Magic beans, Bahamian penthouses, old-fashioned fraud and other important SBF-in
&gt; In crypto it is common for one exchange to do all of these things, to run the exchange that matches trades and also the website that takes customer orders and also the bank that lends customers money and also the market maker that buys what customers are selling and sells what they’re buying.<p>One thing, well there are thousands, but one thing traditional finance does far better than crypto as the above quote points out, is separation of duties.<p>Exchanges, allow for trading.<p>Clearing houses handle settlement.<p>Back offices&#x2F;prime brokers handle custody of assets and margin allocation for those that want to trade on margin<p>Government and self regulating agencies handle compliance and oversite.<p>This means that when there is a failure at one of these, the rest go on mostly unaffected.<p>FTX was handling trading, settlement, holding of customer funds, margin allocation&#x2F;loans and regulation.<p>So when FTX failed&#x2F;was found out as a fraud, the entire thing went belly up.<p>Crypto will get there with separation, its considered a best practice, but it takes time for people to realize why traditional finance is structured the way it is.<p>The one retort you may come up with is that the major sell side institutions do alot of these, but you&#x27;ll also be aware that they are very securely firewalled away from each other.<p>Some sell side institutions own their own trading venues, but they are ran as arms length separate companies.<p>When Lehman went bankrupt no one who primed with them lost their shares held by Lehman as those were firewalled away from Lehman&#x27;s trading business and Lehman couldn&#x27;t touch them to cover its own losses.<p>In each collapse we learn new lessons.  In this latest crypto crash we learned a few things:<p>1) that you can&#x27;t give unsecured loans to even the most blue chip of names( 3AC in this case) as everyone can go bankrupt, defi has seemed to learn this lesson and weathered the storm well<p>2) everyone was essentially doing the same trade, either piling into USDT&#x27;s 20% farming premium or in the case of sell side institutions like Celsius, just lending out customer deposits to the big hedge funds.  And when those trades stopped working, everyone lost their money at the same time and tried to recall their loans at the same time.<p>3) Exchange tokens are garbage.  They have value as long as the exchange is going well, but as soon as the exchange has even the tiniest bit of trouble, they go to zero.  And every exchange will have troubles at some point, even if they are well run and in no way fraudulent.<p>Exchange tokens, not even once.<p>4)  Crypto is big enough to be called its own asset class now.  That&#x27;s great, but just like traditional finance&#x27;s asset classes, there is no such thing as diversification in a single asset class when the entire asset class is going down.<p>or put another way.  You can&#x27;t have a portfolio of crypto only holdings and say you are diversified as there is no such thing in a bear market. You need to diversify across multiple asset classes if you want to preserve wealth