Some notes from the book Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud by Ben McKenzie, with Jacob Silverman
Like many of us, I exist in a state of confusion when it comes to the topic of Cryptocurrency. It’s been extremely trend worthy, we know, and it’s been surrounded with controversy ever since we first heard of the technology. Aside from the generic, though vague, knowledge that crypto is all about ‘decentralisation’ and ‘freedom’, I couldn’t tell you anything detailed about it. I picked this book up with the hope that I’d get at least some clarity on what’s going on in the space, and why in the world, the President of the United States was jockeying one. Not to mention the hundreds of celebrities promoting them, among them being the likes of Stephen Curry.
To understand the origins of economic narratives surrounding Bitcoin and other cryptocurrencies, we have to go back to the events that inspired them. Both crypto and the “easy money” policies from which this book derives its title sprang from the same roots: the Global Financial Crisis (GFC), also known as the subprime crisis.
In 2008, an economic earthquake shook the foundation of the global economy. Unbeknownst to most Americans, pressure had been building underneath the surface of the housing market for years. Two of its biggest drivers were financial deregulation and low interest rates—a decades-long, mostly bipartisan political effort to grow the financial sector combined with a policy intended to stimulate the economy in the wake of the first dot-com bubble. Between 2000 and 2003, the Federal Reserve—the Fed, the nation’s central bank—lowered interest rates from 6.5 percent to 1 percent. Members of Congress from both parties, as well as the George W. Bush administration, encouraged credit to flow into the housing market. The stated political aspiration was to create an “ownership society” of homeowners.
The economic effect, however, proved far less noble. Lenders issued mortgages with abandon, often to poor and working-class people who had little hope of actually repaying them. Many received so-called subprime mortgages. Because the borrower was more likely to default than a recipient of a prime loan, the loan carried a higher—and often variable—interest rate. The low-quality loans were then bundled by the banks into mortgage-backed securities and collateralized default obligations (CDOs). Those loan packages were then marketed as low-risk and sold off in huge quantities to institutional investors and other large clients. Some of these mortgage-based financial products were chopped up further, reconfigured into ever more complicated financial instruments. Ratings agencies—whose job was to assess risk—bestowed high marks on potentially worthless financial products in order to stay in the good graces of their Wall Street clients. As a result, rigidity, complexity, and leverage seeped into the financial system to an extent that even many people in finance didn’t comprehend.
Economists focus on incentive structures, and with subprime loans the incentives were skewed up and down the chain. From the mortgage officer hoping to make a commission to the executive who needed to show ever better sales numbers to the profit-focused corporate boards, few had an incentive to step back and ask if any of it was prudent. The dominant economic thinking of the time was that housing prices would only continue to go up. The idea that there could be a broad decline in the value of US housing seemed far-fetched, even ridiculous. When had that ever happened before? Of course there were warning signs, and some people made a lot of money betting on a crash, as The Big Short dramatized so well on the page and on the big screen. But the people holding the purse strings and their allies in power thought that the good times would go on forever, so they enacted self-interested policies and placed risky bets. Such recklessness is easy to come by when you gamble with other people’s money, there’s little chance of accountability, and you can convince yourself the market only moves in one direction.
As the housing market continued to stall in early 2008 and the economy showed signs of entering a recession, the federal government intervened, trying to stave off a broader disaster. In January, the Fed slashed interest rates by three-fourths of a point, the biggest cut in twenty-five years. It wasn’t nearly enough: More decisive action was needed to stem the collapse of the finance industry and, by extension, the overall economy. In March, the government began bailing out bond dealers, the people who had made toxic mortgage-backed securities and credit-default swaps. It was the first in a long list of actions that essentially guaranteed the finance industry’s bad debt, but did little to help homeowners and everyday Americans. After Lehman Brothers declared bankruptcy in September 2008, equities and commodities prices crashed, and the world economy appeared on the brink of collapse. Coordinating with other countries’ central banks, the US government offered $700 billion in bank bailouts and trillions in loan guarantees, managing to stem the worst of the contagion. Quantitative easing (QE), whereby a central bank purchases financial products on the open market to assure investors, did the rest. By buying longer-dated treasuries and mortgage-backed securities, the Fed encouraged lending and investment. Alongside the bailout and loan guarantees, QE took trillions of dollars of corporate debt off the books of some of the largest (and until recently, most profitable) companies in the country. That debt was absorbed by the balance sheet of the federal government. Before the crisis, the Fed’s assets were $900 billion. By early 2010, they were $2.3 trillion.
It didn’t end there. Originally intended as a short-term response to an immediate crisis, these policies became entrenched. For both political and economic reasons, the Fed would find it impossible to unwind its backstop of the economy. In fact, it continued to grow. By late 2014, what had been $2.3 trillion of assets on the Fed’s books had grown to over $4.4 trillion, a level at which it would more or less remain until March 2020, when COVID-19 hit. At the same time, interest rates stayed historically low as well: effectively 0 percent until 2016, and only rising above 2 percent in 2019.
The government’s response to the subprime disaster spawned an era of easy money that benefited deep-pocketed corporations above everyone else, but that was not all it produced. In the wake of the general distrust born of the crisis, a new mutation to the financial system emerged: cryptocurrency.
