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/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.
Banks 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.
You’re creating a lot of confusion by ignoring cash accounting (the physical dollar I give a bank is then given to a homeowner as a mortgage) and talking about GAAP accounting, without making it clear that is what you are doing (the jargon only makes things worse).
Like sure, it’s loan to capital ratio that matters but as you point out:
> 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,
This is because in practice the money you give to a bank is lent out, even if it’s technically leverage against capital.
Bank runs are a problem in the sense that the bank has a short term liability but they have long term assets. This is called a maturity transformation.
If a bank does a transfer to another bank it will have to send its reserves which means it might have to borrow reserves from another bank or sell its long term assets to get enough reserves and that long term asset might worth a lot or worth very little depending on the difference between it's locked in interest rate and the current interest rate.
This is why banks sell their treasuries to the Fed, they have a long duration asset and a short term liability, so they give it to the Fed to get a short term asset.
I don't know what SBF is doing but maturity transformation is probably the riskiest thing you can do as a bank and it is very likely to break down eventually unless you have a central bank that spreads around the risk. From a purists perspective banks should only use certificates of deposits to ensure that their liability duration is longer than their asset duration. Of course that is difficult in practice because nobody is buying CDs nowadays.
The difference between a bank run on the licensed banking system and a crypto exchange is that the licensed banking system has a lot of experience with these types of problems meanwhile in the cryptospace you ask your neighbor and hope he doesn't shrug.
Yes an no. When there was no electronic means of transactions, what banks lent out was indeed mostly customers' deposit plus their own assets.
Things became interesting when electronic transactions came into play. Banks virtually no longer have to payout any cash when they issue a loan to a client as they now only need to change two numbers: credit their asset account, and debit loan customer's cash account. So unless there were transactions paying out to another bank, there were no cash movements. So the minimum cash the bank should keep in their operation accounts is just the difference of the transactions paying out and those receiving in.
But does that mean customers' deposits are not significant to the banks? Nope. Banks actually lend out much more than their customers' deposits. How much can they lend out is basicly the deposit amount divided by the reserve rate, e.g. 20%.
This is all a roundabout way of saying that, yes, they do lend out the deposits.
Let's imagine a simple bank where my company is the sole depositor - it deposits 100k dollars. Let's assume the bank has no other assets or liabilities - its only asset is the 100k dollars I deposited, and its only liability is the 100,000 dollars it has to pay back to me.
Alice comes in and asks for a 50k dollar loan. The bank accepts the loan, and now has another asset - the 50k dollars that Alice owes them, and a new 50k dollars liability - the deposit with Alice's money. Alice than buys an antique one of a kind Russian doll with her 50k dollars from Bob, and the bank transfers this liability to Bob's bank. Alice fails to pay back her loan, and the bank becomes the owner of the antique one of a kind Russian doll worth 50k dollars.
However, someone finds a new trove of similar dolls, and this ones becomes essentially worthless. So, now the bank's assets are in total only 50k dollars, but its liabilities are still the 100k it owes me. If I try to buy another of Bob's dolls for 80k dollars, the bank must find someone willing to lend it 30k dollars, or it can't honor the transaction, even though I had deposited 100k dollars with them: they lent out my deposit.
Of course, in practice, when Alice asked to transfer her funds to Bob's bank, the bank would have not immediately used my deposit, it would have sought to obtain credit from someone else, using some of the 150k dollars in assets it had at the time as collateral. But, if it couldn't obtain such a loan fast enough, it would have indeed used money from the deposit it had.
How 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.
This is crazy. He was funneling customer funds to politicians too? $40m worth and was planning up to $1b.
"SBF was planning to spend up to one billion dollars to help influence 2024 presidential election campaigns. His real plan is to bankroll the candidate running against former president Donald Trump. In 2020, SBF donated $5.2 million to the Joe Biden presidential campaign.
According to Open Secrets, a platform following the money in politics, SBF is the sixth largest political contributor. The platform reports that he has made a total contribution of $39.8 million for the 2021-2022 cycle."
Whenever a person in their mental framework have a very high moral goal, it is easy for them to justify to themselves, less-moral actions. Almost impossible for it to not happen.
