Sam Bankman-Fried on Arbitrage and Altruism (Ep. 145)

Coordinators are that which is scarce.

Whether it’s scaling an arbitrage opportunity or launching an ambitious philanthropic project, Sam Bankman-Fried has set himself apart. In just a few years, he’s not only made billions trading crypto, but also become a leading practitioner of effective altruism, with the specific aim of making lots of money in order to donate most of it to high-impact causes.

He joined Tyler to discuss the Sam Bankman-Fried production function, the secret to his trading success, how games like Magic: The Gathering have shaped his approach to business, why a legal mind is crucial when thinking about cryptocurrencies, the most important thing he’s learned about managing, what Bill Belichick can teach us about being a good leader, the real constraints in the effective altruism space, why he’s not very compelled by life extension research, challenges to his Benthamite utilitarianism, whether it’s possible to coherently regulate stablecoins, the implicit leverage in DeFi, Elon Musk’s greatest product, why he thinks Ethereum is overrated, where in the world has the best French fries, why he’s bullish on the Bahamas, and more.

Listen to the full conversation

You can also watch a video of the conversation here.

Read the full transcript

TYLER COWEN: Hello, everyone. Welcome back to Conversations with Tyler. Today I’m chatting with Sam Bankman-Fried. Sam is the CEO and founder of FTX, a major cryptocurrency exchange, and the founder and head of Alameda Research, a major cryptocurrency trading firm. Sam has, in a very short period of time, gone from just being a person who believed in effective altruism to being, perhaps, the world’s leading practitioner of earning money to give it away. Sam, welcome.

SAM BANKMAN-FRIED: Thanks for having me.

COWEN: Let me do this a bit in reverse and start with the Sam Bankman-Fried production function — how it is you do what you do. You had a lot of success arbitraging Bitcoin prices across Japan and other locales. What’s the fundamental skill that you have that made you better at that than other people? A lot of people are smart. A lot of people work hard. What’s the extra factor X of Sam Bankman-Fried there?

BANKMAN-FRIED: Quantum mechanics.

COWEN: How so?

[laughter]

BANKMAN-FRIED: It’s an interesting question, and I think that the most interesting thing about it is that there isn’t an obvious answer. “Good at trading” is the thing you could say, but then you break that down. “All right, what’s it mean to be good at trading?” It’s not like you go to school for trading and get a trading degree. They don’t really teach it in school. It’s really a wide collection of things.

I think what they center around is, “Here is a messy thing.” The world is very messy. Math might look clean, but anytime that you jump out into how things really work, there are always going to be factors that you can’t consider, but there’s a huge amount of power in being quantitative. There’s huge power in thinking about things, not just from a qualitative angle, but putting numbers on things, building statistical models.

Doing that in a world where you know you’re forgetting an enormous number of factors — how do you do that? I think that is one of the core things here — getting quantitative, numerical, when it’s really hard to do so.

COWEN: How do you think your early experience as a gamer feeds into what you’ve ended up doing professionally? You played Magic: The Gathering. You still play, right?

BANKMAN-FRIED: Yes.

COWEN: How was that game different? And how does it relate to how you think about what you do in your business?

BANKMAN-FRIED: I think that there are some overlaps. I was at Jane Street before I jumped into crypto, and a lot of the interviews there look like game-type questions or are framed as games. I think a lot of the reason is that a nice property of games is, you’re just put in front of a messy situation, and in the end, your directions are “Do the best you can.” The directions are “Here’s how it works. Now just start playing it.”

You can do whatever thinking you want, whatever you think is helpful to get you to make the right moves, but in the end, what matters is making the best moves that you can, given whatever uncertainty that you have. You’re constantly, implicitly making probabilistic decisions, but in a world where you know you can’t calculate everything out. You need to make sure to include the important factors, and not to spend all of your time worrying about factors that don’t matter, and balancing those reasonably. I think that’s one piece of this.

Another thing that I would say was really important for trading is really, really grinding until you do a good job. Thinking of it in terms of my goal in the end here is to do a good job. My goal isn’t “Check this box.” My goal isn’t “Send this email to this person, telling them to do this thing.” My goal is, I need to make the money from having done the trade, whatever that takes, and do everything that it takes to get there.

When you think about some of the trades — especially in crypto — that we did, half of it was operational, and half of it was really annoying. You had to jump through some really bizarre, Byzantine hoops in order to get where you needed to go. That meant that you had to fight through bureaucracies. You could never let them get the best of you. You had to keep being creative and pushing for more and more solutions until you could get there. That’s tenacity. An ability to think of potential solutions to problems and try them out is another really important piece of it.

COWEN: If you’re 14 years old, and you’re arguing with your mother about the repugnant conclusion and trolley problems — and she, as you know, is a famous consequentialist, right?

BANKMAN-FRIED: Yes.

COWEN: How does that affect your attitude toward arbitrage? Isn’t the trolley problem a kind of arbitrage?

BANKMAN-FRIED: Yeah, I think that there is something there. I think that, more generally, even if it’s not framed in terms of thinking hard about numbers necessarily, there’s something very quantitative about how you view the world if you’re thinking about things from a utilitarian perspective, from a consequentialist perspective. There’s this really big notion of, in the end, you turn things into numbers, and you decide which number is the biggest.

It might be really messy to get there, but that thought of trying to take a messy system and do the best things you can when ultimately you care about some quantitative property, even if you can never be sure that you’re calculating it right, you do the best you can.

COWEN: Both of your parents are famous law professors at Stanford. I actually knew who they each were. I just hadn’t known they were your parents.

BANKMAN-FRIED: [laughs]

COWEN: In which respects have you brought a legal mind to your endeavors?

