How We Rebuild with Jesse Powell of Kraken Exchange

welcome to bankless where we explore the frontier of Internet money and internet Finance this is how to get started how to get better how to front run the opportunity this is Ryan Sean Adams I'm here with David Hoffman and we're here to help you become more bankless bankless is on the mind today certainly in the events of FTX the total collapse of FTS X we wanted to get the thoughts of an exchange operator Kraken Jesse Powell is on the podcast today he's been a long time crypto OG and exchange

operator who co-founded Kraken back in 2013 2014 sometime in that time frame and he gives his raw unfiltered thoughts on what happened with FTX why it happened the red flags we should look for in the future and some wisdom Insight he also gives some advice in terms of how we can move forward it's really refreshing David for me to hear from Jessie at this point in time he's seen it all including the mount gox days and he reflects on what this means for

the future of crypto and he also gives a pretty good lesson about proof of reserves and Kraken is of course the exchange that I think implemented proof of reserves first and importantly voluntarily uh not after FTX imploded but before and so I think Jesse and Kraken uh deserve Applause for that fact and I kind of consider them leaders but before we actually needed them and so if you were curious about proof of reserves and how it actually looks like on the Kraken side of things and the

limitations and abilities that proof of reserves uh give to centralized operators then you will also get that lesson in the show guys this is a blitz episode so it's a quick interview format with Jesse Powell we've been doing more of these in the aftermath of the event that just happened uh we hope you enjoy it we'll be right back with our conversation with Jesse but before we do we want to thank the sponsors that made this episode possible the reality today is that five corporations control the the entire world of social media they own our names they restrict our content

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Bangla station we're super excited to introduce you to Jesse Powell co-founder of cracking never been on Bank list before but what better time than now last week was the collapse of one of the largest exchanges in crypto but Jesse Powell he runs Kraken which did not collapse last week Jesse welcome bankless how you doing hey doing well thanks thanks for having me I'm doing great actually relatively speaking uh I've been around for a long time so we've seen a few of these before unfortunately but uh hanging in there how long have you been here have you

been here since the mount gox days uh Jesse were you around then yeah that's actually how I got into the business of running an exchange back in 2011 um Mount Cox got hacked for the first time back in like June of 2011 I had been doing some Bitcoin mining and just like playing around uh with oh my God you said you said for the first time I think some people aren't aware of that right like it wasn't just once Matt Cox got hacked there were multiple times there were multiple times yeah and and that the the final implosion in 2014 was

actually uh the results of an earlier hack maybe even the hack in 2011 uh were some private keys were compromised and that was not noticed and over the course of years uh that wallet was drained as it continued to be top topped up with new client deposits and you know eventually uh that came to be to be realized you know and it was a 600 000 Bitcoin whole at the time so um yeah mount Cox was hacked at least at least

twice um but so anyway yeah 2011 June 2011 they got hacked um I went out to their office in Tokyo to help them out for about a week and a half uh and came away from that whole situation thinking that the industry needed another Exchange probably needed many uh you know it was it was totally it was really terrible for the whole industry you know back then I mean there wasn't really trading happening in other places there was some OTC trading happening but Galax is maybe like you know 95 of all trading that was happening in in Bitcoin at the time and

um they them being offline for a week meant that we had no price Discovery you know Merchants couldn't take it and they're you know there were still a few merchants selling stuff for Bitcoin uh you know like alpaca socks and like other things like that you know back in the day some collectors items now that um you could get for Bitcoin uh so it just kind of shut the whole ecosystem down and um you know I came away from the experience thinking that you know for us if we're going to get to mainstream adoption we've got to develop a really professional Financial Service that is like first and foremost super secure

because obviously Bitcoins are like the best thing you could possibly steal and there's going to continue to be these attacks on on exchanges um so that was kind of like the the whole impetus for like starting Kraken was that you know I thought that my co-founder and I could actually make a good run of that I think the the parallels here are are pretty obvious there's definitely some differences where uh malc Ox was like a technical error where this was a fraud um but yeah I think really the lasting impacts are probably the same um you

know the some of the sort of parallels that I'm seeing is that people post mount gox even people like I remember Andreas Antonopoulos talking a lot about this like we they thought the crypto thought Bitcoin thought at the time like oh this was over that was a fun experiment we're it's dead now uh uh it wasn't dead and no one really thinks that uh FTX this FTX event is really going to kill crypto but even the crypto like people like me and Ryan are just like demoralized as to like how far this is going to set us back in our conversations with Regulators like the

