Nov 17, 2022

The FTX collapse, explained.

Sam Bankman-Fried, the man behind the FTX drama. Image: Cointelegraph
Sam Bankman-Fried, the man behind the FTX drama. Image: Cointelegraph

And what it means for Democrats' mega donor Sam Bankman-Fried.

Today's read: 14 minutes.

We're going long on Sam Bankman-Fried and FTX, the complicated story of a Democratic mega donor and cryptocurrency exchange going belly up. Plus, a reader question about the alleged "15,000" Iranians being sentenced to death, a preview of tomorrow, and a chance to advertise in Tangle. 

I’m Isaac Saul, and this is Tangle: an independent, nonpartisan, subscriber-supported politics newsletter that summarizes the best arguments from across the political spectrum on the news of the day — then “my take.”

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Quick hits.

  1. Yesterday, Republicans won their 218th seat in the House of Representatives, assuring a majority for the next two years. Six races remain uncalled. (The majority)
  2. The Senate advanced the Respect for Marriage Act, a bill that would enshrine protections for same-sex marriage into law, all but assuring it becomes law later this year. (The bill)
  3. Senate Republicans re-elected Mitch McConnell to be minority leader. The seven-term Kentucky senator fended off a group of conservatives who had come together to challenge him by supporting Sen. Rick Scott (R-FL) for the position. (The vote)
  4. U.S. Rep Karen Bass (D) defeated Rick Caruso (R) in the closely-watched Los Angeles mayoral race, becoming the city's first woman to be mayor. (The results)
  5. NATO agreed with an assessment from Polish officials that a strike in Poland was the result of an accident, saying an errant Ukrainian defense system missile landed in Polish territory. (The determination)
  6. 25 Los Angeles County Sheriff's recruits were struck by a driver "going the wrong way" in an SUV, according to reports. Five people were critically injured, and the accident is being investigated. (The accident)

Our 'Quick Hits' section is created in partnership with Ground News, a website and app that rates the bias of news coverage and news outlets.

Today's topic.

FTX bankruptcy and Sam Bankman-Fried (also known as SBF). Over the last few days, dozens of emails have come into Tangle requesting that we cover this story. It has a lot of elements: Finance, politics, Ukraine, cryptocurrency and more. We've waited because there was not much clarity early on about what exactly happened, but a picture is starting to emerge. Today, we're going to try to do the basics: Explain what happened, why it matters to you, why it’s relevant to a politics newsletter, and what people are saying about it.

What happened: On Friday, FTX (the company’s full name, and an abbreviation for “Futures Exchange”), the third largest cryptocurrency exchange in the world, filed for bankruptcy. A crypto exchange is a place where people can trade digital currencies or crypto for other assets like conventional money. The company filed for bankruptcy after experiencing the crypto version of a "bank run," an event that happens when fears that a bank may cease to exist cause so many customers to try to withdraw their funds simultaneously that the bank can't dole out all the cash.

Bankman-Fried, who is a Democratic mega donor and was recently estimated to be worth $23 billion, stepped down as CEO. His net worth has all but evaporated and an estimated one million FTX customers are now having trouble withdrawing their cash, and may continue having trouble for a long time.

Why does it matter: Crypto is an emerging space that politicians already have their eyes on, and the circumstances of FTX's downfall have prompted lawmakers and lobbyists to call for more regulation and oversight. FTX wasn't just short enough liquid assets to cover its liabilities, it also appears to have created a web of other crypto currencies to inflate just how much coverage it really had. Fears about similar exchanges crumbling have led to crypto markets falling $150 billion last week alone.

Through FTX and other companies, Bankman-Fried has significant investment and stakes in many companies across the crypto space. But FTX was also not just limited to the crypto space. FTX and Bankman-Fried's money cast a huge net. He was the second largest Democratic donor in the world behind only George Soros. He donated nearly $38 million in this midterm cycle alone, and he also helped run a website to allow people to donate cryptocurrency to Ukraine. It had investments in major sports brands, too, including MLB, NBA and Formula One.

