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.
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.
The exchanges work very hard to not distinguish between those legally, because if they admit it, they're admitting bank-like aspects and regulations kick in, which they're often trying to avoid.
MtGox was pretty much stripped bare long before it was finally closed down. In fact it was effectively insolvent before it was even bought out by the last owner and running in pure Ponzi mode while the guy tried to make creative "investments" to get the exchange solvent again. Even with the incredible bull market on Bitcoin he couldn't make it work.
So nobody should expect to get much of anything out of the remains of MtGox.
Despite these issues, and despite and the hack, creditors are still set to make at least a 4x return (in USD) based on appreciation of the bitcoin that wasn't stolen.
To do this legally, one can have a separate legal entity to hold on to third party assets. In the Netherlands this can be done using a foundation (stichting derdengelden).
Any transactions of third party assets go through this entity and don’t touch the company at all. And this entity doesn’t take on any risk, whatsoever.
Fees etc, of course, happen separately and are paid to the company.
So in closing: this has nothing to do with fairness and everything with the exchanges (whether purposefully or through negligence) not working this way.
Well, let's not forget that BTC has gone up from $300 to $15,000 in the meantime, meaning those fractions are still worth 50x what they were back in 2014. Although who knows what the value of BTC will be once the funds are released, which is itself an event that's likely to crash the market through oversupply.
> Well, let's not forget that BTC has gone up from $300 to $15,000
Depending on how one measures. Prior to Gox's implosion, BTC was $1,000, which is the price people were actually depositing at. Meanwhile, the fact that we're denominating in USD means that we have to account for inflation if we want to compare historical data, which means the current price is more like $13,000 in 2014. There's quite the difference between 13x and 50x.
I prefer to use the trustee's watermark which reflects the value of Bitcoin after the price manipulation of fake Bitcoin being sold by MtGox had been taken out of the market at $460. But your point is made even stronger if you consider that same money could have been safely invested with a steady interest of 2-4%. And that's if you disregard that the sort of risky investments that that sort of play money could have gone to, nearly all of those investments have been extremely lucrative the past 8 years.
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.
> And that's largely because of the lack of regulation that so many cryptocurrency fans tout.
In next sentence they will tell you, that you shouldn't have kept the private keys at the exchange. Use your own wallet and keep your copy of the Blockchain.
Hardware wallets, which are recommended for holding significant amounts of cryptocurrency, are designed so that even if your normal computing devices get hacked or trojaned, the software running on them cannot steal the coins.
This is because the private keys are securely stored in the hardware wallet, which never reveals them to the outside world. The user has to physically confirm a transfer on the hardware wallet itself before funds can be spent (which is why they usually have either a small touchscreen or a non-touch screen plus physical buttons).
> And once the user has confirmed the transfer, the software could send the coins to a different address, right?
No, the destination address and amount to send need to be confirmed on the hardware wallet.
The hardware wallet cryptographically signs the entire transaction with the private key, so the software in the user's computer or mobile phone cannot change the transaction without the signature becoming invalid.
The software in the user's computer can't, but the software in the hardware wallet can. It's probably more secure than running the software on a conventional computer, this I can see.
The biggest problem probably isn't modifying the transaction, which is pretty easy to catch, but using predictable keys in the hardware or somehow leaking bits of the key in the transaction.
This way they could watch all the value stored in their wallets and steal whatever they wanted by making it look like you did it yourself when one had a large enough balance to be useful.
Most societies generally recognize that a person's ownership extends past the objects in his immediate use/possession. You don't give up ownership of your car, just because you parked it on the street unattended, just like I don't become the owner of it if I steal your keys.
The point is that the holder(s) of the cryptographic keys is the only one(s) that can effectively manage (and transfer) the coins on the blockchain.
When you transfer the coins to a crypto exchange, the exchange becomes the holder of the keys and therefore you run into the risk of the crypto exchange mismanaging the coins, getting hacked, losing them, etc.
This can't happen if you securely hold the keys yourself (with a proper hardware wallet, seed backups and a reasonable amount of OPSEC).
But even in the case the crypto exchange is holding your coins (or they get stolen), legally, the coins are still yours, of course (well, unless the crypto exchange goes through bankruptcy proceedings, I suppose).
But you run the risk of never getting them back even if they are legally yours.
Which is why it's better to hold them yourself if you can.
