FTX, the story continues. And the law has nothing to do with it.

FTX, the story continues. And the law has nothing to do with it.

The FTX scandal, from a few hundred million, is spiraling into the billions of dollars as the investigation continues. Now, even if it caused losses for the entire capitalization, it would reach about 30 billion dollars (for comparison, Lehman Brothers was 1,200 billion), but it is enough to make several people talk out of turn: i.e. those who say "the market is regulated".

When I first wrote about it, the losses seemed limited to $600 million. As the investigations go on, it turns out that FTX also had a Hedge Fund, and that it also had matryoshka companies everywhere in the world, with preference among countries where corruption is endemic.

But we have to stop here, because now everyone is screaming that "that market must be regulated". In reality, at least in the US, that market is regulated.

In the early days of bitcoin, you couldn't make an exchange and register it as "Incorporated". The reason is that in the USA there are two supervisory bodies: the FED, which deals with securities, and the CFTC, which regulates the commodity and related futures market.

It is still a matter of dispute whether cryptocurrencies are Securities or Commodities, but once it was understood that it was one of the two, and only after having understood it, both entities gave the green light to the creation of bitcoin exchanges, which previously they could not set up as companies in the USA.

But be warned: as the digital market is so ubiquitous, they are not so much focused on whether or not a company exists, but whether it can operate with American customers. FTX was incorporated in the Bahamas, in fact: the question was, should it or could operate on American customers.

The Hedge Fund linked to FTX, then (Alameda Research) was incorporated in Hong Kong, i.e. not in the US. MA was licensed to do business with American customers. The other boxes were around the world and are being discovered.

But the point is that in order to operate in the USA with American customers, it also had to have a license, and this allows the American DoJ (the justice department) to take care of it.


But there's more. The US component of Incorporated was itself governed by US law. The trouble is that the laws state very clearly what the internal processes are required to ensure transparency and due diligence in an Inc.

The trouble is, all these regulations have been violated. The bankruptcy trustee (who comes from the Enron disaster, so he has seen some), said he has never encountered such indifference to the rules of law, and such a total lack of any mandatory corporate governance mechanism. In English: “”such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here”.”

And as a bankruptcy trustee he has seen it: https://en.wikipedia.org/wiki/John_J._Ray_III

So, all those who wash their mouths saying that “cryptocurrencies must be regulated” have missed one thing: they ARE regulated. The problem is that the operators have VIOLATED laws, and risk prison for this.

We could certainly move the problem to the culture of cryptocoins, saying that those who work there feel superior to the laws, or exempt from them. But the expertise with which FTX has opened offices in tax havens says the opposite: they knew VERY WELL about the existence of the laws, only that they circumvented them.

But be careful: the Bahamas, or Hong Kong, are not tax havens only for cryptocoins. If by "we need to regulate more" we mean making the Bahamas, Hong Kong, and others lose their tax haven status, this will certainly not be valid only for cryptocurrencies, and not even particularly for them: there is much more to it.


The actions the company took to regulate internally were decided, it seems, by the CEO and management.

The trouble is that US law (and usually European law) requires that there be a financial controller, who should oppose certain transactions. The bailout of other failed exchanges, say, is already borderline in the field of finance. But the CEO's billion-dollar loan, on extraordinarily good terms, a decent financial controller shouldn't let through.

The trouble here is that FTX didn't have the financial controller. He was all the CEO. Now, the problem here is not the lack of laws: the laws are there, and they have been violated . But the laws that allow you to make mortgages and enter them in the balance sheet EXIST: making internal mortgages is a consolidated habit when budgeting with amortization to subsidiaries and more. At the very least, these loans should not be given to the CEO, especially if they are payable in 60 comfortable annual installments with practically zero, if not negative, interest (still being investigated), since the financial controller should completely forbid the CEO from taking loans. mortgages with the same company he manages.

So the laws existed: what happened is that they were circumvented or ignored, which is why the bankruptcy trustee says that FTX was run by “a very small group of inexperienced, unsophisticated and potentially compromised individuals”. We will come back to this part later.


