Kraken Wins Bank Charter Approval
blog.kraken.com
blog.kraken.com
Banks usually borrow short-term from depositors, lend/invest long-term, and make money due to (i) the upward sloping yield curve, and (ii) profitability pricing credit risk.
If that's how you understand what banks are, then SPDIs seems less like banks (which borrow from depositors) than to safe deposit box operators (which provide a place where depositors can keep valuables they don't want disturbed).
So what is Kraken getting from the SPDI designation? Access to bank payment networks like ACH etc.?
[1] https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
[2] http://wyomingbankingdivision.wyo.gov/home/areas-of-regulati...
"Broad money is made up of bank deposits — which are essentially IOUs from commercial banks to households and companies — and currency — mostly IOUs from the central bank.(4)(5) Of the two types of broad money, bank deposits make up the vast majority — 97% of the amount currently in circulation.(6) And in the modern economy, those bank deposits are mostly created by commercial banks themselves."
The information you yourself linked says that 97% of broad money is made up of bank deposits, and that bank deposits are 'essentially IOUs from commercial banks to households'. This supports what I said: that bank deposits are loans from depositors to banks.
A bank can create an unlimited amount of money by issuing a loan: through a simple journal entry, it can create:
- a loan for $1 billion (owed by customer X)
- a deposit account for customer X (containing $1 billion)
But an SPDI can't do that, as it has to have liquid cash for the total amount among all deposit accounts.
As you note, creating a deposit is just a balance sheet expansion, limited only by reserve requirements and capitalization and not at all by the presence of any depositors. And currently in the USA there are no reserve requirements and as far as I can tell capitalization is largely a shell game of packaging loans into various financial instruments that satisfy the legal requirements and trading them with other banks.
I didn't know that about SPDIs, thanks. It certainly does diminish the value of the banking license if they can't create USD deposits like a normal bank.
- increase your current account balance by $10k (credit your current account)
- increase your loan account balance by $10k (debit your loan account)
That $10k deposit appeared from nowhere. You didn't 'put the deposit in', and it wasn't transferred from another customer or another bank. And the bank does not need to have $10k sourced from somewhere else.
Of course, when you want to withdraw that that $10k, or transfer it to someone who uses a different bank, the bank will have to come up with $10k from somewhere.
But maybe whatever they are called up to transfer to customers of other banks will be balanced out by transfers from other banks' customers to their own.
- increase your current account balance by $10k (credit your current account) - increase your loan account balance by $10k (debit your loan account)
That $10k deposit appeared from nowhere. You didn't 'put the deposit in', and it wasn't transferred from another customer or another bank. And the bank does not need to have $10k sourced from somewhere else.
This is not correct. A bank lends against its cash assets, not against nothing.
Bank accounting works like so: when you deposit $1 at the bank, the bank’s assets increase by $1 (the $1 you just gave it), and its liabilities also increase by $1 (the bank owes you your dollar back when you want it). A bank’s loans are financed by its assets; each dollar it lends is a dollar taken from the asset side of its balance sheet. When a bank lends you $1, it (1) decrements its asset balance by $1, (2) increments your bank account by $1, (3) creates a new asset representing a $1 loan on its own balance sheet, and (4) creates a new liability for you representing a loan of $1 owed.
Point is, a bank does not create money from absolutely nothing when making loans in the way you describe. All loans are financed by the bank’s assets, and a bank cannot originate a larger value of loans than the value of its cash assets. Bank “money-creation” refers to the fact that the total bank account balances in the economy increase when a bank makes a loan; this happens after what I described in the previous paragraph, since the $1 loan now increments your bank account, while nobody else’s bank account balance decreases.
(To see how this works in more detail, imagine the process begins with Alice depositing a one-dollar bill at the bank, and then the bank loaning Bob one dollar. Keep track of the distinction between who has the one-dollar bill and who has a one-dollar bank account balance. The loan proceeds as follows: first the bank gives Bob the one-dollar bill it took from Alice as a deposit, then Bob turns right around and deposits the one-dollar bill back at the bank. The result is that Alice and Bob now both have $1 bank account balances after the loan is made, whereas only Alice did before; the bank still has the one-dollar bill. Summing either bank account balances alone or balances plus dollar bills shows $1 more after the loan was made.)
https://www.khanacademy.org/economics-finance-domain/core-fi...