“The token-mania of 2017 helped show that a different way was possible. Bitcoin and other cryptocurrencies didn’t have to be money or a store of long-term value. They could be wildly speculative instruments, pumped via hype, social media, and celebrity endorsements. They didn’t really have to do anything except rise in price. The entire economic foundation of crypto-currency quickly became “number go up.” With a price tag attached, they could be treated as digital assets unto themselves, capable of being used as collateral for loans or transformed into complex financial products, not unlike the credit-default swaps of the mid-2000s. This was the beginning of DeFi (decentralized finance)..”
“Remember from earlier that the Fed’s balance sheet prior to the pandemic stood at nearly $4 trillion as a result of over a decade of easy money policies. In plain speak, the government never sold back the securities it had bought during the sub-prime crisis, effectively maintaining a significant asset bubble. It would only inflate further with the government’s response to COVID.”
“Home prices, which had steadily climbed back above the 2006 peak, now soared, as did stocks and all manner of speculative investments.”
“So if cryptocurrencies weren’t currencies, then what were they? How do they actually work in the real world? Well, you put real money into them and hope to make real money off of them through no work of your own. Under American law, that’s an investment contract. More precisely, it’s a security.
Thanks to a 1946 Supreme Court decision, securities are often defined by what’s called the Howey Test. The test has four prongs: (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit, (4) to be derived from the efforts of others. Check, check, check, and check. Although Bitcoin had somehow come to be classified as a commodity, it was blindingly clear to me that the 20,000 or so other cryptos ought to be classified as securities under American law, and yet they had not been, or at least not clearly enough to stop them from spreading like wildfire.
Prior to the 1930s we did not have federal securities laws in the United States. Securities were regulated at the state level under what were called blue-sky laws. They did not work very well. Fraud was commonplace; the stock markets in particular reflected a capitalistic free-for-all with little to no outside oversight. (Recall Keynes and the origin of the term casino capitalism.) While everything was going up in price, no one seemed to mind. During the roaring twenties, millions of Americans were lured into booming markets with faulty foundations. It was a bubble, and like all bubbles it eventually burst. The stock market crash of 1929 destroyed the finances of multitudes and ultimately led to the Great Depression. In response to this devastation, and the manipulation and fraud in the markets that contributed to it, Congress passed federal securities laws in 1933 and 1934. In terms of protecting investors, the primary purpose of those laws was to require disclosure on behalf of the issuer; if you were investing money in a particular security, you needed to know what you were investing in (i.e., who you were giving your money to) and what they were doing with that money. Cryptocurrencies have no disclosure requirements, effectively by design; the pseudonymity of the blockchain conceals who owns what. Much like the 1920s, this left the door wide open for deception and scams.”
“Just listing some of the incredible but true facts about Tether did half of our work for us. Did you know that the then–$69 billion company had only twelve employees according to LinkedIn, and that even some of those appeared to be fakes? Or that Tether had never been audited, and was run through shell corporations in the Caribbean? Gee, no red flags there. Or that its CFO was a former plastic surgeon who paid $65,000 in a counterfeiting settlement with Microsoft, its CEO hadn’t been seen in public in years, and its general counsel used to be the director of compliance for Excapsa, the parent company of Ultimate Bet? Ultimate Bet was an online poker company that fell apart when it was revealed they had a secret “god mode” that allowed insiders to see the other players’ cards.”
“The third red flag was the personal histories of executives running the company. If you want the best predictor of if someone might currently be engaged in a fraud, consider the obvious: Have they committed fraud before? Tether’s executives were hilariously well cast in this regard—a CFO who settled with Microsoft on charges of counterfeiting software; a CEO who was once a salesman for a company hawking a product that claimed it could turn nicotine into vitamins; and of course, the lawyer with the ties to the online poker site that was caught swindling its own customers. Classy bunch.
But that was not all. By the time Jacob and I came on the scene in the fall of 2021, Tether had a lengthy, and recent, history with various US law enforcement entities. The Commodity Futures Trading Commission (CFTC), which regulates commodities in the United States, had fined Tether $41 million just four days prior to the publication of our article, to settle allegations that it lied about its digital tokens being fully backed by real money. Earlier that year in February, the New York Attorney General had fined Tether $18.5 million, stating the company and several associated entities (iFinex and Bitfinex) had made false statements about the backing of its stablecoin. In exchange for avoiding prosecution, Tether agreed not to conduct any business activities in the state of New York, the heart of global finance.”
“That was the legal backdrop, but the details of Tether’s executive team were also entertaining: Their public spokesperson was their Chief Technology Officer (CTO), a hotheaded Italian guy named Paolo Ardoino. One of Tether’s cofounders was a colorful figure named Brock Pierce. A former child actor, Pierce had starred in The Mighty Ducks films before segueing into various business ventures in online video and video games. Pierce worked alongside such notable corporate luminaries as Trump strategist Steve Bannon, as well as a guy named Marc Collins-Rector. Pierce was living with Collins-Rector in Spain in 2002, when the two men were arrested in a house that contained guns, machetes, and child pornography. Pierce was eventually released, but Rector pled guilty to charges of child enticement, spent time in Spanish prison, and registered as a sex offender. Pierce left Tether one year after its founding, but his early involvement was another important mark on his very strange résumé.”
“What was stopping Tether from simply printing a lot of them, or loaning out huge bunches of them to big buyers who could easily manipulate the prices of cryptocurrencies and would pay them back with their earnings—in real money—later? In a scholarly paper titled “Is Bitcoin Really Untethered?,” John M. Griffin and Amin Shams found connections between the printing of Tethers and positive Bitcoin price movements during the 2017–18 bull market.”
All of this happened in the United States, were there any such cases in The Peoples Republic of China?
