17 ms·

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 bee

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?

deleted 4y ago
[deleted]
djbebs 4y ago
There is nothing wrong with this, and indeed it's a good thing.
- jakelazaroff 4y ago
  Is this… sarcasm? It’s a good thing that crypto exchanges are streaming their customers’ money?
  - djbebs 4y ago
    I'm 100% serious. Exchanges are not and should not be banks. They should not be comingling their assets with client assets.
    - jakelazaroff 4y ago
      (*stealing their customers’ money, but I can’t edit it without making it seem like you’re replying to something else entirely) Okay, but that’s only half of what OP said. They’re also trading on customer assets. That is an extremely bad thing no matter how you look at it.
      - djbebs 4y ago
        They shouldn't be, just like a pumpkin exchange shouldn't be trading using pumpkins that don't belong to them (or at all). That's where the crime comes in.
    - manholio 4y ago
      Yes, exchanges shouldn't commingle their assets with clients funds, yet they have large operational outlays (coding &security, traditional financial fees, meth & luxury condos in Bahamas, etc.) that seem unlikely to be coverable with trading fees alone. Even if we allow them to work like banks, they still can't seem to justify the tens of billion valuations.
      - djbebs 4y ago
        If the fees aren't enough to cover it then the company isn't profitable and should shut down. Or raise fees. "I don't make a profit if I don't steal my customers assets" isn't a valid business plan.
- bestcoder69 4y ago
  Said by the dog in the burning house meme.
- acomms 4y ago
  In a regulated market sure, but here they seem to be trading with customer assets - which is so much worse.
  - djbebs 4y ago
    No regulation would have prevented this crime from happening. I want to be clear here, what happened here is already illegal as is, and no regulation would have prevented it from happening in the first place. Hell, the firm was already being audited, and those auditors didn't catch the accounting discrepancies, so it's doubtful that any additional regulation would have found this earlier either...
    - acomms 4y ago
      You aren't wrong, maybe it's my wishful thinking. What do you think the solution is here? Do you think the house of cards stayed propped up because a lot of people were in on the fraud? Were the auditors just incompetent or were they in on it? Auditors are reasonably well known firms.
      - djbebs 4y ago
        The solution is simple, relegate centralized exchanges to niches that so far can't be fulfilled in any other way (namely fiat-crypto transactions), and use them only briefly and immediately withdraw any assets from it once the transaction you need is complete. You may also take on insurance against such malfeasance on the part of the exchange, increasing your likelihood of recovering your funds. On the plus side insurance agencies now have a financial incentive to ensure the exchanges they insure are honest. In other words, see centralized entities as the unreliable partner that they are and work accordingly.
        acomms 4y ago
        If you're on HN you can be knowledgable and proactive regarding your security with crypto, but I just don't see mainstream adoption without trusted 3rd parties. I don't think insurers would underwrite that sort of thing given crypto's history.
mightypirate 4y ago
itake 4y ago
> Is there any reason someone would take out a loan in crypto and pay interest on the repayments? 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.
- benj111 4y ago
  Or the opposite. Short bitcoin or whatever
  - PaulHoule 4y ago
    It's pretty dangerous though. Even though crypto is mostly on the way down and out some coins will predictably lurch upward from time to time. If you hold an asset long you have a finite potential for loss but infinite potential for gain. Short it's the other way around. Algo traders and hedgies often treat short and long positions as symmetrical as they almost are when linearized but over long periods of time and large princemovements that's wrong. It leaves you with the hedgie viewpoint that it's as bad a "risk" that the stock market goes up too much as if it goes down which is not the way most people think.
  - yvdriess 4y ago
    It's very risky. The price has a tendency to jump up briefly when a large short needs to cover its position.
  - banannaise 4y ago
    The old adage definitely applies here: The market can remain irrational longer than you can remain solvent.
glerk 4y ago
> unless they are charging reasonable money for the privilege of using their exchanges If the trading volumes they are claiming are real, these exchanges should be printing money from transaction fees alone.
- wiredfool 4y ago
  But why settle for 1% of trades when you can have 100% of assets?
- ta988 4y ago
  That's the money that the owners take and hide for when they are out of jail.
- londons_explore 4y ago
  Nearly all trading platforms are fee-free for any big player who asks nicely... 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.
  - flanked-evergl 4y ago
    > Nearly all trading platforms are fee-free for any big player who asks nicely... Too bad they could not figure out how to both give fee-free trading and keep their businesses solvent.
benjaminwootton 4y ago
They should make money in the same way that the New York Stock Exchange does - by taking a small fee from every trade.
- flanked-evergl 4y ago
  I'm not aware of any crypto exchange that does not charge some manner of fees.
  - nannal 4y ago
