Topics: FTX Bankruptcy, Crypto Regulation, Sam Bankman Fried, INX

Host:

Anthony Noto , Benzinga Editor

Featured Guest:

Alan Silbert, North American CEO of INX

INX is a fully regulated trading platform for security tokens.

Anthony Noto: Alan Silbert, welcome to Benzinga Interviews. How are you keeping warm this crypto winter?

Alan Silbert : I'm an old timer in crypto years. I've been around the space since about 2013. And and I'm old anyway, so I was around for Lehman Brothers and some of the traditional world debacles. Yeah these crypto winters have a way of seasoning you or toughening up your stomach.

So if I've been through a few of them I think I probably felt worse. Maybe when Bitcoin was at a high of $1100, $1200, then went back down to, I think it was sub $200 at the time. And that was much earlier in the evolution of the ecosystem. So I think I remember feeling at that point that crypto might be killed off for good.

And after we survived that, that kind of bear market, that crypto wind I don't have that feeling anymore. I think we're definitely here to stay. This current crypto winter it's, yeah, it's very painful. things are happening that I would've really never dreamed of in the space.

And yeah it's gonna be a little bit painful. We'll come out the other side like we always do. 

Anthony Noto:It's interesting that you said you've seen worse times. And I think there's a bit of a tendency for folks to get hyped up in the moment and nervous and they forget just how far they've come.

And like you said, you've been in this industry since 2013 when it was, it's still in its early phase, so when you were in, when it was 2013, did people look at you like you. A little nuts going into this crazy field. 

Alan Silbert: Yeah, thought I was nuts . So it was, when I first got Introduced to Bitcoin, I, I thought it was crazy internet money and that it would be a fad, that it would pass, very quickly.

And when I first started buying Bitcoin, I used to go to the drug store. I used to go to CVS and you had to pick up the red MoneyGram phone and talk to an operator and say, I will Send $100 dollars, then you had to walk to cashier and give them cash. So we've come a long way from there. Yeah, it's, we're far departed from. $1100 to $200 would crash. Every, everything that's in the present is always more painful. Very difficult to see right now.

A lot of people have lost substantial sums of money which is very upsetting to hear. And yeah, it's, we have to rebuild trust in the space and and rebuild.

 3:33 Anthony Noto:Let me take the ball there. I know I've. I gave you a look at your Twitter, and I saw that one of your tweets I guess in the past 24 hours, you talked a little bit about having a lot of discussions over the past week with lawyers, investment bankers distressed companies and you spoke a lot about digital securities and how they could be used in conjunction with the bankruptcy process, and.

The FTX was certainly a huge bankruptcy. So two questions. 

One, give us a tight explanation of what it is for first time listeners. I know most of listeners out there know exactly what's going on, but just in case give us a tight explanation of what it is that happened at FTX and how it is that INX can help.

How are they in a unique position here to help?

Alan Silbert: Yeah, sure. Absolutely. Yeah. What happened with FTX? I Things have been unwinding in the space since, late last year. Bitcoin and most of the cryptocurrencies hit all time highs late 2021. And then all the markets turned, the traditional markets turned, equities turned crypto markets turned and know we started entering a bear market territory.

 And that start, that started the snowball rolling downhill of of bets starting to unwind and um, going people's bets, leverage bets going against them. And then when the the stuff really hit the fan was, the Terra Luna stable coin. It was an algorithmic stable coin.

Was created and it was supposed to always pegged one to one with the US dollar, and there were billions of dollars riding on this stable coin. It was the rails that that money was going back and forth on in the crypto space. It was very trusted that the algorithm behind it would keep it pegged at a dollar all the time.

And people also, Leveraged on top of it they lent this stable coin leveraged it. And for whatever reason there was a bank run on the stable coin, on the Terra USD coin. And it unraveled the whole the whole theory there unraveled the coin. I think something like 40 billion was lost.

And that started undoing some firms in the space, like three arrows. Capital was one of them. Celsius was one of the other ones, and this probably ended up leading to FTX's demise because. The space is all very interconnected. As we've seen. It's similar to when Lehman Brothers failed and everybody saw how the sausage was made.

And behind the scenes there's all these interconnected relationships and lending and exposure. It's very similar. Many companies in the space touched three hours capital touched Celsius, touched FTX. They had money custody there. They were lending to them, they were borrowing from. And at high leverage, not regulated in many cases.

And yeah, and the major themes are there's tons of uncovered leverage, a lot of greed regulators were asleep at the wheel. There, it's still a small relatively speaking. It's a small ecosystem with interconnected players. There's no bailouts coming and, there's no government to bail out the space.

