Twitter Files, SBF, and The Regulation Ruse

The last week has been another long year. I believe there is one critical takeaway from everything; decentralization is the only way forward.

On Monday I was chatting with a fellow crypto-focused Seeking Alpha contributor for this month’s episode of the BCR Podcast. It was fun picking the brain of someone who I’m kind of competing with as we both offer crypto-focused marketplaces on the Seeking Alpha platform. We were talking about data sources that we use to find information. Want to know what he mentioned?

Twitter.

What?! It’s true. I use it for the same purpose. Back in my blogspot days, I interviewed Chris Brown of Aristides Capital for a 2018 post about the psychology of trading. In that conversation, Brown talked about how useful Twitter was as a tool for finding solid market alpha:

even though like 99% of the stock tweets are really low informational value, every once in a while someone will put a nugget up there that’s actually pretty interesting - Chris Brown, Aristides Capital

Paid members can read the entire post here.

I share these anecdotal comments because I think they highlight just how important Twitter has actually been through the years. These two examples have a financial lean but Twitter sort of became the place for numerous other sub-groups to share ideas. It’s the reason why Twitter was the hardest platform to leave back when I dumped most of my tech accounts last year.

It’s also the reason why I came back with the hope that Elon Musk might actually make the place a bit more of a public square again. He has his work cut out for him though because there is no question Twitter is worse now than it was two years ago. Worse than that though, taking Elon’s intentions at face value may not be advisable as we’ve seen at least one account that has historically been critical of him get suspended over seemingly nothing - not a good look from a ‘free speech absolutist.’

Reaction to the Twitter Files

My general silence on the Twitter Files up until this point isn’t out of total disinterest or because I haven’t read the threads. I think my biggest takeaway from all of it is kind of, “no duh.” It was entirely obvious in real time that Twitter’s staffers were making it up as they went along when it came to content moderation and how it handled sensitive accounts. It was entirely obvious in real time that these policies were arbitrarily enforced with the political leanings of the punished usually skewing to one side of the aisle.

Banning a sitting US President was a ‘no going back’ moment. And they knew it. Since Twitter got away with it, the little censorship Nazis at the blue bird were emboldened to do all of the censorship things they were able to do over the last couple years pertaining to COVID. Destroying any counter-narrative from becoming ‘mainstream;’ a move that is entirely anti-science and has aged exactly how many of us here knew it would.

Remember Parag Agrawal? He was the CEO of Twitter when Elon bought the company and succeeded Jack Dorsey. Parag’s time at the top was brief but, under Dorsey’s reign, in the moments when Twitter executives made the decision to ban Trump, Agrawal seemed to understand the gravity of what the company was doing and the negative implications that decision is going to ultimately have for platforms like Twitter for years to come. From the Twitter Files, Agrawal:

In my mind, this is the end of the road for centralized content moderation - hard to believe that this approach will be sustainable going forward.

He’s not wrong. Centralization sucks. It requires trust in a small amount of people - people who probably suffer from a God-complex. With this in mind, it makes it all the more ridiculous that crypto is on trial in the court of public opinion because of the failures of a centralized company. A company that was functioning off-shore and very likely purposefully breaking rules that already exist.

Sam Bankrun-Fraud is Finally Indicted

Whoops, I mean Sam Bankman-Fried. How juvenile of me. I saw that on Twitter (where else) and thought it was funny. Again, how juvenile of me. Sam Bankman-Fried. Or SBF as he's been known throughout crypto for the last few years. What a fall from grace for SBF, amirite? It seems like only yesterday he was getting applauded by a live audience at DealBook and now he finds himself in custody. The indictment includes 8 charges in total. Each of which relate to wire fraud, money laundering, securities fraud, and campaign finance violations. If convicted on all of these charges and given the full penalty, SBF is looking at over a hundred years in prison.

What are the chances that Sam is found guilty? Well, I’d say probably pretty good considering internet sleuths have done a lot of the work for the prosecution already. The indictment mentions North Dimension Inc as the Alameda Research subsidiary that FTX was using to launder money. Why is that interesting? Well, because the self-described “shadowy super coder” Nick Bax found the connection between North Dimension and FTX and shared it on Twitter… on November 10th. What took the US government so long to bring him in?

