Part 2: Brian Armstrong, Erik Voorhees, & Ryan Selkis on Binance’s Acquisition of FTX

backless Nation wow we've got an emergency episode for you David you and I had scheduled a different episode today for our state of the nation but we gotta pivot because something massive is happening in crypto last time I felt like this it was uh during the dokwan days and the collapse of Luna and Tara this is another one of those pivotal days something shocking something surprising happened in crypto some questions I think people want to know is FDX and Alameda going bankrupt is CZ

causing a bank run is that what just happened and is binance about to acquire FTX David what are we going to talk about in today's emergency bankless update episode this feels like it's the final season of Game OF centralized exchanges there can't be that many left for for like really big contagion events because they're all dying yeah they're all there's there's few we're at the very end uh and so this is a story of of

contagion I don't think it goes further Beyond FTX and Alameda but but we'll see but the relationship between Alameda and FTX seems to have actually played out in a negative fashion uh CZ uh we'll we'll figure out how much of a chess move CZ was actually playing or if he was just taking the opportunity as it was given to him but a feud a very short feud between SPF and CZ that started on Monday has resulted in the a letter of

intent being signed by binance to a choir FTX um as a as a result of perhaps we do not know but a under the table relationship between Alameda research and customer deposits in FTX that caused weakness in FTX uh and it was CZ that Lit the match so we're going to cover all these details recap the last 48 hours in crypto which some people are saying are crazier than the Luna debacle even though the lunar debacle was pretty damn crazy some people are saying it's the

craziest thing to happen all of this bear Market that's a big question right it's like with FTX what happens when the thing The Entity that is bailing out other entities I mean they help bail a block fi they helped with some of the Voyager debt now they need a bailout is that what's going on I mean that is pretty massive and just when I think David I can no longer be surprised in crypto I wouldn't ever people tell you know tell me about things and I was like yeah you can't surprise me yeah I've been in crypto for like five years and it always goes back to like uh nope I just got surprised again today like I did not see this one coming yeah it's

it's crazy that ether Bitcoin ether went down to like 800 Bitcoin went down to fifteen thousand dollars or something and that's not what triggered the destruction of Alameda it's weird that we went down so low earlier and they made it through uh but today of all days this week of all week was the week when uh the the bubble finally popped for Alameda research and FTX um there's a lot of things that are still being speculated on we're still waiting for facts to come out uh it is

alleged the tldr that it is alleged that customer deposits in FTX were sent to Alameda research Alameda traded those customer deposits in an attempt to make money they didn't they didn't make money uh and as a result FTX became insolvent and stopped processing customers withdrawals we don't know if that is true we do know that FTX stopped processing customer withdrawals we do not know if they actually did send money to Alameda research but there's all of the facts and all of the actions seem to line up with this speculation and so we're going to go through that story as

to why people are alleging that uh less than good activity was up to uh was going on at FTX that caused um ultimately a run on the bank at FTX guys uh Dave and I are going to take you through all of the facts we're going to take you through the timeline we're going to show you some takes uh and get into the details to see if we can put a analysis on this as well but before we do we want to thank the sponsors that made this episode possible arbitrim1 is pioneering the world of secure ethereum scalability and is

continuing to accelerate the web 3 landscape hundreds of projects have already deployed on Arboretum one producing flourishing defy and nft ecosystems with a recent addition of Arboretum Nova gaming and social daps like Reddit are also now calling arbitrum home both arbitrim1 and Nova leverage the security and decentralization of ethereum and provide a builder experience that's intuitive familiar and fully evm compatible on arbitrum both Builders and users will experience faster transaction speeds with significantly lower gas fees with

arboretum's recent migration to arborstone Nitro it's also now 10 times faster than before visit arbitrim.io where you can join the community dive into the developer docs Bridge your assets and start building your first app with arbitrum experience web3 development the way it was meant to be secure fast cheap and friction free the brave wallet is your secure multi-train on-ramp into web3 and it's built directly into the brave privacy browser gone are the days of managing multiple wall extensions that put you at risk of fishing spoofs and tracking with the

