Forgive my ignorance but it seems that one major problem with crypto-exchanges is that they don't necessarily have any assets other than the crypto that has been deposited there, which means all overheads (which I am assuming for some of these guys is $Ms/year) can only come from trading crypto unless they are charging reasonable money for the privilege of using their exchanges.
In the FIAT world, banks make tonnes of money from things like loans and mortgages so they can handle some risk by holding onto cash.
If this is true, how does it get fixed? Is there any reason someone would take out a loan in crypto and pay interest on the repayments?
An exchange shouldn't count deposited crypto as their asset. It is an asset of their customer.
I do not think the actual problem here is crypto exchanges being unprofitable. Even if a crypto exchange goes under, it could (and frankly should) still be able to go under gracefully, e.g. letting all customers withdraw their assets for a month (and E-Mailing private keys as a last resort).
The issue here is crypto exchanges severely mismanaging the assets of their customers.
Banks need to be heavily regulated because they are investing the assets of their customers. An exchange should not be doing that, it should be holding customer assets and making them available on request.
You can say that, but when MtGox went bankrupt, and also lost 4 fifths of its stored crypto, the court just heaped together all assets into one big pile and all creditors into one big pile and let them fight it out.
So now there's a bunch of assholes including but not limited to Peter Vessenes, that are suing the bankrupt entity for billions (completely frivolous of course) and all the depositors have waited for 8 years now to get a fraction back that the vultures have been picking on.
It's completely unfair, but the courts simply don't distinguish between someone who partners with an exchange, and someone who deposits money at an exchange.
One thing that FTX was doing was minting a new totally BS coin, putting out a small float but retaining the vast majority of it. Then propping up their financials using that completely illiquid asset as collateral. On top of that, allowing Alameda to front run announcements about different coins. There's no way FTX is the only one doing this. How such a thing is allowed is absolutely baffling. It's very Enron-mtm-esque.
> An exchange shouldn't count deposited crypto as their asset. It is an asset of their customers.
Yes they should. A deposit liability arises from the fact that they received an asset in a deposit transaction. Liabilities and assets aren't mutually exclusive in any transaction, and both must increase when you receive a customer's deposit, or else where does the liability come from?
> Banks need to be heavily regulated because they are investing the assets of their customers. An exchange should not be doing that, it should be holding customer assets and making them available on request.
If the exchange doesn't spend assets they received from their customers, they still have assets. If they sit on them until they receive instruction from a customer to dispose of it, it's still an asset on their books until they carry out the instruction.
An exchange facilitates trades between two parties and should not hold client assets at all, not even custodial basis.
A clearing house settles trades between two counter parts often acting as counterpart to both sides of the trade for a nominal fee. Some clearing houses also hold performance bonds (think of margin on futures).
For instance, NYSE uses National Securities Clearing Corporation (NSCC) which is a subsidary of the Depositary Trust Clearing Corporation (DTCC). DTCC is a private company owned by many banks and brokers.
In fact, banks count assets of their clients as liabilities because it is in fact money in their possession (read: control) that they owe to their clients.
That's how they made their money for most of their existence, and how crypto exchanges still do, but not anymore. The NYSE actually makes most of its money now by charging for colocated server space which HFT's use to get super low latency connections to the market.
I know nothing about the world of crypto currencies, but I do know finance.
The exchange does not hold the trades instruments/currencies/securities as assets. The business of a normal exchange is normally risk free (just matching buyers to sellers). Some exchanges step in as middle man in the trades, a process that I believe is called novation of the trade. The original trade between the buyer and the seller is novated, transformed into two trades, both against the exchange, one for each party and opposite direction. In this case the main risk is counterparty risk, the risk that one of the counterparties fail in some way.
An exchange never holds its own positions.
What is the difference in these cases? Have the crypto exchanges somehow used their users cryptosecurities as assets?
Crypto exchanges usually combine a function of an exchange and a clearing house. And tend to create ad-hock financial instruments. Hence the risk.
To me it feels like it is time to rethink at least the proof-of-work coins, particularly the CO2 emissions and energy use. It is crazy that people go cold in Europe while the energy is spent to mine bitcoins. And that the amount of CO2 produced by mining bitcoins is that of a small country. While the benefits of of all these coins seem to be nonexistent.
Most of the exchanges are considered international and dance around laws and regulations. Some have versions of their site that are supposed to be dedicated to certain countries laws, but as we have seen lately that seems to be a lot of lies for a some of these exchanges as well. They make money on customer trades, but when the market is down, trade volume craters. If they were responsible with funds they would know this is coming and have planned accordingly, but most of these exchanges operate like its a perma-bull market. On top of all of that, they are leveraging heavily into other financial devices using customer funds on their books. Its a recipe for disaster.
It would be fine if it were only an exchange. If the only assets are those of the customers deposited, then everyone can withdraw at the same time without issue. The problem is that they are also lending on margin, which means they are lending customers money to use to buy more crypto.
Each customer has their margin loan secured by the crypto in their account, but in a steep drop in crypto valuations, the value of the crypto can drop below the loan principal. And if individuals don't cough up the cash to pay the balance, the exchange is on the hook for it.
And it gets worse. Where does the exchange get the cash to lend in the first place? They borrow it, of course. And like the individual traders use the securities in their account as collateral for their loans, the brokerage uses all of the securities they hold as collateral for their loan. Problem is that they don't own these securities, but rather hold them on behalf of customers. So in a situation where the exchange as a whole is undercolateralized, the brokerage as a whole can get a margin call. And then they will have to liquidate securities they hold (your crypto). This means that even if you are a customer with a low risk portfolio, you can lose your securities because the exchange took on risk to finance someone else's risky trade. This exact process happened at MF Global back in the financial crisis, and would have happened to a lot more firms if the government hadn't bailed them out.
Margin lending in the stock market is heavily regulated, and I'm sure you can see why. Crypto is the wild west. A lot of lessons were learned about this in the crash of 1929, and the crypto market is learning them now.
It gets fixed by largely replicating the traditional finance system, which would of course be completely pointless. The whole point of crypto is to evade government regulations, which means this kind of stuff is inevitable.
The problem with all these current Crypto "projects" is that they don't want to be boring. Banks and other typical financial institutions are boring; and there's a good reason for that. There's a reason why you have all those audits, certifications, compliance programmes and red tape. We (as developers/workers) may like it or not; but as customers we love it.
Banks are audited every month to verify that their reserves are there. They are also audited to see the balance between their risks and assets. Their systems are audited to ensure accountability (everyone must take at least 5 days of PTO a year, to ensure no single point of failure/fraud).
But the kids that are creating these new Crypto CeFi companies hate being boring. They got in because of the millions and the whirlwind of excitement that the Crypto space brings. And for that reason they have a mess in their internal ledgers.
I love Blockchain technologies, Bitcoin and Ethereum. But I couldn't care less for all the "cool kids" wanting to get into this train without proper adult supervision.
The problem is that the people who run the exchanges can't stop themselves from using customers' money to try to get rich.
In theory it is possible that an exchange could just take customer money, keep it in a lockbox, and make their revenue by charging transaction fees. But does that ever happen?
The kind of people who are so into crypto that they build a business out of it are fundamentally incapable of that kind of self control. They think they are revolutionaries who are remaking the financial system. They do really dumb financial stuff that the rest of us learned was bad after the 19th century. They aren't the kind of people who would just leave customer deposits alone.
Remember that FTX was supposed to be the responsible exchange. All the other ones were considered to be worse.
That's an interesting related problem - their costs are real dollars/Euro/Peso etc, but their revenue is in crypto. Eg they have to pay rent, salaries, AWS bill but their revenue is in ETH or BTC or SOL which is a fraction of what it used to be. Banks dont have that problem - their costs are denominated in same currency as their revenues.
With your description I am guessing that what you call FIAT world is a financial system that is regulated where in fact banks (not exchanges, although they are also regulated in terms of what they can do with whatever is deposited and how they create revenue) are forced to hold cash to handle the risk and ensure some safety for the deposits.
