 This looks like a move by an outfit called Robin Hood, which is supposed to be a momentum rather than a deep fucking mental analysis. To not use the word rigged, why? Because it's too Atlanta. Dangerously close to the collapse of the entire system. We like to stop. We like to stop. I gotta do this. Let me do this. We don't want to stop. They're very smart about what's not going on. That's right. How did it come to this? How do we make sense of all of this? And why are all the arrows now pointing to crypto? Well, before that, I should probably clarify what this actually is. Rewind January 28th, 2021. GameStop stock is now trading above $300, a nearly 1,500% increase from the beginning of the year. Hedge funds short positions are being squeezed by a community of retail traders known as R-Sless Wall Street Bets who are buying as much GME stock as they can afford through the free brokerage app Robin Hood. Then, during the morning pre-market hours, an unprecedented waterfall of decisions occurs. Robin Hood, followed shortly thereafter by many other retail brokerages, blocks the ability to buy GME and other meme stocks. Retail traders can now only close positions rather than open them. This creates a lopsided market that drives GME stock prices down below $200 at market close. The public outcry against these decisions was swift and strong. Robin Hood was quickly accused of nefarious motives because of their ties to Citadel, a hedge fund who indirectly had a large short position in GameStop. The brokerages defended themselves by citing financial regulatory requirements and by warning of an imminent collapse of the entire market. But what really happened? And why did the tension from this event spill over into crypto? To make sense of these events, we turned to Sam Bankman-Free, CEO of FTX and Alimator Research, and Cointelegraph's third most important person in blockchain in 2021. Before Sam moved into crypto, he was a trader for three years at Jane Street Capital, which is one of the largest market makers in the world. In 2020 alone, they traded more than $17 trillion worth of securities. So this has given you a very intimate knowledge of how the American financial system works, how the stock market works. So, you know, given that background, and given all that we've experienced over the past few weeks, how do you assess this anomaly that was the GameStop event? Clearly something really bad happened that day on Robin Hood, and it is bad. I mean, is bad and clearly Robin Hood is at least partially at fault for that. And you sort of know that just because it went really poorly, and that's their whole f***ing business, is having, like, that should have been their best day ever. That should have been the day that Robin Hood, like, grew 10x. And instead it was the day people started writing the obituaries. But I think people often misdiagnose exactly what went wrong there and sort of end up with these, like, somewhat myopic views where, you know, it's sort of like this all-encompassing, sort of like, good versus evil, and all of a sudden they're evil, and everything is sort of like, you know, rooted in malice. And, you know, I think this is a case where, like, things did absolutely go wrong. But, you know, I don't think that they were, like, colluding with head funds to try and protect, you know, people's, like, P&L on a short position or anything. I think what happened basically was they just, like, were not prepared for that day. Like, many, many parts of their business were not prepared for it. And, you know, the core thing that happened there, the biggest thing that got them in trouble, is this thing called regulatory capital. And where this comes from, it's sort of an interesting thing that doesn't make sense in a crypto context, is that, you know, in traditional finance, it's not like you have, you know, two users deposit their funds irrevocably via a blockchain onto one platform and then trade against each other. There is customers of it, right? Which is sort of what happens in crypto. Instead, you have, like, 12 companies sitting in this process. And it serves this long food chain of them, you know, going from, you know, customer trades against Robinhood, who then offloads the flow to Citadel, who then uses some technology service to connect to New York Stock Exchange using a, you know, JPMorgan or something to custody their assets. And then, you know, trades on New York Stock Exchange against some other big broker who then, you know, you have the exact same thing, you know, playing out on the opposite side. And it's like 12 companies, you know, that are involved in that process. And what that means is that it's all messy, you're gluing a lot of things together, and a lot of things can go wrong. And so because of this, there's this thing called regulatory capital, which basically says, look, we understand that, like, you, Robinhood, think you're not doing a trade here. That, like, this is just one of your users against another, right? And that you don't have exposure here. And so, like, you know, whatever, like, one of them will win, one of them will lose, and, you know, you don't care. But you can't know for sure that everyone is good for what they say. You can't know for sure if everyone's going to deliver. That the person who bought Game Stock is going to be able to deliver the dollars, and the person who sold it is going to be able to deliver the stock. One of them might go bankrupt. They might not