So 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?
FTX is a centralised exchange, it is not routing all customer trades on chain. It’s not a blockchain failure, it’s just a lack of client asset segregation by a traditional centralised trading house.
The 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.
That's because it is all built on greed and a lot of lies.
The only time you actually are part of the trustless system is when you are sole custodian of any private keys necessary to access the coins.
The issue with this is that a whole lot of people have no idea what it is, how it works, how to be part of the system and how to keep keys secure and safe at the same time.
And it is fine. People can't know everything.
But one thing I know, if you buy stuff you do not understand and then you loose money, it is on you.
Maybe you're thinking of Etherium or other smart-contract systems, Etherium is a system where things like that happen automatically. With Bitcoin, the only thing you have is a secure (but static) ledger of who (which wallet/id) has what bitcoins. Any transfers have to be "manually" and just recorded by the blockchain.
Of course, the automatic processes in Etherium produce a bunch of other weird effects.
Agreed. 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.
> 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.
No, when you take a loan out of a bank, the bank doesn't "create deposits" that it loans to you. The bank loans you existing deposits. The method by which banks end up creating money is less dramatic than you think. I wrote a long-form explainer here: https://www.attejuvonen.fi/money-out-of-thin-air/
The details of how the actual transactions occur might be different, but the general concept of fractional reserve banking is still “loaning out a portion of deposits”
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.
I’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.
One 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.
Well, 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-com...
Pretty much every large exchange has a compliance team, btw, at least the ones with US operations.
compliance 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?
Think how much cheaper and faster cars could be, if we didn't have to spend resources on seatbelts and catalytic converters. The entrenched car hegemony are in bed with the government to keep the little guy down by requiring these things.
>Do they not have any kind of compliance structure?
Not really, but again banks don't have compliance against this either, it's just that people are less likely to withdraw their money from the bank at the same time, and when they do the gov will tell the fed to print more, and with crypto you can't print more, so a bankrun has immediate effects.
Not 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.
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.
This 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.
Why 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.
Do you mean because there's some connection between FTX and YC? I certainly don't know of any.
Moreover, even if there were, (a) the OP has been on HN's front page for hours and is currently at #4, (b) this story has been heavily discussed on HN, with several major threads in the last few days alone, and (c) asking people not to fulminate doesn't mean they can't make substantive critical points—if anything it helps them do so.
Sorry, no. If I can’t protest here, where can I protest? Is this supposed to be a safe space for billionaires? It’s my community, too. Don’t censor me in the name of curiosities. This isn’t Iran.
This makes it easier to answer questions that would otherwise feel like hard tradeoffs. In this case: should people be shouting angrily in a protesty way in HN threads? No—but not because protest is bad or unimportant. It's just incompatible with intellectual curiosity, and since we're optimizing for the latter, it takes precedence.
When people are protesting or doing battle, they tend to either repeat their most effective phrases (slogans, etc.) or to spontaneously vent their strong emotions (name-calling, etc.). But repetition and name-calling are clearly bad for curiosity. I believe these are even different neurological states: high indignation comes with a level of arousal that rules out the relaxed playfulness that curious conversation depends on.
I hope it's clear that this isn't a judgment about protest or indignation in general—those are as human as anything else and when they're called for they're called for. It's just relative to the particular mandate of this particular site. We're trying to play one game rather than the other.
Is that censorship? Well, that word has become so stretchy that you can apply it however you feel. But I'd say no, for the same reason that chess isn't crokinole. It isn't censorship to say you don't get to whack your opponent's bishop.
I checked my FTX account, only had play money in there. But, despite all the people saying "FTX is fine, withdrawls still work, it's all fine" - nope, everything is disabled, withdrawls show $0.10 avaialble to withdrawl (out of a few hundred I had in actual US cash, plus the BTC and doge transactions are all disabled.
This is very serious for many people - there are some who had substantial amounts of money, including my friend who is at the moment suicidal, a lot of his identity and worth was tied up in crypto.
Please offer support to those you know who are affected by this scam, and do not encourage or enable anyone else to dablle more than throwaway money into anything crypto
This has nothing to do with crypto, it has to do with people sending their money to a con man. If your friend had "his identity tied up in crypto", then why wasn't he holding it himself?
