Inside Crypto’s House of Cards

This is part of Slate’s daily coverage of the intricacies and intrigues of the Sam Bankman-Fried trial, from the consequential to the absurd. Sign up for the Slatest to get our latest updates on the trial and the state of the tech industry—and the rest of the day’s top stories—and support our work when you join Slate Plus.

In April 2022, Bloomberg investigative reporter Zeke Faux wrote a profile of the then boy genius of crypto, Sam Bankman-Fried. The article centered on questions of how SBF planned to handle his massive new fortune: Would he follow through on his promises to give it all away or become just another billionaire making empty promises of philanthropy?

Nearly a year and a half after that article was published, Bankman-Fried is … going on trial for fraud. Now Faux and others are wondering: What does the massive rise and even more massive fall of crypto’s golden boy mean for the rest of the industry?

On Friday’s episode of What Next: TBD, I spoke with Faux, also the author of Number Go Up: Inside Crypto’s Wild Rise and Staggering Fall, about crypto’s flight toward the sun—or was it the moon? Our conversation has been edited and condensed for clarity.

Lizzie O’Leary: The whole crypto industry really rests on the idea of a stablecoin, something that is supposed to be backed, one-to-one, with fiat currency. The heart of your book is your investigation of Tether, which everybody was relying on to be solid, and yet the minute you start researching it, it’s like a parade of red flags. Can you take me through the start of your journey looking into Tether?

Zeke Faux: It’s 2021. Janet Yellen calls a meeting of all the top financial regulators. They all walk over to the Treasury Department and they have a meeting about crypto and Tether, the stablecoin. Does it really have $50 billion in the bank? And if it doesn’t, could the financial system collapse—not just the crypto world, the whole real world?

So, I hear about this, and I’m thinking it must be somewhat legit if it has risen to this level. I start looking into it. First off, the CEO and the CFO are never seen in public—there are no interviews. It’s unclear where the company is. They’ve implied they’re regulated by the British Virgin Islands. So, I email the financial regulator there, and I say, “Do you regulate Tether? Do you have any records on them?” And he is like, “No, we have never regulated Tether.” I still think they might be supposed to. I don’t know. It’s very hard to untangle.

A lot of people were skeptical of Tether, but a lot of logic and reasoning seem to go out the window because “number go up.” If everybody believes that the thing is going to be more valuable, then the thing is more valuable. What does that tell you about the mentality behind all of this?

You can think of Tether as casino chips. If you need these casino chips to gamble at this amazing crypto casino where everyone’s getting rich, then you’re willing to overlook any flaws in this casino chip system. And similarly, in the book, I buy an NFT, which is essentially a digital picture of a monkey that I paid $20,000 for. But the process of buying it was so horrible that I thought, Who would do this if they did not think they were going to get rich?

The appeal of “number go up” has to be there to get people to send their money to FTX, this weird offshore company, or to buy dogecoin, or to go through this whole struggle to buy an NFT. Why would I want to get into crypto if I wasn’t going to get rich? I said to a lot of the founders, “I’m not saying your coin’s going to crash, but it can’t go up forever. If it’s just flat, why is anyone going to do this?” And people did not have good answers for that question.

Maybe this is a stupid question, but why did the number go up? Why did people think that they could make money forever?

It’s hard to say. I think that low interest rates made venture capital funding available to a lot of these really speculative crypto companies.

Companies that were throwing off big yields. So instead of putting your money in something that made cents, you might put your money in something that was promising a 20 percent yield, right?

Yeah. In this last crypto bubble, which I think will never be matched, a lot of the companies were promising yield, and you couldn’t get yield elsewhere. If you’re a company trying to be serious about it, you can’t just say, “Oh, I’ve got this coin and it’s the best.” You need a whole pitch about how we’re going to have staking and there’ll be yield and you’ll earn 10 percent. That sucked in a lot of people.

And there was a lot of money available. People had stimulus checks. They were bored. I don’t know exactly how it got started, but once it started going up, it was such a powerful story. If you hear about somebody who made money on crypto, you want to do it too. For a while, it just seemed like everybody was doing it and you were kind of a sucker if you didn’t.

You put the Ponzi scheme question to multiple people in this book, and a lot of them were like, “Well, yeah.” What did you make of that?

They have this saying, “We’re all going to make it.” WAGMI. The idea behind it was: If we all buy and don’t sell, the number will go up and we’re all going to be rich and it’s going to be so awesome. But it just doesn’t work. We can’t all get rich. The number can’t go up forever.

Major banks, big players were all thinking about crypto and trying to take it seriously. What does that tell you about the financial system, that you have a bank like JPMorgan saying, “Well, maybe we ought to take a look at this thing”?

If any normal company even coughs in the direction of bitcoin, the crypto world turns it into a big headline that we all talk about and create this impression that the mainstream world is really interested in crypto. I think the mainstream financial world’s attitude is more like, “Many people are trading crypto; they’re willing to pay fees to do so. I guess maybe we should facilitate that and get some fees.” I did not see too many major players making big bets with their own money on the coin prices going up.

More like, “If you guys want to be stupid, we’ll help you”?

Exactly.

Remember that Tether was supposed to be stable, one Tether backed by one U.S. dollar, but it was really hard to tell what that one-to-one backing really meant. In fact, those Tethers were backed, but not necessarily by dollars—more like exotic loans.

Tether had invested quite a lot in short-term loans to Chinese companies. They’d made loans to other crypto companies. I spent two years looking into this, traveling around the world, trying to get to the bottom of the whole crypto mania. Even as all the other companies started to blow up, Tether did not—the one company that I thought was the most worthy of investigation actually survived this crypto collapse that killed nearly every other company that I came across.

And just started lending again.

