When the pandemic struck in 2020, the actor Ben McKenzie (who you might know from The OC and Gotham) had a lot of time on his hands. And like a lot of people, he suddenly got interested in crypto when an old friend of his pushed him to buy some Bitcoin. But unlike a lot of other people, McKenzie didn't rush out to buy it. Instead, he dusted off his old economics degree and decided to learn about how the industry really works. And what he learned shocked him. So he (along with his co-author Jacob Silverman) spent the last few years writing a new book titled Easy Money: Cryptocurrency, Casino Capitalism, and The Golden Age Of Fraud. In an interview conducted live at the Bloomberg Invest summit, McKenzie explains why he thinks the industry is rotten and corrupt and designed in a way to enrich a small group of insiders at the expense of a large, misinformed and desperate public. This transcript has been lightly edited for clarity.
Key insights from the pod:
How did an actor get into investigating crypto? — 1:42
What makes people buy cryptocurrencies? — 9:17
How big is the crypto market really? — 11:57
FTX, FTT and infinite credit — 16:58
What is Tether exactly? — 18:59
Impressions of Sam Bankman-Fried — 26:35
Where are the regulators? — 32:42
Crypto and gambling addiction — 35:57
Poker and the origins of Bitcoin — 40:14
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Joe Weisenthal: (00:10)
Hello Odd Lots fans. This is a special episode of the podcast that was recorded June 8th at the Bloomberg Invest Conference. Our guest, Ben McKenzie. He's a well-known actor, you might remember him from The O.C., and he is the author of a forthcoming book called Easy Money about his journey into the world of cryptocurrency.
Joe Weisenthal: (00:10)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway: (00:34)
And I'm Tracy Alloway.
Joe: (00:35)
Tracy, you know that intro video they showed, you know, we use our line “the perfect guest,” but this week of all weeks, we have a really good guest.
Tracy: (00:42)
Yeah. This week it's actually true. We're going to be talking crypto, actually with someone who you wouldn't necessarily expect to be the perfect guest to discuss crypto.
Joe: (00:51)
No. But he is. So obviously, this week we're recording it the same week after the SEC filed suits against both Coinbase and Binance. So we are going to be speaking with Ben McKenzie, a well-known actor and the author of the forthcoming book, Easy Money, Cryptocurrency, Casino, Capitalism, and the Golden Age of Fraud. Ben, thank you so much for joining us. How did you arrange that? Sort of from a PR standpoint that you got the government to file suits against Coinbase and Binance as a lead up to your book? That was very well done.
Ben McKenzie: (01:21)
Yeah. I had nothing to do with it. But I'm very grateful. And if they could just hold off on any DOJ pending action until July…
Joe: (01:28)
Just wait until July 18th…
Ben: (01:28)
That would be wonderful.
Tracy: (01:30)
You're going to have to keep rewriting the epilogue, I think. Well, why don't I ask the obvious question, which is, how does an actor get into the profession or hobby of investigating cryptocurrencies?
Ben: (01:42)
Sure. There's a longer answer. The shorter answer is a sort of a mini midlife crisis. It was the fall of 2020. It was the height of the pandemic. And I came down with a serious case of FOMO. I saw all these knuckleheads getting rich and I thought, “Hey, maybe I should, you know, try to get rich as well.” In a roundabout way, that led me to crypto.
A very good friend of mine in my twenties encouraged me to invest in an obscure medical device company that was going to create synthetic blood and it was going to make a ton of money. A random guy at a wedding had assured him so, and so we definitely needed to invest in this. I put money into it and promptly lost almost all of it. Might have been a penny stock, pump and dump. Anyway, that same friend came back to me in 2021 and said: “you gotta buy Bitcoin.” And I thought “Hmm, I wonder what is this cryptocurrency stuff?”
So I have a degree in economics from the University of Virginia. It's about 20 years old. So I dusted that off. And I ended up writing this book. So as to why I'm here, I would say the book is really about money and lying. And I know about money a little bit because I have an econ degree and I made a little bit of two decades of show business. But I know about lying ‘cause I'm an actor and I do it for a living.
Ben: (03:13)
And so when cryptocurrencies were calling themselves “currencies,” the first thing I bumped up on was the word. As an actor and a storyteller, words are tools. They can be used for a variety of purposes. Some of them are honorable and some of them not. And although Bitcoin, of course, was intended to be a currency – that was the intention supposedly of Satoshi Nakamoto – it had never really functioned that way. And it certainly wasn't functioning that way in 2020, 2021 at the height of the mania. So that's where I started. These aren't currencies. So what are they?
Joe: (03:45)
So the friend came, and you already had this view. “Okay, this is the guy who lost you a bunch of money.” Because you said you had FOMO. So a lot of people, they just went out and bought. And your first instinct was like, brush off the old economics books... But so okay, so you didn't like plow your money into crypto at the top. But how did you sort of begin your exploration of this industry?
