Sam Bankman-Fried s latest defense is utterly unconvincing
Understanding exactly what happened to FTX customers money is a bit complicated because FTX didn t just help customers buy and sell cryptocurrencies it enabled them to make leveraged trades, a business that inherently involves extending credit to customers.
For example, FTX offered margin trading. This is a service in which customers might deposit $1,000, borrow another $1,000, and use the cash to buy $2,000 worth of Bitcoin. In this scenario, a customer s $1,000 deposit served as collateral for the loan much as a home serves as collateral for a mortgage. If the value of Bitcoin dropped, FTX would ask the customer to deposit additional collateral. If they failed to do so, FTX would sell the customer s Bitcoins and use the proceeds to pay off the loan.
This worked as long as the value of the customer s Bitcoins didn t fall too quickly. In my example, if Bitcoin s value fell by 50 percent before FTX had a chance to sell them, then the customer would have been wiped out. If they fell by more than 50 percent, the customer would have been wiped out and FTX would have taken losses.
Another FTX offering allowed customers to bet on the future price of cryptocurrencies (FTX is short for futures exchange ). If Bitcoin s value rose, then shorts would lose money and longs would gain. If Bitcoin s value fell, the opposite would occur.
Once again, customers were required to post a certain amount of collateral to cover losses their positions might incur in the future. But in cases of extreme volatility, it might not be possible to close a position quickly enough to avoid big losses. If a customer s losses exceeded their collateral, FTX itself would be on the hook for subsequent losses.
This kind of failure is a theoretical possibility on any exchange that allows leveraged trading. For example, Bloomberg s Matt Levine has written about how the London Metal Exchange almost blew up after a nickel trader couldn t make good on a massive short position.
This is basically what SBF says happened to FTX: FTX allowed Alameda to make huge, leveraged bets on the value of volatile cryptocurrencies. Then the value of those cryptocurrencies crashed. Not only did Alameda get wiped out, but FTX and by extension, FTX s customers lost money as well.
While this story might be basically accurate, I don t think it exonerates SBF the way he seems to think it does.