However, I think it is starting to look increasingly likely that, even if FTX’s handling of its customer’s money was not technically legally fraudulent, it seems likely to have been fraudulent in spirit.
Evan do we really have enough information to conclude this? The only real pieces of information I am aware of is that (1) binance declined to acquire, (2) Alameda owned a lot of FTT, (3) SBF’s tweets from yesterday.
I don’t think that merely lending out deposits is ‘fraudulent in spirit’. That’s standard operating procedure in ordinary banking. For example, in Vanguard terms of service:
> The Program Banks will use Your Sweep Deposits in the Omnibus Accounts to support their investment lending and other activities. [...] Program Banks will receive substantial deposits from the Bank Sweep at a price that may be less than alternative funding sources. Sweep Deposits in the Omnibus Accounts held at a Program Bank provide a stable source of funds for such bank.
FTX has been accused of much worse than merely lending out depositor’s funds, but I’m not aware of any real information about these further claims.
I don’t think that merely lending out deposits is ‘fraudulent in spirit’.
I don’t think the bank analogy is super accurate, because fractional reserve banking is heavily regulated: you can only loan so much, you’re restricted in how risky these loans can be, and you have the FDIC backstopping deposits in the case of crises/fraud. On the other hand, it seems very likely FTX violated their own ToS to loan most of their reserves to SBF’s insolvent crypto prop shop. There’s no backstop and no accountability
FTX’s terms of service did not allow for this. The deposits were “lent” to plug a hole at a corporation owned by SBF. Vanguard is talking about sending certain monies, not your core investment, to a heavily-regulated entity which posed very low risk. That’s OK in my book if disclosed.
Evan do we really have enough information to conclude this? The only real pieces of information I am aware of is that (1) binance declined to acquire, (2) Alameda owned a lot of FTT, (3) SBF’s tweets from yesterday.
I don’t think that merely lending out deposits is ‘fraudulent in spirit’. That’s standard operating procedure in ordinary banking. For example, in Vanguard terms of service:
> The Program Banks will use Your Sweep Deposits in the Omnibus Accounts to support their investment lending and other activities. [...] Program Banks will receive substantial deposits from the Bank Sweep at a price that may be less than alternative funding sources. Sweep Deposits in the Omnibus Accounts held at a Program Bank provide a stable source of funds for such bank.
FTX has been accused of much worse than merely lending out depositor’s funds, but I’m not aware of any real information about these further claims.
I realise I have 18 hours more information at hand, but I think yes, we can conclude this with high confidence:
SBF claimed FTX had enough cash to cover all withdrawals and FTX US was totally fine (tweets deleted; see https://cointelegraph.com/news/ftx-founder-sam-bankman-fried-removes-assets-are-fine-flood-from-twitter).
Now they are both in bankruptcy proceedings, along with Alameda. Proceedings (https://storage.courtlistener.com/recap/gov.uscourts.deb.188448/gov.uscourts.deb.188448.1.0.pdf). Several executives SBF reached out to to discuss bailouts have shared that the deposit windfall is $5-10b (can’t find the link any more, but I’ve seen this claimed by several people). SBF has resigned.
$200M-1B of FTX’s reserves have been withdrawn after bankruptcy filing. FTX claims they were hacked. (https://www.coindesk.com/business/2022/11/12/ftx-crypto-wallets-see-mysterious-late-night-outflows-totalling-more-than-380m/).
I don’t think the bank analogy is super accurate, because fractional reserve banking is heavily regulated: you can only loan so much, you’re restricted in how risky these loans can be, and you have the FDIC backstopping deposits in the case of crises/fraud. On the other hand, it seems very likely FTX violated their own ToS to loan most of their reserves to SBF’s insolvent crypto prop shop. There’s no backstop and no accountability
FTX’s terms of service did not allow for this. The deposits were “lent” to plug a hole at a corporation owned by SBF. Vanguard is talking about sending certain monies, not your core investment, to a heavily-regulated entity which posed very low risk. That’s OK in my book if disclosed.
They were an exchange, not a bank, so this still is bad.