Since coinbase isn’t FDIC insured, it makes sense that if coinbase goes bankrupt, the customer currencies will go away as well. And they aren’t SPIC insured in the situations where crypto is a security.
It’s funny to see people shocked (SHOCKED!) when crypto doesn’t have the protections of regular banking and investments. That’s why you don’t invest with stuff that isn’t insured. Those aren’t real rates, they are risk adjusted rates for not having insurance.
It’s fine to invest in these products, but scary because people aren’t doing due diligence and have unrealistic expectations.
The CEO’s statement that they won’t go bankrupt it just comical. Of course he thinks they won’t. Few bank CEOs think that. But real banks and brokerages have insurance for their customers in the rare situation that they go bankrupt.
I do wonder why he's allowed to say on Twitter there is no risk of bankruptcy [0]. While the risk could be minimal and maybe negligible saying "no risk" means zero chance. That can't be true of any company. For a public company ceo to say that, isn't that securities fraud?
I guess even if it is fraud and they do get prosecuted by the SEC they'd just get fined for it. And maybe the fine here would be much less than the price of a run on coinbase.
The SEC can't prosecute anyone, they have no criminal enforcement power. However they can bring civil actions for fraud or other violations of securities law, and refer criminal fraud cases to the Justice Department.
Okay, but that isn't a liability in an accounting sense, it is a cash flow.
Edit: looking at the 10K, other than customer assets (where they have a net holding), they have like $6 billion in cash and equivalents against less than $5 billion of debts and other obligations).
So if they shut it all down, there would be funds left over.
> they have like $6 billion in cash and equivalents against less than $5 billion of debts and other obligations...if they shut it all down, there would be funds left over
Every company that ever went bankrupt had more assets than obligations before they went bankrupt.
Coinbase's quick ratio [1] adjusted for custodial assets, as of 31 March 2022, was 6.6 [2][a]. That's good. Don't adjust for custodial funds, and it's 0.15. Virtually bankrupt. With $6.2bn cash on the balance sheet and $830mm cash burned by operations in Q1, they have over 2 years of runway assuming Q1's terribleness continues. That's good. But were they to suffer a hack, that margin of safety could rapidly collapse. And in that case, customers could be left behind secured lenders. (Where USDC holders would wind up is a mystery.)
Could you explain how you got 0.15? (6,116,388, cash and cash equivalents + 346,048, accounts receivable + 1,333,333, crypto assets held) / (10,921,823, current liabilities) = 0.71
On paper, you have and can report a lot of assets. However, many companies go bankrupt with current ratios greater than one with either overinflated or overvalued assets or undervalued or understated debts or some combination. Financial reports a la 10-Ks and 10-Qs are 'boring,' difficult for most people to read, contain specialized jargon, and contain significant lag time where a going concern is, well, a concern. Audits are almost always annual and not quarterly. Disclosures may be required, but they can be broad or nonspecific enough as to delay broader acknowledgement of bankruptcy level problems. I'd take information from financial reports with a bit of salt, even if they are often our best, or only, source of information.
Grant Thornton audits Coinbase last I checked. Hopefully they do a better job than EY. I doubt a "stablecoin" holding would count as cash equivalents, but not all cash equivalents are equal and the definition has changed over the years. Commercial paper, 1-3 month maturing Treasury notes, certificates of deposit, money market accounts, and savings account funds can all be counted as cash equivalents. For example, if you hold a two month commercial paper of another cryptocurrency company as Coinbase, this might qualify as a cash equivalent. Cash equivalents are not all equally liquid or risky. Even if all of the cash and cash equivalents are there and solvent, the definition of a cryptocurrency in a bankruptcy might not be settled in a court of law in such a way that it favors account holders of Coinbase held cryptocurrency over stockholders or bondholders.
Would that be 5 billion in customer assets and associated liabilities, leaving about 1 billion of equity for Coinbase? At a burn rate of 430 million per quarter that only leaves a runway about 7-8 months.
Wouldn't a hack of the custodial holdings just mean their customers lose their money but the business is otherwise a going concern (for that few moments until everybody stops paying them)?
They get a lot/most of their money from fees with ongoing transactions. If you look at the ‘5 minutes ahead’ picture if there is a hack that either 1) steals all customer assets, or 2) requires them to freeze all activity for a serious length of time, it’s a ‘no longer going concern’ type situation.
No transactions? No income.
No trust/willingness for people to continue doing transactions? No future income.
According to Coinbase 98% of their crypto is stored in offline wallets. So hacking won’t work. You’ll have to break into wherever they have the coins stored and hope the key isn’t destroyed when you unplug the device.
I would say that's extremely likely. Make a list of your favorite tech companies from 1990 or 2000, and see how many still have technology teams qualified to tie their own shoelaces today, exist, and haven't turned into sleazeware companies.
You can calculate your annualized failure rate. That's a best-case on the odds your funds will continue to exist next year. Move fast / break things / fail fast / developer sprints / etc. speeds this process up even further. Crypto companies also have a giant target painted on their backs for hackers (including rogue state-level actors, some of whom just had large sums confiscated by Western institutions).
