

    Multi-Level Marketing Organizations?

  24. Avatar for bhunt bhunt says:

    What a great post, Eric! This could be an ET note on its own.

  25. Perfect - Thanks My Dad was caught up that for a minute.

  26. Avatar for 010101 010101 says:

    Tokyo commercial land 85-87.

    Polly Peck 82-90.

  27. Funny how the defenses just continued to ring hollow. Barry Silber of DCG group, as the market hits new highs for the day.

  28. i’ve got money sitting in USDC and DAI at the moment. Are we at the stage where we should be paying more in tax and just moving out into USD, or is USDC looking strong enough with US bond backing?

  29. Me too! It was long distance phone cards as a pyramid scheme through churches in my area. LOL

    A few years before that there was a nearby called Studebaker also made a Magic Money Machine, and used the employee pension fund. I still run into people from families that were permanently decimated from that fraud. But no worries now because the PBGC was invented to make sure it could never happen again.

  30. While I agree with the consensus of praise Ben, I disagree with you letting the Biden Administration so easily off the hook. Granted there’s countless rocks to kick over but the continuous money laundering pay to play tactics since the Clintons should not be dismissed as ridiculous. This Ukraine war is so beloved by the Left that, that alone, should raise questions.

    Romanticizing FTX as the “Wild West” seems simplistic without even having to cite Hobbes. The racoons always run havoc in unregulated environments, not that you haven’t written brilliantly about it already. In CA , law-abiding taxpayers are watching in dismay as authorities pay lip service to daily smash & grab organized crime when it is “common knowledge” Dem politicians opened the floodgates to it.

    I don’t think it’s an accident the Biden Administration has hamstrung the oil industry while ignoring rampant crypto corruption. I don’t think it’s an accident Dems have demanded vaccine mandates & avoided passing national abortion rights laws.

    Follow the money Ben.

    Please turn your incredible intelligence on how the country if not world is being run.

    Yes, like you, I thrive on ‘the home on the range (farm)’ mentality, but like an episode of Yellowstone, our personal freedoms have never been more threatened by government.

    Can you see the paradox of no “my body my choice” when it comes to experimental vaccines & shutting down the economy for almost 3 years WHILE letting the Ponzi cryptoverse racoons rape & pillage unfettered as long as politicians, investment bankers, media outlets & yes all the Stadium owners and other PLACEMENT targets benefit.

    How can you give it a pass like it’s a run of the mill scandal? When, in fact, in light of the “cancel culture” & unprecedented government censorship, it is an epic attack against people like us—free thinkers aspiring for individual rights.

    Where’s your incredible wit exposing how wokeness has evolved into fascism & totalitarianism.?

  31. Avatar for 010101 010101 says:

    There has been a fair amount of defence of the ideology of totalitarian democracy that is incompatible with dialogue. Perhaps, sometimes, discretion is the better part of valour.

  32. I’m a bit confused that you make this issue about the Biden administration when the reality of crypto and monetary policy we see right now pre-dates him.

    What do you think has Biden done or I guess not done?

    The SEC under Biden fined blockfi a record 100 million I think, the most that has been issued against a crypto related business. What measures was taken under Trump that Biden didn’t push on with?

    I remember Trump pushed ripple for some reason. But was he doing something else?

    Or is this critique of the system in general? In which case the regulatory capture of government agency seems to have been going on for years. Think of the post office being eviscerated by DeJoy as having a more damaging impact than Tom Brady losing his gambling money imo.

    Because at the heart of it, money is only worth anything for it’s ability to exchange productivity, and any money that was speculatively destroyed in a bubble is money that was unproductive. But destroying the post office and making it less efficient is directly unproductive in a way that money being destroyed isn’t.

  33. Kaiser—I’m not too interested in arguing which party is the lesser evil as both are beyond the pale. My point—in real time—there are layers of corruption that should be exposed & not whitewashed. I always find it amusing when appropriate criticism is met with reflex tribalism. I was raised in a particular religion & was somewhat devout for many years. But self-education & thorough examination provided more than enough reasons to terminate any affiliation. It seems any reasonable reflection towards either political party ought to lead to a similar outcome. Yet tribalism and the attraction of affiliation almost always triumphs even in the face of atrocities. It seems only the most advanced philosophers can transcend such herd psychology.

