The Daily - The Crypto Comeback

Episode Date: May 21, 2024

This month, customers of FTX — Sam Bankman-Fried’s cryptocurrency exchange, which collapsed in 2022 — were told that they would get their money back, with interest.David Yaffe-Bellany, our technology reporter, explains what was behind this change in fortune and what it says about the improbable resurgence of crypto. Guest: David Yaffe-Bellany, a technology reporter for The New York Times, covering the crypto industry from San Francisco. Background reading: Is crypto back? Here’s a guide.And here’s a guide to the risks of Bitcoin E.T.F.s.This is how The Times covered Sam Bankman-Fried’s sentencing.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday.

From The New York Times, I'm Sabrina Tavernisi, and this is The Daily. FTX founder Sam Bankman-Fried was sentenced to 25 years in federal prison. When the influential cryptocurrency exchange FTX collapsed in 2022, it lost billions of dollars in customers' money. The man behind one of the biggest financial frauds in American history. Lost $10 billion of customer deposits, all while living a relatively lavish lifestyle in the Caribbean. Cryptocurrencies have spent the better part of this year in a tailspin, fueled by financial losses. But in a surprising twist earlier this month, those customers were told they would get their money back.

Today, my colleague David Yaffe-Bellini on what was behind this change in fortune and on what it says about the improbable resurgence of crypto. It's Tuesday, May 21st. David, welcome back to the show. Thanks so much for having me. So the last time we spoke, Sam Bankman Freed, the disgraced founder of the company FTX, and in many ways, you know, the face of the crypto industry, was about to go on trial for stealing money from his customers.

And it really looked like that money was never going to come back. Billions of dollars disappeared. But then something surprising happened. Tell us about it. You're right. When FTX collapsed, customers were in total despair. You know, they were convinced they were never going to see this money again. And Sam Bankman Freed was convicted of fraud, stealing this money, and sentenced to 25 years in prison. But after the company collapsed, a team of bankruptcy professionals came in. These are people whose specialty is going into collapsed companies, figuring out what went wrong, and trying to put the pieces back together. And over time, they started cobbling

together a pool of assets, investments that Sam had made in other companies, cryptocurrencies that he had stashed over the years. And as they did this, they built up a large supply of assets. And what they announced just a few days ago is that not only are they going to be able to repay customers, but they'll be able to repay them in full with interest. And this is really a shocking conclusion to this whole saga. And it's in line with a few really surprising things that have happened in the crypto industry over the last year or so,

since it reached its low point back in November 2022 with FTX's collapse. Okay, so let's dig into that. Explain to us how this failed company ended up being able to return billions of dollars. How did it do that? So the first thing that's important to understand is where the money went. It wasn't simply vaporized. Sure, you know, some of it was spent on expensive material possessions, but not all of it. Sam put a lot of this money into investments in other startups, investments in cryptocurrencies, and this was stealing. This was money he wasn't supposed to use. It was supposed to be set aside for customers. But some of those investments actually turned out to be really good. So give me an example. What turned out well? One of Sam Bankman

Freed's pet issues was artificial intelligence. He was obsessed with AI. He was convinced that it was a potential threat to civilization. And his version of a solution to that problem was to invest in AI companies that were committed to developing the technology responsibly. And so one of the companies that he invested in was called Anthropic. And he put in about $500 million in 2021. Now, over the last three years, the AI industry has exploded, and companies like Anthropic have become much, much more valuable.

And so just in the last few months, those bankruptcy experts who are now running FTX sold off a portion of that stake for close to a billion dollars. So that's a tidy profit on the investment that FTX initially made. Okay, so part of the explanation is AI and kind of riding the AI wave. What about all of the money FTX had in cryptocurrencies? I mean, it was an exchange for cryptocurrencies after all. Yeah, I mean, in theory, FTX was supposed to be sitting on a huge number of cryptocurrencies because that's what people were storing on the platform. And it turned out that a lot of those assets had disappeared or they've been converted into other cryptocurrencies. And so it wasn't as simple as the Bitcoin that you'd stored on the platform was still there. But one cryptocurrency that Bankman Freed maintained a large supply of was called Solana.