actually have the stock. You know, there might have been, and whatever. There's sort of like a number of things that could have gone wrong in that process. And so they sort of bake in some baseline level of, like, shit got fucked up in all these trades, and like failure to deliver and things like this. And what that results in is they basically say, look, because some of these trades might fail, you need to keep Robinhood, despite you not putting a position on yourself, you need to keep some capital. On your platform, in order to basically backstop your users, you know, on both sides of these trades. And there's this complicated formula, which is a function of the position sizes and the volatility and things like that. And it's like, at least you need to keep 10% of the position size of your users as extra capital on the platform. Not the capital for that position, that the users have to supply, but you have to supply that in addition. And so anyway, they have to post this rate cap. And, you know, basically what happened was like all of a sudden, you know, and the world went sort of crazy and, you know, their positions kind of grew massively from what they had ever been before, basically, and they just didn't have enough regular capital. They did not own enough money in order to legally be allowed to offer all of those trades to their users. And, you know, they sort of woke up one day and they had to pay, not pay, but they had to post as collateral, you know, like $2 billion, and they just didn't have $2 billion. And so they couldn't. And so they stopped users from opening new positions and in fact started forcibly closing them down. And this is sort of like the backstory here. And it's sort of in some sense a boring technical backstory, which is just a lot less exciting than this sort of like, you know, good versus evil narrative. But on the other hand, that doesn't mean that they're blameless here, right? Because like if you're Robin Hood, this wasn't like something that you never thought would happen. Like you know that you're the most popular, you know, most topical retail trading app in the country. You know that retail trading is getting incredibly popular. And, you know, frankly, you should be expecting something like this. You should be expecting that there's going to be surges in volatile stocks with tons of interest on your platform. That's what your platform is. That's who you are. And if you can't handle that, it's going to be a really, really bad experience for your users. Like they should have predicted this and they should have prepared. And rather than having to scramble at the last minute after this happened, try and find $2 billion, they should have had procedures in place beforehand to deal with this. And even when it did happen, you know, I sort of think they, I mean, I don't know, like obviously I wasn't there, but like I sort of think they probably weren't trying quite as hard as they should have been to be able to get the capital. You know, this is one of these things where if I were in their place, I would have like, I would have been willing to basically pay anything as a company to be able to get the capital that I needed on, you know, on six hours notice to be able to post so that my customers could keep their positions. Because like that's what they deserve and that's what's going to save the business. And, you know, they didn't do that. And, you know, they're sort of paying the price for that. And I think it makes sense that they are because, you know, exactly when their users needed them the most, they were there at the least. And they showed a number of other ways. I mean, they turned off trading on a lot of cryptocurrencies. Later that day, that's not regulatory capital, I don't think. I think that's something else. I think they just like couldn't deal with it. Like couldn't handle the liquidity or volatility or pricing or something like that. I mean, it's like not ready for Dogecoin. And, you know, overall, it's just sort of like a pretty amateurish performance for what should have been like, again, should have been their best day effort. Yeah. And there were just a multitude of strange things that happened that day. Because it wasn't only Robinhood that locked out trading. It was also a number of other brokerages. And the strangest part was that they just locked the demand side. They just locked out demand. Yeah, exactly. It's totally bizarre. And like usually you wouldn't do that. Usually maybe you'd halt trading in both directions. But of course, their problem was they're out of rate cap and all of their customers had it on a same way position. So they're trying to decrease that position size. But still it's like very, very bizarre to only lock out buy side. I've never seen that before. It has weird like inefficient impacts on markets. Like it's not a good thing to do. It's not a healthy thing to do. It doesn't have, it has a really bad look. And it's in fact bad. Other weird things where the liquidating users who seemed to have fully funded their accounts, it's not like they had like deposited $10 and then tried to put on a $20 position. They deposited $10 and tried to put on a $10 position. And then they got liquidated on it. And they're sort of like, what the fuck? Like this wasn't a margin trade. Like I understand that sometimes margin trades get liquidated when prices go down, but that's not what this was. This was, this was, this was very much a spot