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Mt. Gox knowingly traded non-existent Bitcoins for two weeks, filing shows
- api 13y agoWelcome to the world of completely unregulated finance.
- malka 13y agoyeah. Regulated banks would never ever do something that irresponsible.
- mbillie1 13y agoRight, but the regulations do tend to grant the customers some sort of protection in the face of this sort of behavior, which is the whole argument in favor of financial regulation. That said, I did smile and chuckle at your response :)
- wpietri 13y agoMore importantly, they vastly reduce both the frequency and the scope for this sort of malfeasance. If MtGox had been expecting to face bank audits, they would have been forced to a) hire some people who actually understood finance, b) would have had much better internal accounting controls, and c) would have had a much harder time blowing up quite so thoroughly. When I hear people carping about "unnecessary regulation" I imagine some guy looking up at a major bridge and saying, "Ha! You don't need half that metal. I could have done it for way less." Maybe he's right. But more likely, he isn't thinking about high winds, earthquakes, and all of the other extreme circumstances that are the real drivers for how thick the supporting pillars have to be.
- deleted 13y ago[deleted]
- waterlesscloud 13y agoTo me, the evidence seems to indicate regulations make it possible to increase the scope.
- phil21 13y agoThis is accurate and largely true. However, I think everyone screaming "see! regulation works!" is completely forgetting that this site really did bring Bitcoin up from some obscure hacker/modder toy into what it became today. Perhaps some other site would have filled the void, but with regulation mtgox or anything like it could not have existed. So yes, regulation has it's places. However, regulation would have made these early "bootstrap" exchanges unworkable, and probably criminal. How does that help anyone either?
- cobrausn 13y agoIIRC, real banks trade imaginary dollars all the time by operating as a fractional reserve. The average person probably doesn't know nor care, but FDIC insurance prevents the bank run from causing people without a lot of assets from losing it all. Of course, I could be completely wrong. Any experts care to chime in? EDIT: From the explanation linked below it looks like banks keep a fraction on hand and the rest is due to the bank in the form of lines of credit. Which I suppose explains why the FDIC still needs to exist - it's not like the bank can just tell everyone they loaned money to pay it back right away if everyone withdraws their money at once. Also, it seems we are continuously conflating 'regulated currency' with 'regulated banks'.
- philwelch 13y agohttps://news.ycombinator.com/item?id=7399122 https://news.ycombinator.com/item?id=7399122
- bduerst 13y agoThe banks have most of their as assets as liabilities, and only keep a certain percentage liquid (cash). Also, the FDIC (and eventually the NCUA) was created out of a need to stabilize the dollar, post Great Depression. It's considered an organization that helps regulate liquidity of the currency, which is essential to being a currency. Bitcoins on the other hand do not have any such regulation, and exhibit recessionary behavior not unlike gold, which was decoupled from the U.S. dollar about the same time the FDIC was created. Because bitcoins lack liquidity regulation and have an impending production cap, they will almost never make it as a currency. That's not to say some other cryptocurrency won't solve the problem later.
- codelap 13y agoNo, regulated banks would do something worse, and then get the taxpayers to foot the difference.
- malka 13y agoWe agree, my comment was sarcastic ;)
- codelap 13y agoI know, I was trying to add to it by bringing up the sub prime mortgage debacle, but apparently that isn't a funny topic, or I lost something in the delivery.
- misiti3780 13y agoi liked the comment
- mpyne 13y agoIf you're referring to the subprime mortgage crises, the problem appeared to be the removal of regulation more than regulation itself. There was a reason there had used to be laws placing firm lines between banks and securities firms.
- bduerst 13y agoTo my knowledge, those lines haven't been put back, have they?
- mpyne 13y agoAFAIK you're right. Merely some stronger rules and a couple of new agencies, but nothing as strong as Glass-Steagall.
