Quote Originally Posted by vertical_doug View Post
It's an 'and'. Yes, when they take the clients funds, they may be misappropriating client assets, and giving a worthless IOU, but they (FTX) are leveraging their balance sheet. If they make money, they can pay back, and they get away with it.

If the customer was 'staking' their account to earn 8%, the client funds weren't necessarily misappropriated. Because in 'staking' they were lending and had the risk of the borrower not repaying. This is like a margin account with any broker dealer, and you will become a general unsecured creditor against the firm. The question is whether or not, related party transactions were prohibited? This is essentially how Lehman Brothers blew up the hedgefund clients.

There is a lot going on here.

Now let's say I am a black hat. My LLC issued commercial-paper denominated in dollars to Tether for $25,000,000. Now instead of getting $25mm from Tether, I get $25mm equivalent of tether tokens. I deposit the tether tokens at FTX. I buy $25mm of Ethereum. Now FTX goes bankrupt and I have lost access to my Eth. Is my loss $25mm USD or is it whatever the number of Eth tokens I held. And you see how all of my transactions are 100% levered so I created $25mm out of thin air. That is really what is going on in the entire crypto ecosystem.

It's possible because my LLC is a blackhat and tether is willing to pretend I am credit worthy and the commercial paper actually is not worthless.
I still think its misappropriation because of the opacity between FTX and Alameda. As the Wall Street Journal notes, “Using customer funds for proprietary trading or lending them out—without an investor’s consent—is generally forbidden in the regulated securities and derivatives markets.”

While such protections do not exist in the unregulated crypto market, as the Journal points out, FTX’s terms of service explicitly told users that they owned the cryptocurrencies in their accounts; the terms of service document reads: “None of the digital assets in your account are the property of, or shall or may be loaned to, FTX Trading.”