    There are some 0 fees exchanges, often requires significant volume or occasionally it's for limited periods and/or on a small list of pairs, but I wouldn't be suprised that someone's running fractional reserve with an exchange and offers 0 fees because they make money elsewhere.
    - rdtwo 4y ago
      You have to be. There is no money to be made at 0 fee exchanges unless you lend the money out or give unfavorable swap rates
      - hinkley 4y ago
        Or you're a front for money laundering.
    - mccorrinall 4y ago
      Binance and bybit offer 0% fees on spot, but you usually want some kind of leverage, so you pay interest in your margin loan. If you are not a small retail and want to trade crypto, you usually need to use futures - which are associated with fees - because of liquidity and tighter spreads.
    - 867-5309 4y ago
      it costs them money to exchange, and they add profit on top of this. the "0 fees" are therefore the sum of these masked in an inflated exchange rate
oneoff786 4y ago
In the fiat world banks are regulated and can’t do crazy shit with their reserves.
- flanked-evergl 4y ago
  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: https://fortune.com/2022/11/10/sam-bankman-fried-ftx-joe-biden-democratic-party-second-biggest-donor/ https://fortune.com/2022/11/10/sam-bankman-fried-ftx-joe-bid... (https://archive.ph/BBpQN#selection-417.0-424.0 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.
  - spywaregorilla 4y ago
    SBF spent about 33% Republican / 66% Democrat EDIT: Not accurate ^ Yet 18 of the 25 top donors were Republican leaning. Billionaires comprise 20% of Republican funding vs. 14% for Dems. Most republican megadonors were entirely republican. The big ones are from hedge funds. So yeah, SBF donated to the dems. We need more regulation to get money out of politics. But let's not kid ourselves into thinking the republican party is immune to this. They are in it. They tend to be more in it. 96% of house seats were won by the party that spent more in their race. https://web.archive.org/web/20221113221316/https://www.nytimes.com/2022/11/03/us/politics/midterm-money-billionaires.html https://web.archive.org/web/20221113221316/https://www.nytim... https://web.archive.org/web/20221113013307/http://www.opensecrets.org/news/2022/11/spend-big-win-big-96-of-u-s-house-races-won-by-the-biggest-spender/ https://web.archive.org/web/20221113013307/http://www.opense...
    - 4y ago
numlock86 4y ago
> If this is true, how does it get fixed? The root problem is people buying to pyramid schemes (read as: crypto).
- willturman 4y ago
  It's time to pivot to tangible long term assets, like tulip bulbs.
- jldl805 4y ago
  Ding ding ding ding ding!
LatteLazy 4y ago
The issue here is that crypto exchanges DO make a tonne of cash from trading: the fees are high and the spreads are wide. Yet they have ALSO been "dipping in" to customer money to make "loans" of questionable quality with...
strangescript 4y ago
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.
rr888 4y ago
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.
constantcrying 4y ago
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.
- JumpCrisscross 4y ago
  > exchange shouldn't count deposited crypto as their asset An exchange shouldn’t have deposits. That’s a word for banks and brokers. In practice, these shops act like funds.
  - NovemberWhiskey 4y ago
    Crypto exchanges act like brokers and exchanges. They match orders and they also hold client money.
    - JumpCrisscross 4y ago
      > match orders and they also hold client money Matching orders is what brokers canonically do. Exchanges came about to consolidate their activity. There is nothing resembling a true exchange in the crypto space.
      - pjc50 4y ago
        OK, so it's bucket shop and an exchange. With a side order of boiler room.
      - NovemberWhiskey 4y ago
        That's fair - in any case, the segregation of customer cash and securities from proprietary activities is a (the?) fundamental obligation of broker-dealers.
noelsusman 4y ago
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.
- xtracto 4y ago
  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.
fallingknife 4y ago
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.
melenaboija 4y ago
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.
baxtr 4y ago
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.
roflyear 4y ago
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).
H8crilA 4y ago
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).
tablespoon 4y ago
> 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.
surfsvammel 4y ago
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?
- startupsfail 4y ago
  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.
- drexlspivey 4y ago
  > The business of a normal exchange is normally risk free (just matching buyers to sellers) tell that to RobinHood
twblalock 4y ago
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.
- hinkley 4y ago
  An exchange with a large amount of money in a lockbox has to spend a proportionate amount of money on security otherwise we just repeat MtGox. Again.
deleted 4y ago
[deleted]
Spooky23 4y ago
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.
colechristensen 4y ago
>If this is true, how does it get fixed? 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.
dontbenebby 4y ago
rmbyrro 4y ago
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... It's like hosting every TOR node on AWS.
- hollerith 4y ago
  >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.
Cthulhu_ 4y ago
> 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.

