Part of the problem was that the exchange traded primarily perpetual futures and extended too much leverage to its customers
From afar, all financial disasters can look the same. Too much leverage, illiquid assets, fraud, fire sales and conflicts of interest bring down houses of cards that all sensible people knew could never last. But a closer view and reasoning without the benefit of hindsight it’s less clear that everyone in finance is a bad actor or that new disasters have novel elements. Moreover, leverage and the other things everyone tut-tuts about after-the-fact are essential for economic progress.
Another issue may be that FTX invested its collateral in speculative trades rather than to hedge its customer liabilities. If true, this is similar to the collapse of MF Global Holdings, also part of the traditional world of finance, in 2011. MF Global was a broker and futures commission merchant rather than an exchange, but FTX acted as both broker and exchange.
Finally, the FTX empire was funded partly with FTT tokens, created by FTX. The value of the tokens depended on the continued success of FTX. In traditional finance, the ability to fund yourself with your own currency is usually supposed to be reserved for governments, but private institutions try it sometimes.
The problems at FTX have already led to calls for more regulation of crypto, but there are three big problems with that idea. These same disasters happen frequently in the regulated financial world. Particularly large examples lead to more regulations, but that never seems to stop people from finding new ways to make old mistakes.In all material respects relevant to these problems, FTX was already subject to regulations.
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