Robbery, embezzlement, or natural disaster [1] can also result in loss of funds that would be covered by FDIC, and those risks exist for cryptocurrency too, albeit in somewhat different forms.
[1]: see this paper, which found that "disaster damages play a significant role in bank failures": https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2506710
The statement from the CEO is to prevent a run. Why do they need to prevent a run if they aren’t farming the float?
The only other option is “we make our money on trades” however, and especially in the bigger coins, trades are expensive, and not happening as often as they would like. They would (and will, if it comes to light) likely argue that it would be violation of their fiduciary duty to allow the custodial accounts to just sit there not making money.
If exchange revenue data are public this could probably be figured out based on comparing transaction flow and revenue. My money is they are dependent on float, and probably also directly or indirectly using it to front-run. It is SOP for finance.
Users/holdings going down aren't good for the company and stock, even if a run doesn't hurt them financially.
Coinbase claims not to do anything with deposits: https://help.coinbase.com/en/coinbase/privacy-and-security/o...
But if the loan defaults, the asset disappears, and if this happens enough the bank risks becoming insolvent and no longer being able to repay other liabilities like its deposits unless bailed out.
Maybe that's what you're alluding to - the Fed will always bail them out so deposits are never lost? That's probably true in practice, but a loan from the Fed can't in of itself restore solvency, since it's still both an asset and a liability. In the most extreme case, the bank would still go bankrupt, investors would lose their money, and depositors could also lose some of their money unless individually bailed out by the FDIC.
Back to the original discussion - the key question here is are people who hold cryptocurrency at Coinbase considered "investors" or "depositors", and are they protected by the FDIC? The latter is almost certainly no, and the former determines how much they can expect to get repaid if Coinbase goes bankrupt.
So how banks actually work is important. Banks assets vs liabilities are their capital ratio and they become insolvent when the capital ratios are below fed requirements and are not allowed to continue lending. Notice these ratios were relaxed in the 2008 crisis. But bank liquidity is different from solvency. Liquidity, the ability to make interbank payments for consumers(like writing checks) or make withdrawals is guaranteed for banks because these adjustments are made in bank reserve accounts(at the fed) which are totally different from consumer checking accounts. And, the fed will cover any overdrafts in these accounts by design. So equating lending with consumer deposits and liquidity is wrong. Banks don't check deposit amounts before making loans. This is a myth. They create loans out of thin air so long as capital requirements are met because loan funding is nothing more than a bank making a deposit to the borrowers account in exchange for a signed contract (which is an asset to the bank). The fed will cover overdrafts from banks
I don't understand how they would loan it out. What denomination/form will the loan be transferred in? Bitcoin? If so, how are they creating the Bitcoin to loan out?
They can't take it out of their depositors' wallets because by design that would result in a lower balance for the wallet on the blockchain.
They can't make a copy because Bitcoin prevents double transactions. Likewise, Bitcoin can't be "created" like banks create fiat currency on their balance sheets.
If they are loaning out fiat cash fractionally backed by depositors' Bitcoin, who are they borrowing that cash from, and how can they guarantee to their creditors that the Bitcoin backing the loan are available as collateral?
Would they take their users' wallets' private keys to pay in the event of a default?
Their users balances are just entries in a database at coinbase. Users expect that coinbase holds coins to back up those balances, but there is no proof of it.
Last I checked coinbase doesn't participate in any proof of solvency protocols so there is no way to know if customer balances exceed their holdings.
If the users' wallet values are really just database entries referring to some miniscule portion of the mega-wallet whose private keys are actually owned by an exchange, then what's the point of using the blockchain at all?
What is the value provided by exchanges other than an asset database that (hopefully) has bank-level security?
Just a way for regular folks to speculate on cryptocurrency?
Couldn't that function be equally served by some kind of high-risk brokerage account that has a crypto investment option?
> Couldn't that function be equally served by some kind of high-risk brokerage account that has a crypto investment option?
Absolutely. What coinbase does could be done by traditional brokerage accounts. This is one of the reasons that people have been critical of coinbase as a business.
The regulatory uncertainty around Bitcoin has so far mostly kept more traditional brokerages out of the space. Though, FWIW, Interactive Brokers has a partnership with PAXOS to support bitcoin on their platform, the integration is not amazing however.
It's also the case that cryptocurrency exchanges make a considerable amount of income from promoting varrious extremely sketchy alternative cryptocurrency and accepting massive bribes for their listings and other activities that traditional brokerages wouldn't likely be interested in engaging in because they're already illegal for the other assets they handle.
