To understand the FTX fiasco and how Sam Bankman-Fried (SBF) managed to disappear all those funds, it is important to understand some basic risk management practices, touching on rules and regulations. FTX Operations FTX, a crypto derivative exchange facilitator, is an exchange that provides leverage to allow people to get more exposure in the markets using fewer deposits. For example, if you were to deposit 100 USD and use all of your available leverage by opening positions that are 5 times larger than your account balance – it would mean that a 20% market move could see you losing your entire deposit. The instruments that allow these operations are called “perpetual futures”. The reason they are described as perpetual futures is because these positions roll over month to month, without closing like traditional futures in the CME. Alameda Research The market participants on the other side of your trade who buy and sell the majority of these positions are entities called “market makers”. In FTX’s case, its market maker was a company called Alameda Research. What methodology Alameda followed and where exactly Alameda was regulated remains up for debate – although the crypto industry as a whole remains largely unregulated and typically, crypto start-ups tend to be based offshore (in order to avoid regulator scrutiny). FTT Token The reason the FTT token was created was to allow collateralized deposits like BNB – rather than allow facilitating leverage on multiple cryptocurrencies. Hence, FTT is a collateralized token with incentives, and it is easy to have discounts using the pass. The Capital of Alameda Research Alameda Research used FTT, which was ICO’ed in a way, and created this token because it had an active market and a tangible USD value. The token, before the crash, was trading even at the enormous amount of $25.56 before the market collapsed. So, the capital and all those billions Alameda was holding were mostly FTT -- money raised from sold tokens. The token’s price was determined by supply and demand in accordance with traditional market practice. Client Deposits and FTX As things stand, there are no rules specifying that clients' funds should be segregated from the exchange in the Bahamas (to the best of my knowledge). Or that FTX couldn’t maintain client money in the same accounts as client money. There is a fine line between lending money from their accounts as loans or as margin collateral. It would seem that FTX decided to lend, borrow or provide a margin to Alameda to hold client positions, despite many rumors suggesting Alameda had preferential services like no stop-outs and better conditions. Where Is the Rabbit? We Have Only the Hat! So, Alameda was in the custody of clients' deposits and FTX was acquiring companies and sponsorships while providing a return for FTT through Alameda. Given that the FTT price is based on market fluctuations, it was a matter of time until one big actor (Binance) liquidated its position. Once the hat was gone, the rabbit could never be found while the company was left in Chapter 11 bankruptcy. SBF and What Is Next Suppose it was discovered that SBF could maintain client deposits in non-segregated accounts and that he could offer any loan to Alameda and that FTT could be used as collateral for those deposits… In that case, lengthy prison sentences seem like an outlandish fantasy. What’s important to remember here is that market risk (fluctuations in asset prices) can be extremely volatile. In the cryptosphere, a cryptocurrency can move in excess of 70% during a single trading session which makes it absolutely essential to diversify one’s crypto portfolio and avoid holding all eggs in a single basket (or, all the rabbits in the same hat).

This story contains new, firsthand information uncovered by the writer.

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