“John Maynard Keynes’s famous—and somewhat ominous—maxim held true: “Markets can stay irrational longer than you can stay solvent.””
“To grow their investor/gambler base, crypto corporations employed a time-honored mass marketing device: celebrities. In addition to Matt Damon, other movie stars got in on hawking various forms of digital “assets.” Gwyneth Paltrow and Reese Witherspoon shilled NFTs, as did musicians Justin Bieber and Steve Aoki. Sports stars LeBron James, Tom Brady, Steph Curry, and Aaron Rodgers pitched crypto exchanges and apps as the future of personal finance, with some taking equity stakes in companies like FTX. (It was later revealed Tom Brady received 1.1 million common shares in FTX; his soon-to-be ex-wife Gisele Bündchen held 686,000. She served as the exchange’s ESG—environmental, social, and governance—advisor.) The torrent of interest crested with the pinnacle of American marketing and consumerism: the Super Bowl.”
“Linguistically, the use of community bears a striking resemblance to the verbiage of a multi-level marketing scheme. An MLM—also known as networking marketing or relationship marketing—is a business model predicated on existing members recruiting new ones in order to sell them stuff. Someone comes up with a product, then recruits others to sell it to even more people. It’s important to understand that in an MLM, if you join as a member, you are required to purchase the product to demonstrate its usefulness to others. You therefore have skin in the game. Not only that, but for every new member you recruit, you receive a percentage of their sales, as does the person above you. The person who recruited you is known as your upline, the people below you are your downline.”
“In the case of crypto, the TOPPs are influencers, celebrities, VCs, crypto company executives, and other insiders. They are the industry’s 1 percent, and everyone else is overwhelmingly likely to lose, often through no fault of their own.
The top 1 percent are the beneficiaries of the information asymmetries that abound in crypto—and the discounts sometimes offered to friends, family, and investors. How do you know if a certain coin is about to go “to the moon” or crash catastrophically? You need to be connected to the people controlling its supply (and its overhyped marketing). In this kind of arrangement, a large group of people, some of them financially desperate, are competing for limited, volatile, and risky rewards. It’s hardly a recipe for bonhomie, much less a tight-knit community. It’s a recipe for fraud, and notions of “community” play an important sociological role.”
“The failures of our current system to do so have no doubt lent the story of cryptocurrency much of its power. A severe, and very understandable, lack of trust in the financial system reflects a wider loss of faith in democratic governance. Wealth inequality is at near record highs and many working people feel that the economy is rigged against them. But that doesn’t mean the story of cryptocurrency is true, or offers a better alternative to the present situation. You cannot replace people and flawed institutions with magical bits of computer code.”
“…Blockchain Creative Labs, the new crypto venture from Fox Entertainment. Immediately a few ironies presented themselves. Blockchain was supposed to overthrow the old techno-economic order and yet here was one of the country’s most powerful media conglomerates leading the supposed revolution. The decentralized and democratized future of finance, brought to you by Lachlan Murdoch.”
“…Portugal, a burgeoning crypto tax haven.”
“What benefit did any of this produce for the rest of us? Was it worth the cost? In 2021, the greenhouse gasses released to produce the energy consumed by Bitcoin and fellow networks more than offset the amount saved by electric vehicles globally.”
How does one quantify the losses that future generations will incur as a result of this profligacy?
“It was hard to see how this “democratization of finance” was going to lead to a fairer economy rather than a more chaotic one, with a vast gulf between winners and losers. The liberatory rhetoric and experimental economics of crypto could be alluring, but they amplified many of the worst qualities of our existing capitalist system while privileging a minority group of early adopters and well-connected insiders.
Binance exemplified the worst of these excesses. It was a premiere operator in an industry that prided itself in risk-taking and constantly “building,” although it seemed to be building little more than a better mousetrap.”
“Peter Thiel, the arch-capitalist fifty-four-year-old cofounder of PayPal, was throwing one-hundred-dollar bills from the main stage, trying to signify their unimportance. When members of the crowd rushed to grab them, Thiel appeared shocked. “I thought you guys were supposed to be Bitcoin maximalists!” Raging against the “finance gerontocracy”—which, of course, had helped to make him very rich—Thiel derided legendary investor Warren Buffett as the “sociopathic grandpa from Omaha.” (Tell us about your childhood, Peter). Also on the dais were luminaries like Jordan Peterson, the Canadian psychologist who found his true, and truly lucrative, calling as an alt-right provocateur who encouraged young men to clean their rooms.
In the hall backstage, we passed Tucker Carlson, deep in expository discourse to some trailing microphones and cameras. On the conference floor, picking up on the trend, Bitcoin influencer Max Keiser, a vocal supporter of Salvadoran president Nayib Bukele, tore up some dollar bills with another attendee—caught on smartphone video, of course. They immediately posted the video, cackling at their own daring, their ultimate, performative disregard for real money. All these histrionics felt choreographed and banal.” — Devious roommates
“The goal of interviewing Brock was to talk about Tether, the company he cofounded in 2014. While Brock had no current involvement with the company, we had heard from a source that he had at one point tried to buy back into Tether’s ownership group for the laughably low amount of $50,000. A source had also told us Brock dangled his political connections to the Trump White House in the hopes of getting back into the good graces of Tether executives like CFO Giancarlo Devasini. Brock had some Trump-world associations, having run a company, Internet Gaming Entertainment, with Steve Bannon, who succeeded Brock as CEO. That spring, people close to Bannon were now reportedly advising Brock on his Senate bid in Vermont. Some of these gambits were successful, others ended ignominiously. (The improbable run for Senate followed an unsuccessful 2020 presidential run in which he received a grand total of 49,764 votes.) But they added to the picture of who Brock was: He was a hustler and a survivor. He helped create Tether, and he operated within the same business networks.