BANKMAN-FRIED: It’s becoming increasingly important over time. If you talked to a random financial regulator, say, a year ago or two years ago, and you said, “What fraction of your time each day do you spend thinking about cryptocurrencies?” They’d probably say, “Basically, literally zero. I’m not quite saying I’ve literally never thought about them, but this is a total afterthought.”

If you ask a random financial regulator somewhere in the world today, “What fraction of your time do you spend thinking about crypto?” “Ah, 50 percent,” an enormous fraction. You look at discourse. If I tell you that the Senate is having a hearing on something related to finance today, what do you think the odds are that it’s about blockchain? Yes, 50–50. It’s an enormous fraction of the discourse in the policy world and in the regulatory world in a way that it wasn’t.

What that means is that a huge fraction of the industry and of our business right now is understanding the nuances of the regulatory system, understanding the intentions of regulators, understanding which directions it might go in, understanding what would solve for the various things that people care about, and trying to find ways to get there in a really messy world.

Again, where there are — how many countries are there, 200 countries, roughly, in the world? That’s a lot of countries, and each one of them is trying to figure out what they’re going to do to regulate cryptocurrencies. It’s not like you just read that one law book on cryptocurrencies, and you’re done. There are 200 of them, and half haven’t been written yet. Half the law book is effectively empty, but that doesn’t mean that there’s no regulatory framework. It means that they’re still thinking about it, but you can’t just ignore it and assume everything’s going to be okay.

It’s just — from a large number of perspectives — incredibly messy right now, and also, just incredibly important for our business and the future of the industry to manage that process well.

COWEN: You didn’t start as a manager at all, and you now manage what must be hundreds of people. What’s the nonobvious thing you’ve learned along the way that is important to you?

BANKMAN-FRIED: A ton. I thought when I started that I was pretty good at managing. I think I would’ve given myself an A-minus to an A — probably, honestly speaking, an A, if I’m being honest here. That’s how I would have graded myself before I started up Alameda. In retrospect, I think a B-minus maybe was the appropriate grade for me. In particular, I think I was a pretty good manager when everything was going really well, conditional on there being no real problems.

I was pretty good at making things happen, talking to people about what they were doing, motivation, things like that. As soon as sh-t hit the fan, I had no idea what the f-ck to do. I had no idea what do you do when two employees just vehemently disagree with each other about what to do, and no amount of talking causes those disagreements to come together.

COWEN: So what do you do?

BANKMAN-FRIED: Yeah, so what do you do? Well, I query whether I’m the one you want to take advice from, but I think I know a decent amount about it by now. I’ve had a lot of experience thinking about this and acknowledging that it’s messy and that nothing is perfect here. What I think about now is, basically the most important thing — and embarrassingly, I think a lot of people forget to do well — is, first of all, try to get the right object-level answer.

Before you get into management disputes and things like that, understand what the truth is. That is legitimately, I think, the biggest weakness of a lot of managers. They jump straight into how to manage without first thinking, “Well, what’s the right answer in terms of the object-level problem we’re trying to solve? What coding practices should we use? Should we run this advertisement?” Whatever the question is, first of all, find the right answer. Do whatever research you need to do to find that answer.

Then a thing that is really important — at least in how we function — is having a company culture that that is what matters, and making it clear that in the end, that’s what we care about. That’s what we’re going to push on, and we’re going to be pretty ruthless on that. Caring about making the right ultimate decision, and no other argument is going to win over that one when push comes to shove, and everyone has to be aligned on that fact. But then put that aside for a second.

Okay, you’ve done that. Now, what do you do to actually resolve disputes if there is a dispute? One thing that I didn’t realize at the beginning was that, first of all, it’s great if everyone’s aligned and if everyone thinks the same things. But in the end, there has to be some process by which everyone agrees you’re going to come to a conclusion. There’s some way to ultimately resolve these disputes.

There’s some person, odd number of people, probably 1 percent, honestly, who ultimately makes that final call, and everyone knows it. If a civil war were to break out, everyone could just look at how it’s going to end, and now there’s no civil war. There are downsides to that, but I think they’re outweighed by the upsides from it. That’s one important piece of this, and that’s something that I’ve changed my thoughts on a lot over time and become a lot more cognizant of.

COWEN: What accounts for the Miami Heat being such a well-managed team so consistently?

BANKMAN-FRIED: It’s probably the coaching advice we’re giving them. No.

COWEN: [laughs]

BANKMAN-FRIED: Honestly, that’s an interesting question that I would be interested in talking with them about. But you do see this, and with some teams, I do have a sense of what the answer is. You see some sports team outperform year after year after year.

The Patriots are probably the most notable example of that, and I think everyone knows it’s about Belichick and the staff that he’s built and the culture that he’s built, centered around outthinking some other coaches. But also, a big thing there is doing the right thing. What’s he known for? Being gruff, but in the end, he’ll make the right play.

He’ll come up with wacky new formations that will be good, and he doesn’t care that much what’s popular. He doesn’t care that much about how things are done. He cares about, “What’s the play that will optimize our chances of winning, and how do we do that?” You can see that in a lot of areas.

Look at the running backs that New England has employed over the years. It’s this random, motley crew of people who everyone would have said are randos and unlikely to be that good or important, and then they lead the league in rushing. Then those running backs go get some payday somewhere else, and they have some new running back no one’s ever heard of, and again, they lead the league in yards per carry at least, or some tandem of them.

There’s a lot of things going on there. I think that that’s an important piece of this, and frankly, I think for sports teams in general, a lot of the fruit is low hanging. It’s consistently picking the low-hanging fruit, doing a good job, thinking carefully about what the right thing to do is, not getting too sidetracked by what the convention is for what to do somewhere. I think that gets you a lot of the way.

