Matt Levine Weighs In on the Post-FTX Crypto Ecosystem

sector forever. A month ago, if someone would have told us f t X was potentially mismanaging customer funds, funneling money into its sister trading firm, Alimator Research, and would soon be the disgrace of the crypto industry, we wouldn't have believed them. As more details about its general finances emerged, we're starting to better understand how f t X and its former CEO Sam bankman Fried might have managed to change the industry forever. But how much of a mess

was f t X in, How did nobody notice? And how can this shape the future of crypto? To make sense of what this could all mean, I'm joined by Bloomberg reporter vil Donna Hirich. When we speak to people, to crypto investors or whoever, traders, a lot of them are saying Oh, this is actually like a very scary moment for crypto and we're going to interview Bloomberg opinion

columnist Matt Levin. Classically, the way you get into this situation is like one trade goes wrong and you're like, we can make this up, and then it sort of snowballs from there. Hi, Matt, Hi don I'm here too. Hey Hill Toma, what are you doing there? But if we wanted to dive right in and thank you by the way for being here, thanks for having me. You are like the pre eminent voice here on what's going on, I feel like everybody's already here. You don't have to

flatter Sorry, sorry, I have to. I have to. I'm a big fan. But just to start, maybe you can just give us your take overall what And I know we've all been talking about this like non stuff, but from your point of view, what actually happened? I still don't know. I mean, like, in rough sense, is what happened is that fd X disclose that it didn't have

a lot of customer balances, and that's really bad. I mean, I guess what happened first of all is that customers withdrew a lot of money from fd X, and then ft X shut down with drills because it didn't have it's customers money. Um. But beyond that, the question of where did the customers money go? It still seems very much up in the air. The sort of rough sense is that ft X is affiliated hedge fund Alameda somehow lost that money, but what it did to lose that

money is pretty unclear. There's talk of put a lot of money into venture investments, put a lot of money into rescuing you know, busted to affirms this summer in ways that might have lost some of that money. Um. But it's also you know, it's a leverage hedge fund, and there are a lot of ways to lose money leverage position in crypto this year, so it could have lost money that way, and you know there are other more complicated speculations, but those are some guesses. So I've

read everything that you've ever written. This past week especially you've written a lot on the balance sheet that was first reported by the Financial Times over the weekends. I feel like you did a really beautiful takedown. The big numbers to know, I believe it was nine billion dollars in liabilities, like nine million in actual liquid assets, uh.

And you pointed out that back when I don't know, last week, when we were so young, just talking about the f t T token, you made the point that it seems like some of their main assets were in a token that they made up. But what that reporting revealed by the Financial Times was that actually there's two.

There's more than two. I mean, right, there's the balance sheet that we're talking about is something that f t X was circulating as it was sort of in its death throws, trying to stay about bankruptcy by getting an investment. So I think that, loosely speaking, what happened is that there are customer withdraws, and everything that they had that

was valuable they sold or paid out to customers. So something like five billion dollars worth of bigcoin and dollars and whatever else went out the door, and what was left by the time they prepared that balance sheet was it was the weird stuff. Tell us about the weird stuff. I want to know about the weird. So there's a lot of weird stuff, including a position on Twitter that nobody quite understands, like do they have a position in

Elon Must's Twitter? Um clear, But the bulk of the weird stuff is a basically these f t X related tokens. So there's f t T which is the utility token of f t X, which basically it's not exactly stock in ft X, but it's kind of like stock in the ft X exchange. Right, if you buy that token, they will buy it back out of cash flow of ft X, so it's kind of like the stock of FTEX. There's a token called Serum, which is the not face,

although it isn't that what all alexis. We're interrupted. I will tell you that Sirium is run by a thing called the Serum Foundation. If you and if you google Serum Foundation, it's all makeup. It's not at all contents of the Serum Foundation. But the Sirium is like the