Back when FTX collapsed, Solana was trading at something like under $20 per token, really at a low. But since the collapse, Solana has surged again. And in March, it hit about $200. And the estate sold a large quantity of it and generated billions of dollars to return to creditors from that sale. And the rise in Solana is really part of a larger story in the crypto market, a resurgence that's happened over the last year that's really shocked people and has sent these volatile assets back to some of their all-time highs. Okay, so essentially it's the crypto market that's going to give FTX customers their money back, at least in part. There's been this upswing in the pendulum in recent months, and that is what accounts for this reversal of fortune. But explain to me how that's possible, how that's happened with crypto. I mean, the last time we talked, crypto was really down for the count. down for the count? So it's a combination of factors. One is a kind of perception within the crypto industry that the bad actors have been washed out. Sam Baikman-Fried is in jail. He's serving his sentence. Cheng Peng Zhao, who's the chief executive of another troubled crypto company,

Binance, also just got sentenced to prison time. And so there's this feeling, you know, right or wrong in the crypto industry that a new chapter is beginning and that the bad guys are out of the picture. But the real driver of this kind of market wide surge is Bitcoin, the original, most important, most valuable cryptocurrency. And the cause of the surge is a recent court case. The outcome of this case has essentially brought Bitcoin into the heart of the US economy and mainstreamed case. The outcome of this case has essentially brought Bitcoin into the heart of the U.S. economy and mainstreamed it in a way that it's never been before. So tell me about this case. So the case involves a crypto company called Grayscale. And what Grayscale wanted to do was offer a Bitcoin ETF. That's an exchange-traded fund,

which is essentially a basket of assets that somebody can invest in. Instead of investing in the assets themselves directly, you're investing in the basket that contains the assets. So it's a little bit indirect. And in the case of Bitcoin, it would mean you could just go onto your brokerage account and buy a share in a basket of Bitcoin. You don't have to worry about downloading an online wallet and figuring out the complications of cryptocurrencies. This was a way to open up the possibility of Bitcoin investment to more people.

But the federal government was very resistant to this. You know, ETFs are a pillar of the mainstream financial system. They're a vehicle where people store their retirement savings and other crucial investments. And the federal government basically said, this is too risky. We don't want people's money to be locked up in this market that is super volatile and that just over the last couple of years has plunged significantly.

Right. I mean, it just had this massive crash recently, right? So you wouldn't really think that, like, putting these things directly into American retirement accounts would be a good idea. So it makes sense to me that the government objects. So what happens? Well, there's a huge buildup to the resolution of this case. Financial giant Fidelity now entering a new crypto race on Wall Street over these Bitcoin ETFs. While this case is pending,

a bunch of other companies jump on board and apply to offer their own Bitcoin ETFs. And that includes pillars of the mainstream financial system that have generally been cautious about dealing with digital assets. Asset management giant BlackRock took the first steps yesterday to launch a spot. It kicked off a sudden Floriab activity, a race, if you will, to file these spots. The whole crypto industry is watching. It's considered very, very crucial. Wall Street is getting invited in anticipation of the greatest show on earth. And so everyone in the industry is waiting to see what the court will do.

And finally, the ruling arrives in August. We're following new developments in the crypto world today as a U.S. federal court paves the way for the first ever Bitcoin ETF. And the industry wins. A watershed way for the first ever Bitcoin ETF. And the industry wins. The watershed moment for the crypto industry happening today. Bitcoin ETFs set to begin trading in just about two hours from now. It was a very long road to regulatory approval. The court finds, essentially, that the SEC has failed to meet its burden to show that these investment products shouldn't

be allowed, that they're unsafe for the investing public. And what that means is that in January, the SEC kind of grudgingly says, OK, you know, our hand has been forced and these companies can go out and offer Bitcoin ETFs. And so the ETFs start trading shortly after, and they become really, really popular. JP Morgan points out there's now been a total of $20 billion of inflows into these ETFs. That's excluding... People are seemingly very enthusiastic about putting their savings into these investment vehicles. Fidelity and BlackRock and the other companies that are offering them have to buy lots of

