Remember: this is not a cryptocurrency problem, it's a banking problem. This guy created a literal bank. People deposited funds in it. Instead of simply being a custodian, he took the money and "invested" it. And lost it all.
I wish this sort of thing would happen every time bankers screwed things up. Instead the government bails them out.
Sam didn't create a bank. If he did, this wouldn't have been fraud and he wouldn't be going to jail.
All documentation, marketing, interviews, statements, tweets, general understanding, and government licensing had FTX implemented as a full custodial trust.
FTX promised to hold any funds you deposit in safe, low-interest bank accounts or secured cryptocurrency wallets, ready to withdraw at any time. They explicitly promised to never invest them.
And then Sam broke that promise, stole customer funds and invested them. And it's not like he was planning to pay those customers interest fees if the investments paid off.
Yeah. I was under the misconception that every cryptocurrency exchange operated like a fractional reserve bank with savings accounts, loans and everything. Further down this thread, wmf set me straight. The situation is even worse than I made it seem.
Not really. No amount of auditing prevents banks from going bankrupt. It wasn't that long ago some Silicon Valley bank became insolvent and suffered a literal bank run. And people got bailed out. Again.
They didn’t really do the same thing wrong. SVB did everything right, just not right enough.
“Real” banks, government approved ones, have laws governing how much cash to keep on hand, and how to “invest” the excess, etc. SVB did everything by the books and they’d probably have made it through to the other side if there wasn’t a bank run. They just had underwater investments if sold (but they’d be fine if held to maturity).
FTX was literal fraud and they didn’t protect money. They gave it to friends, and sister companies, and made a lot of bad decisions with it. There’s a big difference between that and SVB.
Oh and of course everyone was made whole in the end after SVB
I'm no expert but from what I understand SVB didn't do everything right. Failure of risk management. Invested too much in long-term securities in search of higher rates than short-term securities when interest rates were already low. Failed to appreciate how fast they could suffer a bank-run with a clientele of highly interconnected and tech industry individuals and companies. Also failed to appreciate its clientele was exactly the ones who would suffer when interest rates rise and would start withdrawing money.
By “did everything right” I should have said “did everything legal”.
SVB didn’t break laws, just as you said, didn’t properly manage risk. If there was no run, they’d have made it through, just with low earnings expectations.
FTX took customer money, gave it to friends, and used sticky notes and slack channels for accounting. FTX spent customer funds on beach houses and political ads and god knows what not on government bonds with a slightly too long maturity.
Not to me. All I see is corporations that accept money, do god knows what with them and cause the money to evaporate into thin air. It doesn't really matter how much the government "approves" of the reserves and investments of banks. They're still all the same: literally one bank run away from insolvency.
A: "We submit to capital controls and while extremely infrequently our investment groups make (occasionally disastrous) mistakes, the system of human finance is arguably more stable than at any point in the history of our species' efforts to trade with people beyond the horizon."
B: "We bought a house for the founder's parents while they advised ways to hide it and threw millions of dollars at the insolvent-by-design crypto fund of somebody in the boss's polycule."
Auditing meant that taxpayers paid nothing and all of their customers were made whole, and the regulators changed policies to prevent that happening again. It’s not perfect but it’s worlds better than the cryptocurrency goat rodeo where we constantly see large, easily foreseeable losses and most of the “community” reacts by saying that the victims should have known better and bought the speaker’s favorite token instead.
They literally backstop bank runs with public money.
> all of their customers were made whole
They shouldn't have been. They loaned money to the bank, they accepted the risk of losses. Should've dealt with the consequences of it.
The government should stop bailing out banks every time they screw up. Otherwise they might as well bail out Tether. What's the difference?
> the cryptocurrency goat rodeo where we constantly see large, easily foreseeable losses and most of the “community” reacts by saying that the victims should have known better and bought the speaker’s favorite token instead
That's exactly what they should do in all cases: avoid putting money into these scams. I just happen to include traditional banks into that same category.
You see, the only reason these banks are any different from crypto exchanges is the government will show up to bail them out when things get bad enough. They reason that it's "better" than a total economic meltdown or something.
> The government should stop bailing out banks every time they screw up.
I think the bank runs become extremely contagious if you do that, affecting the whole economy.
> Otherwise they might as well bail out Tether. What's the difference?
The difference is that Tether doesn't have to follow the regulations trying to avoid bank insolvency. SVB was insolvent by a relatively small margin IIRC. For all we know Tether is 50% hot air.
