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> And given that we've seen exchange after exchange fail to perform basic tasks like "don't commingle customer funds," I have a hard time feeling any sympathy f

> And given that we've seen exchange after exchange fail to perform basic tasks like "don't commingle customer funds," I have a hard time feeling any sympathy for cryptocurrency companies here. There is nothing per se nefarious about co-mingling customer funds, provided that you are otherwise compliant with the law. Banks, for instance, don't just co-mingle customer funds, they invest those funds on their own behalf and reap the profits for themselves. Sometimes a bank will share a portion of its profit with its customers, in the form of intest; more often, the bank pays little or no interest, and actually charges the customer fees. A bank will risk its customers' money, and its customers will pay for that privilege. Kraken has been operating under the money transmitter licensing scheme for a decade, and like banks, money transmitters don't have any legal requirement to segregate customer funds—although they do have the responsibility to maintain sufficient cash balances or liquid investments to cover all of what they owe to customers. Whether Kraken is breaking the law is something that will likely be decided by a court. The SEC asserts that Kraken has broken the law, but it is not up to the SEC to decide—it is up to the courts. It is not illegal to operate a spot commodities exchange without approval from the SEC, unless those commodities are also the kinds of securities the trading of which require SEC approval. It is also not illegal to operate as an unlicensed broker-dealer of non-security commodities, or as an unlicensed custodian of non-security commodities. The SEC only has jurisdiction over securities. It is not in the slightest bit clear yet that the crypto tokens for sale on Kraken are in fact securities of any kind. The SEC asserts that they are, but at this point it is just an assertion. The SEC will have to win in court.