> If this is true, how does it get fixed?
So far the only way to fix this seems to be with regulations, which seems to go against one of the main arguments in favor of these assets.
It's in the name, isn't it? An exchange is where assets are exchanged.
For that service they get a fee, usually tied to the transaction volume. Pay any expenses out of that fee and keep transactions rates high is a good mode for survival.
Unfortunately, if asset prices depreciate, fees tank too. But that's manageable.
What's not manageable though if you start using assets of your customers to create a new revenue stream by locking those assets up somewhere or by using them for high-risk trades.
When people start asking their assets back you suddenly have a problem.
In the real world all organizations are regulated and fraud is illegal. But sadly something being illegal does not prevent if from happening, and greasing political palms always help:
> The 30-year-old Bankman-Fried has been a major force in Democratic politics, ranking as the party’s second-biggest individual donor in the 2021–2022 election cycle, according to Open Secrets, with donations totaling $39.8 million. That ranks only behind George Soros (about $128 million) but ahead of many other big names, including Michael Bloomberg ($28.3 million). What’s more, he had promised to spend far more on Democrats moving forward, predicting in May that he’d fund “north of $100 million” and had a “soft ceiling” of $1 billion for the 2024 elections.
Banks have regulatory requirements that reduce risk. There are insurance mechanisms to protect bank deposits and securities insurance to protect custodial assets.
The problem with crypto stuff is that it was the Wild West and that atmospheric attracts and breeds crooks.
Wrt loans, people were pretending that these coins were cash. The reality is that they are sort of like virtual silver. All debts get settled in legal tender.
This part is not actually that much different with respect to banks, where the cushion is the equity (the stock). Also, if I'm not mistaken the debt securities (bonds) issued by the bank are below the bank account claims, so that's your regular customer cushion too.
Bankruptcy is essentially drawing a horizontal line across the pyramid of liabilities, where everyone below the line gets nothing, everyone above the line gets fully paid back, and everyone on the line is the new shareholder. This line is called "fulcrum".
The difference is in government oversight (regulations) and the social agreement that bank accounts will be bailed out. Because of the former the latter rarely happens (yes I know, 2008, but this concept has been around for a century and a significant minority of protected liabilities such as bank accounts have had to be rescued since then world-wide).
> In the FIAT world, banks make tonnes of money from things like loans and mortgages so they can handle some risk by holding onto cash.
And by being a member of national and international banks; if a bank in NL fails, there's the Dutch National Bank that will step in and guarantee people's money (up until a certain amount); above that is the European Central Bank that holds a lot of money to ensure stability, reliability and trust in the fiat banking system.
Don't get me wrong, the traditional financial system is fucky (professional term) and they do a lot of weird shit with people's money ($1 invested 10x over) but there's checks & balances at least.
It's not true, they're just dipping into customer funds to make risky bets on extremely volatile instruments (more crypto assets) and losing. Along with straight up fraud stealing customer funds and having shit security and getting robbed.
It gets "fixed" by regulatory bodies like the SEC appropriately and quickly requiring a set of rules and regulations on any exchange that operates in country along with auditing, fines, and general fast and effective enforcement.
These exchanges aren't failing because of accidents or inherent risk, they're committing fraud and taking foolish risks that traditional banks aren't allowed to take.
> In the FIAT world, banks make tonnes of money from things like loans and mortgages so they can handle some risk by holding onto cash.
Also, IIRC, conventional stock exchanges make their money from transaction fees on trading volume. Are there cryptocurrency exchanges not doing that? I suppose even if they are, they're probably in trouble, since once the bubble bursts there will be a lot less trading activity going on.
Unless the exchange is only crypto-crypto they need cash as well.
> can only come from trading crypto
"trading" is a really broad term. They will get fees from trading, but they will probably also be doing things like providing liquidly to other exchanges and arbitrage (crypto is of course very volatile so arb opportunities are all over the place).
Banks don't make money from mortgages and loans, but from deposits. Our financial system uses fractional reserve. When you deposit $1 in a bank account, they are allowed to have ~10x that, or $10. They can literally create virtual money and deposit on other people's accounts (loans).
From $1 deposit, they make 900% instantly.
From $1 loan, they make 5-10% a year.
Crypto exchanges can't create money. Unless they have their own tokens. But even these tokens have more transparency than our current financial system.
So yes, they're pushed to handle their customers' money in risky ways to make a profit.
It's dumb. Against the whole point of decentralization...
>Our financial system uses fractional reserve. When you deposit $1 in a bank account, they are allowed to have ~10x that, or $10. . . . From $1 deposit, they make 900% instantly.
That is not how fractional reserve works. The way it works is when you deposit $1, the bank loans it to some other customer but there is a rule saying that they can loan out at most 90 cents of that $1. The purpose of the rule is to make it less likely that the bank will need to resort to the Federal Deposit Insurance Corporation when the bank's customers withdraw more money than the bank expects or hopes they will withdraw.
Pardon for living under a rock, but why are crypto exchanges affected by the mood in the crypto market?
I thought that a crypto exchange functions like a currency market: I put an offer to sell 10,000 EUR for 1 BTC and someone else puts an offer to buy 10,000 EUR for 1 BTC. When orders cross, a transaction happens and the exchange gets a fee, whether in currency or crypto units.
What are crypto exchanges fundamentally doing differently that they are suddenly losing money?
Surely a drop in transactions would make them lose fees and require them to fire some staff, but I expected a "Facebook-like" downsizing, not a full-blown bankruptcy.
Firstly, people keep their Crypto with the exchange for trading purposes and because it is easier than self custody. This means if the exchange goes bankrupt they potentially lose their money.
Secondly, as it is an unregulated space, we have instances such as FTX where they were using clients funds which should be segregated. This arguably crosses into fraud, and we do not really know which exchanges have been doing this and which ones have been properly segregating client funds. Coinbase is probably the only one we know for sure as they are an audited US publically traded company.
Finally, we also have situations where exchanges are doing things such as not matching client deposits to their reserves 1-1, or hold those reserves in less liquid investments. This could range from another fraudulent situation to good practice, but leaves them very exposed to situations where everyones wants their money back now.
Re point #2 - this is one of the crazy things for me. When you work in finance, in the UK at least, you get it drilled into your head what "client money" is, what that implies, what you can do with it, and notably you get reminded during any training session the size of the fines that get imposed on people who fuck with client money.
So to me it suggests that they simply don't employ anyone with any experience in banking or compliance, if they did those people would be raising hell or at least leaking or whistleblowing
You have to look at the business model of the exchange. They way you describe it is how it SHOULD work. The exchange makes money directly from you through transaction fees or just account fees. They would not need to "invest" your crypto in anything, because they have other ways to make money. This is (I think) the way Binance and Coinbase operate.
But a lot of these exchanges have attracted customers by offering interest (rather than charging a fee) and/or free transactions. But then how can the exchange make money and keep the lights on? Well they have to "invest" the customer's money. Then the investments go bad and it all blows up.
That most of them, not all of them but, by very far, most of them are downright scams, planned as scams from day one, just like in the FTX case. Evidence is mounting quickly that both Alameda Research and FTX were mounted as scams (despite the narrative that's going to be sold that it was bad luck / bad trades that sent them in a death spiral).
There are people who warned about the very scam Alameda and FTX were putting the very day FTX launched.
For FTX, turns out they called themselves "crypto exchange" but lent the money just like a bank, making them, surprisingly, vulnerable to bank run, which happened.
Unfortunately, this is common, just like $LUNA called themselves "stable coin" but it was stable only against assets in the crypto that were not stable at all.
Live by "Do your own research" and die by it. I guess.
The thing that you are missing is that crypto transactions are slow and expensive. When I say slow I mean hours to complete a single transaction. That's why people keep their money on the exchange, it's far more efficient and usable. Of course it's also risky because exchanges do rug pulls all the time. Knowing when to pull your crypto and bail is a trick. If you're seeing news articles about "minor irregularities" and "temporarily suspended trading" it is too late. Your money is gone.
