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From the article: "FTX Chief Executive Sam Bankman-Fried said in investor meetings this week that Alameda owes FTX about $10 billion, people familiar with the m
by chlodwig 4y ago
From the article: "FTX Chief Executive Sam Bankman-Fried said in investor meetings this week that Alameda owes FTX about $10 billion, people familiar with the matter said. FTX extended loans to Alameda using money that customers had deposited on the exchange for trading purposes, a decision that Mr. Bankman-Fried described as a poor judgment call, one of the people said."
In the FTX International terms of service ( https://help.ftx.com/hc/article_attachments/9719619779348/FTX_Terms_of_Service.pdf https://help.ftx.com/hc/article_attachments/9719619779348/FT... ) they say that users have full title, ownership and control of digital assets. They say that the assets are the property of the user, and shall not be loaned to FTX trading, shall not be treated as they belong to FTX trading, and that users control the assets in the account.
So if they did indeed loan out customer deposits, that is just straight up criminal fraud, open and shut. This isn't like some DeFi scheme where they are working around some legal loophole or in the fine print tell you that they will probably lose your money. This is just straight up illegal under the plain vanilla theft and fraud laws of any country. This isn't even a bank run (banks at least tell you they are loaning your deposits out) -- it's a run on a U-Haul self-storage where you find out that they actually sold all the furniture in your storage unit to a pawn shop.
- newfonewhodis 4y agoI put $100 in my Chase account. Chase goes horse betting with my money and loses it all. My account shows $0. That's basically what happened here.
- deleted 4y ago[deleted]
- jefftk 4y agoWell, your account still shows $100, but Chase has paused withdrawals while they "sort out liquidity issues" so it's effectively $0
- chlodwig 4y agoNot exactly, because banks tell you that they will loan out your money and you might not get it back, that's why you get interest on the account. They can't go horse betting, but they can loan it out. You don't have "title" over the USD in the bank reserves. This is like if you put $100 in Chase's security deposit box, and they opened it up, took the cash, and lent it out, and then when you come to get it, they say, woops, we lost it all. That would be just straight up theft or fraud.
- kwertyoowiyop 4y agoIn the USA, bank accounts are guaranteed by the government, up to $250K.
- tootie 4y agoAnd the FDIC can afford to do that because there are laws dictating liquidity requirements to banks and disclosure requirements to inspect and enforce those rules.
- kwertyoowiyop 4y agoIt’s almost as if our existing financial system, built upon the lessons from hundreds of years, is worthwhile! :-)
- Veliladon 4y agoIt's been funny to watch crypto basically speedrun the entire monetary system from Rai stones all the way to calls for central banking.
- Animatronio 4y agoThat's what makes it so boring, whereas DeFi is so exciting it gives you a heart attack seemingly every other day.
- 4y ago
- fdgsdfogijq 4y agoWhy is this getting downvoted? its a plain speech description of what they did
- RC_ITR 4y agoBecause Chase actually does something sort of similar (primarily mortgage lending), but they employ a ton of people to think all day about managing risk. So I think people don't like the comparison, since the true difference is FTX did horse betting, while Chase does something much more rational.
- zeven7 4y agoTo add to that: Chase tells you what they're doing. FTX told its customers it wouldn't lend it out, and then it did. Additionally, customer accounts at Chase are insured by FDIC up to $250k. Chase tells you they're going to bet with your money, manages the risk well* on most days*, and even if they lose your money you get it back anyway. FTX did the opposite of all that.
- mjn 4y agoChase is also more restricted in how the investment banking side of the business can use funds from the retail banking side, precisely because banks in the 1920s did play fast and loose with investing customer deposits, which caused a bunch of depositors to lose savings in the 1929 crash and associated bank runs. The amount of interaction between the two sides that's allowed has increased and decreased over the years, but it hasn't been unrestricted since the Glass-Steagall Act of 1933: https://en.wikipedia.org/wiki/Separation_of_investment_and_retail_banking https://en.wikipedia.org/wiki/Separation_of_investment_and_r...
- based69 4y agoDoesnt fannie mae/freddie mac essentially backstop a lot of this risk too?
- roflyear 4y agoProbably bc all crypto exchanges are doing this, essentially. It is the burden of no regulations.
- deleted 4y ago[deleted]
- shapefrog 4y agoIf the 50-1 shot horse won the race, they would have put your $100 back in your account and put $4900 in their account
- vgeek 4y agoI know pop culture and humor is frowned upon on HN, but https://m.youtube.com/watch?v=XhFTG7fFwc4 https://m.youtube.com/watch?v=XhFTG7fFwc4 is just too relevant to not share for this whole situation.
- jojobas 4y agoExcept 1) Chase doesn't have to show you $0, you'll still see $100. 2) When you decide to spend the money, chances are the seller is also with Chase, then all Chase has to do is show you $0 and the seller +$100 3) If the seller happens to be with another bank, Chase will just go in credit with that other bank for $100. The total of such interbank accounts is around 0 as money flows both ways, and, with a decent margin, within the bank reserve amount. Fractional-reserve banking works so well with so little "actual" reserve money that some consider it counterfeiting.
