Big Tech Stories of 2023: Crypto Competitors and Crime

tech are you. As we close out twenty twenty three, I'm looking back on big stories of the year, and one of those is, of course, the legal downfall of one Sam Bankman Freed aka SBF, co founder of a couple of cryptocurrency companies, and following his come upance was that of his rival Chong Peng Zhao aka CZ, founder of Binance, that's the largest cryptocurrency exchange in the world. The two stories are interesting for many reasons. They are

somewhat interconnected, so we're gonna take a closer look today. Also, we'll talk about the having of bitcoin, as in HA l v G, they're having a bitcoin. It's something that a lot of cryptocurrency journals are attempting to explain because it's coming up in twenty twenty four, and it's probably something that a lot of cryptospecific journals are trying to explain in an effort to prevent folks from getting the

willies about investing in cryptocurrency. Because As I've said a lot of times, the thing that makes cryptocurrencies valuable is that people treat it as though it is valuable, and if folks start to doubt that it's valuable, it loses value. So there's a big incentive to reassure folks. But first let's talk about crime. So we're going to start with SBF and his companies Alimta Research and FTX, or I guess I should say his former companies because they stopped existing.

So he co founded Alameda in twenty seventeen and then co founded FTX in twenty nineteen. Alimta Research was a trading firm, but instead of stocks, it'll allowed customers to invest in cryptocurrency itself. FTX, on the other hand, was a cryptocurrency exchange. So Alameda you might invest in a company that deals with cryptocurrency, and in FTX you could exchange one form of currency for another, and you could also trade in things like cryptotokens and their derivatives like

in fts for example. The two companies were meant to be distinct, but would turned out that they were very much not treated as being distinct. So, like a lot of crypto exchanges, FTX minted its own in house tokens. They were called FTT. The company could award FTT to investors and to customers, and they could hold on to FTT, or they could use it to trade for other types

of cryptocurrencies. One big investor in FTX was a competing cryptocurrency, that of Binance, So Binance held millions of dollars in ft T he tokens. By the autumn of twenty twenty one, ftx reached evaluation of twenty five billion with a b dollars, and SBF himself reached the status of billionaire. So for those of you who indulge in Shotenfreida, make yourselves real comfy, because he's going to have an alarming fall from grace.

In twenty twenty two, cryptocurrencies in general experienced a significant drop in value. Bitcoin, which at one point had traded at a high of around sixty thousand dollars per token, was down to somewhere around twenty thousand dollars. Other crypto companies faced bankruptcy or dissolution as the value was dropping out of crypto for the time being, and SBF made kind of a name for himself by bailing out several

companies that were in trouble. As it would turn out, this would only delay the existential crisis that those companies were facing. In November twenty twenty two, the website Coin Desk published a piece that would be the beginning of the end for FTX, Alimator Research, and SBF himself. The site published a leaked balance sheet from Alimator Research that showed it was relying heavily on FTT, the house token

of FTX. This is kind of like saying everyone believes that you're a millionaire, but then it turns out that your vast wealth is actually just a whole bunch of little slips of paper upon which you have written one million dollars. It's kind of like an emperor has no clothes moment. And it also seemed to indicate that Alimator Research was leaning very heavily on FTX, and that in itself raised a lot of red flags. Binance, led by Chung Pang Xiao, you know, cz because these guys love themselves.

Some initialisms said that Binance was going to sell off its holdings in FTX, so it was going to sell off all of its FTT tokens. Following that FTX customers in general start to withdraw their money from the exchange, and like in a couple of days, it reached six billion dollars worth of withdrawals, and it became somewhat clear that FTX wasn't going to have enough money to cover all customers' funds that were supposed to be in it.

CZ said that finance would swoop in and bail out FTX, and then literally one day later essentially says just kidding and backs out of the promise. Three days after that, FTX filed for bankruptcy protection and SBF resigned as CEO. As a part of that, John J. Ray the Third, who is something of an expert when it comes to liquidating companies to retrieve as much value as possible to

deliver to stakeholders, enters the picture. He takes over FTX and it begins to investigate what happened and what could be done to salvage whatever value remained. December twelfth, twenty twenty two, saw SBF arrested. At the time, he was in the Bahamas, which served as the headquarters for FTX,

and he faced charges of fraud and conspiracy. He would be extradited to the US on December twenty first, twenty twenty two, and he would make his first appearance in federal court on December twenty second, and then would be released on a two hundred and fifty million dollars bond. Just a little reminder that folks like SBF live very different lives from compared to the rest of us. Anyway, He then goes to his parents' house in California, where

he is entered into house arrest. This brings us up to this year, so SBF would not actually go to court and enter a plea until early January twenty twenty three, and then he pled not guilty. The judge scheduled his trial for October twenty twenty three. SBF then went on to write a blog post and claimed that none of this was his fault, that really the collapse of FTX and Alimated Research were due to problems in the crypto market in general, and that FTX was overextended but it

wasn't doing anything illegal. Essentially, he was denying everything. Meanwhile, several Alameda and FTX executives or former executives, including SBF's own ex girlfriend, pled guilty to charge as a fraud and conspiracy, and they said essentially, oh yeah, no, no, we were toats doing illegal activity, and we knew about it, and we talked about it with each other. This, as you might imagine, didn't do much for SBF's own defense.

