From the article: "FTX Chief Executive Sam Bankman-Fried said in investor meetings this week that Alameda owes FTX about $10 billion, people familiar with the matter said. FTX extended loans to Alameda using money that customers had deposited on the exchange for trading purposes, a decision that Mr. Bankman-Fried described as a poor judgment call, one of the people said."
In the FTX International terms of service ( https://help.ftx.com/hc/article_attachments/9719619779348/FT... ) they say that users have full title, ownership and control of digital assets. They say that the assets are the property of the user, and shall not be loaned to FTX trading, shall not be treated as they belong to FTX trading, and that users control the assets in the account.
So if they did indeed loan out customer deposits, that is just straight up criminal fraud, open and shut. This isn't like some DeFi scheme where they are working around some legal loophole or in the fine print tell you that they will probably lose your money. This is just straight up illegal under the plain vanilla theft and fraud laws of any country. This isn't even a bank run (banks at least tell you they are loaning your deposits out) -- it's a run on a U-Haul self-storage where you find out that they actually sold all the furniture in your storage unit to a pawn shop.
Banks don't actually even 'lend out' customer deposits. That's a very common misconception.
In modern bank operations, incoming fund transfers (which involve deposits) do provide liquidity that help allow the bank to be able to lend, but banks are actually levering up capital (paid-up share capital, retained earnings, etc.) to lend. The primary limit on how much they are able to lend (by Basel III regulations) is a multiple of this capital, nothing to do with the amount of deposits. Delinquent loans are therefore a loss recorded against this capital, which is shareholder equity - not customer deposits. The real problem for the bank is if more loans become delinquent than the capital they have, and they can't sell collateral for enough to cover it. Then they become insolvent. The Basel III rules increased the capital adequacy limits to try and lower the chances of banks failing after what happened in the GFC.
Bank runs are a liquidity problem because the bank's assets aren't all liquid enough to transfer out all the deposits the bank holds, but they can borrow bank reserves from other banks or the central bank in an emergency.
You’re creating a lot of confusion by ignoring cash accounting (the physical dollar I give a bank is then given to a homeowner as a mortgage) and talking about GAAP accounting, without making it clear that is what you are doing (the jargon only makes things worse).
Like sure, it’s loan to capital ratio that matters but as you point out:
> Bank runs are a liquidity problem because the bank's assets aren't all liquid enough to transfer out all the deposits the bank holds,
This is because in practice the money you give to a bank is lent out, even if it’s technically leverage against capital.
Banks cannot and do not lend out deposits. Bank deposits are a liability of the bank, they do not have it in the first place to lend out. When the bank gives someone else a $500,000 mortgage, they just create the money out of nothing and increase the customer’s bank balance. This new $500,000 liability is balanced by the new loan asset. Almost all money is of this type rather than physical currency.
Ok so then by your logic, why do banks care about collecting deposits?
Because they need a liability to offset their assets? Ok wildly backwards but sure.
And wait, in your metaphor, where does the $500k asset of cash that a depositor gives a bank (which offsets that liability) go? It’s just fake in your mind?
That’s a good a question, understanding why banks want deposits was hard for me to understand in this model. My current understanding is that taking deposits is a cheap source of funding for the bank. They could borrow required reserves from elsewhere but it’s cheaper to take it from customers who accept low interest rates.
For the second part, I agree that if you bring $500k cash to your bank and deposit it, then that asset is real and it basically goes into the bank vault. But that is not the typical case. Most deposits do not come from putting cash in the bank (after all, the amount of cash/central bank reserves is much smaller than the amount of bank deposits). Most of them are just an IOU from the bank and we use these IOUs as the most frequent form of money.
>My current understanding is that taking deposits is a cheap source of funding for the bank. They could borrow required reserves from elsewhere but it’s cheaper to take it from customers who accept low interest rates.
Yeah, why it's confusing to you is that you're segregating "borrowing from capital markets" from "borrowing from depositors" when they are effectively the same thing (both are interest-bearing liabilities).
>For the second part, I agree that if you bring $500k cash to your bank and deposit it, then that asset is real and it basically goes into the bank vault.
I suggest you google 'fractional reserves,' because no, the money does not go into a bank vault (though some of it does!).
> Most of them are just an IOU from the bank and we use these IOUs as the most frequent form of money.
The logical fallacy here is that you're seeing how many IOUs there are (many) and how many cash dollars there are (much fewer!) and then assume that IOUs don't have to be attached to a physical dollar but they do (keep in mind, a physical dollar could just be a line item on The Treasury's balance sheet, it doesn't have to be paper) It's just that many IOUs can be attached to the same dollar through the credit multiplier.
Some banks care about collecting deposits because the interest they earn on short term paper is more than the interest they pay on deposits. Some banks don't accept deposits at all -- these are called investment banks.
Also, banks don't really do a lot of maturity transformation -- there are so many myths about how banks operate -- if you look at a bank's balance sheet, you will see a range of short, medium, and long term debt that is constructed to roughly match their short, medium, and long term assets.
Rather, banks make money off of spreads, because banks have lower funding costs than their customers, due to a web of in house expertise, government guarantees, access to special lending facilities and payment networks that others can't access.
If you want to really understand banks, you should stop talking about deposits, which aren't particularly important, and instead focus on mortgages, which dominate the entire financial industry. If you want to buy a house, you could try to sell a bond into the bond market. But a household will have a hard time selling a bond. So they go to a bank, which performs its own credit analysis and then gives you a loan while they sell a bond. The interest you pay to the bank is more than the interest the bank pays on the bond. Banks make money off of this spread, which is small, but it is leveraged, so the total return on capital for the bank is high.
If you don't like it, you are welcome to try to fund your house purchase by selling your own bonds for a lower rate than what the bank charges you. Try crowdfunding your house purchase and skip the bank! Doing that will be an educational exercise that will clarify how banks make money -- it has nothing to do with funny business about deposits, and everything to do with banks having access to capital markets that the Smith household does not.
Most banks basically just break even on the deposits, given the costs of owning all those branches, paying the tellers, etc. Even if they make a profit, it's a small profit, but it's a great way to upsell other financial services (mortgages, auto loans, lines of credit) that make money for the bank, as well as charging fees, etc.
But they don't need your deposit in order lend someone else money, because they borrow from the capital markets at one rate, and lend at a higher rate, and this has nothing to do with borrowing short term and lending long term. Rather, the primary risk for banks comes from leverage.
>Some banks care about collecting deposits because the interest they earn on short term paper is more than the interest they pay on deposits. Some banks don't accept deposits at all -- these are called investment banks.
LMFAO. I want to go to Goldman Sachs's Balance sheet and then tell me how much they have in deposits ($394 billion!!!). I want you to go to Morgan Stanley's and tell me the same ($338 billion!!!). Nearly all banks use deposits as an easy source of capital that they then invest/lend out.
You are confusing retail deposits with deposits.
Like sure, there's boutiques like Qatalyst and Allen that limit their deposit base for one reason or another, but they are marginal in scale vs. real investment banks.
>If you want to really understand banks, you should stop talking about deposits, which aren't particularly important, and instead focus on mortgages, which dominate the entire financial industry.
This is such a wild conversation! I am talking about mortgages, which are funded by deposits!
>But they don't need your deposit in order lend someone else money, because they borrow from the capital markets at one rate, and lend at a higher rate, and this has nothing to do with borrowing short term and lending long term. Rather, the primary risk for banks comes from leverage.
Yes we agree! And one form of extremely cheap borrowing is taking deposits! That's why they pay interest on it! It's borrowing! It's a liability on the balance sheet! How is this not clicking for you?!?!?!
But there aren't dollars given to banks mostly. Cash is a tiny fraction of the money banks handle. Most of the payment volume is millions of electronics messages between banks to debit and credit numbers in people's accounts, and only at certain times of the day the net of that (a far, far smaller amount of reserves) are actually moved.
It's actually the other way around - trying to follow a physical dollar just makes you confused, because all the actual business of the bank is happening in accounting-land (the bank's balance sheets and electronic records of customer accounts).
You are splitting hairs where it doesn't matter. More alarmingly, by your reasoning the bank is not lending out cash either, so there is no value in considering 'cashflow' at all.
But in practice when people say they 'pay cash' for something large like a house or a car, they are usually effecting a bank transfer (well, in Korea at least). I understand that under the hood in the US this is an IOU between banks, but to the depositor there is no difference whether the money is cash or bits. What matters is whether the bank has the liquidity to provide upon request.
Then by your logic, shouldn’t banks not want customer deposits? Isn’t it just burdensome overhead?
Trust me, I get that people aren’t Fedexing cash envelopes between banks, but that doesn’t mean money is fake and banks can invent it out of think air (they can only multiply it)
And to be clear, again, you can very easily follow physical dollars at banks (otherwise imagine the fraud that could happen!), it’s just circular so multipliers get applied.
Like I get it’s complicated, but my deposit goes into a mortgage that then goes into another account, etc etc etc. that’s called the “credit multiplier” and we can definitely track it.
The issue is that it's very abstract, and all the mechanics of banking are accounting operations, whereas people don't tend to think that way. The deposits themselves are entries on the liability side of the bank's balance sheet. The bank doesn't store money for customers, they take whatever asset you give them and give you basically an IOU in return. So the "customer deposit" is not what you gave the bank (say if you deposited cash), it's a number in a database. Just like what is 'in' the bank's exchange settlement accounts at the central bank (e.g. Federal Reserve), and just like what is moved around in international finance. Electronic messages representing IOUs.
This is balanced by a mix of assets, which are a whole number of things. A tiny amount of cash, a small amount of central bank reserves, some in treasuries and bonds, and the assets created by the bank loans, etc.. (When the bank creates those loans, they create new deposits and a new asset in the loan, in equal amounts. So the assets and liabilities of the bank increase but the balance is zero).
So if the bank gets in trouble, it's because some of the asset mix has declined in value (like too many people have defaulted on their loans) to the point that the assets no longer cover those liabilities.
No, the amount they can lend out is mostly based on their capital. If they want to lend money out but they have reached their capital adequacy limit, they have to capital raise by issuing new shares for cash, not seek more deposits. (I’ve been a bank shareholder when they had to do this, when the Basel III rules changed the limits to make things more stable).
Deposits are liquidity that help grease the wheels, so it’s necessary, but it’s actually more the transfers of money moving in and out that they need, not liabilities sitting on their balance sheets.
The bank has a balance sheet of assets and liabilities. When you deposit money, that’s a bank liability. When you take a loan, that’s a bank asset.
If some people don’t pay back their loans, then that loan gets written down, so the bank has fewer assets than before. A certain level of default is expected and baked into their operations.
If many people don’t pay back their loans, the bank no longer as as many assets as it expected. But it still has as many liabilities. The value of the bank will decrease, potentially to nothing.
As the grandparent notes, banks are subject to special requirements in law that define how much capital the bank needs to have to remain solvent. If the bank is no longer solvent then it can’t cover the liabilities (deposits).
In that case either the government will step in to bail the bank out, or the bank will collapse and the depositors will have to be paid from a deposit insurance scheme.
I'm a bit confused here. I understand that depositing money creates a liability for the bank in the sense that money (and interest thereupon) may be withdrawn at any point... but until the depositor withdraws, isn't the actual cash that has been deposited in an account an "asset," in the sense that it is on the bank's books?
US banks have access to the Federal Reserve Bank and get funds from them at the fed funds rate. Then they add some margin and loan it out to you and me. They’re required to keep collateral and can only lend some smaller percentage of their capital. Etc etc.
The bank originates a mortgage to someone. It uses (some of) your $10k to give cash to the customer getting the mortgage, and the customer then uses that cash to buy the house.
For whatever reason, a bank run happens, i.e. everyone comes to make a withdrawal all at once
You try to withdraw your $10,000. The problem is that everyone wants cash, not shares of houses, but the bank only has so much cash.
The bank is good for your $10k, but not on the timeframe you want it. The bank is _illiquid_, but _insolvent_.
The bank will try and sell it's mortgages to someone else for the money, but if it tries to do this all at once it will likely end up selling them at prices that are below par. In that case the bank might end up with less assets than liabilities; this makes the bank _insolvent_.
In a deposit insurance scheme, the government takes over the bank, pays out to customers, and services the loans. The government can do this because it can easily create liquidity. Generally in recent history the government still makes a profit when it reduces an illiquid bank
I agree, and IDK why it is so hard to talk clearly about finance. Here is how I understand what's been said (not an expert):
When a bank pays a loan out to its lender, it must have capital (valuable assets actually owned by the bank) to back it up. But these "assets" are not always easy or possible to liquidate, or turn into cash. This is where the other person's deposit comes it. They use the deposits for "cash" instead of liquidating the assets they own in order to pay out the loan. This is what is meant by providing liquidity.
Technically, the bank's own assets can be considered to be backing the loan, but the long-and-short of it is that YES, bank's do use the cash from their deposits to make loans, and that is why there is no money available when the bank run happens.
Disclaimer: this is my interpretation of what others on this thread are saying. I don't actually know if this is right or wrong
> and IDK why it is so hard to talk clearly about finance
Because unlike in engineering, in finance, conservation of "energy"/"money" allows arbitrary creation of negative money to cancel out arbitrary created positive money.
We pretend money is a real thing you can have, but it's actually more like one of the two opposite poles of magnet.
It's a game with made up rules, not a natural consistent system.
You deposit $100 dollars at two banks, the banks lend to each other until they have created 10x as much bank money than they have cash. The cash didn't go anywhere, it is still there but if the bank were to pay it out it would not meet its regulatory requirements and be shut down even though it might have $1000 worth of assets if you give it enough time.
The problem essentially is that the money can be withdrawn all at the same time but the obligations cannot.
No, while they can borrow reserves from the central bank (Federal Reserve if you're in the US), they can't 'lend those reserves out'. Those reserves are mostly useful for liquidity. The way that the reserve rate affects mortgage rates is more complicated.
Bank runs are a problem in the sense that the bank has a short term liability but they have long term assets. This is called a maturity transformation.
If a bank does a transfer to another bank it will have to send its reserves which means it might have to borrow reserves from another bank or sell its long term assets to get enough reserves and that long term asset might worth a lot or worth very little depending on the difference between it's locked in interest rate and the current interest rate.
This is why banks sell their treasuries to the Fed, they have a long duration asset and a short term liability, so they give it to the Fed to get a short term asset.
I don't know what SBF is doing but maturity transformation is probably the riskiest thing you can do as a bank and it is very likely to break down eventually unless you have a central bank that spreads around the risk. From a purists perspective banks should only use certificates of deposits to ensure that their liability duration is longer than their asset duration. Of course that is difficult in practice because nobody is buying CDs nowadays.
The difference between a bank run on the licensed banking system and a crypto exchange is that the licensed banking system has a lot of experience with these types of problems meanwhile in the cryptospace you ask your neighbor and hope he doesn't shrug.
Yes an no. When there was no electronic means of transactions, what banks lent out was indeed mostly customers' deposit plus their own assets.
Things became interesting when electronic transactions came into play. Banks virtually no longer have to payout any cash when they issue a loan to a client as they now only need to change two numbers: credit their asset account, and debit loan customer's cash account. So unless there were transactions paying out to another bank, there were no cash movements. So the minimum cash the bank should keep in their operation accounts is just the difference of the transactions paying out and those receiving in.
But does that mean customers' deposits are not significant to the banks? Nope. Banks actually lend out much more than their customers' deposits. How much can they lend out is basicly the deposit amount divided by the reserve rate, e.g. 20%.
This is all a roundabout way of saying that, yes, they do lend out the deposits.
Let's imagine a simple bank where my company is the sole depositor - it deposits 100k dollars. Let's assume the bank has no other assets or liabilities - its only asset is the 100k dollars I deposited, and its only liability is the 100,000 dollars it has to pay back to me.
Alice comes in and asks for a 50k dollar loan. The bank accepts the loan, and now has another asset - the 50k dollars that Alice owes them, and a new 50k dollars liability - the deposit with Alice's money. Alice than buys an antique one of a kind Russian doll with her 50k dollars from Bob, and the bank transfers this liability to Bob's bank. Alice fails to pay back her loan, and the bank becomes the owner of the antique one of a kind Russian doll worth 50k dollars.
However, someone finds a new trove of similar dolls, and this ones becomes essentially worthless. So, now the bank's assets are in total only 50k dollars, but its liabilities are still the 100k it owes me. If I try to buy another of Bob's dolls for 80k dollars, the bank must find someone willing to lend it 30k dollars, or it can't honor the transaction, even though I had deposited 100k dollars with them: they lent out my deposit.
Of course, in practice, when Alice asked to transfer her funds to Bob's bank, the bank would have not immediately used my deposit, it would have sought to obtain credit from someone else, using some of the 150k dollars in assets it had at the time as collateral. But, if it couldn't obtain such a loan fast enough, it would have indeed used money from the deposit it had.
Well, bank lending creates deposits, so they need to deal with deposits to actually be a bank.
There are non-bank lenders (and non-bank payment services companies that offer prepaid visa/mastercard products), but they ultimately are then customers of the bank and they are much more limited in what they can do that banks are. That's why it's crazy difficult to get a banking license.
I have seen a type of banking proposal where the bank always borrows from the central bank at x% and issues loans that way and just passes the x% cost to anyone holding the money. That means no deposits were required to begin with. If anything, cash means that the person who withdrew money would be stuck with the borrowing fee until they deposit their cash back in.
So yeah although this is still theoretical, it is indeed possible to do banking without having a single customer cash deposit.
In that proposal, it seems like all the risk of the loan is carried by the bank with none of the profit. How would such a bank be profitable? What happens if the loan is not paid back?
How many years could Sam Bankman-Fried get in jail?
It is also interesting to read on his Wikipedia profile [1] about "Bankman-Fried is a supporter of effective altruism and claims to pursue earning to give as an altruistic career. He is a member of Giving What We Can and has claimed that he plans to donate the great majority of his wealth to effective charities over the course of his life.". Having direct access to a lot of money changes a some people ethics.
That's quite a stretch to compare, as taxes are derived from rules for the economy that everyone collectively votes on. Everyone benefits from collective projects run by the government to some degree, and a tiered tax system also counteracts the snowballing effect of how it becomes easier to make money the more you accumulate.
Here, we have a guy who is taking money for a specific purpose under circumstances that he completely lied about. And he used that money to attempt to enrich his company at catastrophic risk to the customers.
I suppose it's easier to justify this to yourself when you know most of the people whose money you're gambling with are also driven by the same greed.
The cryptocurrency bubble was very transparently built on delusion and avarice, and everyone involved knew it. There are very few truly innocent victims here.
This is crazy. He was funneling customer funds to politicians too? $40m worth and was planning up to $1b.
"SBF was planning to spend up to one billion dollars to help influence 2024 presidential election campaigns. His real plan is to bankroll the candidate running against former president Donald Trump. In 2020, SBF donated $5.2 million to the Joe Biden presidential campaign.
According to Open Secrets, a platform following the money in politics, SBF is the sixth largest political contributor. The platform reports that he has made a total contribution of $39.8 million for the 2021-2022 cycle."
There should be a tracker for companies that come out of nowhere and buy themselves into the top 10 of any major politician contributors list. So much money, so fast, should be a red flag for astute investors.
It's also a red flag about the savviness of the donors, since the races we're talking about here are extremely overcapitalized. SBF had a good shot at buying influence at the House level, but even in most Senate races the campaigns are probably already at a point of diminishing returns on dollars raised without any of this guy's goofy crypto money. Not that the campaigns won't assiduously take his calls! They'll take the money! Even the Biden campaign, which does not in the final analysis give even 1/15th of a fuck about an additional 5MM, will have someone set up some phone calls to get that money.
Whenever a person in their mental framework have a very high moral goal, it is easy for them to justify to themselves, less-moral actions. Almost impossible for it to not happen.
Although this is a common criticism of utilitarianism in the Bentham traditition, it is not in fact how utilitarian ethics work as a whole. For example John Stuart Mill would say that whether or not an act in a specific case is ethical can be decided by whether or not it is in violation of a general rule, and whether or not the consequences of the general rule are positive or not. Taking clients funds and using them to go double or nothing would clearly lead to lack of trustworthiness and the consequences of this would be clearly negative in general so this is very clearly unethical according to Mill.[1]
> To maximize your expected value, you must aim for it and then march blindly forth, acting as if the fabulously lucky SBF of the future can reach into the other, parallel, universes and compensate the failson SBFs for their losses. It sounds crazy, or perhaps even selfish—but it’s not. It’s math. It follows from the principle of risk-neutrality. [0]
I think he figured in a million realities, the expected value is net very large. He just happens to live in a reality where it collapsed, but how much of his wealth is due to these games? I don't know if the probabilistic method is common among EA. For instance, if you gave me a chance to bet my entire net worth on a 51% odds game, sure the expected return is positive and if i had a million realities and netted everything out, I should take the bet. But most people would see that as insane
So if the chain is supposed to enable "trustless" finance, what enabled Alameda to take anything? Seems Alameda and its clients should be screwed, but FTX's holders should be relatively easy to identify and restore.
But everyone seems to say that's not the case. So what broke down here? Why isn't the ledger ledgering?
FTX is a centralised exchange, it is not routing all customer trades on chain. It’s not a blockchain failure, it’s just a lack of client asset segregation by a traditional centralised trading house.
This is the correct answer. When you move your tokens into a centralised exchange like FTX, your funds are pooled with everyones deposit.
There are always deposits and wihdrawals, and of course maybe you traded your tokens for another before withdrawing. So its hard to parse how much customers deposited vs genuinely withdrew, and so you cant really tell if the exchange is short unless they declare their actual assets and liabilities.
> Something of the sort must happen eventually, as the current system, with its layers upon layers of intermediaries, is antiquated and prone to crashing—the global financial crisis of 2008 was just the latest in a long line of failures that occurred because banks didn’t actually know what was on their balance sheets. Crypto is money that can audit itself, no accountant or bookkeeper needed, and thus a financial system with the blockchain built in can, in theory, cut out most of the financial middlemen, to the advantage of all. Of course, that’s the pitch of every crypto company out there. The FTX competitive advantage? Ethical behavior. SBF is a Peter Singer–inspired utilitarian in a sea of Robert Nozick–inspired libertarians. He’s an ethical maximalist in an industry that’s overwhelmingly populated with ethical minimalists. I’m a Nozick man myself, but I know who I’d rather trust my money with: SBF, hands-down. And if he does end up saving the world as a side effect of being my banker, all the better.
> "I know who I'd rather trust my money with: SBF, hands down."
This quote is complety antithetical to everything crypto is actually trying to achieve; which is a trustless financial system, a system that would be void of these sorts of melt downs.
That works just fine but the vast majority of cryptocurrencies just copied the flawed design of conventional fiat currencies and they fail in exactly the same ways.
Its really worse than this.. This guy really LARPed the white-knight / sheriff-of-the-crypto-wild-west for years. He's the last guy anyone would have thought would pull such blatantly shady stuff like this. Before this all came out, more people in the space would have seen him in positive light than they would have seen CZ (the CEO of Binance).
Somewhat related, the bull run of the last decade has made it possible to run a fund and only have a 10% hit rate (absolute winners), compared to a 52% hit rate for hedge funds in the public markets. The net effect in VC must have been a sense of a "can't lose" attitude. Added to the fact that there is a herd mentality when a firm that is hot is raising money, the due diligence boils down to "other big VCs are investing and we don't want to miss out". In other words Group Think, but it doesn't matter provided the public markets are sending newly minted IPO stocks to the moon. Perhaps more turbulent public markets will enforce more stringent due diligence...
Thanks. great article. also never want to get a letter like that "your investment is marked to zero". got to love this quote from article "“Everything was rickety—there was no avoiding the ricketiness. Obviously, the line between rickety and shady is a little unclear at times, but the places that seemed like they were going to steal customer funds outright, we didn’t touch,” Singh says. “Even the best players in the space were having big problems.”
I still get sketched out that companies feel so free to "unpublish" content that they later decided was embarrassing. Traces of "Nineteen Eighty-Four"...