Ben: (04:10)
Sure. Well, I read a lot of, so first I needed to understand like, okay, where were we? And in 2021, I very quickly came to the conclusion we were in a bubble. You know, a fairly obvious bubble, perhaps, in retrospect. The book is called Easy Money, not just because of this fake money called cryptocurrency, but also because of the easy money policies that have been around since the GFC. And that went nuts. You know, during the response to the pandemic, right? Trillions of dollars jumped into the economy. And by the time I was thinking about entering the market, everything had gone crazy.
So Gary Gensler, the head of the SEC, he taught this course at MIT on blockchain and crypto. And it was available for free online. And again, I had a lot of time on my hands. So I took that, I read a bunch and I just stuck with the feeling. So fraud, historically speaking, runs rampant during easy money times, during bubble times for fairly obvious reasons, right?
When there's easy access to money and credit, people speculate wildly in term in search of high returns. Some of those innovative technologies are truly innovative and people make a ton of money, but some of them are frauds. Charles Kindleberger has studied this, you know, extensively. And so I felt like there probably was a lot of fraud and that became kind of a pandemic hobby of mine. You know, like betting against fraudulent companies and stuff like that. And around that same time, my friend Dave came to me and said “Bitcoin is the bee's knees.”
And I was troubled by Bitcoin and crypto because it was everywhere, and the celebrities were selling it. And, you know, the Super Bowl was going to feature it heavily. And I thought, look, if I'm right — and maybe I wasn't — but if I'm right, this is something like the biggest Ponzi scheme in history. That troubled me.
So I was actually reading my daughter The Emperor's New Clothes. It sounds made up and I probably subconsciously... I was probably intending, but I did see it on the shelf and it did happen organically. She was six at the time. And I remember the gist of the story, but I had forgotten a couple points. The first, the tailor’s trick everyone – basically [is] an appeal to ego and status worship, right? “Only the smartest people can see this, only the people of highest station.”
And the second thing, that really stuck with me was at the end of the story, as the emperor is gallivanting through town naked and the adults are pretending not to notice, it's a child who calls out the scam. The only person brave enough to call truth is a person who doesn't know he's being brave. He's simply speaking the truth. Well, it was hard not to see myself as the child in that metaphor, right? Like, what the heck do I know? I'm just an actor. I have an undergraduate degree in economics [that’s] 20 years old. But I don't know, maybe I'm right? And how often in life do you get a chance to have an adventure? So I got high, I got my medical marijuana card over the pandemic because you know, I like alcohol, but there's a limit. You know what I mean? And I was definitely over it. And so I got high and I was like, well, I should write a book about…
Joe: (07:40)
It's really retro that anyone would like go to the... Now that they literally sell it... That someone would go to the effort of getting a…
Tracy: (07:44)
The medical dispensary.
Ben: (07:47)
No, I'm such a goody two shoes, right? I have my card and I like overpay for my marijuana. But yeah, I got high and I was like, I should write a book about crypto. And it sounds like a really good idea when you're high. The next morning sober I realized I didn't know how to write a book.
So I got high again and I realized this journalist Jacob Silverman had written an article that I really found quite funny. It was called “ Even Donald Trump Knows Bitcoin is a Scam,” which was basically; Trump didn't really criticize crypto until he left office. And then he was like, it's a scam. He brought together a couple things I’d been thinking about the Golden Age of Fraud and all that. So, I summoned the courage to DM him on Twitter, as you do. I realized he lived in Brooklyn and took him to drinks and said, “Hey, what if we write a book that I don't know how to write about events that haven't happened yet?” And he was going on parental leave and he foolishly agreed.
Tracy: (08:46)
I love that during the depths of the pandemic, while other people were getting high and baking sourdough bread or watching Tiger King, you were like “I'm going to launch an all-out investigation into the cryptocurrency market.”
Ben: (08:56)
Well, I'm a weird guy.
Tracy: (08:57)
You touched on the easy money aspect of it and also the FOMO, but can you talk a little bit more about what is it that makes cryptocurrencies so attractive to so many people? And particularly one segment of the population it seems, which would be young men. What is the attraction there?
Ben: (09:17)
Well, that's a great question. So, look, as a storyteller, I became fascinated by Robert Shiller's work, right? The Nobel Prize-winning economist who has talked about how economic narratives form and their response to real events, right? And so the Bitcoin white paper’s release in October of 2008 was at the height of the subprime crisis. And there was an understandable mistrust of legacy financial institutions. Banks, all that. Banks were even more unpopular than they often are.
And so, the timing was perfect to set in motion the notion of a theoretically peer-to-peer currency. It didn't really work; it didn't take off for a while. But I think just sort of, I guess to back up, the reason that I think crypto appealed to so many people in so many different ways, and so many different types of people, — 40 million Americans bought crypto — is that they could kind of see anything in it that they wanted to, right? I mean, on one level it's very simple. It's a get rich quick scheme. But on another, the people that were interested in sort of like libertarian politics could do that. It was marketed as generational wealth builder. It was marketed as a way to bank the unbanked.