> If your friend had "his identity tied up in crypto", then why wasn't he holding it himself?
Some people love day trading crypto. They keep funds on exchanges so they can trade immediately and not deal with constant back and forth transactions with their own wallet.
Here's how my story played out -- maybe there are a million stories like me I'm not sure.
Bought Monero on Voyager (because my electricity costs are high where I live and I didn't want to mine it). Planned to immediately transfer it out from Voyager to my offline wallet. Saw that Voyager "didn't yet support transferring out" for that cryptocurrency but would soon. Cool, I'll just wait.
A month or so later, Voyager goes under and I'll probably get nothing or pennies on the dollar.
Genuinely curious, what was the right course of action to buy Monero in a low-overhead, safe way?
Trading halt announcement at FTX.US.[1] Announcement says withdrawals still up.
But Twitter messages indicate withdrawals are not working.
FTX Japan shut down by order of Japan Financial Services Agency.[2]
FTX.intl processing some withdrawals, according to blockchain.[3] A few lucky people got to exit.
Way too much happening to mention here. Just use Google to search "FTX" and limit search to 1 day. Margin calls all over crypto land. JP Morgan says expect 50% drop across the board in crypto. Around 10 AM PST, somebody just pulled a billion dollars out of Tether. Word of the day: "deleveraging".
> JP Morgan says expect 50% drop across the board in crypto. Around 10 AM PST, somebody just pulled a billion dollars out of Tether.
Meanwhile, aggregate of the cryptocurrency market is up 5.38% over the last day, Tether recovered landing on 0.9999 USD after 4-5 hours of the drop hitting bottom at 0.9818 USD, which was nowhere near previous all-time low Tether has hit previously.
In other words, everyone screams "panic!" while the world quietly moves on.
Tether will stay very close to 1.0 until, some day, they can't make a redemption. The number to watch is their "market cap". Note that Tether can make that go up by minting more Tether, but when you see it go down, that usually means someone cashed out.
This is one of the reasons downturns in markets are good. If the market would've just kept growing then SBF likely could've kept his ponzi scheme afloat without anyone noticing.
The 2008 recession is what really stopped Bernie Madoff.
This is not a ponzi scheme. This is a good old "not firewalling your customer's money and your investment money" that everyone suffered from in 2008. The situation is cataphoric enough without people mis-using terms.
>The first $10,000 USD value in your deposit wallets will earn 8% APY
(This is what FTX was offering customers)
And now we know the accounts weren't actually covered by real money (or "value" as they called it). So when person X was asking FTX for their money back, FTX would send person X+1's money to cover
Tell me which retail brokerages lost their customers assets because they gambled them away?
There is no glossing over the fact that all these crypto explosions are a result of largely re-implementing a pre-Fed, pre-FDIC, pre Great Depression style banking system with all its long-patched defects.
Sure, yet, these people will mostly manage to escape. Have no doubt they all have few mils on side and they are ready to lie to themselves all sort of excuses to make them feel better spending them. Sam apparently "miss-labeled" some accounts all in pursuit to give more to charity i am pretty sure.
Remarkable that a venture-backed company can loan $10B to the founder's hedge fund without running into some sort of board/corporate sign-off that's required to literally execute the agreement/fund transfer.
They had no real board. They had no real governance. What's amazing is that large venture funds would put this much money into this kind of company without any board seats.
He simultaneously played League of Legends when pitching to VC on Zoom call. That indicated to VC how serious and responsible he was. They unanimously and immediately signed off funding merely out of awe.
Really shows how little oversight any of these venture funds have.
They come across more like frat bros with huge pockets casually giving away billions under a pinky promise of eventual returns.
At this point, they are doing the same level of DD as those degens in WSB.
But I guess you don't have much leverage when the fed is printing trillions for years and we end up with dozens of Zuckerberg types, too much power and no oversight to hold them accountable.
"Silicon Valley Poured Money Into FTX, With Few Strings Attached"
"A marquee roster of investors from Silicon Valley and Wall Street swarmed FTX. They invested nearly $2 billion with few strings attached and no oversight on the cryptocurrency exchange’s board, promoting it as a safe bet."
