Cryptocurrencies - intelligent commentary

[zetroc]

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[j44ke]

again, what they thought and what they signed may be too very different things. It all comes down to documentation.

since MF Global and Lehman, the rules for client segregation in developed markets became much more robust. This is not the world Crypto operates in.
It goes back to my original point, once you try to make crypto useful, it turns into finance. If it is not regulated like finance, bad stuff will happen.

The darkside of finance always moves to the least regulated jurisdictions. That is why global regulators are trying to blackball BVI, Cayman, etc. . . PO Box finance is not a good look.
Digital PO Box is even worse which is essentially what crypto is.

Thanks for this explanation Doug. I think I can see the puzzle pieces on the table now if not quite how they all fit together.

[72gmc]

+1, thanks for the explanation. Is there a crypto portmanteau for caveat emptor yet?

[vertical_doug]

There is so much irony inside crypto. It started because people said you can't trust governments and central banks not to debase their currencies. But the issuance of unaudited stablecoins used to facilitate transactions is debasement. (You are creating money which may or may not be backed)

You have El Salvador which adopted bitcoin as its currency and see if it works out any better for them..... answer- it is not.

We already know from the 1830-1850 Free Banking Era, that private companies issuing their own scrip backed by assets with little to no oversight doesn't work.






From WSJ:
Bankruptcy courts had made limited progress reorganizing crypto firms before FTX filed for chapter 11



The U.S. bankruptcy system will hash out the largest-ever collapse of a cryptocurrency exchange through a legal process that has barely begun to answer how holders of digital currencies will fare in an insolvency.

Bankruptcy courts haven’t had the chance to decide complex legal questions around crypto ownership when an exchange or lender goes bust. As FTX’s chapter 11 case gets under way, the question of who even owns digital currencies—the exchanges or the customers who made the deposit—remains unsettled.

FTX collapsed into chapter 11 Friday with no strategy for restructuring and without including basic disclosures about its customers, assets and liabilities. The exchange, led by new management after the sudden resignation of founder Sam Bankman-Fried, also lacks a clear precedent to follow for finding out how much customers are owed and settling those debts.

While chapter 11 is an established process, it has never successfully reorganized a major U.S. crypto firm. Celsius Network LLC and Voyager Digital Inc. tumbled into bankruptcy earlier this year and have yet to unfreeze their customers’ money or secure a restructuring that would unlock users’ assets.




and from another WSJ article,

Securities regulators in the Bahamas are seeking to control FTX bankruptcy proceedings through the crypto exchange’s locally based subsidiary, challenging the company’s chapter 11 filing in Delaware and setting the stage for a possible venue dispute with its new U.S. management.

FTX Digital Markets Ltd., the crypto company’s subsidiary based in the Bahamas, filed for chapter 15 in New York bankruptcy court on Tuesday to seek U.S. recognition of Bahamian liquidation proceedings. The action, if successful, could move at least a portion of the legal proceedings over the collapse of FTX from the U.S. bankruptcy courts to local courts in the Bahamas.

FTX’s management is likely to fight to keep the case in the U.S., according to people with knowledge of the matter.

[72gmc]

FTX collapsed into chapter 11 Friday with no strategy for restructuring and without including basic disclosures about its customers, assets and liabilities.

[fastupslowdown]

Bankman-Fried still thinks he can raise $8,000,000,000 and fix this thing. He's both inexperienced and delusional

[fastupslowdown]

The new boss of bankrupt crypto exchange FTX has slammed the management of founder Sam Bankman-Fried, saying the company’s financial statements could not be trusted and that a business once valued at $32bn lacked any significant internal controls.

John Ray III, a veteran insolvency professional who oversaw the liquidation of Enron, said in a court filing on Thursday that FTX was the worst case of corporate failure that he had seen in his more than 40-year career.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” he said.

“From compromised systems integrity and faulty regulatory oversight abroad to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

[j44ke]

The new boss of bankrupt crypto exchange FTX has slammed the management of founder Sam Bankman-Fried, saying the company’s financial statements could not be trusted and that a business once valued at $32bn lacked any significant internal controls.

John Ray III, a veteran insolvency professional who oversaw the liquidation of Enron, said in a court filing on Thursday that FTX was the worst case of corporate failure that he had seen in his more than 40-year career.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” he said.

“From compromised systems integrity and faulty regulatory oversight abroad to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

Where is this info from? What news source etc. Just helps those playing along at home keep up.

[fastupslowdown]

Where is this info from? What news source etc. Just helps those playing along at home keep up.

FT. I take my news seriously :)

[j44ke]

FT. I take my news seriously :)

Not questioning the validity, just that those interested might want to read the rest of the article. Realize that's tough with paywalls though.

[fastupslowdown]

Not questioning the validity, just that those interested might want to read the rest of the article. Realize that's tough with paywalls though.

When the guy who cleaned up Enron calls this thing a dumpster fire, you know its bad. When all is said and done, investors will be left with gornisht mit gornisht.

[j44ke]

When the guy who cleaned up Enron calls this thing a dumpster fire, you know its bad. When all is said and done, investors will be left with gornisht mit gornisht.

Yeah, kids running the candy store sounds like.

