Hollywood Star: Crypto Represents the “Golden Age of Fraud”

HARI SREENIVASAN, INTERNATIONAL CORRESPONDENT: Bianna, thanks, actor and author Ben Mackenzie. Thanks so much for joining us. First our audience members of a certain age might recognize you from a couple of TV shows and say, wait, what is the guy from the OC doing talking about cryptocurrency? What <laugh> what gave you the idea to write a book about cryptocurrencies, the scams, some of the charlatans involved? How did this happen?

BEN MCKENZIE, ACTOR/CRYPTO EXPERT: It’s a pretty interesting story. I hope. I have a degree in economics from the University of Virginia, about 20 years old. I’d kind of set it aside as I pursued my Hollywood path. But I would say Easy Money. The book I wrote with Jacob Silverman is about money and lying. I know about money cuz of my econ degree. I know about lying cuz I’m an actor and I do it for a living. And the cryptocurrencies were you know, they’re not currencies economically speaking, anyone with even an undergraduate degree, such as myself knows that. So that just got me suspicious and led me down a pretty wild rabbit hole where I interviewed Sam Bankman Fried of FTX and, and traveled the world trying to get to the heart of the matter in terms of, well, what is crypto and, and why have so many people put so much money into it.

but I had this suspicion. I kept doing research and I had the suspicion that if I was right, what I was looking at was effectively the biggest Ponzi scheme in history. Some 40 to 50 million Americans bought cryptocurrency. And so I was struggling with, this was the height of the mania in 2021, and I was reading my young daughter a story. My daughter was six at the time, and I read her at the Emperor’s New Clothes. And I’d forgotten a couple of points in the story. The first is that the swindlers trick, the emperor and all of his courtesans and all of the, the people in town by saying that only the people of highest station, the smartest people can see the imaginary clothes that they leave. So it’s really appealed to, to status worship and ego. And the second thing is that at the height of the story, as the emperor prays through town naked and the adults pretend not to notice, it’s a child who calls out the scheme. The only one brave enough to speak truth to power is someone who doesn’t know he’s being brave. He’s simply telling the truth. It was hard to not put myself as that child. What do I know? I’m a former teen idol, 20 years in showbiz. But then again, I do have an economics degree. I have done the research and I do know about lying and what if I’m right? Yeah. And what an adventure that might be. And it ended up being even more of an adventure than I could have ever expected.

SREENIVASAN: Now when you mentioned your own research, that is one of kind of the crypto gospel, if you will, people who believe in cryptocurrencies as this structural transformation of economies in our banking system, et cetera. They always say, do your own research, right? So here you are kind of doing your own research. What was the – what were kind of the first things that surprised you? 

MCKENZIE: Well, the market structure crypto volumes run through the overseas exchanges primarily. Places like The Bahamas where FTX was based before it collapsed, the Caribbean islands, the Seychelles and places like that. These are areas where obviously American regulations are not in effect. And if American customers are accessing overseas they call them crypto exchanges, but they’re, economically speaking, they are casinos because cryptocurrencies don’t do anything productive. You may have noticed that about them. Yeah. But they would stay in economics as a zero sum game. It’s like playing poker in Vegas. You and I could sit around a table, I might win a hand, or you might win a hand. But we’re not creating any value. We’re not putting capital to productive use. We’re just trading it back and forth amongst ourselves. And meanwhile, the house is taking the rake in Vegas.

They’re taking a little bit of money each hand. That’s what keeps the lights on the casino. So could you win in Vegas? Sure. But over time the average gambler will lose because that’s how they keep the lights on. Yeah. Crypto is an unregulated, unlicensed casino if it’s overseas. So your odds are actually even worse. That was my first sort of fundamental insight. But it really started with language. It started with ‘these things are not currencies, they are securities,’ meaning they’re investments. There are 20,000 cryptocurrencies out there – that’s more cryptocurrencies by number than stocks in the major US stock markets. And they’re effectively, structurally, penny stocks being sold to the general public. No disclosure, no real investor protection. That’s really dangerous. That was terrifying when I discovered that.