Name one Crypto chain that takes hours to confirm a transaction. Bitcoin has a blocktime of 10 minutes and Ethereum is 10 to 20 seconds. More modern networks process transactions in orders of magnitude less time, eg. Solana has a slot time of 0.5 seconds and time to finality being 1 or 2 seconds.
Most of them are committing massive fraud. Gambling with customer funds. Misreporting trading volume via wash trading, and using that to create false impressions in the market that they can trade on. For instsnce, using their own tokens or "stablecoins" and then juicing the numbers for those.
As far as I know, Coinbase works this way. They don't transact, trade, or create derivatives of the crypto coins they manage. They simply make a profit by charging a fee per trade. They are regulated and a publicly traded company (which means certain standards of accounting) so they might be one of the only ones standing when this thing is done falling down.
These other exchanges are doing far more exotic things like creating their own coins to grant status on their exchange and creating derivatives so traders have more leverage and therefore action. Coinbase would be considered boring to these users since it is a vanilla exchange.
Crypto exchanges also function like banks (holding customer deposits, making loans/investments with customer funds), just without reserve requirements or FDIC insurance. The protections against bank runs that we have in place in TradFi are largely lacking in crypto, and the whole sector seems to have reached 1929 in its speed run of modern economic history.
Well, a lot of people will keep some $$$ and some cryptocurrency in their account at the exchange. Maybe because they want to play the day trader, being able to buy and sell at a moment's notice.
So the exchange ends up with a big account of client funds containing cash, and a big wallet of clients' cryptocurrencies.
If a bit of that money goes missing, they can cover it up for a long time, if cryptocurrencies are growing and there's net more money flowing in than flowing out. You just pay departing customers' withdrawals from new customers' deposits.
It is only when the tide goes out we find out which swimmers have lost their trunks.
And once a company's demise becomes inevitable, perhaps insiders decide to help it along. If you've already been hacked for $10 million, why not make it $100 million given the company's going under anyway and you'll be the prime suspect?
Even if an exchange doesn't start out as a scam, it might become insolvent due to a partial hack, or losing a wallet by accident, or some other screwup.
An exchange can be technically insolvent for a long time without anyone noticing, and try to fill the hole with money from fees etc. All will look normal from the outside... until too much money gets taken out too fast.
The only way to be profitable is to fee transactions.
There are a magnitude more ways to be unprofitable, however, and because of rampant incompetence, the the scales are clearly favoring the bold/gullible holding large bags of those who have fleeced.
From a legal perspective there are no required internal controls on the flow of crypto going in and out. Apparently when there is a couple of hundred million worths of crypto sitting in a wallet, it becomes real tempting to go to the racetrack so to say.
Also, most of these exchanges have their own tokens which they control the supply of and keep as "assets" on their books. In doing so they can use these self printed tokens as collateral for loans. Add to that some nicely leveraged positions in all kinds of shitcoins and you start to understand how we got here.
Crypto exchanges always have lots of money because plenty of people keep their money inside. Those lots of money are getting withdrawn by owners and spend. It would be stupid not to do so. Free money yo. It works as long as exchange grows (more money to spend) or at least does not shrink. It stops working when lots of people want to withdraw their assets which are already gone. Time to hide.
> What are crypto exchanges fundamentally doing differently that they are suddenly losing money?
Fractional reserve banking. Exchanges now offer traditional banking services such as savings accounts and loans.
They are unregulated banks with none of the insurance and government protections to bail them out. They cannot resist the temptation to gamble with the vast amounts of money they are sitting on. Only a matter of time before they lose it all and people can't withdraw their cryptocurrencies because there's no money in the reserves.
This all seems like less a problem of crypto as such, and more that exchanges are making a virtual fractional reserve currency by leveraging customer deposits for loans/investments.
ie it's a 'banking' problem, specifically a 'fractional reserve banking' problem, not a crypto problem.
This is exactly why fractional reserve banking is heavily regulated.
None of these collapses have been due to fractional reserve banking, because fractional reserve banking requires being open about what you're doing. These collapses have been about fraud. There are lots of other kinds of fraud; getting rid of this type would barely make an impact.
While there's nothing intrinsic about cryptocurrency that would make it more prone to fraud than anything else, the culture around it seems highly susceptible to it.
> While there's nothing intrinsic about cryptocurrency that would make it more prone to fraud than anything else
There are absolutely intrinsic things that make cryptocurrency more prone to fraud. The inability to reverse transactions, quasi-anonymity, and lack of any central authority to resolve disputes.
To limit fraud to the levels you see in traditional finance, you would need the regulations and oversight by centralized organizations that you have in the traditional space. The entire purpose of cryptocurrencies are to avoid those things, so while you technically could have them with a cryptocurrency, you would end up with no good reason to have a cryptocurrency at all.
But the WHOLE point of crypto was to avoid governmental control. If the government is regulating it that means they can control it. And it becomes completely worthless. If you want digital gold as an inflation hedge you can literally buy a GLD ETF. It gives you digital shares in actual GOLD.
That may actually be counterproductive. If you start regulating crypto, then you are IN. You can't do it half way. Now you have yet another banking sector to regulate.
Maybe what's better and cheaper is to let this wild west "enjoy being poor" nonsense flame out until everyone shoots themselves and it's curtains.
It will sort of be like Usenet - it didn't go anywhere but you have to know how to find it.
Sure, without the safeguards. No FDIC. No lessons learned from the history of banking.
I agree it's a banking problem in that they're trying to streamline a new economy by not doing what "legacy banking" does. Which is like streamlining airlines by starting the rule book from scratch. But the rules and regulation of the airlines have been paid for in blood. Discard them at your own peril.
Or, in the case of cryptocurrencies, at the peril of the finances of anyone investing in your experiment.
So, having been around since the early bitcoin days, core to the salespitch back then was the fact you would have control. You'd have your coins in your wallet, and no need for banks etc. Apparently nobody does this anymore, and gives their wallets to these exchanges (i.e. banks) and balks when the obvious happens in pyramid schemes. People just don't get distributed currency if they promptly undistribute it.
As I've noted before on HN the entire concept of people being able to manage their own wallets flies against everything we know about people. People forget stuff, make mistakes, and lose things. The margin of error for a wallet is tiny. It's not rare for crypto forums, twitter, etc to prescribe completely ridiculous processes and systems for securing wallets, backing up seed phrases, etc. There's an entire cottage industry built around people etching their seed phrases on steel plates for people to (I'm not kidding) bury them like they're gold in the 1800s.
Plus funds in a wallet require extra steps when you want to trade on an exchange (extra costs via gas, time, possible errors, etc). The use cases for crypto are so minimal for the general population one could argue it's only survived this long through making trades on exchanges - to what essentially amounts to gambling. You can't gamble with funds in a wallet which defeats the entire purpose of crypto for the vast majority of the "users" in the space.
> There's an entire cottage industry built around people etching their seed phrases on steel plates for people to (I'm not kidding) bury them like they're gold in the 1800s.
"I write these words in steel, for anything not set in metal cannot be trusted." - The Well of Ascension, by Brandon Sanderson
>There's an entire cottage industry built around people etching their seed phrases on steel plates for people to (I'm not kidding) bury them like they're gold in the 1800s.
I was about to say this isn't the worst opsec until I realized you mean people are sending businesses their passphrases and not purchasing an etching kit to make the plate themselves.
There's a market here for a safe way to store crypto. Something like a thing you carry with you, a thing you can keep at home, a thing you have a friend hold, a thing you have in a safety deposit box, and info a service holds for you. Some combination of majority votes, time delays in days or weeks, and warning messages lets you recover from loss and damage. With backup from an insurance company. But nobody has addressed that market.
> There's an entire cottage industry built around people etching their seed phrases on steel plates for people to (I'm not kidding) bury them like they're gold in the 1800s.
I was stunned to see so many of these products on Amazon last time I searched for smartcard stuff. On that note, I hate that you can't search for smartcard products anymore without 80% of your results being crypto wallets.
The use of intermediaries is due to the deficient user experience of cryptocurrencies and cryptocurrency community:
1) They downplay the expertise and knowledge required to manage your own tokens.