To be fair, if something has been deemed offensive by the everyone on the interwebs, do you leave the offensive thing there to thumb your nose at them or just remove it to at least stop the bleeding?
Fair question, but in this case it wasn't so much "offensive" as "embarrassing to the author." i.e. they're hyping up this guy who later turned out to be not as smart as he thought.
And of course, the only reason "normal people" have "invested" in cryptocurrency is the presence of centralized exchanges like this.
These centralized exchanges are an inevitability and a requirement for crypto to function in the real world. You can't run a ponzi scheme without fresh blood, nor can you pump and dump shitcoins unless normal people can easily and quickly trade them.
It is a blockchain failure in that blockchains in general cannot actually support transactions like this. There's too much volume and there are fees.
It is also a regulatory failure, there are reasons this kind of dipping into customer funds is quite illegal in the US. FTX should not have been reachable by US citizens (funding should have been impossible) _or_ FTX should have been sanctioned _by_ the US. There is no reason at all that rogue financial institutions should be allowed to transact with American-regulated banks. If you want to do business in the finance sector with Americans you need to be regulated. Any argument to the contrary is very clearly contradicted by the series of crypto, defi, etc. failures in which gullible Americans lost tons of money while institutions they trusted violated common sense rules that every traditional financial institution in the US must abide by.
If you want to have freedom from this kind of regulation, you have to live in a world where these kinds of failures and frauds don't happen. Clearly they happen over and over without competent government watching them.
> It is a blockchain failure in that blockchains in general cannot actually support transactions like this.
"The #LightningNetwork has a theoretical throughput of 40 million #TPS... Lightning enables #Bitcoin to be a planetary scale decentralized medium of exchange."
> FTX should not have been reachable by US citizens
Ostensibly this has already been the case. You can't even properly access ftx.com in the US. It just redirects you to the US exchange. FTX US is a distinct company from the international FTX exchange, at least according to Axios. If you still manage to get to ftx.com it gives you a banner saying its read-only, you aren't allowed to use it, and they wont let you.
FTX US is still allowing withdrawals at the moment, unlike FTX proper.
>It is also a regulatory failure, there are reasons this kind of dipping into customer funds is quite illegal in the US. FTX should not have been reachable by US citizens (funding should have been impossible) _or_ FTX should have been sanctioned _by_ the US
I wonder if Sam being the 2nd biggest funder of Democrats has anything to due with this...
It is absolutely a blockchain failure. Blockchains are intentionally designed to facilitate this. They have no possible way to stop this kind of fraud. Even if you built an elaborate set of smart contracts that could audit participants, they would still not stop anything. That activity can just be moved to another chain and avoid the audits. This kind of thing can just keep happening over and over again, as it already has for the last 12 years. Remember Mt Gox? Nothing fundamental has changed about blockchains that could ever prevent this from happening. It's viewed as a feature that everyone just loses their money sometimes. The designers of blockchains want this to happen. From speaking to them, they view any kind of fraud prevention as an affront to their definition of "economic freedom" and what it entails.
If you are the only person in the world with the private key to your coins, you are the only person who can move them. Period.
FTX is a centralized entity that custodies funds. It has nothing to do with a blockchain, which could have completely prevented this.
There are many examples of decentralized exchanges (DEXs) for which it is mathematically impossible to loan out depositor's funds without their consent, because the only person capable of signing a transaction to move the funds is the depositor themself.
> If you are the only person in the world with the private key to your coins, you are the only person who can move them. Period.
Right up to the moment you lose your laptop in a fire, forget the password to your wallet, accidentally run malware on your personal computer, etc. Or if you die and haven't gone through the complication of setting up a way for your heirs to gain control of your accounts.
Yes, you can take steps to mitigate these risks. Those steps are absolutely insane from the POV of everyday human beings.
But blaming blockchain for the failures of centralized finance, which we've seen time and time again throughout all of history, is literally intentional deception.
If a politician or lawmaker or business person blames blockchain for this, it is FRAUD. Full stop.
Well I'm not a politician or lawmaker and I have no problem blaming blockchain for this. I'm technically a "business person" because I have a job, but technically all crypto people who intend to use it to make money are also business people. The way bitcoin and all its friends are designed is intentionally done so in a way that allows centralized entities to run amok and cause havoc without any accountability until the entire thing collapses. It's blockchains that are the fraud. The designers of blockchains, including Satoshi, were aware of these problems and the risks of the system becoming unstable or getting targeted by scammers. They went forward with their designs anyway knowing the risks. Because they thought they were better than the central banks and they wanted to say they were sticking it to the man. How were they better though, when their inventions gave way to one giant fraud after another in a shockingly small amount of time? These Enron-level and WorldCom-level events are a weekly occurrence in crypto.
>Is someone paying you to say this? Did you lose a bunch of money?
No and no. Avoid asking these questions please, they're fallacious and kind of rude. I just see fraud and I call it out. I'm sick of seeing these crypto-Enrons keep happening. I hope the SEC finally cracks down and anyone still involved in crypto after any more of these tumbles goes straight to prison. The entire thing is a ponzi scheme and a fraud and the technology is useless beyond any kind of recovery. I'm dead serious. They should have cracked down on all of these crypto exchanges years ago when it became obvious they were a huge vehicle used to sell ICOs, aka illegal unregistered securities that were complete scams.
>It's an immutable public ledger. We know exactly what happened when someone commits fraud on it
No, you don't. You know almost nothing at all just from looking at one blockchain. If you see a bunch of blockchain transactions moving around, you have no idea what the transaction is actually for or whether that's a legitimate transfer or not. You don't know if a pizza was exchanged for those coins or if anything actually happened, or if the coins were actually stolen, or if some exchange was hacked, or if it was just a wash trade. It's extremely easy for people to commit fraud on blockchains this way so they just do. All you can know from this is that some tokens were transferred to some anonymous wallet address. Just from the blockchain you can never know what it's actually being spent on or who it's being sent to or if there's even any real assets anywhere in the system at all because that information only exists in the real world outside of the chain. There are places to get this information off chain and that's the only way to actually make any of this useful, it totally defeats the purpose of using that chain.
As an independent reporter the only way to figure any of this out is to take data from multiple chains, cross-reference it together, compare it to proprietary data coming from the exchanges, look at public data published by traders, and try to put it all together to paint a picture of where the real money and assets moved. You need a lot of other data sources besides that chain. And when you actually do that, you see things like how there's evidence that most bitcoin transactions are actually fake, fraudulent wash trades for the purpose of market manipulation, and nobody in bitcoin is doing anything about it because they either can't, or they're the ones profiting from it: https://www.forbes.com/sites/javierpaz/2022/08/26/more-than-...
The entire crypto market is awash with fraud. Nothing about blockchains can solve any of these problems. They're intentionally designed to create these problems. Blockchains can't prevent you from just taking that activity off chain and doing it outside of the view of everyone, and that's how you get another Alameda and FTX or Terra or Luna or 3AC or Celsius or Voyager or any of these. If you could force everyone to do all their transactions on one blockchain, then what you're saying would be true. But the technical design of blockchains intentionally makes it so you can't do that and anyone can just create another token out of thin air, or fork an existing token into a second chain, and then start trading it on some exchange and loaning it out with no regulations whatsoever. This is what the cryptobros wanted. It's a perfect recipe for fraud.
Now the only real way to force all these people to use a single blockchain and make them follow normal accounting procedures would be to pass a law making them do it. On that note I always found it funny that a certain segment of cryptobro was pushing for CBDCs. Most of them would probably cry foul if they were forced by law to use a single central bank chain, because then it wouldn't really be decentralized anymore and they couldn't get away with so much fraud.
I can see exactly what Alameda and FTX was doing on chain. I can see the exact amounts of each token they sent, where they sent it, what they swapped it for, etc. It's all publicly documented.
Well if I'm the one who's uninformed, you're not telling me anything I don't already know. Yes, I know you can see the transactions they made in that particular token on-chain. You have to get the information about who owns any of those wallet addresses from somewhere else. The chain doesn't tell you anything other than that they sent a token somewhere. Yes the other data is public but that isn't because of any feature of blockchains. The blockchain also won't tell you the actual details of the deals this guy was making or the favors he was calling in, you gotta look through his phone and emails to get that. As I said, it still doesn't paint the full picture because the real money is off-chain and can never be tracked on the chain. No, a USDT or a USDC isn't a real dollar, those movements may or may not represent actual money changing hands.
You wrote too many false sentences. Here's one: "the technology is useless beyond any kind of recovery."
The technology works. People use crypto for payments.
> Now the only real way to force all these people to use a single blockchain and make them follow normal accounting procedures would be to pass a law making them do it.
I wouldn't be surprised if someone put you up to coming here and writing all this, so you can go back and claim something like "I ran this by lots of smart people and they agree the only way is to pass a law", and then use this to back some legislation.
All these blockchain cryptocurrencies end up being traded on unregulated exchanges. These don't have same protection and requirements as banks. They are a wild west. And why do people use these exchanges so much versus blockchain? Because blockchain is highly inconvenient. I mean for starters how on earth is it user-friendly to require the entire thing on a device, requiring synchronization as well. It also requires a high quality always-on connection.
Pretty easy to download a wallet that’s stored in the Secure Enclave of your iPhone with an encrypted backup to your Apple ID account and all those problems go away.
Keys are still safe in your phone. It’s an encrypted backup. Random Apple employees can’t get to the private key.
I’m not interested in goalkeeping both sides of the convenience-security spectrum. Bury your keys in a tin can if you want, or custody at an insured exchange if that’s your preference. I think installing say Rainbow Wallet is a fine choice.
>If you are the only person in the world with the private key to your coins, you are the only person who can move them. Period.
This is completely and utterly irrelevant and has not stopped anyone from performing massive fraud. Just look at the long history of crypto scams. They still happened constantly despite blockchains having that feature. It's just impossible for a blockchain to prevent these frauds. It doesn't matter if you still have all your coins if the value of that coin drops to zero after it's revealed the whole market for that coin is fraudulent, which is exactly what happened this week! And multiple times earlier this year, and multiple times before that! It doesn't matter if it's stored on a DEX either, when you're still stuck with a worthless coin that no one will trade you for! How many shitcoins need to collapse before this is understood? Blockchains do not and will never solve this problem because they create the problem, by design, by allowing anyone to manipulate and dump tokens anywhere they want with no regard for what's fraudulent and what isn't. On a DEX you can't even know if the person on the other end is a real person or not without going outside the chain. I can't believe I'm still talking about this after the long, long string of fraud that's happened over the last 12 years. FTX is not the problem, they are the symptom. The problem is blockchains. They're intentionally built to enable fraud. They have no other purpose, and they aren't even particularly good at that because they stop working when everyone notices the fraud.
I should also mention, your statement isn't even correct! There's a very easy way to get someone else to move their coins for you: threaten them. That's the entire principle that ransomware is built on. It's real easy for criminals and the police and anyone else using the threat of force to get people to give up their coins, blockchains don't prevent that and it's impossible for them to do so because they can't affect anything that happens in the real world outside the chain. I really can't understate this. Blockchains are a fraud. Every claimed authority or security provided by a blockchain is trivially defeated by just routing around it or by gaming the market, which is ridiculously easy for anyone with some cash to throw around because there are no real rules or safeguards. They're probably the worst "invention" that's come out of the tech sector in the last 15 years. I really hope this crash is the end for crypto.
If I'm trying to arrange a trade on the exchange so I can get a pizza for my dogecoins, because the pizza guy says he only wants BCH and not dogecoins, and I would rather not pay double transaction fees just to buy a pizza, how do I know the other person is a real pizza chef and not a bot trying to scam me?
Your arguments are very misguided, long, rambly, and often digresses. It's hard to decipher your points and it is very exhausting to read. Would love to have discourse, but your points need to be shorter, concise, and clear.
I agree with that, but that's the reason you can't truly store value forever irreversibly. If you can't reverse transactions, you can just abandon the whole currency and start over, and eventually they'll do that.
Irreversible permanent value storage seems like a dubious aim. Gold seems like a good storage of value now but what if in the future there were an explosion in gold supply because humanity developed the capability to mine the asteroids? Same with crypto because people might just stop mining and move on to other “disrupters”. Ultimately people need to understand that value of something itself is a social decision and not inherent. In my opinion the entire crypto space has been propelled in the wrong direction by treating these tokens as assets which presumably “store value” rather than developing them into fast moving easily transactable currencies, cross chain swapping etc. This would have led to freer taxless societies and communes. Instead the greed of “number go up” took over and now people will reap what they sowed.
> That activity can just be moved to another chain and avoid the audits.
> Remember Mt Gox? [...] It's viewed as a feature that everyone just loses their money sometimes [...] From speaking to them, they view any kind of fraud prevention as an affront to their definition of "economic freedom"
I found these observations to be helpful reminders how things are (and used to be!). A blockchain isn't designed to indemnify you if you hop on/off the blockchain.
It's strange to attribute failure to the blockchain in this case. There was no visibility into how much leverage was taken on by Alameda because they aren't borrowing through DeFi means. This a traditional finance problem where a hedge fund takes on too much leverage and no one finds out until they explode.
No blockchain can ever guarantee there's any visibility or accountability. Defi means are only useful to trade cryptos for other cryptos, and you only have visibility if no one launders the money through crypto mixers. Once you want to cash out and trade your cryptos for any real assets, like buying a pizza, you instantly lose visibility again because all that has to happen off chain. Just because something is a tradfi problem doesn't mean it also can't be a defi problem. In this case, and in a lot of other cases, it's both. Blockchains cannot solve this problem in any meaningful way because you can never force everything to go through that chain. Fraudsters will just move it off the chain and lie about it, and that instantly puts you back into a spot where blockchains aren't doing anything for you.
I argue this is what they wanted out of blockchains. I remember all the rumblings in the days of Silk Road and Mt Gox. The enthusiasts that are responsible for propagating this system into today wanted it to be a wild west where anything goes. They said all the same things back then. I heard people saying it was good that Mt Gox got hacked because it meant all the scammers got what they deserved and they learned their lesson. Well, they didn't! It continued to be a wild west and more scammers just showed up. They'll keep scamming and they won't stop as long as they can make money from it. I don't know why crypto people are so reluctant to acknowledge this. Scammers seek out anywhere they can latch onto and they don't leave until forcibly removed. If a malicious person finds a risk-free way to get free money from unsuspecting victims, with no downsides, why would they ever want to stop?
"No blockchain can ever guarantee there's any visibility or accountability."
Ever? Any? Clearly this sentence is false. It takes only one counterexample to prove it.
Here's the counterexample. If someday all the world's money are on a single blockchain and there are no banks, the blockchain guarantees visibility and possibly accountability.
Do you see the meaning of ever now?
Please don't be gratuitously negative. It's to your benefit to be precise. You sell yourself short when you cut off possibilities.
>Here's the counterexample. If someday all the world's money are on a single blockchain and there are no banks, the blockchain guarantees visibility and possibly accountability.
Fine. Let's agree to two premises:
1. all the world's money are on a single blockchain
2. there are no banks
Your conclusion, doesn't necessarily follow!
The problem is I can still contract rights to the blockchain outside of the blockchain, e.g. where on the blockchain did it track FTX's cross collateralization? That's not visible unless I express my right somewhere in the public record.
This scenario (and others) underly the broad point made by the parent.
As far your ad hominem on negativity, I have no idea what you're referring to.
That's a marketing line, it's not true. Nobody actually has any custody of anything in crypto. The value of the tokens is completely and totally dependent on a consensus of crypto miners doing their job within the parameters of the system, assuming you want them to maintain a price and trading volume that's favorable to the token holders. If the majority of miners suddenly go bust due to outside circumstances, or they decide to conspire together and attack the system, or conspire with some whales to perform a rug pull, or any number of other malicious actions, then it's extremely likely that your tokens aren't going to be worth anything anymore. This applies to every token, including bitcoin.
You obviously have no idea what you're talking about. Even if all miners right now colluded and tried to take bitcoin from my wallet - they couldn't. Miners can collude and try to double spend the transaction, hurting centralized exchange for example, but they can not ever take funds from a wallet. You own what's in your wallet.
Also, price doesn't depend on miners. Very often in these bear markets miners mine with huge loss. Many give up in those circumstances. If they had any impact on price we wouldn't see so many miners go out of the business.
>The value of the tokens is completely and totally dependent on a consensus of crypto miners doing their job within the parameters of the system, assuming you want them to maintain a price and trading volume that's favorable to the token holders.
Number of miners has absolutely nothing to do with trading volumes, not sure where you got that from. Miners don't maintain a price any more than a whale maintains a price.
>If the majority of miners suddenly go bust due to outside circumstances
The rest of the miners would step in and start making more money, actually.
>they decide to conspire together and attack the system, or conspire with some whales to perform a rug pull
Not much of a rug pull to sell the tokens you've legitimately acquired through mining or fiat buying. That's just selling. High volatility selling, yes, but still just selling.
>it's extremely likely that your tokens aren't going to be worth anything anymore. This applies to every token, including bitcoin.
Oh yes, Bitcoin has died thousands of times. Maybe you'll be right one day, but I doubt it.
>Miners don't maintain a price any more than a whale maintains a price.
Yes, my point is both of them have a means and incentive to manipulate the price in ways that may not be favorable to the trader.
>The rest of the miners would step in and start making more money, actually.
Yes, at the cost of removing some of the security of the system. They can only maintain security if they have immediate access to more hash power which they probably don't. In that moment because of the sudden drop in hash power, the network is vulnerable to an attack by other malicious miners coming in and taking over. Alternately, if the rest of the miners notice what's going on they could see this as increased opportunity for them to conspire and become malicious.
>Not much of a rug pull to sell the tokens you've legitimately acquired through mining or fiat buying. That's just selling. High volatility selling, yes, but still just selling.
This right here is the conversation I most dread having with crypto people. It's fraud. You can call it fraud. Manipulating the market so the price is artificially high and then dumping it off onto unsuspecting buyers is a fraud. It doesn't matter how you initially got the coins. Yes, we can group different types of selling into different categories, like ones that are fraudulent and ones that aren't.
>Oh yes, Bitcoin has died thousands of times.
The exception that proves the rule, huh? There are definitely thousands of shitcoins that have crashed and burned and won't ever recover because they were plain old ponzis. Bitcoin crashed a lot of times, not thousands, but enough to wipe lots of people out every time it happens, relative to the number of people using bitcoin at the time. It's still not clear that any of the money moving around in bitcoin is actually real money or assets. I'm certain it's a ponzi too.
>Maybe you'll be right one day, but I doubt it.
So you're saying bitcoin is too big to fail, is that right?
As others have pointed out, this is completely wrong in literally every way possible.
> Nobody actually has any custody of anything in crypto.
This is insanely wrong and it’s unreal things like this are being said in 2022.
DeFi Example: Take your self-custody bitcoin to Thorswap and exchange it for Ethereum. Pure defi. No trust needed. Total self-custody cross chain trading.
that is true, but the whole ethos of DeFi is to make the process of mining as decentralised as possible. Have many validators, separated across the globe etc. Obviously, there are still chances that all the miners conspire and kill the system, but the chances of that are decreased with increased decentralisation in the mining and validation process.
Coinbase is a public company trading in the US, they are registered and regulated by the US. Reporting and auditing requirements make this kind of fraud much less likely and punishable earlier than collapse. Shareholder groups or the SEC suspecting this kind of fraud have many avenues to prevent, change, and punish this kind of fraud.
The ledger ensures that the handing over of the "thing" can happen without trust in any intermediary. You still ultimately have to trust the counterparty to deliver what they promise.
Think of it like HTTPS. Nobody can sneak anything into the request, but the counterparty you're contacting could still be a fraud.
There are fully-decentalized exchanges which have to have much less counterparty risk (because anyone could take the other side of your deal, so you don't want to trust them). As a simple example, imagine a contract which I send 1 ETH to, and if you send it 1000 USDC it'll send you the ETH. The big counterparty risk with that system is that the price of ETH will skyrocket and someone else will call the contract to make the trade before I can cancel it, but that kind of thing is hard to avoid in any system.
>but that kind of thing is hard to avoid in any system.
No it isn't, that's what limit orders are for. There's still the exact same counterparty risk there anyway, in the form of USDC. Circle is another big dodgy centralized provider. The major critical flaw with all this defi stuff is that it can only reliably trade cryptos for other cryptos. Once you actually try to get any of it out into real assets, the counterparty risk immediately comes back again. No crypto defi stuff can ever solve that. The idea is just bad, it's a scam from the very beginning.
But this isn't counterparty risk, it's fraud risk, right? It sounds like "Atrium borrowed a bunch of houses from FX, but FX didn't own the houses." When you check the Recorder (the blockchain for houses), the deeds should all say "John Doe owns 123 Main St."
In the world with a Recorder of Deeds, Atrium is screwed, and FX might be screwed, but John Doe is easily confirmed as the owner of 123 Main.
It sounds like people here gave their coins to FX, so that the "deed" shows FX "owns" the coin. In effect, they destroyed the 'trustless' part of the equation. And then SBF violated the trust.
So, the next innovation seems to be a blockchain that shows an owner and an agent?
I think technically you would look at this as exchange risk. Securities regulations exist because of precedent, and this isn’t specifically fraud but lack of customer funds segregation from the business risks.
That's because it is all built on greed and a lot of lies.
The only time you actually are part of the trustless system is when you are sole custodian of any private keys necessary to access the coins.
The issue with this is that a whole lot of people have no idea what it is, how it works, how to be part of the system and how to keep keys secure and safe at the same time.
And it is fine. People can't know everything.
But one thing I know, if you buy stuff you do not understand and then you loose money, it is on you.
There has never been a shortage of liars of every kind that seek to steal your money. Somewhat rarer, incompetents who handle your property stupidly. If you care for your money at all, the only person to fault is you.
I can try to seek "justice", but this rarely happens with cons that really know what they are doing. It is what I call victim thinking. That you do something stupid and then get bailed out by some authority.
Still on you. Who did you trust that lied to you? Then starting to ask oneseld: Why did you trust them in the first place. Understanding that part would make it possible not fall for it the second time.
Luckily in many cases this is in fact not “on you”, but rather is a crime, or is subject to civil litigation depending on the nature of the fraud in question. This helps to avoid instances of retributive violence, which is the general solution when a legal system isn’t available.
Maybe you're thinking of Etherium or other smart-contract systems, Etherium is a system where things like that happen automatically. With Bitcoin, the only thing you have is a secure (but static) ledger of who (which wallet/id) has what bitcoins. Any transfers have to be "manually" and just recorded by the blockchain.
Of course, the automatic processes in Etherium produce a bunch of other weird effects.
Where does this Etherium-meme(?) come from? I’ve seen several people writing Etherium and Monaro instead of Ethereum and Monero on mailing lists, but never understood what it means and where it comes from.
This particular misspelling happens often enough (on this forum) that I don't think it's unreasonable to think that some people are doing it intentionally as a form of trolling.
My gawd, I'm moderately dyslexic and I need to check my spelling on everything unusual. I generally succeed but this time I didn't. It's truly bizarre that you think there's anything weird here.
Overall, I'd suspect people not immersed in the crypto world would easily fall into a spelling that "sounds" like they remember it - spelling phonetically is a lousy way to spell but some percentage of the world does it.
Agreed. I haven't dug into the FTX terms of service, but as you put it, the lack of regulations around crypto should be irrelevant - this is outright fraud/theft. Assuming depositors don't all get their money back (which seems like the obvious outcome), seems like some long jail terms are in order.
I mean, Madoff got 150 years and died in prison after about 10 years. While I don't see the FTX fraud in the same league (Madoff went to great lengths, for example, to generate phony statements over many years) it still sounds like fraud to the tune of billions.
> banks at least tell you they are loaning your deposits out
Side not but that’s not really how banking works. Banks create deposits when they originate loans and separately look for the assets they need in order to satisfy any regulatory requirements and net flows of funds for inter bank settlements.
