What Ben McKenzie Learned When He Started Investigating Crypto

28:19And CZ had this chip, which is that he owned, he had a lot of the FTT token. Sam had tried to separate himself from CZ. I believe, I think they fell out over Malta, a license in Malta that's allegedly that CZ didn't want to fill out the paperwork or something. It's like, you don't want to fill out the paperwork in Malta. Anyway, so they couldn't pay him real money, so they gave him some, I think, but he was mainly paid out in FTT, which gave him this chip to play, right? If he has a lot of the supply. So all of a sudden, there was a run on FTT. Sam's cohort, Caroline Ellison, tried to stop the bleeding by saying, you know, buy all the FTT you want at this price.

29:02And CeCe said, no, let the market play out. and um and it collapsed in spectacular fashion and then there was this brief moment where cz considered buying the company and a non-binding letter of intent which of course was immediately transformed um by certain members of the media into he was definitely going to buy the company but of course it's a non-binding letter of intent so 12 hours later he said no i'm good what was your take uh what was your takeaway from interviewing sam obviously prior to the events of November like? What were your interactions with him like? Well, our interview in person was interesting.

29:40It was July 20th, 2022. It was in a Midtown hotel in Midtown right around here. At the time, crypto had done its sort of first crash, the May crash of Terra Luna. So it was seemingly on life support, but Sam was the golden boy, right? Sam was spending a lot of money on Capitol Hill. He was trying to get a particular piece of legislation through the Ag Committee, the DCPA. He was meeting with the CFTC commissioner. I believe he met with him at least 10 times. And he was being called the JP Morgan of crypto by none other than Anthony Scaramucci, the booch, with whom he had a business relationship.

30:25Anyway. uh so and he was going to buy up the jp morgan references reference to 1907 when jp morgan and his pals had to come in and kind of rescue the uh the financial system from collapse he was going to come in and buy all these companies that were failing right like celsius and blockfi and all these companies so that was the circumstance under which i interviewed him boy i'll put it this way The chapter devoted to that interview is entitled, The Emperor is Butt-Ass Naked. So it was weird. It was really weird because I asked him some questions. I wanted to understand how he could explain cryptocurrency as what good it did.

31:09I found that answer very unsatisfying. um he said uh he kind of tried to duck it and then he went into remittances or uh sending uh payments uh between borders i had just come from el salvador the only country in the world trying to use crypto as real money el salvador's economy the foundation i would argue of el salvador's economy is remittances a quarter of the el salvador economy is people of salvadorian descent who live in the united states two to three million of them sending money home so the government had you know, for reasons that we could go into on another question, had decided to set up a system, Chivo Wallet, and it was suddenly going to, you know, bring in tourists, but it was going to be a way for the Salvador people to profit by, or to not spend money on MoneyGram and Western Union traditional services, and it was going to be this huge boon to the economy.

32:01Well, nobody used it. It was a failure. It was a complete failure for a lot of the reasons that plagued crypto more broadly. The system didn't work. The Chivo system just like malfunction all the time. People got defrauded. People lost their money. And so they decided they would rather stick with traditional services. So according to the government's own figures, less than 2 % of remittances use this system. So I just come from there and he's saying it's remittances. And I'm saying, Sam, baloney, BS. And then we went round and round and round. And when I came back to that same question, because the question was, give me one company.

32:40Just give me one company. Give me one company that's doing anything, anything of productive value, just tell me. And he eventually told me Solana. Well, Solana was known as one of Sam's coins because he owned a lot of it. I think it was like a billion dollars worth of it when they went kablooey. Did he really believe in Solana or was he trying to pump his back? Like, what was that? Also, Solana has an unfortunate tendency to shut down. It just stops working. I think it stopped working at least a dozen times over the course of its history. So I found those answers very unsatisfying. You can't give me one company that's of any use in your industry?

33:14So there was those questions. And then there were questions about his donations. Probably the most nervous I think he got, seemingly, was when he wanted to talk about his effective altruism. He was going to give his money away, pandemic preparedness, all that stuff. I said, how much money have you given to that stuff? He said,$50 to$100 million. I said, okay. How much have you given to politicians? and he froze and he turned his seat and did all this stuff and you know he's kind of a twitchy guy and i get that he's got add i'm not trying to but like it was weird and he wouldn't tell me and at the time i'm thinking this is really strange because this information is public right like i mean we know he gave 40 million to biden we know his co-work gave 23 million to the republicans like why doesn't he just and now you know what's alleged is that he was running a 93 million straw donor scheme.