That actually does sound kinda impossible, 98% of their crypto is in secured cold storage, and it’s spread across distinct coins and different wallets.
I’m not saying it’s risk free, but what exchange or broker is? Does anyone else match Coinbase for security? Gemini seems at best equivalent.
He probably has a disclaimer somewhere saying his tweets are "not forward looking statements" so he is only saying that as of right now in this moment there is no risk of bankruptcy
I wouldn't be sure what the man on the clapham omnibus thinks of that kind of disclaimer. He'd be exposing himself to considerable risk by relying on it
Yes. You can only compute probabilities with respect to a probability model. There exists a model M and an outcome x, such that x has zero probability under M. For example, the probability of getting 2 heads in one coin toss has zero probability under the standard binomial model.
There are all kinds of way out of this in case he would get sued: he could say that with 'there is no risk', he just meant shorthand for 'there is no more than a negligible risk'. Or he could say that with 'there is no risk' he was merely expressing his strong personal opinion based on the vision and faith he had in his company.
Officers of a company are held to a different standard when it comes to public statement.
Declaring it as personal opinion would not likely absolve him. 'Funding Secured' was also a personal believe, from the SEC standard it had to be substantiated in a meaningful way though, or gets fined.
Coinbase is publicly traded, OP is clearly referring to securities fraud as it relates to public statements that could have material impact on Coinbase stock.
Coinbase shares are a regulated security. The poster is suggesting that the statements by the CEO are securities fraud for those shares not for crypto.
If I was a CEO and saw how few and far between (as well as toothless) the repercussions have been for Elon Musk, I wouldn’t fear tweeting whatever I wanted either.
If you were a CEO, you'd often be set up for life with some level of financial prudence, and everything else after achieving that level of wealth seems like it'd just be for a lark or some pursuit of satisfaction/happiness.
To be a bit pedantic, there are CEOs of all sorts of organizations, many of which are tiny nonprofits that bring in very little money. You could be a CEO and bring home $60k a year.
Do you think it would be okay for him to say there's no risk of bankruptcy to some friends in a public bar? How about at a BBQ in his backyard? Would it be okay for him to say this on a flyer stapled to a public board?
Oh, that's backwards from what I thought the situation was. Thanks!
Apparently such information has to be released in a way that all the public, generally, can see it at once and twitter with it's faked high user numbers and famous people fulfills this. Releasing it on a small local poster board would be illegal because it is limited, where twitter is legal because everyone theoretically has access to twitter.
Eh not entirely true. Twitter throws up a login screen if you try to view more than a couple tweets. There’s probably an argument there since an account (and PII) is required.
> Since coinbase isn’t FDIC insured, it makes sense that if coinbase goes bankrupt, the customer currencies will go away as well. And they aren’t SPIC insured in the situations where crypto is a security.
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).
While I agree making a bad loan is the most likely reason for a bank to lose deposits, I wouldn't go so far as to call it "the" reason.
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.
If they were conservatively minded or playing it safe, the highest probability is that they left or lost a long time ago, or they haven’t entered yet. Coinbase won, effectively, which means they are well beyond taking a cut of transactions and calling it good.
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.
Banks do not loan out deposits . This is a misunderstanding of modern banking. In modern banking systems, loans create deposits. Banks create loans out of thin air. In order to make loans they must have appropriate capital ratios. Bank deposits are a liability. When a bank deposit is debited, either via a withdrawal, check, or other transaction, it is settled using reserves. Reserves are federal money that is on deposit in accounts which banks have at the Federal reserve. Banks pay each other via interbank reserve settlements. Banks only maintain a minimal amount of reserves on deposit(Reserve Requirements). They can borrow reserves from the Fed if needed.
Sure, banks can create money "out of thin air" because the liability created when the loaned money is debited is balanced out by the asset of the loan owned to them.
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.
Agreed on crypto. Just feel its important to understand that banks are quasi-government institutions because of the federal reserve system, heavy regulation, and FDIC insurance. All of this evolved over time to improve how they serve as financial intermediaries and most of which crypto lacks.
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
> Is Coinbase "loaning" out the Bitcoin users have deposited in it?
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 depositors wallets aren't "on the blockchain" -- if they were, they'd be in the the depositors custody not coinbase's.
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.
> Their depositors wallets aren't "on the blockchain" -- if they were, they'd be in the the depositors custody not coinbase's.
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?
The exchange is just that.. an exchange, people use it as gateway to the world of dollars. When they're done trading users can (and ought to!) withdraw their funds to their own wallets. Like anything else that requires an extra step, many do not (or delay a long time before doing so).
> 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.
> Is Coinbase "loaning" out the Bitcoin users have deposited in it?
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).
There are many issues here. First is all the crypto that coinbase must hold in order to facilitate trades. If they do not have the inventory, they must source elsewhere. Second is customer funds (cash) which is what they need to facilitate a fiat exchange for crypto for their markets. I'm not exactly sure how their operations work but in a regular stock brokerage, these are segregated from their own cash although in 2010 an incident was shown that even segregated customer funds are not so segregated.
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.
I guess it depends on if those balances are kept on the books as “assets” or not. They may be subject to money transfer laws though, in which case they can’t spend ANY of the deposits.