- colinmhayes 4y agoEventually the other bank will ask for settlement. Maybe it’s because you owe them a billion dollars and they have a liquidity crisis. Whatever the reason is, you can’t just go on forever “oweing” then money.
- wefarrell 4y agoI’m pretty ignorant when it comes to this space. Do they not have any kind of compliance structure? In hindsight it seems pretty obvious that this sort of thing would happen without it.
- hacker_lady 4y ago
- convolvatron 4y agocompliance to what? all those regulations are just hindering the operation of the free market, and we started this whole crypto thing to avoid them on purpose?
- exolymph 4y agoWell, they at least had compliance staff. "Most of FTX's legal and compliance staff quit Tuesday evening, people familiar with the matter told Semafor, leaving few executives who could answer questions that now loom large over the firm." https://www.semafor.com/article/11/09/2022/ftx-legal-and-compliance-teams-quit https://www.semafor.com/article/11/09/2022/ftx-legal-and-com... Pretty much every large exchange has a compliance team, btw, at least the ones with US operations.
- Panzer04 4y agoI mean, would you stay around to answer those sticky questions? They demonstrably failed at their only job.
- fnordpiglet 4y agoThey’re not securities and they’re regulated. Theres nothing to comply to. Perhaps crypto exchanges should be regulated?
- Zamiel_Snawley 4y agoOne thing to note is that FTX.us is an affiliated company that is onshore in the US, that does have compliance requirements, and FTX.us is currently not believed to be insolvent/bankrupt. *This may not be true, there are rumors that I haven't looked into that FTX.us is halting withdrawals, which does not bode well.* FTX.com is some conglomeration of entities incorporated in Antigua, Bermuda, and the Bahamas[1]. FTX.com is the one that has blown up, and I won't pretend to know about the reporting requirements of such a complicated structure in multiple jurisdictions. Also, Sam Bankman-Fried owned 90% of Alameda Research as of last year. So unless that changed(I can't find evidence it has), it looks to me like he tried to bail himself out with customers' money. Presumably he thought he could return the money eventually and no one would be the wiser. So much for that. This is just my understanding and I am not an expert in these things. [1] https://help.ftx.com/hc/en-us/articles/360056976411 https://help.ftx.com/hc/en-us/articles/360056976411 [2] https://finance.yahoo.com/news/ftx-ceo-sam-bankman-fried-profile-085444366.html https://finance.yahoo.com/news/ftx-ceo-sam-bankman-fried-pro...
- Digory 4y agoSo if the chain is supposed to enable "trustless" finance, what enabled Alameda to take anything? Seems Alameda and its clients should be screwed, but FTX's holders should be relatively easy to identify and restore. But everyone seems to say that's not the case. So what broke down here? Why isn't the ledger ledgering?
- delusional 4y agoThe ledger ensures that the handing over of the "thing" can happen without trust in any intermediary. You still ultimately have to trust the counterparty to deliver what they promise. Think of it like HTTPS. Nobody can sneak anything into the request, but the counterparty you're contacting could still be a fraud.
- ChadNauseam 4y agoThere are fully-decentalized exchanges which have to have much less counterparty risk (because anyone could take the other side of your deal, so you don't want to trust them). As a simple example, imagine a contract which I send 1 ETH to, and if you send it 1000 USDC it'll send you the ETH. The big counterparty risk with that system is that the price of ETH will skyrocket and someone else will call the contract to make the trade before I can cancel it, but that kind of thing is hard to avoid in any system.
- LeafGuild 4y ago>but that kind of thing is hard to avoid in any system. No it isn't, that's what limit orders are for. There's still the exact same counterparty risk there anyway, in the form of USDC. Circle is another big dodgy centralized provider. The major critical flaw with all this defi stuff is that it can only reliably trade cryptos for other cryptos. Once you actually try to get any of it out into real assets, the counterparty risk immediately comes back again. No crypto defi stuff can ever solve that. The idea is just bad, it's a scam from the very beginning.
- topranks 4y agoThe big risk with that system is a bug in the smart contract that lets me take all the ETH and USDC.
- deleted 4y ago[deleted]
- wslh 4y agoHow many years could Sam Bankman-Fried get in jail? It is also interesting to read on his Wikipedia profile [1] about "Bankman-Fried is a supporter of effective altruism and claims to pursue earning to give as an altruistic career. He is a member of Giving What We Can and has claimed that he plans to donate the great majority of his wealth to effective charities over the course of his life.". Having direct access to a lot of money changes a some people ethics. [1] https://en.wikipedia.org/wiki/Sam_Bankman-Fried https://en.wikipedia.org/wiki/Sam_Bankman-Fried
- astrange 4y agoGiving away other people’s money is both effective and altruistic, it seems to me.