Another highly regulated aspect, which has been abused, was the creation of the FTT: the FTT, which was classified as "Security" (therefore under the control of the FED) was nothing more than a cryptocurrency, exchanged on the same exchange, which however was used as a "payment" tool for customers. This made it the equivalent of a bond, or at least non-preferred stock, from which it was classified as a Security.

Imagine that a company like eToRO creates, for the forex world, a derivative title called “Totollero”, and that when you earn money in some forex action you find yourself investing in Totolleri and if you earn, you earn Totolleri. Which you can then change into Euros, using the same exchanger (if you trust me to have enough Euros on hand, that is).

Is it legal? Yes, it would. But it is the financial implications that are problematic: such a security would indeed become a Security, and as such its value derives from the trust that investors have in your company. The financial controller, that is, should have acted to have control and a certain visibility. Which was made very simple given that FTT had its own blockchain.

Not for nothing, the disaster really erupted when a competitor of FTX, which traded FTTs, decided to stop dealing with them and sell them.

Now, are securities regulated? Yes a lot. Are they controlled? Yes a lot.

And why did this mess happen? Well, the fact that sixteen billion dollars of FTT was exchanged for dollars and ended up in a CEO account in a tax haven, which was then emptied, could also explain a lot. Except that operating in this way with corporate securities is prohibited.

And the statutory financial controller, if it existed, should have prohibited certain operations.


And it is here that I would like to understand what those who complain about the fact that "there is no regulation", that it is a "poorly regulated market" and that "we need to regulate better" mean.

What are you referring to?

If you're referring to the fact that FTX was incorporated in the Bahamas, i.e. in a tax haven, that the Hedge Fund was in Hong Kong, and that there are bank accounts around the world in highly corrupt countries, well : be my guest! Adjust as well. Do you want to definitively solve the problem of tax havens and corruption on the entire planet? Well, what are you waiting for? Who is stopping you?

In my opinion, your program is a little ambitious, that's all.

What other lack of regulation are you talking about? Of the fact that no one has ever checked that the American branch respected the administrative rules and due diligence, that it had all the organs in place and that they were doing their duty? Be my guest, again! But you are opening a box into which is Satan with Ingrown Hemorrhoids, and if you try to do mandatory checks on it, he plunges you into some bubbling circle of impalement. (in a nutshell, they pay a killer and kill you. Bad.).

These are controls that do not exist, in an automated way, not even for the rest of the corporate world, because the Americans are convinced that the shareholders will leave the company if it is not managed well, and that the controls are done by the FED .

Which doesn't. How many unlisted companies (such as Twitter is now, to be clear) are listed as FTX? Impossible to know.

Do you want to introduce controls of this type? I repeat: be my guest. But remember the story of the bubbling impalement. Some boxes, said Clive Barker, shouldn't be opened.


Is there a technological component to this lack of "regulation"? The only one that exists is that relating to bankruptcy liquidation. In theory, anyone who had placed their Cryptocoins on that platform has the right to get them back. The trouble with this statement is that

  • the technical tools necessary to get back CryptoAssets are not defined.
  • it is not clear whether, in the event of embezzlement, the paper value or the current value should be returned.

this is the only part that is not "regulated", and it is the reason why the bankruptcy trustee is an expert who has been working for 40 years on the worst bankruptcies in history. But be careful: not even here is it really without rules. Chapter 11 is now an old thing, what it lacks, at most, is to understand how to apply it to cryptocoins.

However, it is not a question of such a serious lack: in this period the real speculation has moved to art, and to the purchase and resale of works of art. Let me be clear, in 99.999% of cases they are unwatchable crusts without inspiration and technique. But it doesn't matter because you don't receive them at home, what you buy is the certificate of ownership.

But what if someone ran off with the money, like FTX did? That our investor would see a hundred hideous paintings delivered to his home. Similarly, in the worst case scenario, debtors will be given a key with a wallet back.


Bottom line, if there's one irritating thing about this story, it's the plethora of people who want to "regulate" the issue. The only unregulated parts of the cryptocurrency are so abstract (is it a Security or a Commodity? What is the security value? etc) that they would have NO impact, or would not be preventive, would not prevent what happened from happening afFTX.

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