And and a real lack of risk management by a lot of companies in the space. Having like huge bets through arrows capital or Celsius, leverage bets on top of it. So these are kinda like all the general themes.

 Anthony Noto: And what happened with FTX? Did they just take, did they just make bets even riskier?

What was their deal that compared to what was going on with Terra? 

Alan Silbert: Yeah. Yeah, the fact that FTX had some of the like worst controls, business management skills, systems, anything as it's unfolding, it's an absolute mess on. Everything else that I've mention. They were making bets gambling with company, with client funds.

So they were dipping into their client's wallets, taking their money, and then betting them on their associated trading platform, betting them somewhere else in the space, and, leveraged bets on top of it. So it just exacerbated things. So yeah this is a giant mess, so it's top of everything else.

You probably have, fraud stealing client funds. Yeah it's an Absolute. Mess. Some of the other players in the space are just unwinding because their bets went the wrong way. But FTX kind of took it to a next level. And the company it's it operated they put themselves out there as a regulated company, but it's become very apparent that they were really no regulators watching them whatsoever.

They were operating without really any controls. They had no real board. I think for the last several months, I think the CEO, I think Sam was the only board member. So there were no real like board controls. The financials were getting audited by some weird metaverse auditing firm. And to, so to go back to INX, to back up to the beginning of our history, we were set up in late 2017.

Which was at the end of, one of the last debacles, which was the ICO boom and bust era. And our founder, Shy Datika saw the ICOs that were just getting thrown together with a white paper and tossed up against the wall and everybody was buying into them. And, people lost tons of money in them.

And and so Shy wanted to build a crypto trading and a digital security platform just from the ground up. That was totally regulated. I think like in contrast, a lot of the trading platforms in the space have been formed by techies really? By by coders and traders. So it came with, that came with a certain benefits, but they didn't have a traditional like regulated mindset.

Yeah. And like Mount GOs was the first example. It just was put together by coders and gamers and. Like no controls there. It was mismanaged. So one of the first things we did is we pushed a, the first digital security IPO through the Securities and Exchange Commission.

It was a fully registered IPO for the general public, cuz we, we wanted to it was to show that we could do it, that we could offer an investor to an investment to the general public to mo. And give them all the protections that they should have in the crypto space. So we, we have our financials audited by young, not like a weird metaverse auditing firm.

We set up with, independent board of directors, majority independent board of directors. We have incredible board of directors really. One of the members is David Wid, who is a former vice chairman of NASDAQ. We and we did a fullblown prospectus, so it was 200. 50 pages of all the disclosures and the risks.

We, it was the INX token that we sold in this offering. The token holders would get certain benefits they'd get a 40% percent cut of our net profits. They'd get first liquidation rights to our insurance fund. If in case of a change of control or a bankruptcy, they insurance fund would get paid out to them.

We gave them like a good mix of different benefits. And, along with all the trappings of a real public company we're pub we're public in the US and Canada. And so fast forward back to the current day. We've been through this process of registering a security token.

And now you have all of these companies in the space that are distressed or filing for bankruptcy. And in the US in the bankruptcy courts, they, it offer. Fast track through the same process that we went through. The bankruptcy courts will allow you to fast track a security token. And in a security token for the bankruptcy process can, is pretty valuable.

So instead of just saying to the creditors, alright, we'll give you 5 cents in the dollar and be on your way similar to what Bitfinex did back in the day when they got hacked, you can offer them a security token. The number of rights you can give the ways you can structure it are just infinite.

You can say, okay token holder, creditor we're gonna give you this token representing how much you lost and for the next five years. You'll get paid out X percent of profits until you're made whole, or, you'll get a coupon payment of x percent per year. You can structure it a million different ways.

The bankruptcy court helps you fast track this security into existence and you have all of the guardrails of a, a regulated instrument. So it's. It's proven very valuable in the current environment. And yes we've been speaking with a lot of different companies that are in distress, investment banks lawyers, and yeah they're very busy right now yeah we're educating a lot of them.

 14:22 Anthony Noto: Indeed. But I gotta ask you there you said on Twitter, this is an absolute mess. This bank bankruptcy will take forever when they unravel this dumpster fire. I wouldn't dream of operating a startup like this, much less a multi-billion dollar company. And before we hit record, you called INX, one of the cleanest shirts out there.

Are we at voting of bad players off the island moment where it should we be grateful that this FTX scenario happened. And I mean that, I know a lot of people are hurt and they lost money, but is, like you said you've gone through this. Do you have a little bit of a deja vu where this system can emerge better. In a larger scenario when Lehman Brothers collapsed, like you mentioned maybe we owe a debt of gratitude to this happening so we can, so the industry can get better. Yeah. I would hope so. It's I don't want overbearing regulations. I think, and I think what happened here was more.

