They are an exchange that allows future trading and margin trading which require borrowing money/assets/coins. The FTT tokens were probably put up as collateral for loans. The drop of the FTT value probably triggers calls on those loans. Thus the liquidity crisis.
> Customer deposits should meet liabilities 1:1. If they don't, somebody is lying.
That’s not how banking works. You hold illiquid assets. Sometimes they move in price. If they move enough in price you’re insolvent. Limiting bank runs is a genuinely hard problem.
Exchanges aren't banks, and crypto exchanges especially shouldn't be banks. Crypto is liquid and can be redeemed in its own denomination instantly if you hold it in a simple wallet. That's what exchanges should be doing. They shouldn't be doing fractional reserve banking, and a run shouldn't be possible. Preventing runs on a crypto exchange is exceedingly easy if the operators aren't taking risks with client funds.
B and C are perfectly fair game for a government to attempt to prevent, regulate, and prosecute in my book.
I don't think anyone has an inherent right to take advantage of people's ignorance solely for their own profit even if those people "deserve what they get." We make plenty of other ways of abusing people illegal, why allow that one?
I agree that if voters want to outlaw B and C, that's their prerogative. I don't see any moral imperative for that action, though.
My formulation of 'deserve what they get' was perhaps a bit snarky.
There are good reasons for people to invest in risky ventures. Eg when you invest in a startup, you might be able to get your money back, if you ask nicely, but there's no guarantee, and there's not necessarily any liquid assets backing your funds.
I think investing in risky assets should be legal.
I also think that it should be legal for people to invest in assets that have no official classification into whether they are risky or not. Ie when the company taking your funds makes no claims (as in C), in practice the customers should assume the worst.
If you want to forbid C, alas, that leads to a lot of bureaucracy. Because you have to define what an adequate level of disclosure looks like. And then there will be lots of paperwork.
As a taxpayer I don't want to see any government resources wasted on protecting greedy, stupid cryptocurrency "investors" from their own bad decisions. They deserve what they get and their losses will serve as a useful example to others.
No argument from me there. I was just narrowly addressing the point in stale2002's comment.
Though to be honest, it is well known that the long term fate of any crypto exchange is to go bust. So no one could really claim that they didn't know it was coming.
Crypto is glorified gambling. (At least so far. In principle, crypto can mature over time into something more serious.)
Are you saying that fractional reserve banking should be illegal, or that insolvent banks should be illegal? I think the second one already basically is. Or at least with a real bank, they get shut down and the FDIC bails the depositors out.
Educated rumor is suggesting FTX may be insolvent, not only the victim of a bank run type scenario.
You are referring to liquidity providers and market maker; they provide the liquidity (in the form of loans for margin trading, among other things), take risk in exchange for market making fee.
An exchange on the other hand is facilitating trades by matching buyers with sellers. At least that's how it works in stock markets. Even if NASDAQ were to become a market maker they would have to spin a separate entity, bring their own funds to provide liquidity. Even then I don't know if it's allowed by regulation.
> Even then I don’t know if it’s allowed by regulation
It isn’t, precisely for this reason. The US Equity and Equity Derivative markets have tried a few times to get approval for initiatives using their already existing BDs (to facilitate inter-market order routing), and in every case it’s been blocked by the regulators as too risky to the underlying business.
The issue here has more to do with the lack of a centralized C&S clearing house in crypto, and is one of the reasons counterparty risk remains such a massive issue there. Having to maintain an account at each exchange, much like you would a BD, and praying things don’t suddenly go pear shaped, strikes me as insane (and is one of the primary reasons I’ve avoided getting involved in the crypto space)
> The shadow banking system is a term for the collection of non-bank financial intermediaries (NBFIs) that provide services similar to traditional commercial banks but outside normal banking regulations.[1] Examples of NBFIs include insurance firms, pawn shops, cashier's check issuers, check cashing locations, payday lending, currency exchanges, and microloan organizations.[2][3] The phrase "shadow banking" is regarded by some as pejorative, and the term "market-based finance" has been proposed as an alternative.[4]
It's fine for a trading venue to list all these derivatives, the problem in this case is that the venue and issuer are the same entity. In the trad finance world this is strictly separated.
Your margin account should be immediately liquidated and your positions closed if the value of your collateral drops below your outstanding obligations.