Brock signed a release form and sat down across from me. I started the interview off gently, playing the role of a moonlighting actor passing through a buzzy world I found interesting. We talked about Mr. Pierce’s previous companies, his relationship with Bannon, his abiding love of “innovation,” and his supposed deep ties to major players in the crypto industry. Brock talked up his friendship with CZ, the CEO of Binance, with whom he had been spotted in El Salvador recently. Brock claimed to have helped CZ meet with Salvadoran President Nayib Bukele.” — All so very conservative of them
“Brock shifted on the stool. “Clearly large markets attract large businesses.” There was an awkward pause. The interview appeared to be over. But as we got up from our stools, he kept talking, despite the fact that the cameras were still rolling. I saw my opportunity to ask him about his ties to politics, and specifically to politicians like recently elected New York City Mayor Eric Adams. Adams had reportedly flown on Brock’s private jet to Puerto Rico in November 2021, where he engaged in a publicity tour to promote the Big Apple as a future crypto hub. He proudly announced that he would accept his first three paychecks as an elected official in the form of Bitcoin. It was a ridiculous exercise in showmanship, so of course Jacob and I had written an article in Slate about it. There was no proof he had actually done this, but it was a clever, if unseemly, marketing ploy. I asked Brock about his ties to Mayor Adams. He offered a rambling response about being “pro-innovation.””
“I may have involuntarily laughed at that point. Obviously Brock Pierce would not have attended an NSC meeting! The whole ruse was absurd, a flashback to my Hollywood days. Here was a bullshitter practicing a craft he’d honed for years. Then again, Pierce was connected to former Trump aide Steve Bannon, and the Trump administration wasn’t exactly known for discretion or choosing the highest caliber of people. So who was to say? Could the source who told us Pierce dangled his relationship to the Trump White House to get back in business with the Tether guys actually be right? Had Brock Pierce, the former-child-actor-turned-crypto-insider, who was trailed by a disturbing list of easily googleable rumors and accusations, made inroads with the office of the Fraudster-in-Chief? It no longer seemed like such a stretch. It actually made perfect sense, albeit in an incredibly depressing way. The Golden Age of Fraud, indeed. My head hurt.”
“The day before, while watching a government presentation about the new Chivo Wallet system, Mario noticed something odd. There was a QR code on one of the slides in the deck, and when you scanned it, it took you to an address that had previously been used to scam people. In 2020, approximately 130 high-profile Twitter accounts had been compromised and used to promote a Bitcoin scam. The scammers only managed to make off with $121,000, but the case had briefly attracted global attention. To Mario, this was alarming. The government was using a scam wallet address in the promotional materials for the new Bitcoin monetary system they had developed in secrecy and were about to deploy. Maybe it was the work of a technical novice who googled “crypto wallet QR code” and used the first result that came up, or perhaps it was some scam by a contractor. Either way, it was a disaster, and Mario alerted his fellow Salvadorans via Twitter to the ridiculousness of the situation. The next day Mario was arrested.”
“Much as Donald Trump had done in America, Nayib Bukele bucked conventional political wisdom in El Salvador, marketing himself as both a man of the people and a successful businessman, despite inheriting much of his wealth.”
“Shortly thereafter, the newly reconstituted court creatively reinterpreted the Salvadoran constitution to allow the president to run for reelection, which had previously been illegal. The naked power grab was widely condemned by members of the opposition as well as the international community.” – Constitutional coup
“El Salvador’s economy depends on remittances. The money that the two to three million people of Salvadoran descent living in the United States send home to their families and loved ones accounts for one-quarter of El Salvador’s GDP. The average Salvadoran makes about $400 a month, and 70 percent of the population lacks access to traditional banking, so most business is conducted in cash. (El Salvador “dollarized” in 2001, abandoning its local currency, the Colon, in favor of greenbacks.) Most Salvadorans rely on services such as Western Union or MoneyGram to accept remittances from relatives overseas, despite the sometimes high fees those services charge.”
“After the interview, we trudged up the hill to Garcia’s house. It was meant to be a grand home, but it had been stopped mid-construction and later abandoned by the bank. Garcia and his family squatted on the property, making good use of the modest half-built structure, which lacked running water or electricity or even any doors. Behind the house was the empty shell of a swimming pool, unfinished and overgrown with algae. The family got its water from a creek that ran through a nearby ravine. We found Garcia’s wife laying on a hammock, a small child nestled in her arms. She had been ill and her face shined with sweat. He smiled warmly at her, and she at him, clearly still basking in the glow of their recent reunification. It was a simple moment, but it nearly broke my heart.”
“Do Kwon was a shit-talking thirty-year-old South Korean crypto entrepreneur who, after graduating from Stanford in 2015, founded and sold a wireless networking startup before getting involved in crypto projects, sometimes pseudonymously. Eventually he launched a company called Terraform Labs, which managed a dollar-pegged stablecoin called TerraUSD (UST) and another token called Luna (LUNA). The two were bound together via an arbitrage system designed to keep Terra, a so-called algorithmic stable-coin, at one dollar. This was accomplished via a trading mechanism, allowing Terra holders to exchange one UST token for one LUNA token at any time. The LUNA token was then “burned,” or destroyed, helping to drive up the value of the remaining LUNA by decreasing its supply.