That regulators were asleep at the wheel and just weren't paying attention, really. And yeah, but regulators have been paying attention though. They're, they, we have senators that talk about it quite often about how this industry needs to be Reed in, but then you have Sam Bankman freed, slept on the cover of magazines One second.

it feels within one breath he's, he's got nothing. And now we're calling him his business, a dumpster fire where he was pretty much glorified, not that long ago. So I think regulators were talking about it for a while. What would be over regulation in your point of view?

Alan Silbert: It's right now, to operate in the US is. Is pretty onerous. So it's already a burden, honestly, we, we roll up to, I don't know, probably a hundred different regulators, between our, SCC registrations and our FINRA license and money transmitter and even through state blue sky processes and, it's like to international regulators.

It really needs to be streamlined. It needs to go the other direction. So this FTX debacle is gonna set us back a few steps. In the US every, we need more consistency of regulation really. Instead of that you have. Many different regulators that have different rules and different thoughts.

But here, yeah, through political influence relatives with high up friends. Yeah. Sam worked his way into the upper echelons and was like their favorite person in Washington . So yeah. But But yeah, it's, we took the slow and boring route.

We've been plotting along over the last few years accumulating licenses and, to go back to what, what I mentioned earlier about being the cleanest shirt. Yeah it's I don't, there's very few companies like ours in the world that have the licensing that we do that are, very clean above board.

With the kind of controls, practices, licenses that we have in place. Yeah. And it's, I speak to people now, they're like surprised, but a company like this actually exists. Even some of the, like regulated players in the states in the crypto space are, not operating with the licenses that they should.

Yeah so licenses became more valuable. Absolutely. So in that case, do you consider this, is that the Silbert lining of this FTX fiasco? Because, like we were talking about before, too many people went the shortcut route. You guys went the hard way and now you're seeing it pay off.

Yeah, no, I mean for INX, absolutely. I'm sorry it had to happen this way in the space. But, we're happy to step up and help and use our expertise and and we have one of the few places probably would, probably the only place in the US that you can trade a security token 24 7 365 amongst the general public.

So for companies in bankruptcy that wanna issue a token, like a recovery token, we call it as part of the bankruptcy, we're one of the few places that could trade after the fact. Because, you might, you could issue a recovery token, let's say to a creditor, and then, know, there might be a million creditors like in ftx, just all, all the account holders.

You can, we can issue added recovery token with certain attributes and then we can start trading it on our trading platform or our ats. And maybe a creditor doesn't, they don't wanna hang out for five years and hope for the best. They just wanna get out, but then they can sell it to a willing buyer.

It just just, it, it gives 'em uh, instant liquidity to the claim if they want it. With no restrictions whatsoever. It's, it'll just be a freely trading security very soon after, they close up the bankruptcy process. So it, yeah, it's, INX can offer a lot of different avenues now. It's gotten really interesting.

Ironically, the bankruptcy process is speeding through security matters. It's a, it's a funny irony, but that's, when we did our IPO, it took us 953 days to get from the beginning of our first draft of the prospectus until the SEC kinda cleared us. Yeah, so this, the bankruptcy court makes it a much, much faster process to get us security into the hands of the public.

20:22 Anthony Noto: It was interesting Senator Pat Toomey said this wasn't a failure of crypto, it :was a failure of people And I'd like to get your thoughts on this, why wasn't it a failure of crypto? To the average person, to the average person of cryptocurrency, almost feels like really complicated algebra or calculus, which most people hate.

And the industry hopes to catch on with the casual consumer. So why wasn't this a failure of crypto? .

Alan Silbert: Yeah, so I, yeah, I actually, I met Pat Toomey last week at a conf, at the blockchain association policy summit in DC which happened like immediately afterFTX. It was a very timely conference.

And yeah, I heard him make that speech. What happened at FTX could have happened. At a widget factory, right? They just they just had a lot of money, or it was like, or Enron, it was just a lot of money in their hands that they used inappropriately. They operated in an unregulated jurisdiction in an unregulated way.

And they just use greed and mismanagement to totally implode this company. Yeah. There's nothing about crypto that made this happen, really. It was more of just the unregulated nature, greed, mismanagement. If you take Bitcoin is the most extreme example of decentralized Bitcoin itself, there's nobody that turns the levers really.

It just operates on, its. It just goes on. It's, it's always up, it's always generating blocks approximately every 10 minutes. Bitcoin can't steal your funds, can't leverage your funds, can't mismanage, you can't, can't abscond with your money. And I think when people say it's not the fault of crypto, if in a purely decentralized model, these things don't happen.