2) They advocate for the use of cryptocurrencies by normal (i.e. non-expert) users as this increases the value of their holdings.
3) They prefer to blame users who make mistakes, are hacked/scammed, or otherwise lose (real) money for their lack of technical expertise.
Given this, it's not surprising that the enormous gap between naive engineering assumptions and human reality is filled by intermediaries despite how consistently they fail. As long as cryptocurrencies continue to exist beyond a tiny niche I don't see this changing.
The knowledge gap between "normies" and "crypto-aficionados" is pretty large.
Which is, of course, why so many crypto "businesses" turn out to be scams of one sort or another -- the asymmetry of information makes most folks easy meat for scammers.
To point up this asymmetry, go ahead and watch this[0]. The lack of knowledge WRT crypto-currencies (let alone smart contracts) among the hoi polloi is striking in comparison to those who are in the know.
That's right. Not to mention the transaction fees are so high that moving from a wallet you own to an exchange can cost non-insignificant amount of money.
Add on top of that the general volatility of crypto, people not wanting to deal with maintaining their own wallet, and you have a recipe for people keeping their funds on exchanges.
You're not taking crazy pills. It's become abundantly clear that the vision of everybody being their own bank will never work.
People don't want to be their own bank, just like they don't want to be their own bakery, or their own farmer.
Sure, some people do bake their own bread, but they do it either because they have to, or because they enjoy it.
So the people who control their own keys need to have a reason to do so. Because it takes more effort than not managing your own bank.
What exactly are the reasons to run your own bank? What problems in your life are solved by it?
I can think of a two:
* You want to hold more cash than FDIC guarantees.
* You think the government will seize money out of savings accounts, as happened in Cyprus.
These have to be weighed against the facts that while not literally in your mattress, the money becomes pretty easy to steal, for anyone willing to point a gun at you. And being your own bank comes with obligations, too, so the government will come after you if they want to drain your bank. And the justice system can put you in a box if you don't comply.
Basically: If you already have a bank, why would you not just use it? And if they refuse to do your thing (like order a hit), then buy tokens and pay a hitman in tokens.
If there were FDIC for tokens at your real bank, redeemable in same number of tokens, then any general public that wanted to use cryptocurrency would likely just use that. Because outside of fringe LARPing nobody wants to run their own bank.
> Basically: If you already have a bank, why would you not just use it?
Basic corollary: if you already use a bank, why not just use money?
> If there were FDIC for tokens at your real bank, redeemable in same number of tokens, then any general public that wanted to use cryptocurrency would likely just use that. Because outside of fringe LARPing nobody wants to run their own bank.
So the only remaining question is why would normies who say (according to you) amen to all above would need crypto besides a ponzi-speculative joy ride?
On one hand we have funny money backed by a world power and all its resources, and protected by ICBMs and an impressive navy and bases around the world and a financial infrastructure around USD & convertibles.
On the other hand we have funny tokens issued by "genius" -mushrooms- who are elevated into the spotlight by the likes of Forbes magazine and the rest of the media circus, protected by nothing [though the genius scammers themselves are apparently protected ..]
No, that's exactly it. People love the idea of decentralization and doing things on your own, except then they realize that it's actually kind of hard to be off-exchange and still be liquid (whatever the hell that means in crypto-land).
So basically no real change except they're much more exposed to risk (fraud and market swings notwithstanding)
The core truth in this day and age is that nobody (understand this a non-significant minority if you prefer) wants to host their own stuff. It's way more convenient to use centralized services that do the heavy lifting for you. If you don't have that convenience, you can't have mass adoption.
This is the key to understanding a lot of things about the "cryptocurrency community". There are two groups there with wildly different interests.
A large chunk (probably even a majority) of the people involved in the cryptocurrency space don't actually care about cryptocurrency as a technology at all, they're just there to make money. To these people, market price is everything, and the technology is irrelevant except to the extent that it affects the market price.
Then in the other camp there's a group of people who don't care about the current trading price, they're just interested in the technology and the new capabilities it enables.
I'm in that second camp (perhaps unsurprisingly, since this is Hacker News), so in my view this story isn't really all that interesting or surprising. From a legal/societal perspective, yeah this is terrible and probably someone should go to jail. But from a technical perspective, the fact that exchanges can scam people out of their money is hardly new information. As the saying goes: not your keys, not your crypto.
Though obviously for those who are interested in cryptocurrency solely to make money on speculation, yeah this is a big story.
I think so many cryptocurrency users avoid maintaining their own wallet for the same reasons most people (these days) don't store all their wealth as cash or gold under the mattress: it's both inconvenient and easy to lose.
Of course what folks are seeing now is that it's real easy for exchanges to lose their buttcoin deposits too.
You do have control. You can start your own blockchain and keep the transactions flowing. Of course, transactions imply other people will use your chain. It's like you can create value not by gold, or tobacco, or even math, but by the very trust people have in your asset. And this brings us to a concept that some may be familiar with but is relatively new to the crypto community. A new kind of coin is here.
This is a concept that probably never existed before crypto, called "fiat." "fiat" is the latest and greatest in crypto technology. True decentralization. Multiple countries. Multiple municipalities. Multiple systems, multiple institutions, multiple protocols and multiple contracts, the picture of decentralization that crypto could only dream of. And of course, if you make a mistake, you can revert your transaction, a form of technology crypto has not yet mastered. Oh, NFTs? Please. "fiat" utilizes advanced art international HS92 commodities exchange codes to kick start the burgeoning modern art scene of completely legitimate businesses.
That's because nobody really cares about what crypto can do anymore, and only cares about making fast money.
If you internalize this fact, then it explains why people just keep their coins on exchanges, why they buy centralized "cryptocurrencies" , why they leap at the chance of buying the latest Paris Hilton NFT and why they keep defending Tether as legitimate.
Fundamentals are thrown out of the window unfortunately.
The people who were pushing the fact that you'd have sole control over your wallet were those who wanted to be immune from the government seizing their money: scammers, criminals, tax dodgers, and exchange runners (a combination of the first three).
Those people put a bunch of money into bitcoin to inflate the price, but they need a bunch of rubes trading the currency to keep the value of the coin (relatively) stable so they can withdraw their holdings, but they don't care much if those rubes have full control, and that's where exchanges come in.
Exchanges are there as a way for the first movers and the ultra-wealthy to extract wealth from uninformed, naive new investors into crypto.
> The people who were pushing the fact that you'd have sole control over your wallet were those who wanted to be immune from the government seizing their money: scammers, criminals, tax dodgers, and exchange runners
How sad that you think the only people that cares about not giving governments control of everything are "scammers, criminals, tax dodgers, and exchange runners".
I think once crypto gained traction beyond early adopters into more mainstream people it became an "app" and that "app" was the exchange and non tech, non crypto people don't put more effort into it then that.
What is alarming and becoming more revealing is how much of this crypto was being back-doored from one crypto "product" (exchange, fund, coin, ICO, etc.) into another. In programmer terminology: it looks like there are (were) a lot of pointers to the same memory address.
The crypto community is very much to blame for this. Initially, back when bitcoin was hovering about $1 per coin, everyone was talking about personal wallets, and educating people how the wallet was just a bunch of numbers you can write on a piece of paper and which you can keep hidden in the lining of your pants, etc.
But then bitcoin started getting popular and emerging towards mainstream culture, the talk about wallets seized. All the new crypto firms started marketing accounts and "cloud wallets" and the personal pocket wallet was never mentioned.
Crypto then continued to advance in mainstream culture and personal wallets were kept a secret. I doubt the average crypto user even knows about personal wallets.
And if you disagree, please prove me wrong. There are many crypto commercials on mainstream media, show me one that has mentioned that you can keep a personal wallet.
So the crypto industry is to blame for this. They basically hid the most important part of crypto from the public because they would make more money without it.
Is that the right takeaway? People didn't know cryptocurrencies could be kept on your computer? Or could it be that users just don't want to deal with the complexity enabled by cryptocurrencies, and the bank model is just the natural one that always appears when the public starts making use of money?
