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Comment by shapefrog | Hacker News Reader

12:38 PM · Nov 7, 2022 2) FTX has enough to cover all client holdings. [0]

4:03 PM · Nov 8, 2022 2) Our teams are working on clearing out the withdrawal backlog as is. This will clear out liquidity crunches; all assets will be covered 1:1. This is one of the main reasons we’ve asked Binance to come in. [1]

has enough to cover all client holdings ---> not enough to cover all client holding in 24 hours. Either they lost a billion or so dollars of client segregated funds in a day down the back of the sofa or it was a lie the whole time.

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As other people said, usually a lot of assets are illiquid in 24 hours. You can say I have money to buy this house, but if I ask you for the money the next 24 hours, most people will say they need more time to liquidate.

It is actually irresponsible to the users (risk management wise) to be keeping all that cash in hand 24/7. The easiest bad case example: are you keeping all your savings under your mattress?

Edit/to commenters below: I understand there are emotions, but that's simply how things work. As other fellow commenters noted, banks do not keep or even promise they do keep your money($) under their "mattress."

Say you deposited in EUR. The exchange and everyone borrows in USD, so your EUR become USD -- no way out of it. EUR goes down, and then there is a bank run. Even if as the bank were irresponsible and kept 100% liquid, they can not serve everyone 1:1 in 24h. Nobody can give you that guarantee, besides your local grocery store. We are thinking these things at the wrong scale.

We are not trying to shift blame away from FTX -- already the whole relationship was sketchy. But claims about keeping 100% USD with a 24h cashout in a worldwide scale is not something on the table right now. I get worried when people feel comfortable believing those statements.

I'm not a business masquerading as a bank, lol.

Banks don't have cash on hand equal to assets either...

The CEO of a band has never say they have everyones money sitting in the safe waiting for them to pick it up whenever they wanted it.

FTX CEO litterally said that in his tweet.

My read of the situation: SBF's comments were about assets (balance sheet) rather than FTX's liquidity. I believe SBF was saying (paraphrasing) "Our balance sheet is fine; FTX doesn't invest customer assets; we're processing withdrawals as fast as possible." That's different than saying "we have 100% liquidity."

Banks make similar statements all the time -- they require regular audits of assets (stress tests) and maintain some minimum levels of liquidity.

Banks say that they don't invest deposits?

In the Glass-Steagall sense, they probably shouldn't. Mixing commercial banking and investment banking was illegal from 1933-1999, and it is (arguably) one of the underlying factors in the 2008 financial crisis.

Note: There's a difference between being a custodian of customers' investments (brokerage / commercial banking) versus proactively investing customer deposits (investment banking).

Going to need a _huge_ source on that claim. Investing customer funds is the primary way banks make their money, and has been that way essentially since the invention of banking.

From https://en.wikipedia.org/wiki/Fractional-reserve_banking:

"Fractional-reserve banking predates the existence of governmental monetary authorities"

Banks lend deposits. That's how they make their money. They have to keep some part of the deposits as a reserve.

Real regulated banks have access to the Fed to borrow in a case of a bank run.

And FDIC to de-risk customers from feeling they need to do a bank run.

To a large extent, but not completely.

Anyone who has more than the insured amount, or anyone who needs their money in the near future will still engage in a run.

There were several runs during the 2008 crisis, the most famous is the run on IndyMac Bank.

https://en.wikipedia.org/wiki/IndyMac

It’s pretty clear now it a last ditch Hail Mary effort to save them from a bank run that would ruin them

Real banks have access to a lender of last resort.

Shadow banks don't.

> It is actually irresponsible to the users (risk management wise) to be keeping all that cash in hand 24/7. The easiest bad case example: are you keeping all your savings under your mattress?

"We never block withdrawls" is the new "We don't crash ever" as seen in the Facebook movie.

If you are in the crypto exchange business you gotta do both actually. Don't crash the website and don't suspend withdrawls ever.

If you take other people’s money by promising you will be keeping their money under your mattress, yes, you should keep all that money under the mattress or you’ll be behind bars for fraud.

> risk management wise

Short dated government bonds would be the safest. But tweet 0 he litterally says they dont do that, they keep the cash under the mattress and you can have it if you stop by. People stopped by and there was no cash under the mattress...

I agree. And it is sketchy when people give a guarantee we know they can't keep.

> it was a lie the whole time.

how many of these y'all need before you learn: all crypto is a scam. It never was anything else, it never will be anything else because it can not be anything else.

There's an awful lot of fancy piled on the simple fact that all crypto"currencies" are negative sum games. The only disagreement is whether this is an entirely new type of scam , a "Nakamoto Scheme" or the difference between these and the classic Ponzi are irrelevant like the difference between a CRT and a HDTV and then we are looking at a Ponzi.

Ok, why is this statement not true then:

> There's an awful lot of fancy piled on the simple fact that all "currencies" are negative sum games.

Because it is currency itself that you measure everything else against. What my sentence meant is that without transaction fees it would be a zero sum game -- ie if you undid all crypto-money transactions then nothing is left -- but with transaction fees their sum is a negative number. But you need to measure this in something.