Tracy: (10:37)
Also the “next big thing on Wall Street” at the same time.
Ben: (10:39)
Exactly. Well, it was marketed as the future of money, and all you needed to invest in the future of money was the willingness to part with the current version of it. So it had a very broad [appeal], which was also one of the reasons why I was so skeptical of its authenticity was that, how can it be all of these different things at the same time?
And yet of course it wasn't a currency. So then what the heck was it? Well, it seemed like an investment, right? I mean, people were putting real money into it, hoping to make real money off of it. That sounds like an investment contract to me. So I had to figure out, you know, how did Bitcoin come to be classified as a commodity, which is sort of an interesting, dorky story. But then, what the heck were these 20,000 other things?
Joe: (11:21)
You know, one of the things that's a little bit surprising or sort of interesting is that for as much talk about crypto that exists, it's not that big. The total value of all the coins, I think is like around a trillion dollars.
Ben: (11:40)
Supposedly.
Joe: (11:41)
Supposedly. And then , you know, we discover, and you've reported this out, it's small. There are a lot of people who are just like on a group chat together. And they're all important in the industry. Can you talk about how big is this industry? How real is this industry?
Ben: (11:57)
It's much, much, much smaller than, you know, that $1 trillion number or that market cap number. And you don't have to take my word for it. In March of 2022, I was at SXSW. It was my first venture into the real world. Jacob and I had done everything virtually up to that point. I ran into a guy named Alex Mashinsky. Alex Mashinsky was the CEO of a crypto lending firm called Celsius. It's now bankrupt. He agreed to be interviewed.
I asked him how much real money is in crypto. He didn't ask me what real money was. He said 10-15%. He said the rest is speculation. Now, in March of 2022 the crypto market cap was $1.8 trillion. So, you know, give or take $1.5 trillion of that isn't there. It's speculation, it's leverage, it's all these other things. A chill ran through my… I mean, he said it sort of nonchalantly, but a chill ran through my spine because regular people don't understand that. I mean, they think when they buy Bitcoin, they have, you know, Bitcoin is whatever it is, $26[,000], $27[,000] — I have no idea. They think they have $27,000, but in a way they actually only have maybe 10% or 15% of that. Maybe? if they can get it out?
Joe: (13:14)
Sorry, can you explain that? If someone has a Bitcoin on Coinbase or whatever. In theory, what's it at $28,000 or $26,000? If they could sell that and get $26,000?
Ben: (13:24)
Yes.
Joe: (13:24)
So what do you mean when you say it's only 15% or 20%?
Ben: (13:27)
Sure, yeah. And that's a very good point. And I do want to caveat, if you're going through a licensed exchange — well, perhaps not a licensed exchange, but one that's operating as an exchange, then yeah, you're probably good. And if you're not trying to move a lot of money, okay, you're probably good. But the liquidity in crypto is very, very low. And Brian Brooks, who was the Chief Legal Officer of Coinbase, and then he was the Acting Comptroller of the Currency, and then he went to Binance US for like three months. He testified under oath to Congress about this. So, you know, you don't have to take my word for it.
Again, the liquidity is very little. So how does it work? Well, most of the volume in crypto runs through the overseas exchanges, right? It ran through FTX before it was shut down. It's now running through Binance. You know, Binance is the biggest crypto exchange by a country mile. It's huge. But the question is how much of that volume is real? Wash trading is an enormous part of cryptocurrency. I mean, you've seen it in the SEC charges against Binance. I believe the allegation of their first or second day they were set up was that 99% of the volume in the first hour was wash trading, 70% on the first day.
I've read papers, academic papers that have surveyed, I think they surveyed 29 different exchanges. They found 70% wash trading on the unregulated exchanges. So it's just not there. People are able to create — I'm leaving Bitcoin aside for the moment and talking the other cryptos — people are able to create as much crypto as they want. That allows you, if you can borrow against it, to create as much leverage as you want.
When I testified to Congress in December, Professor Hillary Allen, professor from American University was on the other side with me, testifying alongside me. She wrote a paper in February of 2022, so just a few months before crypto kind of fell apart. And she compared the dynamics of crypto to the subprime crisis. And they're very, very similar in many ways. Leverage, complexity, rigidity. Plus a bank run equals a crash. The difference is, in crypto the leverage is unlimited because you can print as much crypto as you want. The complexity is similar.
You know, all of these things are so complicated, at least theoretically, right? Staking pools and protocols and smart contracts and blah, blah, blah. The rigidity is even worse because of the things like the smart contracts and, and even, you know, the code itself, it's irreversible. It only moves in one direction. So it's a blockchain that can be added to but never subtracted from. So when fit hits the shan, there's nothing you can do. It just blows up. And if you combine that criminal activity, you know, a lot of people lose a lot of money. But not as much money as is claimed.
Tracy: (16:38)
Can you talk a little bit more about the leverage example in the context of, specifically I'm thinking about FTX, right? Because they were sort of the trifecta of creating new tokens out of nothing, borrowing against them, and then also potentially allegedly using wash trading to push the value of those tokens up so they could get even more credit.