same thing. It's it's the token of a thing, a decentralized exchange protocol called Serum, which was started by a built by f t X and Alibata, and it was sort of like, you know, people want to trade on decentralized exchanges, and ft X is the centralized exchange, and so this is like it's like decentralized counterparts. So what

that means is like there's a Serium token. It trades a little, it doesn't trade that much, and they have like all of it, and they have the giant pile of it on their balance sheet that has more than all of the serrium and circulation. And there's just called maps which is the token of a different thing called maps dot me, which I will take no further questions

about what maps dot me does. But there was a third one to but like there's like three million dollars of maps dot me and and they had like million dollars of it on their balance sheet, so like way more than there is maps dot me. And they were acclaiming that as an asset on the balance sheet. So if you add up all the assets and subtract all the liabilities, like you get slightly more assets than my abilities. But then if you like poke those assets a little bit,

they fall apart. Okay, can we poke at the assets? Because as Katie said, so everybody should go and read this first before they even listened to the rest of this interview, because you did such a thorough breakdown of what exactly was on their balance sheet. So maybe can you just characterize for us, like how bad of a balance sheet was it? Uh, Like, in terms of like howling ghosts. Yeah, I said, I said a series of metaphors about how because it is it is not it

is not like expressible in normal financial times. But now I mean the bal like like I want to be a little sympathetic here, because this is the balance sheet, like after they got rid of all the good stuff, this is the balance sheet of stuff they couldn't give to their customers. And it's terrible stuff, but it's it's basically it's mostly tokens that um, it's mostly a couple of things, tokens that they made up that there's no

real market for, like they trade. But if they were to sell billions of dollars with the serum, they would get like, you know, kind of zero dollars for that. So like the billions of dollars is fake, not fake, but it's like not achievable. So I actually have a quote from one of your recent columns. I love it so much I'm going to read it to you. Quote. It's an Excel file full of the howling of ghosts and the shrieking of tortured souls. If you look too

long at that spreadsheet, you will go insane. And that leads me neatly to. My next question is what should the balance sheet of f t X or a company

like f t X, what should it have looked like. Well, it's a little hard to know, because, like you can have a simple model of the balance sheet, which is like customers put in some bitcoin or some dollars and you just hold them right and like you're in exchange, you charge fees for trading, you just hold the customer stuff, and then the customers want their stuff back, you just

give it to them. I think it doesn't work that way because it is a it offers a number of products, but it offers a lot of futures, and so there's a lot of futures trading. So you're doing a lot of leveraging where you're sort of like effectively borrowing money to lend to customers, and you're doing a certain amount of barring from one customer to lend to another customer. So you can have kind of a messy balance sheet.

But broadly speaking, you want to have like valuable stuff to offset your obligations to your customers, and there is just much less valuable stuff on this balance sheet then there are customer obligations. I want to talk more about serum and some of the other stuff that you've found.

Can you talk about the process of how you actually went through all of this and sort of the revelations as you went, you know, line by line or whatever this process actually looks like, because I also have a quote of yours that I'm going to read to you. I love this exercise. I love it. This is so fun. Who said this? It seems bad, but it somehow keeps getting worse. And that's what you said. I believe it was in regards to sirium, and I love I love Sirium.

I wish I had a metaphor for like, there's like a vigorous skinker game applied to this balance sheet. Yeah, like this this balance sheet needs some retinal am I right? Yes, someone did actually email me to be like you're you're overacting this balance This is a balance sheet with no makeup on it. Every financial institution has, like you know, some mess and they clean it up, and like you see the cleaned up version, and this is the sort of like no makeup version, and well that is true,

like substantively the mess is quite bad. Um, I don't know, I mean, like candidly, what happened to me first was not that I read the balance sheet, but that I read the Financial Times article summarizing it, and they got to the point where they said, it has two point two billion dollars of sirium and the market capit sirium is eighty eight million dollars. And I thought, well, those are really bad numbers because the market cap is all of serrium and they have so much more than all

of SIU. They have many times all of Syra. And so I treated that people like, well, you know, the price went down, like, no, the price didn't go down. There's like a deep conception, and the price did go down,

but not that much. The deep conceptual problem, which is that they have way more serium than there is serum, because like you can, you know, you can do this like funny math, where like you have a token and you issue one percent of it for money and then you're like one percent of it was worth ten million dollars, a hundred percent of it was worth a billion dollars.