Note how stocks are decidedly not like this because if you undid all stock-money transactions the sum would be positive because of buybacks and dividends.

> Because it is currency itself that you measure everything else against.

So what? I cannot see the significance of that. There are many possible measures of value.

> if you undid all transactions then nothing is left -- but with transaction fees their sum is a negative number. But you need to measure this in something.

Yes? So what's the important difference between cryptocurrencies and traditional currencies?

The thing is you can buy anything in this world for money. That's what money is for. Thus, we measure these things in money.

I don’t see how it answers those questions.

Distributed ledgers are not a scam, and our true best hope for anti-corruption.

I would like every elected official to have all their income and spending listed on a public ledger.

True accountability of representatives to those they purport to represent will solve so many problems, both in terms of the types of people incentivized to become public servants, and also in terms of public understanding of spending and waste.

All this "crypto" is intellectual warm-up for what is to come, I'd highly suggest looking at rollups (what I would describe as ledgers within ledgers) which are delving into the true possibilities of next-to-zero cost of immutable transaction records.

>Distributed ledgers are not a scam, and our true best hope for anti-corruption.

They are not a scam, but they are almost completely useless

>I would like every elected official to have all their income and spending listed on a public ledger.

A public ledger is not necessarily a decentralised ledger. This could be accomplished by any bank account controlled by a US politician to send the payments made to a US goverment controlled webapp that's then publicly accessible (by FOI request, if necessary). No blockchain, no decentralised woo needed. What you have stated is a POLTICIAL problem, and those require POLITICAL solutions. No new or speculative technology, of any sort, is needed to accomplish the problem statement.

He mentions that they have everyone’s money, and then the very next tweet says “we’ll clear out liquidity crunches”.

Literally a contradiction.

“we’ll clear out liquidity crunches” - they have everyone’s money if they get more money from someone else.

Giving them the benefit of doubt, this is not a contradiction. The statement means that they have enough illiquid assets to cover the withdrawal that they are working on converting into liquidity.

But they're meant to store the customer assets in a cold wallet. They're not meant to invest them in illiquid assets that would need to be liquidated to give people their money. If it's not a contradiction, it's an intentionally misleading statement to avoid admitting they let Alameda Research invest the money when the entities are supposed to be completely separated.

The extremely charitable read is that

1. They have all the funds

2. Many are in cold storage or otherwise inaccessible in short term

3. Their cold storage restore process is so slow they need emergency help to provide liquidity in the meantime

Seems more like that they've either embezzled client funds or been hacked/lost some cold storage keys

In that scenario they could point to some of the wallets to help calm the fears the money isn't available. Or they could approach a number of different lenders who would be comfortable lending at high interest rates if the money is there but slow to access. They only sell if we're in the non-charitable case.

The normal way to handle this would be insurance or a line of credit, not selling your company to your competitor overnight.

They're totally solvent but no one is willing to lend them money?

“Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone.”

FTX/Alameda holds tons of illiquid FTT tokens that they cannot sell and which Binance was dumping. Thus, they might have not technically lied. But they were still wrong from the accounting perspective - they surely understood that FTT token cannot be used to cover gaps in large scale.

It was the question that matters "how fast you can process user withdrawals and with what risk"

Sam owns 8% of Robin Hood that is worth around ~$1B - he could sell that and cover some of the gap. But what we do not know yet is the size of the gap in time and space. FTX had $6B withdrawals pending on Tuesday.

> Sam owns 8% of Robin Hood that is worth around ~$1B - he could sell that and cover some of the gap.

Not knowing too much about this space have you ever seen anything like this happen? A CEO using their personal wealth to cover their customers funds seems unlikely.

Free Jon Corzine!

> have you ever seen anything like this happen? A CEO using their personal wealth to cover their customers funds

No, but I would love to see it happen, enforced by a court, and backed by a promise of jail time if the CEO fails to comply in a timely fashion.

> A CEO using their personal wealth to cover their customers funds seems unlikely.

It’s in the category of “desperately wants to be true” of crypto crash denial.

I’ve been lampooning people defending FTX in Hacker News all day. This is what I come here for!

This isn’t a thing, limited liability (which is the fundamental principle that distinguishes corporations from partnerships) prevents this. The only way would be if SBF was charged with defrauding FTX

That can't happen directly (I think). Mingling breaks the limited liability mantle.

He will have to buy equity or other product from FTX to infuse with cash. And if it is going bankrupt he has to stop running it to preserve the liability "shield" -- details of course depend on the country/state of organization/incorporation. I know nothing about the Bahamas.

Example: Elon for instance infused his own cash into Tesla, when it was going bankrupt. But he practically bought equity to my understanding.

Covering customer accounts is different, in a financial firm. I do not know what tools the Bahamas give to FTX. This is all uncharted territory. (Also there is legal exposure to other countries.)

IMO this would contradict what the GP comment asserts: that SBF said "We don't invest client assets (even in treasuries)".