No, when you take a loan out of a bank, the bank doesn't "create deposits" that it loans to you. The bank loans you existing deposits. The method by which banks end up creating money is less dramatic than you think. I wrote a long-form explainer here: https://www.attejuvonen.fi/money-out-of-thin-air/
When you get a loan, the bank creates a liability and deposit out of thin air. The deposit is a "demand deposit", which is effectively equivalent and fungible to central-bank-backed currency (hence the term "money" usually applies to both, though they are different things).
The bank needs no existing customer deposits to create a demand deposit and liability in your account.
You should run through your example again, except begin by creating a loan, rather than first beginning by a customer lending the bank a deposit.
The BoE article linked above is absolutely correct.
You claim that the bank needs no existing customer deposits to create a demand deposit and liability in your account. This claim is true only in the pedantic sense: if the bank is otherwise capitalized (e.g. money from investors in the bank), then it could create loans using whatever money it has, as opposed to using money specifically from depositors. However, what you probably meant is that a bank could loan out money even if it has $0 money in the bank. This is not true at all. A bank can not loan out money if it has no money. It has no printing presses that print physical banknotes, and other banks would refuse electronic transfers from a bank which is known to have $0 money.
Furthermore, it's not clear to me how you believe that the BoE article contradicts what I'm saying. I'm under the impression that you (along with most other people) are simply misunderstanding what you are reading here.
Can you describe how a bank uses money that it has to originate loans?
EDIT: note that this paragraph (and the one preceding it) directly contradicts what you are saying:
This description of money creation contrasts with the notion that banks can only lend out pre-existing money, outlined in the previous section. Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out. A related misconception is that banks can lend out their reserves. Reserves can only be lent between banks, since consumers do not have access to reserves accounts at the Bank of England.
One thing that should raise an obvious flag is that if the bank lends your bank account balance, why isn't it telling you that you cannot withdraw or spend it? After all, that money is supposed to be in your or someone else's bank account! It can't be in both simultaneously.
The only conclusion is that your bank account isn't actually your money but a bank's promise to pay you money and those promises are obviously created by the bank. The only confusion is over whether highly regulated promises that people use in their day to day activity as money substitute can be considered money or not.
The classic "bank takes your deposit and lends it out" only applies to certificates of deposit, after all, you have no access to that money. You can't transfer or withdraw it until the agreed date.
> Can you describe how a bank uses money that it has to originate loans?
Yes.
If I take a loan out of a bank in physical banknotes, then the bank physically loses the amount of banknotes that I physically receive. Physical banknotes are not duplicated. If I take out 100 euros in physical banknotes, then the bank loses the corresponding 100 euros in physical banknotes. The bank does not magically create physical banknotes out of thin air.
If I take a loan out of a bank in the form of electronic transfer to another bank, then usually one of 2 things happen:
1. The receiving bank requires the sending bank to settle all transfers that occurred throughout a timespan such as 1 day, by transferring reserves held at the central bank. For example, if the net outflow from bank A to bank B is +2M, then bank B would require bank A to transfer 2M of reserves to settle the transfers. Note that also in this case bank A loses the amount of money that it lent to me. Money wasn't duplicated. It was transferred out of the bank.
or
2. The receiving bank B has looked through the books of sending bank A, they have a prior relationship, and bank B provides an unsecured loan to bank A. Note that if bank A actually had 0 money anywhere, then bank B wouldn't want to provide bank A an unsecured loan. In this case bank A does not lose physical banknotes, and does not lose reserves held at the central bank, but they still have to record the unsecured loan. In an accounting sense, they didn't magically gain "free money" by providing a loan to their customer.
> This description of money creation contrasts with the notion that banks can only lend out pre-existing money, outlined in the previous section. Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out
I believe this is referring to the creation of the accounting entry. It's true in the most pedantic sense, which is incredibly misleading and unhelpful. Yes, when you type a number into a computer, you can type any number. If I were to open a business where I operate like a bank, taking deposits from people and loaning money to people, and I were to keep a ledger of how much money each person has at their "accounts" with me, I could type any number I want in that ledger. Let's say I type in "9999999999999 dollars". Sure, why not. If your argument is that one can type in any number they want on a computer, then that's true, but it's not a useful argument to make.
Do you think that a bank which has NO MONEY is able to (in a practical sense) create infinite money out of thin air? Sure it can type "9999999999999 dollars" on a computer, but that wouldn't be "real money" in any practical sense, because you wouldn't be able to exchange it for goods and services.
Follow-up question: if you genuinely believe this to be possible, then why isn't anybody doing that? Surely there are many people working at banks who would like to collude with their friends and family to create infinite money. If you believe that to be possible, why has it literally never happened?
> Furthermore, it's not clear to me how you believe that the BoE article contradicts what I'm saying. I'm under the impression that you (along with most other people) are simply misunderstanding what you are reading here.
The contradiction seems fundamental. You're suggesting existing deposits facilitate the creation of loans. The entire BoE article is a repeated attempt at showing how loans create deposits.
> Do you think that a bank which has NO MONEY is able to (in a practical sense) create infinite money out of thin air? Sure it can type "9999999999999 dollars" on a computer, but that wouldn't be "real money" in any practical sense, because you wouldn't be able to exchange it for goods and services.
That's ... exactly how it works.
If the bank believes you are good for 9999999999999 dollars over the term of the loan, they put +x in your demand deposit account, and -x in your loan account (and from bank's view those are respectively the bank's own liabilities and assets).
You can then go and send that money (demand deposit) somewhere else to buy a house or whatever (goods and services). Bank A and bank B both have banking licences, which means they mutually trust using each other's customer demand deposit accounts as 'money'.
You mentioned you wouldn't be able to exchange that for goods and services - but that's exactly what happens. You then need to find those dollars and pay back the loan eventually from a job or whatever, or else you go bankrupt.
If you would like to turn that demand deposit into hard cash to keep under the mattress, your commercial bank will send your demand deposit to the commercial bank's account with the central bank, and the central bank will truck over some cash in return.
I know you get this since you write it as IOUs in the article. What I'm trying to get across is that nothing has to precede the creation of the IOU, whereas I think you say an initial deposit of government-issued central bank money (cash) is required.
> Follow-up question: if you genuinely believe this to be possible, then why isn't anybody doing that? Surely there are many people working at banks who would like to collude with their friends and family to create infinite money. If you believe that to be possible, why has it literally never happened?
Try it :) I think odds are you end up in jail.
And if a bank (or crypto exchange!) is in the business of writing crap to counterparties who can't pay them back, the bank probably goes out of business once everyone realizes the bank assets (loans) are garbage.
Further, regulators like to see banks hold capital against their assets to make sure they can fill the gap when some loans inevitably go bad. That capital could be retained earnings, shareholder capital, etc etc. It just doesn't have to come from an initial deposit.
> What I'm trying to get across is that nothing has to precede the creation of the IOU, whereas I think you say an initial deposit of government-issued central bank money (known as cash).
I'll start responding to this because I think it's a point where we agree: yes, you can type any number in a computer and call it "money". Yes, I agree nothing has to precede the creation of numbers on a computer. However, in order for those numbers to actually "be money" in a practical sense where someone could exchange them to goods and services, the bank has to actually own some real money. If the bank literally has 0 reserves, then the money that it creates on the computer will not be in practice exchangeable to goods and services.
> > Do you think that a bank which has NO MONEY is able to (in a practical sense) create infinite money out of thin air?
> That's ... exactly how it works. [...] You can then go and send that money (demand deposit) somewhere else to buy a house or whatever (goods and services). Bank A and bank B both have banking licences, which means they mutually trust using each other's customer demand deposit accounts as 'money'.
If bank A tries to send 9999999999999 dollars to bank B, bank B doesn't simply trust that bank A is good for it. The transfer would not actually go through in the real world. Please produce a single example where this has happened: a single example where a bank had 0 reserves, created >9999999999999 USD out of thin air, and then somebody exchanged that money to goods and services. A single example is enough to prove me wrong. What you're claiming to be possible has never actually happened.
> If you would like to turn that demand deposit into hard cash to keep under the mattress, your commercial bank will send your demand deposit to the commercial bank's account with the central bank, and the central bank will truck over some cash in return.
So in this scenario we have a bank that has 0 reserves in the central bank, and the bank then goes to the central bank and says "I would like to withdraw 9999999999999 dollars in cash, please". This scenario is comparable to you opening up a checking account at a (regular) bank with 0 dollars in it and then walking into the bank saying "I would like to withdraw 9999999999999 dollars in cash, please". The bank would tell you "sorry, your account has 0 dollars, which is less than the 9999999999999 you are trying to withdraw, so we can't make the withdrawal". This is exactly what the central bank would respond to a bank that is holding 0 dollars in reserves at the central bank while trying to withdraw an amount greater than 0 dollars. Even if the bank was asking the central bank to produce $5, the central bank would say no, $5 > $0, you can't withdraw money you don't have.
Edit: to add clarity, I'm saying that this specific part of your claims is wrong: "your commercial bank will send your demand deposit to the commercial bank's account with the central bank". To the extent that the commercial bank is able to "create money out of thin air", it isn't the type of money that the central bank would accept as a deposit. You can fact check this.
> Trying to get a loan without intention of paying it back is bank fraud. It happens and occasionally for very large sums [...]
That's completely unrelated to this discussion. Yes, a bank can loan out money (money that it has) to a fraudster who has no intention of paying back the loan. The question we have here is, can a bank that has 0 money, can it magically create 9999999999999 dollars out of thin air and loan it out. That's unrelated to whether the loanee will eventually pay it back or not.
> The contradiction seems fundamental. You're suggesting existing deposits facilitate the creation of loans. The entire BoE article is a repeated attempt at showing how loans create deposits.
You present these things as mutually exclusive - they're not. Existing deposits facilitate the creation of loans, and the creation of loans expands the amount of existing deposits. Both of these things can be true at the same time, and they are true at the same time.
> If I take a loan out of a bank in physical banknotes, then the bank physically loses the amount of banknotes that I physically receive. Physical banknotes are not duplicated
The withdrawl of money from a bank as notes/coins is a different operation than the origination of a loan. When banks originate a loan, the first thing that happens is that you see the balance appear in your account. You can then choose to withdraw that in cash.
> If I take a loan out of a bank in the form of electronic transfer to another bank, then usually one of 2 things happen:
Again, the origination of the loan and the transfer of settlement funds to another bank are separate operations. You cannot take out a loan in the form of electronic transfer to another bank.
> 1. The receiving bank requires ... they didn't magically gain "free money" by providing a loan to their customer.
Agreed, so what you've described so far is that banks need reserve balances sufficient to cover interbank settlements and cash withdrawls, and banks do not receive money by originating loans.
What they do when they originate loans is provide an asset to the customer (a demand deposit balance) in exchange for a liability of the customer (the loan agreement).
> I believe this is referring to the creation of the accounting entry
All "money" is simply an accounting entry.
> It's true in the most pedantic sense, which is incredibly misleading and unhelpful.
It's true in every sense, and is very helpful if you want to understand how banking and money work.
> Yes, when you type a number into a computer, you can type any number. If I were to open a business where I operate like a bank, taking deposits from people and loaning money to people
You haven't described the mechanism by which a bank can use deposits it has taken from customers to originate loans to other customers.
> and I were to keep a ledger of how much money each person has at their "accounts" with me, I could type any number I want in that ledger. Let's say I type in "9999999999999 dollars". Sure, why not. If your argument is that one can type in any number they want on a computer, then that's true, but it's not a useful argument to make.
Yes it is, because it's an accurate description of how banks originate loans.
> Do you think that a bank which has NO MONEY is able to (in a practical sense) create infinite money out of thin air? Sure it can type "9999999999999 dollars" on a computer, but that wouldn't be "real money" in any practical sense, because you wouldn't be able to exchange it for goods and services.
Deposits created by a bank are good for all transactions within that bank. If all people were customers of the same bank (some sort of "central bank" if you will) and all currency were digital, then the bank could indeed create infinity dollars without liquidity risk, because all transactions would occur within their own accounting system with no external settlements.
> Follow-up question: if you genuinely believe this to be possible, then why isn't anybody doing that? Surely there are many people working at banks who would like to collude with their friends and family to create infinite money. If you believe that to be possible, why has it literally never happened?
The reason it has never happened in precisely the way you outline above is quite simply regulation. But also, it does happen, fraud in loan origination isn't that rare. Here's a recent example of a banker originating $16m in loans to Paul Manafort in exchange for a shot at working with Trump:
But let's imagine that a bank did attempt to operate without any settlement balances. What would that look like?
It would originate loans by adding $9,999,999,999 to someone's account, and since they're not the only bank, the person has the choice to spend that money wherever they please and some of that money will end up being withdrawn as notes/coins or transferred to another bank.
The originator of the loan would then have to borrow settlement balances sufficient to cover withdrawals in notes/coins and cover interbank settlements. As a result it would be paying interest, which puts up its costs. Now let's imagine all banks did that, starting from $0 on day one.
What happens? The central bank, which is the lender of last resort, lends money to all those banks and they have to pay interest on it, but in lending the money, the central bank has created reserve balances. Now, the bank that is most successful at attracting people to create accounts receives more reserve balances than the others, which they can use to pay back the central bank, thus reducing their costs. If they continue being more successful, they will eventually not only have paid back the central bank, but will have excess reserves which they can use to satisfy future interbank settlements and cash withdrawls and they may even have so much in reserve that they can compete with the central bank to lend those reserves to other banks (at an interest rate just below what the central bank charges -- ringing any bells?) which makes them EVEN MORE money.
So the reason banks like to attract deposits is that it makes them more profitable.
Of course, there are also regulations and capital requirements that are imposed on banks, and the government also creates net financial assets in the banking sector by issuing bonds on the primary market (which is a vestigial way of overt money creation kept in place because it is convenient for a bunch of rich people to get richer, but that's another story).
But fundamentally, we could have a banking system that operates exactly as I described where ALL money creation occurred only through the origination of private credit and subsequent lending of reserve balances by the central bank. It would be a horrible economy with massive inequality and instability, but you could do it, if you so desired. The reason we regulate it is to remove some of that instability (removing the inequality, we're still working on!)
> the origination of the loan and the transfer of settlement funds to another bank are separate operations
Correct. The first operation ("writing a number on a computer") can occur regardless of how much money the bank has. But if operation 2 is not possible, then the number that was created in operation 1 is de facto not money. Remember, we're arguing whether the bank needs to have physical banknotes and central bank reserves in order to "create money" when originating a loan. We're not arguing about whether the bank can type in random numbers on a computer - on that point we are already in agreement. The disagreement concerns whether/when those numbers can be considered to be "money".
> All "money" is simply an accounting entry.
Excluding physical banknotes, yes that is true, but you are implying the reverse of that statement to be true and it's not true at all: all accounting entries are not "money". If I open an excel sheet right now and type in "99999999", that is an accounting entry, but it is not money. Likewise, if a troubled bank has completely ran out of capital and is not supported by structures like the FDIC, and it proceeds to type in "9999999" as an accounting entry for the account balance of the chairman's wife, that is not "money". The chairman's wife will not be able to exchange it to goods and services - hence, it is not "money".
> Deposits created by a bank are good for all transactions within that bank. If all people were customers of the same bank (some sort of "central bank" if you will) and all currency were digital, then the bank could indeed create infinity dollars without liquidity risk, because all transactions would occur within their own accounting system with no external settlements.
Yes, central banks have the ability to create practically infinite amounts of real money from thin air. The argument doesn't concern the central bank's ability to create money, it concerns a commercial/retail bank's ability to create money in the process of originating loans.
> > Follow-up question: if you genuinely believe [a bank which has NO MONEY is able to (in a practical sense) create infinite money out of thin air] to be possible, then why isn't anybody doing that? Surely there are many people working at banks who would like to collude with their friends and family to create infinite money. If you believe that to be possible, why has it literally never happened?
> it does happen, fraud in loan origination isn't that rare. Here's a recent example of a banker originating $16m in loans to Paul Manafort in exchange for a shot at working with Trump:
Nope, that is not an example of a bank issuing an infinite amount of money while having literally zero money in reserves. That is an example of a bank which has >16M in reserves, then issuing loans for 16M. Nothing weird about that. Completely unrelated to what I was asking for. Show me a bank which has 0 reserves, then issues loans for billions of dollars, and then exchanges those billions to goods and services. You can't do that, because that has never happened, because it's not possible.
> But let's imagine that a bank did attempt to operate without any settlement balances. What would that look like? It would originate loans by adding $9,999,999,999 to someone's account, and since they're not the only bank, the person has the choice to spend that money wherever they please and some of that money will end up being withdrawn as notes/coins or transferred to another bank. The originator of the loan would then have to borrow settlement balances sufficient to cover withdrawals in notes/coins and cover interbank settlements. What happens? The central bank, which is the lender of last resort, lends money to all those banks and they have to pay interest on it, but in lending the money, the central bank has created reserve balances
No, the central bank would NOT provide a loan in this outrageous, obviously fraudulent instance. Again, you're claiming this to be possible, but it has never happened.
> But fundamentally, we could have a banking system that operates exactly as I described where ALL money creation occurred only through the origination of private credit and subsequent lending of reserve balances by the central bank. It would be a horrible economy with massive inequality and instability, but you could do it, if you so desired. The reason we regulate it is to remove some of that instability (removing the inequality, we're still working on!)
Now I'm confused. So the example you provided was not supposed to reflect reality? It was just a "we could in theory have a banking system like this"? Yes we could in theory, but in practice we don't. In practice normal banks need reserves in order to issue loans.
> The first operation ("writing a number on a computer") can occur regardless of how much money the bank has. But if operation 2 is not possible, then the number that was created in operation 1 is de facto not money. Remember, we're arguing whether the bank needs to have physical banknotes and central bank reserves in order to "create money" when originating a loan. We're not arguing about whether the bank can type in random numbers on a computer - on that point we are already in agreement. The disagreement concerns whether/when those numbers can be considered to be "money".
I agree that money is a very ambiguous (and probably not very helpful) term, but insofar as we can consider the M1 money supply measure to be the quantity of money available in the economy at any given point in time (which is what the BoE paper is referring to when it says "money creation"), originating loans definitely creates money[0]. When you get a loan, the money lands in your demand deposit account, it's definitely "money" according to the definition of money being used in the BoE paper.
>> All "money" is simply an accounting entry.
> Excluding physical banknotes, yes that is true
Minor point but I would include notes and coins as "entries" in the same accounting system, in the same way as receipts, invoices or cheques. Not really critical to the conversation though ...
> but you are implying the reverse of that statement to be true and it's not true at all: all accounting entries are not "money". If I open an excel sheet right now and type in "99999999", that is an accounting entry, but it is not money.
Well, they sort of are. I mean, any liability denominated in the state's unit of account is, in some way, money. This is the crux of Minsky's "Heirarchy of Money"[0]
For Minsky, there is nothing special or elusive about money. In fact, he says, "everyone can create money; the problem is to get it accepted" (1986, p. 228)[1]
> Likewise, if a troubled bank has completely ran out of capital and is not supported by structures like the FDIC, and it proceeds to type in "9999999" as an accounting entry for the account balance of the chairman's wife, that is not "money". The chairman's wife will not be able to exchange it to goods and services - hence, it is not "money".
Right, but banks are supported by those structures. That's what makes them banks. As we saw in 2008, the government went to extroardinary lengths to insure that even the most recklessly issued loans didn't result in banks becoming insolvent. Bill Black is definitely worth a listen to on this topic[2].
>> Follow-up question: ... Nope, that is not an example of a bank issuing an infinite amount of money while having literally zero money in reserves. That is an example of a bank which has >16M in reserves, then issuing loans for 16M. Nothing weird about that
Well, we don't really know what the reserve position of that bank was, and $16m was probably a relatively small amount relative to the overall capital position, but this is definitely an example of someone going outside of what would be considered normally regulated procedure (regulation being the only thing that separates "good" loans from "bad" loans) for personal gain which is why I thought it was relevant to your point.
>> But let's imagine that a bank did attempt to operate without any settlement balances ... No, the central bank would NOT provide a loan in this outrageous, obviously fraudulent instance. Again, you're claiming this to be possible, but it has never happened.
When a bank receives its license, it can immediately start both taking deposits and issuing loans. Banks lend money to each other all the time, and most loans from the central bank are against collateral such as government securities and other very liquid forms of capital[3] however the central bank will, under some circumstances, lend money to banks against the assets they have themselves created through loan origination[4].
So while my little thought experiment about "starting from $0" is not quite accurate, it's not that far off!
>> But fundamentally, we could have a banking system that operates exactly as I described ...
> So the example you provided was not supposed to reflect reality? It was just a "we could in theory have a banking system like this"? Yes we could in theory, but in practice we don't. In practice normal banks need reserves in order to issue loans.
My example was intended to show you how banks hold reserves in order to make their loan operations more profitable. The point was that even if you started off with all banks at $0 in reserves and funded the entire operation using only central bank loans, you would end up with a system similar to what we have now where the primary reason banks need reserves is to increase profitability. It may be the case that a bank that had no reserves at all would go bust because it wouldn't be able to compete with other banks, but it's certainly not the case that they all need to attract reserve deposits equal to the amount of loans they want to originate. They only need sufficient reserves to satisfy net flows of funds and, because they're banks, they have access to the types of credit facilities they need in order to satisfy short term liquidity shortfalls.
In fact, there was a spectacular neobanking collapse in Australia recently:
"Xinja failed in part because it started taking deposits before it made loans. That meant it had to pay interest to customers before it was generating income."[5]
Banks don't need a certain level of reserves or even highly liquid government securities to satisfy capital adequacy requirements. If you look at the documentation around commencement of a bank and capital adequacy standards[6][7] you'll find a story that is much more complicated than simply "reserve funds". They look at all sorts of financial instruments able to "absorb losses" or "commitment of funds". These mean that you can have investors who have pledged to step in to satisfy liquidity requirements or provide collateral/security for loans from other banks and/or the central bank.
There is a difference between the "capital adequacy" requirements placed on banks and the imagined "reserve requirement". Bill Mitchell sets it out clearly:
"To understand why reserve requirements do no constrain lending you have to understand how a bank operates. Banks seek to attract credit-worthy customers to which they can loan funds to and thereby make profit. What constitutes credit-worthiness varies over the business cycle and so lending standards become more lax at boom times as banks chase market share (this is one of Minsky’s drivers).
These loans are made independent of the banks’ reserve positions. Depending on the way the central bank accounts for commercial bank reserves, the latter will then seek funds to ensure they have the required reserves in the relevant accounting period. They can borrow from each other in the interbank market but if the system overall is short of reserves these horizontal transactions will not add the required reserves.
In these cases, the bank will sell bonds back to the central bank or borrow outright through the device called the “discount window”. There is typically a penalty for using this source of funds. At the individual bank level, certainly the “price of reserves” may play some role in the credit department’s decision to loan funds. But the reserve position per se will not matter. So as long as the margin between the return on the loan and the rate they would have to borrow from the central bank through the discount window is sufficient, the bank will lend.
So the idea that reserve balances are required initially to “finance” bank balance sheet expansion via rising excess reserves is inapplicable. A bank’s ability to expand its balance sheet is not constrained by the quantity of reserves it holds or any fractional reserve requirements. The bank expands its balance sheet by lending. Loans create deposits which are then backed by reserves after the fact. The process of extending loans (credit) which creates new bank liabilities is unrelated to the reserve position of the bank."[8]
In other words, banks issue as much credit as they can to as many credit worthy customers as they can find, and separately look for ways to satisfy any regulatory requirements. It is the case that regulatory requirements will inform lending criteria but it's nowhere near as simple as "x% of reserves".
I think that's the most prudently argued response I've got on HN.
It sounds like we are mostly in agreement, but we disagree on:
1. When something should or shouldn't be called "money"
2. Will the bank - in practice - lose its money-printing ability if it behaves extremely bad
Regarding point 1, I guess we're going to just agree to disagree.
Regarding point 2, it's up to you to provide a single counter-example and prove me wrong. Theoretical arguments won't cut it here.