rest of the world kind of is thinking wow is this going to be what kills crypto um and it just kind of goes to to show me Jesse and I want your opinion on this is like damn we kind of forgot about the whole not your keys not your crypto thing uh but that's like the lesson that we we learned out of gox and so maybe this is also going to be the lesson that we relearn with FTX about hey uh it's self-custity is important it's a shame that we have to learn this way we have to learn through pain but I'm wondering like is is that what you kind of see as

like the inevitable Fallout of FTX is like it's just the new age gox for the 2022 year yeah I wonder if we have to keep going through this pain every few years when there's kind of a new cycle of people that come in that have forgotten the last big hack and uh you know end up trusting someone they shouldn't have trusted but they're people that I know that lost a ton of money in FTX that lived through gox and they had just admittedly become

so trusting of FTX because of everything around them that was happening I mean it's almost like this is like a combination of of Madoff and um um uh what's like the blood testing company yeah it's basically like fairness right like they stack their bore like they put all these people around and they're super trustworthy they end up buying all this favor the media completely has their back like irrationally so um investors are just throwing money at them blindly and I think all these

people just got to think wow like everyone else just totally trusts these guys my funds must be like completely safe there like it's just unfathomable that these guys would go down I mean they're making they must be making like jillions of dollars because they're just like you know giving so much money away never occurred to people that maybe they're giving away my money you know maybe they have so much money to give away because they're actually like stealing their clients funds you know for some reason that just like people were worried about the hack you know I think because of gox they didn't consider this scenario where it's like

just explicit theft and this like a real legit you know Ponzi like intentionally so um I think a lot of people were caught off guard by it because of all of the hype and um you know I think it is going to set us back tremendously you know we've we've been working very hard in DC over the last uh you know eight years or whatever yeah to like undo the damage of gox um gox is still not resolved by the way people still haven't gotten their money out of it uh I hope you know some of

that has to do with the particulars of the case it being in Japan um they're being like frivolous lawsuits coming after it but I hope things will go quicker here in the states with FTX um but you know this could be a very drawn out process people could still be feeling the pain from this you know many years from now and we're going to have to continue to explain to regulators why this is a Bernie Madoff situation why is the theranos situation this is not an indictment of uh the stock market or stocks or you know the medical profession or anything like that you

know this is like a specific individual a specific company they could have scammed people with anything they just happened to scam the crypto community and uh we should not punish the crypto Community or blockchain technology or you know the Innovations uh because of of one bad actor who was running a centralized you know Ponzi scheme just just see how I want to get your thoughts on um how we got here how you think we got here and I the reason that's an important question because it's more the context if we uh go back to the the gox

times and we fast forward to today I think there was a massive difference in um perception among mainstream let's call it that yeah the gox wild days where you've got this magic the Gathering exchange and you know people don't know what they're doing it's barely secure and like it just seemed like a joke of a custody uh solution back then there was like no security it was like paper walls around the thing and now today you have FTX and it's you

know serious people in suits uh going in front of Washington DC in Congress right having celebrities endorse them having large investors uh invest in their massive raises right run by a you know I don't know was he on the title of the cover of Forbes was it Forbes or Fortune uh you know this Wonder kind who has come out of like not the OG generation of of crypto but um somebody's really

come at it from a different angle different lens come here to kind of professionalize the industry and there was just this um this trust and part of that trust was crypto's now grown up it's now professional it's not going to lose your funds like in the gox days and so FTX is the exchange that you know everyone should trust how did we get there how is that perception so out of touch with reality you know I think establishing that Persona in building this perception was

just part of the scam all along you know it to have this you know I was always suspect of it like this guy is just like he's just too clean like you know he's just like everything he does is like altruistic and like you know he's donating all this money to Charities and all this stuff and and but what he was saying was didn't didn't line up with me you know like he's calling for regulation against defy and at the same time you know seeking to make that trade like I'll

give you defy if you give me the approval to like you know run this thing in the United States uh you know which is not a trade he had the authority to make or anyone you know I think nobody blessed him in that and obviously there's been a massive pushback in the industry so how did he get so far out uh you know admittedly his strategy had been extremely effective right I mean he gained a lot of awareness a lot of traction obviously he was telling DC what they wanted to hear you know this was like music to their ears oh this

company this guy here he wants to be regulated he's you know he was literally right under their noses running the biggest Ponzi just like Bernie Madoff was you know the SEC had even gone to Bernie madoff's office and investigated them and found nothing uh meanwhile you know it was right there the whole time so you know it seems like if you donate enough money to the right people uh if you align yourself with the right ideology um you get politicians you get the media you get these people to have your back

um despite what your actual interests are and um you know I think from from the industry's perspective you know he said from the beginning that uh he was here to make money he wasn't interested in crypto uh that he was just kind of profit motivated the whole time and you know to me again that's like another huge red flag you know I mean most of us I think are here for crypto you know crypto is is the end goal it's not just like a means to make more money in in the short term while we and then