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…
> if those balances are kept on the books as “assets” or not
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.
I get that's true in some situations, but is it true in all cases? Say I rent a safe deposit box, put valuable personal property in it, and the bank goes bankrupt. Does the bankruptcy court sell the box-holders' personal property until the bondholders are made whole?
It seems like depositors should be one of the first in line, certainly before bondholders.
The property in the box was never the bank’s property. They’re just renting a space for you to keep your stuff. In a bankruptcy, that contract could be sold to a third party who takes over the management of the boxes, but the contents are yours.
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.
When you get right down to it, as a purely virtual asset the crypto isn't anyone's property. Coinbase holds some keys which give it the ability to sign transactions on the blockchain, a service which has value. They owe their depositors the service of signing such a transaction on request transferring some quantity of deposited crypto to a suitable withdrawal address; the value of this service to the customer is the market value of the crypto. However, it does not seem likely to me that this service Coinbase owes to its depositors would be prioritized over their other debts, especially if that meant selling off other property to buy crypto so they could complete the transfers.
The difference here is that the bank never has any ownership of what’s in the safe deposit box.
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”.
What if you received your pants, but they were defective so you sent them back to be repaired? Do you then lose them during bankruptcy, and they get auctioned off?
“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…”
Pithy, but also not true. If a bank goes belly up, your average Joe’s bank account is first in line (via deposit insurance), as are employee entitlements.
Coinbase is most decidedly not a bank, which is why the former doesn’t apply.
Actually bond holders eat first in US bankruptcy law. Then employees, and shareholders last. So in this case, under capitalism, billionaire investors eat last. [0]
How do you short a coin on Coinbase? I have never seen the option nor heard reference to it. It sounds like you’re just assuming this is how it works to me but I’d prefer to be wrong and learn something.
I think your statement about the idea that Coinbase isn't living on the float about as likely as the notion that nobody in crypto is desperately trying to create a fiat currency fiefdom. As such, your views come across as the kind of statement that are illegal to distribute concerning regulated investment.
Coinbase looks more like a brokerage to me than a bank. While SPIC insurance covers some of your assets the bigger protection comes from brokerage rules around segregating user funds from company funds and the expectation of the courts that those funds won’t be used to settle company debts.
So it is a little surprising to me that crypto assets wouldn’t be treated similarly, which is probably why the SEC is demanding this disclosure.
> So it is a little surprising to me that crypto assets wouldn’t be treated similarly, which is probably why the SEC is demanding this disclosure.
I only know what I read from the article.
But for me, it seemed like the disclosure was required, not because the crypto funds would be used to settle company debts, but rather, this has never been tested in court. So, it’s highly likely that customer accounts would be protected in a crypto bankruptcy, but we don’t have any precedent on it, so we don’t know this to be the case.
> expectation of the courts that those funds won’t be used to settle company debts
I'm not sure if this is really the case, but I was under the impression that brokerages held the customers securities in trust. i.e. there is not merely a norm that they will not be used to settle debt, but it would be illegal for them to be used to do so.
If anyone knows more about brokerages and whether this really is the case, I would be very interested to know.
I was on reddit and someone called bitcoin a "useful savings account" and I was like, "NO, STOP. Do not tell people this stuff is for savings!" I was downvoted to hell and people were like "lmao noob." Got into a back and forth where I was trying to delineate an investment and savings and people just kept replying stuff like, "it goes up, that means you beat inflation, do you not understand how this works???"
This depends very much on the subreddit. There are still some fantastic communities with top-notch discourse! On the other hand, I don't remember discourse being worthwhile on large subreddits even in the good old days of 2015.
Unfortunately doubly true for their crytocurrency-themed subreddits with millions of followers where each and every post that isn't about 'number goes up' gets moderated.
Even a post got deleted where the user warned others to invest carefully, only funds that they don't mind losing. Or posts where a user posts a proof of their losses.
The subreddit you’re in is what decides whether your opinion will be upvoted. If you go to a video game’s specific subreddit and say “I know you all like Call of Duty, but Call of Duty sucks”, then you will be downvoted into oblivion even if you’re “correct”. Same goes for things like politics and bitcoin. The subreddits all end up attracting people who have a certain opinion and outcasting the rest.
I'm not familiar with how any of this works, but I kind of thought coinbase was less like a bank—paying interest on deposits—and more like a user friendly web ui for managing your assets, because dealing with private keys is hard for a user.
If, for example, Dropbox declares bankruptcy I'd be shocked if creditors could search through the user data for things of value.
It seems like there would be plenty of money to be made just charging transaction fees and holding assets 1-1 for the users, but what do I know.
> I'd be shocked if creditors could search through the user data for things of value.
dropbox don't own any copyright to the content from the user's uploads. So even if the creditors find any valuable IP or content, there's no way they can claim ownership over it.
Coinbase, on the other hand, is given custody of actual assets (the cryptos).
The entire point of Twitter and FB is to commercialise the user content, IMO.
While I wouldn’t a priori assume any given cloud storage user agreement includes a perpetual IP license to anything the user uploads, I also wouldn’t assume it to be free of such a clause.