I'll answer some individual points below:
> I agree that money is a very ambiguous (and probably not very helpful) term, but insofar as we can consider the M1 money supply measure to be the quantity of money available in the economy at any given point in time (which is what the BoE paper is referring to when it says "money creation"), originating loans definitely creates money[0]. When you get a loan, the money lands in your demand deposit account, it's definitely "money" according to the definition of money being used in the BoE paper.
The BoE paper wasn't describing the case where a troubled bank with 0 capital makes up infinite amount of demand deposits. If such a case were to happen in practice, automated systems might initially report the amount of circulating money as infinite, but very soon someone would "correct the error".
> When a bank receives its license, it can immediately start both taking deposits and issuing loans.
This might be as it is written in Australian law, but in practice no bank is going to receive a license if it has 0 capital when starting up. Sure, it doesn't need deposits to start lending, but it still needs reserves.
> Banks lend money to each other all the time, and most loans from the central bank are against collateral such as government securities and other very liquid forms of capital[3] however the central bank will, under some circumstances, lend money to banks against the assets they have themselves created through loan origination[4]. So while my little thought experiment about "starting from $0" is not quite accurate, it's not that far off!
Well, I'd say it's far off. We're comparing "normal bank issuing loans more or less prudently" to "bank with 0 capital issuing infinite money to the chairman's wife". I would argue that your typical central bank is willing to bail out most cases in the former category, while refusing to bail out any case in the latter category.
> It may be the case that a bank that had no reserves at all would go bust because it wouldn't be able to compete with other banks, but it's certainly not the case that they all need to attract reserve deposits equal to the amount of loans they want to originate.
I'm obviously not claiming that banks need reserve deposits equal to the amount of loans they originate. I'm saying that banks need some deposits to issue loans, and I'm saying that any one individual loan is never going to be larger than the amount of reserves held by the bank. The sum of all loans might be larger than the amount of reserves held, but no single individual loan is going to be.
> They only need sufficient reserves to satisfy net flows of funds and, because they're banks, they have access to the types of credit facilities they need in order to satisfy short term liquidity shortfalls.
If a bank issues a huge loan that the customer intends to withdraw from the bank, that can cause a short term liquidity shortfall. So if you're saying the bank needs sufficient reserves to cover for potential short term liquidity shortfalls, then I suppose we are in agreement over the main question in this debate.
> loans are made independent of the banks’ reserve positions [...] Loans create deposits which are then backed by reserves after the fact. The process of extending loans (credit) which creates new bank liabilities is unrelated to the reserve position of the bank."
I'd be to happy to accept a single counter-example where a bank with 0 reserves issues >999999999 dollars to a family friend who then exchanges it to goods and services. Just a single example of this, and I will say I was wrong. Without a single documented case of this happening, you are essentially claiming "this could happen in theory". That's different from "this is how the world actually is today". Many things could theoretically happen in the world, but they don't, and that's not how to world is. In practice banks are constrained in their loan-making by their reserves, even if you have 9 research papers that claim otherwise "in theory".
> Regarding point 1, I guess we're going to just agree to disagree.
I actually agree with you really, I think the term money is terrible and leads to all sorts of misunderstandings about how the world works. But in the sense of the word being used in that BoE paper, bank loans create "money" as in "money supply" as it is measured in official documents.
> 2. Will the bank - in practice - lose its money-printing ability if it behaves extremely bad
I absolutely agree that bad behaviour will (in an ideal world!) lead to the loss of a banking license (although recent events point to the contrary, "To Big To Fail" and all that -- I think that banks should have gone bankrupt and people should have gone to jail after 2008!)
But, with regulation as it stands currently, not having enough reserves to remain liquid prior to originating a loan isn't bad behaviour. In some cases banks can have a negative balance as long as it's not negative for a sustained period of time (regulations differ between jurisdictions). Capital adequacy is not the same as a reserve ratio!
> If a bank issues a huge loan that the customer intends to withdraw from the bank, that can cause a short term liquidity shortfall. So if you're saying the bank needs sufficient reserves to cover for potential short term liquidity shortfalls, then I suppose we are in agreement over the main question in this debate.
I think the key here is the sequence of events, which is subtle but crucial.
Banks don't first take deposits equal to the amount of loans they wish to originate, and then subsequently go looking for people to whom they will originate loans with those reserves as a guarantee of their ability to ensure liquidity to satisfy net flows of funds.
They originate the loans and then separately go looking for whatever funds they need to satisfy their liquidity.
Capital requirements are far more complicated than simply having a reserve ratio. They can be things like commitments of funds subordinated to demand deposit liabilities. In other words capital can be a potential source of liquidity, rather than actual reserves sitting in your account.
They also borrow from each other and from the central bank, including with self securitisation.
> I'd be to happy to accept a single counter-example where a bank with 0 reserves issues >999999999 dollars to a family friend who then exchanges it to goods and services
It doesn't have to be fraudulent in order to fit what the BoE is saying. It just needs to be the case that banks aren't constrained by their deposits, but rather their capital which can take many forms. Reserves make their operations more profitable, and if they're unprofitable enough for long enough, they'll go bust. But the statement "banks lend out reserves" is demonstrably wrong.
> In practice banks are constrained in their loan-making by their reserves, even if you have 9 research papers that claim otherwise "in theory".
I've provided reference documentation from the RBA (that's Australia's central bank) and APRA (Australia's financial regulator), and the original paper is a document produced by BoE which is the UKs central bank, so I think this is a little more than a purely theoretical argument!
I've also discussed this personally with Sean Carmody[0] who works for APRA and has a long history of working in banking with extensive experience particularly in liquidity risk management.
I'm not making it up!
EDIT: Also if you're interested, this whole lecture series is very good (gotta skip over the start with the host economist talking he rambles on a bit) but in particular lectures 6&7 address banking structure and regulation based on the work of Minksy https://www.youtube.com/playlist?list=PLnw-449iRxO-BbfN55FdO...
> the statement "banks lend out reserves" is demonstrably wrong.
It is indeed wrong, but nobody here has made such a statement. Saying "banks lend out reserves" implies that when a bank issues a loan worth $X, their reserves are immediately reduced by $X. I've been pretty clear in my statements that their reserves are not reduced until the customer withdraws $X to another bank (which does not always happen, and even when it does happen, other customers from other banks transfer funds back into this bank, so the net flow is not always negative as multiple banks keep issuing loans and money is shuffled between banks).
> banks aren't constrained by their deposits, but rather their capital which can take many forms
Sure! I like this way of putting it.
Now, a bank which has a high amount of capital can in practice issue more loans than a bank which has a low amount of capital. And one way of increasing the bank's capital (and thus improving the bank's ability to issue loans) is increasing the bank's reserves. So there's some kind of positive correlation between a bank's reserves and its ability to issue loans, right? You mentioned yourself that a bank has to have sufficient capital to survive short term liquidity events, and issuing a large amount of loans increases the probability of such events.
> I've provided reference documentation from the RBA (that's Australia's central bank) and APRA (Australia's financial regulator), and the original paper is a document produced by BoE which is the UKs central bank, so I think this is a little more than a purely theoretical argument!
The sources you've provided describe the "general case" of banks making loans as part of normal business proceedings. The documents do not describe the extreme case of a bank issuing infinite money to the chairman's wife. I don't believe that the writers had this extreme case in mind at all when they were writing these papers. You're making the argument that the same mechanisms that enable the general case would equally apply to the extreme case. I don't believe that, and I don't believe all of the writers of those papers would agree with you either. Even if the writers are sometimes using inappropriately strong expressions like "there is no relationship between customer deposits and loan issuance", I don't believe they mean that literally (and if they do mean that literally, then I'm going to argue that the papers are wrong).
Let's go back to the concrete example: A bank is known to have lost ALL of its capital and is known to have billions in liabilities that it will never be able to pay off. The bank then issues a $10B loan to the chairman's wife. The chairman's wife then exchanges that $10B to physical yachts and aeroplanes. You believe that this can happen in practice, because you believe that the central bank would provide the reserves needed to settle the transfers, even though the central bank is aware that the bank is acting with malice and committing fraud. You believe that this behavior might "lead to the loss of a banking license", but you don't believe it might prevent yacht-buying and aeroplane-buying before the loss of banking license occurs? If I understood your position correctly, then we disagree here, and I'd be happy to change my position when a single counter-example is presented. If something like this has never happened in history, then I don't believe it can realistically happen in the future either.
The reason why I'm bringing up this extreme case is to demonstrate that clearly there is some connection between the bank's... I'm going to say capital... and its ability to issue loans. This connection also exists in less extreme cases, but it's easier for me to demonstrate with this extreme example.
> It is indeed wrong, but nobody here has made such a statement
Really? The very first comment I replied to was:
"banks at least tell you they are loaning your deposits out"
My response:
"Side not but that’s not really how banking works. Banks create deposits when they originate loans and separately look for the assets they need in order to satisfy any regulatory requirements and net flows of funds for inter bank settlements."
Your initial response:
"No, when you take a loan out of a bank, the bank doesn't "create deposits" that it loans to you. The bank loans you existing deposits"
Are you saying there's a distinction between "banks loan you existing deposits" and "banks lend out reserves"? They seem to be the same statement to me ...
> Now, a bank which has a high amount of capital can in practice issue more loans than a bank which has a low amount of capital. And one way of increasing the bank's capital (and thus improving the bank's ability to issue loans) is increasing the bank's reserves
Yeah that's one way they can do it. Those reserves would then almost always be swapped for bonds unless there's more money to be made by loaning them to other banks (which is how the central bank sets and defends the interest rate).
> So there's some kind of positive correlation between a bank's reserves and its ability to issue loans, right? You mentioned yourself that a bank has to have sufficient capital to survive short term liquidity events, and issuing a large amount of loans increases the probability of such events.
You could, if you wanted to, have a bank that capitalised entirely with reserves, but it's way more profitable to attract reserves, lend them out to other banks who have attracted less reserves, and buy bonds with said reserves. You can use the loans you made yesterday to another bank as collateral to borrow at the discount window, for example, if you find yourself in your own liquidity crunch.
So I'd say a more accurate statement is that there is a positive correlation between a bank's ability to attract reserve deposits and its profitability, both due to additional loan origination capacity and due to low capital costs. But reserves are only one piece of the puzzle.
I would say that reserves within a bank's capital mix are similar to tyres and car safety. Having bald tyres is really unsafe, and having better tyres improves your car's safety, but there are tonnes of other ways to drive safely and there's a point at which you're over spending on tyres that won't make any difference to the overall safety of the car (don't you just love car analogies?)
> The sources you've provided describe the "general case" of banks making loans as part of normal business proceedings.
Yes agreed.
> You're making the argument that the same mechanisms that enable the general case would equally apply to the extreme case.
Not really, the part where I used "starting from scratch" as an example was to highlight that reserves increase profitability of a bank and that while, due to regulation, banks can't just start with "nothing" (they need some way to satisfy their liqudity requirements, aka capital), but the system we end up with a little while after "starting from scratch" is very similar to what we have now. The crux of the matter is that reserves increase profitability. It is almost certainly the case that a bank that always has to borrow to satisfy all liquidity requirements will go broke, so regulators don't let that happen, but also a bank which over capitlises reserves relative to loan origination (Xinja being the extreme example of that) will also fail.
The genesis of this thread was the notion that banks "lend out deposits", that's what I'm arguing against.
> but you don't believe it might prevent yacht-buying and aeroplane-buying before the loss of banking license occurs?
Well, actually probably not! Like, they couldn't do it twice, but banks are allowed to have negative reserve balances for a time. If they had been found to be fraudulent then they should go to jail (would they though?) but on the actual day that this happened, the yacht transaction would probably actually succeed. Of course, if the owner of the yacht could be traced back to the fraud committed as a willing participant then that yacht could well be siezed as part of the estate and so on, proceeds of crime and whatnot.
But if some dude really flipped and just typed in the numbers, they could do it, but it would wind up very quickly.
However there are not-too-dissimilar tactics used in banks such as appraisal fraud and liars loans. If you listen to Bill Black's recipe for control fraud it's more or less what you're describing[0], just a little slower and a little more "book cookey".
His book "The Best Way to Rob a Bank is to Own One" has many examples of control fraud. Sure it's a little more deceptive than just opening a spreadsheet and typing in the numbers, but they're totally faking capital levels in order to obtain liquidity to satisfy net flows of funds, resulting in tremendous short term profits and eventual collapse.
> The reason why I'm bringing up this extreme case is to demonstrate that clearly there is some connection between the bank's... I'm going to say capital... and its ability to issue loans. This connection also exists in less extreme cases, but it's easier for me to demonstrate with this extreme example.
Right so what you could say is there's definitely a "credit limit". If you typed in $9,999,999,999,999 into the spreadsheet and then tried to spend it all externally (meaning that none of the people you were buying from had accounts at the same bank, OR you tried to withdraw all that money as notes and coins) then that would set off some sort of warning: either you'd be trying to borrow too much too quickly from too many people, or your account would be so negative overnight that the Fed would give you a call and be like "ummmm ... no". This is pretty similar to what things might look like if you or I tried to spend too much too quickly on our AMEX card.
But "having reserve deposits" is not a pre-requisite for originating a loan. Banks can (and do!) get away with somewhat subtler forms of control fraud over a period of time that is not really that long (2 - 3 years, say) during which time executives can stash an enormous amount of cash and just leave the mess for the regulators to clean up.
There certainly are people who advocate for 100% reserve banking and an end to private credit such as Positive Money[1] but their policies are not very practical and (as per the lecture series I linked to earlier) some private credit creation is probably a good thing to have in an economy. The problem is how dominant the financial system itself (which is, ultimately, just a record keeping system) has become in terms of GDP. We need to make finance boring again!
[1] https://positivemoney.org it's worth noting that while I do, in general, not agree with much of what PM has to say my understanding is that they were actually quite instrumental in lobbying to get the BoE to produce the paper to which I originally linked. In their case they were motivated to "expose the reality" and shock everyone into demanding 100% reserve banking but I don't think anyone was actually all that shocked by it, except David Graeber who wrote about it https://www.theguardian.com/commentisfree/2014/mar/18/truth-... and, as luck would have it, was where I first learned about MMT in the comments section when someone linked to this youtube video https://www.youtube.com/watch?v=bTZGU9s0idM
> > It is indeed wrong, but nobody here has [claimed that "banks lend out reserves"]
> Really? The very first comment I replied to was: "banks at least tell you they are loaning your deposits out"
Hmmh, you're right, that claim has been made. Also I acknowledge that I have phrased some sentences ambiguously. Specifically this one that you dug up:
> > "No, when you take a loan out of a bank, the bank doesn't "create deposits" that it loans to you. The bank loans you existing deposits"
> Are you saying there's a distinction between "banks loan you existing deposits" and "banks lend out reserves"? They seem to be the same statement to me ...
No, I wasn't trying to make that distinction in this context (in another context we were discussing a hypothetical of a newly-founded bank which might have a lot of reserves even before it has depositors, and in that context that distinction is meaningful).
I was making a distinction between the act of writing numbers on a computer, and the act of taking money out of a bank. Note that my sentence began with these words: "when you take a loan out of a bank". When I say "out", I'm referring to a cash withdrawal or bank transfer to another bank. When you withdraw your loan out of the bank, the bank needs to spend some reserves in order to settle the transfer.
You made a point that sometimes the bank acquires those reserves AFTER it issues the loan, and I take your point. You also made a point that the bank might fraudulently acquire those reserves, I accept that as well. My point wasn't really focused on when the reserves need to be available for the bank, or how the reserves were originated (deposits vs fraud vs selling off assets vs ...). My point was that when you take money out of a bank, the bank can't fake it. It needs to have some stuff that it can't make up out of thin air, and after you take that stuff, the bank no longer has that stuff.
> You could, if you wanted to, have a bank that capitalised entirely with reserves, but it's way more profitable to attract reserves, lend them out to other banks who have attracted less reserves, and buy bonds with said reserves. You can use the loans you made yesterday to another bank as collateral to borrow at the discount window, for example, if you find yourself in your own liquidity crunch.
I take your point that a bank's capital mix can consist of many different kinds of assets and reserves play only a small part. We can continue this by discussing the relationship between the bank's capital and its ability to issue loans, since that is a more accurate way of describing things.
> Right so what you could say is there's definitely a "credit limit" [...] Fed would give you a call and be like "ummmm ... no" [...] But "having reserve deposits" is not a pre-requisite for originating a loan. Banks can (and do!) get away with somewhat subtler forms of control fraud over a period of time that is not really that long (2 - 3 years, say) during which time executives can stash an enormous amount of cash and just leave the mess for the regulators to clean up.
Awesome. It sounds like we agree.
Listen, I've enjoyed this discussion so far, and I learned some things I didn't know beforehand, but it's time to call it a day. If you feel that we still disagree on some substantial points, I'd like to hear you hash it out in the form of "this is my opinion, and here is how that's different from your opinion" (articulate not only your own point of view, but also the opposing point of view, and how it is different from yours). I suspect that we're actually in agreement of all substantial points, while we might somewhat disagree on minor things like definitions for words or how easy it is to swap fake money to yachts.
> When I say "out", I'm referring to a cash withdrawal or bank transfer to another bank. When you withdraw your loan out of the bank, the bank needs to spend some reserves in order to settle the transfer.
You are wrong. Without existing deposits the bank has no money to loan out. They can write numbers on screens, but eventually the money they loaned out will be transferred and the bank that it was transferred to will ask for settlement.
That's exactly the point - money is just numbers on screens. there is no money to loan out. the act of lending creates the money.
- Bank starts with $0 capitalisation or deposits
- Customer goes to bank and asks for $1 loan
- Bank believes customer is creditworthy and says yep
- Bank creates two accounts for customer, loan account and deposit account. Loan account is -$1 and deposit account is $1
- customer transfers $1 from their deposit account to someone else's account at a different bank in exchange for goods/services
- customer account at the bank is now loan account -$1 and deposit account $0
- Customer eventually needs a way to get $1 back from somewhere else to pay the loan back, else face bankruptcy proceedings etc etc
Commercial banks all agree with each other that they accept each other's demand deposit accounts as a form of money.
MMT economists have been instrumental in dispelling many of the popular misunderstandings about how banking works in addition to their work dispelling the many popular misunderstandings about how government finance works.
But also qnt is clearly well versed in MMT which is what I was referring to.
The details of how the actual transactions occur might be different, but the general concept of fractional reserve banking is still “loaning out a portion of deposits”
There is the department that issues loans. Their job is to identify credit worthy borrowers and issue loans to them.
Then there is the department that handles compliance. Their job is to make sure the bank complies with the various regulations imposed by the government, such as Basel III and capital requirements and the like.
They are separate operations though. The people issuing loans don't call up the people complying with regulations and check whether or not there are enough reserves there to issue loans today, they just issue as many loans as they possibly can because that's how they make money.
Banks borrow from each other to satisfy their liqudity and other requirements, and the central bank is generally a lender of last resort, so banks can always satisfy their short term flow of funds requirements by borrowing money. The reason banks want to attract depositors is that it's CHEAPER than borrowing the money, and without any deposits they may not actually be profitable.
So the more deposits a bank can attract, the more profitable their lending operations are, but their lending operations are not constrained by their reserves per se.
It's more accurate to say they loan out a multiple of deposits based on the inverse of the fraction (the "money multiplier"). If someone puts 1 million in the bank and the fractional reserve is 20 percent, they can now create loans of up to 4 million. Such that the reserve is 20 percent of their total assets of 5 million (= 4 million loans + 1 million cash).
Again no, neither of these are accurate. Modern banks do not operate on a fractional reserve basis at all. This is a falsehood peddled by well out of date undergrad econ textbooks
I'm describing what fractional reserve means. Technically that fraction has been set to zero very recently so it is trivial though still not false. This was discussed a lot elsewhere on this board.
No, fractional reserve means that they can lend out $800K of the $1M deposited, even though the $1M is still counted as the depositor's money and also $800K is a available to lend.
But there's no multiplier as you describe it. It appears though. First deposit $1M. Then create that loan for 800k, and deposit it right back in the same bank. Now the bank has $1M versus 800k loans so the reserve is back above the 20 percent reserve requirement. We don't even need to work out the math, just keep repeating the process with smaller loans until we reach our limit at the reserve, which clearly must be (the very same) $1M in deposits, and the max of $4M loans, making for $5M total. Accounting rules to prevent this being done by a single bank alone just means it takes more banks trading loans to get the same effect. Rather than a wonky description of the rules, basic econ class still has the variations covered.
Can you describe the mechanism by which deposits held by a bank are lent to borrowers under the fractional reserve system described in that Wikipedia article?
"Fractional-reserve banking is the system of banking operating in almost all countries worldwide,[1][2] under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, and are at liberty to lend the remainder to borrowers"
Nobody expects that their money deposited into a savings account is going to sit in a bank vault until it’s time to go pick it up — they know the bank is going to loan it out and pocket the difference between what they charge the borrower and what they pay in interest.
Checking accounts are different in that they should have the money on hand to settle whatever spending the customers get up to but instead they practice fractional reserve deposits with a central bank to bail them out if needed.
The difference here is the crypto bros are practicing fractional reserve without someone to bail them out so depositors just get screwed.
Reserve requirements are about how much cash they must keep as a percentage of their assets, where capital requirements (which are non-zero) are more relevant to the fraction held in fractional reserve systems and are about ensuring solvency.
The major difference is that banks can be highly leveraged (and cross-leveraged) under capital requirements only. I think this has to be the case or there wouldn't have been a need or reason to reduce fractional reserve requirements; if banks had been holding their capital as currency or deposits in other institutions then the fractional reserve requirements would have been trivially met since the percentages were lower.
As FTX showed, if most of your capital loses its value then you are insolvent. The banking system is just a little more insecure than it was with fractional reserves.
I'm happy to be shown that I'm wrong, since I am not an expert.
I’m not either! Just wanted to point out that the “zero reserves” thing is a bit more complex than purely what US banks are required to keep as cash in the reserve requirements).
Further, from the announcement that lead to this, it seems that the reserve requirement is zero because the mechanisms have changed. The reserve requirements appear to have applied specifically to reserve accounts held centrally at the federal reserve.
To me this looks very much like a ‘scare’ factoid that can be latched onto and shared in order to persuade people that the banking system is way more fragile than it is, and that it’s collapse is either imminent or inevitable.
OMG zero reserves! Dig a bit deeper and that’s partially true and perhaps not all that important, and represents a technical change in operations rather than the massive risk increase it gets portrayed as.
In theory we could do 100% reserve banking with negative interest rates on cash and demand deposits but then "savers" will start complaining how it is draconian to get a certificate of deposit.
I’m pretty ignorant when it comes to this space. Do they not have any kind of compliance structure? In hindsight it seems pretty obvious that this sort of thing would happen without it.
One thing to note is that FTX.us is an affiliated company that is onshore in the US, that does have compliance requirements, and FTX.us is currently not believed to be insolvent/bankrupt. *This may not be true, there are rumors that I haven't looked into that FTX.us is halting withdrawals, which does not bode well.*
FTX.com is some conglomeration of entities incorporated in Antigua, Bermuda, and the Bahamas[1]. FTX.com is the one that has blown up, and I won't pretend to know about the reporting requirements of such a complicated structure in multiple jurisdictions.
Also, Sam Bankman-Fried owned 90% of Alameda Research as of last year. So unless that changed(I can't find evidence it has), it looks to me like he tried to bail himself out with customers' money. Presumably he thought he could return the money eventually and no one would be the wiser. So much for that.
This is just my understanding and I am not an expert in these things.
Isn't it quite possible there might be contagion there though as well? For instance the NY Times had the following in a piece they just published:
>"Mr. Bankman-Fried is also facing dissent from within the senior ranks of FTX. On Wednesday night, the general counsel for FTX’s U.S. arm wrote on an internal messaging system that he had “advised U.S. regulators of my instruction to founders to turn off functionality” of the websites for FTX and the U.S. arm, according to two people who saw the message and a screenshot that has circulated on Twitter.