use that money to donate it to some other cause right like crypto is the thing we're all here to bring to to humanity because we feel like this is going to do for Humanity what you know information sharing did for Humanity with the internet uh so you know for someone to come in and say like crypto's not my goal but I have some other goal which is just to like basically extract as much money as I can out of crypto and then use that for whatever else like you know donating to politicians or you know whatever um you know I I always had red flags there

um it just seemed like you know a person with a Persona that was like kind of too good to be real uh so I think that um you know it hurts it hurts that that someone has been in DC you know basically trying to attack the industry behind closed doors um wasn't working with the industry didn't have the industry's best interests at heart yet at the same time um the industry was just like giving them tons of business so like why would that be and um you know I think it's because they were offering products and services that

that people really wanted but that the the more established players were just not able to offer because of the level of scrutiny that they had come to accumulate over years of successful operation uh you know so like us uh coinbase um you know Gemini the U.S exchanges that have been around for a long time are under heavy scrutiny um you know even saw coinbase they asked the SEC for permission to offer like it was it three or four percent like yield product yeah um you know and they got

shut down like before they could even start it meanwhile FTX is offering the same product with like 10 plus yields offshore uh there's there's nothing really preventing U.S residents from going to use that service uh you know they're doing shoddy kyc they're doing like they're not actually like you know checking your VPN or whatever like you know they basically make it so if you want to do it you can and so people were going there you know it's like too easy to do it and so um you know I think this is a failing of

the regulator and that they prevented a good domestic business from doing this therefore forcing the consumer to go offshore for for what they want at the same time failing to enforce against that offshore operator and uh so you know it's it's a very screwed up situation we we need dramatic reform I think to the laws because I think we can't count on the regulator to actually enforce things fairly um and you know there's certain things that you just can't do in the United States they'll just tell you that's illegal here and no there's not a

license for it so you know in their views it's basically like murder like oh you're asking for a license for murder no we don't there's there's no license for murder so you know you're gonna have to go offshore if you want to murder people so you know and that's basically you know what they say and we'll say look like you know people obviously want this product they're going offshore to get it right now you're not stopping those guys so like you either have to like let us do it and we're happy to be supervised or like go shut down our competitors because right now

um You Know You're basically you've created this situation where you're attacking domestic business these good actors just because out of convenience because they're in your backyard and you know that's literally they will say that they'll say hey like you you're telling us to stop doing this but like these other 20 companies offshore are doing it so what are you going to do about it and they'll say well yeah those guys are all yeah they're kind of hard to get because you know they're in China or they're in uh you know the Bahamas or whatever it's like it's just harder to enforce over there you guys are right here how convenient so you know we're gonna put

some notches on our our belt by going after the easy targets and I think just as a country we need to decide what our national strategy is going to be on cryptocurrency you know and I think it's I think it's a hugely important thing you know I think the U.S largely owns and controls the internet and I think that's that's played out extremely favorably you know we own most of the largest tech companies and I think it could be similar for for crypto but right now it's set up in a way that you

really strongly incentivize to go offshore and um there seemed to be like no consequences for it and um you know at the mean and the domestic businesses continue to suffer under this uh this authoritarian regime that you know both refuses to enforce against offshore competitors and and also refuses to help in any way so I don't have been rambling for a while I don't even know if I answered the original question this is great I've been loving this uh and I think this conversation about this whole drama is really divided into two categories it's

like the external parties that we can be mad about uh SPF being the guy that we should all be furious at he is the con artist but at some point like at this point I'm kind of convinced that Sam's just a sociopath so what's the point of being mad at Sam like he doesn't care uh he sold customer funds in the first place um and then also like Gary Gensler and like the SEC and Regulators like I can maybe we can be mad at them and they are supposed to listen to us uh and I'm happy to go down that that like that

conversation and like unpack like in all the ways that the SEC and the cftc has failed to produce a more friendly environment for safer products on Shore and but those are like the external things those are the extent like we should be mad at them uh and in that sense a talking point that we should Hammer into the regulator's eardrums for the next year until until they give us what we want as an industry but Jesse I'd also like to open up the conversation to like things that we have control over uh because like this is our industry and when there's a rug pull

doesn't matter if it was a sociopath or not it's still our industry and there are some things that I think we can have responsibility over and in your recent tweet thread you talked about the number of red flags that were identifiable and I think post 2022 as this year wraps up to a close um we can see all the red flags that are kind of obvious in hindsight that are ones like that SBF had here that you've uh that you put in this tweet and I'll read it out for the for the listeners uh you list a number of red flags acting

