Charlie Warzel writes:

The world of cryptocurrency is rich with eccentric characters and anonymous Twitter personalities. So perhaps it shouldn’t be a surprise that one of the early figures who called attention to the problems with Sam Bankman-Fried’s cryptocurrency exchange, FTX, is a 30-year-old Michigan psychiatrist who investigates financial crimes as a hobby.

James Block, who runs a crypto newsletter called Dirty Bubble Media, has gotten overlooked in the swift and spectacular collapse of FTX. On November 2, a report from the crypto publication Coindesk highlighted the troubled balance sheet of Bankman-Fried’s crypto-trading firm, Alameda Research. Two days later, Block’s post titled “Is Alameda Research Insolvent?” went viral, and for good reason: Block had connected the dots from Coindesk’s earlier work to suggest that both FTX and Alameda had their money tied up in their own made-up tokens—an unsustainable circular flow of cash that would eventually sink FTX. Within a week, the company filed for bankruptcy.

Currently, Bankman-Fried is under investigation from federal prosecutors who are looking into whether he engaged in illegal market-manipulation tactics. He’s also supposedly going to testify before the House Financial Services committee in the coming weeks. Ignoring the advice of his lawyers, Bankman-Fried has given a series of interviews with independent journalists as well as national media outlets. Throughout, he has continued to deny wrongdoing, maintaining instead that he was ignorant of Alameda’s market positions. “I didn’t knowingly commingle funds,” Bankman-Fried told The New York Times at a conference late last month.

Block, a vehement crypto skeptic, has spent the past 18 months doing forensic blockchain research. He uses open-source tools to follow flows of money between crypto companies, repeatedly demonstrating how shadow banks and nefarious scammers inflate the value of worthless assets in order to generate enormous wealth that exists only on paper. Earlier this week, I called him to talk about how he got sucked into the world of financial-crime investigation, why decentralized finance isn’t actually transparent (or, in many cases, even decentralized), and whether there’s any value at all in the crypto ecosystem. [Continue reading…]