A lot of crypto investors are day traders or naive hodlers who have no idea what blockchain and DeFi means. But DeFi protocols like Uniswap and Aave are holding up fine and are incapable of pausing user withdrawals.
There is still the question of how to convert your crypto to actual spendable dollars again. Sure, uniswap will let you get another token but you still need an exchange to get dollars. This gets particularly important when, say, the giant scam that is Tether finally crashes and burns,
The user growth is high enough that at any given time roughly half of the people involved have been at it for less than 18 months. So the space is dominated by the least-savvy and has been for some time.
Many people will never be capable of self-custody because the lack the interest to do it. They see money to be made and ignore the warnings of those who try to explain what they have on an exchange is a promise of money, not money itself.
When you say "nobody does this anymore," that's kind of true, but also not true. Those who have learned the hard way do, the newbies (which vastly outnumber the first group) don't.
Self custody requires knowledge of some basic math, cryptography, and the ability to understand basic security principles.
User growth explodes with exchange rates. Those diving in understand very little about what they're doing and should stay out. They don't listen to people saying such things and the result is, well, predictable.
You get things, I think, but bitcoin’s transaction bottleneck meant it was never going to be able to handle anything approaching wide scale adoption for day to day transactions. Attempts to address that with other coins or centralized exchanges is at least one of the major factors that lead to this point.
I mean, do you store all your cash under your bed in case your bank go bust? People keep crypto on the exchange because it makes transactions easier, and in some cases you might have other perks such as being able to lend it for interest or spend it with crypto credit cards.
This idea that you can have a digital currency without some kind of bank or exchange is fundamentally flawed imo. Unless you believe the only valid usecase of crypto is as a digital alternative to physical gold then it probably makes more sense on an exchange. The main issue here is that the exchanges are not regulated.
But I suppose given the lack of regulation I would have to agree with you that the only safe use case right now is as a "store of value" in a cold wallet.
Trading is addictive. Like all forms of gambling, it lights our reward centers up.
On decentralized exchanges, you pay each time you trade (gas fees and such). That cuts right through the endorphin rush.
Centralized exchanges keep those fees low by making everything centralized. It's akin to casinos keeping their guests comfortable and liquored up.
As a person who works in crypto, I'd like to see us engage with this more forthrightly. When we cut out gambling, how many use cases are left? How many are viable today?
You still have people with their own wallet. But the vast majority of people don't want to deal with the complexity of decentralization so they prefer centralization
I think the vast vast majority of people just want to increase the balance of their checking account. The fastest way to do that with crypto is speculating on an exchange. I bet 95% of the people getting burned on these exchanges don't even know what a "wallet" is (in the context of crypto currencies).
"Not your keys, not your coin" is a popular adage, but it doesn't really seem like many people follow it. Thus the popularity of coins with high transaction fees.
The original crypto culture which emphasized privacy (although speaking of a public list of all transactions ever performed on the network as privacy oriented is pretty hilarious), control and decentralization has for the most part been lost to crypto's eternal September.
I do this (for the most part). Whenever I buy currency on an exchange, I Immediately transfer it to a personal wallet. This is actually what drove me away from anything based on Ethereum, because the transfer speed and fee system for Ethereum is so horrendous, I found myself leaving that currency in the exchange managed wallets.
Somehow, humanity has gotten good at taking systems that were designed to be decentralized and distributed (like crypto, E-mail, personal websites, and so on) and instead, surrender them to a few big companies who become single points of failure. We keep failing to learn from this every time.
That is still the promise and unlock of cryptographic currencies. But that does not seem to be the use case for much of the people I've seen in the space the last years. I think the fact it is crypto currencies is incidental, it is all about earning money through appreciation of some popular asset.
I read an interesting thread on why this isn't a pyramid scheme. Basically there's no one at the top. It's decentralized so there's a loose federation of edges arranged in a many-sided polygon. So we need a new name. Instead of Ponzi, this is a Nakamoto Scheme.
I say this in jest. There are more than one reason to be interested in crypto, but when bitcoin suddenly went from 1BTC=USD$1 to $1BTC=USD$100 (I don't actually know when the boom happened--I wasn't watching that closely) the individualist, libertarians were obscured by the quick-buck types looking to turn their thousand into a million. Thats when the scammers all came out.
> People just don't get distributed currency if they promptly undistribute it.
Same as with source code version control. As soon as distributed VCS appears (git), people promptly centralize it with another abstraction layer (github, gitlab, bitbucket, etc).
The same thing has happened with git over time, no? Decentralized source control, forking whatever you want/have access to when you have a flash of inspiration, etc.
Now everything is in github, gitlab, or bitbucket, and centralized there.
Pretty good analogy. Discovery and trade (clones/PRs) are so much easier in a centralized system.
At one point I asked (rather naively - not trying to sound wise here) whether our dependence on GitHub was an outage risk. Response from CTO was that git is distributed and everyone has a copy and whatnot. In retrospect, yeah, the code is not lost, but we had never actually built the infrastructure / tested the procedures to actually handle that fallback to a distributed world...
The thing is that the people that are most active in crypto and typically have the largest stacks are traders. They grow their stack by shorting/longing, leverage, staking and DeFi, all of which require an exchange.
Crypto has really only lived in a zero interest rate policy world and it is shitting the bed majorly now when rates are going up. It is likely far from the bottom.
Also not your cheese if you bought BTC any time in the last few years. Without the exchanges, and especially without investor confidence, the days of wild speculation are ending. The price is going to continue to fall and everyone with BTC in their personal wallets gets to take a haircut too.
Why wouldn't you get out of any/all crypto you can right now?
If you're bullish on crypto's long-term prospects you can always buy back in after the crash. There will be a new "ground floor". (I would suggest no one do that... just saying, even if you believe whole-hog in the future of crypto, now's the time to sell any way you can.)
2) Announce they are being frozen at some later time
3) Anyone who is powerful/influential enough to "get to you" gets their withdrawal processed
4) The rest are not dangerous enough to worry about having a hit taken out on you
I hope everyone recognizes that it's about transparency and common sense more than regulation. Sadly this will probably cascade to other exchanges as general awareness forces more people to withdraw from exchanges. Hopefully the stronger exchanges persist.
The real question everyone should be asking is: who is the counterparty to these "losing" leveraged deals?
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In the FIAT world, banks make tonnes of money from things like loans and mortgages so they can handle some risk by holding onto cash.
If this is true, how does it get fixed? Is there any reason someone would take out a loan in crypto and pay interest on the repayments?
I do not think the actual problem here is crypto exchanges being unprofitable. Even if a crypto exchange goes under, it could (and frankly should) still be able to go under gracefully, e.g. letting all customers withdraw their assets for a month (and E-Mailing private keys as a last resort). The issue here is crypto exchanges severely mismanaging the assets of their customers.
Banks need to be heavily regulated because they are investing the assets of their customers. An exchange should not be doing that, it should be holding customer assets and making them available on request.
So now there's a bunch of assholes including but not limited to Peter Vessenes, that are suing the bankrupt entity for billions (completely frivolous of course) and all the depositors have waited for 8 years now to get a fraction back that the vultures have been picking on.
It's completely unfair, but the courts simply don't distinguish between someone who partners with an exchange, and someone who deposits money at an exchange.
"Severely mismanaging" is a euphemism for fraud and theft, right?
An exchange shouldn’t have deposits. That’s a word for banks and brokers. In practice, these shops act like funds.
Exactly. A brokerage firm doesn't own your stocks, so if it goes bankrupt you can still recover what is yours.
FTX pretended to be that, but they just plain lied.
But banks do, multiple times. (one dolar produces n dollars in loans). A test with Bank run can confirm it.
Yes they should. A deposit liability arises from the fact that they received an asset in a deposit transaction. Liabilities and assets aren't mutually exclusive in any transaction, and both must increase when you receive a customer's deposit, or else where does the liability come from?
> Banks need to be heavily regulated because they are investing the assets of their customers. An exchange should not be doing that, it should be holding customer assets and making them available on request.