Ben: (16:58)
Exactly. Exactly. So, right, FTX had this token, FTT and I think you should, you know, let's just start with the obvious. You have an exchange that's issuing its own token, right? Its own security, basically, right? And Binance has the same. Binance has BNB and it also has its own stablecoin, BUSD. So already you've got, you know, potential massive conflicts of interest, right? Imagine if the Nasdaq like issued its own, you know, I mean; we’re going to trade the stock, we're going to issue the stock, we're going to…
And another thing that I think was sort of, the poker chips in the crypto casinos are Tethers. Tether is the biggest stablecoin in crypto by an enormous amount. There's supposedly 80+ billion Tethers out there. The biggest client of Tether, according to Protos, this crypto publication, was Alameda Research. Alameda Research supposedly bought, I think it's $36.8 billion worth of Tether. How? How did that work? How? How did that work? Alameda gave $36.8 billion real US dollars to Tether? That seems unlikely to be true, given that that Alameda had raised a few billion from VCs and allegedly perhaps had stolen some money from their clients. But how did you get to $36.8? So how did it work? I don't know.
Joe: (18:25)
So there's been a lot of skepticism about the existence, the persistent existence of Tether, over the years. And I think both of us have joked that like, you know, in the year 2200, it's like the cockroach surviving the nuclear winter. It's like somehow Tether is going to be there holding the peg. But it is kind of weird because, you know, it has not blown up. And many other things that people thought were professionally run, I would say FTX and the associated entities, have blown up. What did you learn about Tether and what's interesting about it in the course of writing this book?
Ben: (19:00)
Tether’s a fascinating company. The CFO paid a $65,000 settlement to Microsoft for software piracy. The CEO hasn't been seen in public in many years. That public face of the company is their CTO. The Wall Street Journal reported that as recently as 2019 four individuals controlled 86% of Tether. So it's this very, very small company supposedly dealing in, you know, up to $80 billion. Yeah, I don't know how much more I should say, except that that's very suspicious. And it is incredible that they've survived. But they have deep ties to Sam and FTX and Alameda and, you know, I guess we'll see what happens.
Tracy: (19:57)
Let me ask that question in a slightly different way, because I think one of the frustration for a lot of journalists is, you know, cryptocurrencies have been around for a long time at this point. And I've certainly written my share of eulogies for things like Bitcoin. I think the first one I wrote was in 2011, if you can imagine.
Ben: (20:15)
Oh wow. Yeah, sure.
Tracy: (20:16)
And then I did it again in 2017, and each time it comes back. So what would it take, what would be the catalyst for something like Tether to finally and definitively, you know, break the peg and be put to bed?
Ben: (20:31)
These are not honest markets. I don't know how else to say it. Given the amount of wash trading and God knows what else, what other shenanigans. You know, Sam, in a Twitter space, somebody asked him, “Did you even make these trades? Like, do these even exist?” And he said, “Eh, some of it, no.” So that's a bucket shop, right? I mean, that's, that's what that is. Bucket shops were made illegal in the ‘20s.
So in some senses we are revisiting, you know, a century ago. So as to why it hasn't fallen apart and what it would take, I believe it would take law enforcement action to really kind of get to the bottom of where the actual real money is. We'll see if that happens. But I mean, the cease and desist issued to Binance to freeze their money, I think is sort of the next thing to kind of watch. Because they're clearly concerned that the money could be moved away and that the customers, US customers, couldn't get their money out.
Joe: (21:35)
So again, we started this conversation by noting the timing this week of the — what is Binance? Where did this, I mean, it's obviously massive and there's been a lot of reporting on it, but in terms of how you studied the company in your book. What is it that gave it just such an extraordinary footprint in the global market, how did it establish this and how crucial is it to all of the, you know, these fake prices, the prices that exist on Binance.
Ben: (21:58)
It's absolutely crucial. Binance, I don't know today, but I believe actually it's still over half of the volume in crypto, is spot volume [that] trades through Binance. I think it's been as much as, I believ,e 70%. So it's just absolutely massive. Just dwarfs every other exchange. As to how it has succeeded, I mean Changpeng Zhao started early when crypto was at a much smaller stage. He was very aggressive about courting clients, especially big firms to trade on it. And he funded things like FTX. He was an initial investor in FTX. And he's been very good at, Binance Global has no headquarters. There is no finance headquarters, which is a pretty neat trick because it becomes difficult to pin you down are.
Tracy: (22:48)
There is a rumored headquarters, but we won’t go into that.
Ben: (22:52)
Yeah, let's not go into that quite yet, unless you want to. What there are are local affiliations, right? There's a Binance US, there's a Binance Australia, I think, all these places. Well, in the SEC lawsuit, they mentioned this Tai Chi document. So the Tai Chi document is allegedly a document that, an internal document from Binance. Basically, “we're going to practice Tai Chi.” We're going to set up locally compliant places like Binance US, that are going to play nice with the authorities and follow all the rules. But the volume, we're going to push all the volume onto the main exchange. So redirect the regulators energy towards the towards the local shops. If that's true, then interesting strategy heretofore successful. I believe the yen of Chang's Tai Chi may meet the yang of US law enforcement, but I guess we'll see.
