I think the right thing to do is to follow the official, legally authorized bankruptcy procedure (whichever that is—I do hope it’s the Delaware proceeding, but I guess we’ll see).
I don’t think it would be right for people who happen to be in possession of the funds to be making decisions that second guess things like the amount of legal fees. That’s a pretty involved judgment call, and trying to set up some sort of alternative, direct solution will be difficult to implement and execute. You haven’t been entrusted with any of that responsibility by the people who actually own the money, so I don’t think it would be right for you to intervene in that way, even trying to do the right thing.
I can also say for sure that I don’t think it would be right to invest the money in any way. It should just be kept in a deposit account. Investments come with risk of losing some of the principal, and nobody entrusted you with the authority to make that risk calculation.
I also think it’s a time a lot of people are paying attention to us, so I don’t think it’s a terrible time to make commitments to somehow do things right here, but I do have enough uncertainty about how to actually do that that I don’t currently feel comfortable making any super precise and strong commitments besides a general “I will really try pretty hard to make things right somehow, even though I don’t know how yet”.
This is just my outsiders guess, and in the end who knows, but...I predict that if the EA community did try to be sort of heroic, and tried to do some direct-for-depositors complicated thing that worked around the bankruptcy procedure, that would end up with a lot of people mad at EA, and some takes along the lines that this all confirms some of the initial criticisms.
Instead, I think the approach that’s actually better, and I think also has much better optics, is to just work with the official process. There’s a legal process for returning money to creditors and you’re expected to just go along with it, rather than trying to invent your own alternative to try to get what in your view would be a better outcome.
And while I’m not a lawyer, I think you might be pleasantly surprised about how bankruptcy works. (This is all assuming it goes through the Delaware process—maybe the Bahamas is odd or shady or outright corrupt.)
The basic idea is that the administrator lists out all the people who lent money to the company, which includes the depositors, but can also be other companies. Then they pool up the assets of the company, selling whatever they can for the best price they can manage, and try to pay it out to the creditors. If all the creditors can be paid back, congrats, the company is solvent! Now it can be returned to the shareholders, who might have something left that’s worth more than $0. If creditors can’t be made whole, they receive some fraction of what they’re owed, and the company is wound down.
In practice there’s almost always a seniority ordering of creditors, where you have some loan that was secured against some asset. So it’s not necessarily the case that all the creditors will get the same fraction back out. Like, in the basic case, maybe a “creditor” is a bank who gave a mortgage for some property. They get to liquidate that property, so maybe that creditor gets all its money back out, while the others don’t.
It’s definitely weird and unideal that the depositors are just unsecured creditors. If it were a bank or a brokerage or something, it would be handled differently. Nobody knows what sort of deals FTX might have had, with what sort of creditors, secured against what.
On the other hand, definitely no loans would have been secured against user deposits! An no loans would be secured against like, money to grants. So it’s not like you’re returning assets that some institutional loan will be secured against. I think this does just mean whatever funds are returned will go into the pool for unsecured creditors. I’d definitely be happy to be corrected on this though.
The other thing to note is, a lot of the other unsecured creditors can be other crypto firms or other sorts of counter-parties. And maybe their holdings with FTX mean that they went broke and their own depositors are out of money. Who knows.
I don’t think it’s right or good to second guess any of this. There’s a law and process for how assets are parcelled out to creditors in bankruptcy. You can trust that if more money is kicked back into that pot, creditors will get a slightly higher amount back.
I’ll put it this way. Let’s say there was some money that FTX didn’t pay out in a grant, and it instead sat in its bank account like it was supposed to. That money will be swept up into the bankruptcy proceeding to be allocated to creditors. Now, consider your situation: instead of sitting in FTX’s bank account, that money finds itself in your account. It shouldn’t have been transferred to you; FTX wasn’t solvent when it made that transaction, it needed to keep all of its money to try to pay back its creditors. So the right place for the money to go to is into the bankruptcy proceeding. That’s where it would have be if FTX had never transferred it to you.
As for legal fees, yes they’ll definitely make the pie smaller. On the other hand they don’t scale linearly with the amount of money, and this is a lot of money—so hopefully they don’t take up that big a percent.
Assisting the process where possible will hopefully help reduce the fees too.