I thought FTX Alemeda (the trading side) invested into their own token, which is tanking thus causing problems.

Alemeda has like $14b assets and $8b in liabilities. But of that $14b, $5b are in their own token (FTT) which is kinda?? worth nothing at this very moment. So now the assets and liabilities are more equally matched, but less margin for shifting values of tokens.

I don’t know, but the derivative of their assets looks scary the last 24hr.

Disclaimer: not a crypto person

What do you mean illiquid? Worthless?

Illiquid just means that you can't cash it in quickly.

Cash is 100% liquid while a house is illiquid you might have millions US$ parked there but only if you manage to sell it, then you convert it into liquid cash.

Liquidity is a measure of how easy it'd be to trade a thing for another thing you want.

> Liquidity is a measure of how easy it'd be to trade a thing for another thing you want.

It is also very hard to trade worthless things for expensive things you want.

Insolvent institutions like to claim they are illiquid when in reality they are insolvent.

We've seen this happen over and over during the 2008 crisis.

Agreed, but in this case these tokens have suddenly become 'illiquid' because they have just become worthless. It seems that here the term 'illiquid' is being used as a euphemism.

There is a time delta between the statements, assets worth $10B on one day could be worth $5b the next

It’s not a contradiction. It’s easy to have illiquid funds. For example cold storage or locked funds.

But cold storage and locked funds lead to you taking out a loan or just saying "sorry, it's going to be a while, our funds are locked". You know what you don't do if your funds are illiquid? Sell to your competitor over night.

If everybody walked into their bank right now to withdrawal, they couldn't cover either.

Right?

But their point was: FTX doesn't purport to be a bank

It doesn't purport to be a HUGE PONZI either, but... Just another normal day in crypto land.

I mean, the CEO does literally tell people he's running a Ponzi.

https://www.bloomberg.com/news/articles/2022-04-25/sam-bankm...

https://www.fdic.gov/news/press-releases/2022/ftx-harrison-l...

Well…

And that’s why banks are heavily regulated and get protections.

If FTX wanted protections against a bank run they could also choose to be regulated as a bank.

Cryptocons want us to both treat crypto scams as banks and not banks depending on what suits them in the moment, just like they want us to treat cryptocurrencies as assets or currencies based on what suits their argument in the moment.

All to hide the fact that it’s a mediocre technology which has been surpassed by many other technologies for most of its possible uses and is nothing more than a Ponzi scheme designed to enrich its original backers.

You may as well say "if everybody jumped off a bridge at the same time...."

How many bank runs have there been in 2022 in the developed world?

The reason people don't try to pull their money out all at once is because their deposits are insured, because their bank pays into an insurance pool.

    The reason people don't try to pull their money out all at once is because their deposits are insured, because their bank pays into an insurance pool.

Only up to $250k.

https://fortune.com/2022/05/23/record-number-american-househ...

That wouldn't be a problem for the majority of Americans

If you go over $250k, you can just open accounts at other banks to keep being insured. Or get your own insurance I suppose.

My point was that if many would struggle to put together $400 in cash, they’re likely unaffected by a $250k upper limit on insured deposits

How many people do you think have more than $250k in the bank? How many people do you think have more than $250k in FTX? It sounds like you're saying it's not good enough because 0.1% of people won't get the full benefit.

They'd cover it. They might need to call up the fed, but they'd cover it.

Remember that blockchain transactions are slow and FTX has over 1m users. Even in the most positive of scenarios, I would not be surprised if it took days to clear the backlog of withdrawal requests.

Slow blockchain transactions and it would be shocking if they didn't stake user assets. Most (all?) proof of stake chains have lock up periods. Atom and other Cosmos chains are usually 21 days.

Indeed, all Bitcoin blocks today are full. There is no physical possibility to withdraw all those funds. That's why Binance must implement Lightning deposits/withdrawals, like Kraken did.

Adding L2 chains to this equation dumps the frying pan into the fire. We don't need more points-of-failure, it's bad enough as-is.

Inability to process more than 5 tx a second for entire world is a major point-of-failure that L2 chain cures.

Should’ve just increased the blocksize, instead of implementing some crap L2 solution.

Thats the same as to say: let's buy a couple more servers rather than replace bubble sort in our code by qsort.

Not sure what people are talking about here, bitcoin mempool doesn't even have a notably large backlog at the moment and fees are currently low/normal: https://mempool.space/

Exchange withdrawals are one to many for btc helping keep size down and most other chains shouldn't have any issues. Don't see how FTX or really any exchange should be bottlenecked by blockchains here.

It seems to my layperson’s eye that that would be a reason to get a loan for a week or a month, not to sell the company.

“How to destroy the entire basis for blockchain technology in 1 sentence”.

>>Our teams are working on clearing out the withdrawal backlog as is

The "as is" worries me here

You forgot 8 hours ago: Hacker News commenters are in total denial:

https://news.ycombinator.com/item?id=33518961

This is yet another episode in the continuing saga “HN consensus is bad at predicting tech”.

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