Tracy: (23:50)
Well, so one thing on that note, I mean, the proximate cause of a lot of the recent crypto drama was CZ starting to criticize FTX and the FTT token, which a lot of people, I think, commented at the time was kind of weird if you think of crypto as a sort of house of cards market that involves a few big players, it seems like a very dangerous strategy to start attacking each other. Do you have any idea or like conspiracy theory about what was going on there?
Ben: (24:23)
Well, I mean, I was talking to Sam [Bankman-Fried], I interviewed Sam in July of last year and then we continued a DM conversation through October. Things were clearly getting pretty bad. He talked of a stablecoin war with CZ and Binance, so there was clearly some animosity there. And then, yeah, I mean, what I know publicly, what's been presented publicly is that Sam and his cohort Ryan Salame started kind of mocking CZ on Twitter saying “Can CZ even come to this country?” Things like that. Because CZ is a Chinese Canadian. Pretty bold strategy.
And then the balance sheet of Alameda leaked, was reported by CoinDesk. And it was, you know, — can I say sh*t show on the…? Okay. It was, yeah, it was a sh*t show. And CZ had this chip, which is that he owned, he had a lot of the FTT token. Sam had tried to separate himself from CZ. I believe, I think they fell out over a license in Malta, allegedly, that CZ didn't want to fill out the paperwork or something. It's like, if you don't want to fill out the paperwork in Malta…?
Anyway, so they couldn't pay him real money, so they gave him some, I think, but he was mainly paid out in FTT. Which gave him this chip to play, right? If he has a lot of the supply. So all of a sudden there was a run on FTT. Sam's cohort, Caroline Ellison, tried to stop the bleeding by saying, you know, “Buy all the FTT you want this price.” And CZ said, “No, let the market play out.” And it collapsed in spectacular fashion.
And then there was this brief moment where CZ considered buying the company in a non-binding letter of intent, which of course was immediately transformed by certain members of the media into “he was definitely going to buy the company.” But of course, it's a non-binding letter of intent. So 12 hours later he said, “No, I'm good.”
Joe: (26:25)
What was your takeaway from interviewing Sam, obviously prior to the events of November? What were your interactions with him like?
Ben: (26:36)
Well, our interview in person was interesting. It was July 20th, 2022. It was in a hotel in Midtown right around here. At the time, crypto had done its sort of first crash, the May crash of Terra/Luna. So it was seemingly on life support. But Sam was the golden boy, right? Sam was you know, spending a lot of money on Capitol Hill. He was trying to get a particular piece of legislation through the Ag Committee. The DCPA. He was meeting with the CFTC commissioner; I believe he met with him at least 10 times. And he was being called “the JP Morgan of crypto” by none other than Anthony Scaramucci, with whom he had a business relationship. Anyway. And he was going to buy up – the JPMorgan reference refers to 1907 when JP Morgan and his pals had to come in and kind of rescue the financial system from collapse. He was going to come in and buy all these companies that were failing, right? Like Celsius and BlockFi and all these companies.
So that was the circumstance under which I interviewed him. Boy, I'll put it this way. The chapter devoted to that interview is entitled the Emperor Is Butt Ass Naked. So it was weird. It was really weird because I asked him some questions. I wanted to understand how he could explain cryptocurrency, what good it did. I found that answer very unsatisfying. He said, he kind of tried to duck it and then he went into remittances or sending payments between borders. I had just come from El Salvador. The only country in the world trying to use crypto as real money.
El Salvador's economy, the foundation, I would argue, of El Salvador's economy is remittances. A quarter of the El Salvador economy is people of El Salvadorian descent who live in the United States, two to three million of them, sending money home. So the government had, you know, for reasons that we could go into in another question had decided to set up a system, Chivo wallet. And it was suddenly going to, you know, bring in tourists, but it was going to be a way for the Salvadorean people to profit by, or to not spend money on MoneyGram and Western Union, traditional services. And it was going to be this huge boon to the economy.
Well, nobody used it. It was a failure. It was complete failure. For a lot of the reasons that plague crypto more broadly. The system didn't work. The Chivo system just like malfunctioned all the time. People got defrauded, people lost their money. And so they decided they would rather stick with traditional services. So according to the government's own figures, less than 2% of remittances use this system. So I had just come from there and he's saying, “it's remittances” and I'm saying, “Sam, baloney, BS!” And then we went around, around, around.
And when I came back to that same question, because the question was: “give me one company, just give me one company! Give me one company that's doing anything of productive value, just tell me.” And he eventually told me: “Solana.” Well, Solana was known as one of Sam's coins because he owned a lot of it. I think it was like a billion dollars' worth of it when they went kablooey. Did he really believe in Solana or was he trying to pump his bag? Like, what was that? Also, Solana has the unfortunate tendency to shut down. It just stops working. I think it stopped working at least a dozen times over the course of its history.
