FTX collapse ‘worse than Theranos, worse than Madoff,’ expert says — Transcript

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1. 0:02Well, let's continue the discussion with
2. 0:04our panel here, John Reed Stark. He's
3. 0:06with Duke University's Law School. Anil
4. 0:08Mitra, he's former senior special
5. 0:10counsel for digital assets and
6. 0:12blockchain technology at the SEC. And
7. 0:15gentlemen, good to have you both on.
8. 0:17John, I'm going to start with you
9. 0:18because I know you have been very
10. 0:19critical about just the wild west as you
11. 0:23have described it in the crypto space.
12. 0:25It's worth mentioning the numbers again
13. 0:27here. I mean, we're talking about a 32
14. 0:29bi- billion-dollar valuation earlier
15. 0:31this year. Uh they're now trying to
16. 0:33cover a shortfall of $8 billion. How
17. 0:36much of what's playing out right now is
18. 0:37FTX specific? How much of this is a red
19. 0:41flag for the space overall?
20. 0:44How can you even know? You know, you
21. 0:46called it the wild west. That's really
22. 0:48an understatement, Akiko. It's it's
23. 0:51walking dead-like anarchy. There's no
24. 0:54regulatory oversight, no consumer
25. 0:56protections, no licensure, no insurance,
26. 0:58no net capital, no transparency, no
27. 1:00sunlight. We have no idea what's going
28. 1:02on inside of these entities. And if SBF
29. 1:06is actually using Alameda, which all of
30. 1:09the allegations seem to be leading to,
31. 1:11as his personal piggy bank for whatever
32. 1:13he wants to use it for, this is very
33. 1:15serious because you're not just talking
34. 1:17about SEC violations. Right now, the
35. 1:20Department of Justice is getting
36. 1:22together. I was just at the FBI on
37. 1:24Friday in a big meeting just relating to
38. 1:26some general concerns about cyber and
39. 1:28crypto. And these people are all
40. 1:30mobilizing right now. Search warrants,
41. 1:33arrests, all of those things are going
42. 1:34to happen very quickly. The
43. 1:36whistleblowers are mobilizing. The
44. 1:38informants are mobilizing because
45. 1:40they're seeking immunity. This is worse
46. 1:43than Theranos. This is worse than Madoff
47. 1:45if what I'm reading is true. That's my
48. 1:47opinion.
49. 1:48Worse than Madoff?
50. 1:51Yes, absolutely. Because in this case,
51. 1:53you're dealing with all all sorts of
52. 1:56investors, all sorts of Look at look at
53. 1:58these financial entities who had to
54. 2:00write down their entire investments.
55. 2:02These are supposed to be some of the
56. 2:03most sophisticated people around who
57. 2:05conducted due diligence on these things.
58. 2:07But due diligence in the world of
59. 2:08crypto, it it's like it's like proving
60. 2:11what a poltergeist is wearing. These
61. 2:13kinds of things you you can't figure
62. 2:15them out. Look at Some of these
63. 2:16companies, you don't even know where
64. 2:17they're headquartered. You don't even
65. 2:19know who works there. They're not
66. 2:20There's absolutely no transparency. And
67. 2:23the contagion is quickly rapidly
68. 2:26spreading amongst all of the various
69. 2:29crypto ecosystem. And that's a serious
70. 2:31serious problem for anybody who's doing
71. 2:33anything with crypto. I'm sure the SEC
72. 2:35will be sending teams of examiners to
73. 2:37all of these regulated entities to find
74. 2:40out exactly what their exposure is if
75. 2:43there is any. And the enforcement of it
76. 2:45is probably standing down while the DOJ
77. 2:48is doing their criminal investigation,
78. 2:49which might involve informants and and
79. 2:52search warrants and arrests. And the SEC
80. 2:54can't really interfere with that. And
81. 2:55they don't want to get situations where
82. 2:57you're taking testimony from by two
83. 2:59different uh governmental entities.
84. 3:02Uh Anil, you know, you're a former
85. 3:03insider at the SEC. And I'd be curious
86. 3:05to get your take on the impact here to
87. 3:07customers. We've got this banner here on
88. 3:09the screen. Obviously, the SEC, the CFTC
89. 3:12now investigating FTX's handling of
90. 3:14customer funds. We know the FTX halted
91. 3:16withdrawals of fiat currencies as well
92. 3:18as crypto.