If the exchange doesn't spend assets they received from their customers, they still have assets. If they sit on them until they receive instruction from a customer to dispose of it, it's still an asset on their books until they carry out the instruction.
A clearing house settles trades between two counter parts often acting as counterpart to both sides of the trade for a nominal fee. Some clearing houses also hold performance bonds (think of margin on futures).
For instance, NYSE uses National Securities Clearing Corporation (NSCC) which is a subsidary of the Depositary Trust Clearing Corporation (DTCC). DTCC is a private company owned by many banks and brokers.
The exchange does not hold the trades instruments/currencies/securities as assets. The business of a normal exchange is normally risk free (just matching buyers to sellers). Some exchanges step in as middle man in the trades, a process that I believe is called novation of the trade. The original trade between the buyer and the seller is novated, transformed into two trades, both against the exchange, one for each party and opposite direction. In this case the main risk is counterparty risk, the risk that one of the counterparties fail in some way.
An exchange never holds its own positions.
What is the difference in these cases? Have the crypto exchanges somehow used their users cryptosecurities as assets?
To me it feels like it is time to rethink at least the proof-of-work coins, particularly the CO2 emissions and energy use. It is crazy that people go cold in Europe while the energy is spent to mine bitcoins. And that the amount of CO2 produced by mining bitcoins is that of a small country. While the benefits of of all these coins seem to be nonexistent.
tell that to RobinHood
People want to increase their exposure to crypto via leverage. For example:
1. Collatorize BTC to get USDT
2. Use the USTDT to buy ETH.
3. Use ETH to collatorize to get USDT
4. Use USDT to buy sh*tcoin
5. wash, rinse, repeat
If everything goes up, you can make a ton of money. If things go down... you lose everything.
If the trading volumes they are claiming are real, these exchanges should be printing money from transaction fees alone.
The platforms themselves like big players making their order book deeper and bumping up the volume figures.
I would be surprised if even 10% of the trades paid the advertised fees.
Each customer has their margin loan secured by the crypto in their account, but in a steep drop in crypto valuations, the value of the crypto can drop below the loan principal. And if individuals don't cough up the cash to pay the balance, the exchange is on the hook for it.
And it gets worse. Where does the exchange get the cash to lend in the first place? They borrow it, of course. And like the individual traders use the securities in their account as collateral for their loans, the brokerage uses all of the securities they hold as collateral for their loan. Problem is that they don't own these securities, but rather hold them on behalf of customers. So in a situation where the exchange as a whole is undercolateralized, the brokerage as a whole can get a margin call. And then they will have to liquidate securities they hold (your crypto). This means that even if you are a customer with a low risk portfolio, you can lose your securities because the exchange took on risk to finance someone else's risky trade. This exact process happened at MF Global back in the financial crisis, and would have happened to a lot more firms if the government hadn't bailed them out.
Margin lending in the stock market is heavily regulated, and I'm sure you can see why. Crypto is the wild west. A lot of lessons were learned about this in the crash of 1929, and the crypto market is learning them now.
Banks are audited every month to verify that their reserves are there. They are also audited to see the balance between their risks and assets. Their systems are audited to ensure accountability (everyone must take at least 5 days of PTO a year, to ensure no single point of failure/fraud).
But the kids that are creating these new Crypto CeFi companies hate being boring. They got in because of the millions and the whirlwind of excitement that the Crypto space brings. And for that reason they have a mess in their internal ledgers.
I love Blockchain technologies, Bitcoin and Ethereum. But I couldn't care less for all the "cool kids" wanting to get into this train without proper adult supervision.
In theory it is possible that an exchange could just take customer money, keep it in a lockbox, and make their revenue by charging transaction fees. But does that ever happen?
The kind of people who are so into crypto that they build a business out of it are fundamentally incapable of that kind of self control. They think they are revolutionaries who are remaking the financial system. They do really dumb financial stuff that the rest of us learned was bad after the 19th century. They aren't the kind of people who would just leave customer deposits alone.
Remember that FTX was supposed to be the responsible exchange. All the other ones were considered to be worse.
> If this is true, how does it get fixed?
So far the only way to fix this seems to be with regulations, which seems to go against one of the main arguments in favor of these assets.
The root problem is people buying to pyramid schemes (read as: crypto).
For that service they get a fee, usually tied to the transaction volume. Pay any expenses out of that fee and keep transactions rates high is a good mode for survival.
Unfortunately, if asset prices depreciate, fees tank too. But that's manageable.
What's not manageable though if you start using assets of your customers to create a new revenue stream by locking those assets up somewhere or by using them for high-risk trades.
When people start asking their assets back you suddenly have a problem.
Yet they have ALSO been "dipping in" to customer money to make "loans" of questionable quality with...
https://fortune.com/2022/11/10/sam-bankman-fried-ftx-joe-bid... (https://archive.ph/BBpQN#selection-417.0-424.0)
> The 30-year-old Bankman-Fried has been a major force in Democratic politics, ranking as the party’s second-biggest individual donor in the 2021–2022 election cycle, according to Open Secrets, with donations totaling $39.8 million. That ranks only behind George Soros (about $128 million) but ahead of many other big names, including Michael Bloomberg ($28.3 million). What’s more, he had promised to spend far more on Democrats moving forward, predicting in May that he’d fund “north of $100 million” and had a “soft ceiling” of $1 billion for the 2024 elections.
The problem with crypto stuff is that it was the Wild West and that atmospheric attracts and breeds crooks.
Wrt loans, people were pretending that these coins were cash. The reality is that they are sort of like virtual silver. All debts get settled in legal tender.
Bankruptcy is essentially drawing a horizontal line across the pyramid of liabilities, where everyone below the line gets nothing, everyone above the line gets fully paid back, and everyone on the line is the new shareholder. This line is called "fulcrum".
The difference is in government oversight (regulations) and the social agreement that bank accounts will be bailed out. Because of the former the latter rarely happens (yes I know, 2008, but this concept has been around for a century and a significant minority of protected liabilities such as bank accounts have had to be rescued since then world-wide).
And by being a member of national and international banks; if a bank in NL fails, there's the Dutch National Bank that will step in and guarantee people's money (up until a certain amount); above that is the European Central Bank that holds a lot of money to ensure stability, reliability and trust in the fiat banking system.
Don't get me wrong, the traditional financial system is fucky (professional term) and they do a lot of weird shit with people's money ($1 invested 10x over) but there's checks & balances at least.
It's not true, they're just dipping into customer funds to make risky bets on extremely volatile instruments (more crypto assets) and losing. Along with straight up fraud stealing customer funds and having shit security and getting robbed.
It gets "fixed" by regulatory bodies like the SEC appropriately and quickly requiring a set of rules and regulations on any exchange that operates in country along with auditing, fines, and general fast and effective enforcement.
These exchanges aren't failing because of accidents or inherent risk, they're committing fraud and taking foolish risks that traditional banks aren't allowed to take.
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Also, IIRC, conventional stock exchanges make their money from transaction fees on trading volume. Are there cryptocurrency exchanges not doing that? I suppose even if they are, they're probably in trouble, since once the bubble bursts there will be a lot less trading activity going on.
> can only come from trading crypto
"trading" is a really broad term. They will get fees from trading, but they will probably also be doing things like providing liquidly to other exchanges and arbitrage (crypto is of course very volatile so arb opportunities are all over the place).
From $1 deposit, they make 900% instantly.
From $1 loan, they make 5-10% a year.
Crypto exchanges can't create money. Unless they have their own tokens. But even these tokens have more transparency than our current financial system.
So yes, they're pushed to handle their customers' money in risky ways to make a profit.
It's dumb. Against the whole point of decentralization...
It's like hosting every TOR node on AWS.
That is not how fractional reserve works. The way it works is when you deposit $1, the bank loans it to some other customer but there is a rule saying that they can loan out at most 90 cents of that $1. The purpose of the rule is to make it less likely that the bank will need to resort to the Federal Deposit Insurance Corporation when the bank's customers withdraw more money than the bank expects or hopes they will withdraw.