You don't you don't have to trust anybody because things operate on their own. So that's, yeah, that's my thoughts on that.

22:42 Anthony Noto: It's interesting you mentioned Enron because the Enron fixer John J. Ray III is quite a name. Yeah. Is is the one sort of overseeing FTX now.

What needs to happen for heat, for FTX to even come back? What does that look like? Can you, is there any, can you give us a quick curtain razor into that bankruptcy process? Cause I've covered bankruptcy. Yeah. I actually just love factories and stuff and banks and, but this is something a little bit foreign to me.

Alan Silbert: Yeah, I was actually, I was just listening to the bankruptcy court one of the hearings before where they were actually discussing just making sure the names of the clients of FTX were redacted were hidden from any kind of paperwork that's floating around. I think it was the Celsius, I think it was in the Celsius bankruptcy, where information got inadvertently, pushed out.

Or maybe not even inadvertently. Maybe it's just because it's part of the public bankruptcy process for that, that wherever the jurisdiction is. But in any case, that's what they're talking about today. But yeah, they, yeah, they found, they brought in the Enron fixer because this is gonna be, very complex.

Yeah. And I think you probably saw he already characterized this as like the, Historical bankruptcy and it's gonna be a mess. And that's because, first of all, they FTX or chart is, it's a site to see. It's hard to follow all the lines.

So you have to dig in all the different entities where money was moved possibly or taken. Illegally who owns what entities have value left in them that they can they can liquidate for the creditors, right? They're the company's record keeping. Like I said before, the record keeping controls, everything was like an absolute mess.

He's gonna have a his hands full. I'm sure there's many forensic accountants and everything in there. He's gonna really have his hands full, unwinding everything and seeing where money is. It's yeah, I think even I saw even today that like Sam's parents I guess the company bought them like a place in The Bahamas or something, so they have to That's right.

Sell the deed to this condo back to the estate. So there's just, there's so much crazy stuff going on. It's gonna take a while, unfortunately. To, to work through the process. But, again, this is another situation like a recovery token. It could work if there's, I believe I saw they have a billion dollars of cash or a billion dollars of assets there.

There's something there. You could form this into a recovery token for the creditors. There, there is a way to do it. It's bankruptcy in the us as of right now. There, there is a way to do this in the form of a recovery token. Yeah, it'll just it'll take some time to work through, for sure.

26:08 Anthony Noto: We have an event coming up in December December 7th, December 8th, here in New York City where I am. It's called the Future of Crypto.

We have a long list of really great guests who are gonna be talking about the industry, and it's the event is called The Future of Crypto. In your opinion, what does that future look like? What kind of a crypto startup will survive in 2023

Alan Silbert: I think the foundation has been built in the space to the point of where there's no turning back. Like it's, the crypto is absolutely here to stay. Blockchain technology is here to stay. There's gonna be like a cleansing, it's gonna fall back to like its foundation and its anchors.

Like typically the anchors have been like absolutely Bitcoin because it's like a purely decentralized crypto that's just never gonna die. And also like an Ethereum, which you know, which seems to regulators have blessed is not a security, which, has it's own features as well.

And the things you can do with an Ethereum, a smart contract are, pretty amazing as well. Like our token runs the Ethereum blockchain. It's an ERC 1404 token. We can build things into our smart contract a white list. So our token can't get moved anywhere unless the center and receiver whitelisted, it's governed by the blockchain.

So a lot of these, like technologies and features are are, Or pioneering like the next iteration of FinTech and they're not going anywhere. Yeah, you've, you gotta do things the right way going forward. It's regulators are gonna be, scrutinizing everybody under the sun that mentions crypto in their business plan.

You have to do things right from the get go. 

 Anthony Noto: Why aren't companies doing it right from the get. . What? What? Why not?

 It's expensive. It's expensive. Yeah. Expensive.

  Anthony Noto: Not as expensive. As expensive as buying a house in The Bahamas?

 Alan Silbert: No, not as , I just it's just the harder, people take the easier route. This is what they, what the easier route. And that's, that's why they, that's why they do it. And we just we were just very patient and deliberate and, it's a part the fabric of our company is just, we wanna be in a regulated space and so we did everything the right way.

 Anthony Noto:You mentioned before, regulators are gonna be scrutinizing the space even more Now, say for example, you have five minutes to chat with Senator Elizabeth Warren, someone who's been pretty vocal about it. What do you say to him?

