Tales from the crypto: An exchange implodes

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Hello, and welcome to the Intelligence from the Economist. In New York, I'm John Fassman. Every weekday we provide a fresh perspective on the events shaping your world. For centuries, the Sama Bajau people have made a living fishing and diving along the coasts of Malaysia, Indonesia and the Philippines. But they have never been citizens of anywhere, which makes their already hard lives that much harder. And when you think of a fictional American president, who comes to mind? Martin Sheen on the West Wing, Morgan Freeman, Harrison Ford. All reassuring, benign figures. So why are British screenwriters so unkind to their political leaders? First up, though, The world of cryptocurrencies has been compared to the Wild west, something of a free for all. But even by that stereotype, the events of this week have been extraordinary.

So FTX CEO Sam Bankman Fried took to Twitter this morning to clear something up. He said that a competitor is trying to attack the company with rumors. He then says in the same tweet, ftx is fine. Assets are fine.

Over the weekend, a run on ftx, one of the world's largest cryptocurrency exchanges by investors wanting their money out, has brought it to its knees. Briefly, it looked like its main rival was going to come to the rescue, but then it backed away.

It's no deal for ftx and a very uncertain future. Major Cryptocurrency exchange Binance said on Wednesday it's walking away from plans to buy a part of its smaller rival.

FTX's founder Sam Bankman Fried is racing to find $8 billion from new investors to bail out the exchange, but faces mounting challenges. On Thursday, authorities in the Bahamas, where the company is headquartered, froze the assets of its local subsidiary and related parties. And fallout from the crisis is spreading across the crypto industry and beyond.

FTX is one of the biggest and best known crypto exchanges.

Alice Fullwood is our Wall street correspondent.

It was the industry's third largest at the end of last week and it's run and founded by a guy called Sam Bankman Fried, who is a sort of floppy haired 30 year old who goes by his initials SBF. At his peak he was worth about $26 billion. He was a very out there advocate of the idea that you should earn a lot of money and then give it away in the most impactful way possible. He'd also spent some of that fortune on political donations in order to lobby Congress about regulation and the sort of future of the crypto industry. I think that it is coming and I think it is important and I.

Think that it's healthy that the industry will be regulated.

I think it is also already regulated in a number of ways. I think that there are points that need to be addressed to give oversight of various aspects of the industry that do not have sufficient oversight right now. And he presents himself and was perceived as almost an antidote to the archetype crypto bro, as was apparent in a CNBC interview.

Charity.

Do you have a sense of how much you've given away so far? It's a bit north of 100 million so far this year. You're pretty low key in terms of when we think about billionaires. You don't drive a Lambo.

No, I do not.

But much of that wealth is seemingly now gone. So SBF has three companies that he's founded. One is FTX Global, a big global exchange. One is FTX us, which is an American based exchange. And the other one is a firm called Alameda, which is a sort of crypto hedge fund investment vehicle. And Bloomberg wealth now estimates that FTX Global, which is this big important exchange, and Alameda, it's written their value down to a dollar, which means that Sam Bankman Fried is probably no longer a billionaire.

So let's start with some foundational things. Can you remind us what cryptocurrency exchanges do and why FTX got into trouble?

Right. So at its most simple, a cryptocurrency exchange will take dollars or another government money deposited by a customer. That customer will use that money to buy crypto assets, maybe Bitcoin, maybe Ethereum, maybe something else. And the simplest way and safest way to run an exchange is just for the exchange to then hold all of those assets that its customers buy, one for one. And the way the exchange makes money is by collecting fees or a spread on transactions that its customers do. And a lot of exchanges also offer some lending services, so they might let you buy on margin, which is maybe they let you buy a bit more Bitcoin than the money you actually deposit with them, or they might let you borrow against your cryptocurrency holdings. Earlier this week, rumors began to swirl that FTX Global might not be able to meet customer withdrawal requests, that it might not be liquid. And that led to a sort of stampede of investors exiting. And eventually FTX stopped meeting those requests and it announced that it couldn't meet those anymore. And that has led to all kinds of chaos in crypto markets. So the FTX token, which is a token that acts like a profit share for the exchange, that's fallen by more than 90% since November 4th. At one point it looked like another big exchange, Binance was going to buy out FTX and meet those liquidity requests on its behalf. But just a day after the boss of Binance, Changpeng Zhao, said that he was going to buy ftx, he took a look at its books and said that the issues that FTX were having were beyond their control or ability to help. And it was since reported by the Wall Street Journal that Sam Bankman Fried told investors that that FTX was facing an $8 billion liquidity shortfall, so it couldn't meet $8 billion worth of customer requests.