transaction. So why am I getting liquidated? And, you know, basic answer was, well, they had to close down positions because they were kind of fucked. And I think they just had some clauses and they're like terms of service said, yo, by the way, not that you're going to read this, but technically, unless you say otherwise, everything here is a margin trade, even if it's fully funded. And, and this is like a pretty shitty thing to do to your users. No, absolutely. So do you think it was really just them panicking and not really knowing what to do, more so than any other like of this conspiracy kind of? Yeah, they're massively unprepared. The regular is called up. They know what to do. They're freaking out. They're panicking. And they did what they felt like they had to do and they did have to do something, but probably they could have come away better than they did. And, you know, also they, they, they shouldn't have left that one till the last minute. They should have been prepared for it. So do you see this as like the system working as intended? Yeah, I mean, in some sense, yes. Like, you know, I think there's a way in which it is, but obviously it's, you know, sometimes it's not easy to sort of separate out the system from the participants in the system. And clearly Robinhood didn't work as intended. And so, you know, I think in one way you could, you could blame the system. You could also just say, look, the system had these weird rules, but everyone knew they were there. Everyone should have been ready for them. Like it's sort of Robinhood's fault that, you know, Robinhood's fault that they weren't. I think that'd be a totally reasonable sort of take here as well. What kind of reaction do you expect to see from the regulatory bodies? I mean, because on paper, no one really did anything wrong. But how do you think their reaction is going to be to this? Yeah, it's super interesting because you see different people having completely different approaches and completely different responses to what the problem was here, right? You see some people saying the problem was the coordinated manipulative buying. Some people saying the problem was this short selling. Some people saying the problem was Robinhood. Some people saying the problem was red cap. I mean, it's like, you know, so many things have been blamed for this. And, you know, in the end, it's sort of like, you know, just this case where like, look, I don't know, like it was a complicated situation and things didn't work out well. And, you know, I think it's not obvious exactly who is to blame how much. So certainly Robinhood deserves a fair bit of that. But yeah, you see like totally different responses from, you know, from different people, you know, in Washington on this. And I don't know how that's going to end up, frankly. I think that like, best guess is nowhere. I think best guess is nothing's going to change because it's a weird idiosyncratic case and people can't agree on what the right way to interpret it is anyway, other than everyone thinks that Robinhood sucks. Yeah. And that's kind of the saddest outcome, isn't it? Because the whole point of this movement that it kind of became was to create some sort of change, to instigate some sort of change, you know, at least bulk at the system, you know. And if nothing ends up happening because of it, it's just going to be like, it feels kind of like the nail in the coffin a little bit. Yeah, it does. And I think that it's, you know, not nothing will change. Like one thing that's going to change is sort of weird, but I do think this is like the thing that most clearly will change is Robinhood. It's going to take a big hit from this, right? Like they survived, but I mean, not well. Like, can't imagine this was good for their valuation. Can't imagine this is good for the user base. You know, this was really bad for their long-term business. And if nothing else, I think they're going to pay the price for this. Do you see this event in history as kind of like a turning point? Because a lot of people have called it like a cultural turning point or something along these lines, a pivotal moment in finance. Do you see it as such? Well, we look back at this day 10 years down the line and say, you know, okay, this is when the retail population gained a financial voice and caused them to do this, this, this and that along the way. I think I would say something a little bit less strong than that. You know, I think what I would say is something like, this has been brewing for a very long time. And a number of pieces of this story are not new. They're extremely clearly telegraphed, you know, a year or two in advance. I do think this is sort of a watershed moment, though. I think this is a moment when it all came to a head and we sort of all just out in the open, you know, and everyone just sort of voice like, oh boy, this is what's happened. But I do think that like much of what led to this had been brewing for years. And I think that like you can look at everything from board day traders during COVID to the sort of like general Elon Musk movement to, you know, some combination of Occupy Wall Street, but also, you know, it's sort of, you know, growth and sort of like fading away and what it was left with was sort of a weird, more capitalist take on it. And I think that, you know, that's been growing for a while. Wall Street bets has been growing for a while. And, you know, I think that a lot of people sort of