  34. Maybe if Blockfi had been funding politicians and other agents they wouldn’t have been fined.

  35. I misread the situation then. :slightly_smiling_face:

    I just found it odd you mentioned Biden and democrats specifically as if the problem started and ended with them.

  36. Great post! You have a knack for cutting to the heart of a matter.

    I was caught off guard and pleasantly surprised by your upbeat ending.

    For the past ten years, not coincidentally as long as I’ve been writing Epsilon Theory, I’ve been catching glimpses of a new MacGuffin to pursue, a MacGuffin of belonging in the present and difference-making in the (very) long-term future.

    This is why I keep coming back to Epsilon Theory, and why I lurk on the forum from time to time.

  37. To me the most obvious and analogue Magical Money Machine is the most recent, the subprime mortgage debacle. Ben’s analysis of SBF and FTX, while astute and entertainingly wrought, mostly mucks around in the trees without taking in the forest - what reasons does the crypto “industry” have for existing in the first place? By “industry” I mean the digital financial marketplaces in which FTX participated, where thousands of different tokens were created, bought, sold, and, most crucially, used as collateral for loans. Like CDO squareds, crypto was a solution in search of a problem that ultimately found flourishment in the primordial soup of massive unconstrained global liquidity.

    The term Ponzi has been thrown around quite a bit here and elsewhere; and certainly Ponzi-esque elements are rife in crypto land (FTX itself offered investment products touted as high yield, no risk), as they were in the subprime mortgage world (think of the “AAA” tranches of CDO squareds).

    But at its heart, crypto is not so much a Ponzi as a highly levered pump and dump. As described by SBF himself in the interview with Matt Levine cited by Ben, the coins are inherently worthless, but acquire “market cap” through the time honored techniques of promotional hype and supply manipulation. Suddenly a coin invented by anyone, with a tiny fraction of its theoretical total stock floated on an exchange like FTX, pumped up on social media and subject to insider trading that serves to simulate demand, has created hundreds of millions if not billions of theoretical value in the implied market cap of the reserve stock - which is of course all still held by the creator/issuer. If it ended here it would be bad enough. But no - the issuer now uses that pile of coins it holds with its huge implied value and borrows against it, to buy other coins, and so on and so on. It may also lend out some of its borrowed coins in a version of a carry trade. And so what starts out as a guy with no job or assets putting down a couple grand to buy a half million dollar house in Florida for 2x its prior appraised value using a 97% interest only adjustable rate mortgage, turns into that mortgage going into an RMBS, a b-piece of which finds its way into a CDO (filled with other b-pieces of RMBS deals), and CDS against which are further repackaged into CDO squareds. The original crappy loan has been levered and levered and levered again.
    But hey - housing prices only ever go up!

    The same with crypto, except on a much smaller scale but with far less underlying value to recover.

    There was never any reason for this industry to exist other than financial speculation with excess liquidity that could not find another productive use for itself. That liquidity is gone now. If all that meant was silly speculative assets like crypto coins or cookie cutter McMansions by an interstate on a swamp in Florida lost their value, well, ok. The buyer of the coin or the house and the original mortgage lender should have known better. But it was the greatest magical money machine of them all - leverage - that allowed these tiny slivers of equity to become multibillion dollar catastrophes. Whether via securitization, derivatives, or margining of SBF’s market cap box, it’s always the same game and the same result.

  38. Avatar for bhunt bhunt says:

    I agree with this, Michael. I think you’ll like the framing that I’ve settled on for what’s happening here (and has happened on Wall Street systemically from time immemorial) is a Spanish Prisoner con. Note forthcoming!

  39. Avatar for Zenzei Zenzei says:

    Does it matter if it was a “pump and dump” or a “ponzi”? Aren’t these just different ways of saying “fraud”?