On August eleventh, twenty twenty three, a US district judge reprimanded SBF on charges of witness tampering, so SBF's detention would no longer be house arrest because the judge had determined there was probable cause to suspect witness tampering. The judge remanded SBF to the Metropolitan Detention Center in Brooklyn, New York. I'm sure this was a shocking change of venue for him at the time. On October third, twenty twenty three, the trial began, and on October twenty eighth,

SBF would take the stand. His testimony and behavior were not seen as being particularly helpful to getting a not guilty decision from the jury. He was called out multiple times for lying on the stand, and by this point the details of the Alameda FTX situation were much better understood than they were in the wake of the immediate crisis, So a big part of what was going on appeared to be that FTX sent funds to Alameda to help cover investments that had failed, so making sure that Alameda

Research didn't go under. The problem was the money that FTX was funneling to Alameda technically belonged to ftx's own customers, and FTX didn't alert them or get permission for the transfer.

And that's a big old fraud issue. So what was the best guess was that the folks at FTX thought, well, for the time being, let's cover Alameda's debts with FTX money from FTX customers, and then we'll return the money once Alameda recovers, and no one will be the wiser, and as long as no one asks for their money will be fine. Because we can't give everyone their money back because we don't have it anymore, we gave it

to Alameda. On November two, twenty twenty three, a year to the day when Coin Desk published that damning report on FTX and Alameda, SBF had to face the jury. It took the jury less than five hours to find SBF guilty on seven counts of conspiracy and fraud. SBF faces sentencing this coming year on March twenty eighth, twenty twenty four. So he's been found guilty, but his sentencing

won't be until March of twenty twenty four. His legal team actually try to have that sentencing delayed, but the judge had none of it and said, nope, it's going to go forward as planned, and SBF could face a maximum sentence of one hundred and ten years in jail. Now. I don't think anyone expects him to get the max, but the general consensus is that, unlike a lot of his fellow wealthy criminals, including one we're going to talk about after the break, he may face significant jail time.

And we're talking about time that's measured in decades, not in years. And it is possible that the judge could throw the book at him and give him the maximum sentence because SBF was found to have light on the stand in court and judges typically don't really like that very much. All right, So that gets us up to speed with SBF. We're going to take a quick break. When we come back, we'll switch gears and talk about CZ. All right, we're back. It's time to talk about CZ.

And as I said earlier, his company Binance is the largest cryptocurrency exchange in the world and it's not even close. According to coin market Cap, Binance has a daily trading volume of around eighteen billion dollars per twenty four hours. In second place is an exchange called ueex, which has nine point six billion dollars per twenty four hour period, So Binance is almost twice as large if we just

go by trading volume. Now, there are other metrics we could use to measure how big a cryptocurrency exchange is, but generally speaking, Binance is the largest and everyone else is just fighting for second place. So what's the legal issue with CZ and Binance? Well, it largely deals with how CZ was pretty careful to locate Binance outside of US jurisdiction and then get up to some shady business.

In fact, it's a little bit of a mystery as to where Binance proper has its headquarters at any given time, because it has bounced around a bit. There is a US based version of Binance, one that actually has a more narrow list of features and opportunities in order to be in compliance with US law, So technically speaking, American citizens are only supposed to be able to access the US version of Binance, which in itself is not the

full version of finance that everyone else can use. However, it was an open secret that if you had the money and the connections, you could engage with the quote unquote real binance, even if you were an American citizen. As Orwell might have put it, All Americans are created equal, but some are more equal than others, all right. So US authorities had serious concerns about binance, and those date

back many years. There were concerns like money laundering, fraud, violating international sanctions, illegal money transfers, and stuff like this. Because a lot of criminals, such as say black hat hackers, will use cryptocurrency as their preferred way to be paid and to store wealth, and because CZ positioned binance in a way so it was beyond reach of US authorities, they worried that binance was playing a vital role in

criminal activity. It doesn't do you any good if you make a whole lot of money illegally, but then you don't have any way to spend that money. You need a way to realize the value of your ill gotten gains without being tied to how you got that money in the first place. So you need some sort of money laundering. You know, maybe you're funding illegal activities overseas. You need to get a way to get that money

over to your destination. Like there are lots of issues with handling money if you are involved in criminal activities, and US authorities were concerned that Binance was making it easier for the criminals to do that kind of stuff. So the authorities had started to investigate Binance all the way back in twenty eighteen, but it was really this year twenty twenty three when things started to come to

a head. So in March twenty twenty three, the US Commodity Futures Training Commission or CFTC brought civil charges against Binance. They accused the company of deliberately failing to put anti money laundering measures in place and thus effectively allowing money