- Aaronontheweb 13y agoActually, regulation was part of the problem - specifically the Community Reinvestment Act http://en.wikipedia.org/wiki/Community_Reinvestment_Act http://en.wikipedia.org/wiki/Community_Reinvestment_Act This encouraged banking institutions to increase the number of sub-prime mortgages with the stated goal of increasing home ownership among lower income communities. Changes to this regulation made during the 1990s, specifically the 1992 change to require Fannie Mae and Freddie Mac (USG-sponsored entities) to devote a percentage of their annual budget to securitizing (read: buy the loans made by other banks and bundle them into securities) these sub-prime mortgages. This, among other factors, eliminated a lot of the risk for banks - there was always going to be someone to buy the sub-prime mortgages, thanks to this regulation. And as long as housing prices went up they could afford to keep issuing predictably bad loans, since the assets that would fall under forfeiture would have a greater value than the principle of the loan. When housing prices tanked in the mid-2000s, after a solid 10+ year housing bubble, all of this mania inevitably caught up with reality as home values went under water. So let's not pretend that regulation is some short of magic wizard armor that prevents human stupidity and greed (on all parties: the banks, the Government, the realtors, the home builders, and the consumers who took the loans). Regulation doesn't guarantee anything other than unintended consequences and should be looked at as a tool of absolute last resort when it comes to addressing market issues. Consider the FDIC, often held up as an example of successful financial regulation - it's enabled plenty of new forms of reckless behavior on the part of financial institutions (see the Savings & Loan crisis from the 1980s) and more or less guarantees government bailouts to the depositors. Laws are not magic patches to the fabric of reality and human behavior. They often don't even achieve their stated goals and aren't always so easy to correct.
- bcohen5055 13y agoI'm not a finance guy but I took a finance class once... I believe that all banks are required to hold a minimum reserve that is set by the Fed. Each day banks with assets greater than needed "sell" their reserves to banks with less via T-notes. This is all due to regulation, banks on their own wouldn't participate in this because it costs the banks with low reserves money but it keeps banks from disappearing overnight like MtGox. To be fair though Gox was an exchange and not a bank and that is a bit different Edit: Wow bad spelling..
- bduerst 13y agoRegulated banks would have FDIC insurance. How many accounts in Mt. Gox got their funds back?
- saalweachter 13y agoTo be fair, MtGox was an exchange, not a bank. My understanding is that if a standard exchange (eg, Ameritrade) went down in a similar fashion, you'd be equally screwed.
- svenkatesh 13y agoI have a trading account at Ameritrade (through ThinkorSwim). Cash in your account that is not invested in a security is still FDIC insured.
- saalweachter 13y agoHuh, that's better than I expected. So if they screwed something up, and somehow lost all of your stock and cash, your cash would be covered by the FDIC and your stock would be lost? (Assuming they don't have some sort of supplemental insurance to cover loss of stock.)
- svenkatesh 13y agoSEC has consumer protection rules for stocks. Even if they're managed by a brokerage, they're yours, even if the brokerage falls into insolvency
- svenkatesh 13y agoI'm replying to myself, but for the curious: FDIC covers bank accounts; SIPC covers securities accounts.
- bunderbunder 13y agoIn the US, at least, a bank would have a very hard time doing something this irresponsible. The FDIC would have noticed the problem and stepped in long before the situation could get this bad. I'll cut off the inevitable reference to 2007 at the pass by pointing out that none of the big banks that got bailed out ever made it anywhere close to digging themselves into a hole as deep as Mt. Gox did. For example, the biggest bank failure in US history, Washington Mutual, went down with about $300bn in assets against $200bn in deposits. Creditors ended up getting wiped out, but deposits were safe.
- dnautics 13y ago"Creditors ended up getting wiped out, but deposits were safe." Deposits were safe, but all of society got kicked by inflation and increased unemployment. Of course, that only hurts poor people, so, win for the depositors!
- saalweachter 13y agoInflation from 2007 to 2012 was about 10% (total, not per year). Inflation from 2002 to 2007 was about 15%.