brave wallet you can securely manage your crypto assets across more than 100 different chains including ethereum layer 2's Solana and more all without downloading risky extensions the brave wallet is easy to set up and removes a headache of jumping between wallets and extensions it's lightweight but packed with great features like built-in token swaps buying and holding nfts with a gallery view and support for Hardware wallets but also much more than that because Brave is shipping new features every single month with a mission to make web3 easier to navigate for its over 55 million users while extensions

are a thing of the past so get started with Braves web 3 ready browser today an experience a decentralized web seamlessly without all the Clutter you can download the browser at brave.com banklist and click the wall icon to get started nexo is your financial hub for all your crypto needs next though lets you buy crypto instantly with your credit or debit card or via bank transfer they also have an awesome Advanced trading platform called nexo Pro that pays you rewards when you swap crypto assets and nexo also lets you earn interest on your crypto in Bitcoin eth or other assets and they also give

you an instant crypto line of credit with as low as zero percent APR and they also give you access to a crypto backed MasterCard of course earning you more crypto when you use it so enhance your financial life with nexo who ensures all credit lines are over collateralized with insurance on all custodial assets next though the right place for your crypto so click the link in the show notes to join over 5 million users who are getting the most out of their crypto Finance acquiring FTX that is the question it seems to be the case we've got a bank run possibly we've got

bailouts from CZ we've got binance coming to the rescue there's a three bees there and of course this is bankless that you're watching we're going to cover everything that we we know from a timeline perspective there's going to be two parts uh to what we're doing today so the first part is David and I are going to go through a timeline and the takes to break this story down for you and how it unfolded uh and the takes hopefully we learned something from this episode as we've learned from every single episode uh event in crypto that has happened over the past couple of years so we want to walk away with

some lessons and then the second part of this is we're probably going to ask some people in uh we know in kind of the community to join us maybe for a conversation at the end I have no idea who those people are going to be it just all depends available we're doing it live uh David's got tweets out to like uh Eric Voorhees and people like this so um we'll we'll open up the conversation a bit later but first things first David we gotta talk about about this incredible story something that a lot of people didn't think Could Happen including myself I mentioned the intro I

was surprised by this it looks like FTX is on the brink insolvent needs a bailout FTX the second largest maybe the largest by some measures uh Exchange in the U.S and certainly one of the top three binance coinbase and FDX these are the the world's largest crypto exchanges right now and FTX about to go bust that's what it's looking like um David why don't we unpack this story by talking about some of the

stakeholders some of the entities and people involved because the players in the game of of Thrones yeah yeah be helpful I think to get the same yeah so so you mentioned one uh Alameda Alameda research uh who is Alameda research when we get to them and they're part of the story what are these guys about yeah so Alameda research was spf's first Endeavor I believe sandbagment Freeman freed yes exactly uh and so it was a trading firm it is a trading firm uh and has been trading

since 2017 has done done very well for itself uh SBF Sam bankman freed uh red Alameda until he started SBI or excuse me FTX uh and so that this is where FBF really got his big claim to fame by starting Alameda research um I don't know why they call it research uh but it's a trading firm uh they just trade they do hedge funds yep exactly deals made a ton of money during the 2021 bull market and seemed to be one of the few trading firms hedge funds

that were able to survive up until this point uh it survived three hours Capital it survived the Luna debacle uh but I guess perhaps its time has come uh anyways they've been around for a while so that's that's Alameda and then so how are they linked to this other entity that is also owned by controlled by primarily uh sandbag benfried that is Ft uh that is SPF The Entity FTX that's the exchange our Alameda and FTX they're separate entities are they not but how

does FTX enter this story yeah it's really just a Association through Sam bankman freed so in November of 2017 SBF founded Alameda research he later founded FTX uh he founded FTX and when was that I think 2018. uh and so started started with Alameda then created FTX as FTX became the bigger organization he distanced himself from Alameda and mainly focused on FTX however there's always been this