COWEN: Let me ask you a few questions about effective altruism, a movement where you’ve been a leader and major supporter. Thanks to people like you and also Open Philanthropy, effective altruism seems to be moving away from being funding-constrained to now being talent-constrained or people- or organization-constrained. (A) Is that true, and (B) if it’s true, what does that mean for strategy?

BANKMAN-FRIED: Yeah, I think it’s sort of true, but I think it’s true a lot less than most people think it’s true. That is the meme right now. That is what most people will say, that effective altruism is now not funding-constrained because of myself, because of Dustin Moskowitz with Open Philanthropy, and a few other things. That’s been a pretty big update. There certainly is a lot more funding than there was before, but saying it’s not funding-constrained — I think people go too far in that, and to some extent that’s a symptom of not thinking hard enough about great ways to spend money.

I think that there needs to be more innovation in ways to spend money before there’s going to be the capacity to spend the amount of money that effective altruism is going to have, but I also think that innovation is happening. It will happen, and so, I just think there’s billions a year that I can see spent extremely effectively. That’s one thing I’ll say, but to the extent that it is funding-constrained — and it certainly is more so now than it was before — I think a big piece of that is that basically, the biggest thing that’s missing is a weird . . .

If it’s not funding-constrained, then it has to be something-else-constrained. That’s the basic question: What is the limiting factor on growth of the movement? And I think people will say “people.” You could talk a lot about effective altruists who aren’t sure what they should do with their life, which makes you wonder what “people” means exactly. It’s not that there aren’t people anywhere.

COWEN: But those people are maybe not project drivers. They would be an okay number 17 in an organization, but they’re not going to make things happen. They’re not the Sam Bankman-Fried arbitrageurs of the world. That is scarce. You must think it’s scarce, right?

BANKMAN-FRIED: I do, and I do think that that is probably one of the most scarce pieces — someone who can start something and drive it and lead it and take responsibly for it, and be the person who’s like, “If this doesn’t go great, that’s on me. I will do whatever it takes to make sure this thing goes great, and I can get it there. I’m not allowed to blame anyone else for failing. If it fails, that means I failed to find a way to route around whatever problems I was having.” I think that’s a big piece of it.

There’s maybe another thing, which is a little bit of a variant on that, but I think may be an interesting variant, which is a constraint on everyone getting together and doing the thing. What’s it take for a new project to start up, a new altruistically minded project? It takes funding. It takes founders. It takes employees. It takes ideas, and they all have to come together at the same place and the same time and meet up.

I actually think that that is quite hard and quite difficult, and often that is actually what is blocking something. The funding is there. The people are there. Maybe the founders are even there somewhere. I think sometimes they are, but what happens is they — I don’t know, they cross paths in the night, so to speak.

COWEN: So, coordinators are scarce?

BANKMAN-FRIED: Coordinators are scarce, but it’s easy to be a coordinator and have that feel kind of lame, like, “Oh boy, I’m directly a coordinator, but I’m not really coordinating anything right now.” I think that’s a dangerous position to choose to hold in a lot of ways, and so you want to be cautious about saying that that is the blocker, although I think it is a blocker. It’s sort of coordinators, but it’s sort of someone who just puts the flagpole down and says, “This is happening.”

“This is happening tomorrow in Redwood City, and the funding is there. I know it will be there. I guarantee it is there. And I found a person, and he will be there because I’m going to make him be there.” And thus, “I know it’s happening. I can prove it’s happening.” And when you do that, the interesting thing is, everyone shows up. I think that there’s a little bit of this getting everyone to take that leap together that’s necessary for a project to really start up.

COWEN: Let’s say you had a magical capital gain of $1 million, and you had already decided to give it away. This happens to you all the time, but at the margin, the next million — where do you give it?

BANKMAN-FRIED: I think that there are a lot of good places to give it, first of all. I think that there’s no shortage of good answers, and you can look at any of the standard ones that I think people will talk about.

Let’s talk about great answers. What would be something that I think would go above and beyond what people can usually think of to do with money? I think there are things there, but to some extent, I think that they need more than just money. I think money is an important piece of it, but it’s not the only piece. They also need that drive to exist and to happen and to happen right and well.

What I think I would do is one of two things, and I don’t want to say these are the causes that necessarily matter the most, long term. I do think that they’re the most important for the long term of humanity maybe right now, but others might develop really great ways to innovate soon.

Right now, the things I’m most excited about — one of them is pandemic preparedness. This is probably the one I’ve been thinking about the most recently. I think the single clearest takeaway from COVID is that we don’t have our sh-t together as a world. That’s what’s become clearest, is that there is no magical wizard behind the curtain who makes everything go okay. It’s actually a mess, and everyone can agree that we screwed up the COVID response in every possible way.

But I think one of the more depressing things is, it also seems like we’re not really ready for next time.

COWEN: Not at all. We haven’t improved anything as far as I can tell.

BANKMAN-FRIED: Right. Other than getting common knowledge that things suck, we haven’t actually made them not suck. We’ve just agreed that they suck. That’s not great. We got a little lucky with COVID, frankly. We got lucky because it could have been much worse. For all of its ills, COVID was not the most lethal disease ever, and the next one might be more lethal. The next one might be a lot nastier.

I don’t think we’d be ready for that one either. I think we’d fall on our face just as much, but death tolls could be way higher. You could imagine something destabilizing for society. I’m still not sure we’d get our sh-t together on it. We seem to have only one mode, and that mode is freak out and do some stuff in a disorganized way, like shut the economy down. We’re good at that, and that we’re really good at dragging on, in particular, as long as possible.

We can eventually make a vaccine. Actually, we can make vaccines quickly, but it still takes a year to get them out, which is fast by vaccine standards but slow by everyone-is-dying-right-now standards. If it was actually that type of scenario, a year is not necessarily okay. I don’t know, you don’t really have any —

COWEN: To boost pandemic preparedness, you have your million dollars. To whom do you write the check or to what?

