[ExI] lotta splainin to do

[Stathis Papaioannou]

On Wed, 16 Nov 2022 at 00:57, spike jones via extropy-chat <
extropy-chat at lists.extropy.org> wrote:

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> *‘’’*> *On Behalf Of *Adrian Tymes via extropy-chat
> *Subject:* Re: [ExI] lotta splainin to do
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> A lot of FTX's assets and value were in its own token, FTT, much like
> normal banks back their assets with cash, gold, or the like.  So, when the
> value of FTT suddenly plunged (because someone who had a lot of FTT
> suddenly no longer trusted FTX, and sold their FTT to wash their hands of
> their investment in FTX), FTX suddenly didn't have the assets to conduct
> its normal business with, much like a bank run.  The inability of a major
> currency exchange to convert cryptocoins to USD meant those cryptocoins
> were significantly less able to be converted to USD - which caused their
> value in USD to drop substantially.
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> Much like any bank run, a massive hit to public confidence in a major
> financial institution caused impacts to the value of the main currencies
> that institution dealt in.
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> OK cool thx, so the service FTX was providing is converting digital
> currency into fiat currency and back?
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They weren’t just doing that. They were using depositors’ funds for risky
activities, such as lending to or investing in other parties or to
subsidiaries. As a result their liabilities are now greater than their
assets, and depositors will not get their money back. If it had just been a
liquidity problem another business, such as Binance, would have taken over.

> Well that makes sense, for I often wondered about that step: that
> conversion looks like the most dangerous one.  Adrian your comment confirms
> it and makes perfect sense: something vaguely analogous to a bank would do
> business the way a bank does: keeps a small amount of cash to pay out
> withdrawals but not enough for all the depositors to withdraw at once,
> betting they won’t do that.
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> So… a major competitor could buy up a bunch of FTX, then dump it, causing
> the modern equivalent of a bank run, analogous to what the evil Simon Bar
> Sinister (disguised as the evil Mr. Potter) did to George Bailey in
> Wonderful Life.  Then Potter can buy his broken competitor for pennies on
> the dollar, as he tried to do, but Bedford Falls rejected the bad guy.
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> OK then, that all makes sense.  So now I am back to where I was 20 years
> ago: recognizing that digital currency is cool, but it is still vaguely
> unclear (and possibly risky) to convert it back and forth into
> universally-recognized currency.
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> This part rings true: governments which print fiat money (which is all of
> them) will fight back somehow against upstarts challenging and competing
> with their money factory.
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> spike
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-- 
Stathis Papaioannou
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