34:03So maybe, I don't know, maybe that was why. It was a really bizarre interview. It was really one of the most strange hours of my life. We've had our own weird interview with Sam. Well, that's right. Well, that was very informative. So, I mean, if you don't mind, I'm just going to, you know, so in the spring of that year, he had been on your podcast with Matt Levine and he talked about, I believe it was magic boxes out of which money comes. The question was, how does yield farming work? Right. And we were expecting a technical answer of, you know, oh, there's this protocol and then this protocol.

34:36Yes, yes, yes. Instead, it was magic boxes out of which money comes. And Matt correctly said, that sounds like a Ponzi skew. I think Sam laughed. I don't know what happened after that. But it was really strange for me. I mean, you know, I've got an ego and stuff, but I have an undergraduate degree. I'm an actor. I've just been looking at this for a couple years, and I'm here talking to the supposed JP Morgan of crypto. Can he give me one satisfying answer? Can we get one moment where I could see how this was going to work? I left basically with a lot of questions, but they were all the same one.

35:17What the fuck was that all about? What was that? It was really weird. Yes. All of this sounds familiar. You mentioned law enforcement earlier. So again, let me ask the basic question, but where are the regulators? So we're starting to see some actions now, notably from the SEC and the CFTC also sued finance earlier this year. But where have they been and why the reluctance to crack down on this industry? Yeah. So I believe it was 2014 when the CFTC commissioner, Timmy Mossad, asserted CFTC control over Bitcoin, said because futures were being traded. And under the CEA, the Commodity Exchange Act in 1936, they could argue that Bitcoin's a commodity.

36:07Okay, so that already creates a little bit of a gray area, right? Because if Bitcoin's a commodity, but these 20 ,000 other cryptos came into existence, what are they? You can say the SEC hasn't been as aggressive as it should have been, and I don't disagree with that. I think the politics are interesting. I mean, people are now very angry. Gary Gensler in the crypto industry. and they're angry that he allowed Coinbase to go public. Coinbase was listed on April 14th, 2021. Gary Gensler assumed office on April 17th of 2021. Say what you will about Gensler, but he does not have a time machine. So look, here's what I'll say.

36:54Crypto has exploited a gray area between how we classify commodities and securities. I do think this is a problem. We are the only country in the world that separates our commodities regulation from our securities regulation in the way that we do. We have two different agencies. They are overseen by different committees in both the House and the Senate. That creates really bad incentives. As an armchair economist, that's very bad incentive-wise, right? Because politicians want to get on, elected members want to get on those committees to oversee the industries, but also to get donations. And the regulators are fighting for turf, sometimes friendly, sometimes not.

37:40The crypto industry really, really wants the CFTC to be in charge. The CFTC is the smaller agency. It's about a quarter of the budget of the SEC. So there's a lot of blame to go around, I would say. But in the defense of regulators, it does take time to build cases to target these and how to require law.

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40:26You know, we've talked a lot about the industry, but your story starts with like a friend. And obviously a lot of people have lost a ton of money over the last couple of years, particularly. Can you talk a little bit more in the course of your reporting? like surely the types of people that you met on just this sort of like the buyers, like the people who like got sucked in at the top? It's everybody. I mean, it's really fascinating. Like you could interview and I did. I interviewed everyone from, you know, kind of regular traders. I walked around the Bitcoin conference in Miami last year, just talking to random people.

40:59And then of course, there are more sophisticated players. There are hedge funds, there are, you know, high frequency trading firms, things like that. And then there are the sort of the core players, which, you know, where Sam and CZ and the folks that are kind of facilitating these transactions. So amongst the kind of the regular folks, again, I kind of go back to this point of like, crypto just becomes whatever you want it to become, right? It's like, it's a way of you expressing your freedom, your, you know, get off the shackles of TradFi and like find your own, create your own financial destiny kind of stuff.

41:41And I get that. That is such an intoxicating pitch, sales pitch. That's why Schiller talks about these narratives and how powerful they can be and how difficult they are. He compares them to viruses. You know, it's sort of you have to study the epidemiology of them. And we kind of have to, you know, reach herd immunity here, which I think we kind of are getting to now in crypto. But it's also very sad because I tell a story at the end of the book about a particular case. It's pretty rough. But you are also getting into gambling addiction. I mean, let's be honest. It's young men. 42 % of men 18 to 29 have purchased, used, bought cryptocurrency.