BANKMAN-FRIED: To whom do I write the check? I will say that I have been giving some funding to an org Guarding Against Pandemics. Conflict of interest note: My brother is heavily involved in it, so take that for what you will. Basically, it’s doing a number of things. The biggest of them is basically lobbying Washington for more spending on pandemic preparedness. There’s actually a lot of interest in doing this, but getting across the finish line is quite difficult. I think that a dollar can turn into way more than that when done effectively there. That’s where I have been giving.

The other thing that I would be really excited by — and this one, I don’t have an organization name for — but it’s funding efforts to build up vaccine capacity, vaccine stockpiles, distribution networks, early detection systems, and other things that could be done rapidly, that could be done within a couple days of a new pandemic appearing. Maybe over the next year, I’ll have more actual organization names on that one, none for now. That’s one of the things that I would like heavily to think about doing, and in fact, am doing right now with that marginal dollar or marginal million dollars.

COWEN: As I understand your views, you’re a fairly pure Benthamite utilitarian. Is that correct?

BANKMAN-FRIED: That’s correct.

COWEN: Given that that’s the case, as I see it, the replacement costs of human life are pretty low, so you could spend a modest amount of money and get people to have more kids. So why then should we ever spend a whole lot of money on life extension since we can just replace people pretty cheaply? We can grow utils more easily than save them, is another way to put it.

BANKMAN-FRIED: Yes, I agree.

COWEN: Then, why isn’t the priority birth subsidies, maybe in some roundabout, highly indirect manner?

BANKMAN-FRIED: Speaking for myself here, I will say that I find that I’m not very compelled by life extension research for the exact reason you’ve said. I think that it is really cool, really f-cking cool, but I’m not sure it’s the most pressing problem for the world. As you said, we’ve been getting on okay without it. There are real human costs to it. It would be great to have, but I don’t think it’s necessary for the flourishing of the world.

On the birth subsidy side, there are a lot of things you can do to try to influence population rates up or down. I actually want to look into that a little bit more and develop a more refined opinion on it. I will say that at some point, feedback mechanisms might start kicking in. At some point, you might have some births replacing others. At some point, you have to think hard about the factors in both directions there, and what does it do to international coordination?

I don’t know the answer to this. I will say that whenever companies start to get bigger, they become a sh-tshow. Probably, that really shouldn’t necessarily mean that that’s true of the world or countries.

COWEN: But it is true with countries. The best-governed countries —

BANKMAN-FRIED: It is true with countries.

COWEN: — tend to have fewer than 20 million people, right?

BANKMAN-FRIED: Yeah, I think that’s right. I don’t want to make a strong statement here. All I’ll say is, that’s something that points in the opposite direction. On net, I just haven’t thought about this hard enough to feel confident in my thoughts on current fertility as it relates to design of the world.

The other thing is if — and this is an if — but if you think that the next few years are extremely crucial for the world — the next 20 years, the next 30 years — anything relating to birth is going to be delayed by 25 years in impact on the world. Depending on what your timelines are for earth-changing technology, that’ll influence, to some extent, how much of a discount rate you apply on that. I don’t think it’s obvious what the right number is there.

COWEN: Let’s say we can raise animals so they have positive utility, I’ve seen Swiss cows. They look pretty happy. The final moment is not so great. Why shouldn’t we just do that and eat meat? It’s good to eat meat because we support them, but we ban factory farming. Why doesn’t a Benthamite believe in that? Or does he?

BANKMAN-FRIED: Oh, that’d be totally fine with me.

COWEN: But you’re vegan, right?

BANKMAN-FRIED: I am vegan.

COWEN: Eat Swiss cows. Isn’t that a moral imperative?

BANKMAN-FRIED: First answer is, I have no problem with people eating happy meat. If it really is net happy, that is fine with me. I don’t personally do it. The reason I don’t personally do it is, basically, it’s too confusing for me — the cognitive load. When I was first trying to go vegetarian and then vegan, it took me six months to make any progress. It was really unpleasant. I made no progress at all for six months.

Basically, each day, I’d go to the cafeteria and be like, “What good vegetarian thing do I want to eat?” Think for four minutes, and then get a steak and cheese sandwich. That didn’t go so well. Then, finally, one day I was with my friend who had just gone vegetarian. A mutual friend said, “Oh, hey, are you vegetarian now?” To them they said, “Yes.” I was eating tofu that night, and she said, “Oh, you’re a vegetarian, too?” I said, “Yes.” I’d had a burger for lunch that day, so “yes” was not a factually supported answer at that time, but I have not eaten meat since.

It was way easier for me once I went cold turkey than it was for me to try to wean myself off it because the cognitive load of every time that I went to eat, having to decide what I could and couldn’t eat and should and shouldn’t eat was just overwhelming me. It’s way easier to say, “Yeah, I don’t eat meat.”

It’s a similar thing here. I don’t want to have to sit down at the dinner table and think for 30 minutes about what life a particular animal lived and whether it was net positive or net negative. For me, in particular, that’s a big cost. I would prefer just not to eat meat than to have to go through that process. But I don’t, in principle, have a problem with that.

The other thing I will say is that — and this is specific to the environment today; this needn’t be true — but today, almost all meat is inhumane meat. If you look by count, a very, very tiny fraction of it is actually happy. Again, that doesn’t need to be true necessarily. You could imagine a world where most meat was happy meat. We just don’t happen to live in it. That’s another reason that, right now, it just wouldn’t buy you that much.

That might change in 20 years. I think there are real interesting questions like, between humanely raised meat, synthetic meat, and fake meat products — what the race between those three will look like.

COWEN: Should a Benthamite be risk-neutral with regard to social welfare?

