From The Wall Street Journal, November 9:
FTX’s crisis is a reminder of what is right about traditional finance
Cryptocurrency is an industry often powered by extraordinary belief, yet losses of faith are increasingly common.
The latest example is also one of the biggest: The sudden liquidity crunch for FTX and its subsequent takeover agreement with rival Binance. The exact sequence of events that led up to the agreement isn’t totally clear. They seemed to accelerate when Binance’s founder, Changpeng Zhao, tweeted that Binance was going to sell FTX’s own cryptocurrency called FTT. That appears to have prompted a series of events that culminated in what The Wall Street Journal described as a “run” on FTX by users and a deal with Binance.
FTX founder Sam Bankman-Fried, in a tweet about the deal being struck, wrote that the combined teams were “working on clearing out the withdrawal backlog as is. This will clear out liquidity crunches; all assets will be covered 1:1. This is one of the main reasons we’ve asked Binance to come in.”
Runs are a major part of financial history. Until crypto’s emergence, though, they have rarely been part of the financial present. That isn’t because there is universal trust in the traditional finance realm but because there are many mechanisms and guardrails in place to deal with them.
The first line of defense is trying to prevent runs from even starting by offering insurance. For U.S. bank deposits under a certain size, this is provided by the Federal Deposit Insurance Corp. U.S. brokerage accounts have a form of insurance from the Securities Investor Protection Corp.
If that doesn’t stop a run from starting, banks and brokerages are required to keep sufficient resources to cover these withdrawals in extreme scenarios. Banks have things such as liquidity coverage ratio requirements and brokerages have net capital requirements. These safeguards aren’t perfect, but depositors and investors seem to generally trust them.
Keep in mind, banks and brokerages do different things with your money. Though checking accounts might seem like lockboxes because of the FDIC—and because sometimes they come with access to literal metal boxes in brick buildings—deposits are in a sense a kind of loan to the bank. There are myriad regulations, like the Volcker rule preventing proprietary trading, or risk-based capital requirements, designed to ensure that deposit-taking banks don’t take undue risk. Fundamentally, though, banks are free to use that money and might do dumb things with it.
Brokerages are different. They sell investments and services and earn fees, but customers’ money typically remains their own. Under the U.S. Securities and Exchange Commission’s Customer Protection Rule, customer assets are supposed to be segregated from the broker’s proprietary assets....
....MUCH MORE
Also from the Dow Jones empire, MarketWatch via MSN:
FTX problems mean big headaches for its private equity investors
...The private investors in FTX include BlackRock Inc. Sequoia, Ontario Teachers’ Pension Plan, Softbank Group Corp. Tiger Global Management, Ribbit Capital, Temasek and Lightspeed Venture Partners. A spokesperson from BlackRock did not comment....
Don't cry for the PE peeps, all of the names can handle the hits.