laundering to take place on the platform. Then, in June twenty twenty three, the US Securities in Exchange Commission or SEC brought thirteen charges against CZ and Binance, accusing them of securities law violations, and not to be outdone, the US Department of Justice brought criminal charges against Binance and CZ in late twenty twenty three. These charges include the failure to institute any money laundering practices and that Binance played a pivotal role in dark web operations, acting as

a sort of clearinghouse for ill gotten gains. On November twenty first, twenty twenty three, CZ and Binance entered a guilty plea to the charges. As part of this deal, CZ would step down as Binance CEO. He also is ordered to pay a fine like two hundred million dollars in fines, and he faces time in prison, but his maximum sentence is one century less than what SBF could face. SBF could receive up to one hundred and ten years

in a sentence, but CZ the max. It's just ten years, which is wild right because SBF was found guilty of fraud and conspiracy. CZ pleaded guilty to charges that essentially said he allowed massive criminal activity to happen across his platform, activity that potentially ranges from ransomware hackers to arms dealers, to terrorism to human trafficking. And he faces ten years

versus SBFS one hundred ten years. What a world anyway, Finance itself will have to pay a fine of four point three billion with a B dollars, but it will still continue to exist just without CZ as CEO. So the sec case that one's still pending, so we're not out of the woods yet. There could be even more charges and penalties laid down before it's all said and done.

Now that wraps up our look on binance. Let's now spend just a couple of minutes talking about bitcoin, having so part of the design of bitcoin involves how new bitcoins come into existence. Technically, computers that are connected to the Bitcoin network are competing with each other to mine the next batch of bitcoin that then get released into circulation.

There's a finite number of bitcoin that will ever exist, which is twenty one million bitcoin, and in an attempt to control the release of the currency into circulation, the amount awarded per block mined in the bitcoin blockchain will change over time. Essentially it gets cut in half every four years. The number of release bitcoin will reduce by half each time this happens. And when bitcoin first lawn, if you were successful in mining a block on the blockchain,

you would receive fifty bitcoin. Now that's worth a fortune today, but back then bitcoin was worth very little, like fractions of a penny, so it wasn't really seen as a lot when it was first launched. These days, that's a huge amount of money, right, But after the four years of folks mining bitcoin in the early days, the amount

then reduced to twenty five bitcoin per successful mining. Then we get down to twelve point five bitcoin, then most recently, in fact, currently it's six point to five bitcoin per block. Mind this actually reminds me of the paradoxical thought experiment. Let's say that you're in a room and there's a door on one end of the room, and you take a step toward the door, and then you take a half step, then you take a quarter step, and so on, so you half the distance you travel with each step forward.

You're always moving forward, but you never reach the door. That's kind of similar to how bitcoin releases happen. It's not exactly the same, it's not truly apples apples, but it's close anyway. We'll leave Zeno in his dichotomy behind for the moment. As a record this, the value of bitcoin stands at a little more than forty three thousand dollars per coin, which means if you were to mine the next block, you would get six point two to five bitcoin, which means you would have more than a

quarter of a million dollars worth of bitcoin per block. Mind. This is what drives the insanely competitive bitcoin mining community, as the same community known to consume more electricity than some countries managed to do in a year. It's because mining one block nets you about a quarter of a million dollars and a new block is ready to be mined every ten minutes. That's a huge incentive to get

involved in bitcoin mining. But next year the number of bitcoins awarded will have again down to three point one two five, which means, let's say that the value coin remains the same, it's still at around forty three thousand dollars. If you mind a block, you would receive the equivalent of one hundred and thirty four thousand bucks and some change. It's still a princely sum for ten minutes of work, but it's a huge drop from a quarter of a million dollars, and so there are now questions as to

how this might affect bitcoin. Will miners get discouraged and drop out, Because to be competitive in bitcoin mining, you have to run very sophisticated and very expensive computer networks to be in the running. Otherwise you're just going to lose out to someone who's got a faster computer system than you. Do. Will they drop out because now the amount of money rewarded will be less, and so it'll be harder to sustain the mining operation. It just won't

make a sense from a return on investment perspective. Or will new miners come in with less powerful rigs and then fill in the gap and thus keep the thing running at more or less the same pace, but now with less computer power dedicated to it. It's hard to say. Will the value of bitcoin fall and thus once it starts to fall, it disincentivizes even more people from participating. Well, here's the truth of the matter. No one really knows yet.

There are still folks who say that bitcoin will hit one hundred thousand dollars per coin before the end of this year, and we ain't got long left. By the time you listen to this. The year is ending, and I would be shocked if it went up in value by sixty grand by the time this episode publishes. So we'll see anyway. That's the wrap up on SBF on CZ and they're legal woes as well as the upcoming

having of bitcoin. We'll see where things go. You know, it's so hard to determine where things are headed with cryptocurrencies, but I remain skeptical of them in general. But you know, I'm a grouchy old man, so that's always going to be the case. I hope you all have a happy New Year. I hope you're healthy and say and surrounded by loved ones. And I'll talk to you again really soon.

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