To give you an idea of just how wide a net this financing cast, consider this (which also doubles as a journalistic disclosure): FTX and Sam Bankman-Fried are investors in Semafor, a newly launched media start-up run by former BuzzFeed editor-in-chief and New York Times columnist Ben Smith. Semafor inquired about acquiring or partnering with Tangle, and I met with Smith to discuss the idea — but no deals came to fruition. So even I was briefly grazed by the cash Bankman-Fried and FTX were spreading around.

Now, Bankman-Fried and FTX are being investigated by the Department of Justice and the Securities and Exchange Commission to determine if any criminal offenses were committed, according to the Associated Press.

The details: This story is incredibly complex, but generally speaking, it goes something like this: Bankman-Fried created FTX, a place where people can buy and sell crypto in exchange for other assets. He launched FTX with the profits he made from running a crypto hedge fund called Alameda Research, which built its fortunes buying crypto in one exchange and selling at a higher price in others. However, the two companies were supposed to be operating separately.

Two weeks ago, CoinDesk, a website that reports on the crypto space, dropped an article detailing the seemingly close ties between FTX and Alameda Research. Alameda's balance sheet consisted largely of tokens created by FTX. That realization caused a massive sell-off in those tokens over customer fears that something was amiss.

Subsequent reporting paints an even more troubling picture. It appears that when customers were buying and selling cryptocurrency on FTX, the company was preserving the value of their customer's money with liability assets that it mostly invented. Namely, other cryptocurrencies, which were being propped up in a cycle of convincing people the currencies were worth more than they were, inflating their market caps, and covering up the fact that FTX had very little actual liquid cash to support its customers (which is a very bad thing, especially if a crypto bank run happens).

One popular theory, explained neatly by Matt Levine, whose coverage of this story in Bloomberg has been essential, is that Bankman-Fried was passing money from FTX to Alameda — who then lost the money. Or that Alameda lost the money when crypto markets melted down earlier this year, and Bankman-Fried floated Alameda with FTX customer's cash, and then Alameda failed to make the money back. Either way, the same assets were appearing on both Alameda and FTX's balance sheets, and Reuters reported that Bankman-Fried was secretly using $10 billion of customer funds to prop up his trading business.

What we also know, for now, is that about $16 billion of customer cash went into FTX and nobody seems to know exactly where all that money is. Reuters reported that Bankman-Fried transferred $10 billion of customer cash from FTX to Alameda and a "large portion" has since disappeared. On Twitter, Bankman-Fried is now shopping around FTX's balance sheet in hopes of finding an investor to make his customers whole.

The story is having a massive impact in the crypto and finance space because of its effect on confidence in cryptocurrency generally. In politics, it has people talking about how Democrats will replace one of their biggest donors, and how Congress should be regulating the industry. In the philanthropy space, it's a bombshell: Bankman-Fried had promised to give away much of his massive wealth, and had donated to countless nonprofits — or assured them that money was coming.

Today, we're going to take a look at some reactions from the right and left, then my take. Given our specialty is politics, we'll focus on the political threads of this story.

What the right is saying.

  • Many say it's another warning sign about the speculative nature of cryptocurrencies, but are skeptical of government regulation.
  • Some call out Democrats and the media, who had taken SBF's money and framed him as a rich do-gooder.
  • Others say there are a lot of questions remaining about Democrats’ ties to SBF.

The Wall Street Journal editorial board called it "another lesson in the risk of joining a mania in speculative assets."

“According to a Journal report, FTX lent more than half of its customer assets to Alameda to fund risky bets. Uh oh. Mr. Bankman-Fried says FTX now faces a shortfall of up to $8 billion. If it can’t raise that cash, the plunge could be swift and the losses for investors steep, if not total. That’s capitalism, or at least a speculative form of it. Regulators will have to watch for contagion to the banking system, but there’s no reason not to let FTX fail if it comes to that. The last thing we need is the feds rescuing investors in speculative assets," the board said. "All of this is a lesson for crypto investors and the Fed, which encouraged excessive risk-taking by keeping real interest rates below zero for so long."