But that's not really true. And the other issue with having so much of this one thing is that if they were to offload it, then it would actually push the price out, making their holdings worth even less, right, Yeah, but also like if they were to offload it, like something's gone wrong. Exterium is a sort of FTX project, and FTX we're like we're dumping all of it today. You wouldn't go down by like you know, you wouldn't like calculate the effect of liquidity. You'd be like, well,

and that's worth zero, right, So it's bad. So I want to talk about the fact that f t X finance their centralized exchanges. And a counterpoint that I've seen or narrative that I've seen on Twitter recently over the past week or so, is that this is why you know you shouldn't trust centralized exchanges. And then, as you point out in a column, it kind of feels like

Finance wants to be a central bank. They have this recovery fund, by the way, like of FTX, right, like this is this is like the Binance recovery fund is First of all, it's just it's just a tweet from CZ right, But like even you if you sort of like try to fill in the details with your best guess, it sort of ends up looking like what FTX was during this Well, I promised on getting to a question here because there's also been warding that you've seen huge

outflows from exchanges, like billions of dollars. So I guess I want to know if we make this a binary question, where do you see the crypto industry going towards this central bank sort of route, putting more trust and exchanges such as binance we're trying to fill this void. Or do you see a world sort of like a d globalization and actual decentralization, people taking their money off of exchanges, putting them in cold storage, wanting control of their keys.

It feels like we're at that precipice kind of. Yeah. I think it's really hard. I think that UM cold storage is like it's not a it's like like that's a solution for like, you know, institutions wanting to buy and hold bitcoin. But like there is this view that you're building this whole financial system and that requires trading, right, it requires exchanges. Like a lot of the people in crypto are not you know, buy and whole bitcoin and

forget about it. Their page fund guys. They want to trade um and it's hard to do that if you don't have any exchanges that you trust. I think people keep claiming victory for decentralized plinance because it seems to not have some of these problems of charismatic founders losing all the money. But you know, like the liquidity there's the remains a lot smaller than on central than on

centralized exchanges. And I think, you know, the user experience of that for either a retail customer or like you know, the sort of like big institutional money that people want to bring into Kryptos is I think, you know, I don't know, you want to have an entity that you're facing,

So I think that's hard. And then I think, like the central bank model, I would have to think that most people trust finance less now than they did two weeks ago, not because finance did anything wrong, but because the person they trusted two weeks ago they don't trust anymore, right, Like you, it's hard to be like, oh, like the savior centralized exchange went bust, so we'll pick a new savior central It's just like seems like a crazy thing

to do. Um, So I don't know, I mean, I think the central bank model, like, I think the best case is something like the central bank model, something like we're gonna trust finance and coin based on others, and we're going to do it in a vastly more regulated way where there's like some like adult supervision of all of this, so that it's not c Z saying I'm going to be the central bank. But it's like there's some sort of institutional framework in which it can be embedded.

And I think that's also very far away and very hard to do. So I don't I don't know. I don't gonna answer your question like there's a lot of bad options. It sounds like if I listened to your answer though, that this just isn't the death of centralized exchanges.