Either way, read closely. And get legal advice if it matters, because jargon doesn’t mean what outsiders think it means.
> It’s funny to see people shocked (SHOCKED!) when crypto doesn’t have the protections of regular banking and investments.
The problem isn't crypto, it's these exchanges. Nearly everyone just leaves their coins in the exchanges. They're essentially banks but with none of the protections. They even offer cryptocurrency loans, savings accounts and everything.
Cryptocurrencies were supposed to replace banks but they ended up reinventing the whole thing badly. It was supposed to be a dollars -> electricity -> CPU -> bitcoins closed decentralized system, but now it's just dollars <-> bitcoin within centralized exchanges.
I'm not sure who first said it, but crypto feels like a solution in search of a problem. Something akin to "when all you have is a hammer, everything looks like a nail" - forcing crypto/blockchains as solutions to problems that are either already solved, or could be solved in other more traditional ways, only acts as a disservice to wider adoption imo.
> crypto feels like a solution in search of a problem
Well, to me the problem is absolutely real. Decades ago, my country suffered from hyperinflation. We went through several inflationary currencies like it was nothing until some economist managed to dupe everyone into believing it was gonna be different this time. Not before desperate attempts to control inflation were implemented, though. In the 90s the president just froze everybody's bank accounts.
I simply don't trust governments. I want them to have zero authority and influence over my money. I don't care what it costs to achieve this, as long as governments are successfully exorcised from this economy it's worth it. The way I see it, pure blockchain solutions are the only way this could possibly work and even then only if sufficiently decentralized. Exchanges are the complete opposite of this vision, they're literally banks with all of the downsides and none of the upsides.
In order for a cryptocurrency to be the solution to that problem - an authoritarian government routinely destabilizing a currency, or freezing financial accounts - that cryptocurrency would have to be ubiquitously in use by everyone involved in any financial interaction. Grocery stores, clothing outlet malls, lawyers, healthcare services, rent/mortgage services, etc. would all have to be on-board with using that cryptocurrency and have the infrastructure to facilitate it. If they didn't, you might as well have a frozen bank account, or a hyper inflated currency.
If you're in a state that can freeze bank accounts and completely retool the national currency on a whim, what prevents them from strong-arming every one of those above-mentioned institutions into not accepting that cryptocurrency? If you can freeze everyone's bank account, you can certainly enforce jail time for a store owner who is found to be doing transactions in whatever cryptocurrency.
Basically, for cryptocurrency to solve the problem you describe, it would have to become the same structure that caused/causes the problem to begin with. You'd be back to square one.
Or you make that your central bank is independent from your president, and that only qualified majority + accords from your judicial power can modify the target of your central bank. (Edit: to be clear: target and not policy. The central bank can still choose how they will reach their target).
But you need an effective republic for this, and one that have a hint of democracy.
> Cryptocurrencies were supposed to replace banks but they ended up reinventing the whole thing badly.
The only way that statement could be true is if anyone every assumed it's feasible or desirable for everyone to have physical wallets and self-host everything
What i don't understand is why don't people create their own wallet and keep their funds there? Isn't that the entire purpose?
Of course they could still use coinbase as an exchange. But if everyone let's another party "manage" their wallet in what way is it really decentralized...
> What i don't understand is why don't people create their own wallet and keep their funds there? Isn't that the entire purpose? Of course they could still use coinbase as an exchange. But if everyone let's another party "manage" their wallet in what way is it really decentralized...
The real purpose of Bitcoin is to speculate on the roller coaster. Everything else is basically woo that's needed to fuel it. The "future of money" where people by their coffee with a super-secure private wallet is a lie.
> For some people sure, but not all, and I would even go as far as to say not the main intention of the original product.
It certainly wasn't the "main intention of the original product," but Bitcoin failed at that. A big part of that failure was the peculiar ideology that got baked in through many of its design decisions.
what makes you say that? I use bitcoin to conduct private transactions regularly and its pretty darn solid for that purpose. Doing such a transaction over the internet, before bitcoin, required you to use permissioned rails.
> what makes you say that? I use bitcoin to conduct private transactions regularly and its pretty darn solid for that purpose. Doing such a transaction over the internet, before bitcoin, required you to use permissioned rails.
Just because it can be used like that doesn't mean it actually succeeded. The vast majority of Bitcoin is held as a speculative investment, and the deflationary aspects are a strong disincentive to regular circulation.
AFAICT, the main intention of the original product was to undermine fiat currency, and by proxy, the institutions that are built on and support it, primarily governments and central banks but extending beyond that to broader societal institutions that use taxes and monetary policy as their tools.
I'm not so sure it's done with that yet.
The financial FOMO that fuels that goal just seems like a means to that end, and the climate damage from it's energy consumption seems like an (unintended?) second order effect whose problematic nature needs to be rationalized post hoc.
You can 100% create and manage your own wallets on your own hardware. However, most exchanges have transfer fees, on top of whatever costs are incurred on the network by the transfer. And, if you want to sell on an exchange, you likely need to transfer the tokens into the exchange wallet anyways.
If someone is buying crypto to hold it for years, then wallets and hardware keys and 12-word passphrases make the most sense.