Let's talk a bit about Binance. Why do you think they were interested in FTX in the first place?

Yeah, that's a great question. So Binance is the world's biggest exchange. It's run by Changpeng Zhao, who goes by the initials cz and he and SBF have been long time rivals. SBF is seen as this sort of crypto golden boy, a sort of young up and success story. CZ is wealthier, Binance is a sort of longer running business, but he doesn't seem to have sort of earned himself that rising star reputation. So Binance has actually been banned in several major countries, including Britain, Singapore and some states in the US over disputes with various regulators about which kind of regulations applied to them and whether or not they were complying with all of it. And so they were sort of very different characters in the space. And CC has played an important role in unravelling of ftx. So the events that led to the position that the firm is now in started on November 2nd when CoinDesk crypto newspaper published a document that they'd seen that revealed the assets of Alameda, which is the trading firm that SBF founded. And essentially in response to seeing that balance sheet, CZ tweeted that he was going to sell off all of his holdings of the token that FTX issued, which is called ft, which was at the time worth about half a billion dollars. That led to the value of those FTT tokens going down and seems to have contributed to the difficulties that FTX now sees itself in. So he was involved in the very beginning of this dynamic. Then when he sweeped it on November 7th to try and buy up FTX, some people thought that it might have been a sort of orchestrated move, that he might have set off the slide in the FTX tokens to try and buy up the exchange. But I think that narrative is a little more difficult to swallow now that he's turned tail on buying ftx. It seems more likely that sort of the way that FTX was run is probably to blame for the position it now finds itself in.

How so?

So if you run an exchange in that simple way that I talked about, then it would basically be impossible to face this kind of liquidity crunch. And so the big question is, how did FTX get its itself into this position? There are two things going on here. One is that FTX does do some lending out of customer assets. So it might lend a customer some amount of Ethereum against its Bitcoin, and that's because it allows customers to use leverage on its platform. But the real problem seems to have been the connection with an affiliated trading firm, Alameda, which was also founded by Sam Bankman Fried. And the problem seems to have been that FTX has lent a huge amount of customers assets to that trading firm. The Wall Street Journal reported that of the $16 billion in assets that FTX customers had deposited with them, they had lent $10 billion worth to Alameda. So the vast majority of customer funds, and it lent those in return for tokens that have turned out to not be good collateral. So it lent at least some portion of that huge amount of money against FTT tokens. Now those are tokens that FTX issued themselves. It valued them on Alameda's balance sheet at several billion dollars. But after CZ announced that he was selling off those tokens, the price has completely collapsed. And so all of the loans of custom assets that FTX made to Alameda are now backed essentially by not very much. And that seems to have been the big problem, the sort of connection with Alameda, the scale of the lending of customer assets and using those assets ultimately to fund sort of the risky bets that this trading company was making. And that connection with Alameda is something that regulators have been looking into, apparently the securities and Exchange Commission and the Commodities and Futures Trading Commission, two of America's biggest financial markets regulators, both launched probes into the connection between these firms several months ago. And it's also been reported that the Department of Justice is now investigating the connection as well.

What's been the effect of all this on other parts of the crypto industry?

The fallout from this is absolutely enormous. Arguably the biggest blow to crypto that we've seen for many years. Previously, the routing crypto prices this year had claimed the kind of victims you might expect. So a very poorly designed stablecoin, a hedge fund, several platforms that made very risky loans. But that it's come for FTX and in particular it's come for Sam Bankman Fried. That is an order of magnitude more damaging for the perception of crypto than previous difficulties that other crypto firms have run into. The price of all crypto tokens has plunged. Bitcoin has dropped by more than 20% since November 8th and seems to still be sliding. Now it's left other exchanges sort of scrambling to reassure customers. JP Morgan, a big investment bank, published a note saying that it thinks a sort of enormous capital call is rippling around all crypto institutions and that that probably will lead to continued liquidation of crypto assets and continued price slides. So yeah, it's, it's an enormous blow.

