MF Global traces its roots back over two centuries, starting as a sugar trading business in 1783, slowly expanding the range of its activities, but staying within the market of agricultural commodities for almost two centuries. In the late 1970s, they discovered the much more profitable area of futures trading, where they rapidly expanded their business with managed futures, hedge fund products and other financial instruments that they had no competition in. By 2000, they abandoned their roots in agricultural commodities entirely. In the next decade, they would expand to become one of the largest hedge fund managers and brokers in the financial world. However, on October 31, 2011, the unexpected happened: the corporation collapsed like a house of cards over a bad bet on European sovereign debt. Later, it would be found that $1.2 billion, equal to almost 100% of its total net worth, somehow disappeared entirely, and as of the end of January investigators are still just as puzzled as to where it is.
The causes of this are obvious: the company was massively overleveraged, with a debt of $39.7 billion backing assets of $41 billion, and the $7.3 billion that should have been held in a segregated account for its customers actually wasn’t. In our world of fractional reserve banking, where the vast majority of our money ultimately exists only as numbers on a balance sheet, such collapses are inevitable, and some say that it is only a matter of time before the number juggling game cannot be kept up any longer, people realize that they are actually broke, and the system collapses entirely. However, what is more interesting is the complete lack of transparency in the entire system. Regulators and ratings agencies had no idea that MF was exposed to $6 billion of European sovereign debt until October 21, and MF had no idea where its customers’ money was. In this day and age, where supposedly every electronic payment and trade made can potentially be tracked and audited for regulatory, tax and anti-laundering compliance, a billion dollars somehow managed to escape the books undetected.
All this reveals just how little power we have over our money, and just how much power the wealthy financial system does. In order to invest our wealth or insure against unexpected economic circumstances, we are forced to deal not with other fellow investors directly but through cumbersome, unstable, essentially unaudited corporations. Organizations which are supposedly brokers, simply making trades on their customers’ behalf, may in fact be running a fractional reserve scheme behind everyone’s back. Some picture the classic image of evil corporate executives grinning in a boardroom over their new secret plans to skim an extra few percent profit by risking their customers’ savings, but strangely enough it often isn’t like that at all – the web is simply so tangled that financial derivatives become Ponzi schemes entirely by accident.
As for the rest of us, we have no choice but to participate in this process not only to invest but also to use any electronic money at all. In fact, with tax-funded bailouts “socializing the losses” of schemes that do fail and laws already present in Italy – and soon to come in many other countries – that ban cash transactions over 1000 EUR, participation in the financial industry’s gambling activities is becoming, in every sense of the word, compulsory. This is why reform is needed, and a mere round of regulations that temporarily reduces the maximum leverage and attempts to force segregations of funds like those that MF was required to have in the first place, is ultimately doomed to failure. As long as the current system remains, not in its specifics but in its very essence, tax evasion and blatant theft are not truly illegal – they are simply the exclusive domain of the powerful.
Vitalik Buterin is a co-founder of Bitcoin Magazine who has been involved in the Bitcoin community since 2011, and has contributed to Bitcoin both as a writer and the developer of a fork of bitcoinjs-lib, pybitcointools and multisig.info, as well as one of the developers behind Egora. Now, Vitalik's primary job is as the main developer of Ethereum, a project which intends to create a next-generation smart contract and decentralized application platform that allows people to create any kind of decentralized application on top of a blockchain that can be imagined.