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I thought that a crypto exchange functions like a currency market: I put an offer to sell 10,000 EUR for 1 BTC and someone else puts an offer to buy 10,000 EUR for 1 BTC. When orders cross, a transaction happens and the exchange gets a fee, whether in currency or crypto units.
What are crypto exchanges fundamentally doing differently that they are suddenly losing money?
Surely a drop in transactions would make them lose fees and require them to fire some staff, but I expected a "Facebook-like" downsizing, not a full-blown bankruptcy.
What am I missing?
Secondly, as it is an unregulated space, we have instances such as FTX where they were using clients funds which should be segregated. This arguably crosses into fraud, and we do not really know which exchanges have been doing this and which ones have been properly segregating client funds. Coinbase is probably the only one we know for sure as they are an audited US publically traded company.
Finally, we also have situations where exchanges are doing things such as not matching client deposits to their reserves 1-1, or hold those reserves in less liquid investments. This could range from another fraudulent situation to good practice, but leaves them very exposed to situations where everyones wants their money back now.
So to me it suggests that they simply don't employ anyone with any experience in banking or compliance, if they did those people would be raising hell or at least leaking or whistleblowing
But a lot of these exchanges have attracted customers by offering interest (rather than charging a fee) and/or free transactions. But then how can the exchange make money and keep the lights on? Well they have to "invest" the customer's money. Then the investments go bad and it all blows up.
Each coin offers anywhere from 4% annual percentage yield (APY) to 20% APY. There are also limited-time-only offers, which can go as high as 60% APY.
https://www.aax.com/en-US/invest/savings/
That most of them, not all of them but, by very far, most of them are downright scams, planned as scams from day one, just like in the FTX case. Evidence is mounting quickly that both Alameda Research and FTX were mounted as scams (despite the narrative that's going to be sold that it was bad luck / bad trades that sent them in a death spiral).
There are people who warned about the very scam Alameda and FTX were putting the very day FTX launched.
Unfortunately, this is common, just like $LUNA called themselves "stable coin" but it was stable only against assets in the crypto that were not stable at all.
Live by "Do your own research" and die by it. I guess.
Thanks!
These other exchanges are doing far more exotic things like creating their own coins to grant status on their exchange and creating derivatives so traders have more leverage and therefore action. Coinbase would be considered boring to these users since it is a vanilla exchange.
So the exchange ends up with a big account of client funds containing cash, and a big wallet of clients' cryptocurrencies.
If a bit of that money goes missing, they can cover it up for a long time, if cryptocurrencies are growing and there's net more money flowing in than flowing out. You just pay departing customers' withdrawals from new customers' deposits.
It is only when the tide goes out we find out which swimmers have lost their trunks.
And once a company's demise becomes inevitable, perhaps insiders decide to help it along. If you've already been hacked for $10 million, why not make it $100 million given the company's going under anyway and you'll be the prime suspect?
An exchange can be technically insolvent for a long time without anyone noticing, and try to fill the hole with money from fees etc. All will look normal from the outside... until too much money gets taken out too fast.
The only way to be profitable is to fee transactions.
There are a magnitude more ways to be unprofitable, however, and because of rampant incompetence, the the scales are clearly favoring the bold/gullible holding large bags of those who have fleeced.
Also, most of these exchanges have their own tokens which they control the supply of and keep as "assets" on their books. In doing so they can use these self printed tokens as collateral for loans. Add to that some nicely leveraged positions in all kinds of shitcoins and you start to understand how we got here.
Fractional reserve banking. Exchanges now offer traditional banking services such as savings accounts and loans.
They are unregulated banks with none of the insurance and government protections to bail them out. They cannot resist the temptation to gamble with the vast amounts of money they are sitting on. Only a matter of time before they lose it all and people can't withdraw their cryptocurrencies because there's no money in the reserves.
Next week, we'll announce insolvency, and all those withdrawals in the queue that haven't been processed never will be.
ie it's a 'banking' problem, specifically a 'fractional reserve banking' problem, not a crypto problem.
This is exactly why fractional reserve banking is heavily regulated.
While there's nothing intrinsic about cryptocurrency that would make it more prone to fraud than anything else, the culture around it seems highly susceptible to it.
There are absolutely intrinsic things that make cryptocurrency more prone to fraud. The inability to reverse transactions, quasi-anonymity, and lack of any central authority to resolve disputes.
To limit fraud to the levels you see in traditional finance, you would need the regulations and oversight by centralized organizations that you have in the traditional space. The entire purpose of cryptocurrencies are to avoid those things, so while you technically could have them with a cryptocurrency, you would end up with no good reason to have a cryptocurrency at all.
Maybe what's better and cheaper is to let this wild west "enjoy being poor" nonsense flame out until everyone shoots themselves and it's curtains.
It will sort of be like Usenet - it didn't go anywhere but you have to know how to find it.
I agree it's a banking problem in that they're trying to streamline a new economy by not doing what "legacy banking" does. Which is like streamlining airlines by starting the rule book from scratch. But the rules and regulation of the airlines have been paid for in blood. Discard them at your own peril.
Or, in the case of cryptocurrencies, at the peril of the finances of anyone investing in your experiment.
Seems hard to try to disentangle money and how money gets managed at scale.
Or is it I who's doing the not getting things?
Plus funds in a wallet require extra steps when you want to trade on an exchange (extra costs via gas, time, possible errors, etc). The use cases for crypto are so minimal for the general population one could argue it's only survived this long through making trades on exchanges - to what essentially amounts to gambling. You can't gamble with funds in a wallet which defeats the entire purpose of crypto for the vast majority of the "users" in the space.
"I write these words in steel, for anything not set in metal cannot be trusted." - The Well of Ascension, by Brandon Sanderson
I was about to say this isn't the worst opsec until I realized you mean people are sending businesses their passphrases and not purchasing an etching kit to make the plate themselves.
One of the joys of HN is that on the whole no one knows who anyone else really is nor keeps track of what they've argued previously.
I was stunned to see so many of these products on Amazon last time I searched for smartcard stuff. On that note, I hate that you can't search for smartcard products anymore without 80% of your results being crypto wallets.
vs
Give your private key to an exchange, and enrich the shitheads running the exchange when they run away with your money.
First option seems preferable. If you're going to lose your money, better for the money to be truly lost than to enrich a thief.
1) They downplay the expertise and knowledge required to manage your own tokens.
2) They advocate for the use of cryptocurrencies by normal (i.e. non-expert) users as this increases the value of their holdings.
3) They prefer to blame users who make mistakes, are hacked/scammed, or otherwise lose (real) money for their lack of technical expertise.
Given this, it's not surprising that the enormous gap between naive engineering assumptions and human reality is filled by intermediaries despite how consistently they fail. As long as cryptocurrencies continue to exist beyond a tiny niche I don't see this changing.
The knowledge gap between "normies" and "crypto-aficionados" is pretty large.
Which is, of course, why so many crypto "businesses" turn out to be scams of one sort or another -- the asymmetry of information makes most folks easy meat for scammers.
To point up this asymmetry, go ahead and watch this[0]. The lack of knowledge WRT crypto-currencies (let alone smart contracts) among the hoi polloi is striking in comparison to those who are in the know.
[0] https://www.pbs.org/wgbh/nova/video/crypto-decoded/ (Recent NOVA episode).
The name of the game is pump and dump, you can't play the game (speculation) if you're not on the field (the exchange).
Crypto's marketing is 'financial freedom' as in get-rich-quick, not free as in libre.
Add on top of that the general volatility of crypto, people not wanting to deal with maintaining their own wallet, and you have a recipe for people keeping their funds on exchanges.
People don't want to be their own bank, just like they don't want to be their own bakery, or their own farmer.
Sure, some people do bake their own bread, but they do it either because they have to, or because they enjoy it.
So the people who control their own keys need to have a reason to do so. Because it takes more effort than not managing your own bank.
What exactly are the reasons to run your own bank? What problems in your life are solved by it?