> I think the bank runs become extremely contagious if you do that, affecting the whole economy.
Let them. Why contain it? Maybe the world would be a whole lot better if people faced the consequences of their choices.
Maybe after enough people lose everything, they'd learn that banks are dangerous and would stop putting their money in them. With less capital in banks, there would be less loans and credit. That means less inflation. Less planet-destroying credit-fueled exponential growth.
> SVB was insolvent by a relatively small margin IIRC. For all we know Tether is 50% hot air.
It's either solvent or insolvent. There is no margin. Banks are insolvent by definition. There is not a single bank on this planet that can cover 100% of its withdrawals. If push comes to shove, the governments will have to step in.
> Maybe after enough people lose everything, they'd learn that banks are dangerous and would stop putting their money in them. With less capital in banks, there would be less loans and credit. That means less inflation. Less planet-destroying credit-fueled exponential growth.
Maybe, but I wouldn't count on any government wanting to try. And it does seem a bit of a economic crisis without a need.
> It's either solvent or insolvent. There is no margin.
I think it matter whether the bailout is for 1 billion or 10. Or even without a bailout, whether depositors get back 95% the next week or 10% after 2 years on bankruptcy court.
You got it backwards. They became insolvent due to a bank run. Based on false speculation that they couldn’t liquidate their treasuries. Which the government then bought back 1:1.
So basically Peter Theil caused a run on a bank for no reason other than he got people panicked about their tbill risk ladder. Which by the way want as bad as Bank Of Americas right now.
Didn't meant to imply an ordering of events when I posted that. Makes no difference either way. They still suffered a bank run and still ended up insolvent to the point the government had to step in and bail them out with taxpayer money.
Banks pay the FDIC for insurance. That would be true if only insured deposits were made whole. That's not what happened though.
> On March 12, 2023, a joint statement was issued by Secretary of the Treasury Janet Yellen, Federal Reserve Chairman Jerome Powell, and FDIC Chairman Martin Gruenberg
> stating that all depositors at SVB would be fully protected and would have access to both insured and uninsured deposits
> Regulatory filings from December 2022 estimated that more than 85% of deposits were uninsured.
Where'd that come from? Surely not the government?
He didn't lose it all. His early investor position in one of the big AI companies alone is worth a lot.
Not condoning SBF's misconduct, just correcting a mis-statement of fact.
I agree. However, he used a bank to steal from people. It's not like he exploited vulnerabilities in smart contracts or whatever. He literally exploited people's propensity to keep their money at the bank where it's "safe". Not a single person who kept their coins in their own wallets was affected by this.
He took demand deposits and invested them. That's banking, whether you do it as a regulated bank or not. There were banks before the current banking charter regime and there will be banks after it.
Note that FTX told their customers that they would not invest their deposits. Customers who opted in to margin lending could lend money to other customers but even in that case FTX went far beyond what they promised to their customers. It would be more accurate IMO to say that FTX embezzled (or just plain stole) customer deposits.
Huh. That makes it even worse. Every cryptocurrency exchange I've ever seen offers literal savings accounts, it's obvious to anyone who knows how banks work they're loaning out customer funds. You're saying FTX didn't do that? That's even worse...
Yeah. Celsius, BlockFi, Voyager, Gemini Earn, etc. were structured like savings accounts but FTX was not. FTX was supposed to be "your money is your money". What happened wasn't a mistake; it was theft.
If it does fractional reserve banking, it's a bank. If you can deposit currency in it and collect some "interest" from those holdings, it's pretty much a bank. Every cryptocurrency exchange you can find does that. They even offer loans and everything. Therefore they are banks.
1. FTX got away with this for so long, in part because they weren't subject to the auditing and scrutiny of traditional finance.
2. Volatile crypto prices exacerbated the issues caused by alameda's borrowing.
3. Sam could pretend that FTX had more assets than it really did thanks to FTT, a crypto coin with no inherent value, and an artificially inflated price.
This was a banking problem, sure. But most banks didn't have this problem. The manipulated nature of cryptocurrency markets and the legal gray area it operates in facilitated this scam.
Yes. Banks too lose everything and go bankrupt. The difference is nobody goes to jail when they screw things up. Actually the government comes and actually bails them out with taxpayer money. Bank keeps all the profits and socializes all the losses.
I love what happened to this Bankman guy. It's what I wish would happen every single time some banker screwed up with our money.
I wish this sort of thing would happen every time bankers screwed things up. Instead the government bails them out.