loose unofficial association between Alameda research and and FTX and so Alameda research would Market make on the FTX exchange and so there was a significant overlap between the assets just overall the social connections between Alameda and FDX one of the reasons why FTX became such a dominant place to trade is because they got early liquidity and a lot of that early liquidity came because of the relationship to Alameda research it Formed I don't think the relationship was really codified or formalized it's

just there's this guy SBF he's at the heads of both of them he can kind of steer both ships at once we don't really know how much uh how much symbiosis Synergy between these two things he really leveraged but we do know that there was overlap there was Association basically all of alameda's uh assets they would hold in FTX and they would trade on FTX and they would just prop up the support of FTX as a Marketplace so there may have been some co-mingling between these two entities but one is clearly in exchange the other is a hedge fund all sort of lead directed uh

founded co-founded by this figure SPF sandbankment freed maybe a bit of background on Sam bankman freed so is he like the world's youngest multi-millionaire yeah well maybe not anymore but okay but like prior to this like by reputation effective altruism was the thing he planned to give away 99 of his uh of his wealth uh that is give that away to altruism not to not watch it drop to zero different things um but um very successful kind of figure

in the crypto space kind of rising star and it was an incredible Story how FDX kind of I mean he started an exchange in 2018 2019 April 2019. yeah it's even later so uh well Gemini and coinbase and Kraken and binance were already established he had the audacity started Exchange in 2019 and rocketed that exchange to growth so quite an impressive figure you guys may have seen him on a recent bank list live stream where we were talking about crypto regulation with Eric Voorhees he had kind of a different take

from Eric Voorhees but he's been involved in the the regulatory the DC regulatory scene so that is on one side we've got Alameda uh hedge fund we've got FTX exchange and we've got SBF at the center in our other Corner we have another Corner we have binance all right the kingdom of binance who is binance and uh talk a little bit about um binance's leader CZ you know in the same way ft TX just rocketed in 2020 and 2021 binance had that same story in

2017. binance was my first exchange back in the Ico days of of ethereum it was a an exchange I believe it started out of China but quickly became more Supra National I don't really think it's domiciled anywhere in particular I think it does have a base in Singapore but it's really all across the world um it's the it's the most decentralized centralized company of all time started by CZ who I believe used to work at OK coin or another different another another exchange and then CZ decided to make binance and uh just binance just

saw gangbuster success in 2017 uh by being the place to launch icos get Ico liquidity the user experience was great I remember using it all the time in 2017 to 2018 and it has just turned into a gargantuan Empire in the East it has it is the dominant crypto exchange by legitimate volume I think binance is somewhere between like 75 to 80 percent of all particularly outside the US I mean it just dominates right yeah uh and it got there because for the longest time you did not need to do kyc on

binance uh and so it was kind of kind of pushing the the into the gray area legally um but it just has by and large by far the most massive gargantuan Beast of a centralized exchange that's in the room even compared to coinbase even compared to FTX uh and it's been around for a while uh and so like not only of course we all know binance smart chain is one of its projects there's many other affiliate uh products out of the binance ecosystem uh they have some of the most adoption in the developing world in in

Africa in in South America um highly just massive uh and so these are the two players you got CZ and binance you got FB SBF and FTX um yeah last thing uh we'll say in introducing kind of names and definitions there are also two assets coming from each of the these kingdoms so we've got the SBF Kingdom with an asset called ftt behind it and then we've got from the binance kingdom cz's Corner BNB a different asset how are these uh assets similar and what's their

link to their the respective uh exchanges and Empires you might call these things pseudo Equity they have no legal connection to these exchanges they are not claims on Equity or ownership they unlock services uh inside of the exchange so if you own ftt in your FTX account you get reduction in fees when you trade you can open up stronger Services uh same thing with BNB if you it's it's the it's the tokens the access token that you know makes perks happen

