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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

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.
    - cortesoft 4y ago
      Isn’t the blockchain itself the “true exchange” of the crypto space?
      - NovemberWhiskey 4y ago
        No; that's a ledger. In the context of traditional securities flows, that's more like the post-trade process and share registration etc. If you think about Bitcoin; the blockchain can literally only tell you about how Bitcoin was transferred between addresses.
    - mianos 4y ago
      There are multiple exchanges in the crypto space. I spent 20 years working in conventional exchanges and where I work now is very much the same. This said, we don't appear on the radar, as a conventional exchange is not as highly profitable because they can't make use of client funds or holdings. (We offer a few other unexciting institutional services that make more money than the exchange). One day people will realise the value in conservatism in financial markets.
tinco 4y ago
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.
- danaris 4y ago
  And that's largely because of the lack of regulation that so many cryptocurrency fans tout. If it's not legally regulated as a currency, or a security, or anything of the sort, then why would it be considered to belong to you, and not Mt Gox, once you've given it to them? All you have is a digital account that's basically the legal equivalent of an IOU on a napkin. Welcome to your libertarian utopia.
  - anon291 4y ago
    An IOU on a napkin has legal weight.
  - tinco 4y ago
    Let the record show that I have always supported (explicit) regulation of cryptocurrency. In addition I have always held the opinion that Ripple is a security, not a cryptocurrency, and that it should never have been tolerated by the SEC. The reality there is that no one is actually doing anything about anything unless there's a big scandal. Maybe FTX will change things.
  - kinnth 4y ago
    Defi is not this. In defi exchanges you place your coins into a smart contract or have them always on your account. If anything a crypto exchange is a misnomer as it's not even needed. The only reason it exists is because smart contracts didn't exist when they first started.
oldgradstudent 4y ago
> The issue here is crypto exchanges severely mismanaging the assets of their customers. "Severely mismanaging" is a euphemism for fraud and theft, right?
- zach_garwood 4y ago
  When you steal $1000 from someone, it's theft. When you steal $1000 from a million people it's "mismanaging assets".
  - a4isms 4y ago
    Related: "One man with a briefcase can steal more money than a hundred men with guns." —Don Corleone, "The Godfather"
  - memish 4y ago
    When you're $1000 in debt, it's your problem. When you're $1M in debt it's the bank's problem.
    - a4isms 4y ago
      As told in the old, old, story: Bernice can't sleep. She tosses and turns, tosses and turns. Her partner asks, "What's the problem?" "You know the $1,000,000 bridge loan we got from Fred's bank? It's due tomorrow and thanks to not closing the PQX deal, we don't have the money to pay." Her partner thinks for a moment, then pulls out an iPhone and says aloud, "Hey Siri! Tell Fred that Bernice doesn't have the money to repay the bridge loan... Send!" Bernice is aghast. "What did you do that for!?" Bernice's partner smiles. "Now it's Fred's problem. Let him toss and turn, you can go back to sleep."
- constantcrying 4y ago
  Absolutely.
- eschneider 4y ago
  Those of us who were around during the Saving and Loan Crisis learned that the best way to rob a bank is to own one.
branko_d 4y ago
> An exchange shouldn't count deposited crypto as their asset. It is an asset of their customer. 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.
nulbyte 4y ago
> 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.
- remcob 4y ago
  > 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? Does a cash transporter count the contents of their armored vans as assets? Does DHL count the contents of their vehicles and warehouses as assets? Why should exchanges be different? I know it's the law for exchanges to account custodial funds as assets (SAB121), but I don't see why it should be this way. In fact it seems to achieve the opposite of consumer protection.
  - deleted 4y ago
    [deleted]
  - nulbyte 4y ago
    They way I look at it, deposit and withdraw implies storage. I'm not giving you something to transport, I'm giving you something to store until I tell you what to do with it at a later time. I'm not sure I agree it achieves the opposite of consumer protection. The liability to the customer is equal to the asset being stored this way. Lack of regulation is what achieves the opposite.
beezle 4y ago
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.
krzyk 4y ago
> An exchange shouldn't count deposited crypto as their asset. It is an asset of their customer. But banks do, multiple times. (one dolar produces n dollars in loans). A test with Bank run can confirm it.
- IanCal 4y ago
  Exchanges aren't banks.
  - krzyk 4y ago
    Correct, exchanges won't be saved by government.
- deleted 4y ago
  [deleted]
partiallypro 4y ago
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.
Valakas_ 4y ago
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.