Anyhow, The board of directors consisted of SBF until the summer of 2021. Then 2 "independent" directors were added, 1 was an FTX executive, the other was a lawyer in Antigua
The recent Sebastian Mallaby book about VC charts the growth of this "founder rules" approach.
In the age of ESG, it turns out that the "G" part is being ignored totally (because it counter to the interests of insiders) but the "E" and "S" is ever more important (because it is in the interests of insiders) despite it doing little to help improve returns (SBF was the king of "S"...might there be a correlation between saying you are more ethical than anyone and permitting yourself to steal from customers?).
Sequioa, who invested in FTX quite loudly, reported to their LPs that they only lost 150MM in their fund that had 7.5B in realized gains. Going off their letter they took 5B and turned it into 12.5B for a return of 150%[0].
After this spectacular blowup barely put a dent in their returns, why would LPs demand anything? Sequioa will just tell them "hey it's the name of the game, there are some losers who go bankrupt and winners who return the entire fund several times over".
If Sequioa took a massive markdown on FTX that would be a different story. However they came out unscathed and looks like they are managed well despite fellating SBF quite openly. What would you even demand of them given that they didn't lose much money? They probably lose even more money on companies that end up just not being successful in the first place. You can't ask them to not invest in risky business, thats the whole point of VC.
[0] Could be misinterpreting the letter, they said FTX was 3% of commited capital, 150M / 3% = 5B, and they had 7.5B of realized and unrealized gains.
I generally agree, but it's not "people," it's institutional funds (endowments, pension funds, etc). The way venture returns are distributed is that a small number of funds (of which Sequioia has historically been one) stand out from the rest in terms of returns. With the lengthy bull market that we have had until this year, VC was a high-performing asset class. Pension fund and endowment managers felt they needed to be in the asset class, which really meant being in those top 10 or so funds that were generating outsized returns. When LPs are competing to get into a few top funds, the funds have all the leverage. My sense is that LPs don't feel like they can make any kind of demands on the VC funds, for fear of being blocked out of investing.
Now we have a market turn and VC is unlikely to sustain the returns of the past decade. That may shift the leverage, but history suggests that LPs will still not put any kind of meaningful pressure on the top funds to do anything different.
I mentioned this is another reply, so sorry for anyone who reads both.
I would read Mallaby's history of the VC industry to see why this isn't possible. Around 1997 the balance of power shifted heavily in favour of founders (this is when dual-share class) started, and they stopped demanding seats on the board.
Iirc, Sequoia was a firm that held out (along with other old-style funds), they missed out on a lot of companies over the next ten years so ended up racing to the bottom...this is how we got here.
Btw, just on corporate governance...it is the most important factor for a company. A lot of the issues with corporates we have today are due to poor oversight from shareholders (not helped by passive). If corporate governance isn't working, capitalism won't work either.
The number of 'major red flags' here is shocking, and frankly, you'd think after 2008 that firms would have to hire, you know, an 'accountant'.
My god, there are so many things that were there to have been a modicum of parental oversight, the situation would not have festered.
This one is going to stain Web3, Defi, and notably VC.
Hey - VC are the partners of innovators so it's not good to see them in these situations.
Partly they are victims, but partly, they are responsible obviously.
We should note, this has a lot to do with the magical 'made up' nature of tokens. The entire Ponzi was based on tokens worth nothing, with massive leverage. It's a lot of money that VC cab hardly take their eyes off of. Why invest in 'doing stuff' when you can just 'make something up' and say it's worth billions? Given the way VC portfolios work they are going to run at that stampede because of the money flowing into it.
It's a systemic problem.
It would help if there were more regulations around this - at least to dampen he leverage. More transparency, higher interest rates will help as well.
I was partner at a couple of hedge funds. Every fund has its own docs, but normally it is going to restrict you to sending money to specific things, you can't just do anything you want. Certainly you cannot just lend it to yourself if you want serious investors, they do a whole due diligence questionnaire about what sign-off is needed, who can sign, audits, and so on.