want to phrase this as like frustration with the elites, you know, and sort of an anti-elite movement. And I think that's not quite right. Because, I mean, you know, one thing obviously you can look at like, you know, I mean, Elon Musk is the richest person in the world and is sort of the spokesperson for it. So it's clearly not like an anti-rich person thing, exact. Well, it's like anti-establishment, isn't it? It's more anti-establishment. It's more anti-establishment. It has sort of a lot of sort of, you know, this is like newer generation type stuff, you know, a lot of, you know, it's got a lot of like, I don't know how to put it exactly, but sort of rebelliousness, you know, it has a lot of like, you know, sticking a middle finger to the system. Even if it's sort of like some people who are very doing quite well in that system, who are, you know, leading it. And yeah, I think that this is like, you know, something more less economic. It's not sort of economically anti-elitist. It's more culturally so. I think it's more like, you know, these sort of institutions that have been controlling the way that we talk and think about things. You know, and I think it has a playful aspect too, right? Like, I think it's hard to talk about it without talking about memes, without talking about trolling, right? Without talking about Elon's shitposts. These, like, that is really the heart and soul of it. And it's sort of interesting because they're intentionally not really serious, but kind of, but not really, you know. And I think that that's part of the movement too. You know, part of this is like, oh, you guys take yourself so seriously. You know, not only do I like think that's sort of like elitist, but something stronger, which is that it's not necessary, that it doesn't even accomplish what you think it is. That, you know, they sort of like decoupling of elitism with wealth and this decoupling of elitism with success and trying to make the point of you can be fantastically successful and wealthy in the system without being culturally the same way as sort of the, you know, quote unquote, stodgy old folk are, you know, without playing the game in terms of how you think and talk and what you endorse. You know, you can shitpost on Twitter and still be a hundred billionaire. And, you know, you can sort of like thumb your nose at the SEC and still see your stock price do well. And I think that that sort of, you know, that is really an integral piece of this. It's, you bring up a number of really interesting points in there actually. I like the memes thing because it's kind of like homebrew advertising in a way for things, right, you know, because people like it and then that makes them kind of want to buy it. But it's also this kind of cultural thing that just perpetuates itself because, you know, it's fun. So it's a really interesting dynamic that's brought about by social media. And the other thing about separating elitism from wealth is also interesting because you have figures like Elon Musk, Mark Cuban, David Portnoy, you know, not really traditional kind of big finance hedge fund, old white guy kind of figures who are supporting this grass roots Wall Street bets movement. Yeah. Which, you know, do you find that a little ironic or does it totally fit? Well, I think it's ironic under the understanding that I think many people had of elitism and how many people thought of it. I think it makes sense from the perspective that, you know, that that sort of this new movement is thinking about it. But it is a different way of thinking. And it's a, you know, it's something which I think you think necessarily quite what people want to pose it as, you know, it's very easy to pose this as sort of like socialism 2.0. And it's very much not that it's very much pro wealth, you know, and pro capitalism that trying to pose this as, you know, sort of, you know, sort of stoners like, ah, whatever, chill out, like why you got to be so uptight. But in fact, it's very into working hard and trying to achieve what you can. And so I think it's like, you know, very paradoxical isn't quite the right word, but I think paradoxical, if you came at it from two dogmatic and historical lens. Let's kind of circle back to the game style saga. Because after the people got locked out of a trading on all these various platforms, like Robin Hood, Webull, E-Trade, TD Ameritrade and all that, there is a huge rush into doge of all things. And it just pumped doge up. Why was doge the outlet for the casino frenzied traders? Oh, it was definitely going to be the outlet. There is no question about that. And I mean, do you think about, you know, think about where this is coming from, right? Like partially it's at Elon Musk, who is by far the most influential person for this movement and maybe in the world almost right now. What cryptocurrency was he most associated with? The answer is dogecoin. And so that alone was going to be, you know, powerful, you know, sort of incentive for dogecoin becoming the cryptocurrency of choice. And but beyond that, it sort of stands for some things that this movement does in a weird sort of way, the not taking yourself too seriously, the emphasis of memes. You know, the sort of like, you know, maybe you'll deal a thousand extra money type thing. And, you know, dogecoin is a very low price coin. And yeah, I think like in a lot of ways it was just a the obvious coin that it was always going to be. And, you know, basically it