OT: FTX Founder Appears to Admit to Fraud

As many people here know, I am a crypto-skeptic. But I’m really skeptical of crypto exchanges, which are necessary for crypto to exist in any meaningful way. As its simplest form, exchanges simply match buyers and sellers. In order to that, you need to have your crypto on the exchange, as opposed to self-custody. At some point exchanges began offering generous interest rates if you loan your crypto to them. This is called staking. It also makes no sense. Crypto is static. It doesn’t pay dividends. There is no underlying income stream. The only way it can work is if the interest for existing investors is being paid by new investors, who also help to drive up the price of crypto, which also helps pay interest. Crypto staking is a clear and obvious Ponzi scheme. There is no other possible explanation. Every exchange that offers staking is a Ponzi. That’s why exchanges have spent billions on Superbowl ads and stadium naming rights. They need a steady stream of new marks to keep the Ponzi going.

However the obvious fraud that has been going on in plain sight has been soft peddled and mostly ignored by the main stream media. For example, this NYT piece on the Helium Network. To be fair, the Helium scam was sophisticated enough that it didn’t necessarily meet the test of fraud, but the way it was run was identical to a Ponzi. But the business model behind it was stupid. There is no way it would work. The NYT article was like “this is kind of interesting.” The article should be been “it is interesting how stupid this thing is.” It blows my mind there is all this obvious fraud going on all around us and there seems to be very little effort to alert the public.

Anyway, as crypto prices start to fall this spring, the Ponzis predictably began to collapse. Voyager, Celsius, etc, including wonder kid Sam Bankman-Fried’s FTX. I’m still puzzled about how the media are covering the story for the most part. Against all rational legal advice, SBF has been giving interviews, basically arguing he is just really bad at accounting, but no one has really held his feet to the fire.

Except for one guy, a youtuber named Coffeezilla. I have no idea what his background is, but he has been going hard after the crypto scammers for at least a year. Somehow, he managed to get on a group phone interview with SBF and he trapped SBF into admitting that he co-mingled funds between customers who were just holding their crypto (and therefore should have been safe) and speculators who were staking their crypto (who were taking a risk). This was against FTX’s terms of service. I am not an attorney, but it seems reasonable that misrepresenting how you will manage a client’s assets–in this case speculating with them instead of storing them–meets a common definition of fraud.

I enjoyed the whole video, but the fireworks start at about 14:00.

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The SEC head Gensler is claiming as of yesterday there may be criminal charges against SBF. He may have broken security laws.

Gensler is being careful because he needed to see evidence. He can not shoot from the hip.

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I tend to agree.

This, BTW, is one of the reasons why no one’s trying to arrest SBF yet. There are others, of course. He hasn’t admitted to fraud (unlike, say, Madoff), it takes time to build a case against complicated financial fraud, and he’s already in another country.

But apart from that, he’s spouting off all over the place about not just what happened, but what he was thinking at the time, what he was trying to do, and what motivated him. That is a gift beyond measure to prosecutors. One of the hardest elements to prove in fraud cases is the intent of the people involved, and usually prosecutors have only whatever paper trail (memos, emails, and the like) to admit into evidence. Sometimes it’s hard to prove up the criminal intent. But the more SBF rambles on and on and on about what happened, the more material prosecutors will get to use in court.

It’s just…it’s just amazing. He doesn’t seem to realize that he is talking his way into possibly spending the rest of his life in prison.

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Just wow. First, love the sepia toning and that vintage PI look. But he got SBF to admit that he was allowing withdraws even to the point that “safe” accounts would get impacted. “He doesn’t seem to realize that he is talking his way” into jail, no kidding!

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As I have said I am not investing in any of it.

But there are working areas that matter. There is development that matters.

If Musk actually straightens out Twitter while Web3 platforms take a much more mature shape you could see Twitter out perform Tesla. The vig for Twitter to facilitate Web3 could be very exciting and lower risk.

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I think you need to read more because it is obvious you really do not understand how the dividends are being paid for Crypto. I am not saying that the dividends seemed high and not warranted but to say there is no underlying income stream is completely false.

Andy

OK. What is the underlying income stream that provides for dividends?

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From the You Can’t Make this Up Department:

SBF’s plan to bail out his Ponzi is…another Ponzi! The mind reels.

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Speaking of crypto. The Grayscale Trust (GBTC) is now trading at under 50% NAV. I remember when that fund would be 20% over-valued. What is up with that?

