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FTX tapped into customer accounts to fund risky bets, setting up its downfall

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Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#611

Post by nfw2 »

woah wrote: post #317
skullone wrote: post #145

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, includin…

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?

Crypto is like the wild west by design. Chaos enables con men. They aren't unrelated

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#612

Post by imtringued »

lupire wrote: post #584
stephen_g wrote: post #559

Earlier quoted context omitted.

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 m…

Why do banks bother with customer deposits at all, instead of spinning out to separate companies?

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.

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#613

Post by fshbbdssbbgdd »

UncleEntity wrote: post #364
fshbbdssbbgdd wrote: post #207

Earlier quoted context omitted.

FTX let people withdraw 100% of the time until they didn’t.

Which is pretty good uptime if you ask me…

I guess the Tacoma Narrows bridge had 99.999% uptime because it lasted for months and then only took minutes to collapse.

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#614

Post by stephen_g »

RC_ITR wrote: post #589
stephen_g wrote: post #559

Earlier quoted context omitted.

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 m…

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 e…

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).

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#615

Post by stephen_g »

gigatexal wrote: post #582
BurningFrog wrote: post #568

Earlier quoted context omitted.

I didn't understand much of the jargon, but if banks don't lend out customer deposits, why are they gone when banks go bankrupt? If they were not lent out, where did they go?

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. Such is what I have pieced together.

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.

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#616

Post by unmole »

dools wrote: post #529
qnt wrote: post #443

Earlier quoted context omitted.

Not at all. 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 ex…

Always good to find another MMTer out in the wild ;)

This has absolutely nothing to do with MMT.

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#617

Post by stephen_g »

lupire wrote: post #584
stephen_g wrote: post #559

Earlier quoted context omitted.

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 m…

Why do banks bother with customer deposits at all, instead of spinning out to separate companies?

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.

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#618

Post by RustyRussell »

woah wrote: post #351
solotronics wrote: post #273

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.

Well, their largest asset was probably their own token. Once that went to zero, maybe it was Bitcoin, but I doubt it. Tether more likely.

Remember, this was a casino, not really an exchange.

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#619

Post by stephen_g »

BurningFrog wrote: post #568
stephen_g wrote: post #559

Earlier quoted context omitted.

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 m…

I didn't understand much of the jargon, but if banks don't lend out customer deposits, why are they gone when banks go bankrupt? If they were not lent out, where did they go?

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.

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#620

Post by runeks »

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)

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