“Securities and Exchange Commission Chair Gary Gensler has raised fair concerns about crypto company conflicts of interest and opaque profit-making activities such as those that seem to have landed FTX in trouble,” the board said. “But his regulation by enforcement isn’t working and merely fuels market uncertainty. Mr. Bankman-Fried and other crypto leaders have lobbied Congress to enact clear rules. Members of Congress disagree over which regulator is best suited to supervise crypto firms, but this can be worked out. The bigger problem is that progressives favor letting Mr. Gensler regulate the industry out of business. One worry is that an FTX collapse will become an excuse for him to do so.”

In The New York Post, Miranda Devine criticized the money made from nothing that arrived for Democrats at just the right time.

“It is a stunning fall to earth,” Devine said. “The financial media and big investors have feted the young billionaire as a saint who shunned earthly pleasures like Lamborghinis and Rolexes, but lived only to give away all his money and make the world a better place. He was the most famous millennial adherent of a cult known as ‘Effective Altruism,’ which originated at Oxford University, found fertile ground in Silicon Valley — and now has gone down in flames along with him. EA is a disguised form of socialism, because all the ‘good’ that is done just happens to match up perfectly with the left’s obsessions, whether climate change, social justice, equity, banning meat or his favorite, ‘pandemic preparedness.’

“SBF certainly ‘impacted’ the midterms, funneling his millions into the Democratic National Committee and Democrat-friendly PACs such as Protect Our Future and Guarding Against Pandemics. He donated to committees aligned with Nancy Pelosi and Chuck Schumer to help Democrats win races,” she wrote. “He lavished his largesse on ‘pro-crypto Democrats’ like New York Sen. Kirsten Gillibrand, who was sponsoring a bill to lock the Securities and Exchange Commission out of regulating the crypto market.  He also visited the White House, meeting with top Biden adviser Steve Ricchetti on April 22 and May 12, according to the Washington Free Beacon. No wonder the Biden administration has been weak on regulating the crypto market. It was the goose that laid the golden egg. Meanwhile, the media massaged his profile.”

In The Epoch Times, Jeffrey Tucker described it as something akin to a Democratic money laundering scheme.

"Where to begin?" Tucker asked. "There is the strange relationship that FTX had with the Ukrainian government, which used the exchange as a depository of funds. This was well enough known that Bankman-Fried bragged about it. Then FTX became a huge donor to the Democratic National Committee (DNC). Fascinating. Very convenient. This Ukrainian/FTX/DNC relationship would normally be all over the headlines as worthy of a deep look, especially with the midterm timing, the wild passion of the Biden administration to funnel as much money as it could to Ukraine at a time when Americans are suffering from high inflation, and the murky world of crypto financing that bypasses normal banking channels.

“There are other strange signs, such as how FTX was founded just following the announcement in 2019 that Biden would run for president and that Bankman-Fried’s own mother was a co-founder of Mind the Gap PAC, the sole purpose of which has been to fund Democrat campaigns,” Tucker said. “Additionally, there’s Alameda Research, which served as the investment arm and eventual destination of billions in customer funds from FTX, a practice that violated every best practice of the crypto world, which favors 100 percent reserves... It’s all just incredibly shocking: the ties, the trickery, the scamming, the dark money, the ruling-class ties, the fake organizations, the ridiculous celebration of who in retrospect is an obvious fraud, along with the silly children the fake man had tapped to pretend to be the C-suite of FTX’s sister company. What a symbol of our times.”

What the left is saying.

  • Many liberals are disappointed in the news because they had high hopes for SBF's philanthropy.
  • Others argue that this is the latest example of why we need regulation in the crypto space.
  • Some express deep disappointment, saying SBF showed his true colors.

Matty Yglesias wrote about how much hope he had in SBF, and how bad the situation now looks.