BANKMAN-FRIED: Yes, that I feel very strongly about.

COWEN: Okay, but let’s say there’s a game: 51 percent, you double the Earth out somewhere else; 49 percent, it all disappears. Would you play that game? And would you keep on playing that, double or nothing?

BANKMAN-FRIED: With one caveat. Let me give the caveat first, just to be a party pooper, which is, I’m assuming these are noninteracting universes. Is that right? Because to the extent they’re in the same universe, then maybe duplicating doesn’t actually double the value because maybe they would have colonized the other one anyway, eventually.

COWEN: But holding all that constant, you’re actually getting two Earths, but you’re risking a 49 percent chance of it all disappearing.

BANKMAN-FRIED: Again, I feel compelled to say caveats here, like, “How do you really know that’s what’s happening?” Blah, blah, blah, whatever. But that aside, take the pure hypothetical.

COWEN: Then you keep on playing the game. So, what’s the chance we’re left with anything? Don’t I just St. Petersburg paradox you into nonexistence?

BANKMAN-FRIED: Well, not necessarily. Maybe you St. Petersburg paradox into an enormously valuable existence. That’s the other option.

COWEN: Are there implications of Benthamite utilitarianism where you yourself feel like that can’t be right; you’re not willing to accept them? What are those limits, if any?

BANKMAN-FRIED: I’m not going to quite give you a limit because my answer is somewhere between “I don’t believe them” and “if I did, I would want to have a long, hard look at myself.” But I will give you something a little weaker than that, which is an area where I think things get really wacky and weird and hard to think about, and it’s not clear what the right framework is, which is infinity.

All this math works really nicely as long as all the numbers are finite. As soon as you say, “What are the odds that there’s a way to be infinitely happy? What if infinite utility is a possibility?” You can figure out what that would do to expected values. Now, all of a sudden, we’re comparing hierarchies of infinity. Linearity breaks down a little bit here. Adding two things together doesn’t work so well. A lot of really nasty things happen when you go to infinite numbers from an expected-value point of view.

There are some people who have thought about this. To my knowledge, no one has thought about this and come away feeling good about where they ended. People generally think about this and come away feeling more confused.

COWEN: Derek Parfit once told me the same thing. He said, “No one has a good account of infinities.” He was suspicious of them.

BANKMAN-FRIED: Yeah, no one does. My instinct here is, it matters. This isn’t a “No one has a good account of it, whatever, ignore this all bullsh-t” type thing. Yes, no one has a good account of it. That’s too bad, and it’d be better if people did. I think it is a relevant unknown.

COWEN: I have some crypto questions for you. Is there, in fact, any way to coherently regulate stablecoins? I see what the proposals say: It’s all about capital requirements, deposit insurance, treat it as a bank account, like a new kind of money market fund. Can that possibly work? Doesn’t it end up having to be applied to all of crypto, all payments companies, PayPal, whatever else? What’s really there that they can do?

BANKMAN-FRIED: That’s a really interesting question. First of all, I will say, I think there is something that does work compared to the current environment, but I’ll get to your point — it’s actually a good one. If you just said, “Look, all stablecoins have to be fully backed by the dollar and have to have audits to confirm that they are in a bank account,” that would get a pretty safe product that was well understood, well regulated, and frankly would be, from a product perspective, just as good as current stablecoins. That’s what all the stablecoins are doing today.

It’s a mess because there’s no clear regulatory framework for them to fit into and to have oversight of that. So, part of my answer there is, basically, yes, I think that framework would solve the current problems that people have in a pretty clean way. But you have a good point there, which is, how about PayPal? There are all these things that we don’t call stablecoins right now, that we call something else.

COWEN: PayPal promises me a dollar, and they give it to me. I’m happy, right?

BANKMAN-FRIED: Exactly. In fact, a lot of these look a lot like stablecoins when you drill into it. When you really dig into it, what is the difference between PayPal and USDC? I guess there’s some differences, but I think there are more similarities than there are differences, to be honest. What does that imply for PayPal? You can just say, whatever it implies, stablecoin is not PayPal — it’s how it is.

I think there would be a big improvement over the current world, where it’s the same thing but without regulatory oversight and with a lot of random drama because of this. But I do think that it gets to this question of, “Wait, but banks are allowed to rehypothecate dollars. Banks are allowed to do all manner of wacky things with their deposits.” Are stablecoin companies allowed to? If not, is it obvious they shouldn’t be allowed to? And how should that be governed and regulated?

Maybe the answer is, whatever: The banks will do that on their behalf, the banks where they hold their assets, and then pay them interest for the right to do that — although, of course, right now banks aren’t actually paying interest, really . . .

COWEN: Not to me. Also, how stable does a stablecoin have to be to be regulated as such? If there’s any regulatory definition, won’t a lot of people just camp their crypto assets to be just slightly more volatile than wherever the line is drawn, or you’d just end up regulating all of crypto? How does that work?

BANKMAN-FRIED: This could go in a few ways. Is your thought that people will attempt to get just barely into the regulatory system or just barely out of it?

COWEN: Maybe both, but a lot of people will go out of it. So I’ll issue something. I’ll call it a “not stablecoin,” but de facto, it will be very stable. But also, “Oh, it’s just sort of an accident. Oh, who knows what the markets going to do today?” It’s just stable for decades. How do you regulate that?

BANKMAN-FRIED: Oh, that’s a really good question. Of course, what it gets you is this question of, what if a stablecoin didn’t promise to be a stablecoin? Is it bad that it’s backed by the dollar? Does it somehow make it worse from a regulatory perspective? Why is it being held to a higher standard?

COWEN: Exactly.