- dnautics 13y agoIt's higher than that, because the CPI does a lot of adjustments to the offical figure. Moreover, your years are cherry-picked; there was a wave of deflation (that occurred in 2008-2009) as loans went though a cycle of defaults to clear out bad debt. Finally, the effects of top-down stimulus take a long time to propagate, especially since the current money multiplier for dollars is still quite low, and bank's lending activities have been relatively stagnant (roughly speaking, base currency went up, but debt expansion, which is what really counts, has not caught up yet because people are reluctant to go into debt - hence the popularity of debit cards vs. credit cards). Eventually as people start using debt to paper of catastrophes and emergencies, the overall indebtedness will increase, and the inflationary increase in the base currency will propagate into the debt burden, and we will have a sudden increase in inflation. I personally think it's unlikely to be hyperinflationary, but it will be very uncomfortable, especially for poor and middle class. But, perhaps i should not have used the past tense.
- kiba 13y agoThere is a difference between good regulation and bad regulation, though.
- mpyne 13y agoIs there anyone on the planet who disagrees with that though?
- babesh 13y agoIsn't the corollary of unregulated finance taking the law into your own hands when someone steals your stuff?
- svenkatesh 13y agoOkay internet tough guy. People say this all the time, but users still went to the SEC when Pirate@40's Ponzi collapsed, instead of meting out justice themselves. AFAIK no one who has had money stolen in any of the countless bitcoin scams like BMR, Sheep, etc. used vigilante justice, even though many of them threatened to. Talk is cheap.
- pessimizer 13y agoI don't think babesh was endorsing vigilantism, just making a parallel.
- xaqfox 13y agoVigilantism was presented as a false dichotomy, though, conveniently forgetting about that thing called the justice system.
- babesh 13y agoThat is correct. I am not endorsing vigilantism. I am saying that it has happened a lot in the absence of law. What does it mean for bitcoin to be unregulated? Do people want bitcoin regulated and how? Is someone stealing your bitcoins illegal? What if an exchange steals your bitcoins? What if you conduct a transaction in bitcoins and you never receive the bitcoins? What if someone conducts a ponzi scheme with bitcoins? Would front running and faking trading activity be legal? EDIT: Note I hold no bitcoins, never have, nor am I shorting them so I have no skin in the game.
- waterlesscloud 13y agoHow do you know it hasn't happened in the case of BMR, Sheep, etc? It's one of those things you can't really know in those cases.
- VMG 13y agoHooray! Where can I have a look at the list of competing unregulated US-based exchanges so I can pick the best one?
- johndavidback 13y agoI was just thinking the same though. Perhaps a bit more crass, however, my thought process was something like 'tough shit'. My assumption would be those investing heavily in BC were thinking 'high risk, high reward'. Well, it proved to be pretty risky.
- mattm 13y agoBitcoin =/= Mt. Gox
- sillysaurus3 13y agoOne theory is that Mt. Gox became fractional reserve some time in the past, either by losing bitcoins or by spending them. Then they were unable to replenish their supply, so it was a matter of time before a bank run. The reason I tend to believe this scenario is because it's completely consistent with their behavior. I watched them very closely, and there seemed to be no rhyme or reason for their behavior. That is, unless they were missing everyone's bitcoin for some reason. Then their behavior made perfect sense. In that scenario, Mt. Gox would have knowingly traded non-existent Bitcoins for far, far longer than two weeks. EDIT: I should mention that there's still no evidence whatsoever that malleability somehow led to the loss of >500,000 BTC.
- philwelch 13y agoThat's not how fractional reserve works; that's just fraud. With fractional reserve, a bank holds maybe 1/8 of account balances in cash and the other 7/8 in loans due to the bank. So if eight people each deposit $100,000, the bank holds $100,000 in cash and can make three mortgages for $200,000 each plus ten $10,000 car loans. Either way they hold sufficient assets to cover their deposits, just not all of those assets are fluid. (The bank earns enough interest on the mortgages and car loans that they can pay interest to their depositors and take some profit off the top.)
- wpietri 13y agoExactly. And for those unfamiliar I'll add that banks face a classic problem: their loans have long terms, but their deposits can be withdrawn at any time. That is normally not a problem, but there are issues and edge cases that we handle with things like bank capital standards, deposit insurance, and swift government takeover and resolution in the case of bank failures. For those interested in this, I strongly recommend Sheila Bair's "Bull by the Horns". She was the head of the FDIC up to and during the 2008 financial crisis, and this is her memoir. She's a fiscally conservative Republican, but one who strongly believes in the value of regulation as a way to create a sound economy so that all citizens can thrive. The book was fun to read, and it gave me a much better understanding of the forces at play and why good regulation of banks is immensely valuable to us all.
