Another issue is the fiat that FTX owed customers. I think FTX did not say that the $ were being held as deposits (e.g. I think the terms of service explicitly say they aren’t). Those numbers in accounts just represent the $ that FTX owes its customers. And if the main problem was a -$8B fiat balance, then it’s less clear any of the expectations about assets and lending matters.
The statement “we never invest customer funds” is still deeply misleading but it’s more clear how SBF could spin this as not being an outright lie: he could ask (i) “How much cash are we owed?” (ii) “How much cash do we owe?” (iii) “How good is collateral for the cash we are owed?” If the first number is larger than the second, and the collateral is good enough, then I think it’s not too surprising if you aren’t even tracking individual customer $ or thinking about where money is coming from, you are just adding up entries in a spreadsheet and saying “we are a net lender to customers, not a net borrower.”
I find this particularly unsurprising if lots of customers have negative fiat balances (which I expect was the case). For a reasonable broker I expect the sum of all the customer fiat balances to be equal the amount of fiat that the broker has on hand. I don’t particularly expect FTX to have more $ on hand than the sum of all positive customer balances. (E.g. I wouldn’t expect my broker to have so much $ on hand.)
But again, I think that the willfully negligent accounting and risk management is a big deal, and the distinction between “customers owe money, with reasonable collateral posted that we could liquidate at any time” and “we’ve bought a bond and have no collateral at all” is entirely about the quality and liquidity of the collateral. So this whole discussion is just about whether there needs to be additional fraud, or whether there’s a reasonable description of the whole thing as willfully negligent risk management.
The question is whether FTX’s leadership knowingly misled for financial gain, right? We know that thety said they weren’t borrowing (T&C) or investing (public statements) users’ digital assets, and that Alameda played by the same rules as other FTX users. They then took $8B of user-loaded money (most of which users did not ask to be lent) and knowingly lent it to Alameda, accepting FTT (approximately the company’s own stocks) as collateral, to make big crypto bets. Seems like just based on that, they might have defrauded the user in 4+ different ways. I think “we were net-lenders, and seemed to have enough collateral” might (assuming it is true) be a (partally) mitigating factor for the fourth point, but not the others?
The picture I was suggesting is: FTX leaves customer assets in customer accounts, FTX owes and is owed a ton of $ as part of its usual operation as a broker + clearinghouse, Alameda in particular owes them a huge amount of $ and is insolvent (requiring negligence on both risk management and accounting), FTX ends up owing customers $ that FTX can’t pay, FTX starts grabbing customer assets to try to meet withdrawals.
I’m still at maybe 25-50% overall chance that their conduct is similar to a conventional broker+exchange+clearinghouse except for the two points I raised: (i) extremely and probably willfully negligent risk management + accounting, (ii) selling customer assets to raise $ once they were insolvent, rather than owning up to the shortfall. I do think it’s probably worse than that, but (i) is already bad enough that I expect SBF could end up in prison indefinitely.
I’m interested in having more answers, but expect it will all become clear in time and it’s easier to just wait.
(Small point: it was bad for FTX to take FTT as collateral but I think they did so openly from all of their clients, see here.)
One bit of clarifying info is that according to Sam, FTX wasn’t just grabbing customer $ after Alameda became insolvent, but lent ~1/3 or more of the customer funds held to Alameda. And this happened whenever users deposited funds through Alameda, something we know was already happening years ago—from the early stages of FTX.
Another issue is the fiat that FTX owed customers. I think FTX did not say that the $ were being held as deposits (e.g. I think the terms of service explicitly say they aren’t). Those numbers in accounts just represent the $ that FTX owes its customers. And if the main problem was a -$8B fiat balance, then it’s less clear any of the expectations about assets and lending matters.
The statement “we never invest customer funds” is still deeply misleading but it’s more clear how SBF could spin this as not being an outright lie: he could ask (i) “How much cash are we owed?” (ii) “How much cash do we owe?” (iii) “How good is collateral for the cash we are owed?” If the first number is larger than the second, and the collateral is good enough, then I think it’s not too surprising if you aren’t even tracking individual customer $ or thinking about where money is coming from, you are just adding up entries in a spreadsheet and saying “we are a net lender to customers, not a net borrower.”
I find this particularly unsurprising if lots of customers have negative fiat balances (which I expect was the case). For a reasonable broker I expect the sum of all the customer fiat balances to be equal the amount of fiat that the broker has on hand. I don’t particularly expect FTX to have more $ on hand than the sum of all positive customer balances. (E.g. I wouldn’t expect my broker to have so much $ on hand.)
But again, I think that the willfully negligent accounting and risk management is a big deal, and the distinction between “customers owe money, with reasonable collateral posted that we could liquidate at any time” and “we’ve bought a bond and have no collateral at all” is entirely about the quality and liquidity of the collateral. So this whole discussion is just about whether there needs to be additional fraud, or whether there’s a reasonable description of the whole thing as willfully negligent risk management.
The question is whether FTX’s leadership knowingly misled for financial gain, right? We know that thety said they weren’t borrowing (T&C) or investing (public statements) users’ digital assets, and that Alameda played by the same rules as other FTX users. They then took $8B of user-loaded money (most of which users did not ask to be lent) and knowingly lent it to Alameda, accepting FTT (approximately the company’s own stocks) as collateral, to make big crypto bets. Seems like just based on that, they might have defrauded the user in 4+ different ways. I think “we were net-lenders, and seemed to have enough collateral” might (assuming it is true) be a (partally) mitigating factor for the fourth point, but not the others?
The picture I was suggesting is: FTX leaves customer assets in customer accounts, FTX owes and is owed a ton of $ as part of its usual operation as a broker + clearinghouse, Alameda in particular owes them a huge amount of $ and is insolvent (requiring negligence on both risk management and accounting), FTX ends up owing customers $ that FTX can’t pay, FTX starts grabbing customer assets to try to meet withdrawals.
I’m still at maybe 25-50% overall chance that their conduct is similar to a conventional broker+exchange+clearinghouse except for the two points I raised: (i) extremely and probably willfully negligent risk management + accounting, (ii) selling customer assets to raise $ once they were insolvent, rather than owning up to the shortfall. I do think it’s probably worse than that, but (i) is already bad enough that I expect SBF could end up in prison indefinitely.
I’m interested in having more answers, but expect it will all become clear in time and it’s easier to just wait.
(Small point: it was bad for FTX to take FTT as collateral but I think they did so openly from all of their clients, see here.)
One bit of clarifying info is that according to Sam, FTX wasn’t just grabbing customer $ after Alameda became insolvent, but lent ~1/3 or more of the customer funds held to Alameda. And this happened whenever users deposited funds through Alameda, something we know was already happening years ago—from the early stages of FTX.
The same gist comes across in interviewing from Coffezilla: https://t.co/rMljwAqhDq