SREENIVASAN: Well, what about the underlying kind of technological arguments that were being made? I mean, one of the biggest challenges that cryptocurrency proponents say that they pose is to the existing fiat or the paper currency banking system that we know of, that, you know, they are saying that this is coming at a time when there is such little trust in our financial institutions where we’ve come across financial crises like the subprime housing mortgage meltdown, and we look around and we say, how many of those people went to jail versus how many of those people were left out of their homes? So it seems like that sort of technology was trying to, well, harness this discontent.

MCKENZIE: It absolutely harnessed it, and I would say exploited it. If there’s anything that I agree with the crypto folks on, it’s that our regulated system is deeply flawed. But that’s true of almost any system. I mean, we, humans made up money. We made up our financial system. We made up our economic system. They are our collective hallucinations to some degree, and they are under our collective control. But we see the myriad flaws in them. And that gives the story of cryptocurrency, which in effect crypto is really just a story that gives the story a lot of power. But the trick there is you go from starting with an assumption that most people have, which is that our system is not great and could be improved at best, if not, but somewhat darker take. It starts from that assumption, which most of us agree on.

And then it says, crypto solves all those problems. That’s the trick. That’s the, that’s the, the three card Monte move. That is not true. Cryptocurrency does not do any of the things that it says it’s going to do. It does not fix any of the problems that it says it’s going to fix. In fact, it exacerbates almost all of them. It’s, it was saying that it was going to create generational wealth. It was marketed to the black community in particular as a generational wealth builder. In fact, it risks doing the opposite. You risk losing all of your money. It was marketed as a way of banking the unbanked providing banking services to people that couldn’t get get those services provided to them. Well, it doesn’t do that either. 

SREENIVASAN: And who fell for it? Meaning who were the ones who were kind of most affected? 

MCKENZIE: In terms of who bought in, everyone. And I mean everyone. 40 to 50 million Americans bought cryptocurrency. It’s actually fairly similar. The percentage equates to about 16 to 20% of the adult American public. It’s everyone from the wealthy to the middle class, to the working class. All races all, both sexes. It was primarily men or disproportionately men. And unfortunately the minority groups bought towards the end of the cycle in a disproportionate numbers. So they have suffered, I would argue the most, which is I think one of the most pernicious parts of crypto is that it’s exploited an understandable mistrust, lack of trust with our regulated system. And it said that crypto can fix it when in fact crypto makes it worse. You know, and it can confer the risk of impoverishing people. But I wrote the book in part for the people that have invested in, have lost because I want them to understand, if possible, if they’re even interested in how they may have been swindled. And hopefully, you know, they can, they can take from that some lessons in the future.

SREENIVASAN: You had a chance to sit down with Sam Bankman Fried, he was, became the face of the crypto industry He was on the cover of magazines, was called What the JP Morgan of his Generation. He sits down with an interview or an interview with you on camera and what happens…

MCKENZIE: It felt at the time, like I was punching against air. What I knew of Sam was pretty much what the public knew. He was on the cover of all of these magazines. He was testifying in front of government officials. He was the golden boy from California, the quant genius who was going to clean up a, you know, innovative industry that just needed a little bit of regulation. And what I found was, instead, a 30 year old kid, smart, from a family of law professors, had all the credentials. But when I asked him very simple questions, for example, I asked him, give me one company, any cryptocurrency that’s doing anything productive that has an actual use case, has a good or service that it provides, does anything. He struggled to answer that question. And he ultimately talked about a cryptocurrency that he in fact owned a lot of, which I found awfully convenient.

We went around and around and around and the more we talked, the more hollow the whole thing felt. And I couldn’t put my finger on exactly what was wrong because at the time, of course, we did not know what he’s alleged to have done, which was basically to run a Ponzi scheme. But all, but a lot of signs were there. He was running an exchange that was domiciled overseas, so free of US regulation. He was running a market making firm that was trading on that exchange. That’s a conflict of interest. It’s not allowed in regulated markets. He had a very small group of people that he was friends with, people that he knew from, for many years. That’s what fraudsters do. They need to keep the circle of trust tight. And then he was donating a lot of money to politicians, both Democrats and Republicans to try and steer legislation that would be favorable to his industry. Now, maybe any one of those things in isolation is not a huge red flag, but all combined together? That’s massive. Those are massive red flags. And I’ll put it this way, the title of that chapter is entitled The Emperor Is Butt Naked. And that tells you pretty much all you need to know about my experience with Sam Bankman-Fried.

