russ_watters said:
In seriousness: I'm not totally clear on what happened here. Is it simply that a major holder pulled all their money from the bank at once - with a loud public announcement - triggering a run and loss of liquidity? Is that legal how it went down? What happens if Bill Gates says "I don't think Citibank is solvent so I'm withdrawing all my money?"
And what happens to the account holders? Are they going to be able to keep/recover their holdings? If google serves, FTC is/was the 3rd largest exchange. That's a really big bank failure.
First, it's not a bank. Some people might think of it like one, but the difference is important to keep in mind when making decisions about your risk.
I don't know the details here, but here are some possible ideas
1.) Crypto venues explicitly have a murky relationship with their customers. Ftx might have used customer funds to fund their earlier acquisitions and overextended themselves.
2.) ftx let's customers have leverage. If you deposit 10,000 dollars, ftx will key you spend 100,000 dollars on bitcoin. You pay interest for this. If bitcoin drops more than 10%, ftx loses money. They protect themselves by selling your bitcoin immediately if it drops, (picking a random number here) 5%. In theory this makes the lending safe, but they allow up to 20x leverage, so they might have lost some money on this if they weren't able to close everyone out during a bitcoin crash. In order to lend like this you need to have extra cash on hand to cover the losses. If they didn't have enough cushion, they can't pay out if their customers start withdrawing money.
3.) If you put 10k dollars in ftx, that money doesn't sit there as dollars. A safe thing to do with it would be to invest it in short term treasuries, earning ftx a little bit of interest (which they may or may not give some back to you as an incentive to park your money in ftx) of course that doesn't earn a lot. If you think crypto only goes up, you might put it in bitcoin, or lend it to a crypto venture, and make a lot not money that you keep for yourself. If those investments go bust, in theory you should have a cushion of extra cash at the exchange to cover it, but if you lose too much then you can't pay back your customers.
#3 has basically happened to a ton of crypto places this year. Ftx is somewhat famous for stepping in and covering the customer losses while acquiring the bankrupt business, which is why this failure is so surprising and ironic.
In this particular case, speculation is that ftx was using its ownership of its own tokens as equity/cash to cover possible losses as listed above, vand binance kind of announced they thought those tokens weren't worth very much, which meant ftx didn't have enough money anymore to cover those losses because the announcement made those tokens go down in the market.
What happens to account holders depends a lot on the facts. For a real bank, the central regulator would try to convince another bank to buy them and cover all the accounts. If that doesn't work, in the US and I assume other places accounts are insured - your first 250k dollars are covered. Beyond thatyou might lose money, you would be a claimant in bankruptcy proceedings and get whatever you can get.
Here, there is no regulator or insurance. Binance has announced they are going to make sure all account holders are made whole, so customers might be fine. If that didn't happen though, a couple scenarios could play out
1.) Ftx s shuts itself down and pays out as much money as possible. This was kind of happening - they had already paused anyone withdrawing money it sounds like, which is a key step to making sure that when you figure things out everyone gets a fair cut instead of the fastest people to withdraw getting their money and everyone else getting nothing.
2.) You just ride it out and see what happens. A lot of people will withdraw money as they find out there are issues, and eventually you will have nothing left. Whoever didn't withdraw gets nothing. In some outside chance, maybe you make enough money back or get additional investments and you end up not actually having a problem.
2 is kind of illegal in the US (ftx is not a US company) as you are required to declare bankruptcy if you can't pay back your liabilities instead of paying them back in a random fashion. That way a court decides the fairest way to split the money.