Maybe not Bitcoin, because I don't know if Bitcoin has any staking protocols in it.
But things like Anchor / UST / Luna participated in a staking scheme, where if you promised not to sell UST, you'd get 20% APY gains (measured in UST of course, not US-dollars).
Coinbase could be participating in those schemes in a group wallet-setting. Ex: UST holdings at Coinbase would be staked, so that Coinbase would get those gains. Or with other coins with such benefits??
I'm mostly pulling this out of my ass btw. I don't know the structure of Coinbase. But I can see the "incentivizing" from the various cryptocoins on the market or the various "protocols" that allow for exponential growth (as long as you "lend" or "stake" your coins somewhere else).
The risk here is always the same. Liquidity in terms of cash. I dont believe there is any regulation stopping coinbase from using or investing customer cash or anything preventing them from acting as a hedgefund (leveraging that cash) to make investments using customer funds. The real risk is there. If they are using crypto as collateral to make investments that are tanking in value, while crypto is tanking in value, they'll be forced to post more collateral in the form of cash or be forced liquidated to take a loss. Insolvency leads to bankrupcy.
Each US state has their own laws, and I’m sure some of them are vague enough to not specify the currency in order to regulate transfers of foreign currencies… so that could get interesting if anyone notices that they are money transfer services…
Yes, they appear as a "customer custodial funds" current asset and "custodial funds due to customers" current liability on Coinbase's balance sheet [1]. Under current law, Coinbase's customers have a claim to those assets.
Look at a brokerage's balance sheet, on the other hand, and you see special line items for segregated cash and securities. If a broker-dealer goes under, "it ordinarily is liquidated under SIPA, not the Bankruptcy Code," where the SIPC "asks a federal court to appoint a trustee to liquidate the firm and protect its customers" [2]. The first priority is customer assets. Creditors second. Coinbase isn't similarly regulated, in part because it has fought tooth and nail against being needed to.
[1] https://d18rn0p25nwr6d.cloudfront.net/CIK-0001679788/89c60d8... page 5
[2] https://www.mondaq.com/unitedstates/investment-strategy/6631...
Cite please, because if true that would be mind-boggling.
Say you ordered a pair of jeans from Sears, via the catalog. And unfortunately your cash transfer cleared on the day they went bankrupt.
They owe you a pair of pants, or your money back if they cannot deliver the product you ordered.
They also owe their employees money, if they have not issued payroll yet for that month.
They also owe their bondholders money.
They may have also taken out bank loans.
You, as the client, are in line behind the employees and bondholders and other creditors.
probably last in line.
In which case you've lost your pants.
It seems like depositors should be one of the first in line, certainly before bondholders.
When you send money to Coinbase, it’s not like that. This latest disclosure makes it clear assets held at Coinbase (or other exchanges) aren’t yours in any sense.
users of coinbase never "owned" or "have" anything. You gave money to coinbase, they have the money now.
If you had the decryption key offline, then you could control the cryptocurrency.
this is cryptocurrency 101 - the very basic nature of the blockchain itself guarantees whoever has the key to have ultimate control.
Coinbase is not a bank, they don't have to give you anything.
When you buy crypto with coinbase, they hold that crypto in a custody account they have keys to. It’s not guaranteed how the court would rule on distributing those assets in case of bankruptcy.
From the article “it is possible, however unlikely, that a court would decide to consider customer assets as part of the company in bankruptcy proceedings even if it harmed consumers”.
You will probably get them back, but that is far from guaranteed [1].
[1] https://www.nytimes.com/1991/02/23/news/if-a-shop-closes-wit...
“the exchange noted that in the event it ever declared bankruptcy, “the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings.” Coinbase users would become “general unsecured creditors…”
And possibly second and even third, depending on liquidation preference terms.
Coinbase is most decidedly not a bank, which is why the former doesn’t apply.
[0] https://www.investopedia.com/ask/answers/09/corporate-liquid...
What kind of nonsense is that? I'm just some rando on the internet.
Is Coinbase "loaning" out the Bitcoin users have deposited in it?
The reason banks need the FDIC is that they loan your deposits out instead of throwing it in a vault and sitting on it, so if they go under they don't have those assets to distribute in a bankruptcy. Given how immature and non-economic cryptocurrency is, it wouldn't surprise me if Coinbase was sitting on all/most of its users desposits. So it's possible the users might get most of their deposits back after a bankruptcy proceeding (assuming the reason wasn't massive theft of assets or something).