deleted 4y ago

[deleted]

djbebs 4y ago

There is nothing wrong with this, and indeed it's a good thing.

jakelazaroff 4y ago
Is this… sarcasm? It’s a good thing that crypto exchanges are streaming their customers’ money?
- djbebs 4y ago
  I'm 100% serious. Exchanges are not and should not be banks. They should not be comingling their assets with client assets.
  - jakelazaroff 4y ago
    (*stealing their customers’ money, but I can’t edit it without making it seem like you’re replying to something else entirely) Okay, but that’s only half of what OP said. They’re also trading on customer assets. That is an extremely bad thing no matter how you look at it.
    - djbebs 4y ago
      They shouldn't be, just like a pumpkin exchange shouldn't be trading using pumpkins that don't belong to them (or at all). That's where the crime comes in.
  - manholio 4y ago
    Yes, exchanges shouldn't commingle their assets with clients funds, yet they have large operational outlays (coding &security, traditional financial fees, meth & luxury condos in Bahamas, etc.) that seem unlikely to be coverable with trading fees alone. Even if we allow them to work like banks, they still can't seem to justify the tens of billion valuations.
    - djbebs 4y ago
      If the fees aren't enough to cover it then the company isn't profitable and should shut down. Or raise fees. "I don't make a profit if I don't steal my customers assets" isn't a valid business plan.
bestcoder69 4y ago
Said by the dog in the burning house meme.
acomms 4y ago
In a regulated market sure, but here they seem to be trading with customer assets - which is so much worse.
- djbebs 4y ago
  No regulation would have prevented this crime from happening. I want to be clear here, what happened here is already illegal as is, and no regulation would have prevented it from happening in the first place. Hell, the firm was already being audited, and those auditors didn't catch the accounting discrepancies, so it's doubtful that any additional regulation would have found this earlier either...
  - acomms 4y ago
    You aren't wrong, maybe it's my wishful thinking. What do you think the solution is here? Do you think the house of cards stayed propped up because a lot of people were in on the fraud? Were the auditors just incompetent or were they in on it? Auditors are reasonably well known firms.
    - djbebs 4y ago
      The solution is simple, relegate centralized exchanges to niches that so far can't be fulfilled in any other way (namely fiat-crypto transactions), and use them only briefly and immediately withdraw any assets from it once the transaction you need is complete. You may also take on insurance against such malfeasance on the part of the exchange, increasing your likelihood of recovering your funds. On the plus side insurance agencies now have a financial incentive to ensure the exchanges they insure are honest. In other words, see centralized entities as the unreliable partner that they are and work accordingly.
      - acomms 4y ago
        If you're on HN you can be knowledgable and proactive regarding your security with crypto, but I just don't see mainstream adoption without trusted 3rd parties. I don't think insurers would underwrite that sort of thing given crypto's history.

mightypirate 4y ago

itake 4y ago

> Is there any reason someone would take out a loan in crypto and pay interest on the repayments? 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.

benj111 4y ago
Or the opposite. Short bitcoin or whatever
- PaulHoule 4y ago
  It's pretty dangerous though. Even though crypto is mostly on the way down and out some coins will predictably lurch upward from time to time. If you hold an asset long you have a finite potential for loss but infinite potential for gain. Short it's the other way around. Algo traders and hedgies often treat short and long positions as symmetrical as they almost are when linearized but over long periods of time and large princemovements that's wrong. It leaves you with the hedgie viewpoint that it's as bad a "risk" that the stock market goes up too much as if it goes down which is not the way most people think.
- yvdriess 4y ago
  It's very risky. The price has a tendency to jump up briefly when a large short needs to cover its position.
- banannaise 4y ago
  The old adage definitely applies here: The market can remain irrational longer than you can remain solvent.

glerk 4y ago

> unless they are charging reasonable money for the privilege of using their exchanges If the trading volumes they are claiming are real, these exchanges should be printing money from transaction fees alone.

wiredfool 4y ago
But why settle for 1% of trades when you can have 100% of assets?
ta988 4y ago
That's the money that the owners take and hide for when they are out of jail.
londons_explore 4y ago
Nearly all trading platforms are fee-free for any big player who asks nicely... 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.
- flanked-evergl 4y ago
  > Nearly all trading platforms are fee-free for any big player who asks nicely... Too bad they could not figure out how to both give fee-free trading and keep their businesses solvent.

benjaminwootton 4y ago

They should make money in the same way that the New York Stock Exchange does - by taking a small fee from every trade.