Now, consider your situation: instead of sitting in FTX’s bank account, that money finds itself in your account. It shouldn’t have been transferred to you; FTX wasn’t solvent when it made that transaction, it needed to keep all of its money to try to pay back its creditors.
Is that true of grants made back in Jan—Feb? I read somewhere (Forbes, I think) that this was when the big grants to EA orgs were made, whereas it seems maybe the solvency issues didn’t arise until after the Luna crash in May?
For a neater, hypothetical version of the question: consider some honest profits FTX made several years ago. If still in their accounts now, it would need to be used to pay back the creditors. But suppose instead that they immediately granted out those profits (several years ago), which seemed an intrinsically legit transaction given the circumstances at a time, and the recipient org for some reason hasn’t gotten around to spending those funds (not sure exactly what that means, in accounting terms, since money is fungible and the org would surely have had some expenses during this time; but maybe it was earmarked for a specific purpose that hasn’t yet eventuated). Do you think the org is obligated to return the funds in this case?
While none of know exactly what went on or what the state was at any time, my mental model is basically that there was never a time where FTX genuinely had “honest profits” it was free to disperse as it wanted.
It sounds like they intermixed user deposits with operating capital from day 1, and never accounted for anything well enough to have a responsible estimate of whether they had money to donate.
It could be that if you went back to some particular snapshot in time, you could find various points where yes their actual assets exceeded their liabilities (which doesn’t count having as “assets” a bunch of shitcoins marked to market). But even at that point, I think if you go back a further they’ll have passed through points where they weren’t solvent—where they traded on user funds. This is basically what Shkreli went to jail for: he dipped into one fund to rescue another. The trades happened to work so everyone was in the black, but this still isn’t legit.
However, let’s grant the premise of your hypothetical, and imagine a world where FTX circa 2020 had always been in the black, and it granted out some of its rightly gained profits. The recipient of that grant shouldn’t need to give anything back. In that transaction FTX did have the right to give the grant, so there’s no issue.
But I really don’t think this hypothetical has much relation to the actual situation. I think it’s better for recipients of money from FTX to assume it wasn’t legit, and set anything aside that hasn’t been spent.
It sounds like they intermixed user deposits with operating capital from day 1, and never accounted for anything well enough to have a responsible estimate of whether they had money to donate.
I think this is plausible, but I would currently take a bet against this. My best guess is that customer deposits were safe until earlier this year.
Thanks for such a thoughtful reply.
I think the right thing to do is to follow the official, legally authorized bankruptcy procedure (whichever that is—I do hope it’s the Delaware proceeding, but I guess we’ll see).
I don’t think it would be right for people who happen to be in possession of the funds to be making decisions that second guess things like the amount of legal fees. That’s a pretty involved judgment call, and trying to set up some sort of alternative, direct solution will be difficult to implement and execute. You haven’t been entrusted with any of that responsibility by the people who actually own the money, so I don’t think it would be right for you to intervene in that way, even trying to do the right thing.
I can also say for sure that I don’t think it would be right to invest the money in any way. It should just be kept in a deposit account. Investments come with risk of losing some of the principal, and nobody entrusted you with the authority to make that risk calculation.
This is just my outsiders guess, and in the end who knows, but...I predict that if the EA community did try to be sort of heroic, and tried to do some direct-for-depositors complicated thing that worked around the bankruptcy procedure, that would end up with a lot of people mad at EA, and some takes along the lines that this all confirms some of the initial criticisms.
Instead, I think the approach that’s actually better, and I think also has much better optics, is to just work with the official process. There’s a legal process for returning money to creditors and you’re expected to just go along with it, rather than trying to invent your own alternative to try to get what in your view would be a better outcome.
And while I’m not a lawyer, I think you might be pleasantly surprised about how bankruptcy works. (This is all assuming it goes through the Delaware process—maybe the Bahamas is odd or shady or outright corrupt.)
The basic idea is that the administrator lists out all the people who lent money to the company, which includes the depositors, but can also be other companies. Then they pool up the assets of the company, selling whatever they can for the best price they can manage, and try to pay it out to the creditors. If all the creditors can be paid back, congrats, the company is solvent! Now it can be returned to the shareholders, who might have something left that’s worth more than $0. If creditors can’t be made whole, they receive some fraction of what they’re owed, and the company is wound down.