93. 3:20I mean, what what kind of protection is
94. 3:22there in place right now for those
95. 3:24customers who are saying, "How do I get
96. 3:26my money out?"
97. 3:28Not a whole lot. And I will echo John
98. 3:30here. I think that this is a a disaster,
99. 3:33especially for retail customers. And you
100. 3:35know, Chair Gensler of the SEC has said
101. 3:38on multiple occasions that he thinks
102. 3:40that these platforms need to be
103. 3:41regulated like national securities
104. 3:43exchanges. He's expressed concerns about
105. 3:45how they handle custody. He's expressed
106. 3:47concerns about, you know, whether they
107. 3:49have protections in place. And if you
108. 3:51were setting up a hypothetical to prove
109. 3:53him right, you couldn't do better than
110. 3:55what what has sort of just happened with
111. 3:56with FTX. So, you know, there are
112. 3:59questions here regarding
113. 4:01whether FTX and its sister firm Alameda,
114. 4:05as David just discussed,
115. 4:07whether there there's been whether there
116. 4:09have been sort of
117. 4:10flows of funds between them that that
118. 4:12that perhaps shouldn't have taken place
119. 4:14or that are questionable.
120. 4:16you know, there there
121. 4:17there are questions around whether cus-
122. 4:19customer funds have been have been used,
123. 4:21whether customer funds have been moved
124. 4:23out of custody. And if actually, if you
125. 4:24look at FTX's terms, they say pretty
126. 4:27clearly, you know, for the standard FTX
127. 4:30sort of retail trading product, I think
128. 4:32the the terms say pretty clearly that
129. 4:34customer funds are customer funds. They
130. 4:35can't be moved without customer
131. 4:37permission. And you know, so there are
132. 4:38going to be questions raised around
133. 4:40whether the terms were sort of complied
134. 4:43with in in this case. So, a lot of the
135. 4:45protections that people have were
136. 4:47contractual. They had terms of service
137. 4:49with with sort of that they signed up to
138. 4:51with FTX. What happens if those are
139. 4:54violated? You have a breach of contract
140. 4:55against against an an institution that's
141. 4:58basically could be looking at
142. 4:59bankruptcy. So, you you you just don't
143. 5:01know how strong those contractual
144. 5:03protections are. In terms of federal
145. 5:04protections, I mean, until you have
146. 5:06until you're a registered national
147. 5:07securities agency, you don't have a lot
148. 5:09of protection. You you might have
149. 5:11protections in terms of fraud where the
150. 5:13DOJ can come in, but you're not really
151. 5:14under the SEC umbrella.
152. 5:16Uh Anil, we had a guest on yesterday, um
153. 5:19Peter Tchir from Academy Securities, who
154. 5:20said that he thinks this is going to
155. 5:22trigger a bit of a land grab from
156. 5:24regulators as to what should be defined
157. 5:27as securities. And I wonder if you take
158. 5:29that thesis, how much of this could be
159. 5:31avoided could have been avoided if, you
160. 5:35know, crypto, you look at some of these
161. 5:37exchanges, they had all fallen under the
162. 5:39same kinds of regulations that are
163. 5:41applied to securities?
164. 5:43Let's let's take that. Let's break that
165. 5:45down. You know, I think that when you
166. 5:47look at exchanges and broker-dealers,
167. 5:49I've been writing since like 2017 that
168. 5:51they should have to register with the
169. 5:53SEC like everyone else. And it as Neil
170. 5:56said, these people are now they're not
171. 5:57customers. They're they're going to
172. 5:58become unsecured creditors. Now, I
173. 6:00worked in the Division of Enforcement
174. 6:02for almost 20 years, 11 years as chief
175. 6:04of the Office of Internet Enforcement.
176. 6:06And I can tell you the SEC has brought
177. 6:07over 100 cases, and they haven't lost a
178. 6:10single one in the area of crypto. And
179. 6:12they've been very very aggressive in
180. 6:14enforcement. They've hit experienced
181. 6:16incredible criticism for doing so.
