<story><title>FTX tapped into customer accounts to fund risky bets, setting up its downfall</title><url>https://www.wsj.com/articles/ftx-tapped-into-customer-accounts-to-fund-risky-bets-setting-up-its-downfall-11668093732</url></story><parent_chain><item><author>LeafGuild</author><text>It is absolutely a blockchain failure. Blockchains are intentionally designed to facilitate this. They have no possible way to stop this kind of fraud. Even if you built an elaborate set of smart contracts that could audit participants, they would still not stop anything. That activity can just be moved to another chain and avoid the audits. This kind of thing can just keep happening over and over again, as it already has for the last 12 years. Remember Mt Gox? Nothing fundamental has changed about blockchains that could ever prevent this from happening. It&amp;#x27;s viewed as a feature that everyone just loses their money sometimes. The designers of blockchains &lt;i&gt;want&lt;/i&gt; this to happen. From speaking to them, they view any kind of fraud prevention as an affront to their definition of &amp;quot;economic freedom&amp;quot; and what it entails.</text></item><item><author>phas0ruk</author><text>FTX is a centralised exchange, it is not routing all customer trades on chain. It’s not a blockchain failure, it’s just a lack of client asset segregation by a traditional centralised trading house.</text></item><item><author>Digory</author><text>So if the chain is supposed to enable &amp;quot;trustless&amp;quot; finance, what enabled Alameda to take anything?  Seems Alameda and its clients should be screwed, but FTX&amp;#x27;s holders should be relatively easy to identify and restore.&lt;p&gt;But everyone seems to say that&amp;#x27;s not the case.  So what broke down here?  Why isn&amp;#x27;t the ledger ledgering?</text></item><item><author>chlodwig</author><text>From the article: &amp;quot;FTX Chief Executive Sam Bankman-Fried said in investor meetings this week that Alameda owes FTX about $10 billion, people familiar with the matter said. FTX extended loans to Alameda using money that customers had deposited on the exchange for trading purposes, a decision that Mr. Bankman-Fried described as a poor judgment call, one of the people said.&amp;quot;&lt;p&gt;In the FTX International terms of service ( &lt;a href=&quot;https:&amp;#x2F;&amp;#x2F;help.ftx.com&amp;#x2F;hc&amp;#x2F;article_attachments&amp;#x2F;9719619779348&amp;#x2F;FTX_Terms_of_Service.pdf&quot; rel=&quot;nofollow&quot;&gt;https:&amp;#x2F;&amp;#x2F;help.ftx.com&amp;#x2F;hc&amp;#x2F;article_attachments&amp;#x2F;9719619779348&amp;#x2F;FT...&lt;/a&gt; ) they say that users have full title, ownership and control of digital assets. They say that the assets are the property of the user, and shall not be loaned to FTX trading, shall not be treated as they belong to FTX trading, and that users control the assets in the account.&lt;p&gt;So if they did indeed loan out customer deposits, that is just straight up criminal fraud, open and shut. This isn&amp;#x27;t like some DeFi scheme where they are working around some legal loophole or in the fine print tell you that they will probably lose your money. This is just straight up illegal under the plain vanilla theft and fraud laws of any country. This isn&amp;#x27;t even a bank run (banks at least tell you they are loaning your deposits out) -- it&amp;#x27;s a run on a U-Haul self-storage where you find out that they actually sold all the furniture in your storage unit to a pawn shop.</text></item></parent_chain><comment><author>siftrics</author><text>This is not true at all.&lt;p&gt;If you are the only person in the world with the private key to your coins, you are the only person who can move them. Period.&lt;p&gt;FTX is a centralized entity that custodies funds. It has nothing to do with a blockchain, which could have completely prevented this.&lt;p&gt;There are many examples of decentralized exchanges (DEXs) for which it is mathematically impossible to loan out depositor&amp;#x27;s funds without their consent, because the only person capable of signing a transaction to move the funds is the depositor themself.</text></comment>