> Thanks for explaining something to me that I did not require explanation of
It didn't seem like you understood the value of the expression "not your keys, not your coins", because you argued for the legal position, which implied that the legal position was more significant and that holding the keys didn't have as much value (even though it's the only one that actually ensures that you don't lose the coins).
Another interpretation is that you understood "not your keys, not your coins" literally, because you said (paraphrasing) "no, in fact they are your coins, otherwise stealing them wouldn't be illegal". Which implies that you did not understand the meaning and utility of the expression.
So maybe I misinterpreted you, or maybe you didn't express yourself as well as you think you did.
I didn't argue for the legal position. I pointed out that "not your keys, not your wallet" is a trite statement that doesn't account for the reality we live in, in which property law is a thing. But very generous of you to explain it again and to do so so welcomely!!
> I pointed out that "not your keys, not your wallet" is a trite statement that doesn't account for the reality we live in, in which property law is a thing.
So again, you are still interpreting the expression literally?
It doesn't mean that they are not literally your coins if you don't have the keys! Do you understand this?
It means that you can lose the coins forever if you don't have them securely stored yourself.
It's not a literal statement, it's a concise expression that gets used repeatedly to get a very important point across unsuspecting (unexperienced, novice) crypto holders. So it's actually good that it's a trite statement, because it helps to decrease the probability of someone losing money, potentially ruining their lives unexpectedly.
So that the reality is not literally what the expression says is besides the point!
In fact, I've never heard of someone (besides you) that has interpreted this expression literally and actually thought that the expression means that you completely lose the ownership of the coins as soon as you transfer them into a crypto exchange.
But if you want, I'm sure you can propose a better phrasing that has the same viral effect while also being literally true.
> But very generous of you to explain it again and to do so so welcomely!!
>So again, you are still interpreting the expression literally?
People use it literally all the time. I don't buy that people mean it figuratively. Maybe you do. But this statement is banded out so often and with no regard to the situation except where the coins are gone, it reflects little insight into the situation besides what I have pointed out.
I am happy for you that you find such meaning in the statement. That you read that statement and it means, to you, so much more than what it says.
> It's not a literal statement, it's a concise expression that gets used repeatedly to get a very important point across unsuspecting (unexperienced, novice) crypto holders.
A group of people who just so happen to think that the crypto is somehow exempt from the law, which they reflect with statements like "not your keys, not your crypto" which is said with absolutely no reflection on how property law works. It's not as if this is even a new thing, intangible property has existed long before crypto. Yet in the crypto world, the statement which you find so meaningful goes so far!
> People use it literally all the time. I don't buy that people mean it figuratively. Maybe you do. But this statement is banded out so often and with no regard to the situation except where the coins are gone, it reflects little insight into the situation besides what I have pointed out.
Well, see, when you use more words to express yourself, it actually makes it possible to understand what your point was.
I was not aware that your perception existed. So thank you (genuinely) for explaining it.
I think that this could be better explained to new users, especially by crypto exchanges which are usually the onboarding vector for them.
I think one good way to solve this, is actually for crypto exchanges to require that a relatively strict test about some crypto, investment and trading basics should be passed when you first register for an account at a crypto exchange, before these new users would be able to start operating with crypto currencies or any such trading products.
I wish crypto exchanges did this out of their own initiative rather than the government requiring such regulations, but since this is clearly not happening so far, I'm not against some government regulation for exchanges in this direction (although I'm against requirements about minimum investment amounts, as that promotes inequality and unfairness).
> A group of people who just so happen to think that the crypto is somehow exempt from the law
I'm not aware that this is the case, but I'm willing to concede that there might still be some unwarranted beliefs in this general direction, given all the carelessness that's going on from companies and projects in this sector. I hope that these people are proven wrong and either responsibility improves substantially, or that at least justice gets served when bad things happen.
> which they reflect with statements like "not your keys, not your crypto" which is said with absolutely no reflection on how property law works. It's not as if this is even a new thing, intangible property has existed long before crypto. Yet in the crypto world, the statement which you find so meaningful goes so far!
As you're already aware, I never interpreted this statement literally and never thought other people did, so I don't know... maybe you're right that the expression is not clear enough. I think my suggestion above about the test requirement for onboarding new users would improve the status quo with regards to this issue that you are pointing out.
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.
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.
>The only reason it exists is because smart contracts didn't exist when they first started.
Calm down. That is not true. Smart contract based exchanges do not let people exchange real money into crypto. There will always need to be offchain exchanges for trading USD for crypto. Additionally, trading off chain is much cheaper than on chain.
