What the FTX Scandal Can Teach Us About Trusts

dan • December 10, 2022

Depending on how plugged into the world of crypto you are, you may have heard a lot about the recent collapse of a company called FTX. FTX provided an exchange market where people who wanted to buy and sell crypto could connect with one another. FTX’s customers gave it money for two reasons: (1) to put into the customer’s account for trading with other FTX customers; and (2) to pay FTX’s fee for providing this exchange service.

O.P.M. -- other people's money

The critical distinction to understand is that the money in the first category was not FTX’s. Yes, its customers had given that money to them. Yes, that money was held in an account owned by FTX. But FTX was merely holding it for the customers. It was not FTX’s. So when FTX “borrowed” that money without taking the customers and used it to make speculative investments in other cryptocurrencies via its Alameda Research entity, it was stealing money. From a legal perspective, what they did was exactly the same as if they had physically broken into their customers banks and stolen money out of their accounts. This kind of arrangement – where someone can steal money that is under their control – is more common than you might think. A CEO of a company, for example, is in the same situation. They have control of the company’s money. They decide where it gets stored and how it gets spent. But if they use that money for any purpose other than furthering the company’s interests, they are at least breaching their fiduciary duty to put the company’s owner’s interests first. If they use the company’s money for their own interests, now we are starting to engage in something that looks like theft. There have been numerous CEOs over the years who have gone to jail for spending their employer’s money on lavish birthday parties, fancy to vacations, and elaborate home remodels.

The estate's money is not your money

When you are the personal representative of an estate or the trustee of a trust, you are in the same position. You are in control of the estate’s money, but unless and until it gets distributed out to you, it isn’t yours. You are merely shepherding it for the estate’s beneficiaries and creditors.
The confusing part about this is that you might be in one or both of those groups too. Just like it is very common for a CEO of a company to also be one of its founders and owners, the executor of an estate can also fill multiple ties. But even in that situation, until the money is distributed to you from the estate, it is not yours, and treating like it is can get you in a lot of trouble.

what next?

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