"Bankman-Fried’s publicly stated plan was reckless. But the truth appears to be much worse than reckless, even as it’s still not fully clear exactly how much worse (did he and his circle lose the money? did they pocket it?), and for those of us who defended him against some of his critics, a reckoning is due. SBF is notable in politics because he gave a lot of money. He’s notable to me in particular because he gave to causes that I think are good," Yglesias said. "He gave tens of millions of dollars to get Donald Trump out of the White House (and also quite a bit to Democrats in the 2022 cycle)...”

“Any political success is a highly collective endeavor and no one person is responsible for any result. But money does matter in politics, and some of these races — including very notably the 2020 electoral college — were very close. It’s plausible that without SBF’s money, Trump would still be in the White House," Yglesias said. "By betraying his clients — I don’t know whether he 'defrauded' or whatever else in a legal sense, but he certainly betrayed them — SBF is leaving many of his causes worse off than they would have been if he’d never invested in them. He’s also brought negative brand energy to the whole concept of Effective Altruism, including the people working in areas he didn't spend as much of his money on, like farm animal welfare and public health in poor countries."

In The New Republic, Alex Shephard said he hopes it is a wake-up call for Democrats.

"It’s easy to imagine a world in which Sam Bankman-Fried treated this moment as a coronation, arriving as a new political power player who would use his vast wealth and influence for decades. Instead, as Democrats piled up victories in tight congressional elections, Bankman-Fried was holed up in the Bahamas as his cryptocurrency exchange collapsed amid a liquidity crisis and allegations that he had misused funds," Shephard wrote. "Democratic hopes in Bankman-Fried had already started evaporating before the elections. Although he spent big in the primaries, the spigot dried up down the stretch, possibly due to FTX’s worsening situation. By mid-October, he had backtracked on his '$1 billion' pledge, calling it 'dumb,' and paused campaign spending altogether.

"There is a lesson here for Democrats: Get out of bed with crypto bros like Bankman-Fried and regulate the industry," Shephard said. "For most of the last few years, the party has been divided on the rise of cryptocurrency, which is decentralized, unregulated digital currency. [Sen. Elizabeth] Warren, in particular, has pushed for more regulation, citing its potential for risk, fraud, and chaos, as well as its extreme environmental impact and the high energy required to 'mine' digital coins. Others in the party, meanwhile, have insisted that Democrats should proceed more gingerly. Bankman-Fried was intimately connected with many Democrats via campaign contribution... But Democrats have an opportunity not just to act but to unite on cryptocurrency regulations now—to stop taking money from the Bankman-Frieds of the world and to start pushing for badly needed regulations."

In Vox, Kelsey Piper recapped an interview she had with him this week, and expressed dismay at the positions he took.

"As we messaged, I was trying to make sense of what, behind the PR and the charitable donations and the lobbying, Bankman-Fried actually believes about what’s right and what’s wrong — and especially the ethics of what he did and the industry he worked in," she wrote. "Looming over our whole conversation was the fact that people who trusted him have lost their savings, and that he’s done incalculable damage to everything he proclaimed only a few weeks ago to care about. The grief and pain he has caused is immense, and I came away from our conversation appalled by much of what he said. But if these mistakes haunted him, he largely didn’t show it.

"Before his empire collapsed, Bankman-Fried was actively engaged in lobbying in Washington for a regulatory framework for cryptocurrency," she said. "But in our conversation, he dismissed their role. He characterized his past conciliatory statements — like when he said just last month that some amount of crypto regulation would be 'definitively good' — as little more than 'PR.' In doing so, he all but confirmed the view of critics who have argued that his overtures to Washington were much more about image than substance... Bankman-Fried has maintained that FTX has never invested the deposits of crypto account holders on the exchange. I pressed him on that point via Twitter, and while he continued to insist that FTX did not directly use account money in this way, he said that Alameda — which he also owns — had borrowed far more money from FTX’s balance sheet for investments than he had realized."

