Exchanges are NEVER supposed to lend out customer funds without their consent, and it’s clear FTX did that. What’s more, they should not accept their own “stock” as collateral. Accepting your own stock as collateral is like opening the book of world-ending spells and randomly chanting incantations; there’s a reason no one does it.
Normally it’s impossible to bankrupt a company by shorting its stock. But if the company in question holds its own stock as collateral, that changes. You can crash the price of stock (or a token in this case) by borrowing a ton of it and then selling it on the market. And now the company has a major problem: they’ve lent out user funds, but the collateral that was supposed to protect them in case the borrower defaulted is now worthless.
If users become aware of the situation, a bank panic will ensue as everyone tries to get their money out before the bank (or exchange in this case) runs out. After that, all they will have left is their useless stock, which they can’t redeem for assets they owe to users.
If you have huge reserves, this wouldn’t really matter much because you could pay them off with those other reserves. But when you’ve lent out over half of all user funds to this one borrower in particular without their knowledge, accepted collateral that is now worth nothing, and lied about it publicly on Twitter...
You’re in for a world of pain. Sam Bankman Fried did commit fraud, and knowingly lied about it to the public. I will happily eat my shorts if he turns out to be innocent.
I think what he did is a crying shame. I deeply admired him before this all went down. He had created a money printing machine and was using it to fund some of the causes I hold most dear.
I still don’t really understand why he did what he did. He did not strike me as a dishonest person, though maybe I am just naive. My best guess is his hedge fund made some really bad investments, and instead of taking the L, he raided the piggy bank thinking he could make it all back before anyone found out.
Having spent the better part of the last three days looking into this, I disagree.
FTX lent $10 billion out of $16 billion in customer assets to a hedge fund in which its CEO owned a 50% stake.
It accepted at least $4 billion in collateral of its own token, FTT. The total circulating supply at the time was less than that.
Exchanges are NEVER supposed to lend out customer funds without their consent, and it’s clear FTX did that. What’s more, they should not accept their own “stock” as collateral. Accepting your own stock as collateral is like opening the book of world-ending spells and randomly chanting incantations; there’s a reason no one does it.
Normally it’s impossible to bankrupt a company by shorting its stock. But if the company in question holds its own stock as collateral, that changes. You can crash the price of stock (or a token in this case) by borrowing a ton of it and then selling it on the market. And now the company has a major problem: they’ve lent out user funds, but the collateral that was supposed to protect them in case the borrower defaulted is now worthless.
If users become aware of the situation, a bank panic will ensue as everyone tries to get their money out before the bank (or exchange in this case) runs out. After that, all they will have left is their useless stock, which they can’t redeem for assets they owe to users.
If you have huge reserves, this wouldn’t really matter much because you could pay them off with those other reserves. But when you’ve lent out over half of all user funds to this one borrower in particular without their knowledge, accepted collateral that is now worth nothing, and lied about it publicly on Twitter...
You’re in for a world of pain. Sam Bankman Fried did commit fraud, and knowingly lied about it to the public. I will happily eat my shorts if he turns out to be innocent.
I think what he did is a crying shame. I deeply admired him before this all went down. He had created a money printing machine and was using it to fund some of the causes I hold most dear.
I still don’t really understand why he did what he did. He did not strike me as a dishonest person, though maybe I am just naive. My best guess is his hedge fund made some really bad investments, and instead of taking the L, he raided the piggy bank thinking he could make it all back before anyone found out.