By Dan diBartolomeo, President and founder of Northfield Information Services, Inc. Based in Boston since 1986, Northfield develops quantitative models of financial markets.


The bankruptcy of FTX, a large international cryptocurrency dealer will no doubt have serious repercussions in the cryptocurrency world. The investigation into what went on at FTX could take months or years to be completed. Since the major business unit was legally located in the Bahamas, there are probably few regulations that could be broken. Most regulations that do exist relate to privacy of financial transactions which will slow down any judicial proceeding. There were obviously some rules in place as FTX continues to allow withdrawals from accounts of Bahamian citizens while non-local accounts have been frozen. This kind of “don’t mess with the locals” rule is common in tax havens like the Cayman Islands, Panama, etc. Financial firms in these jurisdictions have an expectation of criminal charges for fraud if local citizens lost out, while prosecution for losses suffered by external participants is extremely rare.

FTX was organized as three companies, one of which (Alameda) undertook proprietary trading with the firm's capital. The main business was the crypto equivalent of a securities broker-dealer, but broker-dealers are heavily regulated in the US under the Securities Act of 1934, Rule 15c3-1, known as the "net capital rule." All the technicalities around this rule run to about 300 pages. Most other countries with organized financial markets have similar rules. If FTX had been regulated as a broker dealer, then all customer funds and assets for which the investor had fully paid would have to be kept segregated from any funds available to the firm. If a customer has a margin account with a broker, then assets of the margin account act as collateral for loans from the broker to the customer. The broker can then pledge those same assets for loans to the broker from an external lender (e.g. a bank). The net capital rule regulates how these collateral relationships are managed and how much firm capital and liquidity the broker must maintain.

If crypto was regulated as a commodity (as the US IRS treats it for tax purposes), then FTX would have been treated as a "futures commission merchant" or FCM by the CFTC. FCM's are subject to a similar net capital rule CFTC 1.17(a)1(i) which requires net capital of $1 million or more based on the volume of business. If the FCM deals in OTC transactions the minimum capital is $20 Million. Code of Federal Regulations ( Given FTX "total assets" of tens of billions the capital requirement would obviously have been substantial.

From the early reports, it appears that FTX lent $10 Billion of customer funds/assets to their own trading affiliate without collateral. Initial reports suggest that around $1.7 Billion is now missing, most probably through trading losses at Alameda. There have also been news reports of a separate $473 million in suspicious transactions that could represent further losses. It should be noted that most trading in fiat currencies (FX) and physical commodities (e.g. gold bars) is also unregulated in the US and many large countries. However, most currency trading is done by banks, so the activity is often indirectly regulated.

From a theoretical perspective, investors are dealing with both market risk and operational risk being jointly important, but hard to assess. Our research article published in the Global Commodities Applied Research Digest (JPMorgan/University of Colorado) provides a unique framework for that problem, Assessment of Cryptocurrency Risk for Institutional Investors - GCARD ( A less formal version of the same article appeared in PRMIA Intelligent Risk earlier this year and has been distributed through other portals. Northfield’s Peter Horne has also published two related articles in the Journal of Performance Measurement on how the evolution of cryptocurrencies and “decentralized finance” will impact institutional investors. At least one institutional investor, the Ontario Teacher’s Pension Fund, has indicated investments of about CDN$95 Million related to FTX.

The “wild west of crypto” in the US seems to have arisen from the inability of the SEC, CFTC, IRS, and the Federal Reserve to coordinate on how to approach crypto. The FTX situation is somewhat akin to the some of the earlier losses associated with “over the counter” swaps. Initially, swaps were explicitly exempted from most regulation by prior Federal laws, so regulators could claim their hands were tied. Rules for reporting and clearing swaps were enacted after the Global Financial Crisis, but some aspects of individual swap transactions (e.g. margin requirements) are still generally treated as private business contracts. In the US, the CFTC has primary regulatory power on swaps, but the SEC can get involved in cases where swap transactions are based on securities that the SEC would normally regulate.

A clear regulatory picture in the US would improve the ability of the G20 countries to collaborate on sensible guidelines, leaving unregulated crypto activities to operate only in small countries with economic incentives for liberal engagement with cryptocurrencies (e.g. El Salvador).

About the Author:

Dan diBartolomeo is President and founder of Northfield Information Services, Inc. Based in Boston since 1986, Northfield develops quantitative models of financial markets. The firm’s clients include more than one hundred financial institutions in a dozen countries.


Dan serves on the Board of Directors of the Chicago Quantitative Alliance and is an active member of the Financial Management Association, (“QWAFAFEW”), the Society of Quantitative Analysts. Mr. diBartolomeo is a Director of the American Computer Foundation, a former member of the Board of Directors of The Boston Computer Society, and formerly served on the industry liaison committee of the Department of Statistics and Actuarial Sciences at New Jersey Institute of Technology.

Dan is a Trustee of Woodbury College, Montpelier, VT, and continues his several years of service as a judge in the Moscowitz Prize competition, given for excellence in academic research on socially responsible investing. He has published extensively on SRI, including a forthcoming book (with Jarrod Wilcox and Jeffrey Horvitz) on portfolio management for high-net-worth individuals.