So I found those answers very unsatisfying. You can't give me one company that's of any use in your industry. So there were those questions. And then there were questions about his donations. Probably the most nervous I think he got seemingly was when he wanted to talk about his effective altruism. He was going to give his money away, pandemic preparedness, all that stuff. I said, “How much money have you given to that stuff?” He said, $50-100 million. I said, “Okay, how much have you given to politicians?” And he froze and he turned in his seat and fiddled with stuff. And you know, he's kind of a twitchy guy and I get that he's got ADD, I'm not trying to… but like, it was weird.
And he wouldn't tell me. And at the time I'm thinking, this is really strange because this information's public, right? I mean, we know he gave $40 million to Biden. We know his coworker gave $23 million to the Republicans. Like why doesn't he just… and now, you know, what's alleged is that he was running a $93 million straw donor scheme. So maybe, I don't know, maybe that was why. It was a really bizarre interview. It was really one of the most strange hours of my life.
Tracy: (31:09)
We've had our own weird interview with Sam.
Ben: (31:13)
Well, that was very informative. So I mean, if you don't mind, I'm just going to, you know, so in the spring of that year, he had been on your podcast with Matt Levine and he talked about, I believe it was magic boxes out of which money comes.
Tracy: (31:25)
The question was, “how does yield farming work?” And we were expecting a technical answer of, you know, “Oh, there's this protocol and then this protocol.”
Ben: (31:33)
Yes, yes, yes. Instead, it was magic boxes out of which money comes. And Matt correctly said, “that sounds like a Ponzi scheme.” I think Sam laughed. I don't know what happened after that. But it was really strange for me. I mean, you know, I’ve got an ego and stuff, but I'm just, I have an undergraduate degree. I'm an actor. I've just been looking at this for a couple years and I'm here sitting talking to the supposed JP Morgan of crypto. Like, can he give me one satisfying answer? Can we get one, you know, moment where we could see how this was going to work. I left basically with a lot of questions, but they were all the same one. What the f*ck was that all about? What was that? It was really weird.
Tracy: (32:18)
Yes. All of this sounds familiar. You mentioned law enforcement earlier. So again, let me ask the basic question, but where are the regulators? So we're starting to see some actions now, notably from the SEC, and the CFTC also sued Binance earlier this year. But where have they been and why the reluctance to crack down on this industry?
Ben: (32:42)
Yeah, so I believe it was 2014 when the CFTC Commissioner Timothy Massad asserted CFTC control over Bitcoin. [He] said because futures were being traded. And under the CEA, the Commodity Exchange Act of 1936, they could argue that that that Bitcoin's a commodity. Okay. So that already creates a little bit of a gray area, right? Because if Bitcoin’s a commodity, but these 20,000 other cryptos came into existence, what are they?
You can say the SEC hasn't been as aggressive as it should have been. And I don't disagree with that. I think the politics are interesting. I mean, people are now very angry at Gary Gensler in the crypto industry. And they're angry that he allowed Coinbase to go public. Coinbase was listed on April 14th, 2021. Gary Gensler assumed office on April 17th, 2021. Say what you will about Gensler, but he does not have a time machine.
So look, here's what I'll say. Crypto has exploited a gray area between how we classify commodities and securities. I do think this is a problem. We are the only country in the world that separates our commodities regulation from our securities regulation in the way that we do. We have two different agencies. They are overseen by different committees in both the House and the Senate. That creates really bad incentives. As an armchair economist, that's very bad incentivize-wise. Because people want to get on, politicians want to get on elected, members want to get on those committees, to oversee the industries, but also to get donations, right?
And the regulators are fighting for turf, sometimes friendly, sometimes not. The crypto industry really, really wants the CFTC to be in charge. The CFTC is the smaller agency. It's about a quarter of the budget of the SEC. So there's a lot of blame to go around, I would say. But in the defense of regulators, it does take time to build cases to argue these things out.
Joe: (35:15)
You know, we've talked a lot about the industry but your story starts with like a friend and obviously a lot of people have lost a ton of money over the last couple years particularly. Can you talk a little bit more in the course of your reporting, like the types of people that you met on just this — sort of like the buyers -- the people who like got sucked in at the top?
Ben: (35:37)
It's everybody. I mean, it's really fascinating. Like you could interview – and I did, I interviewed everyone from, you know, kind of regular traders, I walked around the Bitcoin conference in Miami last year, just talking to random people — and then of course there are more sophisticated players. There are hedge funds, there are, you know, high frequency trading firms, things like that. And then there are the sort of the core players which, you know, were Sam and CZ and you know, the folks that are kind of facilitating these transactions.