like you know everything after you show up to the battle eight years late nine figures of buying political favor being over eager to please DC huge ego purchases like a nine figure Sports deal being a media darling seeking out puff pieces uh virtue signaling and and ftt of course so these are the big red flags and some of these red flags I think also are shared by the other uh uh criminals of 2022 if you will really the the huge

ego uh is really the thing that stands out to me the most and I'm wondering if you can just like uh these are these are things as an industry we all need to learn these are the flags uh and dokwan has his own favor of Flags uh three arrows Capital had their own flavor of flags but I'm wondering like when you think about like all right what do we as an industry have control over what what can we do better how can we be more prepared next time uh what are your thoughts on on that whole side of the conversation yeah I think it's easy to kind of get

trapped in the thinking of like you just look at one thing in isolation and you're like that's kind of suspicious but man like there's so much other positive stuff you really have to kind of like assemble all of these pieces together and and look at it as a whole in like you know with like these 10 things that are really sketchy like as a whole can I ignore all this or you know is this all just like you know coincidental or something um and I think that was like kind of the case with like FTX and some of these other things too right like you just people see like one thing and like man

like you know well like dokwan's a genius or oh you know Sam's a genius or whatever like they have all these other backers and you know I think a lot comes back to this like the social proof that these guys were able to get because there's so much money involved and because uh early insiders were able to make so much money and and they lent their their reputations to these things and I think it just allowed a lot more retail to Pilot so I mean one thing to look at is just like of the people who have their name on this thing like how much are they up already uh you know did they get some

kind of preferential treatment like were their names just bought or are they in this because you know they're really they paid a fair price and they're really in it for the tech but most of these anything with a token like if you see like a big name VC on it like 90 chance they bought the token at some like 90 discount to the Ico price so all of these red flags you know I think are there um you know I think some people myself included you know I could have called out uh Sam Moore I think you know galwa

Capital called out Luna uh three arrows actually called out Sam you know I think I I think that um you know it's it's tough to take I think another exchange CEOs um you know criticisms like seriously because people will just dismiss it as being like Oh like you're just trying to like kill your competitor you know um and uh you know also like there's there's like the possibility of like you know defamation suit as well right you're like I mean I haven't seen

ftx's books uh and for all we know they might have been totally clean until like six months ago uh you know when maybe he just got like nailed with some Cascade of like uh you know big hits with like Luna and Celsius and all this other stuff um you know so it's kind of hard to know you know like someone might be running a legit operation and then just like blow up uh you know in ftx's case you know another red flag that I didn't have on that list there was you know when we were hearing from

investors so we were talking like the same investors at the same time and these investors were comparing us to FTX and they would ask us you know like hey looks like you guys have you know like your security team is like a hundred people but it looks like FTX is doing so much more than you and their whole team is like 50 people so you know they would look at this and and you know this is like extremely naive and I think these guys are mostly used to investing in like Instagrams and stuff like that not like not companies

yeah definitely not Fort Knox you know and you're and you're like yeah okay you know and obviously like emerging in like 2019 and then catching basically the entirety of the bull market um you know their growth if you look at their chart it just looks like a crazy hockey stick because they just came in right on the floor and just like everything exploded and they were there at the right time they were small enough to skate by The Regulators and do all this crazy stuff and capture all this growth um but you know I used this phrase

before like they basically built a glass Cannon you know it's like you're familiar with like uh video game builds you know like basically it's like all points in like attack and like zero points in defense and so yeah you can go fast when you're like you know 50 guys in a room together just doing whatever like pushing product out with like no Security review no audits no process no controls all of this stuff that you might want um you know from a custodian you know and if you I think most people were

thinking of them as a trading venue but to trade there you have to custody your funds there you know so really I mean first and foremost you should be thinking about like okay I'm going to put my funds here to trade maybe they have all these really great trading features but I have this counterparty risk when I do that I have my funds there and am I going to make enough trading to make up for losing all my money you know when this thing blows up and you know as we've seen that there was like very little very little process

right like I mean I don't have control at Kraken to to move money around uh no one has the ability to move money around like secretly you know everything requires like multiple signers there's just audits happening all the time there's systems like reconciling things all the time uh you know this this but this would have been possible uh you know 10 years ago and you know that is like what I told these VCS was like look these guys are are of early stage startup um they're obviously just kind of like

doing things like they're cowboys basically you know I mean they're they're like they're getting away with this now but I think it's just a matter of time before this catches up with them and um you know unfortunately the VCS were just like uh like you know I think they didn't appreciate the risk and um you know they saw a hockey stick and they saw an opportunity um and you know I think as an industry what we can do is we have to just like look for these signs and not try to like you know ignore the profits and ignore the great

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