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Comment by graeme | Hacker News Reader

That's putting it a little strong. FTX went bankrupt. You might normally expect to lose a substantial portion of your assets when that happens.

To instead get back everything in dollar terms with a gain is remarkable.

If you sent crypto to FTX legally you no longer owned them. You owned a claim to $X on FTX. It just wasn't analogous to a regulated broker where the client is the legal owner of a security. Iirc the contract with FTX is the creditors sold their stake to FTX.

It is valuable to explain that these creditors underperformed simply holding crypto but calling it "fake news" really misrepresents the situation.

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Not really. You owned a claim to the very specific asset you deposited in an exchange, which is how segregated accounts work.

Why US Dollars? FTX.us was domiciled in the US but FTX.com was in Bahamas. Why not some other arbitrary currency? Why not Bahamian dollar? Why not in Bitcoin?

FTX has paid close to 1 billion dollars in fees to army of lawyers, consultants, bankers etc. in what was even at the time an 8 billion dollar bankruptcy. Even if FTX froze in time and did nothing at all, its assets would've recovered completely that 8 billion gap in its funding. It's been a boon to everyone involved and they're taking full advantage.

I have no sympathy for FTX. It was a clear case of theft. However the creditors are getting robbed twice. Once by FTX, once by the bankruptcy proceedings.

>You owned a claim to the very specific asset you deposited in an exchange, which is how segregated accounts work.

The company went bankrupt. Bankrupt. They did not have the assets they purported to have.

FTX owed money to a variety of creditors including to crypto traders who deposited. They gambled on handing over their assets to a largely unregulated entity and it went bust.

If a regulated securties broker goes bankrupt you still own the securities. Brokers need to follow very strict laws to be in that position.

FTX faced no such regulation and if you sent them crypto you no longer owned it. FTX did.

And they went bust. What you're saying makes sense if FTX were a US registered securities broker for listed securities on an exchange.

But that wasn't what it was. And they went bust.

I think you are not distinguishing between what a bankruptcy vs. theft means. I worked over a decade in investment banking including on large bankruptcy proceedings.

A bank can go bankrupt and your deposits might be in jeopardy, because there is fractional reserve banking and by law they are allowed to hold far less (in the US it would actually be 0%) of your deposits and can deny your request to redeem your assets in full in cash. That is to prevent bank runs.

FTX was an exchange, and while the holding company can go bankrupt the customer assets should be always fully funded in segregated accounts. FTX stole from customers and used the fund to front run their own customer via Alameda research.

Most of FTX customers were outside US and are not US residents. US Dollars in this context holds no significance.

For the record, FTX.us was a registered broker.

https://brokercheck.finra.org/firm/summary/158816

And with SEC as an exempt broker.

https://www.sec.gov/Archives/edgar/data/1876386/000187638621...

> FTX was an exchange, and while the holding company can go bankrupt the customer assets should be always fully funded in segregated accounts

FTX marketed itself as an exchange. That didn't make it one. Giving it money was legally akin to handing any small business in your town money.

> Most of FTX customers were outside US and are not US residents. US Dollars in this context holds no significance.

FTX was a U.S. company. Even the Bahamas outfit had U.S. dollar bank accounts. FTX's customers were obviously subject to U.S. jurisdiction.

> FTX.us was a registered broker

They owned a FINRA-member broker-dealer. Most FTX customers weren't doing business with its b-d.

> with SEC as an exempt broker

Not what Form D means. ("Exempt broker" isn't a thing under U.S. securities law.)

Also, side note, banks can refuse withdrawals but specifically not to prevent a bank run [1]. A bank restricting withdrawals due to illiquidity is going under FDIC conservatorship.

[1] https://activitycovered.com/can-a-bank-refuse-withdrawal/

> FTX faced no such regulation and if you sent them crypto you no longer owned it. FTX did.

This is at best only partially true, you own a claim on the underlying asset.

This is not a matter of regulation, it's a matter of your contractual agreement with FTX.

I don't know how more regulated brokers work, but I also doubt you own the asset outright, you also probably own a claim, which is why if the broker goes bankrupt because of fraud you might not recover it.

Regulation wouldn't have changed anything here: as FTX simply broke the law, which they could have done regardless of regulation & reporting requirements (e.g. WorldCom, Enron, ...).

What they did was not legal, even wrt to what regulation they were subjected to.

> you own a claim on the underlying asset

No, you're describing a secured claim. No crypto exchange I know of voluntarily gives customers a secured claim. At the moment of bankruptcy, unsecured claims are a claim on the company. Not on any asset.

> don't know how more regulated brokers work

The assets are segregated and customer claims prioritised and guaranteed by the SIPC.

> Regulation wouldn't have changed anything here: as FTX simply broke the law

None of what FTX did would have been remotely plausible if they'd been regulated as a broker-dealer. They'd have failed their FINRA audit on day one.

Not saying what they did is impossible at a regulated b-d. It would just take a lot more thought and work than the shitshow they were running [1].

[1]. https://www.bloomberg.com/opinion/articles/2022-11-14/ftx-s-...

> You owned a claim to the very specific asset you deposited in an exchange, which is how segregated accounts work.

Maybe in a real bank you do. Not in cryptoland. "Not your keys, not your coins" as they are so fond of saying.

> You owned a claim to the very specific asset you deposited in an exchange, which is how segregated accounts work

There weren't segregated. The segregation claim was made by an entity in bankruptcy. FTX's customers have unsecured claims.

> if FTX froze in time and did nothing at all, its assets would've recovered completely that 8 billion gap in its funding

The FTX estate barely held any crypto when it went under.

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