I remember a friend with a fund, he was in a short-term pickle waiting for some money to bridge a house purchase. Didn't even cross his mind to lend it to himself and pay it back two weeks later, even though that would have been nearly risk free and a minuscule proportion of the fund.
> Corzine was subpoenaed to appear before a House committee on December 8, 2011, to answer questions regarding 1.2 billion dollars of missing money from MF Global client accounts. He testified before the committee, "I simply do not know where the money is, or why the accounts have not been reconciled to date," and that given the number of money transfers in the final days of trading at MF Global, he didn't know specifics of the movement of the funds. He also denied authorizing any misuse of customer funds.
> On the day of MF Global's bankruptcy, a Bloomberg reporter wrote "Jon Corzine's risk appetite helped destroy his firm. It also provided an object lesson for Paul Volcker's campaign against proprietary trading on Wall Street."
Of course not. Crypto is a vehicle for tech founders to do all the unethical things that are banned in traditional finance without technically breaking the law.
For those wondering why people would store coins on centralised exchanges, the answer is simply because you are heavily incentivised to do so.
When Ethereum was congested and simple transfers were costing upwards of $200 - FTX offered a number of free ERC20 withdrawals if you staked a certain amount of FTT.
in addition to that - the more FTT you staked the more preferential treatment you got in access to IDO's and referral fees, when you couple this with a platform that felt "safe" and "trustworthy" - this was a recipe for disaster.
I've been in Crypto a long time and previous rugs always felt a bit sketchy, like it was an unfinished product, you put up with it but your risk tolerance was lower as those platforms felt like they might disappear at any one point.
FTX felt different - and this is why there are people with 8 figures+ stuck on there right now.
It feels like every time there's a crypto exchange exit-scam/fail/crash/run/fraud, someone says "but this one felt safe/different/better than the others".
I (genuinely) wonder how many more times that will happen?
Name one other one? There hasnt been one, there have been custodial lending platforms that have had all the credentials - this isn't the same.
Imagine the second largest bank in your country just up and dissolving with everyones money - that is exactly how this feels to those of us who have been in this space a while.
Another reason is that many people in crypto trade often. They don’t intend to hold any coins for long. Withdrawing and depositing frequently will cost a ton in that case.
Readit News
In the FTX International terms of service ( 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.
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.
Like sure, it’s loan to capital ratio that matters but as you point out:
> 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,
This is because in practice the money you give to a bank is lent out, even if it’s technically leverage against capital.
If they were not lent out, where did they go?
If a bank does a transfer to another bank it will have to send its reserves which means it might have to borrow reserves from another bank or sell its long term assets to get enough reserves and that long term asset might worth a lot or worth very little depending on the difference between it's locked in interest rate and the current interest rate.
This is why banks sell their treasuries to the Fed, they have a long duration asset and a short term liability, so they give it to the Fed to get a short term asset.
I don't know what SBF is doing but maturity transformation is probably the riskiest thing you can do as a bank and it is very likely to break down eventually unless you have a central bank that spreads around the risk. From a purists perspective banks should only use certificates of deposits to ensure that their liability duration is longer than their asset duration. Of course that is difficult in practice because nobody is buying CDs nowadays.
The difference between a bank run on the licensed banking system and a crypto exchange is that the licensed banking system has a lot of experience with these types of problems meanwhile in the cryptospace you ask your neighbor and hope he doesn't shrug.
But if the liabilities are mostly deposits, then it's the deposits that allow it to be a levered business at all.
Things became interesting when electronic transactions came into play. Banks virtually no longer have to payout any cash when they issue a loan to a client as they now only need to change two numbers: credit their asset account, and debit loan customer's cash account. So unless there were transactions paying out to another bank, there were no cash movements. So the minimum cash the bank should keep in their operation accounts is just the difference of the transactions paying out and those receiving in.
But does that mean customers' deposits are not significant to the banks? Nope. Banks actually lend out much more than their customers' deposits. How much can they lend out is basicly the deposit amount divided by the reserve rate, e.g. 20%.
Let's imagine a simple bank where my company is the sole depositor - it deposits 100k dollars. Let's assume the bank has no other assets or liabilities - its only asset is the 100k dollars I deposited, and its only liability is the 100,000 dollars it has to pay back to me.