It’s all a bit complicated, so think of it this way: Luna is the counterweight to Terra, a way of balancing supply and demand for the supposed stablecoin. When Terra trades at a price that’s higher than its 1:1 peg, that should mean that demand for the stablecoin is higher than supply, so the supply of Terra ought to be increased to match demand. The protocol incentivizes users to create (or “mint”) new Terra and destroy (or “burn”) Luna. With more Terra created, its price drops. With fewer Luna, its price goes up. Users continue this arbitrage process until Terra trades at its target peg price.
Or so went the plan. There was also a “staking pool” called Anchor, which was also created by Do Kwon and his company, Terraform Labs. (They always call them “labs,” don’t they?) Investors were encouraged to buy Terra coins, which they could then “lock,” or deposit, onto Anchor in exchange for an improbably high yield of 20 percent. Terra became a popular stablecoin, with exchanges like Binance marketing it as a safe investment. FTX also listed it. Some South Koreans put their retirement savings into it.
In early 2022, Do began to attract attention for both his flippant comments and, more important, for his plan to buy up billions of dollars’ worth of Bitcoin as a financial backstop to his crypto empire. Major investors and day traders flocked to him, supporting his projects financially, sharing his roguish media appearances, touting his tokens as the future of stablecoin economics, and generally hanging on his every word. He developed a cultish following of fans who proudly called themselves Lunatics. Mike Novogratz, a billionaire Goldman Sachs alumnus who ran a New York City–based digital asset firm called Galaxy Investment Partners, got a Luna tattoo inked on his shoulder. Do Kwon even named his daughter Luna. “My dearest creation named after my greatest invention,” he tweeted.
Sure, there was the occasional bit of criticism. The economics of Terra, Luna, and Anchor were clearly Ponzi-like, involving the circular flow of money common to such schemes. Where was the 20 percent return on Anchor coming from? There were multiple red flags of a Ponzi scheme: an impossibly high rate of return marketed as low risk, a complex strategy to achieve said returns, and unregulated products sold in an unregulated marketplace. That the whole thing smelled like a Ponzi was no secret, but rather a fact discussed by some big industry names on Twitter, podcasts, and in other media.
Do Kwon had a variety of other projects, including something called The Mirror Protocol. The Mirror Protocol was essentially a replica (a “mirror”) of licensed, regulated stock exchanges on which real companies trade real stocks. But on Mirror, people weren’t trading real stocks in a regulated market. They were trading synthetic copies of real stocks on a market overseen by, well, Do Kwon. The SEC subpoenaed Do at a conference in New York, with Do publicly refusing to comply, responding to the government’s principal securities regulator with a defiant lawsuit. Can you imagine the gall it takes to set up a fake copy of the New York Stock Exchange, one that, given its shaky underpinnings and nonexistent oversight, might attract who knows what kind of shady players? And then to refuse to even account for it?”
“On May 8, UST slumped to $0.985 as the markets showed signs of big holders fleeing Terra. On Twitter, Do Kwon joked about the risk, even as his company was taking extraordinary measures, loaning out billions in crypto to trading firms to allow them to prop up his tokens. “So, is this $UST depeg in the room with us right now? No?” he asked. “I prescribe 24 hours of pegging over the next 7 days.”
The next day, the bottom fell out from the once-stable Terra. UST plummeted to thirty-five cents. In the midst of the collapse, Do tweeted a statement that would enter crypto infamy: “Deploying more capital - steady lads.”
It didn’t work; confidence in the scheme evaporated. Over the next week, UST remained massively off its peg while its associated token, LUNA, became nearly worthless. Positions were liquidated across crypto markets, as large UST and LUNA holders found their tokens plummeting in value. On May 12, the Terra blockchain was halted—essentially put on ice—as exchanges began to delist the organization’s tokens, removing them from the proverbial trading floor. In every important sense, TerraLuna was dead. On May 16, the Luna Foundation Guard, the organization that helped backstop UST with billions of dollars’ worth of Bitcoin, revealed that it had spent more than 79,000 Bitcoin to buy Terra in a fruitless attempt to pump up the price. The coming weeks would reveal huge losses—hundreds of millions for some of Do Kwon’s investors and financial partners, which ranged from venture capitalists to important crypto hedge funds.”
“An estimated $40 billion or more of value was wiped out, leading not only to a loss of personal wealth but a cascade of liquidations and loan defaults as a thicket of interlocking financial products, many of them flowing through unregulated DeFi protocols, began to unravel. As the first domino fell, we began to see that crypto was, quelle surprise, far less decentralized than advertised. It revolved around a handful of interconnected players, who all seemed to owe one another money, real and fake. They also owed investors and customers, who wanted their money back. But few had liquid assets on hand to pay up. It was time to keep watching for dominoes.”
“In the midst of all this, Terraform Labs’ entire legal team quit at once. The company’s Korean employees were forbidden by authorities from leaving the country, as South Korean law enforcement launched a number of investigations into different crypto exchanges and tokens, including, of course, TerraLuna. Do Kwon managed to abscond to Singapore and holed up in semi-seclusion there, citing death threats and needing to spend time with his family. Later he appeared to be in Serbia. His tweets became less frequent, but he expressed little real contrition or introspection regarding the damage he had wrought. His revamped coins, far diminished in price and any speculative possibility compared to their predecessors, continued to trade on most major exchanges. Do had the industry’s support.”
