James Block is a junior doctor at a major university hospital in the midwestern United States. What his patients don’t know is that he has a hobby: in his spare time Block uses software to look through the hundreds of billions of dollars invested in cryptocurrencies and digital assets, exploring how much they’re really worth and who, if anyone, is getting rich from the digital investment boom.
Block is one of a group of people – bloggers and independent researchers, many of whom are anonymous and unpaid – who have helped to expose the inner workings of the financial system’s most controversial assets. These amateur sleuths have helped to reveal the workings of FTX, the $32bn crypto exchange that collapsed last month and whose founder, Sam Bankman-Fried, was arrested on 12 December; he has been indicted on eight criminal charges including wire fraud, securities fraud and money laundering.
“I have a weird fascination with fraud,” Block told me in one of several phone and video calls we’ve had in recent months, after I contacted him through Twitter. When he first started watching the news, the main items were Enron, the 2008 financial crisis and Bernie Madoff, the New York financier whose asset management business turned out to be a $50bn fraud. “Most of the people I knew in high school didn’t care, but I was always fascinated with it, how these things come about.”
Growing up in Michigan, Block, 30, noticed other people weren’t so bothered, either. “People I know, my age, who are my friends, almost all of them are very credulous. If somebody’s making a lot of money, they don’t think: where’s the money coming from? Or, is what they’re doing ethical or sustainable? They just think: how can I get in on this?”
He recognises that his dedication is unusual. “Nobody does anything for free, right? It’s always, you have a side hustle, you try to make more money being an influencer or whatever. Nobody does anything for fun.”
For Block, it’s fun to look at complex problems. At university in Detroit, he studied not only for a medical degree but also a PhD in cancer biology, a science he “really enjoyed”. He says there are parallels with his work on crypto: in groups of cells and in financial markets, there are tests that can be run, data that can be gathered, and a story that can be told about how a handful of factors assemble the pattern of disaster.
But when he started to point out that, in crypto markets, the familiar pattern of the Ponzi scheme – a kind of fraudulent investment that only pays out as long as new investors are joining – could be seen again and again, no one seemed to want to know. Block’s posts on Twitter were studiously ignored by a world caught up in the great speculative investment boom of 2020 and 2021, when the stimulus programmes governments deployed during the pandemic created a huge bubble in asset prices. Novice investors piled into anything that offered enough risk – bankrupt companies, blank-cheque vehicles, crypto, NFTs (digital ownership tokens) – and in doing so sent their prices, as the saying goes, to the moon.
“That made me upset,” Block admits, but it also gave him resolve. “I decided to keep going with it. It provoked me into taking it more seriously.”
Block began teaching himself about decentralised finance. Originally intended to let people make simpler transactions between each other, using cryptocurrencies, without needing to use (or pay for) banks, this soon became even more speculative and overcomplicated than regular finance. He learned about about the esoteric constructs – protocols, tokens, decentralised markets – that have been built to make it appear that something very clever is being done to produce returns. Occasionally, he would see something that looked recognisably pyramid-shaped.
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One company offered a guaranteed 12 per cent return to investors, but wouldn’t say how the money was being made. It was a very similar guarantee to that offered by Madoff, who offered reliable double-digit returns with little explanation of the magic that created them (until he went to prison in 2009, owing $170bn in restitutions). “That’s what I mean about recognising a Ponzi when you see it.”
But more than this company itself – a crypto exchange and lender called Celsius – Block was captivated by its CEO, Alex Mashinsky. Mashinsky, a serial entrepreneur, was known for his brash, self-aggrandising demeanour. He claimed to have invented or created early versions of Skype and Uber, but to have been so far ahead of the curve he was unable to capitalise on his innovations. He had reportedly departed from a number of businesses leaving investors and colleagues riled. When it came to the new crypto religion, Mashinksy was a devout and vocal convert, preaching the litany of rising numbers from conference stages on which he would wear a T-shirt that read: “Banks are not your friends.”
Mashinsky would hold regular “ask me anything” sessions online for investors, so Block joined one and asked questions he didn’t like. After some back and forth, Mashinsky told Block: “There are no rules in this business.”
“It was him that really got me to focus on Celsius,” Block told me.