“Sam has a different perspective than me on this,” wrote the lawyer, Ryne Miller. He added that “we should not be optimistic for an outcome that is positive.” The post was swiftly deleted."[1]
Well, they at least had compliance staff. "Most of FTX's legal and compliance staff quit Tuesday evening, people familiar with the matter told Semafor, leaving few executives who could answer questions that now loom large over the firm." https://www.semafor.com/article/11/09/2022/ftx-legal-and-com...
Pretty much every large exchange has a compliance team, btw, at least the ones with US operations.
compliance to what? all those regulations are just hindering the operation of the free market, and we started this whole crypto thing to avoid them on purpose?
Think how much cheaper and faster cars could be, if we didn't have to spend resources on seatbelts and catalytic converters. The entrenched car hegemony are in bed with the government to keep the little guy down by requiring these things.
>Do they not have any kind of compliance structure?
Not really, but again banks don't have compliance against this either, it's just that people are less likely to withdraw their money from the bank at the same time, and when they do the gov will tell the fed to print more, and with crypto you can't print more, so a bankrun has immediate effects.
Not exactly, because banks tell you that they will loan out your money and you might not get it back, that's why you get interest on the account. They can't go horse betting, but they can loan it out. You don't have "title" over the USD in the bank reserves.
This is like if you put $100 in Chase's security deposit box, and they opened it up, took the cash, and lent it out, and then when you come to get it, they say, woops, we lost it all. That would be just straight up theft or fraud.
Civil asset forfeiture is one of those things that feels really unjust in the US, and I'm somewhat surprised there hasn't been a Supreme Court case ruling it unconstitutional per the 4th Amendment.
I'd love to hear a steelmanned argument in favor of it, maybe I'm missing something obvious?
The only steelmanned argument for civil asset forfeiture goes back to its origins, when it was used to seize smuggled goods on ships. Since the ship's owner was almost always a wealthy person living in a different country making them almost impossible to go after, and the smuggled goods were missing tax stamps etc. making it clear that they were being illegally smuggled, the government would simply seize the goods. That's literally the origin of civil asset forfeiture in the US, and all of the horrible and unjustifiable examples of it that we see nowadays grew out of that much more limited and justifiable example.
Seems to me in the specific case of wealthy foreigner owns smuggled good a better (more just) arrangement accuses them not the goods, but with the mechanism that if they for some reason don't want to attend court (maybe because they're super guilty?) their goods are seized but the crime still exists.
There are some nuances to work out to ensure cops can't accuse say Vladimir Putin of a crime involving the $8000 they found in your house, and then since Putin doesn't show up they keep your money, but the general idea seems more sound than civil forfeiture.
If they reasonably cannot determine its owner, they get to seize it, but if you show up with proof it's yours they have to give it back (and go through the normal process).
> I'd love to hear a steelmanned argument in favor of it, maybe I'm missing something obvious?
If it were a big shipment of plutonium laced heroin, it seems fair game.
I think the biggest issue with civil asset forfeiture is the conflict of interest where police departments are keeping/using the seized assets. From the outside it looks a lot like the government acting like a gang.
The other big problem is it seems like it is up to the owner to prove the assets "innocence", rather than police proving the assets were the result of illegal activity.
If assets are seized, they need to go to a third party that can store them safely, return the assets to their owners. If found "guilty", the assets should go to some victims of crime fund, or destroyed.
Gold is legal. So is cash - in fact it’s legal tender for all debts public or private. By contrast, plutonium laced heroin is definitely not legal without the appropriate licenses from multiple regulatory agencies.
Yeah, I guess I wasn't super clear. I meant seizure of certain things is fair game i.e. Obviously problematic stuff. I didn't mean to suggest that means all things are fair game to be seized.
Looking at Wikipedia's definition of civil asset I see my "in head definition is slightly wrong:
> Civil forfeiture in the United States, also called civil asset forfeiture or civil judicial forfeiture, is a process in which law enforcement officers take assets from people who are suspected of involvement with crime or illegal activity without necessarily charging the owners with wrongdoing. While civil procedure, as opposed to criminal procedure, generally involves a dispute between two private citizens, civil forfeiture involves a dispute between law enforcement and property such as a pile of cash or a house or a boat, such that the thing is suspected of being involved in a crime...
So my use of clearly illegal assets being seized means it wouldn't actually be civil asset forfeiture. Mea culpa!
Civil asset forfeiture is a surprisingly complicated network of related legal issues, unfortunately. It can be incredibly complicated to litigate. Asset forfeiture cases often involve the federal government and have to be litigated in federal court, which is difficult and expensive.
If you want to think of laws as an ecosystem, then think of civil asset forfeiture as a highly evolved species with all sorts of specialized defenses.
It seems to be slowly being ground away. The modern version of civil asset forfeiture was as a tool to take away the profits of drug kingpins in the 1980s and bootleggers during prohibition. Seems like the modern drug kingpins are companies like Johnson & Johnson, though.
No civil asset forfeiture: cop pulls a drug dealer over, the drug dealer bribes the cop and is on his way.
With civil asset forfeiture: cop pulls a drug dealer over, the drug dealer offers to bribe the cop, the cop laughs and takes all his stuff anyway, books him, and the police department buys a martini machine.
Kind of a weak case, but that was the best steelman I could think of.
It sounds like a good idea until a cop acuse you of been a drug dealer without evidence, take all your money, and then you realize why you need a constitution and a independent court system.
> Every year, a few hundred customers report to the authorities that valuable items — art, memorabilia, diamonds, jewelry, rare coins, stacks of cash — have disappeared from their safe deposit boxes.
Asset forfeiture sucks, but I’d be more worried about run of the mill bank incompetence. Banks don’t really want to be in that business and screw up often.
And the FDIC can afford to do that because there are laws dictating liquidity requirements to banks and disclosure requirements to inspect and enforce those rules.
What was that recent quote about cats thinking they are independent, but in fact are completely dependent on a system that they don't understand at all?
You would’ve been correct two years ago. We’re doing zero fractional reserve banking now. Hearing this should convince people that they should get their money out now, but nobody seems to care.
The required reserve amount was reduced to zero at the beginning of the pandemic as a way to increase the velocity of money. We are in ZFRB land right now.
Bank reserves have obviously dropped year over year since the introduction of this policy, especially as a percentage of M1/M2.
>The required reserve amount was reduced to zero at the beginning of the pandemic as a way to increase the velocity of money.
No; again. The Fed moved from a 'scarce reserves' regime for monetary policy to an 'ample reserves' regime; that was announced in 2019. Since the 'ample reserves' approach doesn't depend on bank reserves to implement short-term rate management, there wasn't really a need for an ongoing Fed reserve requirement.
>Bank reserves have obviously dropped year over year since the introduction of this policy, especially as a percentage of M1/M2.
Bank reserves increased hugely from 2019 through the middle of 2021, as you can see from the chart I posted. Although they've dropped somewhat since then, they're still like 75x what they were in say 2007.
You are describing their reserve requirements at the fed itself. Nothing has changed with their A&L requirements from the variety of banking regulators (including the fed & fdic).
For comparison there were rumors that Credit Suisse was in trouble when r their asset to liability mix got around 1.65. That is they marked their assets to 165% of their liabilities and it was a major issue.
I don’t know about others, but I suspect that if the FDIC ran out of money, congress would figure out a way to fund it even if it meant printing money. I am okay with this.
Right, but the FDIC explicitly says large amounts may take longer in the status quo. The only reason to have money in the bank is for a reasonably safe, liquid form of money.
If they aren’t providing safety or liquidity, why should you use them?
They are providing safety and liquidity, your statement is laughable, honestly.
The safety is personal — no one can rob your home when you're gone and steal the money under your mattress because it's not under there, it's in a bank.
And in regards to liquidity, if you can tell me the exact day, time, and amount you tried to pull out of a consumer bank (large household bank names) and instead of getting cash in hand the bank told you "sorry, we spent your money on loans, we don't have any to give you", I'd love to see it.
Bonus points if then the FDIC didn't cover it.
Banks provide both safety and liquidity at the consumer level. It would also be a really bad idea to continue to encourage everyone to pull money out of banks and hold it in cash — both economically and personally. People largely benefit from banks existing, that's, well, why they exist!
> Right, but the FDIC explicitly says large amounts may take longer in the status quo.
Right, you can’t ramp up the printing presses instantly — which is literally what they would do if they had to.
I think people are missing the point that if it ever got so bad the FDIC had to worry about covering everyone your biggest worry would be the roving gangs looking for the Mormon food caches.
The FDIC, as of March 2021, has 119.4 billion[0], along with "... a US$100 billion line of credit with the United States Department of the Treasury.[9]"[1].
I think they've got enough to cover any consumer issues.
Bank of America has an estimated 67 million customers. Assuming $250k per person, and I've got the number of zeros right, that's $16 trillion ($16,750,000,000,000) in liability if they were to go down, enough to sink FDIC.
I think you got the math wrong, because I'm 100% sure not all 67million customers have $250,000 in their accounts. Being that 56% of Americans can't cover $1,000 expense[0], and most people with >$100k assuredly have their money in assets rather than cash, I think your math is way, way, way off.
How much is the total liability they are guaranteeing?
And $119 billion where exactly? In US treasuries? If so it's about as safe as the social security "fund". What if the "customer issue" includes a govt default?
All you're saying here is that we can treat an FDIC guarantee like a govt guarantee, which is probably true, but still not the same as a case where the guarantor has actual assets which the prior poster was suggesting. The FDIC is making promises and backing those promises with other promises. There's not cash laying around anywhere to back it up. I'm not saying the only response is run for the hills like the other poster, but I find these defenses rather naive. The likelihood of any insurance scheme failing is not zero. Same for a government's finances.
> There's not cash laying around anywhere to back it up.
Did you not read the part where they have $119.4 Billion dollars? And that was a year-and-a-half ago, it's probably closer to $130B now. It seems like you didn't read any of the source material, let alone my comment, before replying.
...yes I did. Your post at least, which was short and sweet. Bravo. I did not read the wiki article and don't plan to, but I skimmed the other one. Got as far as this at least: "Means and Strategies: The FDIC maintains the viability of the DIF by investing the fund, monitoring and responding to changes in the reserve ratio, collecting risk-based premiums, and evaluating the deposit insurance system in light of an evolving financial services industry."
"DIF fund" being the $119B. In my post I presumed that 119 billion is in US Treasuries. I'm also presuming US treasuries are not the same thing as cash. Whatever the case, generally people don't refer to "cash laying around" as an investment.
Per institution.
And there is a lot of consolidation.
So I would be careful.
It is really easy to be placing money into different banks, but essentially the same one.
A married couple each have 250k coverage for their personal accounts, and each have 250k for shared account(s), so they could in theory have 1M coverage at a single institution.
As others have pointed out in comments on this post, banks typically don't loan out customer funds and instead use them as reserves. For loans, banks can create money out of thin air and just increase the number representing the borrower's bank account balance in a database somewhere. Interest is to incentivize adding more reserves to their balance sheets which in turn allows more loans (with considerably larger interest rates) to be given out
>Not exactly, because banks tell you that they will loan out your money and you might not get it back, that's why you get interest on the account.
That's not right either. They promise you will get it back (the FDIC insurance), just that e.g. large amounts may have a delay. They are also scrutinized by regulators to ensure that the loans are sane enough not to all evaporate in value overnight, as a horse bet might.
Yep, this is exactly what happened en masse during the Great Depression. People were selling their bank account books for a fraction of their nominal value.
1) Chase doesn't have to show you $0, you'll still see $100.
2) When you decide to spend the money, chances are the seller is also with Chase, then all Chase has to do is show you $0 and the seller +$100
3) If the seller happens to be with another bank, Chase will just go in credit with that other bank for $100. The total of such interbank accounts is around 0 as money flows both ways, and, with a decent margin, within the bank reserve amount.
Fractional-reserve banking works so well with so little "actual" reserve money that some consider it counterfeiting.
Eventually the other bank will ask for settlement. Maybe it’s because you owe them a billion dollars and they have a liquidity crisis. Whatever the reason is, you can’t just go on forever “oweing” then money.
Because Chase actually does something sort of similar (primarily mortgage lending), but they employ a ton of people to think all day about managing risk.
So I think people don't like the comparison, since the true difference is FTX did horse betting, while Chase does something much more rational.
To add to that: Chase tells you what they're doing. FTX told its customers it wouldn't lend it out, and then it did. Additionally, customer accounts at Chase are insured by FDIC up to $250k. Chase tells you they're going to bet with your money, manages the risk well* on most days*, and even if they lose your money you get it back anyway. FTX did the opposite of all that.
Chase is also more restricted in how the investment banking side of the business can use funds from the retail banking side, precisely because banks in the 1920s did play fast and loose with investing customer deposits, which caused a bunch of depositors to lose savings in the 1929 crash and associated bank runs.
This is why in regulated securities markets customer assets must be held in segregated accounts. Corzine, who knew better, ended up with an orange suit for not doing this.
He did not go to jail, which prompted a satiric call to "Free the Honorable Jon Corzine." His LinkedIn page describes him as running "an opportunistic macro hedge fund."
Why won't he be thrown in jail? This looks pretty open and shut. The courts will confiscate his assets and jail him. This is quite similar to what happened to Bernie Madoff.
From Gulliver's Travels by Jonathan Swift, the lands of Lilliput and Gargantua. In one, every resident is tiny, Lilliputian, and in the other: huge, ...Gargantuan
Notably, the book reads in a very modern way, it's a bit shocking to know it was written in the 1700s when stylistically, and according to its vocabulary, it feels so very modern.
You are absolutely correct. I missed that on my proofread. Kind of lame since it is such a short post.
The older I get, the more I find myself making spelling mistakes based on word pronunciation. Sometimes I use a totally different word than what I was thinking, which makes absolutely no sense unless you read it aloud. Then you realize what happened. Hopefully it is not early onset dementia. Though it would not be -that- early.
> The older I get, the more I find myself making spelling mistakes based on word pronunciation. Sometimes I use a totally different word than what I was thinking, which makes absolutely no sense unless you read it aloud. Then you realize what happened. Hopefully it is not early onset dementia. Though it would not be -that- early.
I think it isn't, and suspect we all have such quirks, especially at the interaction of writing and sound. I occasionally find, for no clear reason, that when I am trying to say a color name I will instead say another color with the same first letter (e.g., if I meant to say 'green', then I will sometimes say 'grey' instead). I am not so young either, but I have done this for as long as I can remember, and don't think I suffer from dementia ….
Do you mean because there's some connection between FTX and YC? I certainly don't know of any.
Moreover, even if there were, (a) the OP has been on HN's front page for hours and is currently at #4, (b) this story has been heavily discussed on HN, with several major threads in the last few days alone, and (c) asking people not to fulminate doesn't mean they can't make substantive critical points—if anything it helps them do so.
I wrote a post critical of the actions of YCombinator and its affiliates, it received thousands of unique visitors and rose quickly on HN, and then was flagged and removed and comments blocked.
I don't think anyone should be able to flag anonymously. Judges don't get to hide behind anon accounts when they hand out sentences. Not in America anyway. It's cowardly and dishonorable.
I don't mind when dumb stuff I submit gets flagged. But when something strikes a chord and rises to the top and then is flagged, we have a "make something people want, that the censors approve of", type of situation.
I think when users flag a post they should only be given that privilege if their account is under their real name and if it shows who flagged a post. I rarely flag a post but when I do I would always be willing to do so publicly and state why. Otherwise downvotes/lack of upvotes should be the only acceptable means of flagging.
Obviously you post under your real name, so if you flag anything then I of course can disagree but have no right to be upset as ultimately you are the final judge here and I respect that.
I understand if you have a disagreement with how flags work on HN—you're not alone in that. But it is a separate issue from the point raised upthread (https://news.ycombinator.com/item?id=33553556).
You want to replace a system that is imperfect and flawed but mostly works with one that is (at least for this and most internet forums) plainly unworkable. That's probably not going to work.
Otherwise downvotes/lack of upvotes should be the only acceptable means of flagging.
It's unlikely the site would have users of 15 years such as yourself if it ever operated like that. Or really any users.
Sorry, no. If I can’t protest here, where can I protest? Is this supposed to be a safe space for billionaires? It’s my community, too. Don’t censor me in the name of curiosities. This isn’t Iran.
This makes it easier to answer questions that would otherwise feel like hard tradeoffs. In this case: should people be shouting angrily in a protesty way in HN threads? No—but not because protest is bad or unimportant. It's just incompatible with intellectual curiosity, and since we're optimizing for the latter, it takes precedence.
When people are protesting or doing battle, they tend to either repeat their most effective phrases (slogans, etc.) or to spontaneously vent their strong emotions (name-calling, etc.). But repetition and name-calling are clearly bad for curiosity. I believe these are even different neurological states: high indignation comes with a level of arousal that rules out the relaxed playfulness that curious conversation depends on.
I hope it's clear that this isn't a judgment about protest or indignation in general—those are as human as anything else and when they're called for they're called for. It's just relative to the particular mandate of this particular site. We're trying to play one game rather than the other.
Is that censorship? Well, that word has become so stretchy that you can apply it however you feel. But I'd say no, for the same reason that chess isn't crokinole. It isn't censorship to say you don't get to whack your opponent's bishop.
You've clearly and concisely stated what I've been struggling to verbalize for several years now: that heated emotional flamewars aren't discouraged/forbidden on HN because emotion is bad (which is a strawman often brought up), but because HN is not the place for that, because we optimize for intellectual curiosity.
Just like programming languages - HN is neither the only forum in existence, nor does it need to serve the needs of every human in existence.
I checked my FTX account, only had play money in there. But, despite all the people saying "FTX is fine, withdrawls still work, it's all fine" - nope, everything is disabled, withdrawls show $0.10 avaialble to withdrawl (out of a few hundred I had in actual US cash, plus the BTC and doge transactions are all disabled.
This is very serious for many people - there are some who had substantial amounts of money, including my friend who is at the moment suicidal, a lot of his identity and worth was tied up in crypto.
Please offer support to those you know who are affected by this scam, and do not encourage or enable anyone else to dablle more than throwaway money into anything crypto
This has nothing to do with crypto, it has to do with people sending their money to a con man. If your friend had "his identity tied up in crypto", then why wasn't he holding it himself?
> If your friend had "his identity tied up in crypto", then why wasn't he holding it himself?
Some people love day trading crypto. They keep funds on exchanges so they can trade immediately and not deal with constant back and forth transactions with their own wallet.
Yes, this is exactly the point that needs to be made. A few weeks ago I think it was quite easy to argue that it was riskier not to have it on an exchange because when it's not on an exchange you can't convert it back into USD when significant market moving events take place.
But more importantly a lot of these people chose to keep their crypto with FTX specifically because it was seen as the safest pair of hands. If investors like Paul Tudor Jones are "stupid" enough to fall for this "scam", then I think we should probably have a bit of compassion for the average Joe who's lost money here.
My heart genuinely goes out to everyone impacted by this.
Uhm, yeah, people made the wrong bet because they fell for another hyped up tech company.
But let's put a fine point on it -- that specifically fell in with a rent-seeking company capitalizing on a decentralizaed space with a centralized platform and then surprise-pikachu'd when they did the same thing as every one before them.
> because when it's not on an exchange you can't convert it back into USD when significant market moving events take place.
Weew, well, idk, if y'all know this, and I'll take the karma hit, but the rest of us that know better than to day trade mostly roll their eyes at this ... crap. And if you WERE "day trading" and didn't manage to pull out, well, maybe day trading isn't in your cards. Go watch YT for a few hours and I'm sure youll be on to your next get rich scheme.
> Go watch YT for a few hours and I'm sure youll be on to your next get rich scheme.
I laughed, hard. Bravo to you.
To be charitable, some people may only be able to afford a normal lifestyle though a successful "get-rich quick" scheme. Think insane markets like Toronto and Vancouver that are flooded with laundered money; how are you going to make enough money for a home without making a YOLO-style bet on something you don't understand (but is portrayed to work for rich people)?
I think far less people would be taken by these scams if their basic needs were more easily paid for.
(Disclaimer: I own zero Crypto, have never owned any Crypto)
Oh, oh dear. Um, that was sarcasm. I clearly don't think people should be looking for get rich schemes, on yt or otherwise. It was aimed at the people that think day trading, lottery tickets, or otherwise longshots are a logical response to a hostile market.
Its hard to think of any scam that isn't portrayed as "working out (for the (would be) rich)". Again, a good reason to be wary of such things.
I'm totally in favor of helping struggling folks, taking care of basic needs, etc (though I'm not sure laundered money is the culprit I'd offer). But lord maybe some reasoning skills would also do some wonders. Also, Christ, it pains me how often I think "if only I could sleep with myself stealing money from fools". Because I do know you're right, that's the psychology of why get rich schemes work...
If you have your money invested in some safe government treasuries with a broker you think you can trust until one day you find out to the surprise of both you and the entire financial system that the broker you're keep your government treasuries with are using them as collateral to fund bunch of risky crap they weren't telling you about. Sure you've lost everything but I mean you could have brought the treasuries directly from the government and held them yourself, right?
I highly doubt most people with crypto on FTX were day trading. My guess is most just held their crypto with FTX because like stocks and bonds it's generally easier to hold them with a broker.
The same argument could be made about cash in the bank. Do you keep all your money in cash under your bed or do you trust your bank isn't going to do illegal crap with it? Oh wait, let me guess, I bet you're day trading your cash for food and shelter instead of keeping it locked in a safe buried 10 feet under ground?
My point is in any normal market the government would have stepped in if this were to happen. Crypto investors deserve similar protections as investors in other asset classes. They also deserve our sympathy. These weren't the degenerate gamblers you're paining them as.
I'm not too involved with the crypto space, but why have a centralized exchange at all? Like why can't the exchange setup a transaction directly between me and the counterparty that we both sign?
I guess that makes sense given that the CEX can simply update values in their own (non-blockchain) database. This highlights that blockchain tech isn't really ready for prime-time use, yet. If the cost / tx could be brought down significantly, then there would be no need for a CEX.
Here's how my story played out -- maybe there are a million stories like me I'm not sure.
Bought Monero on Voyager (because my electricity costs are high where I live and I didn't want to mine it). Planned to immediately transfer it out from Voyager to my offline wallet. Saw that Voyager "didn't yet support transferring out" for that cryptocurrency but would soon. Cool, I'll just wait.
A month or so later, Voyager goes under and I'll probably get nothing or pennies on the dollar.
Genuinely curious, what was the right course of action to buy Monero in a low-overhead, safe way?
I was perusing hot wallets recently and USDT is still pretty well funding on a few wallets (BSC, SOL, TRON) if I remember. USDC is mostly empty or near empty.
Didn't check other coins but if you can I'd cancel the withdrawal, swap to USDT, swap back to USD somewhere else. Costs some fees but much better than potential total loss.
And send small some test transfers first to see which paths work.
reading your original post, if available to withdraw only shows 0.1, are you possibly lending out or taking a margin position? I experienced that the 'available to withdraw' field indicated what I should be able to withdraw in theory, not what ftx could actually handle
Trading halt announcement at FTX.US.[1] Announcement says withdrawals still up.
But Twitter messages indicate withdrawals are not working.
FTX Japan shut down by order of Japan Financial Services Agency.[2]
FTX.intl processing some withdrawals, according to blockchain.[3] A few lucky people got to exit.
Way too much happening to mention here. Just use Google to search "FTX" and limit search to 1 day. Margin calls all over crypto land. JP Morgan says expect 50% drop across the board in crypto. Around 10 AM PST, somebody just pulled a billion dollars out of Tether. Word of the day: "deleveraging".
Because the law isn't computer code and there are always grey lines. From Matt Levine:
>But there are also a lot of places in securities law where the rules are a little bit vague and you are operating a little bit on the cutting edge and the best practice is to pick up the phone and call the SEC staff and say “hey what do you think about this?” Sometimes this is fairly formalized: The SEC staff issues “no-action letters” (you send them a letter saying “is it okay if we do this,” and they send back a letter saying “if you do that, we probably won’t sue you,” which is almost as good as them saying “yes”) and “telephone interpretations” (you call them up and ask “is it okay if we do this,” they say “sure seems fine” or “no that’s bad,” and then they write down the question and answer so other people with the same question don’t have to ask it again). These are places where the rules are unclear, or they are clear but applying them as written would create bad results, so the solution is to ask the SEC “is it okay if we do this” and they just tell you.