on the exchange BNB is also special in that it is also the staking coin for binance smart chain for BNB chain so it's got that extra ecosystem but uh it seems to be a lot of exchanges other than coinbase seem to launch the pseudo Equity tokens that just enhance your powers on the exchanges and they come to be associated with the value of the exchange itself and so when we see these token prices go up and down it's kind of the public opinion on like how much is this exchange worth um these are very relevant especially

ftt the ftt token of FTX is a very significant player in this story it's one of the big pieces of ammo that these exchanges that these billionaires have to throw at each other to uh engage in billionaire economic war games they're they're really Tethered to the fates of their respective Empires so we'll get into some pricing conversations okay definitions aside and we've gotten that out of the way hopefully you know the players who've got these two opposing uh crypto Banker Empires now let's talk about the timeline David timeline of events take us back if you will to uh

November 2nd I think our timeline events probably it goes from November 2nd to November 8th which is today when we're recording I'm sure there's more coming I'm going to be more by the time we're done here we're this is an unfinished episode there's plenty more to talk about but I think we've seen some major milestones and events take place during the course of uh you know this last week or so but take us back to the start November 2nd uh SBF talking a lot about regulation this actually ties into a little bit of a you know the bankless

story uh we played a minor role in this as well but what are we looking at what tweet are we looking at here so yeah so this is this is pre-november 2nd the bulk of this story started on November 2nd but the context for this starts with Sam bakeman's freed his dccpa bill and also the bankless episode of SBF versus Eric Voorhees at public debate really it's Sam bankman freed going to DC and lobbying for things that seem to really benefit FTX in particular uh and so that was kind of the concern and the claim

that not not CZ but all of the industry was concerned that Sam was doing he was going to uh he was going to to DC to lobby for a regulation that would primarily benefit FTX to the loss of any other competitor monitor so that is the context that is the background and we all know that the bankless episode with uh SPF and Eric Voorhees that really accelerated this conversation into the mainstream this is this is the background uh so while this story starts this specific story of what we're talking about today starts with November 2nd a coindesk report uh the context of

what SPF is doing in DC is extremely important to keep in mind as we go through this story so let's fast forward to more recent times November 2nd that was last week a report comes out of coindesk that states that uh that leaks the Alameda balance sheet and so this uh this leaked document discloses a lot of what's on alameda's balance sheet and this perks the attention of a lot of people in the crypto industry there was some conversations some back and forth some people were saying this report's not that big of a deal some reports some

people were saying this report's massive um basically a quote from the document says coindesk claims to have reviewed A Private Financial document which shows that on June 30th Alameda had 14.6 billion dollars in assets 3.6 billion was unlocked ftt and 2.6 billion of that was ftt collateral against eight billion dollars in liabilities uh that's not too much information so if you take 14.6 billion dollars in assets and and subtract 8 billion dollars of liabilities you'll get something like 6

point or 7.4 billion dollars in assets that they have so positive 7.4 billion dollars but 3.6 billion of that is ftt tokens 2.6 an additional to that is ftt collateral so that's that's uh 6.2 billion and right there yes and so the ftt the value of their own token exactly the concern is that so not their own tokens Alameda research this is Alameda research sure not their own not their own tokens Alameda Alameda research had a bunch of

its total balance sheet was this ftt token well that's already a tie there that's already massive amounts of commingling between the organizations yes a huge tie massive tie but like anyone can anyone can own ftt I can own ftt you can own an ftt um you'll own a little bit less in value today um but uh the concern is that ftt is not that liquid owning billion billions of dollars of ftt tokens does not it should not feel good and secure because you will not be able to liquidate a billion dollars of ftt tokens there's not enough

liquidity there to support that we're watching this happen I'm looking at the ftt chart we'll get there later uh there's a lot billion let me tell you Ryan billions of dollars have left uh the ftt ecosystem but even if you just add that up we have 14.6 billion in assets eight eight billion in liabilities but if you subtract like the the 6.2 from the 14.6 right we're already at like just over 8 billion which kind of matches the amount of liabilities it doesn't seem like there's much room there in the balance sheet for anything that does not indicate like a a

that's not a strong statement of solvency yes but I guess I guess this is not FTX we should remember this is just let me research so that thing could go to zero and presumably shouldn't affect FTX at all presumably presumably yes okay um and this is this is what the Twitter conversation again this was on November 2nd so this was six days ago this was last week and so up to this point this was just mere Twitter conversation I was kind of expecting it to die off I kind of expected it to turn into a nothing