flanked-evergl 4y ago
I'm not aware of any crypto exchange that does not charge some manner of fees.
- nannal 4y ago
  There are some 0 fees exchanges, often requires significant volume or occasionally it's for limited periods and/or on a small list of pairs, but I wouldn't be suprised that someone's running fractional reserve with an exchange and offers 0 fees because they make money elsewhere.
  - rdtwo 4y ago
    You have to be. There is no money to be made at 0 fee exchanges unless you lend the money out or give unfavorable swap rates
    - hinkley 4y ago
      Or you're a front for money laundering.
  - mccorrinall 4y ago
    Binance and bybit offer 0% fees on spot, but you usually want some kind of leverage, so you pay interest in your margin loan. If you are not a small retail and want to trade crypto, you usually need to use futures - which are associated with fees - because of liquidity and tighter spreads.
  - 867-5309 4y ago
    it costs them money to exchange, and they add profit on top of this. the "0 fees" are therefore the sum of these masked in an inflated exchange rate

oneoff786 4y ago

In the fiat world banks are regulated and can’t do crazy shit with their reserves.

flanked-evergl 4y ago
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: https://fortune.com/2022/11/10/sam-bankman-fried-ftx-joe-biden-democratic-party-second-biggest-donor/ https://fortune.com/2022/11/10/sam-bankman-fried-ftx-joe-bid... (https://archive.ph/BBpQN#selection-417.0-424.0 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.
- spywaregorilla 4y ago
  SBF spent about 33% Republican / 66% Democrat EDIT: Not accurate ^ Yet 18 of the 25 top donors were Republican leaning. Billionaires comprise 20% of Republican funding vs. 14% for Dems. Most republican megadonors were entirely republican. The big ones are from hedge funds. So yeah, SBF donated to the dems. We need more regulation to get money out of politics. But let's not kid ourselves into thinking the republican party is immune to this. They are in it. They tend to be more in it. 96% of house seats were won by the party that spent more in their race. https://web.archive.org/web/20221113221316/https://www.nytimes.com/2022/11/03/us/politics/midterm-money-billionaires.html https://web.archive.org/web/20221113221316/https://www.nytim... https://web.archive.org/web/20221113013307/http://www.opensecrets.org/news/2022/11/spend-big-win-big-96-of-u-s-house-races-won-by-the-biggest-spender/ https://web.archive.org/web/20221113013307/http://www.opense...
  - 4y ago

numlock86 4y ago

> If this is true, how does it get fixed? The root problem is people buying to pyramid schemes (read as: crypto).

willturman 4y ago
It's time to pivot to tangible long term assets, like tulip bulbs.
jldl805 4y ago
Ding ding ding ding ding!

LatteLazy 4y ago

The issue here is that crypto exchanges DO make a tonne of cash from trading: the fees are high and the spreads are wide. Yet they have ALSO been "dipping in" to customer money to make "loans" of questionable quality with...

strangescript 4y ago

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.

rr888 4y ago

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.

constantcrying 4y ago

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.

JumpCrisscross 4y ago
> exchange shouldn't count deposited crypto as their asset An exchange shouldn’t have deposits. That’s a word for banks and brokers. In practice, these shops act like funds.
- NovemberWhiskey 4y ago
  Crypto exchanges act like brokers and exchanges. They match orders and they also hold client money.
  - JumpCrisscross 4y ago
    > match orders and they also hold client money Matching orders is what brokers canonically do. Exchanges came about to consolidate their activity. There is nothing resembling a true exchange in the crypto space.
    - pjc50 4y ago
      OK, so it's bucket shop and an exchange. With a side order of boiler room.
    - NovemberWhiskey 4y ago
      That's fair - in any case, the segregation of customer cash and securities from proprietary activities is a (the?) fundamental obligation of broker-dealers.

noelsusman 4y ago

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.

xtracto 4y ago
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.

fallingknife 4y ago

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.

melenaboija 4y ago

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.

baxtr 4y ago

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.

roflyear 4y ago

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).

H8crilA 4y ago

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).

tablespoon 4y ago

> 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.

surfsvammel 4y ago

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?

startupsfail 4y ago
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.
drexlspivey 4y ago
> The business of a normal exchange is normally risk free (just matching buyers to sellers) tell that to RobinHood

twblalock 4y ago

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.

hinkley 4y ago
An exchange with a large amount of money in a lockbox has to spend a proportionate amount of money on security otherwise we just repeat MtGox. Again.

deleted 4y ago

[deleted]

Spooky23 4y ago

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.

colechristensen 4y ago

>If this is true, how does it get fixed? 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.

dontbenebby 4y ago

rmbyrro 4y ago

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... It's like hosting every TOR node on AWS.

hollerith 4y ago
>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.

Cthulhu_ 4y ago

> 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.