>Crypto people want rules! I don’t mean that they want to be regulated; I mean, specifically, that they want rules. They want published, objectively specified, open and transparent rules, so that everyone is on a level playing field to do crypto stuff that complies with whatever the rules are. I don’t mean that everyone in crypto wants that: Informal regulation favors the well-capitalized and the incumbent, and if you’re a big crypto firm on good terms with the SEC (which might be an empty set) you might prefer informality and opacity. I just mean that, philosophically, crypto people should want open transparent rules for permissionless innovation. That is how the crypto system is designed to work, and they should want the securities laws to work the same way. And in fact Coinbase Global Inc., which is maybe the closest thing the US crypto industry has to a big regulated incumbent, has sent the SEC a petition asking it to make rules for crypto securities.
>Temperamentally I do not think the SEC likes this, and I think that Gensler means what he says about “working directly with entrepreneurs,” and I think that this is a reasoned choice. Look at how crypto often works in practice. People write smart contracts with immutable public code, and then other people hack them to steal their money. That could be the SEC! If you are the SEC, and crypto people say “please write clear transparent rules so we know what is and isn’t allowed,” you might hear that as “please write clear transparent rules so that we can game them.” This would be a reasonable lesson for the SEC to take from (1) the history of crypto’s “code is law” philosophy ending in hacks, (2) the history of crypto firms ignoring the US securities laws, and for that matter (3) the history of traditional finance firms trying to game the SEC’s rules. Crypto is a wholly new area for US securities regulation, and if you try to write all the rules from scratch in one go you will get things wrong. And then people will ruthlessly exploit whatever you get wrong.
Such disappointing reasoning (by the SEC, not Levine). Seems to be summarized as "we can't make rules because people might follow them. We'd rather sit back and reserve the right to punish whatever we feel like."
Might have something to do with the $40mm donation he gave to politicians recently... and the fact that he was "buddy buddy" with Gary Gensler (at least until this morning, when Gary rushed to throw him under the bus in a media interview).
> JP Morgan says expect 50% drop across the board in crypto. Around 10 AM PST, somebody just pulled a billion dollars out of Tether.
Meanwhile, aggregate of the cryptocurrency market is up 5.38% over the last day, Tether recovered landing on 0.9999 USD after 4-5 hours of the drop hitting bottom at 0.9818 USD, which was nowhere near previous all-time low Tether has hit previously.
In other words, everyone screams "panic!" while the world quietly moves on.
Tether will stay very close to 1.0 until, some day, they can't make a redemption. The number to watch is their "market cap". Note that Tether can make that go up by minting more Tether, but when you see it go down, that usually means someone cashed out.
This is one of the reasons downturns in markets are good. If the market would've just kept growing then SBF likely could've kept his ponzi scheme afloat without anyone noticing.
The 2008 recession is what really stopped Bernie Madoff.
This is not a ponzi scheme. This is a good old "not firewalling your customer's money and your investment money" that everyone suffered from in 2008. The situation is cataphoric enough without people mis-using terms.
>The first $10,000 USD value in your deposit wallets will earn 8% APY
(This is what FTX was offering customers)
And now we know the accounts weren't actually covered by real money (or "value" as they called it). So when person X was asking FTX for their money back, FTX would send person X+1's money to cover
I find it very ironic that Satoshi created Bitcoin with the objective to be more resilient than banks, with the famous genesis block containing "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks". A decade later, the bitcoin creation generated an entire industry of "crypto banks" that are opaque, played with customers money and went bankrupt.
It's a beautiful lesson in human behavior and greed. You're given a perfect form of money (Bitcoin) that you can safely hold with minimal effort and your shortsighted greed ("yield farming") forces you to lose it all to a conman.
The silver lining to all of this is that people might actually start listening to Bitcoin maxi's after this year.
Ha, wow. Yeah no, Bitcoin is not a perfect form of money at all. It-
- uses vast amounts of energy
- can only process a few TPS
- confirms slowly
- has limited quantities which warps economies
- is irreversible in cases of theft or fraud
- is lost forever if you lose your keys
And that's just off the top my head. I get what you're saying - "not your keys not your coins", but the idea that this system is somehow an optimum is just plain wrong.
For those of us who do not fetishize decentralisation, those negatives are unacceptable in any form of 'money'. Even if you do believe in decentralisation, it's clear that this is far from perfect.
Bank branches, ATMs, armored cars, computer systems for the banks, computer systems for card processors, credit rating firms, etc. Bitcoin replaces all of that and, comparatively, for significantly less energy. This is a surface-level argument intended for shortsighted thinkers.
- can only process a few TPS
- confirms slowly
On main net. Lightning network can outpace Visa.
- has limited quantities which warps economies
By warp, you actually mean makes them fair and natural. It encourages free trade, merit, and competition. Not fiendish scamming and Machiavellianism.
- is irreversible in cases of theft or fraud
Which is good. It increases the need for reliable actors in the world and creates a citizenry that's more discerning about whom they spend their money with (i.e., building strong, trustworthy relationships).
- is lost forever if you lose your keys
Which is good. It makes you value it. If I hold all of my money in cash and have a house fire, it's lost forever. No difference.
> For those of us who do not fetishize decentralisation
No, it doesn't, it doesn't offer 1% of the services those things you mentioned can offer.
> This is a surface-level argument intended for shortsighted thinkers.
Yes, that describes your argument perfectly.
> On main net. Lightning network can outpace Visa.
The fact the lightning network needs to exist shows flaws in bitcoin, or lightning wouldn't be required. Lightning also has massive flaws and is unlikely to be able to scale very far due to routing issues, and requiring the locking of funds. Its main utility seems to be for people to handwave away problems with bitcoin.
> By warp, you actually mean makes them fair and natural.
No, we have a lot of history to show us currency that is in limited amounts is a very poor idea, favouring and rewarding those who hold the tokens over those who actually produce.
> Which is good. It makes you value it. If I hold all of my money in cash and have a house fire, it's lost forever. No difference.
Wow. This is why people don't do that, and use banks, precisely to avoid that sort of catastrophic loss. Though you've just told us in previous comments that you shouldn't trust crypto custodial services either. You're basically saying "this is a huge risk and in my perfect system you just have to live with it, and there's no recourse if it goes wrong and it's your fault"
No thanks!
> Slaves?
Yeah, this is idealogical nonsense at this point, not any sort of reasoned debate.
But regardless of whether you agree with the points I raise, the idea that bitcoin is 'perfect' doesn't really hold up. The huge energy use is not a desirable feature for a monetary system, one that is 'perfect' would not have that. Perhaps we cannot create such a 'perfect' system, perhaps (and this is not my view, obviously) bitcoin is the absolute best we can ever do(!), it's still not 'perfect', because it encompasses a set of compromises.
Money must be backed by something. Bitcoin is backed by nothing. This makes it a ponzi, not money. It's very simple.
It can be used as a means of exchange, but due to being unbacked isn't and can't ever become a store of value, which in turns means it's completely useless as a unit of account due to eternal volatility.
The only way to get real wealth in exchange for bitcoin is to hope someone later decides to buy it. That's again a characteristic of something that isn't money. Americans are forced to sell wealth for us dollars, and without that force it would die. That's actual backing enforced by governmental force.
One of my favorite bond films is Goldfinger (1965), starring Sean Connery as James Bond and Gert Frobe as Auric Goldfinger. In the movie, Goldfinger hatches a plan (they always hatch a plan) to destroy the gold reserves at Fort Knox. This will make his own gold holdings much more valuable, but, Bond intones, it will also destroy the world's economy, since the gold in Fort Knox "backs" our money, and if it were to disappear, we'd have hyperinflation.
And I wondered about that a bit. Suppose a meteor filled with gold were to crash onto Federal Property, and they hook up some tractors and drag the thing into Fort Knox. Would this massive new pile of gold cause hyper-deflation?
Bottom line, I don't think money needs to be backed by anything. It just needs to be limited in its quantity. For example, if gold is money, then what is gold backed by? Anyway, Goldfinger is worth a watch -- great film.
Gold isn't money. It was when the US government (and other before) forced people to sell other wealth for it to pay taxes. It was an early implementation of money.
Gold has very weak utility today.
>I don't think money needs to be backed by anything.
Which was empirically tested for the last 13 years. What happens is that people get bored of old ponzi schemes and stop buying them, instead preferring to be early in new ones. Which is why inflation-adjusted btc is at the very early Dec 2017 price. Nobody borrows in bitcoin (denominated in it - borrow x btc, pay back x+y btc) for unrelated investments which is one of the main use cases for money.
>It just needs to be limited in its quantity
Artificial scarcity is infinite. Claiming first artificial scarcity is token is somehow special is just a marketing spiel - one that's visibly losing its effectiveness. Which is why bitcoin dominance is dropping so fast.
> Money must be backed by something. Bitcoin is backed by nothing.
Yes, it is:
1. Incorruptible supply enforced via a halving algorithm that can't be messed with without creating a hard fork or receiving universal consensus on the network.
2. Proof of work. In order for the Bitcoin network to function (meaning, for new Bitcoin to be minted up to the cap and for transactions to be validated/added to the blockchain), energy must be expanded. There's no way to fake it.
3. Self-custody that's difficult (near impossible if done properly) to confiscate by force. If you control your keys, you control your money. Full stop. Metals, cash, etc. are all subject to confiscation via force. At worst, they can throw you in jail and torture you and still turn up empty handed if they can't get your private keys.
4. Transmittable to anyone, globally, without limitation/permission in a few seconds to ~ 1 hour.
---
These intangible "backings" are identical to being backed by "the full faith and credit of the U.S." or "the U.S. military." Neither of those are impervious to failure. For example, if the U.S. continues to pile on debt or countries start to dismiss the petrodollar concept, as we're seeing (BRICS), that full faith and credit is meaningless. If they can't pay the military (or foolishly discharge them for ideological reasons) because their money isn't of value, the military won't care to enforce anything.
This is why, ironically, fiat is the ponzi scheme. It requires everyone involved to believe the lie that printing infinite amounts of money and burning it on investments with little-to-no return (e.g., socialistic entitlement programs, moonshot nonsense businesses, dragged out government projects) is some genius-tier strategy. When in reality, it's just one giant cult where everyone is pointing a gun at someone else under the table.
It will inevitably blow up and when it does, the very people who protected it will walk around with their hands in their pockets whistling.
I don't know how to say this clearly enough: It's a Ponzi because you can't buy anything except other currencies with it.
Like sure, you can't steal it from me, but you can sure as hell prevent me from acquiring goods/services with it (Governments all around the world have done an amazing job of that whether they tried to or not), so it's only worth something insomuch as you can turn it into fiat.
And it's only worth what it is in fiat because people believe that in the future it will be able to buy goods and services, despite no evidence that it will be able to do that.
>energy must be expanded. There's no way to fake it.
That's a negative, not a positive. It means bitcoin actively destroy wealth while giving nothing in return.
>3. Self-custody that's difficult (near impossible if done properly) to confiscate by force. If you control your keys, you control your money.
It's not money, so properly described: a ponzi scheme that's harder to shutdown than more traditional attempts.
>Neither of those are impervious to failure
How fragile or not the backing mechanism is a completely separate issue.
>This is why, ironically, fiat is the ponzi scheme
It isn't. Investors (???) into us dollars don't cash out on future investors that were mostly lied to about what the dollar is. It's a tax token and people are forced to buy it.
>It requires everyone involved to believe the lie
No, it doesn't. It requires the ability to physically enforce the law. Whether people like the dollar or not, is, in itself, of zero consequence as long as the enforcement mechanism works.
>If they can't pay the military
Yes, an incompetent government can kill the economy to the point that no amount of force will work, whether due to violent opposition or lack of any remaining wealth. What actually happens is that people switch to using other stuff for transactions. It can be fiat money that's enforced by another country, or something of inherent value, like coffee beans (happened in Venezuela), salt.
>When in reality, it's just one giant cult
It's not a cult, money is always and everywhere a tax extraction technology. It's going to exist in some form as long as it's possible to tax people under a credible threat of violence. One day in history some human ancestor figured out that collecting rare thing (like seashells) and then forcing people to buy them (with actual wealth) is a good way of living and that's how it goes.
>It will inevitably blow up and when it does
...it won't be replaced by bitcoin, but by some other form of fiat money. Below all the false marketing lies a simple truth: buying bitcoin is a one sided wealth transfer, giving away real wealth in exchange for a printed from thin air token. Some people will as long as they think they will be able to sell to a greater fool in the future.
The problem is that eventually the scheme gets old and it's becoming hard to see where they could come from. People that like ponzi schemes realize that it's better to start new ones and be early. Which is exactly what happened. Btc's returns in the last cycle were pitiful. Now it's bear market and it's extremely weak - both absolutely and relatively. It's an old 13 year old thing that failed in all its stated goals. On top of that it's getting hammered by massive inflation.
Next bull cycle it's going to under-perform even worse and that will be the last time general public will think about it.
Indeed, ironic. But this also laid the path for DeFi, which processes similar volumes per day as centralized exchanges, without the single counterparty risk.
But fundamentally and crucially, nobody is bailing these banks out. Bitcoin itself, and its holders (other than those who left their money in FTX) are untouched. It seems to be unironically working as intended, no?
>Presumably FTX expected that its risky bets would pay off and that return would then fund the interest promised.
So did Bernie.
>Otherwise, would you consider corporate debt a ponzi scheme?
Depends on what you count as corporate debt.
I'd have no problem buying the debt of a mature, massive company like Apple or Microsoft, because they have hard assets, steady cashflows, successful products on the market.
The debt of a zombie corporation with a useless product that was only sustainable due to 0% interest rates? No thanks. Is that a ponzi scheme? Probably not the classical definition of one, but it's ponzi-adjecent.
No, he just straight up didn't invest peoples money, he paid out "gains" just from other deposits. That's why it was a Ponzi scheme - that's what they are.
Initially, he did invest their money, he just didn't get the (I believe it was) +/- 10% that he promised investors (and was getting like clockwork) before the 08 crash.
Once he started not being able to make those returns did thing start to unravel. His own kids were in denial right up until the end - almost nobody, even inside Bernie's firm, knew it was fraudulent.
IMO this is key, the interest being paid out to account holders was not profits from any underlying business, it was just paid out from new "customer" deposits.
If a corporation is in debt and paying back interest, it's sustainable as long as the business actually has a plan to grow. If your business is acquiring new users to pay out obscene interest rates to your early adopters, that's a ponzi
(mr ponzi himself didn't mean to scam anyone either way by the way, until he realized his postage-arbitrage plans were going south and he scrambled not to break his promises)
The original scheme by Ponzi himself was based around profiting from arbitrage from postage stamps. He promised 50% returns within 90 days and couldn't keep up with his claims in a legitimate manner.
FWIW I have difficulty distinguishing the difference between a Ponzi scheme and "The Time Value of Money" concept itself. Every place I see that offers interest on crypto deposits, I fear they have no business plan to generate the profits to pay the interest on a deflationary fake internet money in the first place.
My fear is they are just Ponzi-ing on Wayne! seeking the next highest interest rate holding the biggest bag, hoping the 'ol Time Value of Money will save their ass.
The whole house of cards has a lot to do with the _velocity_ at which the money moves and whether it's stagnating or generating interest somewhere else.
My rant is over. None of this stuff has affected me.
>Every place I see that offers interest on crypto deposits, I fear they have no business plan to generate the profits to pay the interest on a deflationary fake internet money in the first place.
You are correct. Literally every place offering high interest rates on crypto deposits is a Ponzi scheme.
Time value of money is not the same. It’s actually simple and elegant and flexible, and to your point, you want to see the borrower have a plan, so to speak. Or cash flows. Or collateral. Or all of the above. And still, you can lose. But the concept of the price of money is separate from that.
The concepts bleed into each other, but Matt Levine explains it well. The Ponzi scheme is unsustainable. it gives you a solvency problem, your assets are bad and no amount of time will help. With fractional reserve banking run on banks usually come down to a liquidity problem, everyone wants their money now and you don't have all of it. So you call up someone with cash, like the FED, and theyll lend to you because you are a chartered, regulated bank.
basically the difference is asset quality and proper accounting. Banks are similar to ponzis, but they are HIGHLY regulated to ensure their continued operation.
Tell me which retail brokerages lost their customers assets because they gambled them away?
There is no glossing over the fact that all these crypto explosions are a result of largely re-implementing a pre-Fed, pre-FDIC, pre Great Depression style banking system with all its long-patched defects.
>Tell me which retail brokerages lost their customers assets because they gambled them away?
Banks are required to keep a percentage of deposits in risk free assets as part of the Basel Accord[1].
Banks were marking risky assets such as Super Senior tranches of CDO's as risk free when, guess what, they were actually super risky. When the value of those tranches dropped, the banks lost tons of value and all of the sudden couldn't cover their debts because they were gambling with what should have been cash.
So to answer your question: all of the banks (who were dealing in CDO's) did this.
Bill Hwang lied about his market exposure to the brokers who sold him the equity swaps. It was just garden variety fraud with no ponzi adjacent behavior at all.
So my understanding is that alameda needed more capital to fund its operations that had a track record of success, so sbf created ftx and gave customer assets to alameda to invest. So the business thesis here isn’t “use new user money to pay old users” it’s “steal all the users money to invest and hope the investments continue to be profitable.” I guess they started ponzi-ing once alameda went bust but that wasn’t the original plan, although that’s probably true for most ponzi’s.
Sure, yet, these people will mostly manage to escape. Have no doubt they all have few mils on side and they are ready to lie to themselves all sort of excuses to make them feel better spending them. Sam apparently "miss-labeled" some accounts all in pursuit to give more to charity i am pretty sure.
Remarkable that a venture-backed company can loan $10B to the founder's hedge fund without running into some sort of board/corporate sign-off that's required to literally execute the agreement/fund transfer.
They had no real board. They had no real governance. What's amazing is that large venture funds would put this much money into this kind of company without any board seats.
He simultaneously played League of Legends when pitching to VC on Zoom call. That indicated to VC how serious and responsible he was. They unanimously and immediately signed off funding merely out of awe.
Really shows how little oversight any of these venture funds have.
They come across more like frat bros with huge pockets casually giving away billions under a pinky promise of eventual returns.
At this point, they are doing the same level of DD as those degens in WSB.
But I guess you don't have much leverage when the fed is printing trillions for years and we end up with dozens of Zuckerberg types, too much power and no oversight to hold them accountable.
It is dangerous to extrapolate from one case (or even a few notable cases in recent years) that venture funds have "little oversight" over portfolio companies. These are the exceptions rather than the rule.
Obviously, some boards are better than others at oversight, but the complete absence of a functioning board, as was the case at FTX, is definitely very, very unusual.
"Silicon Valley Poured Money Into FTX, With Few Strings Attached"
"A marquee roster of investors from Silicon Valley and Wall Street swarmed FTX. They invested nearly $2 billion with few strings attached and no oversight on the cryptocurrency exchange’s board, promoting it as a safe bet."
Anyhow, The board of directors consisted of SBF until the summer of 2021. Then 2 "independent" directors were added, 1 was an FTX executive, the other was a lawyer in Antigua
The recent Sebastian Mallaby book about VC charts the growth of this "founder rules" approach.
In the age of ESG, it turns out that the "G" part is being ignored totally (because it counter to the interests of insiders) but the "E" and "S" is ever more important (because it is in the interests of insiders) despite it doing little to help improve returns (SBF was the king of "S"...might there be a correlation between saying you are more ethical than anyone and permitting yourself to steal from customers?).
> SBF himself has amassed more wealth in a shorter period of time than anyone else, ever. The 2022 Forbes Billionaires List pegs SBF’s net worth at $24 billion. He’s now 30 years old. But we get ahead of ourselves.
This is just gold.
Hopefully this all circus going down will also bring down all the phonies from VC companies like Sequoia Capital, guys (they're mostly guys, of course) who still live off the few successful bets they made in the early 2000s. We need fraudster-enablers like Sequoia to actually go bust if we really want for our industry to find its lustre again and for real innovation to come back.
Later edit: I've mostly gone through all of it, and I have to say that that that archived article is pure genius, it has copy-paste-ble gem after copy-paste-ble gem. It would most probably deserve its own, separate submission, on HN.
In a saner investment environment that sort of article, and the huge fraud the people behind it helped perpetuate by giving this SBF guy money (one of the Skype founders, really? the rationalist community, really?) should help bring some people down, and in so doing leaving our industry, well, cleaner.
But I'm pretty sure that nothing like that will happen, the small fries will be too scared to call these people out as fraudster-enablers, thinking that they might need money from them at some future point, the other sharks in the pool will behave like nothing has ever happened, hoping that the regulatory powers that be will move along, to say nothing of the politicians, after all, to quote Vox, SBF is "one of Biden’s biggest donors" [1].
To re-capitulate, one of the US president's biggest donors has just defrauded people out of $10 billion (that we know of) while some of the biggest figures/institutions in the US tech industry had stood behind him. Business as usual in the rules-based United States.
>But, right there, between a bright yellow sunshade and the crumb-strewn red-brick floor, SBF’s purpose in life was set: He was going to get filthy rich, for charity’s sake. All the rest was merely execution risk.
A nice quote that seems rather relevant right now:
> To do the most good for the world, SBF needed to find a path on which he’d be a coin toss away from going totally bust.
That link is taking me to a "oh shit our bad" sort of page now, but I'm curious on the date. I don't see an original timestamp on the wayback machine version, though. :(
If they were still taking him seriously as "ethical" after the Luna fiasco where he had previously trashed it in press (as the scheme was just a perpetual motion machine) but was perfectly willing to make money off of poor suckers who got conned... I don't know what to say.
Sequioa, who invested in FTX quite loudly, reported to their LPs that they only lost 150MM in their fund that had 7.5B in realized gains. Going off their letter they took 5B and turned it into 12.5B for a return of 150%[0].
After this spectacular blowup barely put a dent in their returns, why would LPs demand anything? Sequioa will just tell them "hey it's the name of the game, there are some losers who go bankrupt and winners who return the entire fund several times over".
If Sequioa took a massive markdown on FTX that would be a different story. However they came out unscathed and looks like they are managed well despite fellating SBF quite openly. What would you even demand of them given that they didn't lose much money? They probably lose even more money on companies that end up just not being successful in the first place. You can't ask them to not invest in risky business, thats the whole point of VC.
[0] Could be misinterpreting the letter, they said FTX was 3% of commited capital, 150M / 3% = 5B, and they had 7.5B of realized and unrealized gains.
I generally agree, but it's not "people," it's institutional funds (endowments, pension funds, etc). The way venture returns are distributed is that a small number of funds (of which Sequioia has historically been one) stand out from the rest in terms of returns. With the lengthy bull market that we have had until this year, VC was a high-performing asset class. Pension fund and endowment managers felt they needed to be in the asset class, which really meant being in those top 10 or so funds that were generating outsized returns. When LPs are competing to get into a few top funds, the funds have all the leverage. My sense is that LPs don't feel like they can make any kind of demands on the VC funds, for fear of being blocked out of investing.
Now we have a market turn and VC is unlikely to sustain the returns of the past decade. That may shift the leverage, but history suggests that LPs will still not put any kind of meaningful pressure on the top funds to do anything different.
I mentioned this is another reply, so sorry for anyone who reads both.
I would read Mallaby's history of the VC industry to see why this isn't possible. Around 1997 the balance of power shifted heavily in favour of founders (this is when dual-share class) started, and they stopped demanding seats on the board.
Iirc, Sequoia was a firm that held out (along with other old-style funds), they missed out on a lot of companies over the next ten years so ended up racing to the bottom...this is how we got here.
Btw, just on corporate governance...it is the most important factor for a company. A lot of the issues with corporates we have today are due to poor oversight from shareholders (not helped by passive). If corporate governance isn't working, capitalism won't work either.