    My point here is that there seems to be a general move in the zeitgeist to say things like:

    “It wasn’t a Ponzi, it was a real business!” as some soort of apologentsia for the elites caught in the event. I keep hearing things like “how could they have known” or “they should have known” as pro and con arguments for the elites and the taken.

    An activity (AMA anyone?) motivated by lies and deception and theft of other people’s property is a negative force for life - the label is less interesting to me.

    The meta idea, for me, is that while some of us are busy trying to be a force for positivity in the world, others just see it as their personal oyster to be fucked around with.

  40. Avatar for bhunt bhunt says:

    It’s a very good question! Flow is the business of matching buyers and sellers who want to trade something, and taking a (small) percentage of the trade amount as your fee for ‘making’ this market.

    Read Hunger Games for more!

  41. I’m hoping the SDNY cases go to Jed Rakoff. I served as an expert in the Refco and Pertobras cases, which he handled. He is a no-nonsense judge that takes no B.S. from anybody.

  42. I just wanted to chime in with a couple things about SBF’s fraud case now that he has been arrested, and give a defense’s attorney’s perspective on it.

    Disclaimer: Don’t consider what follows here legal advice. If you think you might’ve done some crimes or might do some in the future, seek a private consultation about your particular situation.

    To start, SBF’s statements on the situation made me cringe from the very beginning because he struck me immediately as that client who cannot shut his mouth and think he’s talking himself out of jail when in fact he is talking himself into jail. There is a reason why you have a constitutional right not to say anything at all, and your lawyer generally tells you to use it. You’d be surprised how many cases there are where the prosecution’s case would have just been lint and candy wrappers if the client had not said something he shouldn’t have said.

    But SBF obviously bought too much into his own “smartest guy in crypto” narrative/act. and as a result has now said things that didn’t quite make sense on their face, and now are contradicted by the allegations of his associates in a pretty damning way. That’s kind of the worst case outcome - to proclaim a particular defense loudly, only for it to get blown up by the statements of your co-conspirators.

    The narrative that he tried to shop was basically, “Because we had poor internal accounting and controls, I didn’t realize that Alameda had run up such massive debt and become insolvent, and I also didn’t realize that the loan I was giving them was from customer funds.” He thought that if he stayed consistent with his image of being the hyper-ethical super-thoughtful and responsible crypto guy, he might win the narrative game and not get completely exposed.

    But there were some problems with this strategy, as I’m sure his lawyers told him, and I’m sure they had some nice big facepalms with each interview and tweet his insisted on putting out there.

    Matt Levine in his columns has done a great job breaking down why this is suspicious at best even on its own terms:

    1. FTX and SBF himself advertised FTX as having sophisticated, automated risk management protocols that shouldn’t have allowed Alameda to get into the position it did. SBF has admitted that there was some extra “leeway” afforded to Alameda. This in and of itself could be considered fraud.

    2. SBF claims that he was aware of the potential conflict of interest and risk from Alameda’s position as an affiliated entity. But then he says, that’s why he reduced his involvement in running Alameda and monitoring their risk? That’s not necessarily fraudulent but it is so extraordinarily stupid that it isn’t consistent with his “smartest guy in crypto” image that he touted for years.

    3. The spreadsheet contained an entry saying that a large part of the debt FTX owed was due to a “hidden, poorly internally labeled fiat account.” I mean…ok… “Poorly labelled”? Not great, but not necessarily criminal. A “hidden” account? Um. Hidden from whom? Hidden from your super sophisticated risk management system? Hidden from you, the CEO? What legitimate reason could there be for a hidden account with $8B in it? Also, this makes me laugh because sometimes as a defense attorney, clients can’t always decide what their story is. Was it hidden, or was it poorly labelled? Are you saying you didn’t see it, or that you did see it but you didn’t know what it is? Those don’t strike me as totally consistent. His lawyers must have had, or should have had, an awkward conversation about this, I imagine.

    Then we also learned further allegations, which vary from “possibly defensible” to “SBF is cooked”

    1. Caroline Ellison and Gary Wang say that SBF was aware at the time that customer funds were being misused to cover Alameda losses. If this is true, SBF is cooked.