My take.

Reminder: "My take" is a section where I give myself space to share my own personal opinion. It is meant to be one perspective amid many others. If you have feedback, criticism, or compliments, you can reply to this email and write in. If you're a paying subscriber, you can also leave a comment.

  • I'm glad I was not caught in his massive net.
  • It's supremely disappointing, because the crypto space has such potential.
  • It's another reminder (to me) of the importance of these regulators, even though I sometimes despise the government.

I'm glad to be an observer in this mess — and not directly involved.

One of the fears I've always had about taking investment in Tangle, or being owned by someone, is that a situation like this could arise. Every mission-oriented organization has to make calculations about whose money to take and why, and I feel bad for the many good people who have (or were planning to) rely on SBF's funding for a genuinely good cause they believed in, only to have the rug ripped out from under them.

By all indications, SBF seemed like an interesting and decent dude. I followed him regularly. He was mega-rich, obviously, but also unique in the space and particularly good at selling a vision for a "better future." One where mega-rich people like him were honest about their intentions and cynicism. His attitude seemed to be: Get rich to spend on things you think are good. I'm okay with that, and appreciated what I took for transparency. That is the essence of the whole "effective altruism" movement. It's okay to do some "bad" things (from the effective altruists' perspective, like engaging in the depravity of capitalism) to do some "good" things (in SBF's case, invest in a bunch of liberal and charitable causes).

What we're getting instead is another lesson in how smart people with seemingly good intentions can do very shady, very bad, or very stupid things in an effort to "win." Perhaps, now that we're seeing the real SBF, the truth is he wasn't that smart or that good after all.

Which is a bummer. Because in the macro, his actions are going to hurt an industry like cryptocurrency that has a lot of potential. I'm a "believer" in the technology behind crypto and the potential for more economic dynamism. I own cryptocurrency that I bought years ago when it was just a moonshot idea. I watched the value of it grow and grow and grow, then collapse, then grow, then collapse, then stabilize and now — collapse again.

While making a few thousand dollars as a broke journalist was great, it was never really the point. The idea was that the "blockchain," the decentralized ledger propping up cryptocurrency transactions, was an opportunity to bring transparency to and level the power dynamics in spaces that have traditionally been rife with fraud and scams. I’m not even sure that its best use case is currency, but many of us who read enthusiastically about the space imagined a future where we relied on it for bank transactions and payments and plenty more.

Now, though, SBF has helped define that same space as one rife with fraud and scams, too. It's hard to overstate how much long-term damage his actions may do. However you feel about his politics, he was truly supposed to be one of the "good guys."

Without question, moments like this make me glad for regulators. As much as I sometimes loathe the government’s intrusiveness and inefficiency, the fact that the SEC and Justice Department are already investigating brings some comfort. Some hope, at least, that the people who lost their shirts might be made whole, and that if what SBF did is as bad as it looks, he will pay a sufficient price for his crimes.

As for the politics of it all, some of the stories are bogus and some are deeply concerning. The whole "Democrats funneled money through Ukraine and FTX" story seems to be mostly bogus. FTX allowed Ukrainian charitable funds to be delivered in crypto and then turn those funds into normal currency. There is no evidence Ukraine was re-routing any of that money to Democrats. It also doesn't make a whole lot of sense. SBF was proudly and publicly dumping tens of millions of dollars into Democratic candidates, he didn't need a money laundering scheme to pass through Ukraine. Meanwhile, we can also see how the money sent to Ukraine using FTX has been spent.

More concerning, obviously, is just what this illustrates about how our political system works right now. The big money angle is plain as day. SBF gives cash to Democrats. Then SBF lobbies Democrats for certain regulatory rules to be passed in Congress. Democrats enthusiastically prop him up. Then SBF openly admits his "belief" in regulation was a complete public relations scam, all while it turns out his entire financial enterprise is being held up by sleight-of-hand. Some Democrats touting his ideas either took the story hook, line and sinker, or knew he was full of hot air and ran with him anyway. Neither outcome is a good look.

