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Why is it apparently so difficult to run a solvent crypto exchange? On the face, it shouldn't be too hard, just take deposits, stick them in a wallet, and swap

Why is it apparently so difficult to run a solvent crypto exchange? On the face, it shouldn't be too hard, just take deposits, stick them in a wallet, and swap client balances in a database. Is the temptation to maintain a reserve ratio < 1 just too great? Do operators try to earn small, low-risk return on client funds only to find there are no low-risk, positive-return assets in crypto? Are the extending margin to clients or explicitly stepping in as counterparty, and get exposed to losses as prices move?

fshbbdssbbgdd 4y ago
Running a reserve ratio < 1 is a convenient way of funding advertising to get more people to use your exchange. So the question you should be asking is: if there is a solvent crypto exchange, how would I ever find out about it?
- kristjansson 4y ago
  Presumably transaction fees, market data fees, etc. would provide enough revenue to fund advertisements?
  - fshbbdssbbgdd 4y ago
    Advertising is a market, you see ads for whoever is willing to bid the highest. It seems like Coinbase had to raise money to get big. FTX arrived to the scene later. It would be hard to compete by bootstrapping from organic growth.
    - kristjansson 4y ago
      Taking outside money doesn't preclude solvency
TimJRobinson 4y ago
The reason FTX got to #2 exchange in only 3 years is because they were using customer funds and leverage to grow rapidly. If they hadn't done this they might have been much smaller. There are hundreds of exchanges now, most work exactly as you describe but don't make headlines because they don't grow rapidly then collapse.
chis 4y ago
Probably the insolvent exchanges are able to offer lower costs and better promotions to users. For instance Coinbase has always charged way higher fees than FTX for simple buying and selling of coins.
- from 4y ago
  Sometimes they offer to cover withdrawal fees too. Still it seems like they should be making money hand over fist.
deleted 4y ago
[deleted]
espadrine 4y ago
Storing money costs money: at least the bank fees, if not the negative interest rates. Processing money costs even more money: operations must be scrutinized, international movements require validation and communication, and various AML/CFT/Fraud procedures must perform investigations etc. You have accounts in various currencies, perform conversions to maintain liquidity… So I can see why they would start dipping their toes into investments. Once they start, they probably don’t consider enforcing Basel III to their procedures, and things just unfold.
theptip 4y ago
> Why is it apparently so difficult to run a solvent crypto exchange? Running a stock exchange is a hard business too; you are the market maker, you set the spread, and the most sophisticated investors in the world are trying to arbitrage you. Any mistake can potentially ruin you. If you do you job right you take a tiny sliver of profit from each transaction. Now consider crypto, where your ability to pause the market or unwind clearly-erroneous transactions is reduced or removed. Sounds excruciatingly hard to me.
- Bootvis 4y ago
  That's why you get outsiders on your exchange to make markets and you just charge commissions and access fees.
- JumpCrisscross 4y ago
  > Running a stock exchange is a hard business too; you are the market maker, you set the spread, and the most sophisticated investors in the world are trying to arbitrage you Normal markets aren’t as centralised as crypto. The exchange and market maker are separate.
  - pcthrowaway 4y ago
    It's pretty uncommon for exchanges to do all their market making directly, and many of the ones that do still rely on outside market making. FTX was almost the exception since Alameda spun out of it IIRC
    - JumpCrisscross 4y ago
      > pretty uncommon for exchanges to do all their market making directly Point is, in real finance, it's pretty uncommon for exchanges to do any of their market making. Largely to ensure they can project confidence in crises. Market makers blow up. Exchanges shouldn't.
      - Ferrotin 4y ago
tim333 4y ago
The majority of crypto exchanges failing has been due to them being hacked or assets stolen. It seems to be an ongoing problem. It's kind of inherent to crypto transfers not being reversible. In a regular stock exchange if a crook tries to transfer the assets somewhere you can freeze or reverse the transaction. Crypto not so much. The FTX issues seem to be something else - it's a bit unclear what exactly at the moment. I've got some assets with FTX so I'm curious. As well as holding crypto they do futures trading on it and I wouldn't be surprised if Alameda Research, their privately held prop trading fund is a counterparty to some of those and may have gone bust.
favflam 4y ago
Asset heavy. The computer systems to run one are expensive. Compliance is expensive. Your return on assets are probably lower than 5% in a regulated market. If you don't take extra risks to spruce up returns, you lose money.
octodog 4y ago
FTX offers leveraged products so they are borrowing assets from somewhere to fund these trades.
- mianos 4y ago
  This is only true for covered leverage with physical delivery. If you match a buyer and a seller, they can agree to settle in fiat.
jl2718 4y ago
Faking the liquidity.

