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It's not necessarily about covering all liabilities of an enterprise nor all its assets. It's about building a proof that you hold your customer assets and you

by pa7x1 4y ago

It's not necessarily about covering all liabilities of an enterprise nor all its assets. It's about building a proof that you hold your customer assets and you are not running a fractional reserve. You may still run an unprofitable business and perhaps at some point you go bankrupt. But at least all the customer assets are there and segregated from the business assets and you cannot use them as the piggy bank for your business.

beefield 4y ago
So, lets imagine you have been running this continuously from the beginning and there is absolutely nothing fishy on the chain of the events of the ledger that makes this proof. All customer deposits (1B worth of coins) are backed by respective assets (1B) in the portfolio. Unfortunately the business has been run badly, and in addition to this portfolio, the exchange has assets of one worthless laptop, but there are some tax liabilities worth 2B and an just found loan payable to Italian Mafia worth also 2B. Tax authorities file for bankruptcy. 1. How does the exchange ensure money is paid to the customers instead of Mafia or tax authorities? 2. If/when it can't, how these liabilities are included in the proof of liabilities? (note: this is a real and difficult problem. That's why there are laws, regulations and deposit insurances around customer funds in finance, which, yes, fail occasionally. I just do not see how that can be solved by blockchain.)
- pa7x1 4y ago
  You make good points, this by itself is not sufficient. That doesn't mean it's not useful, though. For Centralized Exchange you need additional regulation to ensure that level of customer protection. And yet, regulation itself is not enough, as you can still defraud in a regulated entity. You need that the weight of criminal punishment is hard enough to disincentivize it. And you possibly need insurance (FDIC and equivalents) too. Hence why proponents argue to do things on-chain, where we have built-in guarantees and this issue disappears entirely.
rsj_hn 4y ago
> But at least all the customer assets are there and segregated from the business assets and you cannot use them as the piggy bank for your business. Why would they be segregated? The priority of creditors in a bankruptcy proceeding is controlled by courts that will order assets handed over to senior creditors whether they are holding "on chain" liabilities or not. It is the disclosure of such a contract that is the problem of understanding all liabilities, both on and off chain, as bankruptcy court doesn't care about the distinction.
- pa7x1 4y ago
  https://www.interactivebrokers.com/en/index.php?f=2334&p=fin&conf=am https://www.interactivebrokers.com/en/index.php?f=2334&p=fin... > Client money is segregated in special bank or custody accounts, which are designated for the exclusive benefit of clients of IBKR. This protection (the SEC term is "reserve" and the CFTC term is "segregation") is a core principle of securities and commodities brokerage. By properly segregating the client's assets, if no money or stock is borrowed and no futures positions are held by the client, then the client's assets are available to be returned to the client in the event of a default by or bankruptcy of the broker. Because segregation is a necessary prior to enshrine further protection on customer assets.
  - hef19898 4y ago
    That seems to be a case in which regulation is actually protecting clients of brokerages. Of course, thise regulations are bad if you are a, say, crypto exchange, and want to, say, engage in "investment" activities using those client deposits (regardless if those a fiat currency, crypto or something else).
    - pa7x1 4y ago
      Absolutely. Centralized crypto exchanges should have the same regulation and oversight as brokerages/banks/other financial institutions. Because they are that type of institution, just having crypto under custody doesn't make it magically solve any issues.
  - 4y ago

by pa7x1 4y ago

beefield 4y ago

So, lets imagine you have been running this continuously from the beginning and there is absolutely nothing fishy on the chain of the events of the ledger that makes this proof. All customer deposits (1B worth of coins) are backed by respective assets (1B) in the portfolio. Unfortunately the business has been run badly, and in addition to this portfolio, the exchange has assets of one worthless laptop, but there are some tax liabilities worth 2B and an just found loan payable to Italian Mafia worth also 2B. Tax authorities file for bankruptcy. 1. How does the exchange ensure money is paid to the customers instead of Mafia or tax authorities? 2. If/when it can't, how these liabilities are included in the proof of liabilities? (note: this is a real and difficult problem. That's why there are laws, regulations and deposit insurances around customer funds in finance, which, yes, fail occasionally. I just do not see how that can be solved by blockchain.)

pa7x1 4y ago
You make good points, this by itself is not sufficient. That doesn't mean it's not useful, though. For Centralized Exchange you need additional regulation to ensure that level of customer protection. And yet, regulation itself is not enough, as you can still defraud in a regulated entity. You need that the weight of criminal punishment is hard enough to disincentivize it. And you possibly need insurance (FDIC and equivalents) too. Hence why proponents argue to do things on-chain, where we have built-in guarantees and this issue disappears entirely.

rsj_hn 4y ago

> But at least all the customer assets are there and segregated from the business assets and you cannot use them as the piggy bank for your business. Why would they be segregated? The priority of creditors in a bankruptcy proceeding is controlled by courts that will order assets handed over to senior creditors whether they are holding "on chain" liabilities or not. It is the disclosure of such a contract that is the problem of understanding all liabilities, both on and off chain, as bankruptcy court doesn't care about the distinction.

pa7x1 4y ago
https://www.interactivebrokers.com/en/index.php?f=2334&p=fin&conf=am https://www.interactivebrokers.com/en/index.php?f=2334&p=fin... > Client money is segregated in special bank or custody accounts, which are designated for the exclusive benefit of clients of IBKR. This protection (the SEC term is "reserve" and the CFTC term is "segregation") is a core principle of securities and commodities brokerage. By properly segregating the client's assets, if no money or stock is borrowed and no futures positions are held by the client, then the client's assets are available to be returned to the client in the event of a default by or bankruptcy of the broker. Because segregation is a necessary prior to enshrine further protection on customer assets.
- hef19898 4y ago
  That seems to be a case in which regulation is actually protecting clients of brokerages. Of course, thise regulations are bad if you are a, say, crypto exchange, and want to, say, engage in "investment" activities using those client deposits (regardless if those a fiat currency, crypto or something else).
  - pa7x1 4y ago
    Absolutely. Centralized crypto exchanges should have the same regulation and oversight as brokerages/banks/other financial institutions. Because they are that type of institution, just having crypto under custody doesn't make it magically solve any issues.
- 4y ago