SREENIVASAN: You also sat down with the CEO of Celsius, one of the banks that you write about at South by Southwest, What did that conversation with him show you, and what happened to him? 

MCKENZIE: I sat down with Mr. Mashinsky at South by Southwest, an impromptu setting. I just saw him and I knew something about his history and asked him to interview him, he agreed.
I would say the most shocking thing about our interview to me was I asked him how much money in crypto is real, and he didn’t need me to explain what real money was. He said 10 to 15%. He said, the rest is speculation. At the time the crypto market cap was, I believe $1.8 trillion. So give or take, what he was saying is that 1.5 trillion of that isn’t there. It’s leverage, it’s speculation. It’s all these things that exist in other markets, but the American public was not being sold on that. The global public – they were being told that this was the future of money, and if you just put your money in, you were gonna make a ton of money. In fact, what was really happening was these prices of all of these speculative assets were being manipulated upwards to get real people in. And ultimately, as the prices went down, real people wanted their real money back only to find that it wasn’t there.

I talked to Mashinsky in March of 2022, and just a few months after I spoke to him, his company went belly up. It’s now in chapter 11 and 300,000 people who had given their money to Celsius now cannot get their money back. And it’s unclear how much of that money even exists. Mashinsky is being sued by the New York Attorney General for fraud.

SREENIVASAN: Well, I wanna know, you know, you testified in front of Congress last December and what are the things that we can do? What can legislators do to try to prevent more people from being swindled? Because cryptocurrencies still exist, there are still exchanges. You and I can go buy whatever we want.

MCKENZIE: We have to enforce our securities laws and our commodities laws rigorously, and then we need the DO J to shut down some of these places overseas. I use the example in the book, but online poker is really the best parallel here. In the two thousands online poker took off as young men saw a guy named Chris Moneymaker won the World Series of Poker and he was just an average Joe, and they thought, Hey, if he can do it, so can I. And so online poker went from an industry that was borderline non-existent to a multi-billion dollar industry. In the span of a few years, regulators and lawmakers realized that it was the Wild West and that people were probably getting swindled and that it was being used to facilitate crime. So they passed a law in 2006 and Bush signed it into law. Well, the gambling companies on the poker companies moved overseas to places like Caribbean Island nations, where some of these crypto companies exchanges are now based.
Ultimately it took the D O J shutting those websites down on what is called Black Friday in the online poker community. And one of the things that they discovered when they shut it down was that some of the sites had been swindling their customers one of them in particular had a secret “God mode” where insiders could see the their, the other players’ cards. Some of the players in cryptocurrency actually got their start in online poker.

SREENIVASAN: One of the central tenets of cryptocurrencies, or at least the math behind it, is that it provides what’s called a trustless system, right? That you trust the math, the cryptography, that this isn’t about what a Federal Reserve chairman is gonna do with interest rates or what a, a government or a currency is gonna do in response to its own economic needs. What did you find as you went through this reporting?

MCKENZIE: You cannot have trustless money because money is trust. We made money up, it’s not real. And so whether it’s a piece of paper, green piece of paper with funny little markings on it that I give to you, that you accept because you know, you can take that green piece of paper and use it to buy whatever you want. Money is basically trust scaled. So saying you want to create a trustless money is literal nonsense. It’s like saying you want to create a government list, government or a religion list. Religion, the words you’re searching for are anarchy and cult. What you’re really saying when you say trustless is you’re trusting the code. But code does not fall from the sky. People write code. And as we saw in the FTX debacle, what’s alleged is Sam Bankman-fried told one of his subordinates to change a single line of code and millions of lines of code to create a secret backdoor where he could borrow his customer’s money.
We are all fallible as humans, and it is perhaps discomforting to acknowledge that fact and to acknowledge that our system is deeply flawed and it needs fixing. But there is no magic magical bits of computer code that fall from the sky that will solve our problems. In fact, it’s usually being used to scam or defraud you.

SREENIVASAN: Ben Mackenzie, the author of Easy Money. Thanks so much for joining us.

MCKENZIE: Thank you for having me.