So amongst the kind of the regular folks, again, I kind of go back to this point of like, crypto just becomes whatever you want it to become, right? It's a way of you expressing your freedom, you know, get off the shackles of TradFi and create your own financial destiny kind of stuff. And I get that. That is such an intoxicating pitch sales pitch. That's why Shiller talks about these narratives and how powerful they can be and how difficult they are to, he compares them to viruses. You know, you have to study the epidemiology of them, and we kind of have to reach herd immunity here, which I think we kind of are getting to now in crypto.
But it's also very sad because I tell a story at the end of the book about a particular case. It's pretty, pretty rough. But you are also getting into gambling addiction. I mean, let's be honest, it's young men. 42% of men 18 to 29 have purchased, used, bought cryptocurrency. That's a big number. I mean, almost half. It's gamified, right? It's very similar-ish to Robinhood, but unregulated. And it's easy to hide from friends and family. I mean, gambling addiction.
We talked to some gambling experts for this and they told us that there it is, a husband wife, they run a boutique firm in in Brooklyn, but that services a lot of Wall Street clients. And so they're treating all kinds of addictions. They saw a trickle during the last craze of 2018-2017, but they saw a tsunami recently. And it was all men under 40. Some of them are sophisticated Wall Street guys. Sophisticated and people that really know their stuff about all sorts of other financial stuff. But have got gotten drawn in, and everything down to teenagers. I mean, parents coming in with their teenagers saying they're gambling away their minimum wage job, you know, their summer job paycheck on this stuff.
And that's where it gets into the casino capitalism. That's why I want the book to be about more than just crypto, because I do worry that we are, Keynes said this actually. You know, when – I won't try to quote him exactly – but basically when you turn the nation's capital markets into a casino, you know, the job is likely to be ill-done. You are not servicing an effective use of capital. And I believe we need to look at some of these things through the lens of how much social harm they can do. Gambling addiction, I've heard from several people, has the highest rate of suicide of all the addictions. It's much easier to hide because all you need is a phone and a few minutes or even seconds to make some trades. And so by the time families find out about the predicament that usually their son or husband/partner is in, it can be too late and money is gone.
It is treatable. It is a treatable addiction, but you have to take some pretty serious measures sometimes and remove the ability to make the trades and to actually access the accounts. So yeah, not to turn it into a bummer, but I really think we need to talk about these things because the marketing was of course, the exact opposite. It was all the shiny stuff and all the amazing things.
But when you come down to it, economically speaking, crypto is a zero-sum game. It's poker because it doesn't do anything productive, it's strictly competitive. For someone to win, someone else has to lose. But it's not a fair game. You're not playing in Vegas now, you're playing in Vegas in the 50s when the mafia ran it. You know what I mean? And unlike Vegas, where there's entertainment value, you get comps and drinks, have a dinner, see a show, you know, crypto is like Vegas without the drinks, the dinner or the show. So you're going to lose, you know, you're going to lose. 99% of people are going to lose.
Tracy: (39:58)
In the book, you actually talk quite a bit about the overlap between online poker and crypto, and you almost, almost draw a connection between the end of online poker and the beginning of Bitcoin. Talk to us more about the overlap that you see there?
Ben: (40:14)
Sure. So in the original code that became the Bitcoin white paper code, there's a poker lobby. So whoever Satoshi Nakamoto is, was, whoever they are, we do know they were interested in poker. At the time similar time to when the Bitcoin white paper came out, online poker was, you know, about to get crushed. It had moved overseas. All these online poker rooms had been set up and eventually the government got around to shutting him down on, you know, what's become famous as Black Friday in online poker. And it was because they were cheating their customers. There's a company called Ultimate Bet that had a secret god mode where insiders could see the other player's cards. The compliance officer for the holding company Excapsa of Ultimate Bet is a Stuart Hoegner. He's now Tether’s general counsel.
Tracy: (41:16)
Synergies.
Ben: (41:17)
Daniel Friedberg also worked at Excapsa. He was FTX's lawyer. I think he then became their chief regulatory officer or something like that. Interesting.
Joe: (41:31)
Where were the signs?
Ben (41:32)
Where were the signs? There are really strong parallels. So maybe crypto, maybe Bitcoin was set up to be this emancipatory new form of peer-to-peer currency. Or maybe it was literally online gambling 2.0. A way of moving money overseas and, you know, using it to facilitate gambling.
Joe: (41:53)
You know, one thing that you've talked about, and I think it's, it might be, there's probably been other cases like this, but there's been a lot of peer pressure in crypto. It's like people telling their friend “Yyou have to get into it.” Well, your friend. Or just being told online “Have fun staying poor.” If you don't…
Ben: (42:12)
They tried that line on me. That line didn’t work,
Joe: (42:16)
But, you know, that wasn't there in like online poker, that degree to which the sort of crowd whips its own members into a frenzy.
Ben: (42:23)
Yeah. And that's where I think you get into a multi-level market marketing scheme. The abuse of language is similar. The way that they're sort of twisting words and trying to create a pressure-filled environment where you feel like, you know, FOMO. “You're going to miss out if you don't invest now, you know, really quick. You have to really quickly invest in the future of money. Because otherwise you're not going to get in there.” Which is bizarre. But those tactics are very similar.