“But there wasn’t much time to focus on Do because other dominoes began to fall. Based in Singapore, Three Arrows Capital (3AC) had started as a small hedge fund run by former boarding school classmates Kyle Davies and Su Zhu, both thirty-five years old. As the crypto markets mushroomed in size during the 2020–21 bull run, so did 3AC’s portfolio. The fund swelled to a purported $18 billion in net asset value before collapsing in a matter of weeks, having sunk an embarrassing amount of money into the TerraLuna “ecosystem.” According to a source quoted in New York magazine, their stake in Luna, once valued at half a billion dollars, collapsed to just $604.”
“But the firm had borrowed enormous sums from multiple major players in the industry. Genesis Global Trading, a crypto prime brokerage and lending behemoth, was owed the most: $2.3 billion. Voyager Digital, another crypto lender, said 3AC owed it more than $650 million when it filed for bankruptcy in July. Blockchain.com, a crypto exchange, was due $270 million. The contagion had spread.
What did the 3AC guys do with the money they were loaned other than gamble with it? It was crypto, so of course they bought a yacht. (This one was worth $50 million and called Much Wow.)… Reportedly on their way to Dubai, they disappeared. Even their lawyers couldn’t find them.”
“In the financial press, stories appeared claiming that Celsius—a professed nonbank that allowed people to “unbank” themselves with unregulated, uninsured bank-like services—was seeking the help of Citigroup. The irony was delicious.”
“How much real money was left? How much had gone into this bubble? The curtain was being slowly peeled back through a steady diet of leaks, bankruptcy filings, and the first wave of lawsuits. Important revelations were emerging, some of which confirmed earlier criticisms from skeptics. First, these companies were willing to embrace enormous risk, employing massive amounts of leverage, taking on huge loans, and sometimes loaning out the same crypto more than once.”
“When it filed for Chapter 11, Celsius reported $5.5 billion in liabilities and $4.3 billion in mostly illiquid assets. Technically, it had been insolvent—meaning it owed more than it had—since 2019. But Mashinsky and his cronies kept the plates spinning, until eventually they couldn’t.
With Celsius’s failure, the real victims were everyday retail investors who had trusted Mashinsky’s overwrought promises about revolutionizing finance. Celsius had claimed to have 1.7 million customers, but even though the real number turned out to be closer to 300,000, the company’s failure inflicted enormous financial pain, often borne by those least able to afford it.”
“The fraudsters like Do Kwon were held up as innovators, pillars of the industry designed to grant self-sovereignty and liberate the masses from the shackles of TradFi. Constantly preaching ideas of community, democratic empowerment, and individual liberty, crypto’s leaders and influencers had instead created an anarchic set of markets that invariably funneled money from information-poor retail investors to well-connected insiders and whales. The outright scammers—the NFT con men and rug-pulling DAOs—were there to take advantage of an already fragile situation, cleaning up what the exchange CEOs and VCs and insiders hadn’t added to their own coffers. The truth is that most of the scammers and con men were tolerated—or even encouraged—by the wider crypto industry because there was no economic incentive to do otherwise.”
“Macroeconomically, the writing was always on the wall. When the easy money went away, crypto was bound to crash. Remember my initial thesis: When a bubble pops, the most speculative things fall fastest. Since crypto was entirely speculative, the investment equivalent of gambling, it was bound to go poof when the Fed started raising interest rates. That said, even I was surprised by the speed at which events played out. Over the course of 2021, inflation began to rise in the United States in response to easy money policies, supply chain disruptions, and changes to the labor market, among other factors. In 2020 it was a modest 1.2 percent, in 2021 it had grown to 4.7 percent, and in 2022 it would balloon to 8.2 percent by year’s end. On March 17, 2022, seeking to counteract inflation, the Fed raised interest rates by a quarter point (or 25 basis points if you want to sound fancy). On May 5, they raised half a point and the carnage began. On May 8, crypto had a nominal market cap of $1.8 trillion. By June 18, it was $800 billion. A trillion dollars evaporated in less than six weeks. The joke was the lie that it had ever been there in the first place.”
“Sam was Biden’s second-largest donor in 2020. He’d given $40 million to the Dems. His partner at FTX, Ryan Salame, gave $23 million to the Republicans. They were playing both sides, cozying up to Democratic and Republican politicians alike.”
“I asked him how he explained crypto’s 70 percent drop in market cap over the past nine months, as companies like Terraform Labs, 3AC, Celsius, Voyager, and BlockFi had either gone belly up or were threatening to do so. It did not seem like the decentralized, democratized future of money we had been promised in the ad campaigns, I said. Rather, it felt more like subprime 2.0.”
“But there was another issue when it came to Solana. It periodically stopped working. The Solana blockchain suffered numerous outages since its launch in 2020, with fourteen in 2022 alone. It also had an unfortunate tendency to be hacked, including a hack that would occur just weeks after our interview that cost users at least $5 million.
Sam went into a long explanation that boiled down to sure, Solana and other blockchains had problems now, but through the process of experimentation and refining they would improve over time. It was a standard crypto argument (again, we’re still early), and as always with crypto CEOs, a pretty easy one to make when it was other people’s money at stake.”
“So, by the way, your former general counsel, Daniel Friedberg, used to work for [the parent company of] Ultimate Bet as well. He’s now your chief regulatory officer.”
I paused. Sam appeared at a loss for words.
“I just thought that was sort of interesting.”