Yeah. Now that interest rates have climbed, Tether’s business model is unbelievable. The pot of money has grown to $80 billion. They can take that and invest it in U.S. treasuries, which are very safe and earn 5 percent a year. Tether is now one of the most profitable companies in the world. It makes higher quarterly profits than Nike.

What do you do with that?

I just continually ask myself why people are trusting Tether. Because in the crypto world, a lot of the pitch was “It’s trustless. You don’t have to trust.” But we’ve found, again and again, that you do have to trust. And if the people running the company are untrustworthy, they may come up with some way to take your money. In the case of Tether, the company has been sued by the New York attorney general for lying about its reserves.

The biggest question behind all of this—the losses, the gains, the crazy stories—is whether, when we talk about crypto, we are talking about some bad bets or about fraud. And that brings me back to Sam Bankman-Fried. The U.S. government has charged him with seven counts of fraud and conspiracy. Much of the trial will turn on whether he was knowingly misleading his lenders and inappropriately using his customers’ money for huge, wild, speculative bets through FTX’s sister hedge fund, or, as Bankman-Fried maintained in his apology tour after FTX collapsed, that it was a case of confusion and bad management. How do you feel about the profile you wrote of SBF back in 2022?

I was sitting right there with a guy running a giant financial fraud. I’m an investigative reporter. My job is to identify these financial frauds, and I didn’t. I don’t feel good about that. I wish I had been the guy who spotted it and who alerted the world to it earlier.

How much do you think his message to you—that he was going to give his money away, his involvement with effective altruism, all of those appearances in Washington—contributed to people saying, “Well, this guy seems good”?

The pitch that he was going to save the world was kind of suspicious. But what actually helped him gain my trust was that when he was talking to people who were skeptical of crypto, he would act like he was also skeptical of crypto.

He seemed like the grown-up in the room who didn’t buy into “number go up” thinking and came across as one of those Wall Street guys who was creating an app. If people wanted to go gamble on crypto, they could do it on his app and he was going to make money. And, by all accounts, the app was great—it worked really well for gambling on crypto.

It seems like there was a logical way he could have become really, really rich and achieved his goals without doing anything fraudulent. I mean, it would’ve been possible.

What I didn’t suspect, and what basically no one suspected, was that he had this offshore crypto casino where he was essentially stealing the money out of the back of the casino and taking it to other casinos to buy dogecoin. That was not on my radar. I was caught off guard when that was revealed to be the truth.

You were back in the Bahamas about a week after FTX collapsed. What did you expect to find there?

FTX had failed. Sam had not yet been charged with anything, he hadn’t gone on his big apology tour yet, and I wanted to know what had happened. It looked really bad. It seemed pretty clear to me: $8 billion was gone; news was coming out about sketchy things that had happened with this money. It seemed pretty clear that fraud had been committed. But I wanted to hear Sam’s side of it, and I thought, Even if he’s not going to admit to anything, maybe there’s something to be learned by hearing his explanation for this.

There are times in poker where the best play can be to go all in, to bet all your money. And even if it doesn’t work out, the fact that you end up losing doesn’t mean it was a bad bet—maybe you just got unlucky and the other guy pulled the ace of spades and beat you. So, I stayed up really late one night because he keeps odd hours, and I sent him a message essentially asking him, “Did you make some sort of mistake, or did you just get unlucky and you had made the right play?”

He said that was kind of an intriguing question. Then I said, “Great. I’ll be in the Bahamas tomorrow. See you soon.” After a few more days of suspense, when it wasn’t clear if he was going to speak with me, he invited me up to his $30 million penthouse to talk about this question for the whole day.

What did he say?

Honestly, we were prevented from having the kind of discussion that I wanted because he knew that he was in legal jeopardy and needed to lay the groundwork for his criminal defense. He thought he was going to go testify before Congress, so when I met him, he was working on the speech he was going to give there, which never happened because he got arrested.

But that speech was supposed to start “I bleeped up,” and that was sort of his pitch to me. He fully acknowledged that the $8 billion was gone, and he wasn’t even really disputing that his hedge fund had used that $8 billion and lost it. Instead, he was trying to say that he did not know that was happening and that he basically just wasn’t paying attention and lost track of everything. I mean, these are very big numbers.

Whoops, I lost 8 billion.

I was like, “Sam, are you really saying you just misplaced $8 billion?”

And then he said to me, looking kind of pleased with himself, “Misaccounted.”

He got out his computer and was typing on a spreadsheet, trying to show me what he thought the $8 billion had been spent on and how he could have possibly imagined that it was less money. And he was trying to say that he was paying so little attention he did not even notice how much money was going out the door.

I told him that I didn’t think this was very plausible.

Then he started talking about the people who were in charge of his hedge fund, which includes Caroline Ellison, who was his friend. They dated at times, and as he was talking about this, his explanations were long. And I said to him, “Sam is the TL;DR of this explanation ‘My ex-girlfriend did it’?”

And he was just like, “Well, I don’t know who did it.”

I’m thinking to myself, This guy will probably get arrested soon. He could spend decades in prison, and he’s going to be in court saying, “My ex-girlfriend did it.” That doesn’t sound like something that Congress or a jury will ever like.

Is this trial the end of crypto? Or is it just a weird little speed bump?

I don’t think that the fate of crypto is on trial. We’ve seen so many companies, not just Sam’s, that were hailed as potentially the future of finance or art or the internet—and they’ve all come to nothing. The next time that somebody pitches “I’ve got this new coin, and I’m going to create this metaverse soon and that we’re all going to live on the blockchain,” I don’t think it will have the same appeal.

I think the only thing that crypto proved to be any good for was gambling. And then Sam ruined that by turning one of the best casinos into a big scam.