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I don't think it solves that at all, but, as I understand it, that's not been the problem _so far_. If someone has lent an exchange assets against its users' as

I don't think it solves that at all, but, as I understand it, that's not been the problem _so far_. If someone has lent an exchange assets against its users' assets then it's not at all clear that they have the superior claim to those assets if the exchange goes bankrupt can't repay those liabilities.

beefield 4y ago
What? I just checked news last week and there was a small thing about an exchange called FTX that seemed to have exactly this problem.
- petesergeant 4y ago
  My understanding is that FTX lent customer deposits to Alameda, who lost them, not that FTX owes money to Alameda. In that scenario, FTX wouldn't have been able to prove they held customer deposits.
  - giaour 4y ago
    Didn’t FTX just hold the customer deposits in a scam token after some financial shenanigans? You would still need auditors to determine what assets on a company’s books were worth their stated value and attest to their liquidity.
    - petesergeant 4y ago
      Right, but "hold the customer deposits in a scam token" means they no longer hold them in the real tokens, which would be obvious using the method in the linked article.
      - giaour 4y ago
        Wouldn't this effectively reduce the role of the custodian from "bank-ish entity" to "safe deposit box operator"? The custodial entity would need to hold on to the exact assets provided by the customer (the equivalent of your bank holding on to the exact $ bills you originally deposited), which means they couldn't be used for revenue generating activities like investing or lending, which in turn means the custodian could only make money through user fees. Once the custodian is allowed to do anything that causes the exact tokens a customer deposited to be exchanged for another asset, that opens the door to FTX-style malfeasance.
        petesergeant 4y ago
        Yes, and I mean I think that's exactly the point: people aren't expecting their exchanges to be a bank that puts their assets at risk, they're expecting them to be a custodian only, and ding them with fees when they trade, or possibly to actively charge them fees for holding deposits. The only reason actual banks get with putting customer funds at risk is that deposits (up to a certain point) are insured by the government. If the exchange wants to offer interest-bearing deposits (eg: loan out your crypto), well then you'd expect to no longer be able to verify your deposits because you'd know they were loaned out, or that the exchange was trading with them, or whatever else. You'd also be forced to confront the fact that your assets are at risk at that point.
lottin 4y ago
Other creditors may or may not have preferential claims over depositors. The point is that you can't prove that the exchange is solvent (which was the entire point of this exercise) unless all assets and liabilities are considered.
michaelt 4y ago
> If someone has lent an exchange assets against its users' assets then it's not at all clear that they have the superior claim to those assets if the exchange goes bankrupt can't repay those liabilities. Right, but if an exchange took out a bank loan, the loan was recalled, and the exchange repaid it with customers' deposited cash and later goes bankrupt - possession is nine-tenths of the law. Especially if the exchange intentionally has a structure that can avoid international tax laws - who's to say it won't also avoid international bankruptcy laws?
- petesergeant 4y ago
  > and the exchange repaid it with customers' deposited cash Then in this scheme depositors would be able to see that straight away, and force bankruptcy and asset recovery on the exchange while those assets still existed. This would (presumably!) stop the exchange repaying debts with customer deposits, because those customers would know straight away and could seek legal recourse against the bank and the exchange.
  - michaelt 4y ago
    > Then in this scheme depositors would be able to see that straight away, If you trust the fiat bank account statements, certainly.
    - petesergeant 4y ago
      This is explicitly addressed in the article: use stable coins for that. I'm very much a crypto-skeptic, but I do think this particular solution will provide some level of increased safety for coin-heads.
      - michaelt 4y ago
        If you trust the solvency of the likes of Tether and Luna, certainly. Seems to me the problem of solvency at the boundary between the worlds of fiat and cryptocurrency is always present, and shuffling it around doesn't make it disappear.

beefield 4y ago

What? I just checked news last week and there was a small thing about an exchange called FTX that seemed to have exactly this problem.

petesergeant 4y ago
My understanding is that FTX lent customer deposits to Alameda, who lost them, not that FTX owes money to Alameda. In that scenario, FTX wouldn't have been able to prove they held customer deposits.
- giaour 4y ago
  Didn’t FTX just hold the customer deposits in a scam token after some financial shenanigans? You would still need auditors to determine what assets on a company’s books were worth their stated value and attest to their liquidity.
  - petesergeant 4y ago
    Right, but "hold the customer deposits in a scam token" means they no longer hold them in the real tokens, which would be obvious using the method in the linked article.
    - giaour 4y ago
      Wouldn't this effectively reduce the role of the custodian from "bank-ish entity" to "safe deposit box operator"? The custodial entity would need to hold on to the exact assets provided by the customer (the equivalent of your bank holding on to the exact $ bills you originally deposited), which means they couldn't be used for revenue generating activities like investing or lending, which in turn means the custodian could only make money through user fees. Once the custodian is allowed to do anything that causes the exact tokens a customer deposited to be exchanged for another asset, that opens the door to FTX-style malfeasance.
      - petesergeant 4y ago
        Yes, and I mean I think that's exactly the point: people aren't expecting their exchanges to be a bank that puts their assets at risk, they're expecting them to be a custodian only, and ding them with fees when they trade, or possibly to actively charge them fees for holding deposits. The only reason actual banks get with putting customer funds at risk is that deposits (up to a certain point) are insured by the government. If the exchange wants to offer interest-bearing deposits (eg: loan out your crypto), well then you'd expect to no longer be able to verify your deposits because you'd know they were loaned out, or that the exchange was trading with them, or whatever else. You'd also be forced to confront the fact that your assets are at risk at that point.

lottin 4y ago

Other creditors may or may not have preferential claims over depositors. The point is that you can't prove that the exchange is solvent (which was the entire point of this exercise) unless all assets and liabilities are considered.

michaelt 4y ago

> If someone has lent an exchange assets against its users' assets then it's not at all clear that they have the superior claim to those assets if the exchange goes bankrupt can't repay those liabilities. Right, but if an exchange took out a bank loan, the loan was recalled, and the exchange repaid it with customers' deposited cash and later goes bankrupt - possession is nine-tenths of the law. Especially if the exchange intentionally has a structure that can avoid international tax laws - who's to say it won't also avoid international bankruptcy laws?

petesergeant 4y ago
> and the exchange repaid it with customers' deposited cash Then in this scheme depositors would be able to see that straight away, and force bankruptcy and asset recovery on the exchange while those assets still existed. This would (presumably!) stop the exchange repaying debts with customer deposits, because those customers would know straight away and could seek legal recourse against the bank and the exchange.
- michaelt 4y ago
  > Then in this scheme depositors would be able to see that straight away, If you trust the fiat bank account statements, certainly.
  - petesergeant 4y ago
    This is explicitly addressed in the article: use stable coins for that. I'm very much a crypto-skeptic, but I do think this particular solution will provide some level of increased safety for coin-heads.
    - michaelt 4y ago
      If you trust the solvency of the likes of Tether and Luna, certainly. Seems to me the problem of solvency at the boundary between the worlds of fiat and cryptocurrency is always present, and shuffling it around doesn't make it disappear.