Unfortunately, huge, super-rich donors driving the agendas of Democrats is not a problem that is unique to them. SBF is just the latest to be exposed, but there are plenty of similar players on both sides of the aisle.

In the meantime, all I can hope is some of the people who got ripped off get their cash back. But I wouldn't hold my breath.

Your questions, answered.

Q: I saw several social media posts, including one from Viola Davis, attributing a Newsweek article that says 15,000 Iranian protesters were sentenced to death for protesting Mahsa Amini in Iran. Is this true or is this the internet being the internet?

— Carly from Morrisville, PA

Tangle: I saw this too. And it's basically nonsense. Our Instagram account was one of the first to debunk it.

The initial report was posted by Newsweek and became so widely circulated that even Canadian Prime Minister Justin Trudeau — a man who has an entire intelligence apparatus at his fingertips — shared it.

Here is what is real: Thousands of protesters in Iran have been arrested. A handful — maybe five — have been sentenced to death. The 15,000 figure is a rough estimate of just how many people have been arrested. Sources reporting that figure have also said 350 have died in various ways during the protests.

With 15,000 people arrested, members of Iran's parliament signed a statement saying the people "waging a war against God" should be dealt with decisively. This was interpreted as a parliament plan to execute all 15,000 people. But after the report went viral, many members made it clear that is not what they meant. For what it's worth: These mistakes are much more common when U.S. journalists are covering shocking reports about nations that are adversaries of the U.S. and I encourage you to always view them with skepticism (Adam Johnson calls it the "North Korea rule of journalism").

Regardless, none of this should be comforting. So far, we know of five people that are likely going to be executed for a righteous protest against a regime that stifles free speech and the free movement of its own people. It’s certainly possible dozens or even hundreds more face the same fate. 15,000 have reportedly been arrested. It's okay to be irate and deeply concerned about what's happening in Iran, but there is no need for the invention of even more horror.

Want to have a question answered in the newsletter? You can reply to this email and write in (it goes straight to my inbox) or fill out this form.

Under the radar.

A bill that will limit the use of Non-Disclosure Agreements (NDA) in sexual harassment cases is heading to President Biden's desk. The U.S. House passed the Speak Out Act with bipartisan support on Wednesday, with a 315-109 vote. It passed the United States Senate unanimously. The bill only applies to NDAs that are signed before a dispute arises, the kind of agreement you sign on your first day of work. Axios has the story.


  • 2,972. The total number of Tangle readers who took yesterday's survey.
  • 24.1%. The percentage of all respondents who said they voted for Donald Trump in 2016.
  • 5%. The percentage of all readers who said they'd consider voting for Donald Trump in 2024.
  • 4.4%. The percentage of Tangle readers who identified as Democrats and said they definitely want Biden to run again in 2024.
  • ~100. The number of Tangle readers who replied to yesterday's newsletter to tell me they had voted for Trump in both 2016 and 2020.
  • Three. The number I counted, so far, who said they were likely or definitely going to be voting for Trump again in 2024.
  • 17.1%. The percentage of Tangle readers who said that, in the event of a Biden vs. Trump 2024 race, they would not vote or would vote for someone else.

Have a nice day.

An underwater buoy could be the future of renewable energy generation. A Scottish startup called AWS Ocean is testing Archimedes Waveswing, a contraption that harnesses the power of waves to turn them into energy. The 50-ton, buoy like device is tethered to the ocean floor and uses the force of passing waves to generate power. After six months at sea, a test model produced 80 kilowatts at its peak (for context, 10 kilowatts is enough to power an average home of a family of four). That was 20% better than expected. The International Renewable Energy Agency said there is enough energy in the motion of the oceans to power the entire planet. New Atlas has the story.

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Isaac Saul
I'm a politics reporter who grew up in Bucks County, PA — one of the most politically divided counties in America. I'm trying to fix the way we consume political news.