BANKMAN-FRIED: I do think there’s a little bit of an answer here, although I also think that this is getting at another point, which is, you could reasonably say, “Look, are consumers doing what they’re doing with their eyes wide open?” If there’s sufficient disclosures and transparency, shouldn’t people be allowed to use stablecoins with some risk in them?

I think that’d be a reasonable thing to think, but if you put that aside for a second, you say, “No, absolutely not.” Here’s one difference between that and the stablecoin, which I think is relevant, is that a stablecoin is not just stable in one direction. It’s stable in both directions. In particular, if you’re an investor, and you buy a stablecoin, you have downside risk but not upside. If somehow the stablecoin company makes money, you’re probably not going to get any of that, but if it loses money, somehow, you’re probably on the hook for that.

So, there is something a little asymmetric going on here for the consumer. I think it wouldn’t be crazy from that perspective to think that there should be some protection here and that maybe there should be regulation if consumers are only given one side of exposure, but I don’t think that’s obviously true. I think you’re making a decent point.

COWEN: Now, if we look at DeFi, there are some forms of obvious, explicit leverage, like people borrow money to participate in the system. But those aside, I’ve learned over my life, if you look at any system, any institution, typically there are forms of hidden implicit leverage in those institutions. Might be good, might be bad, but it’s there, and in a sense, you don’t understand the institution until you understand where’s the implicit leverage in this game. In DeFi, where is the implicit leverage? Is it rehypothecation, or where is it? What is it?

BANKMAN-FRIED: Ignoring the explicit leverage of borrow-lending protocols —

COWEN: Yes, which is easy to see, right?

BANKMAN-FRIED: Which is easy to see, yes. So, what happened in 2008? What caused the collapse in a lot of things? That’s sort of a dumb question, but one of the things that led to this is that no one knew how much leverage there was, really, in the system. As you said, there’s always implicit leverage, and in this case, it was all of these bespoke OTC swaps between banks that basically didn’t get reported anywhere. In fact, those got rehypothecated again and again and again. No one was keeping track of the total notional fees. It was impossible to — they weren’t public.

One thing you could do is look for a similar thing in crypto. You could look for OTC transactions. You could look for OTC swaps that live on. You could look at OTC borrow-lending. Those are in crypto. Are they in DeFi? It’s sort of ambiguous — they touch all areas of the crypto ecosystem.

But that’s an area where I think there’s some dubiously accounted-for leverage. I think that’s one answer to that question. Where else is there leverage that sort of is implicit? Rehypothecation sometimes, although in DeFi, because it’s all on-chain, it has to be pretty explicit if it’s going to be rehypothecated, but you’re not . . .

COWEN: But it’s hard to see, right? If you traced everything, you could find it, but no one’s actually watching it. Or are they?

BANKMAN-FRIED: Well, they’re halfheartedly watching it maybe, is how I’d put it, which is not great. Maybe full-heartedly watching it. I could imagine arguing for people full-heartedly watching it, and that would be a reasonable thing for them to be arguing for. In particular, if someone releases a protocol, there’s a question of, well, is that protocol rehypothecating? You just look at the code and see if it can rehypothecate, right?

In general, people actually often do know whether each protocol individually can rehypothecate, which is a separate question from whether they, as a group, can or whether they are or something. But in fact, most of these aren’t. Most DeFi protocols are not doing things beyond what they literally say they’re doing, and so the amount of leverage they introduce into the system mostly is what they say they are.

But here are some hidden things. First of all, you take one leverage thing, you put in another leverage thing, so DAI. DAI is an algorithmic stablecoin. Like other algorithmic stablecoins, it is not perfectly stable. It’s not perfectly stable because it’s not backed by the US dollar. It’s backed by crypto assets that could have price movements. It’s very overcollateralized. DAI can then be used as collateral on some borrow-lending protocols in crypto. That’s one form of rehypothecation in DeFi markets that you can trace through. It is, in theory, public, but it’s not super easy, necessarily, to trace through.

COWEN: Now, for mathematical finance, as you know, we at least pretend we can rationally price equities and bonds. People started with CAPM. It’s much more complicated than that now. But based on similar kinds of ideas — ultimately arbitrage, right? — if you think of crypto assets, do we even have a pretense that we have a rational theory of how they’re priced?

BANKMAN-FRIED: With a few of them, not with most. In particular, let’s talk about Dogecoin for a second, which I think is the purest of a type of coin, of the meme coin. I think the whole thing with Dogecoin is that it does away with that pretense. There is no sense in which any reasonable person could look at Dogecoin and be like, “Yes, discounted cash flow.” I think that there’s something bizarre and wacky and dangerous, but also powerful about that, about getting rid of the pretense.

I think that’s one example of a place where there is no pretense anymore that there is any real sense of how do you price this thing other than supply and demand, like memes versus — I don’t know — anti-memes? I think that more generally, though, that’s happened to a lot of assets. It’s just less explicit in a lot of them.

What is Elon Musk’s greatest product ever, or what’s his most successful product ever? I don’t think it’s an electric car. I don’t think it’s a rocket ship. I think one product of his has outperformed all of his other products in demand, and that’s TSLA, the ticker. That is his masterpiece. How is that priced? I don’t know, it’s worth Tesla. It’s a product people want, Tesla stock.

COWEN: But the prevalence of memes, Dogecoin, your point about Musk — which I would all accept — does that then make you go back and revisit how everything else is priced? The stuff that was supposed to be more rational in the first place — is that actually now quite general, and you’ve seen it through crypto? Or not?

BANKMAN-FRIED: Absolutely. It absolutely forces you to go back and say, “Well, okay, that’s how cryptocurrencies are priced. Is it really just crypto that’s priced that way?” Or maybe, are there other asset classes that may claim to have some pricing, or purport to, or people may often assume it does, but which in practice is not exactly that? I think the answer to that is a pretty straightforward yes.

