Bitcoin, Blockchain, Battlestar Galactica

Points 3 and 4 are basically just fraud/theft but 1, 2 and 5 are quite interesting and seem to get in to the ponzi nature of this scheme.

SBF himself said Alameda provided the liquidity to jazz FTX into overdrive. Liquidity in this context means trading partners willing to take the other side of the customer bets. (If there is no liquidity, customers cannot execute their trades on FTX).

But now we know that liquidity was in part, the customers own money, and margins calls were not made against Alameda. This basically means the gains of the customers credited in their trading accounts didn't exist.

 

Matt Levine has been developing his thesis that crypto is relearning the lessons of the GFC

The example he gives is apparently SBF may have been instrumental in bringing down Terra/Luna with a large bet and market manipulation. Then Binance seems to have started the run on FTX.

The problem with this stuff is you can make money on the volatility, but if you destroy the credibility of the market, you are the loser when the entire ecosystem implodes.

These 2nd and 3rd order effects seem to have collapsed 3AC. They 'only' lost 200m on Terra/Luna, and then also their lenders got jumpy and took money out. Still survivable. But the 3rd order effects killed them i.e. traders all over the place exiting trades and liquidity rushing out of the market. That blew up all their 'investments'.

 

So the indictments have dropped and it looks like Alameda is the centre of the frauds, and FTX was a feeder scheme. Basically he was a fraudster every step of the way - this isn't a case of a business which turned into a ponzi later on due to losses.

Thread

"From at least May 2019 through November 2022, Bankman-Fried engaged in a scheme to defraud equity investors in FTX Trading Ltd. (“FTX”).... at the same time that he was also defrauding the platform’s customers."

SEC brings fraud charges against SBF.
https://t.co/frxeLfGQtI

— Frances 'Cassandra' Coppola (@Frances_Coppola) December 13, 2022

A core idea is that Alameda could run a negative balance at FTX - that meant it was using the customers $$ for it's trades

ETA:

Remarkably this seems to be 2-3 types of ponzi combined

 

Putting aside the basic theft/losses aspect - it seems the long read guy a couple of pages ago was correct about the basic nature of this ponzi scam, and the securities fraud involved.

As a prop trader Alameda had done OK, but it was getting tough to make any money.

SBF saw the opportunity to create his own exchange, and use Alameda as the market maker and creator of liquidity, taking on the other side of the customer trades on FTX. You could legitimately do this even as a loss leader - i.e. Alameda might lose some money, to get the exchange moving. Investors would then get excited about this new exchange and pour money in. So even if you lost some money on the Alameda side, the valuation of FTX (eventually $32bn) means it was worth it.

But here comes the ponzi scheme.

When a customer does some margin trades with Alameda and say makes USD1m, its account is credited plus 1m and Alameda is credited negative 1m. But it turns out Alameda never posted margin, and is never liquidated - it just runs a negative 1m

So if the trader now withdraws his money, his gains are paid by the other customers capital not by Alameda

That is a classic ponzi scheme.

https://www.epsilontheory.com/the-macguffin-part-2-the-story-arc-of-sbf-and-ftx/

 

He's been indicted by DOJ for wirefraud and conspiracy to commit securities fraud as well now

 

So basically he is indicted by SDNY

The SEC charges are civil for defrauding investors

 

This freakin guy ... says it was Binance's fault with a straight face. Unbelievable.

“Binance put FTX out of business”

Bullshit!
FTX stole money and got caught.
Simple.

pic.twitter.com/F4kgBVZPc8

— Bitcoin Archive (@BTC_Archive) December 14, 2022

 

... the ponzi was bound to collapse unless SBF could clear his own trades, which is what he was trying to achieve with his lobbying. With open access to US retail, + clearing ---> anything is possible fraud wise. This is how Madoff got away with it for so long.

I don't fully understand this but it seems one of the big issues with the Madoff style fraud is being both custodian of the securities, and being able to execute fraudulent trades. Madoff was able to report non-existent trades to his customers - i.e. the assets never existed, and the trades never happened. We see similarities here with FTX/Alameda holding billions in magic beans instead of the real assets, plus falsifying clearance.

https://www.americanbar.org/groups/business_law/publications/blt/2021/07/madoff/

 

Binance is offering 50% APR for Tether lockups - completely normal and legit

 

This is the point about being able to be the exchange doing the clearing, but also having custody of the assets.

The Flow business is the exchange business. It’s the market-maker business, where you take a small transaction fee for being the middleman and bringing together a willing buyer and a willing seller. You don’t have to be right to make money in Flow, because you’re not expressing a buy/sell opinion. You don’t have to be timely and you don’t have to be effective, again those terms don’t really have much meaning in an opinion-less Flow business. All you have to do to make a Flow business work – and when it works it really works – is to be there. You have to be the market-maker that people use. You need to provide ‘liquidity’ (being the buyer or seller temporarily if there’s no buyer or seller you can match with the seller or buyer knocking on your door). You need marketing and you need reputation.

Fortunately for SBF, he’s already got all of the ingredients here. Alameda can provide the liquidity. They can be on the other side of any trades that need to be made, and then hold the exposure on the hedge fund books until it makes sense to get out of the trade. Certainly SBF can provide the reputation. He’s got a Magical Money Machine, after all, and is the smartest guy in crypto.
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Control of the trades, and custody of the assets gives a giant opportunity for fraud.

The FTX.com is the new market-maker and flow business entity, but you’ll see that I call it an exchange + broker. That’s because while it acts as a market-maker for crypto trades and calls itself an “exchange”, it is also a brokerage, meaning that it maintains or custodies the actual trading accounts that people would use to make those crypto trades.
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This is why I think ultimately most of crypto is a fraud.

According to multiple reports, SBF was looking for permission to clear and settle his crypto futures trading in-house at FTX.

You know, I work with words for a living, and it is difficult for me to communicate what a TERRIBLE idea this is. But I’ll try anyway. The entire “we’re going to use The Blockchain! TM and smart contracts and aLgoRItHms to make securities clearing and settlement more efficient” argument is just complete bollocks. There’s a good reason that clearing and settlement is less than perfectly efficient, that all the back-office work of delivering securities and confirming exactly who bought and sold what and how they are paying for it takes a day or two, and that’s to make sure that there are multiple sets of eyes on each stage of the process. You do not want clearing and settlement to be instantaneous. You do not want clearing and settlement to occur in someone else’s code. You do not want clearing and settlement to be handled in-house by the same firm that serves as market-maker and broker. Why not? Because it is a license to steal and defraud at a massive scale.​

Tether and Binance, which represent much of the market now, are clearly scams, but there is no way to establish it because they don't have to prove their assets, and they rig the trades/market

 

It'll be interesting to see with Tether. I suspect it is not possible to prove it is a ponzi because they can rig the prices on the exchange, and never have to prove custody of the underlying assets.

Yes its a negative sum game which creates no value. It always requires a greater fool for you to cash in your 'gains"

This is why in every single crash, bag holders get left behind who have no choice but to wait for the next run up to find a new bag holder.