Alice comes in and asks for a 50k dollar loan. The bank accepts the loan, and now has another asset - the 50k dollars that Alice owes them, and a new 50k dollars liability - the deposit with Alice's money. Alice than buys an antique one of a kind Russian doll with her 50k dollars from Bob, and the bank transfers this liability to Bob's bank. Alice fails to pay back her loan, and the bank becomes the owner of the antique one of a kind Russian doll worth 50k dollars.
However, someone finds a new trove of similar dolls, and this ones becomes essentially worthless. So, now the bank's assets are in total only 50k dollars, but its liabilities are still the 100k it owes me. If I try to buy another of Bob's dolls for 80k dollars, the bank must find someone willing to lend it 30k dollars, or it can't honor the transaction, even though I had deposited 100k dollars with them: they lent out my deposit.
Of course, in practice, when Alice asked to transfer her funds to Bob's bank, the bank would have not immediately used my deposit, it would have sought to obtain credit from someone else, using some of the 150k dollars in assets it had at the time as collateral. But, if it couldn't obtain such a loan fast enough, it would have indeed used money from the deposit it had.
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
"SBF was planning to spend up to one billion dollars to help influence 2024 presidential election campaigns. His real plan is to bankroll the candidate running against former president Donald Trump. In 2020, SBF donated $5.2 million to the Joe Biden presidential campaign.
According to Open Secrets, a platform following the money in politics, SBF is the sixth largest political contributor. The platform reports that he has made a total contribution of $39.8 million for the 2021-2022 cycle."
When the ends justify the means, anything goes.
But everyone seems to say that's not the case. So what broke down here? Why isn't the ledger ledgering?
Think of it like HTTPS. Nobody can sneak anything into the request, but the counterparty you're contacting could still be a fraud.
The only time you actually are part of the trustless system is when you are sole custodian of any private keys necessary to access the coins.
The issue with this is that a whole lot of people have no idea what it is, how it works, how to be part of the system and how to keep keys secure and safe at the same time.
And it is fine. People can't know everything.
But one thing I know, if you buy stuff you do not understand and then you loose money, it is on you.
Of course, the automatic processes in Etherium produce a bunch of other weird effects.
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.
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/m...
https://en.wikipedia.org/wiki/Fractional-reserve_banking
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.
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
[2] https://finance.yahoo.com/news/ftx-ceo-sam-bankman-fried-pro...
Pretty much every large exchange has a compliance team, btw, at least the ones with US operations.
Think how much cheaper and faster cars could be, if we didn't have to spend resources on seatbelts and catalytic converters. The entrenched car hegemony are in bed with the government to keep the little guy down by requiring these things.
Not really, but again banks don't have compliance against this either, it's just that people are less likely to withdraw their money from the bank at the same time, and when they do the gov will tell the fed to print more, and with crypto you can't print more, so a bankrun has immediate effects.
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That's basically what happened here.
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.
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.
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>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.
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HN is a site for curious conversation, so please wait to feel some curiosity before you comment.
* https://news.ycombinator.com/newsguidelines.html
Hearby nominated as word of the day. Excellent.
Moreover, even if there were, (a) the OP has been on HN's front page for hours and is currently at #4, (b) this story has been heavily discussed on HN, with several major threads in the last few days alone, and (c) asking people not to fulminate doesn't mean they can't make substantive critical points—if anything it helps them do so.
That tradition has gone out the window: https://twitter.com/breckyunits/status/1590858862504316928
This makes it easier to answer questions that would otherwise feel like hard tradeoffs. In this case: should people be shouting angrily in a protesty way in HN threads? No—but not because protest is bad or unimportant. It's just incompatible with intellectual curiosity, and since we're optimizing for the latter, it takes precedence.
When people are protesting or doing battle, they tend to either repeat their most effective phrases (slogans, etc.) or to spontaneously vent their strong emotions (name-calling, etc.). But repetition and name-calling are clearly bad for curiosity. I believe these are even different neurological states: high indignation comes with a level of arousal that rules out the relaxed playfulness that curious conversation depends on.
