[barry-cotter]

> 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.

[zeven7]

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.

[eru]

Well, it seems the word 'exchange' in this case is used with a different meaning when applied to FTX than the meaning you have in mind.

[stale2002]

Which is exactly the problem.

This should be illegal, and people who do this should go to jail.

Customer funds should be 1 to 1 backed with assets.

[eru]

As long as noone is being lied to, I don't see any problems.

Case A, tell your customers that their funds have asset backing, and have asset backing: fine.

Case B: tell your customers that their funds have no asset backing, and have no asset backing: fine. (Those customers deserve what they get.)

Case C: tell your customers nothing, and do whatever you feel like: fine. (Those customers deserve what they get.)

Case D: tell your customers that their funds have asset back, and have no asset backing: bad.

[majormajor]

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?

[eru]

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.

[nradov]

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.

[zeven7]

Case D is what we are seeing over and over again, including this circumstance

[eru]

No argument from me there. I was just narrowly addressing the point in stale2002's comment.

[stale2002]

> As long as noone is being lied to

That is exactly what is happening. There is lots of lies being told, with no transparency, and then people's money disappears.

Instead of that, if people money disappears, we should arrest the people who made it disappear.

[eru]

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.)

[stripedfish7]

Except none of these 4 cases happened with FTX.

SBF claimed that assets WERE backed, while it appears that they were not.

[eru]

That would be case D, wouldn't it be?

[vba616]

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.