Let's talk about f t X, which has brought the specter of fraud into this business cycle, and the question now whether f t x it's downfall was due to incompetence, too much risk, well flat out fraud. To talk about this some more, we've got Edward Harrison, he's at Bloomberg senior markets editor who's been writing a column about this topic. And and I know you make an observation that stuff like this typically happens towards the end of cycles. Can
you tell us more, Yes, Paul, thanks for having me. Uh. It is interesting that when you look back at most of the major business cycles, including the Great Depression, that the large frauds happened very near the end. That is, that the large institutions that had the veneer of respectability, but underneath uh, fraudulent activity was occurring. They didn't go bust. The fraud wasn't uncovered until all of the red hikes had been through. Uh, the economy potentially had gone through
the ringer. It was right at the end that the fraud was uncovered. I'm wondering if there is an analog here that would help us understand the magnitude of this. I mean, is the Birdie made Off scandal in any way um analogous to what we're seeing play out in the ft X story. Yeah, I mean it's it's it's to be determined whether it was in competence, fraud or or or what have you. People talking about Lehman Brothers uh and made Off as the two parallels that they're
most likely thinking about. I actually looked back at Ivra Krueger from nine to thirty two. He was I thought, I think of him as more of an analog in terms of here was a business that was a very real business. It was doing well, but when the whole economy hit the skids, Uh, the the manager Ivra Kruger, the owner of the company, turned to fraud, and eventually it was uncovered and he took his own life in two. So the parallel here is is that f t X
was a real company. It was If they had stuck to their knitting and engaged in exchange activity rather than loaning money or acting in a u a untoward way with an affiliated company, they would still be around. Is this perhaps a different case though, because the crypto world is somewhat opaque, there's very little regulation, and there's another old saying there's never just one cockroache, right. I would
agree with that. Another place where um, the Swedish match king was very similar to what's going on today, is the lack of regulation. Price Waterhouse back in the day looked at the books when they had a chance to do so, and they said, anyone with any sort of rudimentary accounting no, that these books are completely fabricated, fraudulent.
The poor record keeping, the lack of of a regulatory structure to make sure that this company had good accounts is very much something that would not have happened in it more highly regulated banking industry, or even within the
United States outside of the banking industry. I remember in the kind of the late nineties when the guys and traders over at Enron were held in such high regard, nobody could figure out what was going on at Enron to the degree that the company was able to um create those enormous returns, and then the bloom came off the rows, so to speak. It was a spectacular unwind there. I mean, do we think that it's going to arc
in the same way in terms of prosecution? Is there going to be I know you're talking about the lack of regulation, but there has there been the kind of violation of law where we would see kind of aggressive prosecution of this case. Yeah, I think that we're at the point, the discovery point. Uh. The new CEO of f t X has said that the accounts are very terrible. He was also the man who was responsible for cleaning
up in Ron. Uh. What we know now is is that there was sixty billion dollars of collateral according to Sam Bankman Freed that went down to nine billions. We know that they engaged in a non armed length relationship with the affiliated Alameter Research, which Sam Bankman Freed also started. So there are a lot of things that have happened that would suggest that, at a minimum, we're going to
see some prosecution. If you think back to the two thousand and eight scenario, we had Lehman Brothers with Countrywide Financial, with Angelo, Mozilla, both of those companies, there was an attempt to find out whether there was malfeasans but ultimately, uh, no one went to prison in those cases. So we can't really say at this point other than it's very
likely that we're going to see prosecutions. Yeah, there are according to the US bankruptcy called fifty unsecure creditors owed more than three billion and SOGG there's an awful lot more unsecured creditors out there. How long is it going to untangle this mess? And how bad does it does it look? It is a good question because today in the bankruptcy proceedings, the creditors were not named. They did not want to be named. I would imagine part of
that is because they're involved in the same business. And once it's learned who they are, and there were the top ten creditors had nine figure credits with with f t X, people will then start to wonder whether these individuals, these UH organizations have problems themselves. And what do you think the reputational damage HIG is to the entire crypto space as a result of this. I think that the
reputational damage is tremendous. It means that it can no longer be seen as an adjunct to the regulated banking system, that it's not something to get involved in unless you're a true believer. No one who is mainstream and certainly not institutions will want to touch this with a ten foot barge pole. Yeah. Crypto, once known as Digital Golden New payment system, a replacement for cash having underlying blockchain technology? Is this technology and an answer in steach of a question,
just quickly, I think it is. It is. Uh. We have yet to see the killer app, so to speak. There's no applicable usage of blockchain technology thus far that would bring it into the mainstream. And that's the biggest problem alright. Edward Harrison, Bloomberg Senior my gets editor, writing a very fascinating column about the downfall of f t X. Recommend you read that on the Bloomberg terminal