FTX and Alameda have now filed for chapter 11 in the United States, and about time too. Regulators will for sure want to try to preserve something for creditors, even though there is unlikely to be very much.

The ongoing saga of the FTX collapse is displaying all the characteristics of Russian TV news on the Ukrainian ‘Special Military Operation’. Now they say they have been hacked and millions have been stolen by third parties, and “FTX apps are all infected with malware”.

But stop and think – there are billions missing. Supposedly, somewhere between $10 billion and $50 billion. How can they not know with a little more precision?

How useful to be able to say that lots of cash has disappeared elsewhere when it would certainly appear that quite a lot of it may have simply been moved into the pockets of bad actors.

There are many things that have happened, not least FTX allegedly using its FTT token as collateral and to pay for things – most notably, Binance exiting its FTX investment.

Binance, quite rightly, sought to recover the cash by selling FTT and did a great job salvaging what it could. There could be a bit of conflict of interest here, but Binance has and had every right to crystallise and exit its investment in FTX.

Unravelling the FTX collapse

The problem is Alameda and FTX reportedly used FTT to invest in at least 50 other companies and projects. Each one of those must now be in serious trouble. And, not only because of the drop in value and lack of liquidity, but also in the alleged straightforward looting of other companies.

But, perhaps the second most blatant misuse of power and fiduciary responsibility was late in September when FTX allegedly used $4bn of FTT tokens – which had just vested – to ‘repay’ a similar amount due to Alameda.

Fair enough you may say – except FTX recorded it as a loan to Alameda and when the next day it was returned to FTX, the ‘loan’ was extinguished – and so was the Alameda loan.

So, Alameda was ‘better off’ by $4 billion and so was FTX. Of course, neither statement appears to be true.

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But absolutely the number one blatant misuse of fiduciary responsibility was the alleged use of client funds on the exchange to support FTT, which was necessary to stop FTT dropping and leaving lots of black holes everywhere.

Whatever the actors in this drama may say, these funds are not, were not, and never did belong to FTX itself. Older readers may remember Robert Maxwell and the Mirror pension fund scandal, which changed pension oversight rules for the better. In many ways FTX’s use of client funds is analogous.

Regulation in the wake of the FTX collapse

I sincerely hope US regulators will pull the whole thing apart and bring charges against those responsible. This is quite possibly the best thing that has ever happened to crypto, as finally regulators will see that the same standards that apply to traditional financial institutions and constructs must apply to crypto as well.

Likewise, the proposed lifeboat for any future collapses, mooted by CZ, would be a very positive development to protect investors from losses.

Gideon Greenspan said it nearly eight years ago and was roundly condemned. But his thesis – regulators central banks and governmental treasury departments are not going to allow billions to be shifted about with no knowledge of from whom, to whom, and where the funds actually came from – remains even more true today than it did then.

That will now hopefully leak across to the proper oversight of crypto exchanges and protection for investors.