1. Credit asset account X (which one?)
2. Credit customer's bank account
3. Debit customer's loan account
4. Debit liability account Y
I agree with #2 and #3, which I described in my earlier comment. But:
#4 is already handled by #3
#1 is some unspecified 'asset' account; which one? It can't be cash (as they're not paying out cash) and it can't be a balance they hold with another party (as nothing in this transaction involved anyone but the customer and the bank)
Please take another look. Maybe defining which exact asset and/or liability accounts you believe are affected by each of the entries #1 to #4 will help me understand your point better.
I meant to make two points. First, that IMO it is misleading to say that a bank simply creates new money ex nihilo when making a loan, counter to what you wrote ("the bank does not need to have $10k sourced from somewhere else"). There is in fact a bound on the amount of new lending a bank can undertake, one related to its assets, and in that sense the money lent does "come from somewhere." My attempt at a (poorly) stylized accounting was meant to illustrate what sort of thing makes up a bank's cash assets and how they relate to lending, but I'll try a new approach below. Second, I was trying to clarify what "bank money" means, to explain how it gets created, as much of the broader confusion in this thread seems to be around what "[bank] money-creation" really entails.
Let me try to make my first point again. In modern banking systems, fractional reserve has been mostly replaced by capital requirements, which limit a bank to holding an amount of (risk-weighted) assets no greater than some multiple of its capital. A bank's capital is its assets less its liabilities, which we'll write A - L. Let's call the regulatory capital multiple M, then capital requirements essentially say that A <= M(A - L). When a bank makes a new loan, its assets and liabilities increase equally in the way you described. That means that for a loan of X, if the lending bank is not already bounded by capital requirements, that the capital adequacy inequality becomes X + A < M(A + X - (L + X)) = M(A - L). That is, the left side of the inequality increases but the right side of the inequality is unchanged, so the capital requirement binds more tightly. In particular, it must be that the loan amount X < M(A - L) - A; in other words, new loans are constrained to be less than the excess of regulatory capital over pre-existing assets. So a bank cannot just create arbitrarily large new loans; loans are constrained by capital, the positive component of which is assets. That's where loan money "comes from": a bank's assets.
The second point I meant to make about bank money-creation was not directed at your comment specifically. But I wanted to point out that "bank money" simply means the sum of all bank deposits, and that it, too, is constrained to be a finite number. In this sense also banks cannot poof into existence arbitrarily large loans (with corresponding deposits) in the way I read your comment to imply.
Your point about capital requirements is well made. This is what I was hinting at (but did not explain) in my other comment here: https://news.ycombinator.com/item?id=24538786
> The obvious next question is: what, if any, mechanism > puts a limit on bank X's ability to lend? If it > considers a borrower credit-worthy for a $1 billion > unsecured loan, can it just make the loan, even if the > loan is much larger than the bank's existing balance > sheet? What will happen when the borrower tries to spend > some of the money with a customers of bank Y or Z?
The answer is, of course, the capitalization requirements you described above mean that (i) no, it can't make arbitrarily large loans, and (ii) the bank should hopefully have enough liquid assets to satisfy redemption of demand deposits.
Regarding your earlier statement: "in aggregate the bank doesn't borrow deposits from its customers, it creates deposits for its customers"... I think it's true in aggregate across ALL banks, but less true in aggregate for an individual bank.
Imagine there are 1000 banks in the country. Customer A borrows money from Bank X, which creates a loan and a deposit balance. Presumably, A wants to spend that money (otherwise, why borrow it?), so she transfers it to Customer B, who has a 99.9% chance of banking with a different bank, let's call it Bank Y.
Now imagine this being repeated many many times, across many customers, at each of the 1000 banks. In the end:
- all of the deposits were created as the result of a bank loan, but
- for any individual bank, 99.9% of the deposits came as the result of customers receiving transfers from other banks
The obvious next question is: what, if any, mechanism puts a limit on bank X's ability to lend? If it considers a borrower credit-worthy for a $1 billion unsecured loan, can it just make the loan, even if the loan is much larger than the bank's existing balance sheet? What will happen when the borrower tries to spend some of the money with a customers of bank Y or Z?