And I would say, here's the thing that's a big tell to me. The use of the word “community.” The use of the word community is just fascinating. You're not an investor. You're not a client or a sucker. You're a member of a community. You're going to be reborn to land of the free. Strange to characterize a financial relationship, especially with people you don't even know, right? I mean, so much of this stuff is done online and through synonymous accounts. That's your community? I'm not saying people don't find community. What's interesting is some of the strongest communities I've found are the participants in the class action lawsuits against companies that have allegedly defrauded them, because they're bound by the fact that they had a similar experience where they had a lot of high hopes and then they were let down.
Tracy: (43:41)
It is true. No one talks about the community of, like, T-Bill investors.
Ben: (43:45)
Yeah, exactly.
Tracy: (43:46)
It's not really a thing. Let me ask a devil's advocate question. You know, we've been talking about cryptocurrency mostly as a monolith. We did touch on the narrative flexibility around Bitcoin. So the idea that it can be many things to many people all at once. One of the things that it seems to be now, or at least there are some people pushing the story, is the anti-crypto. So if you lost money in, you know, some random coin because of a centralized exchange that did something bad, you should buy Bitcoin because it's truly decentralized and only you have access to it in your cold storage wallet or whatever. How valid do you think that argument is?
Ben: (44:30)
So you're saying you need to be more pure? You need to believe more in the decentralization.
Tracy: (44:35)
If you don't like crypto, you should buy the original crypto!
Ben: (44:37)
Exactly, exactly. Not a cult. I think on, you know, so that's the flippant answer. On one level, there is some truth in the sense that it, that Bitcoin is more decentralized by nature of the proof of work. But that cuts the other way too. Because of course, proof of work means it can't scale. Bitcoin can only process five to seven transactions a second. It hits a limit. It hits what's called a Red Queen's race, where you're using more and more energy depending on how many competitors are there. The more competitors come in, the more energy is expended for the same block. So, you know, it's like what the Queen says to Alice, right? You have to run twice as fast to get anywhere.
It also, because of that energy usage, has an environmental problem. I mean, I went to the biggest crypto mine in the country. It's outside of my hometown of Austin. Rockdale, Texas. It took over a former Alcoa aluminum smelting plant. And the reason it took that over is because it's connected to the grid. So it can handle a lot of power. You know, in 2021 the Bitcoin network and other cryptocurrencies used the energy equivalent of Argentina, the entire country. That's a problem.
If you view it as I do — as a zero-sum game — it's not doing anything productive. And yet you're using a lot of energy. So, on one level you could make the argument “oh you're more pure, you're more decentralized.” But in terms of stepping back for the rest of us, why should it at least not be taxed at an extraordinary level?
Joe: (46:10)
Real quickly, we just have a couple minutes left. You know, you mentioned, you used the virus analogy and you talked about maybe reaching herd immunity. And then the question is like, is there some pool of new money or new people that can be brought in to keep it going? Do you think that the sort of potential pool of would-be crypto buyers is more or less exhausted?
Ben: (46:29)
Well, it has utility, you know, for gambling. I mean, you can gamble on anything. So I don't think that makes it unique. But it has utility as a gambling device and it has utility to facilitate crime because you can use it for money laundering and avoiding capital controls. Tax evasion, sanctions, evasion, whatever. And I understand that there's an argument, it's like some of that's good, right? We don't like some of these authoritarian governments. Okay, sure. But also, if it goes that way, it also has to go the other way, right? If the good guys can use it, the bad guys can use it. So yeah, I just, I don't know how else to answer that question.
Tracy: (47:02)
Actually maybe a related question, but are you planning to write another book? What's next?
Ben: (47:08)
Well, I filmed a lot of these conversations, so I'm working on a documentary. And yeah, I don't know. I mean, I've had such a blast on this book. It's been such an adventure. I think the best part – I know it's cliché – but it's really the people I've met, especially the skeptics. Skeptics are just a great group of eccentric, wonderful, you know, nerds. It's just fun. And it's opened up my view of the world. I just have this much more, I just understand, I think, I'm not saying, I just have a much more varied experience in the world, right? It's really been an adventure. So yeah, I don't know what the next book is, but I really appreciate that everyone asks you that just as soon as your first book — that’s not even out yet!
Joe: (47:52)
Ben McKenzie, thank you so much for joining us. The book Easy Money. July 18th.
Ben: (47:57)
July 18th. Thanks.
Joe: (47:57)
Congratulations. And thank you so much for coming on.
Joe: (48:15)
I really enjoyed talking to Ben. You know, I feel like we're so in this, we follow the crypto story so much. It's good to sort of zoom out a little bit and talk to someone who kind of came at it with fresh eyes.
Tracy: (48:26)
Well, totally. And to his point, it was all about the outsider perspective, so it was a fun conversation. Shall we leave it there?
Joe: (48:34)
Let's leave it there.
You can follow Ben McKenzie on Twitter at @ben_mckenzie.