Centralized exchanges will always exist because people want on / off ramps, people want low fees, and because people are willing to trust others.
it's superior in terms of not having the trusted third party that facilitates your trade make off with your money, as is happening in these self-described exchanges right now. Keeping a trusted third-party in the loop is always cheaper than automating that function using a blockchain, unless the risk is factored in.
There are a few classes of users. If you're the type who always uses the "I forgot my password" workflow on sites then you probably are the type who will lose your keys.
But if you're the type of trader who makes a trade and then forgets about it for a while you're at risk of losing the funds left on the exchange - like with Paypal.
Lots of things are tradeoffs. In this case, the tradeoff is that trades are more expensive on chain, but you don't have to worry that the exchange will blow up and lose all your money, like happened with a huge exchange just last week.
As a bonus, Ethereum's scaling roadmap is coming along pretty well, with a pretty clear path to 100K tx/sec within the next few years. That should make transactions quite a bit cheaper.
The flaw of BTC: everyone wants to cash out in dollars, euros or Swiss francs. Real money
BTC is barely used as an actual currency to buy things with. I could be wrong but I thought the idea was that you'd be using BTC in daily life so that you wouldn't need to go "off the ramp".
Well yes but at 2-3tx/sec, that supports a large flea market or a mid-sized costco, not a global economy. Even onboarding everyone onto Lightning would take 75 years, the entire rest of the block reward, about a trillion dollars worth of electricity and many gigatons of e-waste.
There are people, even today, who have no better choice but to use BTC for transactions or for storing value.
The point is that if you want to (or need to), you can do it. So people now have that option, which they didn't have before BTC was created.
As an example, it might be the best option for doing transactions and storing value for large amounts of people in some area, in times of crisis (e.g. financial crisis, war, oppressive governments, etc). You might not be able to use a fiat currency in such cases without significant downsides, such as extreme inflation, confiscation, blocking of bank withdrawals or transactions, going to prison, etc. Bitcoin is available and can be used whenever such events happen.
In fact, if you ever run into a situation like this, you might even desperately need BTC and will be very glad it exists, so don't discount its value so easily.
That said, sure, it would be better if there was more adoption. I think there should be and hope there will be.
But it's not exactly a flaw, in the same way as you not being able to use the currency of some obscure country in your daily life is not a flaw with that currency.
> storing value for large amounts of people in some area, in times of crisis (e.g. financial crisis, war, oppressive governments, etc).
> Bitcoin is available and can be used whenever such events happen.
Except the fact that bitcoin needs continuous internet access and electricity. The first can be blocked by oppressive government. The second can be hard to come by in times of war.
Bitcoin is a first-world solution to imaginary problems.
> Except the fact that bitcoin needs continuous internet access and electricity. > The first can be blocked by oppressive government.
First of all, bitcoin users don't need continuous internet access. At best, they need intermittent internet access.
It's also possible to use Bitcoin without internet access. Nowadays you can send and receive Bitcoin transactions over satellite, SMS and I think even over radio, no Internet required.
There are also ways to get around Internet blocking.
> The second can be hard to come by in times of war.
There are ways to produce your own electricity. And using Bitcoin (as opposed to mining it) doesn't require much electricity. You just need to be able to charge your mobile phone with a small portable solar panel.
There are also many, many, many examples of such crisis where people have access to both the Internet and electricity.
> Bitcoin is a first-world solution to imaginary problems.
You really are completely oblivious to the many crisis around the world that have happened in recent decades, aren't you?
> It's also possible to use Bitcoin without internet access. Nowadays you can send and receive Bitcoin transactions over satellite, SMS and I think even over radio, no Internet required.
All of these mean: continuous easily available connection at any point. And to send anything through SMS or radio? Again. First. World.
"To send Bitcoin (or any cryptocurrency) over ham radio you need to download the apps TxTenna and Samourai wallet, sync your phone with a goTenna mesh device, and then you’ll be set up to send and receive Bitcoin via a mesh network "
Ah yes. Apps. And readily available proprietary mesh devices.
> There are ways to produce your own electricity.
And all that is surely available and instantly accessible to people living with oppressive governments and in times of war. Instead of, you know, actual cash, barter, and storing valuables in actual valuables.
> You really are completely oblivious to the many crisis around the world that have happened in recent decades, aren't you?