The great thing about crypto for people like Block is that, while in some ways it conceals the identities of the people using it as money (which is why it is so widely used by drug dealers, fraudsters, illegal porn sites and tax evaders), the money itself is often public. In many cases transactions are recorded in the currency’s public database (its blockchain), which is shared with every other user of the system. “There are certain things you can’t hide,” he told me. Block began using software, much of it available for free, to scan blockchains and identify where the money flowed and who owned the accounts (known as wallets) behind the transactions. He began publishing his findings as Dirty Bubble Media. (The Dirty Bubble is a villain from the cartoon Spongebob Squarepants: he’s a bad guy, but you can see through him.)
In the trading of Mashinsky’s Celsius crypto token (CEL), Block says he saw a pattern of “very questionable and high-risk activities”: significant volumes of the token appeared to move between the same accounts, bouncing across different exchanges before returning to the Celsius Network in a manner that may have artificially inflated its value. And as the rising price of CEL persuaded more investors to put their money in the Celsius Network, Mashinsky and his fellow executives were withdrawing tens of millions of old-fashioned dollars (and placing them, presumably, in those banks about whose intentions Mashinsky was so concerned).
In the end it was Mashinsky’s showboating that proved his undoing: Block was able to identify different crypto wallets as belonging to him because the crypto CEO would often boast about making deposits, posting screenshots that included details of the digital wallets he had used. Mashinsky’s profile picture on Twitter was “one of those stupid NFTs – of himself, of course – and if you track the wallet that holds that NFT, you can prove beyond any reasonable doubt that he controls one of these wallets that engaged in millions of dollars of sales”.
In July this year, Celsius filed for bankruptcy, leaving its more than 300,000 active users out of pocket. Mashinsky’s statement claimed that market conditions and “misleading media coverage” had led to a “run on the bank”. Securities regulators across the US took a different view: officials in at least 40 states have begun investigating the company for what the Vermont state regulator called “unregistered securities activity, mismanagement, securities fraud, and market manipulation”. Block’s work would later be cited by Celsius creditors in their court filings.
Among the largest creditors listed in the Celsius bankruptcy filing were a hedge fund called Alameda Research and a fund owned by a company called Lantern Ventures, whose CEO was also a co-founder of Alameda. Alameda was a sister company to FTX, the world’s second-largest crypto exchange. Both were founded by someone who would soon become a household name: Sam Bankman-Fried.
In July 2021 a source messaged me to say that FTX was “the new Bitmex” (Bitmex is a crypto exchange co-founded by an “effective altruist” who was found guilty in 2021 of violating securities laws). The source claimed that Bankman-Fried was raising large amounts of capital from investors “to cover up losses”. At the time Bankman-Fried, now 30, was the rising star of crypto, a cartoon of the disruptive entrepreneur: a 29-year-old who lived in the Bahamas, slept on beanbags in the office and was worth $16bn. He played video games in meetings with venture capitalists, and paid Bill Clinton and Tony Blair to appear at his conference.
When I spoke to that source this month he said I could call him “Andrew Ryan”, although that’s not his real name. Ryan describes himself as “kind of the original sceptic” when it comes to crypto. While people have been questioning crypto’s uses and purpose since it launched in 2009, Ryan began looking at movements in the price of Bitcoin in 2017. What made him suspicious was that, every now and then, for no apparent reason, the price of Bitcoin would suddenly rise.
“It’s almost like a restaurant that claims they have a booming restaurant business, but the restaurant, every time you go there, it’s closed. There’s nobody there. But they’re claiming, ‘Oh, yeah, it’s packed!’ It doesn’t make sense. That’s kind of what triggered me.”
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Like Block, Ryan used blockchain tools to create an account of what was really happening in crypto. Unlike Block, he didn’t have a particular fascination for fraud. Ryan could spot the pattern of market manipulation not because he had a background in finance, but because he had a background in financial crime. “There was a period of my history,” he told me, “where I did the same exact thing. I printed a bunch of currency units, and I inflated a market. And I got caught. And I kind of got in trouble.”
What Ryan’s research concluded was that the price of Bitcoin was being moved by another cryptocurrency, Tether. As a “stablecoin”, Tether is designed to be redeemable for $1, which allows it to be traded as a replacement dollar on crypto exchanges. There is supposed to be a dollar (or, since 2019, a dollar-equivalent asset) in a bank account somewhere for every Tether issued. The company that owns Tether should therefore have $65bn in assets, which would make it considerably larger than some UK high-street banks and building societies. But as Ryan pointed out in 2017 – and a subsequent investigation by Letitia James, the New York attorney-general, agreed in 2021 – there was at least one period in which most Tethers were not backed by dollars, at which time the company did not even have a correspondent bank to carry out dollar transactions with clients.