fshbbdssbbgdd 4y ago

Running a reserve ratio < 1 is a convenient way of funding advertising to get more people to use your exchange. So the question you should be asking is: if there is a solvent crypto exchange, how would I ever find out about it?

kristjansson 4y ago
Presumably transaction fees, market data fees, etc. would provide enough revenue to fund advertisements?
- fshbbdssbbgdd 4y ago
  Advertising is a market, you see ads for whoever is willing to bid the highest. It seems like Coinbase had to raise money to get big. FTX arrived to the scene later. It would be hard to compete by bootstrapping from organic growth.
  - kristjansson 4y ago
    Taking outside money doesn't preclude solvency

TimJRobinson 4y ago

The reason FTX got to #2 exchange in only 3 years is because they were using customer funds and leverage to grow rapidly. If they hadn't done this they might have been much smaller. There are hundreds of exchanges now, most work exactly as you describe but don't make headlines because they don't grow rapidly then collapse.

chis 4y ago

Probably the insolvent exchanges are able to offer lower costs and better promotions to users. For instance Coinbase has always charged way higher fees than FTX for simple buying and selling of coins.

from 4y ago
Sometimes they offer to cover withdrawal fees too. Still it seems like they should be making money hand over fist.

deleted 4y ago

[deleted]

espadrine 4y ago

Storing money costs money: at least the bank fees, if not the negative interest rates. Processing money costs even more money: operations must be scrutinized, international movements require validation and communication, and various AML/CFT/Fraud procedures must perform investigations etc. You have accounts in various currencies, perform conversions to maintain liquidity… So I can see why they would start dipping their toes into investments. Once they start, they probably don’t consider enforcing Basel III to their procedures, and things just unfold.

theptip 4y ago

> Why is it apparently so difficult to run a solvent crypto exchange? Running a stock exchange is a hard business too; you are the market maker, you set the spread, and the most sophisticated investors in the world are trying to arbitrage you. Any mistake can potentially ruin you. If you do you job right you take a tiny sliver of profit from each transaction. Now consider crypto, where your ability to pause the market or unwind clearly-erroneous transactions is reduced or removed. Sounds excruciatingly hard to me.

Bootvis 4y ago
That's why you get outsiders on your exchange to make markets and you just charge commissions and access fees.
JumpCrisscross 4y ago
> Running a stock exchange is a hard business too; you are the market maker, you set the spread, and the most sophisticated investors in the world are trying to arbitrage you Normal markets aren’t as centralised as crypto. The exchange and market maker are separate.
- pcthrowaway 4y ago
  It's pretty uncommon for exchanges to do all their market making directly, and many of the ones that do still rely on outside market making. FTX was almost the exception since Alameda spun out of it IIRC
  - JumpCrisscross 4y ago
    > pretty uncommon for exchanges to do all their market making directly Point is, in real finance, it's pretty uncommon for exchanges to do any of their market making. Largely to ensure they can project confidence in crises. Market makers blow up. Exchanges shouldn't.
    - Ferrotin 4y ago

tim333 4y ago

The majority of crypto exchanges failing has been due to them being hacked or assets stolen. It seems to be an ongoing problem. It's kind of inherent to crypto transfers not being reversible. In a regular stock exchange if a crook tries to transfer the assets somewhere you can freeze or reverse the transaction. Crypto not so much. The FTX issues seem to be something else - it's a bit unclear what exactly at the moment. I've got some assets with FTX so I'm curious. As well as holding crypto they do futures trading on it and I wouldn't be surprised if Alameda Research, their privately held prop trading fund is a counterparty to some of those and may have gone bust.

favflam 4y ago

Asset heavy. The computer systems to run one are expensive. Compliance is expensive. Your return on assets are probably lower than 5% in a regulated market. If you don't take extra risks to spruce up returns, you lose money.

octodog 4y ago

FTX offers leveraged products so they are borrowing assets from somewhere to fund these trades.

mianos 4y ago
This is only true for covered leverage with physical delivery. If you match a buyer and a seller, they can agree to settle in fiat.

jl2718 4y ago

Faking the liquidity.