42:23That's a big number. I mean, almost half. It's gamified, right? The apps are, it's very similar-ish to Robinhood, but unregulated. And it's easy to hide from friends and family. I mean, gambling addiction, we talked to some gambling experts for this, and they told us that there's a husband and wife. They run a boutique firm in Brooklyn, but that services a lot of Wall Street clients. And so they're treating all kinds of addictions. But they saw a trickle during the last craze of 2018, 2017. But they saw a tsunami recently. And it was all men under 40. some of them are sophisticated wall street guys sophisticated and people that really know their stuff about all sorts of other financial stuff um but have gotten drawn in uh and everything down to teenagers i mean parents coming in with their teenagers saying they're gambling away their their minimum wage job you know their summer job paycheck on this stuff um and that's where it gets into the casino capitalism that's why i want the book to be about more than just crypto because i i do worry that we are canes said this actually you I won't try to quote him exactly, but basically when you turn the nation's capital markets into a casino, the job is likely to be ill done.

43:44You are not servicing an effective use of capital. And I believe we need to look at some of these things through the lens of how much social harm they can do. Gambling addiction, I've heard from several people, has the highest rate of suicide of all the addictions. It's much easier to hide because all you need is a phone and a few minutes or even seconds to make some trades. And so by the time families find out about the predicament that usually their son or husband, partner is in, it can be too late and money's gone. It is treatable. It is a very treatable addiction, but you have to take some pretty serious measures sometimes and remove the ability to make the trades and to actually access the accounts.

44:27so yeah not to turn it into a bummer but like I really think we need to talk about these things because the marketing was of course the exact opposite it was all the shiny stuff and all the amazing things but when you come down to it economically speaking crypto is a zero sum game it's poker because it doesn't do anything productive it's strictly competitive for someone to win someone else has to lose but it's not a fair game you're not playing in Vegas now you're playing Vegas in the 50s when the mafia ran it you know what I mean and unlike Vegas where there's entertainment value, you can get comps and drinks, have a dinner, see a show.

45:00Crypto is like Vegas without the drinks, the dinner, or the show. So you're going to lose. You're going to lose. 99 % of people are going to lose. In the book, you actually talk quite a bit about the overlap between online poker and crypto. And you almost draw a connection between the end of online poker and the beginning of Bitcoin. Talk to us more about the overlap that you see there? Sure. So in the original code that became the Bitcoin white paper code, there's a poker lobby. So whoever Satoshi Nakamoto is, was, whoever they are, we do know they were interested in poker. At the same, similar time to when the Bitcoin white paper came out, online poker was, was, you know, about to get crushed.

45:49It had moved overseas. All these online poker rooms had been set up and eventually the government got around to shutting him down on what's become famous as Black Friday and online poker. And it was because they were cheating their customers. There's a company called Ultimate Bet that had a secret God mode where insiders could see the other players' cards. The compliance officer for the holding company, Escapsa, of Ultimate Bet is a guy named Stuart He's now Tether's general counsel. Daniel Friedberg also worked at SCAPSA. He was FTX's lawyer. I think he then became their chief regulatory officer or something like that.

46:42Interesting. Where were the signs? Where were the signs? They're really strong parallels. So maybe crypto, maybe Bitcoin was set up to be this emancipatory new form of peer-to-peer currency. Or maybe it was literally online gambling 2.0. A way of moving money overseas and using it to facilitate gambling. You know, one thing that you've talked about, and I think it's, it might be, it's probably, there's probably been other cases like this, but there's a lot of, there's been a lot of peer pressure in crypto. It's like people telling their friend, it's like, you got to get into it. Well, you're a friend or just being told online, have fun staying poor.

47:22If you don't. They don't, they tried that line on me. That line doesn't work. Didn't quite work. But like, you know, that wasn't there in like online poker, like that degree to which like the sort of like crowd whips its own members into a friend thing. Yeah. And that's where I think you get into a multi-level marketing scheme. The abusive language is similar. The way that they're sort of twisting words and trying to create a pressure-filled environment where you feel like, you know, FOMO, you're going to miss out. If you don't invest now, you know, really quick, you got to really quickly invest in the future of money because otherwise you're not going to get in there.

47:55which is bizarre. But those tactics are very similar. And I would say, here's the thing that's a big tell to me. The use of the word community. The use of the word community is just fascinating. You're not an investor. You're not a client or a sucker. You're a member of a community. You're going to be reborn to the land of the free. Strange to characterize a financial relationship, especially with people you don't even know, right? I mean, so much of this stuff is done online and through synonymous accounts. That's your community. I'm not saying people don't find community. What's interesting is some of the strongest communities I've found are the participants in the class action lawsuits against companies that have allegedly defrauded them because they're bound by the fact that they had a similar experience where they had a lot of high hopes, and then they were let down.