    2. SBF was aware that they created exceptions in the risk management system specifically for Alameda, including that they had an unlimited line of credit, funded by borrowing from customer funds. Quite bad, because FTX advertised itself as specifically not doing things as stupid as this. I perceive some chance that this is defensible because SBF has tried to say that the FTX terms of service allowed customers to borrow from each other on margin. But borrow unlimited amounts against any risk protocols? I don’t think that was in the terms of service…

    3. SBF directed the creation of another corporate entity whose relationship to Alameda and FTX was concealed/unknown to obscure the transfer of customer funds to Alameda. This is interesting to me because - isn’t all this stuff on the blockchain? Isn’t it public information who is associated with what accounts? If the information is broadcast to the public, but you try prevent people noticing, is that fraud? This will depend on what exactly they did to conceal the relationship.

    4. FTX used Alameda to pump FTX’s shitcoins specifically so that Alameda could use them as inflated value collateral for loans. This could be defensible, if not for Wang and Ellison specifically having said they were pumping the price for this very purpose in the SEC and CFTC complaints. Cooked.

    5. There are some other more minor privileges Alameda enjoyed as result of SBF’s self-dealing that I think are defensible, (faster execution time, etc.) that I think were kind of well-known or at least commonly speculated upon. Since fraud has to be a material misrepresentation, ie., you have to have told a lie that actually made a difference to whether people fell for your scheme, I think SBF can argue that since this stuff was kind of known, either people knew about it, or they didn’t know but it also didn’t really matter.

    It seems clear to me that SBF was implicitly trying to throw Ellison and Wang under the bus, claiming everything was due to misbehavior/incompetence on their part, and he didn’t really know what was going on. This was a bad strategic move. If they all stuck to that defense together, they had a chance of staying out of prison. But since he decided to pre-emptively throw Wang and Ellison to the wolves to save his own skin, the obvious move for them is to rush into the prosecutor’s office and cut a deal as soon as possible. Again…I imagine his lawyers told him this. But some clients just don’t want to listen, perhaps because they’ve started buying their own bullshit?

    Again - not legal advice; don’t do crimes; if you insist on doing crimes, retain an attorney and ask them about it.

  43. Are you speaking to Rakoff’s competency or objectivity? If objectivity (suggesting that he has more), I think it would be helpful to call it by the real name - bias.

    We can’t expect even habitually honest people to play fair games if everyone knows that the umpires aren’t objective. And once everyone knows that everyone knows - I figure that we are probably on the doorstep of anarchy. The umpire calls strike 3 and the batter pulls out a gun and shoots the pitcher or the umpire. Unfortunately players don’t really have the choice to just quit the game.

  44. I appreciate your expert insight and detail. And I think your perspective is likely correct - that SBF the carney barker started to believe his own schtick - especially given his mental state.

    But I also wonder how it plays out, given that he served a very useful purpose by ensuring that fiat currency won the continued role of dependable store of value against the best alternative in history so far. And that he donated more to politicians than they have available to refund. Maybe he loses his case and the CIA rescues him from prison to serve his sentence on a tropical island? Or is he going to be a sacrificial lamb? Does he not have valuable kompromat to trade? Per Ben’s note, he obviously planned to be a cartoon from the beginning, and I always questioned his reasoning behind that - it was the dad shoes. His generation has made fun of white sneakers since their early teens. My kids demanded I throw out a perfectly good pair in favor of bright blue and orange. Was it just performance art to align with the good art of crypto?

    Trying to get this answer is my primary interest in seeing it play out. I certainly don’t think this leads to reform that prevents the next Madoff, Ken Lay, Fed / Congress insider trading, etc.

  45. Avatar for bhunt bhunt says:

    Completely agree! (I’m not a lawyer, but I’m married to one and the brother of another, so of course I can opine like I am - lol). Great note, David.

Continue the discussion at the Epsilon Theory Forum

1 more reply


The Latest From Epsilon Theory


This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.

Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.