FTX, crypto landscape are like the ‘Wild West, like Tombstone, Arizona’: Jordan Belfort

Entrepreneur, speaker, and "Wolf of Wall Street" author Jordan Belfort joins Yahoo Finance Live to discuss the fallout of the FTX collapse and crypto market sell-off.

Video transcript

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RACHELLE AKUFFO: Rival crypto shares, crypto values have been falling in reaction to the bankruptcy of popular crypto exchange FTX, where former CEO Sam Bankman-Fried orchestrated a scheme that misused customer funds and has left more than one million creditors without access to their money.

Well, the Wolf of Wall Street, Jordan Belfort, an entrepreneur, speaker, and author joins us now for more on this. Jordan, welcome to the show. I want to first ask you because we talked about this issue of trust. As someone with skin in the game yourself, what has this done for your trust in exchanges and really trying to decipher which ones are trustworthy right now?

JORDAN BELFORT: I don't have any of my money in any crypto on exchanges. It's all off on the chain. It's in a cold storage wallet, so to speak, with Ledger. So I got hacked, actually. I lost about, was it 300 and something thousand dollars on MetaMask last year. This is a very, very, very tough industry right now because it's really literally like the Wild West.

It's in desperate need of regulation, desperate need of the SEC or some body to step in here and bring at least some level of order to the chaos. Even after they do that, there will still be fraud. There always is in every market. But still, it's literally the Wild West right now. Like, it's like Tucson, Arizona out there.

SEANA SMITH: Jordan, I want to get more specifically in what you want to see in the regulation side, but first, just more broadly speaking, what we've seen play out over the last two weeks with Sam Bankman-Fried, the scale of this collapse, what it's done to the crypto market, what's your initial reaction to what we've been hearing specifically about FTX?

JORDAN BELFORT: So, first of all, a couple of misconceptions about FTX. And this is like-- the crypto world has got a strange way of putting labels and calling things, things that they're not. Like, FTX, in my mind, is not an exchange. It's a brokerage firm or, really, a self clearing brokerage firm. Like, it holds customer funds, like a brokerage firm. And what he did was really simple and straightforward. He essentially advertised, hey, you know, we're this great brokerage firm. Come deposit your money with us and trade through us.

Like, say you deposited at Charles Schwab or Ameritrade, right? It's a brokerage firm. And you put your money there. And we'll go to JPMorgan Chase, the positive money in the bank, and then you find out, oh, wait, Jamie Dimon is actually taking your money and going to Vegas on the weekends. He's not-- just, like, doesn't respect that it's your-- oh, your account, my account. It's all one big account.

And he just takes the money. That's really what FTX was. It was not an exchange. It was a brokerage firm where they co-mingled funds, and they took the money and just spent it on some lavish expenditures. But also they lost a lot of money just being lousy traders.

SEANA SMITH: So, Jordan, do you think that this is more of an FTX specific issue? Because we had the new FTX CEO coming in a filing, saying that he's never seen, quote, "such a complete failure of corporate control." So is this only FTX, or do you think we could see something similar down the road in the crypto world?

JORDAN BELFORT: No, I don't think it's just FTX. It's hard to say. When someone is committing fraud-- like, they were committing fraud there clearly. I'm comfortable saying that right now at this point that they were co-mingling funds without telling customers, which is blatant fraud, trying to phase your fraud, right? And I don't see any way that he can say he wasn't aware of it. It was like done purposely to shore up the balance sheet of Alameda, which was bleeding cash, right?

So the question really is, how many bad actors are there at exchange? You don't know. You just don't know. And that's why people are saying prove that you have your reserves. The only exception, I would say, is probably Coinbase is a listed-- reports to the SE-- I'd be shocked to find out that Coinbase was insolvent. I mean, that would be really shocking to me.

But these ones that are offshore, they don't report, there is no way of knowing what they're actually doing. This is a huge problem right now in the whole crypto world. So whether it's just FTX or it's many of them, I'm sure there's more. They also-- because they all invest in each other and borrow from each other and leverage. There's a lot of that. I guess it's a house of cards and mirrors at the same time, where they pump up the values. They issue their own tokens, and one person buys another. It's insane, right? It really is tombstone.

So until all of this winds down, there's going to be a lot more blood in the streets for sure. And then the SEC, at least some body has got to come in and pass really, I think, some significantly strict laws here to bring some order to the chaos.

RACHELLE AKUFFO: And Jordan, you've labeled FTX as a frat house. But I mean, you have to wonder. You had institutional investors also investing with him. Where in the due diligence did this all fall apart?

JORDAN BELFORT: I'm baffled. Like, I was kidding when I said, send me down, I would have seen this in two seconds. Like, you have a bunch of kids that are in one small office, just understaffed. They were, like-- they lacked even the proper personnel. Like, forget it that each of them were incompetent to themselves. They were missing probably 100 or 200 employees that you just normally have as controls and checks and balances. I don't think there was even a chief financial officer, I heard.

And the whole thing literally defies logic. I do not understand how some of the biggest hedge funds in the world or VCs in the world simply ignored what are, obviously, blaring warning signs. Not that it's a fraud. It's very hard to find out if someone's trying to defraud you. It's very difficult. But just to see that all the earmarks of a fraud are there, and then you dig further and then you can find the flaw when you dig into the accounting.

SEANA SMITH: Jordan, you mentioned regulations. Let's dig into that a little bit more. More specifically, what do you think is necessary in order to regain that trust and really limit the fraud or the deception that's clearly going on within the crypto industry?

JORDAN BELFORT: Two things. I think it should be-- number one, I think 99.99% of these tokens and coins are securities. And they should be regulated as such. Bitcoin, I don't believe it's a security. Bitcoin truly is a commodity or property, whatever you want to call it. It's decentralized, so I think that's a very different thing, Ethereum as well. But outside of those two-- and again, there's probably a few others in there, but I don't really own any of the others. I own those two are the only things I own. I have some small stuff, but that's on my own, right, that I never sold, and it's just speculative investments.

But the point is, is that I really believe that the SEC should be regulating this no different than they regulate the stock market literally. And also, this is more than that. You also, to really make this work, you need to have, assuming you have, like, the FDIC for banks, SPIC for brokerage firms, there needs to be some insurance mechanism in place that when these brokerage-- they're not exchanges.

When these brokerage firms fail that are holding customer funds, there's at least some insurance in place that allows the people to be made whole. That's what stops US bank runs. That's what brings a lot of order to market. For example, back in 2008, when I remember IndyMac was going under and WaMu, Washington Mutual, no one was worried. You never worried that you weren't going to get your money. The government backed it up, right? So the whole government would have to fail.

So I think that that's a problem. People say, oh, the government should be involved. Like, the government needs to be involved because there's got to be some buyer of last resort, some person to backstop all of this, or else, it's going to be the same story again and again and again.

RACHELLE AKUFFO: All right, a big thank you there to Jordan for breaking all of that down for us. Obviously, something new seems to pop up every day when it comes to FTX. Thank you for joining us.

JORDAN BELFORT: My pleasure.