182. 6:18Hester Peirce, the one of the
183. 6:20commissioners, they call her the crypto
184. 6:21mom. The SEC brings a case against
185. 6:23BlockFi. Hester Peirce then announces
186. 6:25her dissent. The SEC forms a crypto
187. 6:27unit. Hester Peirce says this is
188. 6:29regulation by enforcement. The SEC has
189. 6:32been regulating the marketplace, has
190. 6:33been shouting from the rooftops what the
191. 6:35law is. And just just yesterday, case
192. 6:38came down in New Hampshire where a
193. 6:39federal judge said
194. 6:41to one of the crypto defendants who
195. 6:43claimed that they hadn't received fair
196. 6:44notice of the of the SEC rules and
197. 6:47regulations, that that defense was
198. 6:50useless, weak, pathetic, absurd, and not
199. 6:53and wholly dismissed. So, I think the
200. 6:56SEC's been very active here, and they're
201. 6:57going to get more active. My view is
202. 6:59they're going to sue more of these
203. 7:00exchanges, probably again, in my
204. 7:02opinion, starting with Coinbase.
205. 7:04Anil, you agree?
206. 7:06Yeah, I think I I largely agree. The SEC
207. 7:08has been has been aggressive in
208. 7:10enforcement. It it's sort of said
209. 7:12outside of the enforcement context, it's
210. 7:13talked about how it needs to
211. 7:15go after these exchanges and and make
212. 7:17make make sure that they're sort of
213. 7:18registered. But you know, what
214. 7:20enforcement is a whack-a-mole problem
215. 7:22because, you know, you take it takes
216. 7:24years to build a case against a sizable
217. 7:26entity like an exchange. And you know,
218. 7:28you shut one down, there's still 100
219. 7:29more operating. A lot of the money just
220. 7:31gravitates over to the to the next
221. 7:32exchange. So, enforcement is a powerful
222. 7:34tool, but enforcement has its
223. 7:36limitations. And so, you know, really
224. 7:38there's going to have to be a question
225. 7:39here whether Congress or or one of the
226. 7:42regulators or someone steps in to
227. 7:44essentially just make sure that there's
228. 7:46umbrella regulation of of all of these
229. 7:48platforms that are trading crypto.
230. 7:51Uh finally, John, um
231. 7:52you know, as we're watching what's
232. 7:54playing out with FTX, there is a
233. 7:55question of
234. 7:57confidence in the system that exists
235. 7:59right now, confidence in the other
236. 8:01tokens. I mean, what's the next shoe to
237. 8:03fall here? How big is the contagion
238. 8:05effect?
239. 8:07I think it's larger than the one we
240. 8:08experienced in July, Akiko. I really do.
241. 8:11Because again, it's it's amazing the
242. 8:13cycle of news. Within 24 hours,
243. 8:16SBF goes from from rescuer to rescued to
244. 8:20potential global fugitive. You know, so
245. 8:23it's it's happening very quickly. It's a
246. 8:26matter of trust. There's never been a
247. 8:28lot of trust. Most of Most of what um
248. 8:31keeps props up cryptocurrency is just
249. 8:34the greater fool theory. There's no
250. 8:35intrinsic value there. There's nothing
251. 8:38There's no fundamentals. There's There's
252. 8:40no balance sheets. There's no account
253. 8:42statements. There's nothing. It's just
254. 8:45a mathematical computational blather.
255. 8:47It's just computer code. And this
256. 8:50glorified append- append-only limited
257. 8:52writer spreadsheet is not some kind of
258. 8:54global panacea. So, it's really no use.
259. 8:57Crypto doesn't really function well as
260. 8:58an investment because it's just the
261. 9:00greater fool theory. You're not basing
262. 9:02it on any actual
263. 9:04um information. And it doesn't function
264. 9:05well as a currency. It's far too
265. 9:07volatile. There's many too many tax
266. 9:09consequences. There's going to be
267. 9:11extraordinary reporting consequences
268. 9:12associated with it. It The only thing
269. 9:15crypto does really well is provide a way
270. 9:18for criminals to commit horrific crimes
271. 9:20like ransomware, murder for hire, drug
272. 9:23dealing, terrorism. A report just came
273. 9:25out yesterday about how Russia's using
274. 9:27crypto for um
275. 9:29its various
276. 9:31nefarious activities. North Korea's
277. 9:32using it to build nuclear its nuclear
278. 9:35weapons arsenal. So, I I don't see
279. 9:37anything except the the the killer app
280. 9:39for criminals.
281. 9:41Yeah, John and Anil, I get the sense
282. 9:42that we could be talking about this for
283. 9:43another hour. We will have to have both
284. 9:45of you back on the show, but do
285. 9:47appreciate your insight today. John Reed
286. 9:49Stark as well as Anil Mitra.