[vertical_doug]

[fastupslowdown]

from bloomberg:

The Debtors did not have the type of disbursement controls that I believe are appropriate for a business enterprise.  For example, employees of the FTX Group submitted payment requests through an online ‘chat’ platform where a disparate group of supervisors approved disbursements by responding with personalized emojis. In the Bahamas, I understand that corporate funds of the FTX Group were used to purchase homes and other personal items for employees and advisors.  I understand that t here does not appear to be documentation for certain of these transactions as loans, and that certain real estate was recorded in the personal name of these employees and advisors on the records of the Bahamas.


To my knowledge, the Dotcom Silo Debtors do not have any long-term or funded debt.  The Dotcom Silo Debtors may have significant liabilities to customers through the FTX.com platform.  However, such liabilities are not reflected in the financial statements prepared by these companies while they were under the control of Mr. Bankman-Fried.  The chart below summarizes certain information regarding the Dotcom Silo’s consolidated liabilities as reflected in the September 30, 2022 balance sheet: 

[fastupslowdown]

posting the full court filing


I think this puts to bed that this wasn't a leverage issue, but a situation of no financial controls where customer assets were misappropriated. A complete shit show

https://assets.bwbx.io/documents/use...gJS1JHEf2XE/v0

[vertical_doug]

posting the full court filing


I think this puts to bed that this wasn't a leverage issue, but a situation of no financial controls where customer assets were misappropriated. A complete shit show

https://assets.bwbx.io/documents/use...gJS1JHEf2XE/v0

It's both. Issuing your own currency, FTT allows you to leverage with dollars created out of thin air backed by nothing.
The misappropriation of funds is just another piece of the puzzle. It's not an either or, it's a 'and'. This is a classic derivatives style blow-up

Enron was basically account tricks.
MF Global was lack of controls and leverage
Madoff was a ponzi scheme....

This is a trifecta

I think the hardest part for John Ray will be figuring out how much actual real 'currency' came in the front door versus all the sums being tossed around which are inflated values.
When Irving Picard handled the Madoff unwind, he did a great job clawing back funds from early investors who withdrew. Whether that precedent will apply here, remains to be seen.

[fastupslowdown]

It's both. Issuing your own currency, FTT allows you to leverage with dollars created out of thin air backed by nothing.
The misappropriation of funds is just another piece of the puzzle. It's not an either or, it's a 'and'. This is a classic derivatives style blow-up

Enron was basically account tricks.
MF Global was lack of controls and leverage
Madoff was a ponzi scheme....

This is a trifecta

I think the hardest part for John Ray will be figuring out how much actual real 'currency' came in the front door versus all the sums being tossed around which are inflated values.
When Irving Picard handled the Madoff unwind, he did a great job clawing back funds from early investors who withdrew. Whether that precedent will apply here, remains to be seen.

Maybe we're arguing on semantics. brokerages generally are prohibited from borrowing against their customers. by issuing currency it was essentially taking customers money (borrowing it) and giving an IOU. It's just smoke an mirrors. They did what banks and brokerages are not permitted to do and use customer money to trade. If the customer funds were segregated, FTX would still have failed but customer positions would not have been impacted.

[vertical_doug]

Maybe we're arguing on semantics. brokerages generally are prohibited from borrowing against their customers. by issuing currency it was essentially taking customers money (borrowing it) and giving an IOU. It's just smoke an mirrors. They did what banks and brokerages are not permitted to do and use customer money to trade. If the customer funds were segregated, FTX would still have failed but customer positions would not have been impacted.

It's an 'and'. Yes, when they take the clients funds, they may be misappropriating client assets, and giving a worthless IOU, but they (FTX) are leveraging their balance sheet. If they make money, they can pay back, and they get away with it.

If the customer was 'staking' their account to earn 8%, the client funds weren't necessarily misappropriated. Because in 'staking' they were lending and had the risk of the borrower not repaying. This is like a margin account with any broker dealer, and you will become a general unsecured creditor against the firm. The question is whether or not, related party transactions were prohibited? This is essentially how Lehman Brothers blew up the hedgefund clients.

There is a lot going on here.

Now let's say I am a black hat. My LLC issued commercial-paper denominated in dollars to Tether for $25,000,000. Now instead of getting $25mm from Tether, I get $25mm equivalent of tether tokens. I deposit the tether tokens at FTX. I buy $25mm of Ethereum. Now FTX goes bankrupt and I have lost access to my Eth. Is my loss $25mm USD or is it whatever the number of Eth tokens I held. And you see how all of my transactions are 100% levered so I created $25mm out of thin air. That is really what is going on in the entire crypto ecosystem.

It's possible because my LLC is a blackhat and tether is willing to pretend I am credit worthy and the commercial paper actually is not worthless.

[vertical_doug]

Let's take this one more step:

during the bankruptcy work out, Eth declines by 50%. Of course, I am going to want to be paid my original cost price in dollars, the bankruptcy administrator is going to want to pay me my original number of tokens.

but if the opposite happens, I will want my tokens, the administrator will want to payout the original dollar amount and pocket the rest.

(This is a real world example on the Mt. Gox bankruptcy which was the original largest bitcoin exchange that was hacked and went bankrupt in 2014. Everyone is a blackhat.)

[j44ke]

There are so many moving pieces in this.

With all these questions about actual value, is this going to have repercussions on the general global economy? What, for example, would be the impact on Tether and their secured bitcoin in the above scenarios? Anything?