If you're not sure if you'll hold a coin for long, or are speculating, or have less than $5k on the exchange, it might not be worth the hassle (for the indeterminate 'you') to create and manage your own wallets.
> However, most exchanges have transfer fees, on top of whatever costs are incurred on the network by the transfer.
Most might, but Coinbase does not. Outgoing transfers are free—they even cover the network fee. For incoming transfers the sender pays the network fee but there is no additional charge.
It's a bit of a hassle to shift funds around, and not having your funds instantly available on the exchange limits your ability to take advantage of short-term opportunities, but in general I would still recommend self-custody over leaving "large" amounts of crypto on an exchange for very long. That's less due to the risk of bankruptcy and more due to the risk of the exchange getting hacked—practically speaking we have more real-world examples of the latter case, discounting bankruptcy directly resulting from a previous hack.
It’s the obvious thing, convenience. Humans love convenience. People build billion-dollar businesses like Steam and Spotify that basically sell convenience.
Makes sense that a lot of people just want an easy way to manage their crypto. If you’re not ideologically dedicated to decentralization, why not do the easy thing?
It takes discipline to keep a wallet safe. I used to discount the risk of that, but over time I feel less and less confident in the average person's ability to not lose a wallet or have it hacked.
To me Coinbase feels more like bank. Once I deposit money I no longer worry about the physical security of that money. Clearly that isn't the case given it's not FDIC insured, but the fact that it's a multi-billion dollar publicly-traded corporation instills some confidence.
> To me Coinbase feels more like bank. Once I deposit money I no longer worry about the physical security of that money. Clearly that isn't the case given it's not FDIC insured, but the fact that it's a multi-billion dollar publicly-traded corporation instills some confidence.
And that is the danger. It feels like a bank, and lots of other people also feel it is like a bank, so you figure you are safe.
But it is not a bank. It does not offer the regulator protection of a bank. Feelings don't change that. A good UI does not change that. Only regulation change that.
Unless Coinbase is regulated like a bank or brokerage, what it feels like is irrelevant if you're in the U.S. Short of your deposits being FDIC or SIPC insured you know all you need to know: every cent and/or coin you have with them is at risk.
Early on I had some Bitcoin hacked from a wallet. That was before wallets even had passwords, if I remember correctly.
I bought a hardware wallet years ago and then decided not to use it. If Coinbase goes down crypto as a whole will probably be brought under with it, so I’d rather have someone else manage it for me.
Would you like to explain to my 70 year old mother that she should install a Chrome extension, transfer her coins to it and expect her not to lose that? Oh and then explain to her that she is going to print out a piece of paper with 12 words on it. That's her backup in case she loses everything...so "Mom, do not lose this piece of paper you're screwed!"
Then crypto will never be the future of money. That's their point.
But honestly, most HN uses password managers -- if crypto became primary currency, that would make hacking someplace like Bitwarden or Coinbase enormous world shattering honeypots -- like Nation state targets.
This and also arguably 70 year old moms are probably just fine at "don't lose this crucial piece of paper" given stuff like social security cards, birth certificates, savings bonds, and all the other bits that have been important pieces of paper for most of their lives.
Surprised that customer positions aren't considered loans with first rights over all other lenders in a bankruptcy proceeding. The company shouldn't be playing around with these, but based on this statement it sounds like they are doing something odd and trying to run a fractional reserve system, or leveraging customer deposits for other high risk activity such that the money may not be there.
Makes me think that I should move my crypto back to my own wallet/sell the crypto.
They don't have my keys, but they are holding the asset as a custodian. From a practical perspective, I'm not certain they are actually holding my BTC in a dedicated wallet or a central wallet with an off blockchain ledger.
The only exception I might take to what you're saying is that one of the main reasons for crypto is resistance to central authority, so the emergence of a situation where something like this can happen should be edifying.
It's not the first time this has happened; people seem to forget about Mt Gox.
These exchanges need to be part of the crypto schema. Crypto theory is so focused on the chain and not the infrastructure that builds up around it.
Anyway, I completely agree with what you're saying but it has special meaning when you're talking about something that's supposed to transcend the need for regulatory structures like FDIC.
> The only exception I might take to what you're saying is that one of the main reasons for crypto is resistance to central authority, so the emergence of a situation where something like this can happen should be edifying.
Explain.
> It's not the first time this has happened; people seem to forget about Mt Gox.
False equivalence, MTGOX wasn't a Publically traded company with tons of VC money and lots of institutional funds (Ark et al) backing them; Mark embezzled funds and had horrible OPSEC that led to a massive hack. He tried covering this up, Coinbase reporting a massive loss is definitely not the same thing.
> These exchanges need to be part of the crypto schema. Crypto theory is so focused on the chain and not the infrastructure that builds up around it.
Coinbase has been the bane of the Bitcoin ecosystem since MTGOX folded. They are not a representation of what the 'Crypto' schema needs, in fact I'd argue CASH is a superior product in very conceivable way.
And what exactly is Crypto theory, exactly?
