3 ms·

Well, crypto-exchanges already offer deposit accounts backed with reserves. If at any point the reserve ratio falls below 1 (we don't know if this has already

by lottin 5y ago

Well, crypto-exchanges already offer deposit accounts backed with reserves. If at any point the reserve ratio falls below 1 (we don't know if this has already happened), the quantity of bitcoins in circulation will increase as a result of that.

woodruffw 5y ago
I know of some cryptocurrency exchanges that offer stablecoins, which are a dollar-denominated asset that’s (theoretically) backed by cash in the bank. We’ve seen plenty of evidence that the largest stablecoin players are actually fraudsters. I don’t know of any exchange that offers a deposit account that’s dollar-denominated but backed by cryptocurrency. I can think of lots of reasons for that, FDIC regulations being the least of them. But again, even that wouldn’t make the number of bitcoins in circulation increase: it would be an unstable (and illegal) financial fiction.
- lottin 5y ago
  I'm talking about bitcoin-denominated accounts backed with bitcoins. These are the standard exchange accounts that most people have.
  - woodruffw 5y ago
    Okay. In what world would any retail consumer accept a Bitcoin-denominated account based on marginal Bitcoin reserves? Exchanges would be forced to purchase on the open market to meet their withdrawals during demand, which would cause another deflationary spiral. It’s a nightmare scenario with no conceivable upside compared to actual currency. And again, this is before we get to the problem of “the government lets you do this.”
    - lottin 5y ago
      I don't think you're following me. This isn't some hypothetical scenario. It's common for people who own bitcoin to have their bitcoins deposited at some exchange. Since exchange customers are unlikely to withdraw all their bitcoins simultaneously, exchanges don't have to keep 100% reserves. For instance, they can lend out some of the reserves, or they can use them for whatever purposes they want. When this happens the quantity of bitcoins in circulation goes up. To all effects and purposes, new bitcoins have been created and put in circulation.
      - woodruffw 5y ago
        I hope that I'm not following, because what you just described is both crazy and illegal. Cryptocurrencies are currently considered securities under US law. You can't just pop unrealized securities into existence when a prospective investor asks you for them: it's akin to naked shorting. That's why the stock market has "market makers," i.e. firms that provide low-latency settlement of securities in exchange for a small part of the spread. I can't find any evidence online that any reputable exchange is using its underlying reserves to cover multiple in-kind balances. If you have links to exchanges actually doing this, both I and the SEC would love to see them. Edit: I'm struggling to even find links to people discussing this hypothetically online. I found this one on a wiki[1], where it's discussed in the abstract. And I found another thought piece from the Atlanta Fed[2]. But no indicator that any current above-board reserve is currently doing this. [1]: https://en.bitcoin.it/wiki/Fractional_Reserve_Banking_and_Bitcoin https://en.bitcoin.it/wiki/Fractional_Reserve_Banking_and_Bi... [2]: https://www.atlantafed.org/cenfis/publications/notesfromthevault/04-fractional-reserve-cryptocurrency-banks-2019-04-25 https://www.atlantafed.org/cenfis/publications/notesfromthev...
        lottin 5y ago
        It can be crazy, in your opinion, but the fact is fractional reserve banking has been a standard practice in banking since the invention of banking. I don't know of any country where it's illegal. Whether it would be legal for crypto-exchanges, which typically don't have a banking license, to engage in fractional reserve banking I don't know. Even if it was illegal in the US, it could be legal in Cayman Islands, or elsewhere, and the result would be the same—an inflated supply of bitcoins circulating around the world. Also a lot of exchanges don't seem to be regulated at all. The ones that are regulated could just get a banking license.
        woodruffw 5y ago
        Fractional reserve banking isn't the crazy or illegal part. It's not crazy or illegal because it makes sense in the context of currency, where the purpose is denominational value and facilitating value transfers. The crazy and illegal part is the idea of "fractional reserves" in the context of a fixed-supply security. There's no such thing. I used the US as an example; what you're describing is illegal on every single major international exchange[1]. And as far as banking licenses go: the FDIC won't touch Gemini's actual non-third-party-custodial depository products with a ten foot pole, and they're about as clean as a cryptocurrency firm can be. If you want cryptocurrencies to "succeed" in some nebulous sense, it would be good to get a start on the "not just good for crime" part of the equation. This isn't it. [1]: https://en.wikipedia.org/wiki/Naked_short_selling#Regulations_outside_of_the_United_States https://en.wikipedia.org/wiki/Naked_short_selling#Regulation...