The number of 'major red flags' here is shocking, and frankly, you'd think after 2008 that firms would have to hire, you know, an 'accountant'.
My god, there are so many things that were there to have been a modicum of parental oversight, the situation would not have festered.
This one is going to stain Web3, Defi, and notably VC.
Hey - VC are the partners of innovators so it's not good to see them in these situations.
Partly they are victims, but partly, they are responsible obviously.
We should note, this has a lot to do with the magical 'made up' nature of tokens. The entire Ponzi was based on tokens worth nothing, with massive leverage. It's a lot of money that VC cab hardly take their eyes off of. Why invest in 'doing stuff' when you can just 'make something up' and say it's worth billions? Given the way VC portfolios work they are going to run at that stampede because of the money flowing into it.
It's a systemic problem.
It would help if there were more regulations around this - at least to dampen he leverage. More transparency, higher interest rates will help as well.
I was partner at a couple of hedge funds. Every fund has its own docs, but normally it is going to restrict you to sending money to specific things, you can't just do anything you want. Certainly you cannot just lend it to yourself if you want serious investors, they do a whole due diligence questionnaire about what sign-off is needed, who can sign, audits, and so on.
I remember a friend with a fund, he was in a short-term pickle waiting for some money to bridge a house purchase. Didn't even cross his mind to lend it to himself and pay it back two weeks later, even though that would have been nearly risk free and a minuscule proportion of the fund.
> Corzine was subpoenaed to appear before a House committee on December 8, 2011, to answer questions regarding 1.2 billion dollars of missing money from MF Global client accounts. He testified before the committee, "I simply do not know where the money is, or why the accounts have not been reconciled to date," and that given the number of money transfers in the final days of trading at MF Global, he didn't know specifics of the movement of the funds. He also denied authorizing any misuse of customer funds.
> On the day of MF Global's bankruptcy, a Bloomberg reporter wrote "Jon Corzine's risk appetite helped destroy his firm. It also provided an object lesson for Paul Volcker's campaign against proprietary trading on Wall Street."
And for anyone who wasn't familiar with this guy and doesn't click on the link, he was a US Senator and then NJ Governor who ran this fund immediately after leaving office. He's the guy Chris Christie replaced.
Of course not. Crypto is a vehicle for tech founders to do all the unethical things that are banned in traditional finance without technically breaking the law.
For those wondering why people would store coins on centralised exchanges, the answer is simply because you are heavily incentivised to do so.
When Ethereum was congested and simple transfers were costing upwards of $200 - FTX offered a number of free ERC20 withdrawals if you staked a certain amount of FTT.
in addition to that - the more FTT you staked the more preferential treatment you got in access to IDO's and referral fees, when you couple this with a platform that felt "safe" and "trustworthy" - this was a recipe for disaster.
I've been in Crypto a long time and previous rugs always felt a bit sketchy, like it was an unfinished product, you put up with it but your risk tolerance was lower as those platforms felt like they might disappear at any one point.
FTX felt different - and this is why there are people with 8 figures+ stuck on there right now.
It feels like every time there's a crypto exchange exit-scam/fail/crash/run/fraud, someone says "but this one felt safe/different/better than the others".
I (genuinely) wonder how many more times that will happen?
Name one other one? There hasnt been one, there have been custodial lending platforms that have had all the credentials - this isn't the same.
Imagine the second largest bank in your country just up and dissolving with everyones money - that is exactly how this feels to those of us who have been in this space a while.
Another reason is that many people in crypto trade often. They don’t intend to hold any coins for long. Withdrawing and depositing frequently will cost a ton in that case.
You know those corner stores that act as Western Union/Moneygram agents? They have to follow stronger regulations (KYC/AML/BSA) and are audited on a quarterly basis by WU/MG to ensure there is no co-mingling of funds.
A bodega conducts better financial oversight than these masters of the cryptoverse.
Probably a good time to mention the original mission statement of Bitcoin was to custody your own money without counterparty risk. Time and time again we have seen altcoin ponzis and exchanges collapse under the weight of their fractional reserve. What is still working? Bitcoin.
Greed in this space causes people to act with a more short term view for quick profits while ignoring fundamentals. Over and over again.
This has nothing to do with Bitcoin or not. Bitcoin was probably one of FTXs largest assets. Every cryptocurrency allows self custody, as this is core to the concept.
If this was all done on-chain, users would have sole custody over their funds and no one else in the entire world, including SBF, would be able to move them or loan them out.
The Twitter thread from SBF is even better where he admits he messed up. And still trying to throw jabs at Binance here and there like it’s their fault they’re here. Unbelievable.
To me the funniest part is him saying "I should've done better", as if he was attempting something worthwhile, but failed. No, he stole his customers and "done better" would've been doing the opposite.
He also attempted to claim that the problem was due to an issue with the "labelling" of funds...this story leaks, we know he has been telling people he lent the money to Alameda, and in these tweets he is now saying that he has a problem expressing what happened...
...I feel bad for him because he obviously believes his own bullshit, but he should have just said nothing rather than lie about what happened and pull the Mr. Magoo act.
I highly doubt he believes it. He has been living a lie for months now and can't bring himself to come clean about the deception. So he instead is "admitting" to vanilla incompetence and confusion and, most importantly, continuing to tell the lie that this is a liquidity issue at heart and not a solvency issue. That may have been the case a few weeks ago, but is palpably false at this point.
That article is miniscule and mostly just links to the tweets. After the 3 sentence preview which is visible to anyone it has 1 more sentence (a quote from SBF) then "Other highlights from his series of tweets" followed by 5 short 1 sentence bullet points summarizing things from the tweets. Then an embed of the first tweet wraps it up.
Usually you can get a copy of the article by going to archive.ph and pasting the paywalled link.
It may not be most ethical thing to do but if you want to read an article or two behind a paywall, I don't think it is insane to do.
This article though seems to be some kind of a live feed where there is not really a lot archived - maybe it works better for paying users viewing things live.
This is the part of the thread that killed me: "FTX International currently has a total market value of assets/collateral higher than client deposits (moves with prices!)."
He is counting the 10 billion he loaned to himself and then lost as an asset for FTX that just happens to be illiquid right now. Yeah it's very illiquid lol
I think he's in the anger and bargaining phases of it all. I expect he will either kill himself or go to prison when his fraud laid out. "I messed up" isn't going to get him out of this. This story has just begun.
It really does look like he got caught up in something and completely lost track of reality basically. It's like those dreams, that at least I have, where you have some problem that you're solving and almost there but everything you try can't finish it, and then all of the sudden you wake up and have no idea what you were even trying to solve.
It really shows how the media, these VCs, these paper billionaires, and their followers get caught up in hype storms that sort of self-perpetuate until they hit land.
What's even crazier is that both of his parents are law professors.
"A person familiar with the dealings between FTX and Binance described the books as a “black hole” where it was impossible to differentiate between the assets and liabilities of FTX and those of Alameda Research. This person spoke on condition of anonymity because they weren’t authorized to speak publicly about the matter. This person said Bankman-Fried had committed the “ultimate sin” by tapping into FTX’s custodial assets to fund Alameda Research."[1]
There are people trying to blame Binance for the collapse. That's bogus. If FTX was stealing customer funds, it's entirely FTX's fault.
Interesting info: Bankman-Fried owns part of Robinhood Financial.[2] Which will probably be audited real soon to see if he somehow took money out of there.
This is the kind of thing prosecutors refer to as an "ongoing criminal enterprise".
> FTX Chief Executive Sam Bankman-Fried told an investor this week that Alameda owes FTX about $10 billion, the person said. FTX extended loans to Alameda using money that customers had deposited on the exchange for trading purposes, a decision that Mr. Bankman-Fried described as a poor judgment call, according to the person.
This raises the question of who else Alameda owes. It's a sign of the times that $10 billion doesn't seem like a lot today, but it's way more than the Long Term Capital Management debacle:
> LTCM was initially successful, with annualized returns (after fees) of around 21% in its first year, 43% in its second year and 41% in its third year. However, in 1998 it lost $4.6 billion in less than four months due to a combination of high leverage and exposure to the 1997 Asian financial crisis and 1998 Russian financial crisis.[4] The master hedge fund, Long-Term Capital Portfolio L.P., collapsed soon thereafter, leading to an agreement on September 23, 1998, among 14 financial institutions for a $3.65 billion recapitalization under the supervision of the Federal Reserve.[1] The fund was liquidated and dissolved in early 2000.
Cumulative inflation since 1998 is about ~83%, so that's part of it. There are other parallels to LTCM, too. Once the Alameda balance sheet leaked, people could see exactly what coins they had and where they were vulnerable. And most of the risk came from their FTT token, where their holdings would have taken years to sell at the average daily value traded. Thus other traders could start shorting FTT to catalyze the fall, just like what happened to LTCM's illiquid "off the run" bond positions:
Badly in need of a lift, Meriwether called an old friend, Vinny Mattone, who had been the fund's first contact at Bear Stearns, LTCM's clearing broker. Mattone, who had retired, was everything that J.M.'s elegant professors were not. He wore a gold chain and a pinkie ring, and he showed up at Long-Term in a black silk shirt, open at the chest. He looked as if he weighed 300 pounds. Unlike J.M.'s strangely wooden partners, Mattone saw markets as exquisitely human institutions -- inherently volatile, ever-fallible.
"Where are you?" Mattone asked bluntly.
"We're down by half," Meriwether said.
"You're finished," Mattone replied, as if this conclusion needed no explanation.
For the first time, Meriwether sounded worried. "What are you talking about? We still have two billion. We have half -- we have Soros."
Mattone smiled sadly. "When you're down by half, people figure you can go down all the way. They're going to push the market against you. They're not going to roll [refinance] your trades. You're finished."
LTCM was a problem because everyone lent to them since they had lots of government bonds to hock as collateral. So that 4.6 billion loss due to impairment of the value of the Russian loans was a huge problem.
By contrast no bank would have touched Alameda with a ten foot pole. Loan to a crypto fund?
Would you believe...that pension funds, particularly Canadian ones, invest in lots of risky assets?
Also, they invested in the equity, specifically because they're not allowed to hold crypto. In theory, it's also the better risk/reward in the long run i.e. casino house vs gambler (provided the exchange isn't effectively also a hedge fund that blows up).
Whenever something like this happens, I'm often surprised by the relative lack of outrage. People are too forgiving. I noticed a lot of comments about SBF along the lines of "I know he's a good guy..." or "Everyone makes mistakes" or "Everyone deserves a second chance..."
F that. Society has created an environment where it's better to ask for forgiveness later than it is to ask for permission prior. Our society systematically rewards deception and punishes honesty. There are a large bunch of apologists who keep showing up saying "Oh but deep down, such and such is a good guy" - If we keep going down that path of pretending that people's actions don't define their true character, we will soon run out of actual good guys... Or those that remain will be backed into a corner and forced to fight to survive.
SBF has turned out to be a complete psychopath. It’s scary. Someone who was quite trusted in a number of circles turns out to be a liar, fraud, and just knowingly stealing from retail.
Mr. Brian Simms, K.C. (Lennox Paton Counsel and Attorney-at Law) was appointed as provisional liquidator. Additionally, the powers of the directors of FDM have been suspended and no assets of FDM, client assets or trust assets held by FDM, can be transferred, assigned or otherwise dealt with, without the written approval of the provisional liquidator.
I have no sympathy for Sequoia et al and the various celebrities that lost their money betting on FTX. I feel terrible for the average retail investor that got duped by the string of endorsements that made FTX seem "legitimate".
I'm hoping the little guy is able to get their money out before investors do, but history makes this seem unlikely.
So they stole 10 billion. It’s always a good deal to invest other people’s money into risky bets then take all the profit. If you lose you stick them with the losses.
A lot of people should go to jail but probably won’t.
They only should go to jail if the US had that actual ideology. Remember, every decision made by the state is political, these people not getting punished is everything working exactly as intended
No idea why you're being downvoted. It is a fact that he donated ~40M to politicians this election cycle.[1] If I had to guess the donations were part of a hedge to avoid accountability for this scam he ran.
Interesting. I was reading his bio and noticed the do-gooder activities he and his family are involved with. Funny how they end up defrauding people in the long run.
"Motivated largely by his own awareness of the discreditable nature of his secret behavior, the covert deviant develops a presentation of self that is respectable to a fault. His whole lifestyle becomes an incarnation of what is proper and orthodox."--Laud Humphreys
This is actually a common pattern. Hedge fund manager Kyle Bass has given presentations where he says that charitable works is actually one of a handful of factors they look for when assessing a fraudulent company because the correlation is strong.
I was reflecting on this recently in the Chinese property bubble. I suspect firms that take customer deposits and use them to speculate of future growth grow much quicker in a boom environment than firms that handle the deposits responsibly. Crowding out responsible firms.
This has lead to Chinese property developers spending all the money they collected to build homes on new parcels of lands and even soccer teams instead of finishing those homes. After all there will always be new money coming in.
In the crypto space this has lead exchange firms that speculate with their customers assets to out compete the safe approach providing exchange services and collecting a commission.
Oversimplification, but: Alameda made a lot of money on paper, kept mostly in incredibly volatile assets. Over the last week, it turned out that those assets were worth very little.
Bernie Madoff was also a big political donor, didn't help him in the end. SBF will also probably not hand out donations in the near future, so there is very little incentive to help him out at this point.
The CEO of FTX said "we tend not to have stop losses... I'm trying to think of a good example of a trade where I've lost a ton of money... I probably don't want to go into specifics with that"
That's the exact example why cryptos solved no problems at all. Centralized institutions are there for a reason, and obviously cryptos failed to recognize that. And soon exchanges were created which are in the exact role of banks etc. they swore to remove but with almost no regulations. I would be surprised if no such things happen at all.
This means that, in the line of people to get paid out of those assets, you're not even at the front. Custodial accounts leave you with little protection.
What I'd like is a tool on Hacker News, that would allow me to click on a username in a thread and do a quick search for a term related to the thread. For example, I'd like to know how many people in this thread who are posting against SBF praised him in threads from months ago. I think the whole story with him is a testament to what's wrong with tech culture and the media more largely. It's almost Elizabeth Holmes-esque but with a different personality angle.
Ah you were just looking for a tool that searches HN's comments from a specific user containing a keyword, so I linked the tool along with an example query.
I don't understand how it can ever be acceptable for a company to risk its customers' deposits, regardless of what kind of company it is (bank, exchange, whatever).
There should be a law that states:
1. Depositors are the most senior creditor (ie. they must be paid first, before any other creditor)
2. Investing depositor funds without explicit approval is a criminal act (because it's essentially using other people's money for your own interests)
"Because the terms of service specify that customer funds do not belong to FTX, those funds cannot be used to pay back creditors or other stakeholders in the event of insolvency."
When I see names so highly correlated to the event, it really makes me think along magical lines of thinking or we really are playing in a game.
> FTX Chief Executive Sam Bankman-Fried said in investor meetings this week that Alameda owes FTX about $10 billion, people familiar with the matter said.
How ironic that crypto bros (like me) want a libertarian-yet-democratic user-owned form of currency without government intrusion, and then something like FTX not being overseen by the government tanks all cryptos.
When pretty much any company or industry gets to a certain valuation size, it seems that oversight is an absolute requirement lest things go south quickly, whether intentional or negligent. Government oversight isn't a guarantee of fair play, but it can lessen the risk.
Bahamas Securities Commission: “The commission is aware of public statements suggesting that clients’ assets were mishandled, mismanaged and/or transferred to Alameda Research. Based on the commission’s information, any such actions would have been contrary to normal governance, without client consent and potentially unlawful.”
The Bahamas Securities Commission just froze FTX's assets in the Bahamas.[1] A provisional liquidator has been appointed. Next stop, bankruptcy.
All the jurisdictions where FTX has a presence are now after Bankman-Fried. US, Japan, Bahamas...
Richmond, CA police department. Alameda Research HQ is at 5327 Jacuzzi St Ste 1c, Richmond, CA 94804. Since they were apparently the recipient of the money, and he's apparently the principal beneficiary of all this, that's where to start. Mr. Bankman-Fried may not physically be there, but they have jurisdiction.
Once there's an arrest warrant, getting away becomes much more difficult.
You're conflating FTX.us (which is regulated) and operates in the USA, and FTX global (where all this chicanery happened) and is located in the Bahamas.
With that said, the SEC is already also investigating any potential links between the two entities. I don't think they'd be stupid enough to cross those wires, but you never know.
No, see Molly White's blog and the WSJ parent article. What seems to have happened is that 1) FTX.intl loaned money to Alameda Research in the US in exchange for some token, 2) Alameda Research, which is a crypto trading firm, speculated with that money and lost, 3) the collateral from Alameda to FTX turned out to have little value, and so 4) FTX.intl goes down. Bear in mind that Mr. Bankman-Fried heads all three organizations.
Whether FTX.us is also involved is not yet clear. But it will be. The SEC and CFTC are descending, with hard questions.
Molly White: "This suggests to me that a) they are in a really bad spot, and b) they want as few people sniffing around in their books as possible." Right. That was probably the real goal of a merger with Binance. In bankruptcy, all the dirty laundry comes out. Being acquired by Binance offered hope of keeping any criminal activity hidden. That hope is now gone.
I fully understand the purported chain of events. But, again: the US does not have jurisdiction over FTX. So why would he "get arrested" in California for embezzlement? He didn't break any US laws. The FTX/Alameda deal was likely done via SAFT[1], which is both legal and popular.
The US has jurisdiction over Mr. Bankman-Fried, who is an American citizen born in California. The US has jurisdiction over Alameda Research, which is a US company operating in California and appears to have been the beneficiary of the scam. That's plenty of jurisdiction.
Thanks - this is the most succinct summary of the financial nexus leading to FTX's spiral into insolvency that I've seen, and squares with my own understanding. What we don't know is how the chain of cause and effect played out over a timeline. How did Alameda lose $10bn? How long has FTX been insolvent?
Surely they have been staring down the end of a barrel for a good while?
The entire point of FTX is that Americans were barred from using it. Now Americans certainly ignored that rule by using vpn’s, but I’m not sure that gives the sec jurisdiction. The Americans using the exchange were explicitly breaking the TOS
The SEC is unusually strong (which might surprise you), and because the American market is so wealthy and the rules are relatively clear, the SEC has a huge influence over investment structure.
Isn't this what a bank is? The money sitting in your account is not really there, it's being invested by the bank. Bank accounts exist on the gamble that not everyone wants to withdraw money at once.
I've seen the movie. Man gambles other people's money and attempts to hide the losses in a fake account. Basically the Mt Gox story and not too dissimilar to what FTX has done.
and frequently failing to get that the reason that other people aren't performing the scam is that they don't want to rip people off and don't want to suffer the consequences-- not because they couldn't figure out how.
How is a new Hacker News reader supposed to understand what’s considered unacceptable behaviour unless it’s called out? I don’t want a comment stream full of people unaware they’re about to violate a rule when they post.
Personally, I find dang’s feedback to be helpful and respectful.
This was one of the worst written, saddest pieces I have ever read. It's full of idiotic commentary, unjustified praise and just plain ignorance. Out of the dozen+ remarkably stupid quotes I found I'll share this excerpt:
> That’s when SBF told Sequoia about the so-called super-app: “I want FTX to be a place where you can do anything you want with your next dollar. You can buy bitcoin. You can send money in whatever currency to any friend anywhere in the world. You can buy a banana. You can do anything you want with your money from inside FTX.”
> Suddenly, the chat window on Sequoia’s side of the Zoom lights up with partners freaking out.
> “I LOVE THIS FOUNDER,” typed one partner.
> “I am a 10 out of 10,” pinged another.
> “YES!!!” exclaimed a third.
> What Sequoia was reacting to was the scale of SBF’s vision. It wasn’t a story about how we might use fintech in the future, or crypto, or a new kind of bank. It was a vision about the future of money itself—with a total addressable market of every person on the entire planet.
> “I sit ten feet from him, and I walked over, thinking, Oh, shit, that was really good,” remembers Arora. “And it turns out that that fucker was playing League of Legends through the entire meeting.”
Lo and behold. The intricate, behind-the-scenes scheming of the highly educated financial elite, revelead at last. All predicated upon the grand vision of... buying a banana with your "super-app". No wonder we're going through a much needed correction, some people need to be weeded out of decision making roles ASAP.
"Among Wall Street’s financial elite, SBF’s Bitcoin arb is mentioned in the same hushed tones as Paul Tudor Jones’s 1987 shorting of the entire American economy, or George Soros’s 1992 raid on the Bank of England, or John Paulson’s 2008 bet against subprime mortgages. Alameda’s capture of the kimchi premium (and other trades like it) gave SBF the grubstake he needed for his next move: founding the crypto exchange FTX—a company that may very well end up creating the dominant all-in-one financial super-app of the future."
That is what aggravates me the most: that there is so much money sloshing around out there, desperate to be spent, and it goes to obvious bullshit instead of building bio-sand water filters for every off-grid community in the world, or ensuring everyone in the world gets a sandwich at least once a day, or basically ANYTHING that would make the world a better place for everyone. Instead, over-privileged, over-wealthy, over-gullible people are wasting the economy on digital artifacts. What a senseless waste.
If it's any consolation I expect that a significant portion of the "billions" they're talking about simply never existed.
E.g. I print a trillion tokens, keep most in my pocket but give out some chunks to friends and put a few percent on the open market. They trade on the open market for $1 and tada I'm a trillionaire. The token price crashes and now my friends have lost billions.
But it was all just a mirage.
There are real losses in that example-- the suckers that bought the tokens for $1 on the market-- but they may be tiny compared to the numbers being discussed.
> o I find myself convinced that, if SBF can keep his wits about him in the years ahead, he’s going to slay—that, just as Alameda was a stepping stone to FTX, FTX will be to the super-app. Banking will be disrupted and transformed by crypto, just as media was transformed and disrupted by the web. Something of the sort must happen eventually, as the current system, with its layers upon layers of intermediaries, is antiquated and prone to crashing—the global financial crisis of 2008 was just the latest in a long line of failures that occurred because banks didn’t actually know what was on their balance sheets. Crypto is money that can audit itself
> there. The FTX competitive advantage? Ethical behavior. SBF is a Peter Singer–inspired utilitarian in a sea of Robert Nozick–inspired libertarians. He’s an ethical maximalist in an industry that’s overwhelmingly populated with ethical minimalists. I’m a Nozick man myself, but I know who I’d rather trust my money with: SBF, hands-down. And if he does end up saving the world as a side effect of being my banker, all the better.
> Alameda’s CEO is Caroline Ellison, a Stanford University graduate who like Mr. Bankman-Fried previously worked for quantitative trading firm Jane Street Capital. Alameda is based in Hong Kong, where FTX was headquartered before relocating to the Bahamas last year.
Are the folks at Jane Street making money because they are smart, or because they use that perception to perpetuate some scam?
I interact with a lot of Harvard kids. Some of them are from Long Island, they know dads who work at that Republican's hedge fund. They are smart kids. They have good cognitive gifts.
But not once - not from word of mouth, or directly from them, or someone, ever, anywhere - have I heard a common sense way these guys make money due to intelligence, instead of due to a scam or due to luck.
It is really frustrating. So much human potential wasted on chasing the dollar sign. They are in denial that it is scams.
It has always been scams. Why is this so hard to believe? Why in the absence of any positive evidence, like "oh here is our genius but nonetheless expired" trading strategy, which anyone could have furnished in the last two decades, they agree, oh it must be real?
The simple answer seems, because if you believe it to be real, you can be this specific kind of Harvard + New York + "X" kid - and seriously, they are all cut from the same jib, superficially and inside their character, it tarnishes the institution - and you can do this scam and pocket your change and eat dim sum with 20 people on the weekends and have a skinny girlfriend and buy a condo. You can do something pretty meaningless with your life in exchange for the burn out.