Burger but why um just because I mean they survived so far Alameda research they're a hedge fund they don't have customer deposits that they have to honor they're just a HED fund hedge funds can blow up that's fine so long as there's no contagion but as we learned we'll get into that we do we did know of course SPF did have close ties to the trading firm but overall this this this report started to Peak uh get people peaked as to whether or not FTX would be caught up in any sort of

Alameda really related contagion so if the big question was could Alameda go under and FTX be okay and the problem was no one knew the answer to that question uh Daniel Dylan Leclair did a deeper dive on the balance sheet and the balance sheet gets even unhealthier the more we unpacked it so he said other significant assets on the balance sheet include 13 3.37 billion of crypto held and a large amount of Solana's blockchain native token 2. 220

292 million dollars over a billion in in Solana Solana right again like not liquid decently liquid still not not super liquid and again a lot of that is locked so actually technically some of that is very very illiquid as in Alameda would not be able to access that so Alameda is already feeling the squeeze and it's also worth noting that defy apps like Abracadabra had a hundred million dollars in ftt collateral as well so that's what Ryan is showing on the screen here the point is is that ftt was in a very precarious position as in

Alameda was using it as collateral to backstop a lot of their loans and so why yeah yeah well that's because that's they had they had those assets that's what they had and so of the eight billion dollars that um Alameda had his liabilities 7.4 billion of that were loans presumably US dollar denominated loans oof wait wait run that by me again uh so I this is uh reading in the coindust report so there are more FTX uh tokens

among its eight billion dollars of liabilities 292 million dollars of locked liabilities uh the liabilities are denominated by 7.4 billion dollars of loans uh if it's U.S dollar loans that's bad uh if it's crypto asset loans that's a little bit better because those things move price in tandem but if they're dollar loans they have Dollar loans but ftt collateral and ftt collateral goes down that's bad and this is why this is why we brought up Abracadabra also having a hundred million dollars in ftt collateral a lot

of people are using FDT as collateral to backstop loans that is precarious especially for Alameda research who has billions of dollars of ftt as collateral and 2.6 billion in ftt collateral okay so so Alameda is not looking good I mean some people dismiss that as flood last week others were saying hey this could also have an effect Ripple effects on FTX given how close these entities are together but but people are dismissing that as flood that was that was last week so that report came out November 2nd now we can fast forward to uh

November 6th that was uh I guess Sunday uh when things started heating up a little bit more over the weekend uh what is this tweet that we have displayed so this is the Alameda CEO who tweets out a few notes on the balance sheet if you are a hedge fund manager and you have to tweet out about the state of your balance sheet we're already not off to a great start a few notes on the balance sheet info that has been circulating recently the specific balance sheet is for a subset of our corporate entities we have over 10 billion dollars of

assets that aren't reflected there the balance sheet breaks out a few of our biggest long positions we obviously have Hedges that aren't listed giving the type tightening and crypto credit spaces here we've returned most of our loans by now basically saying we're totally solvent uh we have more assets that are off the books that aren't listed there but like it was fun we're good don't worry about it it's fun we're good my desk article whatever um a lot of people uh this this allegedly reminded a lot of people of dokwan saying uh uh what do you say

study Labs deploying more Capital uh it was a and also Alex was machinsky did the same thing he's like Celsius is totally solvent we're totally good like everything is fun you have I'm not saying you have to I mean you could be honest with people but like if you are in the midst of insolvency or some sort of bank run right you have to project confidence you have to project strength which is why this is always the strategy employed by by those who are trying to fend off some kind of a bank run uh but but