by lottin 5y ago

woodruffw 5y ago

I know of some cryptocurrency exchanges that offer stablecoins, which are a dollar-denominated asset that’s (theoretically) backed by cash in the bank. We’ve seen plenty of evidence that the largest stablecoin players are actually fraudsters. I don’t know of any exchange that offers a deposit account that’s dollar-denominated but backed by cryptocurrency. I can think of lots of reasons for that, FDIC regulations being the least of them. But again, even that wouldn’t make the number of bitcoins in circulation increase: it would be an unstable (and illegal) financial fiction.

lottin 5y ago
I'm talking about bitcoin-denominated accounts backed with bitcoins. These are the standard exchange accounts that most people have.
- woodruffw 5y ago
  Okay. In what world would any retail consumer accept a Bitcoin-denominated account based on marginal Bitcoin reserves? Exchanges would be forced to purchase on the open market to meet their withdrawals during demand, which would cause another deflationary spiral. It’s a nightmare scenario with no conceivable upside compared to actual currency. And again, this is before we get to the problem of “the government lets you do this.”
  - lottin 5y ago
    I don't think you're following me. This isn't some hypothetical scenario. It's common for people who own bitcoin to have their bitcoins deposited at some exchange. Since exchange customers are unlikely to withdraw all their bitcoins simultaneously, exchanges don't have to keep 100% reserves. For instance, they can lend out some of the reserves, or they can use them for whatever purposes they want. When this happens the quantity of bitcoins in circulation goes up. To all effects and purposes, new bitcoins have been created and put in circulation.
    - woodruffw 5y ago
      I hope that I'm not following, because what you just described is both crazy and illegal. Cryptocurrencies are currently considered securities under US law. You can't just pop unrealized securities into existence when a prospective investor asks you for them: it's akin to naked shorting. That's why the stock market has "market makers," i.e. firms that provide low-latency settlement of securities in exchange for a small part of the spread. I can't find any evidence online that any reputable exchange is using its underlying reserves to cover multiple in-kind balances. If you have links to exchanges actually doing this, both I and the SEC would love to see them. Edit: I'm struggling to even find links to people discussing this hypothetically online. I found this one on a wiki[1], where it's discussed in the abstract. And I found another thought piece from the Atlanta Fed[2]. But no indicator that any current above-board reserve is currently doing this. [1]: https://en.bitcoin.it/wiki/Fractional_Reserve_Banking_and_Bitcoin https://en.bitcoin.it/wiki/Fractional_Reserve_Banking_and_Bi... [2]: https://www.atlantafed.org/cenfis/publications/notesfromthevault/04-fractional-reserve-cryptocurrency-banks-2019-04-25 https://www.atlantafed.org/cenfis/publications/notesfromthev...
      - lottin 5y ago
        It can be crazy, in your opinion, but the fact is fractional reserve banking has been a standard practice in banking since the invention of banking. I don't know of any country where it's illegal. Whether it would be legal for crypto-exchanges, which typically don't have a banking license, to engage in fractional reserve banking I don't know. Even if it was illegal in the US, it could be legal in Cayman Islands, or elsewhere, and the result would be the same—an inflated supply of bitcoins circulating around the world. Also a lot of exchanges don't seem to be regulated at all. The ones that are regulated could just get a banking license.
        woodruffw 5y ago
        Fractional reserve banking isn't the crazy or illegal part. It's not crazy or illegal because it makes sense in the context of currency, where the purpose is denominational value and facilitating value transfers. The crazy and illegal part is the idea of "fractional reserves" in the context of a fixed-supply security. There's no such thing. I used the US as an example; what you're describing is illegal on every single major international exchange[1]. And as far as banking licenses go: the FDIC won't touch Gemini's actual non-third-party-custodial depository products with a ten foot pole, and they're about as clean as a cryptocurrency firm can be. If you want cryptocurrencies to "succeed" in some nebulous sense, it would be good to get a start on the "not just good for crime" part of the equation. This isn't it. [1]: https://en.wikipedia.org/wiki/Naked_short_selling#Regulations_outside_of_the_United_States https://en.wikipedia.org/wiki/Naked_short_selling#Regulation...