I don't think so. I don't think so. One thing that's very weird is that it should be very easy to write a cryptic exchange and not lose all your customers, like and and you know, I'm really about this, and I don't want to be too glib because you know the people I just keep up. But like coin base is a U S public company with an auditor balance sheet. That's pretty straightforward, right, Like they take your money and they put it somewhere and when you ask for it back,

to give it back. And their business model is they charge you a lot of fees for trading, and you trade a lot, and so they make a lot of money. Right. Like that's oversimplifying in various ways, but it's like a

pretty easy business, right. Um. At the Bloomberg cryptos somewhat, I interviewed SPF and said, you know, we talked a little bit about like the analysis of these acquisitions, and he said something to the effect of, like our thinking was, if we could incinerate a relatively small amount of money, we would do it. And there's a lot of ways

in which that makes sense. Right. If you are the biggest player in crypto and you want the crypato ecosystem to be healthy, you would incinerate some money for the broader,

like longer term purpose of keeping the ecosystem healthy. If you are a well capitalized player, that is the time to deploy capital, either because you think there will be a recovering you'll make money on it, or even if you are really incinerating money, you're at least keeping the system healthier and you know, improving your long term cash list. If you're not well capitalised, though, which it seems like they were not, then it's a terrible decision. Um, and

that seems to be part of the problem. Anyways, they blewe money on buying failed crypto firms so that they didn't get back. Coming up more with Bloomberg reporter vill Donna Hirich and Bloomberg opinion columnist Matt Levine on what the FTX fallout could mean for the future of crypto. So that kind of leads me to a question I've been thinking about, and I think I've asked you this a few different times already this past few weeks. Week Uh to your point that if you were well capitalized,

that's the thing to do. If you weren't, that's a terrible decision. When you think about just SPF, how we acted, what you the conversations that you've had with SPF. Do you think that this was intentionally bad decisions like intentional fraud, intentional evil, or do you think this was just hubrius someone who got over their skis. I don't know. I I you know, I've said I have talked to SBF a few times. I've I've liked I've liked him personally.

I would like to think the best of everyone. I think that, um, it is hard to get into this sort of situation as like your plan, because like what's the next step of the plan? Right, like like it doesn't like this doesn't seem to have worked out great for SPF. So it just and just in general, like looking at a lot of these sort of situations, you know, loosely speaking, Um, the way you get into the situation

is you get out over your skis. I mean the way you get like classically, the way you get into the situation is like one trade goes wrong and you're like, we can make this up, and then it's sort of snowballs from there to the point where you're sort of

using all of your customer money. Um. I also think like looking at that like one thing that you've learned, like you noticed looking at that balance sheet is that like the processes at FTX, we're maybe not great, right, And like there was certainly like part of their media images that is a very small firm that was very profitable with very few people, and all the people were sort of like the perceptions they were all brilliant and like came from like you know, Jane Street, and like

I knew a lot about trading, but they're you know, accounting and compliance functions. Seems to have been maybe less than you would want. And so one thing that SPF has tweeted and then the Terrible Balance Sheet said was that there was a hidden, mislabeled eight billion dollar gap

where they just forgot about it at some level. That's hard to believe, but also I believe it, Like I mean, who among right like like like something went wrong that had something to do with sloppin us in some form, right, And I don't know exactly what that was, but they do seem to have lost track of some of their money. Well, speaking of that, if I can quote you to you again, you cannot apply ordinary arithmetic to numbers in a cell

labeled hidden poorly internally labeled account in all caps. Of course, the result of adding subtracting those numbers with ordinary numbers is not a number, It is prison. Do you want to talk more about that? Not really, but like, I mean, clearly people are in legal jeopardy when they lose customer money and hidden poorly leavel all the ways. What kind of like you could imagine that being a series of understandable mistakes and still being in a lot of legal trouble.