Bitcoin in order to support these investment offerings. And as a result, the value of the cryptocurrency Bitcoin raced to an all-time high today. Bitcoin's price surges. 72,000. It hits its all-time record, which is about $70,000. And remember, this was an asset that was dipping below twenty thousand dollars back a year and a half ago in November 2022. And so it's just an amazing surge. So suddenly Fidelity and BlackRock are trading these investment vehicles, these ETFs, with Bitcoin at the heart of them, which means that Bitcoin is no longer fringe. It's mainstream. Absolutely. And this is a huge change because during the last

crypto collapse, one thing that was striking about it was that people who worked in the crypto industry or had investments in crypto, they suffered as a result. But the rest of the economy was basically walled off. The fact that Bitcoin lost almost all of its value in a year, that didn't affect normal people because most normal people didn't own Bitcoin. And so what this change has done is set the stage for Bitcoin to essentially affect a much broader swath of the population. And the precedent set by this major victory

in the introduction of Bitcoin ETFs is maybe the crypto industry can get what it wants. Maybe it can defeat the federal government and really intersect with every other part of the mainstream economy. Which is pretty remarkable considering where it was just two years ago. Absolutely. I mean, we were at a point where people were declaring that crypto is dead. That always sounded a little bit premature to me,

but the turnaround we've seen over the last year is nothing that anyone is dead. That always sounded a little bit premature to me, but the turnaround we've seen over the last year is nothing that anyone ever expected. And this time, the stakes are even higher. We'll be right back. So crypto, as it turns out, is not dead. And in fact, it's no longer even fringe, right? It's mainstream. What does that mean, David, for the next time there's a big crypto crash? I mean, I'm assuming the federal government is going to feel some pressure to be on the hook

for it because these aren't just speculative internet investments, right? They're solid retirement investments for average Americans. So there are two schools of thought on this and how it could go. If you ask a crypto proponent, they would point out that even though crypto has endured these sort of boom and bust cycles over the years, the overall trend is up. You know, if you bought Bitcoin 10 years ago, you've seen massive gains. And so giving more Americans a way to access that asset is a potentially positive thing. That's the industry argument. But certainly there are a lot of people who are really, really concerned about this.

Because last time crypto crashed, the rest of the economy, the mainstream economy, was essentially walled off. If you owned crypto and you'd experimented with digital currencies, in some cases you lost all your savings and really suffered. But everybody else, you know, they might not even have noticed. And that could change. I mean, now that the Bitcoin ETFs are rising in popularity, you know, more and more people are likely to be connected to this volatile industry. And so another downturn could ultimately harm a much broader swath of the population.

So a bigger chance for contagion to the rest of the U.S. economy should something go wrong with crypto. Yeah, exactly. I mean, is the ETF alone going to bring down the American economy? Probably not. But it's a first step in the direction of a kind of more systemic risk. Okay, so what are we really looking at here? I mean, now that these Bitcoin ETFs have been approved, are we looking at a future where other forms of crypto enter the mainstream as well? There's actually a broader legal battle that's going on between the federal government and the industry. You know, the SEC is arguing in all sorts of court cases that a cryptocurrency is no different from, you know, stock, essentially, like a share in a company that you might buy. And that it should be regulated like that,

meaning that someone can't just create a new cryptocurrency and start selling it. It has to be properly registered. They have to make all sorts of disclosures associated with this product. All of those rules that apply to public companies that are trading their shares on Wall Street. And the agency frames this as a matter of investor protection.

This is how you ensure people know what they're buying when they kind of get into this weird and volatile industry. Crypto people are opposed to that, and they have a few different visions of how the industry should actually be regulated. In one version, they kind of compare cryptocurrencies to collectibles like Beanie Babies or trading cards and say that the way in which a cryptocurrency accrues value over time is more akin to that than to, you know, shares in a

company that rise in value. Some say we need entirely new rules. Congress should start from scratch and come up with a new system just for governing cryptocurrencies. So essentially, this is a very big new battle. The government's saying the Wild West needs a sheriff, but we still don't know if it's going to get one, right? If it's going to prevail. Well, the government is trying to be that sheriff. It is actively suing a whole bunch of crypto companies, including some of the biggest in the United States. The most obvious example is Coinbase, the largest U.S. crypto company currently getting sued by the SEC. And the potential outcome here is really, really damaging for these companies.

The government is arguing that they've been operating as illegal securities exchanges. And if the government prevails, we could see massive fines on such a scale that they could even bankrupt some of these companies. And the ultimate outcome there is crypto getting driven out of the U.S., companies moving offshore, all those weird startups with dog names relocating to Singapore or whatever jurisdiction happens to be flavor of the month. And in fact, we're already seeing that to some extent. There has been a flight from the U.S. by a few crypto startups that are kind of

worried about how this might work out. But then there's another scenario, the one that the Bitcoin ETF victory almost previewed for us, where the crypto industry actually wins. You know, the federal government is unable to prove that these digital currencies should be regulated like securities. And the industry flourishes in the US. It becomes more and more mainstream. And everyday Americans start pouring their savings into it. Which again, seems quite risky. It's definitely a major, major risk. And even when the SEC approved the Bitcoin ETF back in January, Gary Gensler, the SEC chair, who's this huge villain in the crypto industry, he's very opposed to the kind of expansion of the industry.