discodave 3y ago
> For what its worth, banks don't just co-mingle customer funds, they invest those funds on their own behalf and reap the profits for themselves. And that is why banks are regulated, must register, follow certain rules etc. > Kraken has been operating under the money transmitter licensing scheme for a decade Yeah, but that doesn't give them a license to operate a securities exchange, or a bank. How many other money transmitters (that are not registered securities exchanges or banks) have 'tokens for sale' like Kraken?
- przeor 3y ago
  [flagged]
- legutierr 3y ago
  > How many other money transmitters (that are not registered securities exchanges or banks) have 'tokens for sale' like Kraken? Quite a few. In fact, all of the major centralized exchanges operating in the US are authorized to do so because they are licensed money transmitters (with the exception of some that might be operating under the NYS "Trust" licensing scheme), and none of them are broker-dealers regulated by the SEC, because until very recently the SEC has taken the position that broker-dealers are not allowed to sell crypto assets. For years the money transmitter licensing scheme was understood to be the correct (and sufficient) licensing scheme under which a crypto exchange could legally operate in the United States. It is only since the beginning of the Biden administration that the SEC has taken the position that crypto exchanges have an obligation to register with the SEC. The Ripple lawsuit was filed at the tail end of the Trump administration (after the election), but it was not targeted at exchanges. It's also worth noting that the judge in the Ripple case found that exchange-traded XRP tokens are not securities. In other words, the SEC's assertion of authority over exchange-traded Ripple tokens was explicitly denied. There is good reason to believe that SEC will be unsuccessful in asserting even broader authority over all tokens that are available on Kraken.
  - westurner 3y ago
    In order to justify such a specific claim against Kraken to be heard, isn't it necessary to first qualify that such assets are themselves securities? Am I crazy to call this vexatious harassment? If P then Q: If {x,y,z} are securities, [ then {Exchanges a, B, and C} have provided securities exchange services of assets {x,y,z} without the requisite license are thus owe a civil fine. ] But how is a suit against Exchange A the appropriate forum to hear whether assets {x, y, or z} are securities? Given that - presumably - assets {x,y,z} are not yet ruled to be securities, there was not sufficient cause or standing to make a claim of bad faith or intent to provide exchange services for unregistered securities. Exchange A operated in good faith, pursued the requisite state and federal procedures for assessing whether or not such assets were securities, and specifically does not intend to sell securities. Should there be an is_this_a_security() function of a US government regulatory agency, defendants would be required to request such review before listing said specific types of assets.
b112 3y ago
Kraken has been operating under the money transmitter licensing scheme for a decade, and like banks, money transmitters don't have any legal requirement to segregate customer funds—although they do have the responsibility to maintain sufficient cash balances or liquid investments to cover all of what they owe to customers. I think you meant to say here and unlike banks, because banks absolutely do not need to have sufficient funds to cover all customer's savings. Unless.. are things different in the US? It's been a decade since I've read the Bank Act (Canadian), and when I did, only 5% of customer's account holdings were required to be held in tangible assets (gold, cash, etc), and inspected yearly by the Minister of Finance. And I believe even that requirement has been dropped.
- WinstonSmith84 3y ago
  Yes, banks typically do not have sufficient funds to cover all customer's savings, and when customers realize their bank played with their money but lost, they freak out and do a so called "bank run". At least banks are regulated, so that's fine, right. For those who have a short memory, a bank run last occurred earlier this year with the Silicon Valley Bank... https://www.investopedia.com/svb-financial-group-shares-crater-on-stock-sale-announcement-7253409 https://www.investopedia.com/svb-financial-group-shares-crat... By the way, if you put your cash money in a bank, your money is insured up to 250,000USD in the US and up to 100,000EUR in the EU. Anything above is your own risk. But it's perfectly fine because at least, it's regulated.
- lottin 3y ago
  Canada follows Basel rules for banking, which are much more complicated than that.
  - b112 3y ago
    Basel does not hold sway over the Dominion of Canada! We follow Her Majesty's Bank Act. https://laws-lois.justice.gc.ca/eng/acts/b-1.01/ https://laws-lois.justice.gc.ca/eng/acts/b-1.01/
    - 3y ago
vasco 3y ago
> Banks, for instance, don't just co-mingle customer funds, they invest those funds on their own behalf and reap the profits for themselves. Sometimes a bank will share a portion of its profit with its customers, in the form of intest; more often, the bank pays little or no interest, and actually charges the customer fees. A bank will risk its customers' money, and its customers will pay for that privilege. Banking has not worked like this in quite a few years.
- KRAKRISMOTT 3y ago
  Is Glass Steagall still a thing?
  - JohnFen 3y ago
    Sadly, no. It was repealed in 1999.
- 5ersi 3y ago
  Fractional reserve banking is exactly how this works, albeit banks do not "invest" the customers' money, instead they lend it.
  - legutierr 3y ago
    What is a loan but an investment? What is government debt? What are mortgage backed securities? The investments that banks can make are restricted, but it is not inaccurate to call them investments.
nivertech 3y ago
> It is not illegal to operate a spot commodities exchange without approval from the SEC In the case of spot markets CFTC can only intervene if there is a fraud or manipulation. There is also “actual delivery rule”, I.e. if crypto “exchange” didn’t settled spot trade on underlying Blockchain or a ledger in 28 days - they effectively created a derivative, and fall under the CFTC mandate.

discodave 3y ago

> For what its worth, banks don't just co-mingle customer funds, they invest those funds on their own behalf and reap the profits for themselves. And that is why banks are regulated, must register, follow certain rules etc. > Kraken has been operating under the money transmitter licensing scheme for a decade Yeah, but that doesn't give them a license to operate a securities exchange, or a bank. How many other money transmitters (that are not registered securities exchanges or banks) have 'tokens for sale' like Kraken?