<story><title>FTX tapped into customer accounts to fund risky bets, setting up its downfall</title><url>https://www.wsj.com/articles/ftx-tapped-into-customer-accounts-to-fund-risky-bets-setting-up-its-downfall-11668093732</url></story><parent_chain><item><author>LeafGuild</author><text>It is absolutely a blockchain failure. Blockchains are intentionally designed to facilitate this. They have no possible way to stop this kind of fraud. Even if you built an elaborate set of smart contracts that could audit participants, they would still not stop anything. That activity can just be moved to another chain and avoid the audits. This kind of thing can just keep happening over and over again, as it already has for the last 12 years. Remember Mt Gox? Nothing fundamental has changed about blockchains that could ever prevent this from happening. It&amp;#x27;s viewed as a feature that everyone just loses their money sometimes. The designers of blockchains &lt;i&gt;want&lt;/i&gt; this to happen. From speaking to them, they view any kind of fraud prevention as an affront to their definition of &amp;quot;economic freedom&amp;quot; and what it entails.</text></item><item><author>phas0ruk</author><text>FTX is a centralised exchange, it is not routing all customer trades on chain. It’s not a blockchain failure, it’s just a lack of client asset segregation by a traditional centralised trading house.</text></item><item><author>Digory</author><text>So if the chain is supposed to enable &amp;quot;trustless&amp;quot; finance, what enabled Alameda to take anything?  Seems Alameda and its clients should be screwed, but FTX&amp;#x27;s holders should be relatively easy to identify and restore.&lt;p&gt;But everyone seems to say that&amp;#x27;s not the case.  So what broke down here?  Why isn&amp;#x27;t the ledger ledgering?</text></item><item><author>chlodwig</author><text>From the article: &amp;quot;FTX Chief Executive Sam Bankman-Fried said in investor meetings this week that Alameda owes FTX about $10 billion, people familiar with the matter said. FTX extended loans to Alameda using money that customers had deposited on the exchange for trading purposes, a decision that Mr. Bankman-Fried described as a poor judgment call, one of the people said.&amp;quot;&lt;p&gt;In the FTX International terms of service ( &lt;a href=&quot;https:&amp;#x2F;&amp;#x2F;help.ftx.com&amp;#x2F;hc&amp;#x2F;article_attachments&amp;#x2F;9719619779348&amp;#x2F;FTX_Terms_of_Service.pdf&quot; rel=&quot;nofollow&quot;&gt;https:&amp;#x2F;&amp;#x2F;help.ftx.com&amp;#x2F;hc&amp;#x2F;article_attachments&amp;#x2F;9719619779348&amp;#x2F;FT...&lt;/a&gt; ) they say that users have full title, ownership and control of digital assets. They say that the assets are the property of the user, and shall not be loaned to FTX trading, shall not be treated as they belong to FTX trading, and that users control the assets in the account.&lt;p&gt;So if they did indeed loan out customer deposits, that is just straight up criminal fraud, open and shut. This isn&amp;#x27;t like some DeFi scheme where they are working around some legal loophole or in the fine print tell you that they will probably lose your money. This is just straight up illegal under the plain vanilla theft and fraud laws of any country. This isn&amp;#x27;t even a bank run (banks at least tell you they are loaning your deposits out) -- it&amp;#x27;s a run on a U-Haul self-storage where you find out that they actually sold all the furniture in your storage unit to a pawn shop.</text></item></parent_chain><comment><author>caminante</author><text>&lt;i&gt;&amp;gt; That activity can just be moved to another chain and avoid the audits.&lt;/i&gt;&lt;p&gt;&lt;i&gt;&amp;gt; Remember Mt Gox? [...] It&amp;#x27;s viewed as a feature that everyone just loses their money sometimes [...] From speaking to them, they view any kind of fraud prevention as an affront to their definition of &amp;quot;economic freedom&amp;quot;&lt;/i&gt;&lt;p&gt;I found these observations to be helpful reminders how things are (and used to be!). A blockchain isn&amp;#x27;t designed to indemnify you if you hop on&amp;#x2F;off the blockchain.</text></comment>