The Infrastructure was meant to be P2P, as noted in the White paper by Satoshi: exchanges are merely a response from the growing Market to cater to the increase in demand, and the truth is they still exist. Kraken, Binance, Gemini etc... still exist and will for some time. The number of exchanges isn't the issue in 'Cryoto land,' it's the scams and I'm glad Coinbase being a pusher of these worthless alts deserves to suffer. My worry is what happens to their BTC if they decided to unload to cover losses.
I wouldn't read into that comment (of mine) too much. I meant what I said in an abstract sense.
> False equivalence, MTGOX wasn't a Publically traded company with tons of VC money and lots of institutional funds (Ark et al) backing them; Mark embezzled funds and had horrible OPSEC that led to a massive hack. He tried covering this up, Coinbase reporting a massive loss is definitely not the same thing.
Fair enough; good point. They are different. But I do think these intermediary, exchange entities, whatever you want to call them, tend to emerge repeatedly, with their own vulnerabilities, in a way that isn't always fully recognized in a lot of the discussion of cryptocurrency. My sense (which could certainly be wrong) is there's a bit of a gap between blockchain-level issues and macroeconomic theory as it comes up in discussions of cryptocurrency.
> And what exactly is Crypto theory, exactly?
I just meant academic computer science - economic theory about cryptocurrency, like you might have in conference proceedings, academic journal articles, or technical papers openly distributed for critique and discussion. Maybe the sort of thing that might get discussed in formal policy reports by various public and private profit and nonprofit institutions.
> The Infrastructure was meant to be P2P, as noted in the White paper by Satoshi: exchanges are merely a response from the growing Market to cater to the increase in demand,
I think that's part of what I'm getting at. From the very beginning it's been clear to me people generally don't actually want pure cryptocurrency P2P in the sense they don't actually want to store the entire blockchain on their laptop. So these kinds of intermediary structures will emerge.
> and the truth is they still exist. Kraken, Binance, Gemini etc... still exist and will for some time. The number of exchanges isn't the issue in 'Cryoto land,' it's the scams
I don't mean to imply I have a problem with exchanges per se, it's that it would be nice if there was some kind of robustness built in surrounding them. Maybe fraud is inherent to all economic systems (people lose money all the time on traditional stock exchanges and in investment schemes), but it would be nice if there was something like, just say hypothetically, a higher-order layer akin to the FDIC etc (in the absence of the FDIC etc), but distributed or something? I just think these things aren't really well-worked out -- the idea that someone could exchange USD into crypto and then have it disappear because a central entity collapses is going against the grain of what crypto is supposed to prevent.
The Fortune article in the HN link is writing only about the crypto assets, which lack FDIC insurance. Cash assets are FDIC insured.
From Coinbase: "To the extent U.S. customer funds are held as cash, they are maintained in pooled custodial accounts at one or more banks insured by the FDIC."
> "To the extent U.S. customer funds are held as cash, they are maintained in pooled custodial accounts at one or more banks insured by the FDIC."
Doesn't that mean Coinbase is insulated from the banks going bust? I don't know why a "pooled custodial account" would help the Coinbase user. It's still Coinbase's money held for them (just like the BTC).
If this was a brokerage with stocks, the customers own those stocks. There is no reason crypto shouldn't be the same. There is no reason crypto shouldn't have top priority to their owners. It isn't okay for a company to put other creditors above the owners of that crypto
> this was a brokerage with stocks, the customers own those stocks
Sort of. Most individuals' shares are held in "street name,"[1][2].
You have a claim against the broker for those shares, but that could be impaired if the broker went under. Losses are rare because American brokers are highly regulated. Coinbase has fought vigorously against being similarly regulated [3].
If you look closely you’ll find that the broker and the holding company have similar but distinct names - it’s supposed to be setup so that if the broker goes under the holding company can be transferred and continue.
Similar to banks and FDIC the financial industry is good at this kind of thing and brokers can go bankrupt without customers ever really noticing.
SIPC is just the framework. The primary thing is that customer assets are held in custodian accounts and not intermingled with the brokerage assets themselves. This is different than a bank which can lose your money if it does go bankrupt - it's just that FDIC steps in and makes whole the customers that qualify for the insurance (and pays out to other customers above the limits first before other creditors).
No, the SIPC, like the FDIC, can step in and make people whole if assets go missing. FDIC's for deposit accounts, SIPC is the equivalent for brokerage assets.
"SIPC oversees the liquidation of member firms that close when the firm is bankrupt or in financial trouble, and customer assets are missing."
In Coinbase's case, holding in a custodian account doesn't save them if the Bitcoin in it gets sent to an attacker's wallet. They're just gone, and neither the SIPC nor FDIC cover that asset class.
This is not entirely true, especially if you have a margin account.
In the US, there is Government insurance up to the SIPC limit of $500,000 of securities and $250,000 of cash. But coverage ends at that point.
I have had the annoying experience of having to pry restricted stock certificates out of the vaults of a failed broker. Fear of the regulatory agencies is strong enough that a week of phone calls produced the certificates.
You don't seem to understand how bankruptcy works. Creditor seniority is set by the court, following the bankruptcy code. The insolvent company has very little control over that process.