This scam life lets 20 year olds not hear from their horrible parents that burned them out and gave them no meaning. Eventually they turn 30 and hope that a decade went by without a crash, and then life decides for them to sell before the ponzi collapses. Like you have a baby with your skinny girlfriend and you buy the condo and great, you sell, and it happens to be well timed!
I fucking hate Jane Street, I have hated them since I've known the assholes who intern there, and I don't know why this Bankman-Fried guy got such a big pass for scamming literally millions of people, and why this Caroline girl isn't going to be sent to jail, and it's frustrating because you can actually tell! You can predict this from when these kids are 20!
> But not once - not from word of mouth, or directly from them, or someone, ever, anywhere - have I heard a common sense way these guys make money due to intelligence, instead of due to a scam or due to luck.
Financial markets have a fascinating property: any well-known strategy that can be implemented at reasonable cost [0] stops working. This is because people implement it and the profit goes away. If Jane Street has a common sense strategy or three that makes money, they’re not telling you about it.
(I’m taking about actual market profits here. It is well known that you can make lots of money by charging fees on a lackluster fund as long as you can find investors.)
[0] The cost issue is real, and the relevant parameter is some combination of profit (revenue - opex), capex and risk. For example, one can make money (revenue) by being the fastest market on the block. But the revenue there is approximately bounded and competition has driven the cost up to insane levels, so it is not straightforward to do this profitably.
>Why in the absence of any positive evidence, like "oh here is our genius but nonetheless expired" trading strategy, which anyone could have furnished in the last two decades, they agree, oh it must be real?
I agree that there should be some obviously awesome things these funds did that they can share now given they are no longer able to exploit them. I have no idea if they have done so and I and GP are just not aware of it.
That is part of it. The Sequoia piece[0] describes what kicked off Alameda Research: after a tumultuous hard fork, there used to be a discrepancy between the price of Bitcoin in JPY at a Japanese exchange, and that in a US exchange. So he opened a Japanese account, bought a bitcoin in the US for a low price, and sold it in Japan for a high price.
To be clear, it is described by SBF. I haven’t verified historical prices to confirm it. The journalist that wrote this article probably hasn’t either.
And at least in SBF/Alameda's case, they did, and you can google it. IIUC it was basic arbitrage, the hard part was figuring out how to interface with Japan's banks.
Maybe the guy is a bad dude, I don't have a horse in that race. But lots of trading strategies that have worked in the past are well known.
There are known expired strategies that generated large profits for long periods of time. In some cases the people involved in developing the strategies have directly published things explaining what they did.
I see a lot of variations on these arbitrage and secrecy themes.
Arbitrage that sticks around for years: those are scams dude. They involve collusion, not intelligence. I understand it might not be illegal collusion, but if either side of the transaction being scammed found out, they would find someone else to work with.
I mean, yeah. For arbitrage to stick around for years it requires that the person who first found it be years ahead of the curve, and that's really hard to do just by being smarter than the competition. The vast, vast majority of these will be collusion, or regulatory capture, or literal fraud, or whatever where the competition knows full well what you're doing, but can't/won't jump in for completely unrelated reasons.
But finding lots of different things to arbitrage and consistently being two weeks ahead of the competition is something you can do with a dedicated team of smart, experienced people, and this is the business model that Jane Street and others claim to be running.
The obvious suspicion, for any company that is both a market maker and doing prop trading, is that they're engaging in some sort of front running. They're probably doing it in a highly obfuscated non-trivial way otherwise they'd get caught quickly, but nevertheless are using their visibility into trillions of dollars worth of order flow to shape their own trading strategy.
Trust me I know about the inner workings of the Financial world because I did an internship at a Digital Marketing agency and totally didn't get coldly rejected by Jane Street when I applied for their Head of Trading position that I totally deserve because I'm like way smarter than those Harvard Math 55 morons.
SBF tried to throw Ellison under the bus in his latest tweet storm saying that he was shutting the fund down and that her tweets (some of which appear to have been either straight lies or attempts to manipulate the market) weren't approved by him.
I would suspect that both of them get into legal trouble.
Btw, I would say generally: quant investing isn't a scam, Jane Street make most of their money from ETF AP...that isn't complex, most of the high capacity strategies are quite simple (index replication being one, stat arb being another). The more complex HFT strategies tend to be (at their root) about detecting when someone is moving the market: for example, XYZ fund gets new money from investors, they deploy that into stocks, and HFT is about detecting that and calculating whether that is going to move the market (and XYZ fund now deploys various execution algos to stop HFT funds detecting that they have a huge order that will move the market).
There is nothing wrong with this work and, contrary to what people think, it is valuable. If you look at what it cost to invest capital even ten years ago, it was expensive. As in: $10-20 for a single trade. That has gone down to pennies, and created trillions of value. Saying they are all scammers because one guy is a scammer is not really a valid criticism.
> The simple answer seems, because if you believe it to be real, you can be this specific kind of Harvard + New York + "X" kid - and seriously, they are all cut from the same jib, superficially and inside their character, it tarnishes the institution - and you can do this scam and pocket your change and eat dim sum with 20 people on the weekends and have a skinny girlfriend and buy a condo. You can do something pretty meaningless with your life in exchange for the burn out.
> This scam life lets 20 year olds not hear from their horrible parents that burned them out and gave them no meaning. Eventually they turn 30 and hope that a decade went by without a crash, and then life decides for them to sell before the ponzi collapses. Like you have a baby with your skinny girlfriend and you buy the condo and great, you sell, and it happens to be well timed!
This is great screenplay material, like a "Millenial Fight-Club on Wall-Street". You should keep writing!
1. The value you add to the economic 'stream' flowing around you
2. The amount you're able to divert out of that and into your own control
These are influenced by a number of secondary factors:
1. Starting capital to buy tools and resources to increase your ability to contribute
2. The ability to help others increase their contributions, or less charitably, the ability to take credit for the contributions of others
3. A willingness or unwillingness to pillage the commons
A humble farmer can work some acres of land, use his mind to know what best to grow, use his hands to make it happen, trust the sun and rain to grow the crops, and sell the harvest for a value greater than the cost to lease the land and buy the seed. With a million-dollar combine, cultivators, spreaders, center-pivot irrigation systems, an all the other features of modern agriculture, he can reap a much greater - more valuable - harvest.
But when a dealership has negotiated exclusive rights over a region, and the salesmen take a non-negotiable commission of sales, does the salesman who connects the farmer to the combine he knows he needs deserve thousands of dollars for closing that sale, just because he's situated himself between the farmer and the manufacturer?
When Wall Street or Jane Street sees that our massive farm industry needs massive numbers of combines - it's a $500B industry - and they're able to siphon off a percent of that industry's output for "providing liquidity" just because their Daddy knows some people, while the farmer's Daddy worked 18-hour-days every harvest season until he died, and the former is a multimillionaire by age 30 while the latter might make $200k during 4 of 5 seasons and lose $300k in a bad year...it just doesn't feel right.
> 3. A willingness or unwillingness to pillage the commons
This is an important point. As we've pushed the limits of our natural resources, and woken up to the externalized costs of some of our ways of creating value (i.e. respiratory disease from fossil fuel based energy), this is increasingly going to require us to re-evaluate how we define 'value' added to the economic stream.
> But when a dealership has negotiated exclusive rights over a region, and the salesmen take a non-negotiable commission of sales, does the salesman who connects the farmer to the combine he knows he needs deserve thousands of dollars for closing that sale, just because he's situated himself between the farmer and the manufacturer?
I'm not arguing for any value added by middle-men in your example, but sales people provide a service that many of us "maker" types don't want to deal with, which is to engage "socially" with potential customers. Selling and buying an expensive product or service is often a social act. That social act has a value in some spaces.
> honestly by finding mispricings in the market. Eg Buffet, or Burry during the housing crisis.
Like who wants to be on the other side of a Jane Street transaction? Absolutely fucking nobody. If you're talking about "mispricings" during the "housing crisis," my dude, nobody wanted to sell their house to these dumb fucks! They were going to starve, they had no choice! How does that not seem like a scam of some sort to you? That's not honest money!
Those 20 year olds with Math degrees from Harvard. They don't fucking know anything dude, they did not discover a model, they did not make a model with a price that says price is lower than this other price, then persuade some people to make some bet. That's a parallel reconstruction, that's to justify whatever actual scam is going on. How do you not see that?
There's no common sense reason Math 55 equips you with some magical vision into pricing that actually winds up meaning anything. When it does, it might as well be random.
If the Mercers were good people, would they be Republicans? No dude. C'mon, use common sense. Don't get hung up on "normal sense." Use common sense.
If Sam Bankman-Fried was a good person, would he fuck $10b out of his own god damned customers' money?
No dude, he's made some unspecific, previously-bankrupt-and-now-literally-bankrupt promise to donate some money to something somewhere in the future, to whitewash the fact that he just went around fucking everyone.
I mean get a grip Effective Altruists, whose guts I hate too, and whose energy is the stereotype of the student I am talking about - the same students! - where they get this readily packaged "religion" that happens to align exactly with their meaning-bankrupt approach to life.
So don't even get on it with the "honest" money. I can find the venture capitalists who take some dumb person's money and then hand it over to something risky and interesting: I see how VC is honest, it's just not necessarily intelligent, but it's redeemable. But the Jane Street people: No dude. Not Warren Buffet, not Burry, none of those vultures.
>Like who wants to be on the other side of a Jane Street transaction? Absolutely fucking nobody. If you're talking about "mispricings" during the "housing crisis," my dude, nobody wanted to sell their house to these dumb fucks! They were going to starve, they had no choice! How does that not seem like a scam of some sort to you? That's not honest money!
This comment makes me think you don't have the slightest idea of how the financial sector works, how Warren Buffet makes money, what happened in 07-08 or how Michael Burry made money during the crisis.
>If the Mercers were good people, would they be Republicans? No dude. C'mon, use common sense. Don't get hung up on "normal sense." Use common sense.
This comment makes me think you are just a troll.
>But the Jane Street people: No dude. Not Warren Buffet, not Burry, none of those vultures.
This is just ignorant. If Warren Buffet looks at Coca-Cola and thinks hey this stock is under-priced and will be worth more in the next decade and makes 10B off it there's no scam involved. Michael Burry evidently read through hundreds of Mortgage Backed Securities and saw that the underlying assets were more risky then they were priced at and made a killing betting against them. No scam. I'm not privy to what Jane Street's techniques are but it's most likely some ML driven search for alpha but again nothing screams scam. They aren't taking retail investor money, you couldn't invest with them even if you wanted to. Where's the scam?
All of your posts reek of paranoid delusions frankly.
> If you're talking about "mispricings" during the "housing crisis," my dude, nobody wanted to sell their house to these dumb fucks! They were going to starve, they had no choice!
This seems like a pretty gross misunderstanding of all of the very basic finance here. It was NEVER “their house.” A lender let them live their while they payed off a long term contract. They lost it when they could no longer make basic payments OR sort out deferment or other basic accommodations to the existing contract.
> How does that not seem like a scam of some sort to you?
The “scam” that caught your average homeowner wasnt foreclosure. It was the moment someone convinced them could have free money by signing a mortgage at 20x their annual income, 100% ltv, and a 5% adjustable rate. And when they tried to take money off the table with a HELOC they doubled down in to the unsustainable fantasy. They were already blown out and just didnt understand it yet.
Your burys et al werent part of that. they were there to sink the bigger fish who were trading this monopoly money around.
Jane Street has been purchasing advertisements with popular math YouTubers[1][2] recently, and it really bothers me. Think how many young, mathematically curious people are watching these channels and getting told that working for Jane Street is a worthwhile use of their time and intelligence.
Jane Street isn't a hedge fund so I'm not sure why you're lumping in criticism of hedge funds with criticism of Jane Street.
I'm sure some hedge funds have been scams, and probably a decent percentage are frauds in the sense that they have no alpha even before fees (this isn't a crime though). There's not much evidence that the fund you're referring to is a fraud. There are published strategies now that if implemented in the 90s and early 2000s would've earned returns of >50% after transaction costs so their results seem attainable though obviously exceptional.
Just search for that Ellison young lady online. She's partly responsible for fraud that saw $10 billion of other people's money go into the ether. How come that kid (she looks to be under 30 years of age) was put in charge of a multi-billion dollar company is way, way beyond me.
I work in the industry at a market-maker. Jane Street is a lot more than just these two people. Prop trading firms and some quantitative hedge funds are a lot different than traditional hedge funds. Jane Street is mainly an ETF market maker, and are very good in that. They make their money because some of their core strategies work very well.
Also, JS has low attrition and traders there mostly stay long-term since it's a very trader-first place than some other places like HRT, Jump. Both SBF and Ellison had short tenures at JS.
Hedge fund success comes from better tax treatment to very delayed tac for the 'carry over' part. And they get better trading and much higher margin. Yes skill and good ideas can drive better profitz with lower tax. Scams go easier with lower tax too.
I hear what you're saying but consider we're going on two entire generations of brilliant people being spent largely on just putting an ad on your phone and computer. The stock market isn't the only waste of intelligence.
Payment for Order Flow was invented by Bernie Madoff. I believe many of the technical and complex Wall St. "products" like that are probably scams if it were laid out in laymans terms. Not products that retail/brokerage account holders use like buying a stock, ETF's or those "20XX Retirement Fund" - I'm talking about the obtuse derivatives and other "products" that Wall Street invents for themselves.
Edit to add: PFOF is the mechanism that Robinhood (and others) make money on - back of house Wall St. pays Robinhood for the order flow.
This is a very well articulated comment. Thank you for laying this out so clearly. I don't know any hedge fund types so it is helpful to hear from somebody who does.
Everything in their comment points to them not having a clue about the financial industry in general or about how hedge funds / trading firms generate revenue or even try to.
Also in the US at least banks are FDIC insured, so if the bank is breaking the law and gambling inappropriately consumers are still protected.
"How is crypto different than a bank" is a reductive and foolish comparison. There are many, many differences. The primary one being that almost every cryptocurrency system is a fraud at its heart.
Of course you're right that they are very different. But "at it's heart" all money is imagined. Dollars are simply backed by all the most powerful institutions on the planet.
The reason I asked is because it seems to me that people are clutching their pearls and saying this is stealing. But as I see it, the difference between FTX and Chase Bank are that Chase has a lot of rules and regulations, and a good insurance policy. But "at it's heart" SFB is no different than Jamie Dimon. The ethics of what SFB did and what American banks would like to do is exactly the same.
> "every cryptocurrency system is a fraud at its heart."
I'm not sure I agree with you on that part.
Fraud is defined as "wrongful or criminal deception intended to result in financial or personal gain." Encryption-based currency by itself does not meet that definition.
Can people use crypto to commit fraud? Yes, just the same as they could use fiat or anything else that has perceived value.
imho the main value of crypto as a technology is that it is A) decentralized, and B) removes many intermediaries & inefficiencies involved in handling + distributing money. </$0.02>
You misquoted me; I said "almost every cryptocurrency system" for a reason.
A thread where we're discussing a guy using $10B of $16B of cryptocurrency customer deposits to finance his private hedge fund gambling is not a good place to try to make your argument.
Banks lend your deposits out.
Banks do not play the market with your deposits.
Anything close to that ended in 2008.
And even the banks that did so, given they were FDIC insured and part of the Fed Reserve banking system did not leave any customers in the hole.
We can argue about taxpayer bailouts and bad incentives, but the system worked the way it was supposed to - normal people can put their money in a bank account knowing they will be able to get it back out, come hell or high water.
> Banks lend your deposits out. Banks do not play the market with your deposits. Anything close to that ended in 2008.
True that the Volcker rule of Dodd-Frank 2010 eliminated banks using deposits for prop trading as well as other gambling loopholes. That is, until it was weakened in 2019 by R Congress and Trump admin.
Fed doesn't print money, Treasury prints money. Money is created when banks lend. The FDIC DIF (deposit insurance fund) is $125B and funded entirely by private contributions from member banks. They have a $100B line of credit at Treasury if things go pear shaped but generally they have the authority to seize failing institutions and sell the accounts to other banks without touching the DIF let alone the backup line of credit. They did this in 2008, selling WaMu to JPMorgan.
I did not know how the FDIC was backed, thank you.
However, yes the treasury is an actual printing press, but the money supply is controlled by The Fed. They tell the treasury how much to print, they can provide unlimited liquidity to banks, and they are the largest backer of govt debt.
It's different in a lot of ways. The most important one that you've missed is that banks don't need to have enough liquidity to cover customer deposits, but they do need to have enough assets. If a bank's assets ever drop below its liabilities, it is immediately liquidated, the shareholders lose everything, and insurance steps in to fix any gaps.
SBF has neither liquidity nor assets sufficient to cover its deposits, because most of his assets was a pile of worthless fartcoin that he printed for himself, but pretended that it was worth billions. And because he was not properly audited[1], his equity wasn't immediately liquidated to cover the gap, when the gap could still be covered.
... Also, reserve requirements have nothing to do with this particular failure case. They have everything to do with issuing loans, and the rate at which money is created (inflation!), but this wasn't a failure caused by issuing loans.
[1] It's weird how VC due diligence seems to go out the window as soon as their money starts funding a hot new crypto scam. It's almost as if they are playing a heads-we-win-big, tails-we-lose-nothing-but-our-investment game...
> If a bank's assets ever drop below its liabilities, it is immediately liquidated, the shareholders lose everything, and insurance steps in to fix any gaps.
That's how it's supposed to work. We've all found out in 2008 that's no longer the case.
The FDIC took over and sold or liquidated a few hundred small banks and a handful of medium sized banks. The big ones were considered to be too big to fail and were bailed out. The shareholders of these bing banks did not lose everything, and even the subordinated debt was payed (e.g. Citi).
> That's how it's supposed to work. We've all found out in 2008 that's no longer the case.
1. Not every bank that became insolvent had a hole on their balance sheet that required all of their equity to be wiped out to fill. The shareholders got a haircut proportionate to how big those holes were.
2. The rot would have gone far deeper, and the holes could not have been covered if those bank balance sheets looked anything like FTX's did. Banks, for the most part, faced a liquidity crisis, not an insolvency crisis, and the owners of the ones that faced the latter were, for all intents and purposes, wiped out.
3. The FDIC is funded by banks, not by taxpayers. The FDIC only cares about customer deposits, it doesn't give two figs about investments.
The controversial, taxpayer bailouts were not for retail banks (The FDIC was designed a very long ago to handle this case, and handled it well, without dipping into the public purse), they were for shit like AIG. And speaking of shareholder equity, that didn't do so hot. Their public valuation went down 98% from 2007 to 2008, and is, as of today, down 75% from their peak. I wouldn't have wanted to have been a shareholder.
So bail-outs weren't grants, they were loans, and the loans have been repaid netting a massive windfall to the government over over $100B with many more billions to come, a ton of jobs were saved and it's hard to argue that they were at all a bad thing. [1] This is coming from someone who at the time thought the bailouts were a bad idea.
Yes, massive interventions took place - but if that's not a sign that you should be confident the US government will stand by the dollar I don't know what will. The bank was saved, nobody lost deposits. Regulations prevent this from happening in the future.
However I stand by my argument that the US will be repaid in full for its 2008 bail-outs. There's already been $109B in profit, and still $191B in principal left from Fannie and Freddie alone - and they continue to pay massive dividends of about $20B/yr. They US will come out ahead on this and faith in the dollar was restored. Jobs and the economy were saved. And a known good path forward (restoring Glass-Steagall for instance) exists.
I'm not defending Citi. However equating Citi within the economic system with FTX is nonsense. One's a bank which made poor, legal decisions and was saved because of its role in the broader ecosystem. The other is a shady off-shore bucket shop run by a CEO (and his 9 closest bone-bros) who allegedly fraudulently gambled away everyone's money and is on a plane to Argentina.
tl;dr: Even with the Citi bailouts from your article at face value the government will recoup far more than it spent on 2008.
This whole post feels like the dril tweet about the wise man explaining there's actually no difference between good things and bad things.
My argument is not that the financial system as a whole needed no saving, but rather that it was done in a way which encourages massive and perverse systemic risks.
A failed bank like Citi should have been handled like smaller banks at the same situation were handled - taken over by the government, shareholders wiped out, new honest management installed, and criminal referrals made as appropriate. In addition, they should've broken up the bank to smaller units that will not be too big to fail.
The way it was done, most of the management layer remained and had a vested interest in covering up problems and their own complicity. Worse, it made it clear to other institutions that the bigger they become, the less likely they are to be allowed to fail. The incentives are perverse.
Edit: fairness is also important. A large, politically connected, bank benefited from bailouts that smaller, less well-connected banks and regular people did not get.
> My argument is not that the financial system as a whole needed no saving, but rather that it was done in a way which encourages massive and perverse systemic risks.
Absent follow-up regulation, I definitely agree.
> A failed bank like Citi should have been handled like smaller banks at the same situation were handled - taken over by the government, shareholders wiped out, new honest management installed, and criminal referrals made as appropriate. In addition, they should've broken up the bank to smaller units that will not be too big to fail.
Sure, I can get behind that. I do suspect that part of not doing so was pragmatic. Once you get to a certain scale just swapping out management without massive knock-on effects is very hard and the whole point of the intervention was to minimize knock-on effects. Twitter was a few thousand employees and I wouldn't wish that kind of handover on my worst enemies let alone one of the pillar retail banks. Can you imagine just replacing leadership at Apple and assuming it'd go well?
> Edit: fairness is also important. A large, politically connected, bank benefited from bailouts that smaller, less well-connected banks and regular people did not get.
You owe the bank $1M it's your problem, you owe the bank $100M it's their problem and if the bank owes everyone $400B it's the government's problem. Certainly not fair, but pragmatic.
btw, based on your reply I think our positions are probably much closer together than they are far apart. I want Glass-Steagall back.
> You owe the bank $1M it's your problem, you owe the bank $100M it's their problem and if the bank owes everyone $400B it's the government's problem. Certainly not fair, but pragmatic.
Yes, except that the government has the powers (and had them in 2008) to handle the situation.
> btw, based on your reply I think our positions are probably much closer together than they are far apart.
Agreed.
> I want Glass-Steagall back.
Glass-Steagall was explicitly repealed to allow the merger of Citicorp and Travelers Group which created Citigroup.
Robert Rubin, Clinton's treasury secretary, who promoted for the repeal, joined Citi immediately after leaving government and served as chairmen. He made around $140 million until he had to resign because of the financial crisis.
Citi was too big, too connected, and too corrupt. As long as it so large, it will not be effectively regulated, and it will be bailed out again and again.
If there is no effective regulation, and no legal sanctions, management has a strong financial incentives to take actions that are likely to bankrupt the bank.
There's a great paper about it by two winners of the Nobel Memory Prize in Economic Science. It is based on the lessons of the Savings & Loan crisis.
George Akerlof and Paul Romer: Looting: The Economic Underworld of Bankruptcy for Profit
How does this question keep coming up? It's obvious.
1. Banks create money when they lend. This is the job that their Fed has conferred to them. They do so under a strict regulatory framework and with very tight risk requirements. Lending is where money comes from.
2. Fractional reserve works because banks are backed by the FDIC which has a massive deposit insurance fund ($125B). The FDIC has a massive line of credit ($100B) with the Treasury in case that ever runs out. And they have the authority to take possession of failed institutions and sell the accounts like they did in 2008 with WaMu (under OTS). When WaMu went under the bank was sold to JPMorgan and nobody lost a penny without touching the DIF.
3. FTX was backed by nobody and nothing.
4. We know how banks operate, it's public and transparent. If FTX told depositors it was taking their money and gambling with it, and planned to stick them with the losses while keeping all the profit for themselves (a) that would be one thing and (b) nobody would sign up for that.
> Most deposits are used for gambling by banks
No they're not.
> The US fractional reserve requirement for banks is 10%.
No it's not, it's 0%.
> If SBF was gambling with only 10B of 16B that's a 37% reserve - conservative by banking standards.
No it's not. It's wildly irresponsible by any standard.
There is absolutely 0 chance that the WSJ would run an article with a headline like this without verifying the information with multiple parties. That verification is often off-the-record so you won't read about it in the article.