Short answer: people value shares of GBTC less than they value an actual Bitcoin.

Long answer: shares of GBTC aren’t Bitcoins. They don’t have the same characteristics as Bitcoins. So investors value them differently than Bitcoins. Back when there were very few derivative products that allowed you to have exposure to Bitcoin without the hassle of owning Bitcoin, investors prized the different characteristics of GBTC shares. Someone else took care of accessing the chain and protecting against hackers and not losing the passwords and avoiding $5 wrench attacks. But now, there are lots of alternatives. So that service isn’t as valuable.

The trust that administers the GBTC holdings imposes a pretty hefty management fee - 2% per year. So holding GBTC is actually worse than holding a BTC, from a purely financial perspective. You can’t “redeem” GBTC shares for Bitcoin. If you own a GBTC share, the only thing you can do with it is sell it to someone else. It would be wonderful for shareholders if the trust allowed you to trade in the GBTC for Bitcoins, of course. But they don’t want to. If people redeemed their shares for BTC, the trust would lose access to those tasty fees - which are around $200 million per year.

https://www.bloomberg.com/news/newsletters/2022-12-06/grayscale-gbtc-bitcoin-btc-investors-have-trust-issues

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Here’s an article on the Winklevii Ponzi which they call Gemini Earn, which lost $900 million dollars of their customers’ money. It is not apparent to me how there was an income stream big enough to pay the interest rates they were promising.

The employee said he didn’t work directly on developing Earn. When the product finally launched in February 2021, he said, he and other employees saw the terms and conditions for the first time. “[We] were like, “Holy s–t, are you f–king kidding me?’” he said.

Oh it’s clear you don’t understand. The ‘exchanges’ (they’re not banks! That’s why they’re chartered in the Caymans!) offer interest by loaning out crypto to others (at low interest) so those people can buy more crypto. That makes the price go up, and so the exchange makes money, you get your interest, and the loanee has ‘more crypto’.

Do you really not see the logic of this perpetual motion machine?

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There is the scam.

Crypto is, by definition, a finite amount (i.e. there is no infinite/unlimited source of crypto).

Right, like I said and you agreed with that some of the interest rates were very inflated. Just like I have seen in some Reits. That is why the Reits have had to cut their dividends.

Andy

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Oh you mean like Lehman brothers? That is a very good argument. I would say that is the very best argument put forth yet. :roll_eyes:

Andy

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John Ray III brought in to clean up the mess was also brought in to clean up the Enron mess. John Ray III said that FTX has no accounting department, no accounting team at all. There are zero reliable financial statements, and no history of transactions. Financial transactions were made through email emojis.
Sam Bankman-Fried, ex-chief executive, has claimed the company is still solvent. Mr. Ray the current CEO has pointed out that putting together balance sheets, blockchain analysis and forensic accounting for FTX is similar to digging at an archeology site.
On the outset, Ray’s team disclosed that they’ve only found $1bn of liquid – easily sellable – assets and $9bn of liabilities the day before it collapsed. According to the filing, Ray’s team has located about $740m in cryptocurrencies held by FTX. It is probably impossible to know how much FTX is responsible to clients in crypto accounts. Why? There is no accounting history. There are billions in undocumented loans to FTX officers.
The Metaverse, cryptocurrency, bitcoin, et. al has no accounting firm, and probably no reliable transaction records.

Ignorance before the law is no excuse.

It was not ignorance. SBF can bullblank with the best of them. He is thinking he is going to float above it all on intellect. He can really shovel it.

No different than fractional reserve banking which is a legal scam

No different than selling shares you don’t own (shorting)

No different than buying a house with 10% down (mortgage)

No different than fiat money

All are built on trust (the hope that it will work out)

The Captain

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It isn’t like REITs. REITs own the underlying assets which generate revenue in the form of rent which is used to pay dividends. Crypto doesn’t generate revenue. It just sits there. There are no rents to be collected. There is no source of revenue to pay dividends except new investors buying more crypto. If new investors don’t show up, there is no way to pay dividends. That’s why crypto exchanges have been imploding left and right. They can’t pay dividends because there is no money.

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Incredibly, SBF appears to have admitted that FTX crypto transactions did not occur on the blockchain at all. They were just moving crypto around on a spreadsheet without completing the transitions on the blockchain until they had to.

I say “incredibly” because it is incredible that a guy looking a hard time in the big house would say something like that in public.

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