FDIC insurance is for banks, not brokers. I think what protects you from a broker going bust is the separation of client money from firm money. Though I think that separation failed in the most recent major broker bankruptcy (MF Global) and probably many others. FDIC would protect the broker against its own bank going bust (though I am sure there are guarantee caps).
> It’s funny to see people shocked (SHOCKED!) when crypto doesn’t have the protections of regular banking and investments. That’s why you don’t invest with stuff that isn’t insured. Those aren’t real rates, they are risk adjusted rates for not having insurance.
You are missing the point. We are shocked that even if Coinbase keeps users' deposits 100% safe, users could still lose their deposits if a judge decides so. Why isn't there a way to segregate those deposits from assets on which creditors have a claim? This kind of simple arrangement ought to be possible without new regulations or FDIC-style protection.
Needless to say, "not your keys not your Bitcoin" continues to be good advice.
Bankruptcy rules are weird, and it's not just crypto companies that work that way. Lots of uninsured companies could lose depositors' accounts in bankruptcy. Witness grain elevators, or storage companies, or safe deposit companies - it took special laws to protect depositors. Which protection Coinbase doesn't have, apparently.
It's always more nuanced than first glance. And (rich) creditors have always had more sway in court than common depositors, unless special rules are enacted that say otherwise.
It's weird indeed. I admit I believed there was a law that protected depositors (in general) from creditors in the event of a bankruptcy. Are you saying that there's a law that's specifically for grain companies, one specifically for safe deposit companies, etc.? What if you park your car in a garage which goes bankrupt, can you lose your car? I'm kind of mind blown right now...
You are missing the point. The regulations on banking created and enforce those legally binding separations in assets that you are shocked don’t exist.
Seems like a more robust solution would be to just fix the bad bankruptcy laws instead of "regulating" every possible variant of "company has custody of X which is actually owned by customer Y". There ought to be a simple way to declare: "this is not company property and is off limits to company creditors in the event of a liquidation".
These aren’t bad bankruptcy laws. They are actually good and protect things that are most important- bondholders and higher priority creditors.
I don’t think letting companies set their own creditor priorities would really be feasible if we want to have predictable securities markets.
I assume that if we let companies protect certain assets from creditors during bankruptcy they would set aside massive bonuses and all sorts of other shenanigans.
Coinbase could purchase and maintain insurance against such an act. That’s what E*Trade/etc do to protect against the same risk should they go into bankruptcy.
>> Since coinbase isn’t FDIC insured, it makes sense that if coinbase goes bankrupt, the customer currencies will go away as well.
No it doesn't. Well if coinbase is lending crypto like a bank then sure. But if they are acting like a stock broker, they should be holding real assets on behalf of customers and those assets should go to the customers who actually own them.
Longer term investors can actually (could? it's been a while) get their stock certificate mailed and hold it themselves.
They are acting like what is best for them, which is neither. They are taking as much as they can because that is how finance works.
For being on HN this post is confusingly full of people who assume tech companies are run for the public benefit, or at least with some moral obligation of protecting your assets.
I mean with over 250 billion in assets managed, they should be able to get bought out and / or attract investors instead of go bankrupt. I'm sure there's rich folk who have an interest in owning an established crypto exchange.
Although on the other, with that much in assets, there may also be people with an interest in having it go bankrupt - or just to spread these rumors, to further help crash the price of crypto.
> when crypto doesn’t have the protections of regular banking and investments
Coinbase is not 'crypto' though. Nobody's coins go down if one exchange crashes, unless they are careless enough to leave them there. The real problem is that cryptocoins are hard to use , and so exchanges are used as banks (they shoudn't) . But that is something that tech can fix
Yes, if they definitely won't go bankrupt that means the insurance will be extremely cheap! If this insurance isn't cheap then that means there is a reasonable chance they could go bankrupt. In my opinion all it takes is one insider taking a copy of everyone's private keys and they are toast. I would advise to not put all your eggs in one basket.
> it makes sense that if coinbase goes bankrupt, the customer currencies will go away as well
Others have said this, but just to reiterate : this is quite wrong. This is like saying that because you hold Amazon stock via a Schwab brokerage account, if Schwab were to declare bankruptcy, then you would lose your Amazon stock. Needless to say that wouldn't happen because you are the owner of the stock, not Schwab.
FDIC insurance covers a totally different scenario where the money you deposit doesn't really exist (lent to someone else in the meantime).
What makes sense is that Coinbase isn't the owner of customers' crypto assets. This thread is about the fact that apparently that's _not_ necessarily true.
There's no FDIC or other protections in play here, except for the small amount of money a customer might have in "cash", held by Coinbase pending or resulting from a crypto transaction.
Once you buy a bitcoin, you have a digital good, not money/currency (as defined by most governments/courts -- which is the point that matters here)
If you buy a skin in Fortnite, and Fortnite goes under, you no longer have that skin, even it if was made by another player and put on a public marketplace offered by Fortnite. You can't get Forenite to return that skin to you, and you can't ask the author to send you a copy to save.
If Coinbase goes under, the crypto would likely be treated as digital goods by the court, not as "currency".. or perhaps that case would solidify crypto's definition as a security or currency... but I'd argue that it's unclear right now, and that creditors would want Coinbase to liquidate the digital assets to pay off employees, creditors first.