And where does this leave regular institutions and investors that had started to use crypto?

If you look at the list of people that had invested in ftx, it includes Singapore's big wealth fund, Tomarsec, the Japanese sort of tech investor SoftBank, it includes the teachers pension plan pension fund in Canada, it includes the sort of biggest names in vc Sequoia. And some of those quite staid institutions had dipped their toes into crypto, making what they thought was a sensible bet on a sort of successful and well run business. And they have been completely burned in terms of government. SBF had developed relationships with legislators and regulators. It's hard to think that they won't be potentially more suspicious of crypto now than they were before. So it's sort of hard to overstate the impact of this and also how tragic it is for crypto. Of course, there are many crypto detractors, and for them, the events that have taken place over the past few days will probably be a little more comedic though.

And Alice, you co host our weekly business and finance podcast Money Talks. What did you look at this week?

Money Talks episode this week was on pay transparency after New York passed a law that demands that employers list pay ranges alongside any job postings. So we look into the sort of merits of of pay transparency laws and snoop on people's salaries in that episode. Next week we will be doing a much deeper dive on FTX and crypto and the fallout from the failure of that exchange, so be sure to tune in for that too.

All right, Alice, thanks so much for joining us today.

Thank you for having me. John.

Think for a moment about how little you would be able to do if you had no passport and no citizenship. True, you probably wouldn't pay income taxes, but you'd also probably be cut off from nearly every social service for around a million people in Southeast Asia who have plied their trade on the same seas for centuries, statelessness has long been a sad fact of life.

The Samo Bajau are a group of related sea dwelling inhabitants that live around the rim of the South China Sea.

Dominic Zigler is the Economist's senior Asia correspondent and writes the Banyan column.

There is about a million members of the Samarbajau altogether, and they're spread along the coasts of Borneo, in the Malaysian state of Saba, there, the Sulu Archipelago in the southern Philippines and the islands of eastern Indonesia. But they are in essence, all related indigenous groups who live on boats or in villages made up of stilt houses connected by wooden walkways. And historically, they've made their living from fishing and from diving for shells and marine products of worth that are then sold overseas. The striking thing about the Sama Bajau today is that although they've plied the region's seas for centuries or for millennia, most of the Samarbajau are not citizens of any country. They are stateless.

How did that happen? How did such a large group of people end up stateless?

The reasons have their roots in the formations of these countries as nation states after colonial rule. For so long, the Samarbajar had essentially seen their seascape, the seascape on which they made their living as one without boundaries. Without borders. And they freely traveled, interconnected, intermarried, and formed this floating peripatetic community. But when newly decolonized states hammered down their borders as well as hammered down their citizens in place, the Sababaja were found lacking documentation, which is essential for bureaucrats who are trying to form a new state. And perhaps even worse than that, they were seen in the eyes of officials to be of dubious loyalty. If they wandered and if they traveled, how could you vouch for their patriotism, for their loyalty? And so, really, from the birth of the modern states of the Philippines, Indonesia and Malaysia, the Samarbaja were rendered stateless.

How does statelessness impact their lives?

The effects of statelessness are profound. So I was recently on the island of Pulagaya off the coast of the Malaysian capital of Sabah State, Kotakinabalu. And there the villagers really had access to very few basic services, certainly not to sanitation, and there was no medical treatment. Just thinking about healthcare alone, the effects run deep. I met a grandfather, Bill Bayati, the head of a household of nearly a dozen, many of them young children, and he had recently lost his 40 something year old son, Amen Rati. The family breadwinner, Amin Rati, had become ill with blood poisoning. He was admitted to a hospital on the other side of Sabah state, and indeed, after only a few days, he died in hospital. Now, in Malaysia, medical treatment is nearly free for citizens. But as a supposed foreigner, even though Hamin Rati was actually born in Sabah, the father now owes the hospital 4,000 ringgit, which is nearly US$900, for his late son's admission. The striking thing is that for a man who for his 40 something years had been undocumented, well, the hospital wrote out a death certificate at the end of his life and gave it to his father. His father took it out of an envelope and showed me. And this was the first time that Amen Ratty had ever assumed a documented identity. And that grim irony certainly wasn't lost on his father.