It’s a pretty straightforward answer that you look at Tesla, you look at a lot of stocks right now, you think about what determines their market cap — the discounted cash flow? Yeah, sort of, that plays a role in it. That’s 30 percent of the answer. It’s when we look at the meme stocks and the meme coins that we feel like we can see the answer for ourselves for the first time, but it was always there in the other stocks as well, and social media has been amplifying this all over the place.

COWEN: Is this a new account of how your background as a gamer with memes has made you the appropriate person for pricing and arbitrage in crypto?

BANKMAN-FRIED: Yeah, there’s probably some truth to that. [laughs]

COWEN: Now, there’s a mental game people play when they’re trying to price Bitcoin. I’m sure you’ve heard it, done it. It’s like, “Well, gold is worth some amount, and Bitcoin could become a quarter of gold, and then to support that amount of the market, the price of Bitcoin has to be X.” Is that a useful game? Or do you think it’s BS?

BANKMAN-FRIED: I actually do think it’s quite useful. I think it’s straightforwardly useful. It’s not the only thing that matters, certainly, but I think it’s a piece of it. It is a piece of how I think about Bitcoin. I do think about, well, right now, Bitcoin is trading at, what, 10 percent of gold or something like that, depending on whether you count gold in the ground right now, or whatever.

I think that if you told me that Bitcoin was currently trading at 1 percent of gold, I would just be like, “F-ck it, I’m going to buy.” I don’t need to know anything else. What are the odds Bitcoin becomes a new gold? Is it 1 percent? No, it’s more than 1 percent. I don’t know what the percentage is, but one isn’t the right number.

So there’s that, and that’s one piece of this. If you told me that it was worth 10 golds right now — 10 times what gold was — what would I think? I think I’d be like, “I don’t know. Maybe.” I can’t just prove that. It’s no longer just filling the role gold filled — that’s certainly true. I think that is how we think about it.

And maybe another thing to think about is, Bitcoin is about as important as what world’s currency? When you think about impact on the world, I think they sounded like a wacky investigation two years ago, and I worry that some people still think it’s a wacky investigation because they haven’t bothered to recompute whether it’s bizarre, but actually, it totally makes sense. I don’t know, Swiss franc or Bitcoin — which do you think has more impact on the world right now? I just don’t think it’s crazy to say Bitcoin.

COWEN: No, it’s obvious that it’s Bitcoin. It’s crazy to say the Swiss franc.

BANKMAN-FRIED: Exactly, even though three years ago, you’d have probably said the opposite — or five years, I don’t know — at some point, you would have. That’s another metric I use — how does this rank on the world currency list? I think we are on the scale from Polish zloty to euro. Again, I don’t want to claim that this gives you the right answer, but I think it gives you some three-order-of-magnitude-wide band of what the right answer might live in and what it might not live in. And it’s a nice sanity check on a trillion dollars for Bitcoin. Yeah, it’s not a crazy number. Again, I don’t know if it’s too high or too low, but it’s plausible to me that’s the right answer.

COWEN: Why do you think Ethereum is overrated?

BANKMAN-FRIED: Yeah, this is a flagging for anyone who doesn’t know: I have strong opinions on this. My opinions are not the same as everyone else’s — take that for what you will. Basically, if you look at what would it take to have a global-scale blockchain that was replacing substantial fractions of the world’s infrastructure. If that’s where you start, you can just look at, “Well, okay, what scale would that have to be at?”

Pick your favorite big thing — I don’t know — big internet thing. You could say Twitter or Facebook. You could say New York Stock Exchange or NASDAQ. Say Visa, say Google — I don’t know — Amazon. Whatever you say, how many things per second does it have to compute?

Answering it varies some, but you’re generally going to hear answers that sound like a million, somewhere like 100,000 and 10 million, depending on which thing we’re thinking about, and it makes sense. If you have a billion users, for instance, which is the kind of thing you might expect of a gigantically successful internet thing —

COWEN: Sure.

BANKMAN-FRIED: — then a billion users. If there’s, what, 100,000 seconds in a day, if each user does 10 clicks per day, on average, then I think that gets you a million transactions per second, ballpark. The math works out as a sanity check there. “Big thing,” I think, means millions of transactions per second ideally. Maybe you can get away with a little bit less, but it’s got to be a lot, certainly.

Then you say, “Well, okay, what’s that mean for a blockchain?” Well, it means that if you want a blockchain to really get to a truly global scale, you want that blockchain to be processing millions of transactions a second. That’d be great if you could do that. What does that require, then? Well, straightforwardly, it requires technology that can parse that, and we don’t have that on very many blockchains right now.

If you look at most blockchains today, they cannot support millions of transactions per second. Ethereum cannot support millions of transactions per second. Today, it can support ten. Ten is the number of transactions per second it can support. Ten is off by six orders of magnitude from where it needs to get. It’s not close. Now, it’s going to get operated to Eth2 sometime over the next few years, let’s say, at which point it’s going to get to something like thousands of transactions per second, per shard.

The first point I want to make is thousands is still not nearly enough. Thousands would mean that it could not host a single active order book on FTX for the entire blockchain, let alone Facebook. So, thousands isn’t going to get you there, but it’s going to shard. What sharding means, basically, is there’s going to be a bunch of them running in parallel and periodically syncing up with each other.

If you had a hundred of those, if you had a thousand of those, I guess, you’re at millions of transactions a second collectively, but they don’t talk to each other super well. So you’ve got a single-digit thousands per shard, millions overall. Does that work? Is that enough? Maybe. I would be pretty nervous about that, and the reason is that, basically, you can’t take a single order book and shard it.