przeor 3y ago
[flagged]
legutierr 3y ago
> How many other money transmitters (that are not registered securities exchanges or banks) have 'tokens for sale' like Kraken? Quite a few. In fact, all of the major centralized exchanges operating in the US are authorized to do so because they are licensed money transmitters (with the exception of some that might be operating under the NYS "Trust" licensing scheme), and none of them are broker-dealers regulated by the SEC, because until very recently the SEC has taken the position that broker-dealers are not allowed to sell crypto assets. For years the money transmitter licensing scheme was understood to be the correct (and sufficient) licensing scheme under which a crypto exchange could legally operate in the United States. It is only since the beginning of the Biden administration that the SEC has taken the position that crypto exchanges have an obligation to register with the SEC. The Ripple lawsuit was filed at the tail end of the Trump administration (after the election), but it was not targeted at exchanges. It's also worth noting that the judge in the Ripple case found that exchange-traded XRP tokens are not securities. In other words, the SEC's assertion of authority over exchange-traded Ripple tokens was explicitly denied. There is good reason to believe that SEC will be unsuccessful in asserting even broader authority over all tokens that are available on Kraken.
- westurner 3y ago
  In order to justify such a specific claim against Kraken to be heard, isn't it necessary to first qualify that such assets are themselves securities? Am I crazy to call this vexatious harassment? If P then Q: If {x,y,z} are securities, [ then {Exchanges a, B, and C} have provided securities exchange services of assets {x,y,z} without the requisite license are thus owe a civil fine. ] But how is a suit against Exchange A the appropriate forum to hear whether assets {x, y, or z} are securities? Given that - presumably - assets {x,y,z} are not yet ruled to be securities, there was not sufficient cause or standing to make a claim of bad faith or intent to provide exchange services for unregistered securities. Exchange A operated in good faith, pursued the requisite state and federal procedures for assessing whether or not such assets were securities, and specifically does not intend to sell securities. Should there be an is_this_a_security() function of a US government regulatory agency, defendants would be required to request such review before listing said specific types of assets.

b112 3y ago

Kraken has been operating under the money transmitter licensing scheme for a decade, and like banks, money transmitters don't have any legal requirement to segregate customer funds—although they do have the responsibility to maintain sufficient cash balances or liquid investments to cover all of what they owe to customers. I think you meant to say here and unlike banks, because banks absolutely do not need to have sufficient funds to cover all customer's savings. Unless.. are things different in the US? It's been a decade since I've read the Bank Act (Canadian), and when I did, only 5% of customer's account holdings were required to be held in tangible assets (gold, cash, etc), and inspected yearly by the Minister of Finance. And I believe even that requirement has been dropped.

WinstonSmith84 3y ago
Yes, banks typically do not have sufficient funds to cover all customer's savings, and when customers realize their bank played with their money but lost, they freak out and do a so called "bank run". At least banks are regulated, so that's fine, right. For those who have a short memory, a bank run last occurred earlier this year with the Silicon Valley Bank... https://www.investopedia.com/svb-financial-group-shares-crater-on-stock-sale-announcement-7253409 https://www.investopedia.com/svb-financial-group-shares-crat... By the way, if you put your cash money in a bank, your money is insured up to 250,000USD in the US and up to 100,000EUR in the EU. Anything above is your own risk. But it's perfectly fine because at least, it's regulated.
lottin 3y ago
Canada follows Basel rules for banking, which are much more complicated than that.
- b112 3y ago
  Basel does not hold sway over the Dominion of Canada! We follow Her Majesty's Bank Act. https://laws-lois.justice.gc.ca/eng/acts/b-1.01/ https://laws-lois.justice.gc.ca/eng/acts/b-1.01/
  - 3y ago

vasco 3y ago

> Banks, for instance, don't just co-mingle customer funds, they invest those funds on their own behalf and reap the profits for themselves. Sometimes a bank will share a portion of its profit with its customers, in the form of intest; more often, the bank pays little or no interest, and actually charges the customer fees. A bank will risk its customers' money, and its customers will pay for that privilege. Banking has not worked like this in quite a few years.

KRAKRISMOTT 3y ago
Is Glass Steagall still a thing?
- JohnFen 3y ago
  Sadly, no. It was repealed in 1999.
5ersi 3y ago
Fractional reserve banking is exactly how this works, albeit banks do not "invest" the customers' money, instead they lend it.
- legutierr 3y ago
  What is a loan but an investment? What is government debt? What are mortgage backed securities? The investments that banks can make are restricted, but it is not inaccurate to call them investments.

nivertech 3y ago

> It is not illegal to operate a spot commodities exchange without approval from the SEC In the case of spot markets CFTC can only intervene if there is a fraud or manipulation. There is also “actual delivery rule”, I.e. if crypto “exchange” didn’t settled spot trade on underlying Blockchain or a ledger in 28 days - they effectively created a derivative, and fall under the CFTC mandate.