I can think of a two:
* You want to hold more cash than FDIC guarantees. * You think the government will seize money out of savings accounts, as happened in Cyprus.
These have to be weighed against the facts that while not literally in your mattress, the money becomes pretty easy to steal, for anyone willing to point a gun at you. And being your own bank comes with obligations, too, so the government will come after you if they want to drain your bank. And the justice system can put you in a box if you don't comply.
Basically: If you already have a bank, why would you not just use it? And if they refuse to do your thing (like order a hit), then buy tokens and pay a hitman in tokens.
If there were FDIC for tokens at your real bank, redeemable in same number of tokens, then any general public that wanted to use cryptocurrency would likely just use that. Because outside of fringe LARPing nobody wants to run their own bank.
Basic corollary: if you already use a bank, why not just use money?
> If there were FDIC for tokens at your real bank, redeemable in same number of tokens, then any general public that wanted to use cryptocurrency would likely just use that. Because outside of fringe LARPing nobody wants to run their own bank.
So the only remaining question is why would normies who say (according to you) amen to all above would need crypto besides a ponzi-speculative joy ride?
On one hand we have funny money backed by a world power and all its resources, and protected by ICBMs and an impressive navy and bases around the world and a financial infrastructure around USD & convertibles.
On the other hand we have funny tokens issued by "genius" -mushrooms- who are elevated into the spotlight by the likes of Forbes magazine and the rest of the media circus, protected by nothing [though the genius scammers themselves are apparently protected ..]
This is a solved problem up to millions of dollars [1]. Past that, you buy Treasuries. The real third case is you’re doing something illegal.
[1] https://accountopening.fidelity.com/ftgw/aong/aongapp/fdicBa...
So basically no real change except they're much more exposed to risk (fraud and market swings notwithstanding)
A large chunk (probably even a majority) of the people involved in the cryptocurrency space don't actually care about cryptocurrency as a technology at all, they're just there to make money. To these people, market price is everything, and the technology is irrelevant except to the extent that it affects the market price.
Then in the other camp there's a group of people who don't care about the current trading price, they're just interested in the technology and the new capabilities it enables.
I'm in that second camp (perhaps unsurprisingly, since this is Hacker News), so in my view this story isn't really all that interesting or surprising. From a legal/societal perspective, yeah this is terrible and probably someone should go to jail. But from a technical perspective, the fact that exchanges can scam people out of their money is hardly new information. As the saying goes: not your keys, not your crypto.
Though obviously for those who are interested in cryptocurrency solely to make money on speculation, yeah this is a big story.
Of course what folks are seeing now is that it's real easy for exchanges to lose their buttcoin deposits too.
This is a concept that probably never existed before crypto, called "fiat." "fiat" is the latest and greatest in crypto technology. True decentralization. Multiple countries. Multiple municipalities. Multiple systems, multiple institutions, multiple protocols and multiple contracts, the picture of decentralization that crypto could only dream of. And of course, if you make a mistake, you can revert your transaction, a form of technology crypto has not yet mastered. Oh, NFTs? Please. "fiat" utilizes advanced art international HS92 commodities exchange codes to kick start the burgeoning modern art scene of completely legitimate businesses.
If you internalize this fact, then it explains why people just keep their coins on exchanges, why they buy centralized "cryptocurrencies" , why they leap at the chance of buying the latest Paris Hilton NFT and why they keep defending Tether as legitimate.
Fundamentals are thrown out of the window unfortunately.
Those people put a bunch of money into bitcoin to inflate the price, but they need a bunch of rubes trading the currency to keep the value of the coin (relatively) stable so they can withdraw their holdings, but they don't care much if those rubes have full control, and that's where exchanges come in.
Exchanges are there as a way for the first movers and the ultra-wealthy to extract wealth from uninformed, naive new investors into crypto.
How sad that you think the only people that cares about not giving governments control of everything are "scammers, criminals, tax dodgers, and exchange runners".
What is alarming and becoming more revealing is how much of this crypto was being back-doored from one crypto "product" (exchange, fund, coin, ICO, etc.) into another. In programmer terminology: it looks like there are (were) a lot of pointers to the same memory address.
But then bitcoin started getting popular and emerging towards mainstream culture, the talk about wallets seized. All the new crypto firms started marketing accounts and "cloud wallets" and the personal pocket wallet was never mentioned.
Crypto then continued to advance in mainstream culture and personal wallets were kept a secret. I doubt the average crypto user even knows about personal wallets.
And if you disagree, please prove me wrong. There are many crypto commercials on mainstream media, show me one that has mentioned that you can keep a personal wallet.
So the crypto industry is to blame for this. They basically hid the most important part of crypto from the public because they would make more money without it.
Many people will never be capable of self-custody because the lack the interest to do it. They see money to be made and ignore the warnings of those who try to explain what they have on an exchange is a promise of money, not money itself.
When you say "nobody does this anymore," that's kind of true, but also not true. Those who have learned the hard way do, the newbies (which vastly outnumber the first group) don't.
Self custody requires knowledge of some basic math, cryptography, and the ability to understand basic security principles.
User growth explodes with exchange rates. Those diving in understand very little about what they're doing and should stay out. They don't listen to people saying such things and the result is, well, predictable.
I mean, do you store all your cash under your bed in case your bank go bust? People keep crypto on the exchange because it makes transactions easier, and in some cases you might have other perks such as being able to lend it for interest or spend it with crypto credit cards.
This idea that you can have a digital currency without some kind of bank or exchange is fundamentally flawed imo. Unless you believe the only valid usecase of crypto is as a digital alternative to physical gold then it probably makes more sense on an exchange. The main issue here is that the exchanges are not regulated.
But I suppose given the lack of regulation I would have to agree with you that the only safe use case right now is as a "store of value" in a cold wallet.
On decentralized exchanges, you pay each time you trade (gas fees and such). That cuts right through the endorphin rush.
Centralized exchanges keep those fees low by making everything centralized. It's akin to casinos keeping their guests comfortable and liquored up.
As a person who works in crypto, I'd like to see us engage with this more forthrightly. When we cut out gambling, how many use cases are left? How many are viable today?
The original crypto culture which emphasized privacy (although speaking of a public list of all transactions ever performed on the network as privacy oriented is pretty hilarious), control and decentralization has for the most part been lost to crypto's eternal September.
I say this in jest. There are more than one reason to be interested in crypto, but when bitcoin suddenly went from 1BTC=USD$1 to $1BTC=USD$100 (I don't actually know when the boom happened--I wasn't watching that closely) the individualist, libertarians were obscured by the quick-buck types looking to turn their thousand into a million. Thats when the scammers all came out.
Same as with source code version control. As soon as distributed VCS appears (git), people promptly centralize it with another abstraction layer (github, gitlab, bitbucket, etc).
Now everything is in github, gitlab, or bitbucket, and centralized there.
At one point I asked (rather naively - not trying to sound wise here) whether our dependence on GitHub was an outage risk. Response from CTO was that git is distributed and everyone has a copy and whatnot. In retrospect, yeah, the code is not lost, but we had never actually built the infrastructure / tested the procedures to actually handle that fallback to a distributed world...
It's close to just running your own email / fileserver etc. IMHO.
So while possible it's also annoying and not worth it for most people, and I get that.
The right way to do that is to use a hardware wallet. There are many companies making and selling those, so there's definitely a market for that.
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If you're bullish on crypto's long-term prospects you can always buy back in after the crash. There will be a new "ground floor". (I would suggest no one do that... just saying, even if you believe whole-hog in the future of crypto, now's the time to sell any way you can.)
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1) Freeze withdrawals
2) Announce they are being frozen at some later time
3) Anyone who is powerful/influential enough to "get to you" gets their withdrawal processed
4) The rest are not dangerous enough to worry about having a hit taken out on you
I hope everyone recognizes that it's about transparency and common sense more than regulation. Sadly this will probably cascade to other exchanges as general awareness forces more people to withdraw from exchanges. Hopefully the stronger exchanges persist.
The real question everyone should be asking is: who is the counterparty to these "losing" leveraged deals?