You can’t have two people trying to lift the same offer from different shards, and 30 minutes later figure out what happened. In fact, if you tweet, and I was like, “Ah, I can’t see your tweet.” I’m on Twitter shard number 78. You’re on Twitter shard number 331. Of course, I can’t see your tweet. It’s not a great user experience.

Certainly companies, and maybe even industries — you want on a single shard, so I think you want millions of TPS [transactions per second] per shard if you are going to shard it. And that, basically, gets me to where I am, which is, when you’re looking at the type of things that could scale to support gigantic billion-person applications online, I think you’re looking at a very limited number of blockchains that are focusing very heavily on their scaling.

COWEN: Now, I think the best French fries in the world are in southern Argentina, in Patagonia. Where do you think they are?

BANKMAN-FRIED: Oh, I’ve got to say, I like a lot of French fries.

COWEN: So do I.

BANKMAN-FRIED: You give me French fries, I’m probably going to like them. Certainly, growing up, McDonald’s was my answer. That was my favorite place when I was growing up. It no longer is, but it was once. I think that New York has a lot of very good French fries. I think that in Europe, sometimes, very good French fries. You could potentially find them everywhere, but I think that the places you would stereotypically associate with them are the places I’ve had the best ones. I’ve never been to Argentina, though. I’m probably missing the best, and I would go with your place over mine.

COWEN: I think the Andes have the best potatoes, but maybe not the best French fries because the food isn’t always that European. In southern Argentina, you have basically Andean potatoes but European cooking techniques. In Europe, I would say France and Belgium are the best, but try Patagonia.

BANKMAN-FRIED: Belgium is quite good. I will try Patagonia because a big problem I think a lot of people make — feel free to disagree — is not drenching them in salt and oil. They’ll sometimes go light on the salt and oil. I think the whole f-cking point of the French fry . . . Sometimes in Asia, I think there are really good potato products. They’re not — I don’t know — they’re kind of only good French fries, and it’s hard to find the thing that I’m exactly looking for done well there, but Belgian fries are quite good.

COWEN: Yes. What’s your favorite food in the Bahamas?

BANKMAN-FRIED: Beyond Burgers. I’m eating about a Beyond Burger a day right now.

COWEN: What is that?

BANKMAN-FRIED: That is one of the two very popular veggie burgers that has come out over the last five years or so. It’s Beyond, and Impossible Burgers are the other ones. In the last few years, there’s been a real step-change in fake meat, from pretty mediocre to pretty decent, and Beyond and Impossible have been leading the way in that. A huge fraction of all veggie burgers sold globally are Beyond Burgers and Impossible Burgers. They’re just better than most other ones. They’ve done a lot of research on how to make them taste pretty meaty, and I’m not going to say they taste as good as the best beef burger I’d ever had, but they taste a lot better than most veggie burgers.

COWEN: Now, if you try to imagine a scenario where the Bahamas starts having economic growth of 10 percent a year — maybe not every year, but pretty frequently — what does that scenario look like?

BANKMAN-FRIED: Yeah. By the way, I think there’s a real chance of that. I’m somewhat bullish on the Bahamas. Things I’m going to say — I don’t mean these as disagreements with the policy of the Bahamas. I think that they’re doing reasonable things from some perspectives, from law perspectives. I think that it’s embracing what they’re great at, and what is it? Well, it’s been a really great place for us to be from a lot of angles, and I think there are a lot of other businesses it’s a great place for.

I hope that we can have a lot of really positive impact on the economy and the people here more generally. We’re investing a lot in the island, in the schools, and in the health infrastructure here. The biggest things that I would say, other than those — really, health infrastructure is a big one. Massively operating it on all fronts would go a long way towards improving quality of life for everyone here and make it an international hub while also helping the population a ton. That’s maybe the single biggest thing I’d say.

Then the other thing is, if the Bahamas closes their borders for COVID. In general, border closing for COVID, I’m not a huge fan of. But especially, I think it just would kill a lot of what makes it special here — and they’re not doing that, to be clear, and I’m pretty excited about that fact.

COWEN: If you think about underlying factors there — deep cultural roots or norms or whatever — what’s the positive thing about the Bahamas that most outsiders wouldn’t know about or not see?

BANKMAN-FRIED: Here’s one interesting thing. It has a strong democracy. One joke that more than one person told me when I first got here was, “Sam, of our two countries, one of them just had an extremely peaceful transfer of power promptly following an election.” And it wasn’t my country. That’s not true of a lot of other places people would often put in a similar category.

But it’s the combination of a nimble, small state that has a lot going for it, a lot to offer, and also is robustly democratic, which is fairly powerful. People here are really nice — that’s cool. It is just such a stark difference from a lot of other places that I’ve been, and conveniently located. It really is a 30-minute flight from Miami. The infrastructure here is pretty decent, and it is getting better pretty quickly.

COWEN: Last question. I’m sure you faced this already, but let’s say you have an extra million dollars or 10 million dollars to give away to improve life in the Bahamas only — not you change the whole world and the Bahamas benefits — just improve the Bahamas. What do you do with it?

BANKMAN-FRIED: I think health is where I would focus, probably. It depends on exactly the amount because some things have scaling in different directions here. I think the bigger the amount is, the more you’d want to set up trying to build a really great hospital system, for instance. That certainly is a bigger project.

I think working out the healthcare infrastructure, or obviously — and especially with the world we’re in — direct cash transfers are always within an order of magnitude of the best thing you could do. Those are pretty effective in just giving to Bahamians.

We’ve spent some money buying COVID-relief supplies for the island, and we’re monitoring what their stockpiles look like. If that becomes a limiting factor, we’ll put more into it, although I think it’s looking okay from a stockpile perspective right now.

COWEN: Sam Bankman-Fried, thank you very much. My pleasure.

BANKMAN-FRIED: Of course. Thanks for having me.