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Comment by benjaminwootton | Hacker News Reader

Firstly, people keep their Crypto with the exchange for trading purposes and because it is easier than self custody. This means if the exchange goes bankrupt they potentially lose their money.

Secondly, as it is an unregulated space, we have instances such as FTX where they were using clients funds which should be segregated. This arguably crosses into fraud, and we do not really know which exchanges have been doing this and which ones have been properly segregating client funds. Coinbase is probably the only one we know for sure as they are an audited US publically traded company.

Finally, we also have situations where exchanges are doing things such as not matching client deposits to their reserves 1-1, or hold those reserves in less liquid investments. This could range from another fraudulent situation to good practice, but leaves them very exposed to situations where everyones wants their money back now.

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Re point #2 - this is one of the crazy things for me. When you work in finance, in the UK at least, you get it drilled into your head what "client money" is, what that implies, what you can do with it, and notably you get reminded during any training session the size of the fines that get imposed on people who fuck with client money.

So to me it suggests that they simply don't employ anyone with any experience in banking or compliance, if they did those people would be raising hell or at least leaking or whistleblowing

It's worse than that. FTX's regulation and compliance officer was previously the legal representation for a shady online poker operation that used a bunch of offshore shell companies and whatnot to avoid US law for years. It's clear FTX's posture was to maximally avoid regulation.

That might explain a lot of what went down

Well, yes, it was a startup by a bunch of twentysomethings with no real banking experience. There was no partitioning.

> the size of the fines that get imposed on people who fuck with client money.

This is crypto, law doesn't apply here.

Well, that's the marketing pitch at least. So far a lot of exchanges and such like have gone bankrupt or been blatently stolen by their operators and nowhere near enough people have gone to jail.

I should say that what surprised me wasn't that a bunch of kids started up a company and during that process skirted, if not regulations, at least common sense. But that once serious money got involved and they grew into the millions and then billions of assets under management, nobody was around who could tell them that this was reckless and dangerous

On the contrary, they were being touted as a shining example of responsible crypto. They paid for a good reputation by donating to the “correct” causes and politicians.

All of the modern startups have skirting laws as a selling point to investors, they want them to be like that. Look at the Greyballing Uber was doing when it was a multinational billion dollar corperation. They actively don't want to play it the right way, they're going for the money.

3.5 years at Jane Street Capital. No excuse really...

I’m sure some of the people working there raised alarms, only to be shut up by the owners of the exchange, who skirted regulations on purpose.

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