It's precisely because I know of these crises that I find "generate your own electricity to just charge a mobile phone to just send bitcoin transactions over satellite or radio in times of war/oppressive government" laughable.
> You might just eat these words one day.
See, I lived through at least one of these crises in the 90s [1], after the fall of the Soviet Union. The idea that your bitcoin fantasy would survive a single brownout (or a blackout) when you need things like potable water or food now and not when "intermittent internet access is available" shows how much you understand about "the many crises around the world".
And that's without war or an oppressive government.
What good is a book on gardening when you're hungry right now? What good is a herd of cows when you need to put out a fire? You sound like an anti-second amendment person asking if we intend to use our guns to shoot down an f35 fighter.
No, bitcoin and crypto aren't going to be the savior for someone who wakes up in Mosul in the middle of the fighting.
But they might be a way out of the country with wealth intact, the difference between being a penniless refuge and a valued citizen.
> Again. First. World.
You're using first/second/third world incorrectly labels, and you're wrong. Even in the poorest places in the world, and the most war torn, we see people with their mobile devices and tiny solar panels, or charging from a merchant with a larger panel.
> continuous easily available connection at any point
No, you really don't need that. You could produce a signed transaction alone, disconnected from everyone, on your phone, and represent it as a QR code with bushes in your backyard and I could scan it from a satellite photo, decode it, and submit it to the blockchain.
This is far fetched but the point is that the transaction can be made alone and offline, transmitted to the blockchain by any means even over months or years, without risk of being modified on the way. You could hide these in letters overseas, or boxes of goods, etc.
> Instead of, you know, actual cash, barter, and storing valuables in actual valuables.
If I was you I'd list all the ways that cash and valuables can be taken and that barter might be for broken or worthless goods. Instead I'll summarize as "there are risks in everything".
>> smart contracts didn't exist when they first started.
> Calm down. That is not true.
It pretty much is. Bitcoin's solution to scripting exploits was to weaken scripting. It would have been impractical to use BTC for defi and more work was undergoing to fix those problems. The weasels snuck in at the beginning and now that we can do without them they're already in the walls.
> Smart contract based exchanges do not let people exchange real money into crypto.
For trading there are a couple of options (aside from Tether, which is a scam) for pegging a trade to USD.
For on/offramp, you are sorta right. If I want to trade for strawberries I need someone holding strawberries, and I have a risk he'll give me raspberries.
> Centralized exchanges will always exist because people want on / off ramps, people want low fees
On/off ramps don't require centralization, they only require one legally bound actor, and we can all pick our fave. You may trust a lawyer near you, I may trust my local gold bullion store for up to $5k at a time, etc.
Low fees are far better achieved by a channel or rollup based solution, where the assets are essentially on-chain the entire time.
> and because people are willing to trust others.
This is bad argument. You're trying to make trust virtuous even though removing the need for trust is far better for society - removing risk and friction for everyone.
If you let somebody borrow your car and they steal it, that's still a crime. You don't need to be a regulated and registered automotive lender to make it anymore or less of a crime. The law has surprisingly strong enforcement of even informal agreements (such as e.g. an email), and these agreements were anything but informal.
Incidentally, protection of property rights is one of the primary roles of the government in a libertarian ideology. It's not anarchy.
> you let somebody borrow your car and they steal it, that's still a crime
Agreed. But there is no public requirement to direct prosecutorial resources towards your recovery. If the criminal is prosecuted, recovery is a secondary concern, an enforcement cost often borne by the victims through civil action.
Crypto isn't money. You are not a bank customer depositing cash. I'm not sure why their customers should be creditors at all, it's a bit like asking GMail for your emails back when Google goes bankrupt.
> a bit like asking GMail for your emails back when Google goes bankrupt.
And I sure as heck would want by e-mails back if Google goes bankrupt. Google shouldn't own them, they're just an exchange for e-mails. The idea that another entity would buy those e-mails and do with them what they like is ridiculous, regardless of any juristic reality.
As much as tech-bros think that the legal system is stupid, it's usually had to deal with many variations on a theme and has ended up with broad definitions around things of value. It doesn't matter if that thing is chickens, a right to land, potential mining rights or a stamp worth millions. A weird techno thing that has a public dollar value is not hard for it to work with.
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."
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.
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.
That's fair - in any case, the segregation of customer cash and securities from proprietary activities is a (the?) fundamental obligation of broker-dealers.
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.
> 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.
> 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.
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.
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.
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.
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.