A crypto security CEO did business with Sam Bankman-Fried and sent a team to the Bahamas. He was shocked by FTX’s lack of interest in security checks and big ideas: ‘Maybe we’ll buy Goldman Sachs’

In mid-July 2021, Pascal Gauthier made a call to the 29-year-old who had wowed investors and the media by building a large warp-speed trading platform and emerged as the cryptocurrency industry’s most charismatic lobbyist: Sam Bankman- Fried.

“I wanted to find out what his secret sauce was, to grow his business so quickly,” recalls Gauthier, CEO of Ledger, a leading provider of hardware wallets for securely storing digital currencies. (You can read more about that torrid rise and the documents showing how Bankman-Fried sold his vision to VCs here.) But as their conversation progressed, Gauthier was surprised. SBF was describing a model for scaling a business that, in retrospect, contradicted everything Gauthier had learned in over two decades as a successful serial entrepreneur. “It all seemed like a classic recipe for disaster,” he recalls. “I was wondering, ‘It’s a myth; is backed by top investors; it has a valuation in the tens of billions. What I do not understand?’ But they seemed to be building a great business and we thought it was great to partner with them.”

Gauthier reported the incident to Fortune this week in the meeting room of a hotel in Manhattan’s Nolita neighborhood, visiting from Ledger’s Paris headquarters. “I could tell he was playing on his computer, or doing something else at the same time we were talking, but he was also lucidly telling me about his business; it was obvious he could multitask,” says the stocky, black-bearded CEO, whose eight fingers flash folklore rings. “He showed no curiosity about Ledger or me on the call. big business.

But Bankman-Fried, or “SBF” as he’s called in crypto circles, described how he could achieve something Gauthier hadn’t seen before: running a major financial institution as a kind of permanent startup. “She was adamant that she could do it with the very few employees he already had; the number I remember was something like a hundred,” says Gauthier. “He was saying he could build a business with far fewer people than his competitors. That was my number one surprise. that “maybe one day we’ll buy Goldman Sachs,” a boast he also made publicly. Gauthier mused, here’s a guy with $1 billion in revenue, and he’s about to buy one of the largest investment banks in the world with a market cap of market of over $100 billion and revenue of $50 billion?

Many months later, Gauthier had even more reason to wonder how such an unorthodox and unproven approach could seemingly work so brilliantly. “I later read that Sam was inviting investors to create a worldwide financial super app where people could do anything with their money, and maybe that was the reason he landed at the $32 billion valuation. And apparently, he will do it with so few people! I thought, ‘You’d need thousands of people to do that!’” Gauthier points out that he wasn’t predicting the collapse of FTX. He was simply amazed at the gulf between SBF’s ambitions and the number of people he had put behind that super-ambitious execution.

For his part, Gauthier has followed a more traditional path in forging his businesses. He had scaled Criteo of France into a major online advertiser that went public in 2013 with a $1.7 billion valuation, and in 2015 he helped found Ledger, a company with 800 employees that is growing rapidly and in most years generated strong profits. So SBF’s crazy plans left a lasting impression. “If I said Ledger was thinking about buying Goldman Sachs, people would laugh,” notes Gauthier. “But somehow, when SBF said it could buy Goldman, the financial world nodded and thought it might.”

Ledger engineers visit FTX in the Bahamas and get a jolt

In mid-2022, Gauthier dispatched a team of engineers to install systems at FTX’s Bahamas offices that would allow its clients to trade on SBF’s burgeoning platform. Ledger’s product is a wallet that runs on a butane lighter-sized piece of hardware, called the “Ledger nano,” sold at Best Buy, that plugs into your smartphone or connects via Bluetooth. To send cryptocurrencies to another wallet or exchange, to activate the “key” that releases the coins, customers must enter a private “pin code,” just like punching a pad to buy things with a credit card. bank debt. Ledger wallets are created for individuals only. They are a time-tested platform for keeping customers’ Bitcoins and other cryptocurrencies secure. Unlike trading platforms that hold coins, Ledger operates a decentralized system.

The engineers brought back a system and culture that was the antithesis of the rigorous environment that Gauthier had modeled at Ledger. “We found that their business practices were much more flexible and very different from ours,” he says. “What I saw before the fall was an organization that just functioned completely differently than anything I’ve ever seen.”

Gauthier notes that his team could never engage with FTX or SBF in deep conversations about security, and especially about the kind of governance that would be appropriate for a large exchange. Ledger offers a proven product for the institutional market called Ledger Enterprise. But Gauthier and SBF never entered into what Gauthier called “an educated discussion” about security. “I was surprised that they failed, but I was also surprised that they couldn’t engage in a real conversation about the security of the exchange and the security of their government.”

A big lesson from the meltdown, thinks Gauthier, is that security in the cryptocurrency world is even more crucial than for banks and brokers. Yet, digital players are far more indifferent to protecting customer assets than traditional finance. “The crazy kids in the garage approach doesn’t work well with blockchain technology,” he says. “You need governance and risk management and all the stuff that crypto people think is boring.” The magnetism of SBF has taken the eyes of the world away from the vital role of those safeguards. For Gauthier, the missing billions will provide a lasting reminder, the reminder that must be heeded for cryptocurrencies to prove a force for the future.

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