In practice there’s almost always a seniority ordering of creditors, where you have some loan that was secured against some asset. So it’s not necessarily the case that all the creditors will get the same fraction back out. Like, in the basic case, maybe a “creditor” is a bank who gave a mortgage for some property. They get to liquidate that property, so maybe that creditor gets all its money back out, while the others don’t.
It’s definitely weird and unideal that the depositors are just unsecured creditors. If it were a bank or a brokerage or something, it would be handled differently. Nobody knows what sort of deals FTX might have had, with what sort of creditors, secured against what.
On the other hand, definitely no loans would have been secured against user deposits! An no loans would be secured against like, money to grants. So it’s not like you’re returning assets that some institutional loan will be secured against. I think this does just mean whatever funds are returned will go into the pool for unsecured creditors. I’d definitely be happy to be corrected on this though.
The other thing to note is, a lot of the other unsecured creditors can be other crypto firms or other sorts of counter-parties. And maybe their holdings with FTX mean that they went broke and their own depositors are out of money. Who knows.
I don’t think it’s right or good to second guess any of this. There’s a law and process for how assets are parcelled out to creditors in bankruptcy. You can trust that if more money is kicked back into that pot, creditors will get a slightly higher amount back.
I’ll put it this way. Let’s say there was some money that FTX didn’t pay out in a grant, and it instead sat in its bank account like it was supposed to. That money will be swept up into the bankruptcy proceeding to be allocated to creditors. Now, consider your situation: instead of sitting in FTX’s bank account, that money finds itself in your account. It shouldn’t have been transferred to you; FTX wasn’t solvent when it made that transaction, it needed to keep all of its money to try to pay back its creditors. So the right place for the money to go to is into the bankruptcy proceeding. That’s where it would have be if FTX had never transferred it to you.
As for legal fees, yes they’ll definitely make the pie smaller. On the other hand they don’t scale linearly with the amount of money, and this is a lot of money—so hopefully they don’t take up that big a percent.
Assisting the process where possible will hopefully help reduce the fees too.
Is that true of grants made back in Jan—Feb? I read somewhere (Forbes, I think) that this was when the big grants to EA orgs were made, whereas it seems maybe the solvency issues didn’t arise until after the Luna crash in May?
For a neater, hypothetical version of the question: consider some honest profits FTX made several years ago. If still in their accounts now, it would need to be used to pay back the creditors. But suppose instead that they immediately granted out those profits (several years ago), which seemed an intrinsically legit transaction given the circumstances at a time, and the recipient org for some reason hasn’t gotten around to spending those funds (not sure exactly what that means, in accounting terms, since money is fungible and the org would surely have had some expenses during this time; but maybe it was earmarked for a specific purpose that hasn’t yet eventuated). Do you think the org is obligated to return the funds in this case?
While none of know exactly what went on or what the state was at any time, my mental model is basically that there was never a time where FTX genuinely had “honest profits” it was free to disperse as it wanted.
It sounds like they intermixed user deposits with operating capital from day 1, and never accounted for anything well enough to have a responsible estimate of whether they had money to donate.
It could be that if you went back to some particular snapshot in time, you could find various points where yes their actual assets exceeded their liabilities (which doesn’t count having as “assets” a bunch of shitcoins marked to market). But even at that point, I think if you go back a further they’ll have passed through points where they weren’t solvent—where they traded on user funds. This is basically what Shkreli went to jail for: he dipped into one fund to rescue another. The trades happened to work so everyone was in the black, but this still isn’t legit.
However, let’s grant the premise of your hypothetical, and imagine a world where FTX circa 2020 had always been in the black, and it granted out some of its rightly gained profits. The recipient of that grant shouldn’t need to give anything back. In that transaction FTX did have the right to give the grant, so there’s no issue.
But I really don’t think this hypothetical has much relation to the actual situation. I think it’s better for recipients of money from FTX to assume it wasn’t legit, and set anything aside that hasn’t been spent.
I think this is plausible, but I would currently take a bet against this. My best guess is that customer deposits were safe until earlier this year.
Fair enough, thanks for the explanation!