He kind of couched his approval of this product with all sorts of warnings. These products are dangerous. Bitcoin's price goes up and down all of the time. It was a sort of moment of victory for the industry that was framed by the SEC as this real cautionary episode. Where will this be decided, David? These cases are likely to reach the Supreme Court. I mean, it's difficult to predict, of course.

But given the way some preliminary rulings have gone, I think that we're likely to see a sort of split situation where we have divergent rulings coming from different judges. And that's the type of scenario where you ultimately need the Supreme Court. So David, going back to the beginning of our conversation, all of this explains why customers of FTX are going to get their money back. Should this change the way we think about Sam Bankman Freed? I do remember him saying that he just needed a little bit more time to come up with the money. And he was kind of laughed at and then he went to jail. But now that investors are getting their money back, crypto is back up and kind of really in the swing of

things. Was he right? I think Sam Bankman Freed would love to claim this news as a moment of vindication for him, but it really isn't, frankly. Legally, it doesn't actually make that much of a difference. You know, this issue of recoveries for customers came up at trial. And what the judge said, basically, was that if you rob the bank, you steal $1,000, and you use the $1,000 to buy lottery tickets and you end up with a million dollars and you can repay the bank, you still robbed it in the first place. You know, there are laws in place preventing that because most of the time you don't end up winning the lottery.

On the other hand, there is kind of an alternate history here. A version of events where there isn't a bank run on FTX in November of 2022 and the company doesn't collapse, in which all of these investments that SBF has made profit to some degree, and he actually does get the money back and is in a position to repay people. It's a totally theoretical universe,

and who knows if it ever would have played out that way. Maybe he would have just stolen more money. But there's definitely a certain irony in the way that things have played out. If the timing had been slightly different, you know, the whole course of SBF's history could have been changed. So that's one irony. But there's also another, which is that what the crypto industry has achieved over the past couple of months is essentially what Sam Bankman Freed set out to do in the first place. Like the reason he became the face of crypto, went before Congress, advocated for regulation, is that he wanted crypto to go mainstream. He wanted average Americans

to have access to it through his platform. And now they sort of do. Yeah, absolutely. Crypto is as important as it's ever been. It's becoming more enmeshed in the American economy. People are pouring money back in. The numbers on the lines are going up. how much money FTX's customers might get back. Because crypto was initially sold to the public by evangelists who described it as a system that was supposed to be about a lot more than just price. It was supposed to transform finance, overhaul how we're using money, offer access to the financial system to people who've been locked out.

And so far, it just hasn't. financial system to people who've been locked out. And so far, it just hasn't. The industry has never actually produced something that Americans really embraced as a practical use. I mean, for most people, this is just an investment. And the industry's role in the economy has expanded in ways that are potentially dangerous. And it's done that without actually solving any of these problems or answering any of these unanswered questions that have lingered for years at this point. David, thank you. Thanks for having me, Sabrina.

We'll be right back. Here's what else you should know today. Thank you. and Hamas on charges of crimes against humanity. The request must still be approved by the judges from the International Criminal Court, and that could take months. But it represents one of the harshest rebukes to date of Israel's war strategy and of its leader, Benjamin Netanyahu. And Iranian authorities sought to project a sense of order and calm after the deaths of the president and foreign minister in a helicopter crash over the weekend. The country's first vice president assumed the role as acting president, and new presidential elections were scheduled for June.

Iranian state media reported on Monday that the crash happened because of a, quote, technical failure. The deaths leave the country without two influential leaders at a particularly tumultuous moment of international tension and domestic discontent. Although analysts and regional officials expect little change in Iran's foreign or domestic policies. in Iran's foreign or domestic policies. Today's episode was produced by Will Reed, Olivia Natt, Jessica Chung, and Asli Chaturvedi. It was edited by Brendan Klingenberg and Lisa Chow,

contains original music by Dan Powell and Marion Lozano, and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Landsberg of Wonderly. That's it for The Daily. I'm Sabrina Tavernisi. See you tomorrow.