> Others have said this, but just to reiterate : this is quite wrong. This is like saying that because you hold Amazon stock via a Schwab brokerage account, if Schwab were to declare bankruptcy, then you would lose your Amazon stock. Needless to say that wouldn't happen because you are the owner of the stock, not Schwab.
But that isn't how Coinbase works. They aren't holding a share for you, they are holding your actual assets, with nothing in force that they would have to return them, bar what is in USD.
Not sure what you are insinuating but the Schwab fine print definitely says that the customer assets are not Schwabs (because that's the rules of the regulatory environment they work in). No court in the US would would use customer shares to settle Schwab debt.
Stocks are insured by SPIC. I’m not sure it’s possible to find a US brokerage in business that doesn’t insure stocks against this kind of loss in bankruptcy.
Since coinbase isn’t FDIC insured, it makes sense that if coinbase goes bankrupt, the customer currencies will go away as well.
No, it doesn't make sense at all. It is incredible to me that these are all solved problems in traditional finance.
Coinbase could utilize the services of a custodian to hold the crypto. In fact, that's what any responsible financial services company would do. It makes perfect sense because if there is a dislocation in crypto, it could bring Coinbase down but it won't bring Bank of New York down. So hold all the customer crypto at Bank of New York.
Or they could have individual wallets titled to customers. More difficult and doesn't allow them to do off-chain transfers but possible.
There are a million ways to do this, this is a solved problem in finance. Coinbase chose not to do it and now is paying for that by having to disclose the truth - retail customers are screwed if Coinbase declares bankruptcy. Whose fault is that? The CEO apologizes for it so that should tell you.
>For our retail customers, we’re taking further steps to update our user terms such that we offer the same protections to those customers in a black swan event. We should have had these in place previously, so let me apologize for that.
> It’s funny to see people shocked (SHOCKED!) when crypto doesn’t have the protections of regular banking and investments. That’s why you don’t invest with stuff that isn’t insured. Those aren’t real rates, they are risk adjusted rates for not having insurance.
You don't need to hold your crypto within coinbase, you can transfer it to a wallet you fully control.
Coinbase is FDIC insured but that's only relevant for USD. The SEC mandates disclosures of all risk and given that a crypto company like this has not gone bankrupt there, isn't precedent on how bankruptcy courts will consider crypto assets held under custody. Therefore it's a risk that should be made transparent.
> Coinbase users would become “general unsecured creditors,” meaning they have no right to claim any specific property from the exchange in proceedings. Their funds would become inaccessible.
I'm curious about this bit - are they required to structure their company in this way, or was it a choice that they made?
Perhaps someone with closer knowledge of USA finance law can fill me in - is there anything legal preventing Coinbase acting as trustee for customers as beneficiary? Surely that would avoid this situation (though there are probably commercial considerations why they don’t want to do that).
> most people aren’t using them as a USD bank account. Crypto assets aren’t covered by this.
There are lots of people who keep USD there with open flash crash orders. Of course if Coinbase fails, the prices may basically flash crash to zero and your orders will be filled, and then you are no longer FDIC insured.
> Coinbase Pro is FDIC insured, makes one wonder why Coinbase itself isn't.
This is exactly what those not familiar with Coinbase don't understand, the two systems are tiered and reflect that: Coinbase is by far the worst exchange experience, and they do not car about their customers unless they are Pro customers.
This gives the average person with limited knowledge the worst possible UX into thinking this is how things are and likely deters them from ever trying againg when their order doesn't get completed because of some arbitrary reason.
They did this to themselves, I can assure you this was a long time coming.
Who's shocked? The journalist? It's their job to appear shocked so stories sound more interesting. You might be imagining some fantasy fool to laugh at.
Yes, thank you. What’s odd is I thought I typed that but autocorrect changed it and that’s a bit concerning since it changed it to a pretty not cool term.
> have enough to cover maybe 1-2% of all deposits? When the real stuff hits the fan and the buck breaks, there won't be any FDIC to protect any investment
The FDIC "is backed by the full faith and credit of the United States government" [1].
Its reserves (a) provide quick cash in case of limited problems, (b) insulate the Treasury and Congress and (c) hold the FDIC leadership accountable. On account of (c), the FDIC oversees its insurees, including by implementing reserve requirements [2].
> As required by the Federal Deposit Insurance Act, the FDIC Board adopted a Restoration Plan on September 15, 2020, to restore the DIF to at least 1.35 percent by September 30, 2028. The Plan requires the FDIC to update its analysis and projections for the DIF balance and reserve ratio at least semiannually.
It’s funny to see people shocked (SHOCKED!) when crypto doesn’t have the protections of regular banking and investments. That’s why you don’t invest with stuff that isn’t insured. Those aren’t real rates, they are risk adjusted rates for not having insurance.
It’s fine to invest in these products, but scary because people aren’t doing due diligence and have unrealistic expectations.
The CEO’s statement that they won’t go bankrupt it just comical. Of course he thinks they won’t. Few bank CEOs think that. But real banks and brokerages have insurance for their customers in the rare situation that they go bankrupt.