- zukzuk 4y agoI suppose it's easier to justify this to yourself when you know most of the people whose money you're gambling with are also driven by the same greed. The cryptocurrency bubble was very transparently built on delusion and avarice, and everyone involved knew it. There are very few truly innocent victims here.
- ShredKazoo 4y agoGreater fool theory
- eric_cc 4y ago> There are very few truly innocent victims here. Are you suggesting FTX customers deserved this?
- cuteboy19 4y agoEventually, you run out of other people's money.
- colinmhayes 4y agoNot before giving away hundreds of millions of dollars
- fnordpiglet 4y agoThis is why in regulated securities markets customer assets must be held in segregated accounts. Corzine, who knew better, ended up with an orange suit for not doing this.
- qeternity 4y agoDid Corzine actually go to jail? This didn't sound right to me and a quick search suggests no.
- Telemakhos 4y agoHe did not go to jail, which prompted a satiric call to "Free the Honorable Jon Corzine." His LinkedIn page describes him as running "an opportunistic macro hedge fund."
- fnordpiglet 4y agoYes you’re right he didn’t. He ended up paying a $5mm civil fine and was barred from futures business. I misremembered, my bad.
- dools 4y ago> banks at least tell you they are loaning your deposits out Side not but that’s not really how banking works. Banks create deposits when they originate loans and separately look for the assets they need in order to satisfy any regulatory requirements and net flows of funds for inter bank settlements. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
- UncleEntity 4y agoBut that’s the principle of how banking works. Nobody expects that their money deposited into a savings account is going to sit in a bank vault until it’s time to go pick it up — they know the bank is going to loan it out and pocket the difference between what they charge the borrower and what they pay in interest. Checking accounts are different in that they should have the money on hand to settle whatever spending the customers get up to but instead they practice fractional reserve deposits with a central bank to bail them out if needed. The difference here is the crypto bros are practicing fractional reserve without someone to bail them out so depositors just get screwed.
- benlivengood 4y agoU.S. reserve percentages have been 0% across the board since 2020. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- Nursie 4y agoI believe this is misleading, yes, reserve requirements are at 0. Capital requirements are not - https://www.federalreserve.gov/supervisionreg/large-bank-capital-requirements.htm https://www.federalreserve.gov/supervisionreg/large-bank-cap... Reserve requirements are about how much cash they must keep as a percentage of their assets, where capital requirements (which are non-zero) are more relevant to the fraction held in fractional reserve systems and are about ensuring solvency.
- hn_throwaway_99 4y agoAgreed. I haven't dug into the FTX terms of service, but as you put it, the lack of regulations around crypto should be irrelevant - this is outright fraud/theft. Assuming depositors don't all get their money back (which seems like the obvious outcome), seems like some long jail terms are in order. I mean, Madoff got 150 years and died in prison after about 10 years. While I don't see the FTX fraud in the same league (Madoff went to great lengths, for example, to generate phony statements over many years) it still sounds like fraud to the tune of billions.
- chaosbolt 4y ago>poor judgment call >tell people their money is safe then basically steal it by giving it to your friend SBF needs to be thrown in jail, he won't though, for obvious reasons.
- eloff 4y agoWhy won't he be thrown in jail? This looks pretty open and shut. The courts will confiscate his assets and jail him. This is quite similar to what happened to Bernie Madoff.
- Jerry2 4y ago> Why won't he be thrown in jail? He's the second biggest donor to the Democratic Party. He has a lot of political cover.
- eloff 4y agoThat's not going to save him.
- rossjudson 4y agoWhat's the latest over there in election denial news? Seriously.
- 3327 4y ago
- stephen_g 4y agoBanks don't actually even 'lend out' customer deposits. That's a very common misconception. In modern bank operations, incoming fund transfers (which involve deposits) do provide liquidity that help allow the bank to be able to lend, but banks are actually levering up capital (paid-up share capital, retained earnings, etc.) to lend. The primary limit on how much they are able to lend (by Basel III regulations) is a multiple of this capital, nothing to do with the amount of deposits. Delinquent loans are therefore a loss recorded against this capital, which is shareholder equity - not customer deposits. The real problem for the bank is if more loans become delinquent than the capital they have, and they can't sell collateral for enough to cover it. Then they become insolvent. The Basel III rules increased the capital adequacy limits to try and lower the chances of banks failing after what happened in the GFC. Bank runs are a liquidity problem because the bank's assets aren't all liquid enough to transfer out all the deposits the bank holds, but they can borrow bank reserves from other banks or the central bank in an emergency.
- BurningFrog 4y agoI didn't understand much of the jargon, but if banks don't lend out customer deposits, why are they gone when banks go bankrupt? If they were not lent out, where did they go?
- gigatexal 4y agoUS banks have access to the Federal Reserve Bank and get funds from them at the fed funds rate. Then they add some margin and loan it out to you and me. They’re required to keep collateral and can only lend some smaller percentage of their capital. Etc etc. Such is what I have pieced together.