Ryan also revealed that Tether had the same owner as a crypto exchange, Bitfinex (which was confirmed by the “Paradise Papers” leak of offshore ownership information) and that Tether’s money-printing was being used to cover losses from Bitfinex (which, again, the attorney-general’s investigation agreed). His work, published as anonymous blog posts and tweets under the handle “Bitfinex’ed”, helped to lead regulators and prosecutors in the right direction: his findings were cited in an influential 2020 paper by the academic John Griffin, which also concluded that Tether was the most likely cause of large rises in the price of Bitcoin. Griffin’s company, Integra, is also a supplier of services to government agencies including the US financial regulator, the Securities and Exchange Commission.
Like Block, Ryan wasn’t thanked for pointing out what he sees as a problem at “the centre of the whole thing”. He has received death threats and hacking attempts, a common theme among crypto critics. Block, too, had his Twitter account hacked; it took him three months to regain access. The economist Nouriel Roubini also told me he had received death threats and racist abuse from more than 1,000 Twitter accounts when he spoke out against Bitmex in 2018: “armies of bots clogging my feed with thousands of spam messages and attacks”, hacking attempts and a denial of service attack against his email address. When Roubini criticised the world’s biggest crypto exchange, Binance, this year, the bot attacks resumed.
And like Block, Ryan eventually found his work leading him towards one person. Of all the Tether that was printed, one company stood out as a buyer, taking in more than $36bn of the currency, according to research by the crypto news site Protos: Alameda Research. And of that, $30bn went to the crypto exchange FTX. Both were founded – and FTX was run – by Bankman-Fried. “Almost every penny that he got, he sends to Tether,” said Ryan.
It was a blog post from Block that helped precipitate the downfall of Bankman-Fried, whose net worth fell from an estimated $20bn to around $100,000 last month after his network of companies, including FTX and Alameda Research, filed for bankruptcy. The US Department of Justice described Bankman-Fried’s real business as “a massive, years-long fraud diverting billions of dollars of the trading platform’s customer funds for his own personal benefit”. It’s likely he will be extradited to the US.
The crisis for Bankman-Fried began when the balance sheet for his trading firm, Alameda Research, was published by a crypto news website called Coindesk. Block immediately began to analyse the $14.6bn of assets listed. The largest of these was almost $6bn in a crypto token called FTT – a currency issued by Bankman-Fried’s own FTX exchange.
FTX was then the second-largest crypto exchange in the world; at its peak in 2021, more than $21bn was traded through the platform in 24 hours. What Block showed, however, was that only a fraction of 1 per cent of FTT was traded on a daily basis. “And if you look at how it’s trading, it’s all trading in a big circle, suggesting that most of the transactions are not actually real economic trades made by real people.” Elsewhere on the balance sheet were unusable “locked” tokens, some of them made by companies Bankman-Fried had also founded. Alameda’s supposed collateral consisted of billions of dollars in money that Bankman-Fried and his colleagues had made up, and which very few people wanted to buy.
As the implications began to spread, Changpeng Zhao, the CEO of Binance, recognised the analysis Block had done on Twitter. He announced that Binance would be selling off everything that remained of the FTT tokens it held from a deal previously valued at $2.1bn. As head of the world’s biggest crypto exchange, Zhao caused FTX’s customers to run for the doors, but it was too late for many: FTX halted customer withdrawals the same day and within a week had filed for bankruptcy, leaving more than a million unsecured creditors.
For Ryan and Block, a lot of questions remain: where did all the money people trusted to FTX end up? Did Bankman-Fried really send tens of billions of dollars to Tether? But the other fundamental question is: why didn’t anyone believe them? For this the blame is shared by a credulous media, politicians who were too eager to get in on a tech trend, but most of all the decade-long splurge of quantitative easing and low interest rates which led a new generation of investors to conclude that money itself had lost all meaning. In this environment, it made as much sense to invest in a weird internet joke as anything else.
When there’s money to be made in ignoring the facts, Ryan says, there’s no incentive to look for the truth: “It’s easier to scam somebody than it is to convince them that it’s a scam.”
Block agrees that the problem is not so much that scammers exist – they always will – but that the world has made people so ready to believe them. “I did this for free, because it was interesting, and no one can believe that. It’s disappointing, actually. I don’t think too many people are sceptical of anything, any more.”