Cryptocurrencies, I explain the Ftx platform scam
FTX was everything and its opposite: a "exchange" where to trade cryptocurrencies, but also a portfolio of client funds. Mario Seminerio's article taken from the Phastidio blog
Let's try to extract some considerations and lessons from the latest spectacular collapse of a player of high weight, including in the media, of the cryptocurrency world. Let's talk about the FTX galaxy and its dominus, the enfant prodige Sam Bankman-Fried, whose composite and evocative surname has long attracted puns and puns. Now, after his customers are mostly fried, maybe he will become Bankman-Fraud.
For an overview, necessarily concise and non-specialist, I refer you to this article. For my part, I would like to highlight a few points. First, we know that FTX was a sprawling and chaotic conglomerate, with a related party that finally demolished the whole house of cards: it is called Alameda Research and it is not clear what it was after, being mainly a trading house active in derivatives on cryptocurrencies.
YOUR FUNDS ARE (NOT) SAFE
Apart from that, it has emerged that FTX transferred their depositors' money to Alameda without authorization. And here I would say that cryptocurrencies have little to do with it, while the absence of regulation in the crypto sector counts decisively. What Sam Bankman-Fried (from now on, SBF) was insistently looking for, having become the privileged interlocutor of political power (especially the Democrats, of which he was a major donor) and regulatory agencies. Ironies of fate.
It was said, unauthorized use of customer deposits. Which is the conduct that, along with other circumstances, led to the bank failures that led to the Great Depression. But there are other pearls, facilitated by the context. Matt Levine writes about it in a spectacular piece on Bloomberg.
FTX was everything and its opposite. For example, it was a crypto "exchange", an exchange, where to trade cryptocurrencies, even with leverage. But it was also a custody service, i.e. a portfolio of customer funds (tapini). Or a broker-dealer and a lender. This "polyspecialization" is not uncommon in the crypto world, indeed we can say that it tends to be the rule, in a riot of mingling.
After the collapse, FTX's balance sheet appeared to have only 900 million dollars of liquid assets, 5.5 billion dollars of "less liquid" assets made up of so-called tokens (exchange currency generated by a crypto protocol, the real fiat money of scammers in the industry) and $3.2 billion in illiquid private equity investments. No bitcoins in assets but 1.4 billion equivalent value in bitcoins in liabilities.
IMAGINARY AND VERY “FIAT” ASSETS
Crypto assets include a token called Serum, budgeted for $2.2 billion. And here it gets interesting, so to speak. How does it work? The issuer of the token creates it from scratch (value is in the eyes of the buyer, remember?) and sells a small part of it to customers, placing the rest in an asset reserve.
And what happens here? Let's say we've created 10 billion serums, and sold a million of them for $1 each to customers. The "circulating" market capitalization is therefore $1 million. But, be careful: there is also the so-called fully diluted market cap, which is obtained by valuing the entire stock of tokens at the price at which a ridiculous amount was sold, i.e. the million mentioned above. Basically, how much would the "treasure" be worth if all the tokens were in circulation. But they are not, and are instead the exclusive creation of an entity.
With a complex algorithm, 1 dollar a piece for 10 billion pieces is 10 billion dollars. Minus the million collected from the sale to fools to investors, it makes assets belonging to the "creator" of the token for 9.999 billion dollars. Isn't all this wonderful? The real fiat money against which the crypto world fights tirelessly, in search of freedom.
You may have guessed, even if you are not an expert: the assets have been inflated by nothing. What about the real money, the million sold against dollars? Ah, you can do whatever you want with that: invest in listed and unlisted companies, do philanthropy at various levels, grease the wheels in and around Washington.
But it doesn't end there because there is also a nice wealth effect: with trading profits, i.e. commissions, the crypto-exchange buys back part of the tokens it has sold, increasing the price and the theoretical wealth of its owners. At that point it becomes easier to issue new tokens or sell those of the blocked reserve at a higher price, dupes flock to the source of perpetual wealth and the value of the crypto-exchange's assets increases. The scheme is known and widely used: if you buy the house token, you get a discount on trading fees. This also contributes to inflating the price.
THE GREAT RAID STYLE 1929
Then there is the second part of the scam, the one with values deposited by customers: fiat money or stablecoins (i.e. dollars converted one to one into a "service" cryptocurrency), and other deposited cryptocurrencies. And here we can only imagine how it went: Alameda loses money due to the price collapse, perhaps SBF and friends think this is actually a huge opportunity to consolidate the sector, saving other exchanges from certain death.
At that point, to meet the two needs, they divert the depositors' values to Alameda. The rest is history, or at least news. Let's just add the absence of internal controls, spreadsheets made by middle school students, "improper" attribution of accounts between own and third-party funds and financial leverage, a non-existent board of directors or made by friends of the multi-bred genius, and so on.
Central bank monetary tightening is behind these crashes, in the same way it was behind the explosion of the crypto phenomenon. I've been telling you this for a long time, remember? I know what some of you might object: these are scams facilitated by absent controls, bitcoin is something else and is for something else. I know the argument, it is not without foundation. Of course, what I have briefly and improperly described in broad terms is only the transposition of a scam based on the concept of tokens, the "magic token".
WITHOUT TRUST AND WITHOUT PERMITS, LITERALLY
Perhaps one day, after having cleared the field of all the Ponzi schemes thus generated, an effective utility of blockchains will emerge, in a truly trustless and permissionless context, the magic words that indicate that transactions can take place in the absence of a centralized authority and without need for the "trust" that characterizes the institutions built within the "social contract" of the laws.
For now, we can only state that the only thing trustless, in the sense of undeserving of trust, are these "bags". Users who want to protect themselves, waiting for the laws and regulations of the well-known state Leviathan to do so (!), are left with the so-called self-custody, i.e. keeping cryptocurrencies in a wallet with exclusive access, better if offline. Not the most practical and it certainly hasn't saved savers from the collapse of values, but at least it prevents one's funds from being diverted without permission (again, an ironic form of pemissionless). The only risk here is losing the wallet access codes, or having them stolen by third parties who then clean up the wallet.
Be your own bank is a great concept. But obviously not without risk. SBF will become the acronym of a fallen Master of the universe who, it is hoped, will spend time reflecting on what has been done, perhaps in an institutional context and with bars on the windows because re-education, even if not afflictive, can be facilitated in such settings . Instead, here in Italy sbf indicates the "subject to collection", which for many of our compatriots investors in FTX, there was.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/primo-piano/ftx-truffa/ on Sat, 19 Nov 2022 07:07:59 +0000.