Sam’s nervous movements intensified. He tucked one leg under his body and turned his body ninety degrees in his seat, away from me and the cameras. He seemed to grab something from his pocket, and when he turned back he was nodding and twitching so much he needed to take a sip of water."
“How in the world was this massive speculative bubble in an industry rife with fraud—and built upon an incredibly shaky economic foundation—allowed to metastasize to such a degree? Cheating people out of their money is supposed to be illegal, right? What the hell happened to the rule of law around here? Oh right.
In the midst of all this, crypto lobbying expenditures were at an all-time high, and politicians from both parties were touting pro-industry legislation. Leading the charge was Sam Bankman-Fried, the baby-faced effective altruist who had charmed institutional investors (from his offshore Bahamas compound) and was supposed to make crypto safe for Americans. As he told me, he took frequent trips to Washington, the evidence of which could be seen in donation records, televised congressional hearings, and chummy photos with regulators.”
For those looking for concrete examples of what is termed ‘Institutional Capture’, this paper trail is obvious
“According to Bloomberg, “donations from people working in digital assets reached $26.3 million” in 2021 and the first quarter of 2022, more than donations from execs in big pharma, big tech, or even the defense industry. While many of crypto’s true believers were conservative, it was an equal opportunity industry when it came to influence-peddling. Sam Bankman-Fried largesse toward the Democrats was quickly becoming legendary, but lest you think this was a partisan issue, his colleague at FTX, Ryan Salame, as mentioned earlier, donated $23 million to the Republicans. FTX also gave $1 million to a PAC linked to GOP leader Mitch McConnell right before the election. Crypto was playing both sides.”
Under U.S. Legislation, when a entity is classified as a commodity, rather than security, that entity is required to disclose far less about it’s operations - citizens have substantially less information compared to what they would have had the entity been classed as a security. Bitcoins, were classified as commodities.
“According to the Tech Transparency Project (TTP), there were “nearly 240 examples of officials with key positions in the White House, Congress, federal regulatory agencies, and national political campaigns moving to and from the industry.” Crypto’s roster of boosters now included two former chairs of the SEC (Jay Clayton and Arthur Levitt), two former chairs of the CFTC (Christopher Giancarlo and Jim Newsome), and one former chair of the Senate Finance Committee (Max Baucus). A representative example was Brian Brooks, who was chief legal officer of exchange Coinbase before he became Acting Comptroller of the Currency, only to leave that governmental position to become the head of Binance’s US division. He lasted all of three months at that job, before resigning due to “differences over strategic direction.”” – Capture!
“Amid this political passivity, the scuttlebutt was that the crypto lobby could well get legislation passed in the new Congress. One bill going around at the time was known as Sam’s Bill, or the SBF Bill—which tells you all you need to know about his influence at the time. Its official name was the Digital Commodities Consumer Protection Act (DCCPA). It was bipartisan, and it had powerful friends. It was backed by Senate Agriculture Committee Chairwoman Debbie Stabenow (D-MI) and ranking member John Boozman (R-AR). It would give oversight of the crypto spot market—where financial instruments like securities and commodities are traded for immediate delivery—to the CFTC rather than the more powerful and better funded SEC. Crypto broker-dealers would be required to register with the CFTC and submit to oversight from it.”
“The United States of America is unique in the way it separates its regulation of securities from its regulation of commodities. It’s basically a historical fluke. You’ll recall that securities are defined extremely broadly under American law, often under what’s called the Howey Test. It has four conditions: (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit, (4) to be derived from the efforts of others. The expansive definition is purposeful: Human beings are incredibly creative in coming up with new and exciting ways to turn some amount of money into a larger amount of money. Investors, and the general public more broadly, need to be protected in these endeavors. Securities laws are predicated primarily on disclosure. Put simply: When you invest money, you need to know who you are giving your money to and what they are doing with that money.”
“One year later, the CFTC announced that TeraExchange had engaged in illegal wash trading surrounding that very first Bitcoin derivatives transaction. TeraExchange settled with the CFTC, with the crypto exchange agreeing to stop violating the law and to acknowledge the CFTC’s authority. There was no fine or criminal prosecution. CFTC Commissioner Wetjen, in the grand revolving door tradition, later entered the crypto industry. In 2021, FTX US hired Wetjen to be its head of policy and regulatory strategy—the mirror to his former governmental position. To recap, the first derivatives exchange in crypto to be classified as such under American law was later found to have engaged in illegal activity, got off the hook, and then later another exchange hired the regulator who oversaw that decision to help guide their maneuverings on Capitol Hill. You can’t make this stuff up.”
James Block — an important investigator of crypto fraud
“Celsius’s CFO Yaron Shalem had been recently arrested in Israel as part of an alleged fraud scheme connected to Moshe Hogeg, who was also arrested for alleged sex crimes, according to the Times of Israel. (Through lawyers, Hogeg “vehemently” denied the allegations and said he was “cooperating fully with his investigators,” and Shalem said he “acted in accordance with the law and strongly and utterly rejects any attempt to associate him with any act of fraud.”) As soon as Shalem was arrested, he was basically erased from Celsius’s history. The company said nothing about his arrest until it was confronted by critics online. Celsius eventually issued a vague statement without naming Shalem, hired a new CFO, and moved on, dodging questions about him during public events.”
“Create a token out of nothing; pump its value; put it on your balance sheet (look, you’re rich!); use that loaded balance sheet to raise real dollars in investment capital; then take those dollars and buy some companies, some politicians, and naming rights to a sports stadium. Repeat the cycle—keep the flywheel spinning—until it all falls apart. Eventually it does.”