This level of ineptitude is why conspiracy theories form. I’m not claiming this is true, but I can’t help but wonder if this entire FTX debacle has been an elaborate psyop all along. The day before SBF is to speak in front of congress, he’s arrested. Interesting. Rather than get anything meaningful out of Sam in an official setting, we’re inundated with a month of rambling and nonsensical explanations from a highly educated, very well connected guy who is simply claiming ignorance.

We are to believe the man who is MIT-educated and who has not one, but two Stanford law professor parents didn’t know what he was doing when he was funneling money through a shell company to himself, his friends, and most importantly, political figures and causes? We are to believe with two law experts in his family, Sam didn’t know better than to go on a literal media tour while he was under investigation?

The Regulation Ruse

Yesterday we were able to get some pretty damning testimony from current FTX CEO John Ray during the House Financial Services Committee hearing on the FTX collapse. Ray, who was also tasked with cleaning up Enron’s collapse, has been tasked with overseeing FTX’s bankruptcy proceedings and detailed damning moves by Sam, a complete lack of internal controls over customer funds, and essentially a non-existent financial compliance department.

But again, I question how it’s possible that Sam could have been this incompetent given his background and his connections. I’ll admit, I didn’t watch the full testimony yesterday and have only seen highlights. But I can say what I have seen from Ray and House Representative Tom Emmer seemed relatively on point. Especially when Emmer pressed Ray on whether or not Ray would comply with any requests for internal records of communications between Bankman-Fried and SEC Chairman Gary Gensler.

Gensler has been largely regulating crypto by enforcement and has repeatedly denied applications for a spot Bitcoin ETF - something that has been unquestionably damaging to investment demand for the top cryto. But Emmer wasn’t the only one to show up yesterday. To her credit, even the often ridiculous AOC posed some very interesting questions about SBF’s relationship with the Bahamian government and the decision to allow FTX withdrawals from Bahamian accounts before filing for bankruptcy.

Clown Show

Today it was the Senate’s turn to play concerned at the Senate Banking Hearing and I actually got to watch most of this one. Here we saw our fearless leaders questioning the likes of Kevin O’Leary, the famed Shark Tank TV personality, and Ben Mackenzie. You may know Mackenzie better as a young Commissioner Gordon from the old Fox show Gotham.

Nobody can help elected officials make sense of FTX quite like a reality TV star and a literal actor who claims to be a crypto expert. I follow Ben on Twitter, let’s just say I have doubts about his motives and his understanding of what he’s even talking about. Neither of those doubts were alleviated by his testimony today. He’s right about one thing though; crypto is filled with grifters. How do I know? Buy Ben’s book and find out.

Back to the point though, Ben Mackenzie is anti-crypto and Kevin O’Leary is pro-crypto. As fate would have it, they both want ‘regulations.’ My, how convenient. O’Leary was an investor in FTX and has been mocked online for losing millions in the scam. Now we’re relying on O’Leary’s crypto expertise to makes sense of what happened to FTX. Mind bogglingly, at one point during today’s hearing O’Leary tried to blame the FTX collapse on Binance. In fact, there were several moments today when Binance was vilified by those giving testimony. Referencing Binance, O’Leary even falsely claimed crypto is monopolized by an unregulated foreign exchange; as if US-based Coinbase and Kraken don’t exist and practice anti-money laundering measures.

From where I sit, today wasn’t about FTX or Sam Bankman-Fried. Today was about regulating crypto. Crypto tokens are simply assets on a public blockchain. Public blockchain is quite literally the technology that solves many of the problems that created FTX to begin with. Those problems include issues around transparency and regulatory clarity. The offshoring of some crypto businesses is almost certainly because nobody knows which of these assets are classified as currencies, commodities, or securities - each of which demand a different US bureaucratic body to oversee their “safety” and they’re all fighting over jurisdiction.

Crypto criminals?

Generally speaking, today’s hearing was an excruciating two hours. I can’t describe how frustrating it is seeing the same nonsense get regurgitated over and over again by these congressional grandstanders who are making statements disguised as questions for their re-election mixtapes. Per usual, Senator Elizabeth Warren was a massive offender of this kind of performative art as she once again perpetuated the theory that crypto is most useful for criminal activity.

