The financial media has been all over the implosion of the FTX cryptocurrency exchange.
There's been a lot of "Tut-Tut'ing", slowly shaking of heads, and worried looks. Apparently the biggest problem is that Sam Bankman-Fried, the founder of FTX, used deposits of customer's in FTX to trade in his hedge-fund Alameda Research, without the customer's knowledge or consent.

The quant trading firm Sam Bankman-Fried founded was able to quietly use customer funds from his exchange FTX in a way that flew under the radar of investors, employees and auditors in the process, according to a source.

This trading was largely done 'on margin', which means that Bankman-Fried borrowed against the deposit collateral. This makes the trades even more risky. When those trades went bad the cryptocurrency exchange, the hedge fund, and the customer's savings all went 'poof!'

In general, mixing customer funds with counterparties and trading them without explicit consent, according to U.S. securities law, is illegal.

Yes! Illegal! How terrible. This is nothing like how respectable Wall Street banks act.
This sort of shady shenanigans would never be tolerated in New York City!

OK. For full disclosure, this sorts of shenanigans was allowed before 1933, when Congress passed the Banking Act of 1933 (part of Glass-Steagall), which outlawed the mixing of commercial banking and investment banking. For the next 66 years banking was mostly boring, and the nation prospered.
Then in 1999, Congress revoked Glass-Steagall. In 2008 the entire global financial system nearly collapsed. When the financial system was collapsing almost every investment bank on Wall Street converted themselves into a commercial bank in order to get the American taxpayer to back-stop the banks. Congress responded by passing the the Dodd–Frank Wall Street Reform and Consumer Protection Act. A key part of Dodd-Frank was the Volcker rule, which was a dramatically stripped down version of the 1933 Banking Act.

The Volcker Rule was already a compromise (as opposed to the much stronger Banking Act), but it still carried a lot of weight. However, Congress passed the mostly vague Volcker Rule without detailing exactly how the Volcker Rule would be implemented.
The implementation of the Rule would be left up to the regulators. You remember? Those very same captured regulators that looked the other way before 2008. They were now in charge of telling Wall Street what form the Volcker Rule would be used.

Traders shouldn’t speculate for their own personal gain using the money you and I pay in taxes.

Yet bank lobbyists with complicit regulators and legislators took a simple concept and bloated it into a 530-page monstrosity of hopeless complexity and vagueness.
They couldn’t kill the rule. Instead, they are getting Congress and regulators to render it morbidly obese and bedridden.

That was in 2012. Then in 2018 Wall Street went to work on dismantling it.

This May, the five financial regulators tasked with implementing the Volcker Rule issued a proposal that would severely undermine its safeguards and protections...Under the guise of streamlining the rule, the rewrite drives large and irreparable holes in the limits established by statute. By expanding exemptions, watering down definitions, eliminating certain compliance requirements, and transferring some oversight to the banks themselves, regulators are inviting more risk into the banking system.

In 2019 regulators took an axe to the Volcker Rule.

(Reuters) - U.S. banking regulators on Tuesday eased trading regulations for Wall Street banks, giving them one of their biggest wins under the Trump administration but drawing criticism from consumer activists who warned of potential risks to taxpayers...
FDIC Commissioner Martin Gruenberg, a Democrat who backed the Volcker rewrite proposed in May 2018, voted against the final rule Tuesday, saying it would “effectively undo” the rule’s protections.

In particular, he warned that the new rule narrows the definition of banned trading in a way that could free up banks to engage in riskier bets with potentially billions of dollars in financial instruments.
The other three FDIC board members, all Republicans, voted in favor.
The rewrite aims to clarify which trades are exempt from the ban, such as when banks facilitate client trades and hedge risks, and to expand those exemptions. The final rewrite scraps a proposed new test for identifying proprietary trading that banks complained would have made the rule even more complicated.

So even while the Volcker Rule was "effectively undone", there was still a landmine hidden in the regulation that would allow what little good was left to be undone. In 2020 the final gutting of the Volcker Rule happened.

These are called ‘covered funds’ because they are supposed to be ‘covered’ by the Volcker Rule, preventing banks from doing indirectly that which they are prohibited from doing directly.
“Nevertheless, the FDIC just finalized new covered funds ‘exclusions,” which are likely little more than loopholes that, in essence, will enable banks to do an end run around the Volcker Rule. These actions come on top of the de facto repeal of other Volcker Rule provisions earlier this year, which weakened the direct prop trading prohibition provisions related to market-making, underwriting, hedging and other exemptions. Those earlier changes made meaningful oversight of banks relying on these exemptions next to impossible, as detailed in this fact sheet.
“Now, the FDIC has set the stage to turn the Volcker Rule into the regulatory equivalent of a Potemkin Village.

Just so we're clear. On the surface Wall Street banks and FTX were operating under a different set of rules. However, in practice the only thing that FTX and Wall Street banks did differently was that FTX wasn't regulated. If FTX was operating under our financial regulators then everything FTX did would have probably been legal and the American taxpayer would now be bailing them out.

When something happens for the first time in history at federally-insured banks, Congress and federal regulators need to pull their heads out of the sand and pay attention. We’re talking about the fact that in the second quarter of this year, trading revenues at federally-insured commercial banks eclipsed the trading revenues at bank holding companies – which typically include subsidiaries where traders actually have licenses to trade.
...Figures 15a and 15b also show that 100 percent of trading in credit derivatives (the majority of which are credit default swaps) moved to the federally-insured bank in the first and second quarters of this year and out of the bank holding company. Credit default swaps are the most dangerous of the derivatives traded on Wall Street.

The only good news is that cryptocurrencies are outside of the domain of Wall Street banks. Lord knows what sort of shenanigans those banksters would get up to if they ever got involved in cryptocurrencies.

Now the banking industry is racing to catch up. Banks want to compete in this new world and profit from it. Their approach is two-pronged: experimenting with cryptocurrency offerings and lobbying regulators to create rules that work in the banks’ favor. Some are offering cryptocurrency investments to their wealthy clients. Others are weighing trading desks for Bitcoin. JPMorgan even started its own digital currency in 2019.

And instead of warning regulators away from cryptocurrencies, banking industry representatives now complain that regulators have not acted quickly enough and that their inaction is costing banks valuable time in their mission to compete.