“At four thirty AM on November 11, under pressure from lawyers, creditors, and colleagues, Sam signed over control of FTX and more than one hundred associated companies. He resigned as CEO, handing over the company to John J. Ray III. Ray was a professional corporate cleanup artist who was brought in to manage Enron after its collapse. Twenty years later, the guy who supervised bankruptcy proceedings on behalf of one of the most spectacular frauds in corporate history declared that FTX was even worse. “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray said. He dryly noted that one of FTX’s auditors, Prager Metis, boasted on its website that they were the “first-ever CPA firm to officially open its Metaverse headquarters in the metaverse platform Decentraland.””
“Bankruptcy filings helped fill in the picture. FTX was a shitshow. Billions had been diverted from FTX customer deposits to help bail out Alameda, only for the situation to worsen. The company had spent lavishly on celebrities, politicians, real estate, and personal loans to executives. No one knew where all the money went—especially after some $372 million in crypto flowed out of company wallets in a mysterious “hack” just hours after the bankruptcy filing.”
Things went sideways, and it was hard not to feel the industry was fumbling toward an existential reckoning. Several crypto whales died within weeks of one another, their deaths alluding to the industry’s seamy underbelly. MakerDAO cofounder Nikolai Mushegian died in an apparent drowning in Puerto Rico on October 28 after tweeting a series of bizarre messages claiming the “CIA and Mossad and pedo elite” were running a sex trafficking blackmail ring.
Tiantian Kullander, 30, the founder of a once $3 billion digital asset company called Amber Group, which had a major presence in Hong Kong, died suddenly in his sleep on November 23. Soon after, Amber Group laid off 40 percent of its employees while denying rumors that it was insolvent.
Then on November 25, Russian billionaire Vyacheslav Taran perished in a helicopter crash during good weather near Monaco after departing Lausanne. He was the sole passenger. Another would-be passenger had canceled their ticket at the last minute. Ukrainian media had previously alleged that Taran, who cofounded Libertex, a trading and investment platform, as well as Forex Club, a foreign exchange trading group, had ties to Russian intelligence and laundered money.
You can’t make this stuff up…
“On December 12, hours after he publicly declared that he didn’t expect to be arrested, SBF was arrested in the Bahamas, at the request of US authorities. That day, in a Bahamian court, SBF declared his intent to fight extradition. When the judge referred to him as a fugitive, Sam’s mother, Barbara Fried, laughed. His father, Joseph Bankman, who was on the FTX payroll, plugged his ears in order not to hear what was going on. No one in the family seemed to accept the full reality—the gravity—of the situation.” – “A good bourgeoise son of firm stock” is how these violent contradictions often harmonized
“As Mazars retreated from the crypto business, one of its former clients entered. Donald Trump, a king of schlocky endorsement deals who had called Bitcoin a scam, hyped a “major announcement.” The Trump NFT collection—45,000 silly cartoonish portraits of the former prez looking cool and badass—sold out in a day at ninety-nine dollars apiece, likely netting him millions. The NFT market may have been nearly dry, but a master con man could still squeeze out a little more juice. Still, it felt like the end of something. Even some Trump fans laughed at the absurd digital cash grab. It was too much for Steve Bannon. “I can’t do this anymore,” he said on the War Room podcast. The grift got even worse; numerous online sleuths noticed Trump’s collection may have relied on stolen, copyrighted images.
The crypto industry we all knew, and that some even loved, had been discredited. It wasn’t just the emperor—the entire royal court was parading through town naked. Not all of them realized it yet. Some exchange executives and VCs maintained enough self-delusion (and capital on hand) to take another bite at the apple. But millions of people inside and outside crypto could see what was going on. Some of them had been left holding the bag when these same industry leaders cashed out. Now they wouldn’t be made whole. And with interest rates rising, the easy money wouldn’t be coming back”
“Madoff defrauded some 37,000 clients, many of them quite wealthy. FTX claimed 1.2 million retail traders in the United States alone—thirty-two times larger than Bernie’s scheme—and 5 million worldwide. When added to the millions of regular people who have been locked out of their accounts at places like Celsius, Voyager Digital, BlockFi, and others, the breadth of the devastation became clear. Cryptocurrency had lured in folks from all walks of life with the oldest and simplest con in the book, the get-rich-quick scheme, cloaked in the language of innovation. The hollowness of that story was now clear, but so was its power. And if we were to learn anything from crypto’s wild shot across the bow of American capitalism, we needed to understand why it resonated with so many people.”
“In May 2018, the Supreme Court ruled as unconstitutional the Professional and Amateur Sports Protection Act, a law that had made most sports betting illegal—with places like Las Vegas and Atlantic City the obvious exceptions. Suddenly, a massive underground industry came into the open, as legalizing sports gambling became a decision left to the states. Unsurprisingly, most liked the idea of bringing already existent gambling into the open and collecting millions of dollars in taxes in the process. At the time of the Supreme Court decision, the New York Times sketched out a possible future for gambling in America, writing, “The decision seems certain to result in profound changes to the nation’s relationship with sports wagering. Bettors will no longer be forced into the black market to use offshore wagering operations or illicit bookies. Placing bets will be done on mobile devices, fueled and endorsed by the lawmakers and sports officials who opposed it for so long. A trip to Las Vegas to wager on March Madness or the Super Bowl could soon seem quaint.””