Byrne Hobart - FTX, Drugs, Twitter, Taiwan, & Monasticism

**Dwarkesh Patel** (0:00)
Okay, today, I have the pleasure of interviewing Byrne Hobart again for the second time now, who writes at thediff.co. The way I would describe Byrne is, every time I have a question about a concept or an event in finance, I Google the name of that event or concept into Google, and then I'd put in Byrne Hobart at the end of that search query. And nine times out of 10, it's the best thing I've read about that topic.
And it's just so interesting, it's just like the most schizophrenic and galaxy brain it takes about like how, you know, the discourses of, you know, Machiavelli's discourses relate to big tech or like how Soros' theory of real flexibility explains hiring in finance and tech. So just very interesting stuff. I'm glad to have him back on again.

**Byrne Hobart** (0:47)
Yeah, great to be back.

**Dwarkesh Patel** (0:49)
Awesome. Okay, so at first I really wanna jump into the FTX saga.
What the hell happened? Let me just like leave an open-ended question for you.

**Byrne Hobart** (0:59)
Yeah, so I think the first thing to say is that there's a lot we don't know. There's a lot we may never know because so many of the decisions that FTX were made through self like auto deleting encrypted chat. So like there are some holes we will never be able to fill in. The lack of accounting is also gonna make it tough. Like basically I think you can tell a bunch of different stories here. The really obvious one is fraud and you can debate over exactly when it started. Like one version of the story, which is getting some currency is that SPF had this entity Alameda and it was supposed to be this really hot crypto trading fund, but maybe it was a Ponzi scheme all along. And then maybe at some point that Ponzi scheme started to run short on cash. So we decided to start an exchange and the exchange got more cash and then he used the cash to pay off for his investors whatever. I think that's one version. And then kind of the maximally exculpatory version, which actually is still really bad, is Alameda was a real company. They really made money trading.
They took tons of risks. And SBF has talked about why he thinks that's a good thing, that FTX cut some corners when they were raising money and that they had really bad internal accounting. And that basically the extended entity of Alameda and FTX sort of lost track of whose money was where and it ended up with Alameda spending FTX customer money, which I think is like, one way to look at that is like, if you think, okay, fraud is like twice as bad as just incompetently losing money. Well, it's not as if we had a $4 billion fraud instead of $8 billion fraud, everyone would be like, well, that's fine. That's normal. Like why are you giving it so hard time? Like it's bad no matter what. Running a big company that is systemically important in crypto and then having that company completely vaporize over the course of a couple of days, really, really bad and worth understanding what happened. But it's partly worth understanding what happened because there are just different solutions that present themselves depending on what you think the story is. Like if the story is fraud, it's actually a lot harder to solve because there are just a lot of people who are willing and able to commit fraud and to lie.
If the story is bad accounting, then that's actually a lot more solvable because then you could say things like, the solution is make sure you never invest in a crypto exchange that doesn't have a real auditor and make sure that they have their proof of reserves calculation and it's happening consistently and that you can audit that.
There are different solutions. And then I think the actual story is going to be somewhere in the middle of extreme risk tolerance plus extremely poor accounting plus fraud at some point. But I suspect the fraud actually happened pretty late.
If it happened, which I think there's like 80, 90% chance that there was some level of fraud versus pure incompetence. But if so, I think may have happened fairly late in the story and as kind of a last desperate move. And I think part of what drives the response to what happened with FTX and Alameda is that if you think the story is pure fraud, it's very easy to say you would never do that. Like I could say very easily, I would definitely never start a Ponzi scheme and then start another bigger Ponzi scheme to pay off the first Ponzi scheme. That's not me, that's not most people. But I think if you draw the scenario where they discover at some point, like a couple months ago or even a month ago, they realize, hey, we actually, there's a billion dollars plus that was supposed to be customer money, but we thought it was Alameda money and we actually spent it and now it's gone, we've lost it.