- llamataboot 13y agoI look forward to joining the class action suits and getting some fraction of my deposits back in 3 or 4 years.
- Aardwolf 13y agoProbably 6 to 8 years, and the price they spend to mail you large amounts of stylish paper may be bigger than the money regained.
- SilasX 13y ago...and Bitcoiners once again discover the need for regulation. If my bank didn't have a dollar on hand for every dollar it reported as being in customer accounts, it would be shut down by nightfall and every customer made whole. Edit: Satire, guys. Sadly, it sometimes becomes indistinguishable from actual misconceptions. Don't believe me? Similar post from my history: https://news.ycombinator.com/item?id=7227291 https://news.ycombinator.com/item?id=7227291
- cheeze 13y ago> If my bank didn't have a dollar on hand for every dollar it reported as being in customer accounts, it would be shut down by nightfall and every customer made whole. Your bank almost certainly doesn't. Check out fractional reserve banking.
- Aaronontheweb 13y agoYour bank doesn't have a dollar on-hand for every dollar reported in customer accounts. It does fractional reserve banking - some proportion of the bank's assets are indeed held in liquid currency, but the rest are held in assets (read: interest-bearing loans) that are worth of the sum or excess of your deposits. If every depositor tried to withdraw from the bank all at once, the bank would be in trouble and it would likely have to rely on deposit insurance from the government to cover it.
- derekp7 13y agoI doubt they would have to resort to deposit insurance. Those loans have value -- they would either borrow from another bank (one of the central banks, or the Fed) against the value of those loans, or sell the loans. Now this is another interesting thing -- the market value of the bank selling a loan fluctuates inversely with interest. If they have a loan that a customer is paying 8% on, then that loan has a market value much higher if current rates are 3%, and much lower if current rates are 12% (assuming the risk of the loan doesn't change -- that also affects its market value).
- Aaronontheweb 13y ago
- thebokehwokeh2 13y agoIt's almost as if the purely unregulated bitcoin market is finding out the pains of being purely unregulated...
- ossreality 13y agoRight, I forgot we needed regulation, since theft and fraud aren't already illegal.
- rainmaking 13y agoBetter to let bad banks fail than absorb their losses with taxes.
- aaronapple 13y agoCoffin now nailed shut. That's pretty damning.
- thinkcomp 13y agoThe Mt. Gox bankruptcy docket from Texas is here: http://www.plainsite.org/dockets/index.html?id=6395790 http://www.plainsite.org/dockets/index.html?id=6395790
- bayesianhorse 13y agoThe main problem with the bitcoin economy is that trust is fatal. It demonstrates shockingly how much trust in the regular economy is actually dependent on government regulation...
- dnautics 13y agoand this loss of trust is reflected in the drop in bitcoin price from $400/btc to $600/btc since the incident.
- Guvante 13y agoCash requires complete trust and people still use it.
- svenkatesh 13y agoI guess it wouldn't follow your narrative to point out that a few months ago the price was around $1200/BTC.
- dnautics 13y agoThat preceded the public face of the Mt. Gox situation, which is what the original comment refers to. There are always small speculative bubbles here and there, it happened exactly like that 6, and 12 months prior. It's interesting how bitcoin prices are highly cyclical. I think there's going to be ONE MORE expansion, in approximately 3 months, that takes the price of btc to about 5k, although it may pop as high as 10k on its way. If for no other reason than there are often self-fulfilling prophecies in finance.
- bayesianhorse 13y agoLost trust does not mean the price has to fall. As I said, there is close to zero trust in the bitcoin economy, so a loss of the little trust isn't a big surprise. Most savy investors/bitcoin users won't have lost much money in this affair either, because they didn't trust MtGox more than some common criminal...
- peter303 13y agoIt could be a lot longer than two weks. They were having 'technical probelms' and down much of the time for several months before BK.
- deleted 13y ago[deleted]