I hope it's clear that this isn't a judgment about protest or indignation in general—those are as human as anything else and when they're called for they're called for. It's just relative to the particular mandate of this particular site. We're trying to play one game rather than the other.
Is that censorship? Well, that word has become so stretchy that you can apply it however you feel. But I'd say no, for the same reason that chess isn't crokinole. It isn't censorship to say you don't get to whack your opponent's bishop.
You've just described 99% of crypto though.
Some people love day trading crypto. They keep funds on exchanges so they can trade immediately and not deal with constant back and forth transactions with their own wallet.
Here's how my story played out -- maybe there are a million stories like me I'm not sure.
Bought Monero on Voyager (because my electricity costs are high where I live and I didn't want to mine it). Planned to immediately transfer it out from Voyager to my offline wallet. Saw that Voyager "didn't yet support transferring out" for that cryptocurrency but would soon. Cool, I'll just wait.
A month or so later, Voyager goes under and I'll probably get nothing or pennies on the dollar.
Genuinely curious, what was the right course of action to buy Monero in a low-overhead, safe way?
FTX Japan shut down by order of Japan Financial Services Agency.[2]
FTX.intl processing some withdrawals, according to blockchain.[3] A few lucky people got to exit.
Way too much happening to mention here. Just use Google to search "FTX" and limit search to 1 day. Margin calls all over crypto land. JP Morgan says expect 50% drop across the board in crypto. Around 10 AM PST, somebody just pulled a billion dollars out of Tether. Word of the day: "deleveraging".
[1] https://ftx.us/home
[2] https://www.msn.com/en-us/money/companies/japan-cracks-down-...
[3] https://www.msn.com/en-us/money/companies/crypto-exchange-ft...
[1] https://twitter.com/SBF_FTX/status/1590709195892195329?t=tQR...
Meanwhile, aggregate of the cryptocurrency market is up 5.38% over the last day, Tether recovered landing on 0.9999 USD after 4-5 hours of the drop hitting bottom at 0.9818 USD, which was nowhere near previous all-time low Tether has hit previously.
In other words, everyone screams "panic!" while the world quietly moves on.
Stablecoins have only two stable points: 1 and 0.
The 2008 recession is what really stopped Bernie Madoff.
This is not a ponzi scheme. This is a good old "not firewalling your customer's money and your investment money" that everyone suffered from in 2008. The situation is cataphoric enough without people mis-using terms.
(This is what FTX was offering customers)
And now we know the accounts weren't actually covered by real money (or "value" as they called it). So when person X was asking FTX for their money back, FTX would send person X+1's money to cover
Sounds like a Ponzi to me
Tell me which retail brokerages lost their customers assets because they gambled them away?
There is no glossing over the fact that all these crypto explosions are a result of largely re-implementing a pre-Fed, pre-FDIC, pre Great Depression style banking system with all its long-patched defects.
It's not literally a Ponzi, but it's Ponzi adjacent behavior, like what Bill Hwang did.
... cite for this, please. I don't recall there being any significant client money problems in that period.
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I first learned the term "bezzle" here on Hacker News and read more about it in the article "Why the Bezzle Matters to the Economy": https://carnegieendowment.org/chinafinancialmarkets/85179
It's an interesting read to those who enjoy economics.
Warren Buffett
They come across more like frat bros with huge pockets casually giving away billions under a pinky promise of eventual returns.
At this point, they are doing the same level of DD as those degens in WSB.
But I guess you don't have much leverage when the fed is printing trillions for years and we end up with dozens of Zuckerberg types, too much power and no oversight to hold them accountable.
https://www.wsj.com/articles/silicon-valley-poured-money-int...
"Silicon Valley Poured Money Into FTX, With Few Strings Attached"
"A marquee roster of investors from Silicon Valley and Wall Street swarmed FTX. They invested nearly $2 billion with few strings attached and no oversight on the cryptocurrency exchange’s board, promoting it as a safe bet."