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.
  - cortesoft 4y ago
    Isn’t the blockchain itself the “true exchange” of the crypto space?
    - NovemberWhiskey 4y ago
      No; that's a ledger. In the context of traditional securities flows, that's more like the post-trade process and share registration etc. If you think about Bitcoin; the blockchain can literally only tell you about how Bitcoin was transferred between addresses.
  - mianos 4y ago
    There are multiple exchanges in the crypto space. I spent 20 years working in conventional exchanges and where I work now is very much the same. This said, we don't appear on the radar, as a conventional exchange is not as highly profitable because they can't make use of client funds or holdings. (We offer a few other unexciting institutional services that make more money than the exchange). One day people will realise the value in conservatism in financial markets.

tinco 4y ago

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.

danaris 4y ago
And that's largely because of the lack of regulation that so many cryptocurrency fans tout. If it's not legally regulated as a currency, or a security, or anything of the sort, then why would it be considered to belong to you, and not Mt Gox, once you've given it to them? All you have is a digital account that's basically the legal equivalent of an IOU on a napkin. Welcome to your libertarian utopia.
- anon291 4y ago
  An IOU on a napkin has legal weight.
- tinco 4y ago
  Let the record show that I have always supported (explicit) regulation of cryptocurrency. In addition I have always held the opinion that Ripple is a security, not a cryptocurrency, and that it should never have been tolerated by the SEC. The reality there is that no one is actually doing anything about anything unless there's a big scandal. Maybe FTX will change things.
- kinnth 4y ago
  Defi is not this. In defi exchanges you place your coins into a smart contract or have them always on your account. If anything a crypto exchange is a misnomer as it's not even needed. The only reason it exists is because smart contracts didn't exist when they first started.

oldgradstudent 4y ago

> The issue here is crypto exchanges severely mismanaging the assets of their customers. "Severely mismanaging" is a euphemism for fraud and theft, right?

zach_garwood 4y ago
When you steal $1000 from someone, it's theft. When you steal $1000 from a million people it's "mismanaging assets".
- a4isms 4y ago
  Related: "One man with a briefcase can steal more money than a hundred men with guns." —Don Corleone, "The Godfather"
- memish 4y ago
  When you're $1000 in debt, it's your problem. When you're $1M in debt it's the bank's problem.
  - a4isms 4y ago
    As told in the old, old, story: Bernice can't sleep. She tosses and turns, tosses and turns. Her partner asks, "What's the problem?" "You know the $1,000,000 bridge loan we got from Fred's bank? It's due tomorrow and thanks to not closing the PQX deal, we don't have the money to pay." Her partner thinks for a moment, then pulls out an iPhone and says aloud, "Hey Siri! Tell Fred that Bernice doesn't have the money to repay the bridge loan... Send!" Bernice is aghast. "What did you do that for!?" Bernice's partner smiles. "Now it's Fred's problem. Let him toss and turn, you can go back to sleep."
constantcrying 4y ago
Absolutely.
eschneider 4y ago
Those of us who were around during the Saving and Loan Crisis learned that the best way to rob a bank is to own one.

branko_d 4y ago

> An exchange shouldn't count deposited crypto as their asset. It is an asset of their customer. 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.

nulbyte 4y ago

> 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.

remcob 4y ago
> 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? Does a cash transporter count the contents of their armored vans as assets? Does DHL count the contents of their vehicles and warehouses as assets? Why should exchanges be different? I know it's the law for exchanges to account custodial funds as assets (SAB121), but I don't see why it should be this way. In fact it seems to achieve the opposite of consumer protection.
- deleted 4y ago
  [deleted]
- nulbyte 4y ago
  They way I look at it, deposit and withdraw implies storage. I'm not giving you something to transport, I'm giving you something to store until I tell you what to do with it at a later time. I'm not sure I agree it achieves the opposite of consumer protection. The liability to the customer is equal to the asset being stored this way. Lack of regulation is what achieves the opposite.

beezle 4y ago

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.

krzyk 4y ago

> An exchange shouldn't count deposited crypto as their asset. It is an asset of their customer. But banks do, multiple times. (one dolar produces n dollars in loans). A test with Bank run can confirm it.

IanCal 4y ago
Exchanges aren't banks.
- krzyk 4y ago
  Correct, exchanges won't be saved by government.
deleted 4y ago
[deleted]

partiallypro 4y ago

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.

Valakas_ 4y ago

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.