What kind of legal trouble are we talking about? As I understand it, one main kind go on. The US Attorney Office of the Southern District of New York decides to prosecute you for wire fraud. That's the main kind. Yeah, that's the biggie. I think even with a series of innocent mistakes, the U s Attorney's Office will be very interested and will not except a serious innocent mistakes. But I also think, like I don't know, you look at the evidence like your first thought is not a series

of innocence. I'm not a lawyer, but I do want to talk about the fact that SPF keeps tweeting. This man is tweeting through it. It does some weird tweets, like a letter by letter. I know it sounds like a lot of time on his hands. It hasn't been going over too well on crypto twitter. It seems like no one wants this man to be tweeting. Should he be tweeting. I don't think it's doing a lot for anything to be tweeting. So I know we've been talking about, like we heard the word death of x y C

a lot. Katie and I actually on this podcast have been talking about how when we speak to to pe pulled to crypto investors or whoever, traders even not just like bystanders that a lot of them are saying, Oh, this is actually like a very scary moment for crypto. And we we have actually a story from one of our producers. We want to bring her in and have

her share it with you. I think you will like this and get your take and get your take on on what's going on, because she too has been talking to people about everything that's going on and how much of an issue it's been. Hi, Sharon, Hey, guys, how are you. I'm not a reporter, I'm only a producer, I mean a reporter. Yeah, but you're Matt Levine. But this is the point actually of the story that you

are Matt Levin. Yeah, exactly. Um. Yes. Over the weekend I went out and I, um, I guess I should say that I'm within the age range where it's appropriate for me to hang around college seniors and anyway, I she's thirty fun oh man, um and yeah, I just slamped into these two guys and they seemed to be kind of mumbling something about f t X and SPF, and I sort of approached them and I said, oh, what do you think about this whole f t X thing.

And when I told them that I worked for Bloomberg and that I specifically worked within the crypto vertical and the cryptopod, their eyes we're so wide and so lit, and they immediately asked me do you work with Matt Levine? Do you know Matt Levine? And I said, well, I don't know him personally, but yeah, but I've worked in the professional vicinity of Matt Levine. So it was really interesting just kind of like see how they were so awestruck.

I felt like I was like, I just told them that I like worked with the President Barack Obama or like something to that effect. I didn't ask about Katie Kreifeld. That's right, It's right, Well I did, to be honest, I did plug crypto. I r l oh, thanks. I just renamed this podcast to the mal Levine Crypto Podcast and just a pilon Yes. But but was that the story? No, We're still getting to the to the crux of the story, because they told you some interesting things about crypto and

how they're viewing the state of the market. Yeah. I I sort of asked them, like, so, what do you think like it's going to happen now, like about crypto and are you like really into the crypto world. And I mean, when you think about it, like their two year old college seniors, they're just starting to be like financially independent and they're really dipping their toes into like crypto verse, so to speak. And they seem to be

really optimistic about the whole thing. Um, they did say they did acknowledge, you know, this whole FTX fallout is really disappointing. It happened, it was terrible, it caused a lot of pain. We can't disregard that. But they did also follow up with there's a lot of hope, and I don't think we should be, you know, in the

position to say let's give up on crypto. So they were really kind of like optimistic about the future crypto and said let's hold on because these are essentially like growing pains about what they think is going to be like a really game changing industry. Yeah, I mean, you know, this is not the first time that I mean, it's not even the biggest exchange, but this is not the first time the biggest crypto exchange has gone down, right,

I mean, like this is a recurring story. It's a sad and embarrassing story and it's you know, I do think that people you know, in twenty two would say that there is a that crypto has been more institutionalized and like the days of the biggest exchange going down because it was act or over, not that this one went down because it was that, but still and this feels like a throwback to the battle days. But um, you know, in the Battle of this people were still

bullish on crypto. They you know, turned out to be right, right, I mean, like people who but bitcoin after mout Cox Coops did find uh. I don't know, I don't know. I think it's a real step back for institutionalization. I think it is like you know your question earlier, like it's just hard to know, like what the what the just like future mechanical processes for like having a crypto trading ecosystem where like I think trust and centralized exchanges

has gone way down. I think like the thing to replace that is either decentralized exchanges or like regulation, and I think neither of those are kind of ready for prime time. But I don't know. If you're twenty two and you like crypto, I suppose you can still be