Anyhow, The board of directors consisted of SBF until the summer of 2021. Then 2 "independent" directors were added, 1 was an FTX executive, the other was a lawyer in Antigua
In the age of ESG, it turns out that the "G" part is being ignored totally (because it counter to the interests of insiders) but the "E" and "S" is ever more important (because it is in the interests of insiders) despite it doing little to help improve returns (SBF was the king of "S"...might there be a correlation between saying you are more ethical than anyone and permitting yourself to steal from customers?).
https://www.sequoiacap.com/article/sam-bankman-fried-spotlig...
After this spectacular blowup barely put a dent in their returns, why would LPs demand anything? Sequioa will just tell them "hey it's the name of the game, there are some losers who go bankrupt and winners who return the entire fund several times over".
If Sequioa took a massive markdown on FTX that would be a different story. However they came out unscathed and looks like they are managed well despite fellating SBF quite openly. What would you even demand of them given that they didn't lose much money? They probably lose even more money on companies that end up just not being successful in the first place. You can't ask them to not invest in risky business, thats the whole point of VC.
[0] Could be misinterpreting the letter, they said FTX was 3% of commited capital, 150M / 3% = 5B, and they had 7.5B of realized and unrealized gains.
Now we have a market turn and VC is unlikely to sustain the returns of the past decade. That may shift the leverage, but history suggests that LPs will still not put any kind of meaningful pressure on the top funds to do anything different.
I would read Mallaby's history of the VC industry to see why this isn't possible. Around 1997 the balance of power shifted heavily in favour of founders (this is when dual-share class) started, and they stopped demanding seats on the board.
Iirc, Sequoia was a firm that held out (along with other old-style funds), they missed out on a lot of companies over the next ten years so ended up racing to the bottom...this is how we got here.
Btw, just on corporate governance...it is the most important factor for a company. A lot of the issues with corporates we have today are due to poor oversight from shareholders (not helped by passive). If corporate governance isn't working, capitalism won't work either.
My god, there are so many things that were there to have been a modicum of parental oversight, the situation would not have festered.
This one is going to stain Web3, Defi, and notably VC.
Hey - VC are the partners of innovators so it's not good to see them in these situations.
Partly they are victims, but partly, they are responsible obviously.
We should note, this has a lot to do with the magical 'made up' nature of tokens. The entire Ponzi was based on tokens worth nothing, with massive leverage. It's a lot of money that VC cab hardly take their eyes off of. Why invest in 'doing stuff' when you can just 'make something up' and say it's worth billions? Given the way VC portfolios work they are going to run at that stampede because of the money flowing into it.
It's a systemic problem.
It would help if there were more regulations around this - at least to dampen he leverage. More transparency, higher interest rates will help as well.
I remember a friend with a fund, he was in a short-term pickle waiting for some money to bridge a house purchase. Didn't even cross his mind to lend it to himself and pay it back two weeks later, even though that would have been nearly risk free and a minuscule proportion of the fund.
https://en.wikipedia.org/wiki/Jon_Corzine
> Corzine was subpoenaed to appear before a House committee on December 8, 2011, to answer questions regarding 1.2 billion dollars of missing money from MF Global client accounts. He testified before the committee, "I simply do not know where the money is, or why the accounts have not been reconciled to date," and that given the number of money transfers in the final days of trading at MF Global, he didn't know specifics of the movement of the funds. He also denied authorizing any misuse of customer funds.
> On the day of MF Global's bankruptcy, a Bloomberg reporter wrote "Jon Corzine's risk appetite helped destroy his firm. It also provided an object lesson for Paul Volcker's campaign against proprietary trading on Wall Street."
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in addition to that - the more FTT you staked the more preferential treatment you got in access to IDO's and referral fees, when you couple this with a platform that felt "safe" and "trustworthy" - this was a recipe for disaster.
I've been in Crypto a long time and previous rugs always felt a bit sketchy, like it was an unfinished product, you put up with it but your risk tolerance was lower as those platforms felt like they might disappear at any one point.
FTX felt different - and this is why there are people with 8 figures+ stuck on there right now.
I (genuinely) wonder how many more times that will happen?
Imagine the second largest bank in your country just up and dissolving with everyones money - that is exactly how this feels to those of us who have been in this space a while.
You will likely continue to find people who say that until the day you die.