Wrong. Pure and simple. Criminals using public blockchain for illicit activity would be like broadcasting a murder on television in front of a live studio audience and expecting to get away with it. Maybe that’s possible in the movies but nobody is actually doing it in reality. To his credit, O’Leary did point out this fallacy when pressed by Warren.

Once and for all; do criminals use crypto? Yes. Do they use it more than they use cash or other money laundering tools? No. Remember Tornado Cash? It’s the crypto mixer protocol that ended up on the OFAC list because of theorized criminal activity. Well, usage of that protocol fell off a cliff when the US Treasury criminalized its usage:

Gee, would that be because the users were hiding their funds for criminal activity or would it be because people were looking for transaction privacy on Ethereum for perfectly legitimate reasons? I think it’s safe to say criminals will keep using it if they want to. They’re already breaking the law. It’s the law abiding citizens that miss out when the US Treasury uses OFAC to sanction code. Judging from the steep decline in users, it sure seems like former users weren’t doing anything wrong and are now honoring the rules. But yeah, sure, Liz, we’re all using crypto for money laundering, bomb sales, and human trafficking.

Where are the adults?

Senators Toomey and Lummis were probably the only two I can recall who actually put together coherent thoughts this morning, but that probably shouldn’t be a surprise at this point. Near the end of the hearing, Senator Catherine Cortez Mastro asked O’Leary if banks should be banned from utilizing crypto technology to protect investors. His response was borderline epic:

The concept of passing legislation that would ban banks from integrating with cryptocurrencies and crypto technology… if that were to happen, as an investor, I would short every American bank stock because it would make it the most uncompetitive financial services sector in the world. The innovation that is coming forward, once regulated, is going to be profound in terms of how it changes the cost, the efficiency, the auditability, the productivity of the banking sector. Just look at something as simple as ACH transfers, how archaic they are.

At that point Cortez Mastro interjected, “so you do not agree with isolating it (crypto) from the banking system?”

O’Leary: “That’s insanity.”

Mr. Wonderful is right. And you know who else knows that? The banks that he just said he’d short know that. And they know he’s right about that. Crypto is inevitable. The only hope the banks have of being crypto rail owners rather than crypto rail participants is if self-custody is somehow criminalized - I think that is a long shot. But the banks are going to find a way to carve as much flesh from crypto as they can and they’re going to use the hookers in Washington to do it.

Fun fact; the Securities and Investments industry was the 8th biggest industry for lobbying spend in 2021. So far in 2022? 4th biggest. Hmm… why?

Are we being played?

The logical question at this point is why are so many elected officials suddenly so determined to dO sOmEtHInG about crypto now? Terra collapsed in May. Celsius and Voyager fell apart in June. We just experienced the *checks notes* third major crypto mania in the last 10 years and this latest one topped out 13 months ago. We had not one but two FTX related hearings this week and it’s only Wednesday. What is so different about FTX?

The non-conspiracy theorist angle is that many of these people took campaign dollars from Sam Bankman-Fried, the now disgraced former CEO of FTX. The Chief Fraud Officer, Sam. Those little would-be rulers of the free world in congress care so deeply about FTX because FTX actually makes their existence look ridiculous. You can’t take money from a conman and then look clean. That is the only sane explanation from where I sit.

Because if it isn’t simply hurt feelings, this whole debacle looks a lot more like a setup for an excuse to pass bad laws than anything else. I suppose we’ll get our answer whenever we find out what happens to Sam. If he doesn’t get several decades in the clink and/or mysteriously “dies in prison,” we’ll know the fix was always in.

Gangmembers got nothin’ on these congressmen - Nas

Disclosure: I am not a financial adviser. I am not a law expert. I share what I do and why I do it for informational purposes. This blog simply reflects my personal opinions. I have exposure to equities, precious metals, cryptocurrencies, and various other alternative assets. I am staunch supporter of third-party risk minimization when applicable. Meaning, do it yourself and hold it yourself. If you don’t know how, learn. If you can’t manage your wealth yourself, talk to a professional wealth manager. Of course, please remember nobody cares about your money as much as you do.