That's a grim story, Dom. I assume for the Sama Bajo, the problems of being stateless go beyond just a lack of affordable health care though, right?

They do indeed. There's no state schooling for Sama Baja children, for instance, so nearly all of them are illiterate. But there are some efforts by NGOs, including by the UN, to help get Samarbaja people documents and thus really help them with access to the kind of life and services that other citizens of these countries take for granted. For example, in a video from one of these UN missions, there's a mother from one of the communities in the Philippines whose family the UN is helping to become documented. She talks about just how important the coming birth center for good is because it'll help her daughter be able to go to school and get an education.

So it sounds like at least there's some positive work happening.

Yes, there is some welcome work, but the problems are still great. And even educated samarbaja face discrimination. Once they start looking for work, many jobs are denied them, especially if they don't have documents. So, for instance, children head off to the markets to work as porters. Along with adults. Children are often seen begging in quayside markets, for instance, in the fish and food markets. The lack of basic public services in the stilt villages means that infections are high. If you consider that the mildly tidal waters underneath these villages, in which children constantly play well, they're an open sewer. So infant mortality is high and infections are common. Very occasionally, state doctors do visit the settlements, but they almost always visit accompanied by a policeman. And the doctors then complain that ignorant villagers simply vanish and claim that they're uninterested in better health.

And is that true, do you think? Are they evasive? And if so, why?

Well, the evasion is perfectly rational, because experience teaches the samba bajau not to engage with the authorities unless they really need to. One of the reasons for this evasive behavior is that unscrupulous officials prey upon their desire for legality. They demand bribes for temporary permits and passes, for instance. And perhaps worse, samba bajau quite often face arbitrary incarceration. And sometimes they're sent to camps for illegal migrants. Meanwhile, some of the Samar bajau's traditional livelihoods are under pressure. Some of bajau are being kicked out of their traditional fishing grounds as marine parks are declared and designated for tourism. And some of the sama bajar I met report that the marine police often come and throw their fishing rods overboard.

So how does their future look?

Frankly, quite bleak. Things aren't really going to get easier for the summer bajau. And one of the reasons for my pessimism is because of rising tensions and territorial claims amongst the various littoral states around the South China Sea. China, above all, is pressing maritime and territorial claims in the South China Sea. And as a result of this, frontiers are becoming more brittle, more militarized. And that leaves the water's original peoples hemmed in to policymakers in the capitals of these countries. Perhaps the Samarba's plight is a cost of protecting and preserving borders, but in truth, their stateless condition is A disgrace.

All right, Dom, thanks very much for joining us today.

Thanks, John. Great to be with you.

Downing street in London. Almost as soon as Rishi Sunak was appointed Prime Minister, his communications team released a video.

Nicholas Barber writes about culture for the.

Economist, showing us what a great guy he was, how hard working he'd be. Unfortunately for them, the drumbeat that accompanied this sounded a bit too much like the drumbeat of a Gary Glitter single. Gary Glitter Bigger. Conflicted pedophile. Of course, the team then had to issue a denial. This definitely wasn't the Gary Glitter song that we were listening to.

Mr. President, it's Rishi Sunak.

How are you?

You can see what the team was going for. It was showing us that this guy was down to earth. You see him dunking his biscuit in his tea. He's handsome, he's got great hair. He's quite awkward as well. And he has this rather bashful conversation with Joe Biden on the phone. It seems weirdly close to the portrayal of the Prime Minister played by Hugh Grant in Love. Actually, He dances all around 10 Downing street to the strains of Jump for My Love by the Poynter sisters, a classic 1980s upbeat pop single.

Mary, I've been thinking.