48:52It is true. No one talks about the community of like T-bill investors. Yeah, exactly. It's not really a thing. Let me ask a devil's advocate question. But, you know, we've been talking about cryptocurrency mostly as a monolith. We did touch on the narrative flexibility around Bitcoin. So the idea that it can be many things to many people all at once. One of the things that it seems to be now, or at least there are some people pushing the story, is the anti-crypto. So if you lost money in some random coin because of a centralized exchange that did something bad, you should buy Bitcoin because it's truly decentralized and only you have access to it in your cold storage wallet or whatever.

49:38How valid do you think that argument is. So you're saying you need to be more pure. You need to believe more in the decentralization. If you don't like crypto, you should buy the original crypto. Exactly. Exactly. Not a cult. I think, so that's the flippant answer. On one level, there is some truth in the sense that Bitcoin is more decentralized by nature of the proof of work. But that cuts the other way too. Because of course, proof of work means it can't scale. Bitcoin can only process five to seven transactions a second. It hits a limit. It hits what's called a red queen's race, where you're using more and more energy, depending on how many competitors are there.

50:18The more competitors come in, the more energy is expended for the same block. So it's like what the queen says to Alice, you've got to run twice as fast to get anywhere. It also, because of that energy usage, has an environmental problem. I mean, I went to the biggest crypto mine in the country. It's outside of my hometown of Austin, Rockdale, Texas. It took over a former Alcoa aluminum smelting plant. And the reason it took that over is because it's connected to the grid, so it can handle a lot of power. You know, in 2021, the Bitcoin network and other cryptocurrencies used the energy equivalent of Argentina, the entire country.

50:54That's a problem if you view it, as I do, as a zero-sum game. It's not doing anything productive, and yet you're using a lot of energy. So on one level, you can make the argument, oh, you're more pure, you're more decentralized. But in terms of stepping back for the rest of us, why should at least not be taxed at an extraordinary level? Real quickly, we just have a couple minutes left. You know, you mentioned, you used the virus analogy and you talked about maybe reaching herd immunity. And then the question is, like, is there some pool of new money or new people that could be brought in to, like, keep it going?

51:34Like, do you think that like the sort of potential pool of would-be crypto buyers are more or less exhausted? Well, it has utility, you know, for gambling. I mean, you can gamble on anything, so I don't think that makes it unique. But it has utility as a gambling device, and it has utility to facilitate crime because you can use it for money laundering and avoiding capital controls, tax evasion, sanctions evasion, whatever. And I understand that there's an argument like, well, some of that's good, right? We don't like some of these authoritarian governments. Okay, sure. But also, if it goes that way, it also has to go the other way, right?

52:03If the good guys can use it, the bad guys can use it. So, yeah, I just, yeah. I don't know how to answer that question. Actually, it may be a related question, but are you planning to write another book? What's next? Well, I filmed a lot of these conversations, so I'm working on a documentary. And, yeah, I don't know. I mean, I've had such a blast on this book. It's been such an adventure. I think the best part, I know it's a cliche, but it's really the people I've met, especially the skeptics. Skeptics are just a great group of eccentric, wonderful, you know, nerds. Like we're just, it's just fun.

52:41Um, and it's opened up my view of the world. I just have this much more, I just understand, I think, I'm not saying, I just have a much more varied experience in the world, right? Like it's really been an adventure. So, um, yeah, I don't know what the next book is, but I really appreciate that everyone asks you that just as soon as your first book. That's not even out yet. Ben McKenzie, thank you so much for joining us. The book Easy Money, July 18th. Congratulations and thank you so much for coming on up.

53:26i really enjoyed talking to ben you know i feel like we're so in this uh you know follow the crypto story so much it's good to sort of zoom out a little bit and talk to someone who kind of came at it with fresh eyes well totally and to his point it was all about the outsider perspective. So it was a fun conversation. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Joe Weisenthal. You can follow me on Twitter at The Stalwart. Follow our guest, Ben McKenzie. He's at Ben McKenzie.

53:59Follow our producers, Carmen Rodriguez at Carmen Armin and Dashiell Bennett at Dashbot. And check out all of the Bloomberg podcasts under the handle at podcasts. And for more OddLots content, go to Bloomberg.com slash OddLots, where we post the transcripts. We have a blog and a newsletter that comes out every Friday. And for more OddLots content, go to Discord.gg slash OddLots. People are in there 24-7 talking about all types of topics that we talk about on the show, including crypto. And stream Bloomberg TV on Apple Originals, Roku, Samsung, or any other streaming platform. And make sure to tune in on on Bloomberg TV at 10 p.m.

54:39Eastern. Thanks for listening and thanks for watching.

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