was just sort of like how many stocks is this going to go through before it ends up with dogecoin. Because this was like the most crypto like I've ever seen financed by far. And it was clearly going to end in crypto or at least traverse through crypto one way or another, given exactly how, you know, how similar these markets were to crypto markets. And, you know, to kind of add more, you know, more sort of fuel on the fire. I, you know, halfway through this sort of like exhausting, exciting, amazing day. What happened was a bunch of centralized platforms shut off trading for their users. And like there's sort of never been a better advertisement for people day trading cryptocurrency than that. There are a couple of things because, you know, even in crypto, you still have to access the crypto through centralized platforms. And so I wanted to come back to something that we touched upon like way at the beginning of all this, which was kind of the systematic differences between the financial system and the crypto system. You're saying that people in the crypto system don't really understand the traditional financial system because of the supply chain, of the 12 different companies your stock has to go through before you actually get it. And that sort of thing. So I'd like to take a look a bit closer at this systematic difference between the two. Is crypto better prepared to handle a similar situation to the one that happened with GameStop and Robinhood? No, I mean, sorry, it's well prepared to handle that very specific issue because, you know, that very specific issue doesn't currently apply to most cryptocurrency platforms. But that's sort of like a really local answer. And if you branched out even a little bit in your question, right, and you were like, all right, well, how did crypto platforms do that day when Robinhood shut down? Some of the trading the answer is they're all down. Coinbase was down, Binance was down, Cochrane was down. They got overloaded, couldn't handle it, and it sort of like turned off trading for a while. And, you know, that was not well received either. And, you know, they also weren't prepared. They were not prepared for that increase in volume and volatility. And so their matching engines fell over. And it was a more technical problem and a less financial problem than what Robinhood ran into. But, you know, it sort of shares this common theme of like, you know, not actually being a robust enough product to be able to survive, you know, more to be able to survive, you know, difficult circumstances. So, yeah, I think that that's sort of like, you know, my high level answer is that, well, it was, you know, actually sort of a shit show on all fronts. And I don't think, you know, I think most platforms did not come out that day looking so good. So, that being said, on the specific point of like, you know, decentralization, they did, like that specific point of decentralization and relying on fewer intermediaries and things like that, you know, the crypto exchanges came out way better. So, like, looking down the road a bit and examining the viability of both systems in these kind of, like, massive volume volatility situations, would you say that, you know, once the infrastructure is built a bit more, is the crypto sphere better able to handle this kind of big volume? I think it theoretically should be, but it's, I want to hesitate a little bit in saying that because, I mean, you know, you can also look at what happened on March 12th, right, where there is, you know, again, huge volatility, really messy day, and, you know, crypto exchanges, I mean, fell over there because of liquidity. And it was a complete, you know, did not go well. And so, you know, I don't think they have a great track record here, exactly. So, you know, I think, like, I don't know, maybe, maybe, I wouldn't express extreme confidence there. Because it was kind of interesting to see, you know, when the whole Robin Hood thing happened and all the Bitcoin shills were like, this is why we need decentralized currency and all that. And I was just thinking like, hmm, you know, does it really solve, like, the main liquidity issue here? There's a lot of pieces to this, you know. And, you know, I think some of the story here is, like, it's hard to build something complicated and good. That's not an easy task, you know? It's not an easy problem. And lots of people have tried and failed. And some people have tried and failed less. And that's what you're aiming for. That's an interesting take on it. And to wrap things up, I'd like to leave us off with your response to something that Elon Musk said recently about Dogecoin. And he said that, by far, the most ironic outcome of this entire situation would be for Dogecoin to end up becoming the global currency, you know? And his reasoning was because Fate loves irony. Fate loves irony. Like, the most entertaining outcome is the most, like, what would be the most ironic outcome? That the currency that was invented is a joke, in fact, becomes the real currency. So what's your take on that? I don't think Fate loves irony, but I think people in the world love amusing stories. And sometimes that looks pretty similar. All right. Well, I hope that one day I'll be able to throw you some Doge. And that'll be the US dollar of the planet. That would be something. What a world. All right. Well, thank you so much for joining us today, Sam. I really appreciate it. Yeah. Thanks for having me.