He's the one who he fancies as tea lady, played by Martin McCutcheon. And he has a bit of a run in with a sleazy American president played by Billy Bob Thornton. What's interesting is that this is one of the only examples of a fictional Prime Minister portrayed in any kind of positive light in cinema or in TV history. We like him. We want him to live happily with his tea lady. But almost every other prime minister you can think of on screen is a terrible, nasty, villainous, scheming character. It just goes to show, perhaps, how cynical we are about prime ministers, because again and again we see them in TV series and in films, basically as villains. And it's a real contrast with how American presidents are betrayed. In Hollywood Mo. There are villainous American presidents that turn out to be aliens or they're the Antichrist or whatever it is. But that's balanced by far, far more portrayals. Very positive, noble, upstanding, strong characters, usually played by Morgan Freeman. And there's an alien invasion or there's a meteor strike, and the President stands there and he makes a grave address.

Hello, America.

It is my unhappy duty to report to you that the Messiah has failed.

There's even one in Independence Day, played by Bill Pullman. The president not only makes a rousing speech, but he then climbs into his fighter plane and he jets off to have an aerial dogfight with the flying saucers.

Our target is to the north, centered above what remains of downtown Los Angeles.

Now, there is no way you would get a British Prime Minister in a film doing anything like that. Probably the most Machiavellian Prime Minister we've seen on TV is in the series House of Cards, the original British series, which was then remade with Kevin Spacey in the States. But the British version starred Ian Richardson and his character, who often spoke to camera, was the Conservative Party's Chief Whip. And then he rose to being Prime Minister mainly because he was a murderer.

Dear old Patrick knocking shop in Marrakesh, very wide of the mark. Our esteemed new leader wouldn't know a knocking shop if he saw.

There's a theme which runs through so many political TV series. It's not about how they change the country, it's about what's going on behind the scenes. It's about the backstabbing and the scheming and the blackmailing. You've got a whole strain of them who are fascists, basically. There's obviously a great fear in Britain on some level that we'll have a fascist Oswald Mosley type Prime minister. So in years and years, which is a recent British series written by Russell T. Davis, Emma Thompson played a populist businesswoman who became a fascist Prime Minister.

Because the British found a way to empty those camps in South Africa all those years ago, they simply let nature take its course.

There's the film Viva Vendetta, based on the Alan Moore graphic novel, in which John Hurt plays a Big Brother style Prime Minister. Moments such as these are matters of faith. To fail is to invite doubt into everything we believe, everything that we have fought for, which is resonant casting. Because John Hurt had already played Winston Smith in the film of 1984. There was a slight change, which you could tell when Tony Blair became Prime Minister. That was when we had Hugh Grant's Prime Minister in love. Actually. There was also a Prime Minister played by Anthony Head, quite a Hugh Grant ish type character in the sketch show Little Britain. And he's a suave, debonair type of guy who's lusted after by his aide, who's played by by David Walliams.

The results of the opinion Pearl come through. Sebastian. Yeah, I've got them right here. Prime Minister. Well, they're very happy with your work on Northern Ireland. Strong approval on your health service reforms. They'd like to see you in shorts.

You could tell that These characters probably wouldn't have existed without Tony Blair. Whatever you thought of him, he showed screenwriters and directors that a prime minister could be quite funny, could be quite down to earth, could be quite casual, might know a bit about pop music. It's hard to say why it is that British screenwriters and directors and producers are so cynical about British prime ministers. It could just be because that's what the British character is, that in general, we're all a bit cynical about our politicians. We don't hold them in high regard. We might hold the royals in high regard. There are lots of fictional royals who are in some ways the equivalent of the American president. But our prime ministers, well, they're just seen as people who have got the top job possible, possibly by accident, possibly just because they were lucky and they might not hold it for long. The fact that we've seen the prime Ministers come and go at such a great rate at the moment means that cynicism is unlikely to change anytime soon.

That's all for this episode of the Intelligence. Our editors are Marguerite Howell and Chris Impey. Our sound engineer is Will Rowe. Our senior producers are Sam Westrin, Jack Gill, Rory Galloway and John Joe Devlin. Stevie Hertz is our US Audio correspondent and our creative producer is William Warren. Our producers are Alize Jean Baptiste and Kevin Kaners. With extra production help this week from Emily Elias. We'll all see you back here on Monday.