Brian Armstrong from Coinbase was on the latest All-In podcast and talked about this. It sounds like they're not at much risk as they are US based and are regulated to have much higher standards of keeping reserves
If what he's saying is true, there isn't really anything to worry about, and coinbase will likely be the winner here with a proven track record.
If they are truly holding customer funds and crypto 1:1, then you cannot do a bank run on them. They will just pay out. Which is what Armstrong says.
Frankly, after all this shit if an exchange can prove they are reliable and reputable, which Coinbase has so far, they are likely to emerge quite well out of all this (unless the entire crypto market loses all credibility or gets regulated into nothing).
> If what he's saying is true, there isn't really anything to worry about
I don't believe that is entirely accurate. Coinbase used to have a pro account with margin trading. Unless they managed to clearly unwind that business there is a risk that something went wrong at one point.
Margin trading is safe for the exchange if it works as usually described in the terms: they just act as a bookmaker reallocating customer funds according to which side wins each peer to peer bet. There's usually rules that describe what happens in gaps, closing the winning side with a win that never exceeds what the losing side put down when opening the bet.
If they steal customer funds, then all is off, but same when there is no margin trading involved.
If the allow margin gambles they probably are not selling the cryptos for cash to save transaction cost and just calculate the balance virtually. With all the cryptocoin volatility I don't see how process margin calls without keeping the actual cryptocoins either, so you can give them back to the lender.
Ah ok, because CEOs never make a public statement and then the next day literally the opposite of what they just said happens. Not saying that this will happen with Coinbase, but I would not believe that Coinbase is not at risk just because their CEO said it isn't.
Though it then, by definition, makes it not a Ponzi (at that specific point), since Ponzi implies deception : banks are also unable to pay everyone at once, yet they typically aren't called "Ponzi".
Banks have a liquidity and term mismatch, but are required to be solvent. Ponzi schemes offer fake balances and are insolvent.
It's not clear at what exact point FTX became insolvent, but I think the CEO writing an $8bn disguised accounting entry for tokens he'd lent to his girlfriend may have been it.
There's also maybe the option of being insolvent but nobody caring because the money is too good..?
Not sure what to call this since I assume this has been regulated to death in normal finance ?
But it wouldn't surprise me if it had happened at some point at FTX, considering all the greed and hype around crypto...
Though I guess it might be a moot point : information doesn't travel instantly, and a judge might still deem you "guilty of Ponzi" (or whatever term is appropriate) if you haven't literally been shouting "We are insolvent !" from the rooftops ? See again : regulation.
"Trading while insolvent" we call it in the UK; the legal obligation is to call in the administrators when you realize you're insolvent. Which they have now done. And insolvent companies generally do themselves, because it's less painful than the alternative.
There will probably be a lengthy argument in court (but which court - Bahamas?) as to whether they should have realized this earlier and whether their accounting was deceptive or incompetent.
(those interested should read "Lying for Money" by Dan Davies, it's an entertaining and escalating history of fraud)
> banks are also unable to pay everyone at once, yet they typically aren't called "Ponzi".
There's a distinction between liquidity and solvency. Banks can run into liquidity issues, but in theory if they do their job right they should stay solvent, and will be backed by insurance / reinsurance and such. Basically a very different world from these yolo crypto outfits running out of offshore tax havens.
I am not sure there is a clear distinction between the two for fractional reserve banking ?
The bank can have done nothing "wrong", yet if the situation is bad enough : bank run + entities it has been lending to going bankrupt + entities that could bail it out going bankrupt too ; then the bank IS going bankrupt, and taking most of the opposite fraction of the money it claimed to "hold" with it...
This is where the "lender of last resort", i.e. the government, comes in. Depositor losses are sufficiently bad for the economy as a whole that it makes sense to prevent them at almost any cost.
>I am not sure there is a clear distinction between the two for fractional reserve banking ?
If your assets are real and not shitcoins, there is a difference. If I have $200 in my bank, the bank takes $100 from me and buys AAPL stock (and adds their own cash); and then I go to withdraw my $200 on Saturday:
1. The bank is illiquid. I want $200 cash, but the bank only has $100 and 1 AAPL stock.
2. The bank is (likely) solvent. Unless AAPL crashes below $100 on Monday morning they are likely good for the money (AAPL, a blue chip stock, is unlikely to crash below $100) on monday morning. In this case a lender of last resort will step in (like the Fed) and bank may pay some premium for an emergency loan.
It's statistical, like everything, and the difference is whether you have a guaranteed valuation for your illiquid assets. If you are backed by the full faith and credit if the US (taxation, IRS, and military), you are 99% solvent. In Brazil, maybe 80%
Still fraud though. Basically the banks convinced the coin makers to issue new money if they become insolvent. It would be the same as FTX being able to call the
money printers of each currency to get the needed funds to stay afloat. Amazing this is not considered a criminal enterprise.
The banks are just on a different level of grift when compared to crypto exchanges
No, you're completely missing the distinction between insolvent and liquidity problems, even though it was pointed out in the post you replied to.
A bank with liquidity problems borrows newly printed money from the central bank and repays them with the profit generated from its loans. An insolvent bank that made too many loans that won't be repaid can't repay loans the money printers might offer it and so still gets wiped out. (Its customers get bailed out, but its shareholders don't).
Sure, I can understand there's a difference. But what's not equivalent with what happened in FTX? It's essentially a bank run without the ability to get a lender of last resort. Banks are just more protected in this situations, but in the end they are still playing the same game as the crypto exchanges.
> what's not equivalent with what happened in FTX?
Banks openly lend money to a people who are not the bank's CEO and companies which are not run by the bank's CEO and make a profit on the vast majority of them repaying the money, though typically over a time frame of years, not days. This means the lender of last resort providing funds for those days also expects to get repaid
FTX secretly lent customer funds to a single company run by its CEO to bail it out, and there was no realistic prospect of that money ever being repaid.
If you honestly think that's "equivalent", I'll happily share Paypal details so I can look after some of the money in your bank account in what you consider to be the same way the bank does...
I don't really see a reason to be any more trusting in Coinbase than in FTX, since as far as most people were concerned, FTX was a completely reputable company just a month ago. Well, as reputable as crypto companies go anyways.
And now we have reports that FTX had a backdoor to "alter the company's financial records without alerting other people, including external auditors".
Well, for one thing, Coinbase has a board, and FTX did not. They also had no CFO. They were not “completely reputable” by any reasonable standard; it’s just that no one cared at the time.
Just listening to the bossman of FTX in interviews and reading about him was enough to make me swerve anything he touched. Seemed like a shop of cowboys.
I think it depends a lot where an exchange is located, if the place has rule of law and proper supervision for financial service providers. Also, if an exchange has properly regulated external audits.
Is Coinbase at risk?
This is remarkable to watch unfold.