 Alan Silbert:Yes. Yeah, she's a funny one to choose because yeah, she's not particularly friendly to the space. This administration has been difficult in general in that things really haven't moved along. Along. It's the politicians they have their constituents.

I think Elizabeth Warren has a couple kind of traditional world like money transmitter or payment companies that are her donors. But she's not necessarily like the person to go and talk to . We try in a space, but a lot of it's just about education. You just, you just, you constantly have to educate them and reassure them and the reassurance parts what's gonna take a couple steps back and like the trust there's been.

A lot of goodwill done by companies in the space to educate and to get us to where we are today. So we're gonna take a couple steps back. We have to all kind of regroup, and just go back, try to work together to have sane regulation that protects clients, but doesn't make it totally onerous to operate in the space.

I consider the US to be on the more, more onerous side just because of all the different regulators and everything. And we try to push them regulated like the internet, the internet was given. Free reign to innovate in a certain way.

But yeah since there's money involved here, just gets more complicated. 

30:57 Anthony Noto: Cause the industry does feel like it's being given to us like bad tasting medicine at this point. So what needs to happen for it to be in this. Sweet spot where more retailers adopted cryptocurrency as a form of payment.

What needs to happen for it to go mainstream? Because like you said, you've been in this industry for 10 years now. It doesn't seem like it's mainstream. A lot of articles seem to come out where it says, oh, it's mainstream. It doesn't feel that way. Especially if you look here in New York and when you go shopping online, it doesn't feel like cryptocurrency has really hit a stride.

And this year it has definitely not helped.

Alan Silbert: Yeah, I can't emphasize enough like how far it's come because it's a dramatic improvement from when I started in the space. But yeah, there's still a long way to go. The ability to use like like Bitcoins easily, we're getting there.

It's. All the boundaries have to, the UI UX has to be very easy for people to be able to use it like they use Venmo or anything else. So we're getting there. It's a problem in the US that there's no do minimus tax exemption for sending Bitcoin. Right now if you buy a cup of coffee with Bitcoin, that you have a capital gain on is technically tax.

Things like sensible things like that have to get through the government that have to be passed into law. But yeah, I think, it's got to when I first got into the space what got me enamored with it was that it's democratized money. You don't have to trust your government, the US government just, prince trillions of dollars every month.

It's kinda gotten outta hand. You can have your own money. Billions of people in the world are unbanked or unbankable just because the the banking regime will only bank certain people with a certain that meet a certain set of rules. You probably have a few billion people that are just unbanked or unbankable.

It's only fair that you have some democratized money and that people can, I don't know, send back to their family in Africa or South America just with their phone for a few dollars instead of going to Western Union and getting gouged for 10 or 20% and that's the core of the whole space.

It's not going away. There's this kind of democratized money and and. Trustless that we try to build into the, these kind of protocols. Yeah, it'll, it's definitely, it's gonna take some time. Like right now, if you send money back, let's say you wanna send money back to your family in Africa and billions of dollars flow back to people's home countries every year.

It's a major money flow. Right now if you send money back to your family, Africa. Okay, so now you sent them Bitcoin, you sent them, so now what do they. They have to be able to, put it into local currency or they have to be able to use it for goods and services.

These kind of things just take a long time to to develop and, to, for the ecosystem to develop. And it takes a lot longer than 10 years. We're, we've come very far, but know, it's, it takes a more time. 

 Anthony Noto: Last question. Like I said, we have an event coming up on December 7th, December 8th.

I hope to see you there. And a lot of people come to you for answers. You're clearly an expert in the space, you know so much about it, and you have that old world expertise. In a pre cryptocurrency world. What questions do you have? Everybody comes to you with questions, but is there, are there any questions that you have?

What peaks your curiosity? What would you like to see answered? What would you like to see people discuss at an event like ours and in other corners of the cryptocurrency?

Alan Silbert: I think we need to put all of our brains together about what the, the best way is to move forward in a regulated way while not squelching innovation or slowing down the space and there's ways to do it. So I think it's when I talk to people, I just try to, pick their brains for what, how they think this is best accomplished.

Do we need to consolidate things under one regulator? Do we need to I don't know, have state authorities all form a coalition together and have a more efficient path to licensing? So yeah, a lot of my kind of inquiries go to just, The space is it's gonna, everything's gonna be under a regulatory umbrella.

So it's everything that I'm curious about. It is, how can we push things forward in a regulated way, in an efficient way, and so that we can bring this technology to the world and then keep progressing it and keep these bad actors out

Anthony Noto: keeping bad actors out. it sounds INX is a good actor. So I appreciate you taking the time to speak with me today. It's been a pleasure. 

Alan Silbert: Thanks so much. It's been pleasure for me too.