um when did CZ enter the story here because I feel like it was the same day yeah so that that is uh yeah that's where that's where we're going next so this Alameda CEO tweeted this out at 9 30 a.m on November 6 on Sunday that hey everything is fun uh we're good uh don't worry about our balance sheet um an hour and 13 minutes later at 10 47 12 minutes later uh CZ says he's gonna liquidate 2.1 billion dollars of ftt now first how did CZ and binance get their

hands on 2.1 billion dollars of FDT I'm so glad you asked uh binance is actually an early investor in FTX so binance invested in FTX so they own FTX equity and as a result of that also got a bunch of ftt tokens and so since ftt has actually the price of FDT has actually done pretty damn good pretty damn well they had 2.1 billion dollars of ftt says due to recent Revelations that have come to light he's talking about the Alameda report in coindesk we have

decided to liquidate any remaining ftt on our books and so he says we will do so in a way that will minimize Market impact due to market conditions and limited liquidity we expect this to take a couple months to complete a fct at the time was trading 25 27 28 dollars binance has always encouraged collaboration between industry players regarding any speculation as to whether this is a move against a competitor it is not our industry is in its nasincy and every time a project probably fails it hurts every user and platform saying hey uh we're we're liquidating ftt it's

not a play against FTX we just have a bunch of ftt on the balance sheet and the precarious nature of ftt makes us want to remove that for uh remove that from our balance sheet he finished saying we typically hold tokens for the long term we have told it held on to this token for this long will stay transparent in our actions um so there one part of C easy is saying hey I'm just being responsible and I'm liquidating this thing that's precarious other people who are assuming that Assisi is more of a shark than he's

letting on is like he is publicly stating he is dumping 2.1 billion dollars of ftt on an asset that he knows does not have 2.1 dollars worth of liquidity David isn't that obviously what it is I mean coming from CZ who is someone who is generally kind of diplomatic uh and knows exactly what he's doing definitely a strategic thinking thinker the timing of this the communication style right and and by the way we'll read some subsequent uh tweets as well so you can kind of decide but

publicly saying you're going to dump 2.1 billion dollars uh and then saying things like we typically hold tokens fit along run we've held this token for a long time we're just trying to stay uh transparent this sort of thing I feel like CZ knew exactly what he was doing here and this was like a a mob boss Mafia style Game of Thrones power move to like check a competitor now he was obviously phrasing it saying this is just normal course of business but the timing of it right you have to tweet it

he didn't have to be public about this he didn't have to time it as such this looks to me like it was all very uh strategic um but I guess maybe some people still doubt that I think that is a perfectly Fair take okay especially the rod number that is in the first line of the first tweet 2.1 billion like if you're gonna if you're gonna liquidate 2.1 billion of something like you don't disclose that if you're trying to optimize for the price if you're trying to optimize for being front run by other people you disclose that you are going to market sell 2.1 billion dollars if you want to

cause a panic you tweet that you are going to sell 2.1 billion dollars uh and so I think it's it's a fair assumption to say that TZ was using these this tweet as uh as leverage um here's some back and forth too somebody asked him in this thread by the way I think thread will be kind of legendary in terms of the the annals of Chris of crypto history where it's just kind of precipitated the downfall of kind of an enemy or a competitor uh someone asked him if you don't mind me asking if the tokens weren't locked why'd you wait until this long to sell

issue with FTX or liquidity providing during the bear CC goes not locked we usually just hold it removes any doubt that we would attack a competitor not financially sensitive uh sensible we want the industry to go together but there is a limit to hold comma LOL I've about it uh yeah so he's kind of saying look this is normal course of business there's but we're not going to hold on tokens forever uh so he's kind of playing that game back and forth um what's this tweet I think that the end of that line there is a limit to hold

LOL is important because he's what he's implying is that Sam SPF has crossed a line with Alameda is using ftt as collateral uh and we'll also get into other some other things as well he's he's implying that there is a limit to what uh binance and CZ will go up to before they are feel like they must be compelled to sell ftt so that's what he meant by that so he is saying he's implying he is hinting that maybe SPF FTX crossed the line somewhere yes