Conversation

Caitlin Long 🔑⚡️🟠
@CaitlinLong_
3/ "The maneuver freed up billions of dollars per week from 2009-12 that Merrill Lynch used to finance its own trading activities. Had Merrill Lynch failed in the midst of these trades, the firm’s customers would have been exposed to a massive shortfall in the reserve account."
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Caitlin Long 🔑⚡️🟠
@CaitlinLong_
4/ WAIT -- PLEASE STOP AND READ THAT AGAIN 👆. It's really important. So...Merrill Lynch commingled customer funds, used them to cover its own obligations, & had it failed its customers would have been exposed to a "massive shortfall in the reserve account." Where was the NY AG??
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Caitlin Long 🔑⚡️🟠
@CaitlinLong_
5/ But there's MORE! Merrill held $58bn/day (!!!) of customer securities in an account subject to its creditor lien. Per the SEC, "Had Merrill Lynch collapsed at any point, customers would have been exposed to significant risk & uncertainty of getting back their own securities."
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Caitlin Long 🔑⚡️🟠
@CaitlinLong_
6/ Yeah, that Merrill stuff was pretty bad, and it paid a $415mm fine to the SEC in 2016. But the SEC handled it in a manner that didn't spark sudden panic & customer withdrawals from Merrill. But today, #NewYork went w/ the "gotcha" approach & pockets of panic seem to be ensuing
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Jesse Powell
@jespow
In the case of USDT it's the fiat at payment processors and banks that's in question. Someone could have looked at the CryptoCapital or bank balance and reconciled but a number in an account doesn't mean cash in the vault. Would need to audit the whole chain to for deliverability
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Caitlin Long 🔑⚡️🟠
@CaitlinLong_
Yep I agree Jesse—that’s why audited financial statements are important too (not just cryptographic proof of reserves). Audits are a bummer but they do catch stuff like this (I survived several audits of a financial subsidiary I used to run—they’re a pain but they do catch stuff)
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Jesse Powell
@jespow
What would the audit have caught though? Maybe that Tether/BFX were moving money between pockets but I doubt they would have caught insolvency/accessibility issues at the payment processor or bank level. Processor/bank statement matches liabilities, ok check.
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Caitlin Long 🔑⚡️🟠
@CaitlinLong_
Ah—auditors do review material legal agreements & almost certainly would ask for everything related to a relationship this big. They pull info on material transactions too—not just the account balance. They track the cash + review the account agreement & operational controls, etc
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Jesse Powell
@jespow
Replying to
@jespow
@CaitlinLong_
and 2 others
Would need to be more than a basic books audit/reconciliation. It'd have to be a deep business risks type of audit, which would dig in to the viability/legitimacy of key partners. I don't see anybody calling for this kind of audit but it's pretty far up there with reserves, IMO.
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_gabrielShapir0
@lex_node
Right. An audit can be potentially misleading without a systematic review of internal controls. Enron did fine in audit--before Sarbanes-Oxley's focus on internal controls.
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Caitlin Long 🔑⚡️🟠
@CaitlinLong_
Replying to
@jespow
@nic__carter
and
@wtogami
Totally agree. I’m not an auditor but from experience I’d guess that a hypothetical Bitfinex auditor would have seen that a material counterparty wasn’t itself audited & didn’t have proper internal controls—so would have qualified its audit opinion of Bitfinex as a result
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Max
@maxtannahill
No one will audit Bitfinex though. Also, an audit doesn’t help you if a government seized funds which is one of the most serious risks you have as a crypto currency exchange.