bullish on crypto. But I will say, if you're twenty two and you like, there's a good chance you're like working at FDx right now, because they're all like children, and what kind of frustrates me, Like, I know that they were like twenty to thirty actual children, but I'm very old and he's seven, exactly. It's good to laugh. I'm almost thirty myself. I like to think that maybe I wouldn't have come up with an eight billion dollar hold, but I don't know. Maybe I would have gotten over

my skis in the exact same way. It's really easy to judge from the sidelines, you know. Like one thing in financial markets is that people who are older have just seen more cycles and sort of like have a better sense of what can go wrong. I mean in theory, right, it's not always true. But another thing is like, no one's seen any cycles in crypto, right, Like everything encrypto is kind of happening for the first time. I think that entirely have been cycles, but it's like, you know,

it's kind of all happening for the first time. And so on the one hand, that means that the young people are just as much as the old people at the other end, it means that there's a lot more things can go wrong, right, coming up more with Bloomberg reporter Villdanna Hirich and Bloomberg opinion columnist Matt Levine. Can I just say my whole family loves you. I know you know that this is credit podcast. That's that's really nice to hear. Um, I've, I've how much are we

sharing on this podcast? Everything? I know this in part because I talked to your dad on the phone on our way to a crypto hang out. Yeah, I was there. I was there. Can we talk about the I remember it all too well. We can call him out now, we can call him right now, if you can. We talk about the fact that we did to crypto drinks last Thursday before the bankruptcy. But that was really remarkable. That felt like drinks at the end of the world. I don't know. It wasn't a bunker, but it was.

It was in a cellar. It just felt where in downtown Manhattan. It felt like everyone thought it was stunned. I don't know, like out of blank faces. Yeah, at the end of the world. It's like they'll be when they listen to this. Yeah, Okay, let's sober up. Let's tie a ball on this. Matt, what is your best guess what crypto looks like down the road? Where do we go from here? What's the takeaway? I think it's

really hard to know. I think that, you know, the original promise of crypto is sort of like getting away from trusting centralized institutions and putting your trust in like the code or the blockchain or decentralized exchanges or whatever. I think that what we've learned over the last year certainly is that people really want to trust and centralized institutions. That's just like more efficient, it's easier, it works to

how you can have a functioning financial system. But over and over again this year you've seen that that trust has been misplaced. Uh. So I don't know where we go from there. I mean, the way that all other centralized intermediaries work is some combination of transparency and regulation, right, And you can imagine something like that coming to crypto. I mean, is bizarre that that publish its balance sheets? Right? Uh?

And it is sort of reasonable that fd X tried to avoid US regulation by being in the Bahamas, because you know, US regulation of crypto is this sort of not great, but um that in hindsight that looks terrible and the more regulated exchanges do a little better. Uh So, I think that part of the answer is, like, there are ways to make trusted intermediaries more trustworthy, and you could do some of them. You could have transparency and regulation and sort of oversight boards of directors and things

like that. Um, but that's not the answer that everyone in crypto wants to hear, right, And I think this will continue to be a boon for people who want true decentralization. Some of that is you know, decentralized exchange people and people and defy who say that centralized finance is bad and should use defy where you can trust

the code rather than intermediaries. Some of it will be bitcoiners, right where like the bitcoiners are like all of this stuff here, this stuff is all just like the opposite of the point of crypto. The point of crypto is just bitcoin, hard money, no leverage, no trust than anyone, just you and your keys, you and your keys. And that's like, you know, unsatisfying if you're on a hedgehune and you want to be like trade and stuff all the time. But like I don't know it kind of

comes out of this looking I think relatively good. This was the best thing that ever happened to me. I don't know about you, vill Donna. This is pretty fun Matt Levin show. I've never heard a better. Um. All right, great, Matt, thanks for joining us. Thank you, Matt. You can find more of all Donna, Hi, Rick and Matt Levine's work on the Bloomberg Terminal and on Bloomberg dot com. For more, be sure to check out our twice weekly newsletter, Bloomberg Crypto.

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