As I understand it, crypto-currencies are treated by the SEC like commodities, not cash, and your original comment...
> ... SPDIs seems less like banks (which borrow from depositors) than to safe deposit box operators (which provide a place where depositors can keep valuables they don't want disturbed).
... makes sense since in a crypto-currency-as-commodity world the wallets would be treated more like safe deposit boxes than bank accounts.
No, the ability to create money out of thin air is related to the act of lending itself, it has nothing to do with a banking license. I wrote about this at length here:
Promissory notes are a thing and occasionally used for real estate transactions among other things, so it's not like it's just theoretical, but most private individuals will never issue an IOU, written or otherwise, for more than the cost of dinner.
Edit: Also your article is a nice introduction to the concept.
Another good example is when the State of California started paying its bills with Registered Warrants[1] when it ran out of money a few years back. They don't have a banking license, but they do have taxing authority over a trillion dollar economy so banks were actually willing to allow warrant holders to deposit them. In large part this is because they can be transferred and can be used to extinguish California tax liabilities. Needless to say a sovereign State also has other ways to coerce banks operating in its territory, but to my knowledge no such measures were necessary.
Another fun example is Amazon gift cards. Their effective value can be up to whatever planned spend you can offset. It's basically an IOU redeemable for goods or services. I imagine it wouldn't too to hard to talk a private individual into accepting an Amazon gift card at near par to settle a debt.
[1] https://www.sco.ca.gov/eo_registered_warrants_2009_faqs.html
A) $10,000 of cash.
B) Seeing my balance at a bank (e.g. entering the bank URL on a device you control, and then watching as I log in and navigate to the statement).
C) Proof that a non-bank company owes me $10,000.
Most people would only count A and B, because they're perfectly liquid.
If you want to build the SPDI with us -- we're actively hiring for Engineering, Product, Design and more.
Unfortunately our service does not currently support residents of WA. The SPDI should help with this in the future.
Re: working at Kraken, we hire in all US states including WA and most countries globally. We're one of the few global companies that was already fully remote before Covid19. Any engineers in Washington state are encouraged to apply!
Given that an SPDI isn't a deposit-taking license (like a traditional banking license), what building blocks will the Kraken SPDI give you, that you don't have today? Is it mainly the ability to interface with the banking system/plumbing, without being subject to a third-party's AML and risk management processes? Or something else?
Is it a no-op? Does it increase safety of fiat and/or crypto deposits, or increase e.g. the risk that you'll be forced to lock an account for months to comply with some banking laws?
Some of our team has also expressed interest in visiting Cheyenne to work for a period of time, even if they are not moving there full-time! We will continue to have many fully remote positions open for hiring globally (as we always have).
Not necessarily. See the existence of crypto-only exchanges like Binance. In fact, I think that's the default form of crypto market.
Anyway, there's quite a leap between being a middleman for trades, and emulating a traditional bank with all its associated services.
Considering the volatility of crypto currencies, plus the tendencies of crypto companies to go bust or simply disappear, what is the value of not just going with a regular bank?
More than likely will get their ESP's attention.
I'm sorry to hear about this and would like to apologize for the inconvenience.
Could you please share your public account ID? Please see this support article for more information on how to find it:
https://support.kraken.com/hc/en-us/articles/360028555092-Ho...
I'll then make sure you're being removed from the mailing list as soon as possible. Thank you in advance.
Best, Walter from Kraken
30 days is unheard of for an unsubscribe system. Usually it's not mentioned or it's 48 hours. Very very few websites claim they need thirty days, and it's ridiculous.
I would argue, they dont trust ether either.
I thought banks were the enemy of Bitcoin? Guess it's market cap is high enough that it too must be corrupted by the powers at be.
The funny part is that I've often seen crypto enthusiasts (including here on HN) claim that cryptocurrencies are the future and not as hard to use as people say, and then they go on to talk about their Coinbase provided Visa card how convenient it is. Good work guys, you've reinvented banks with extra steps.
DeFi is currently just hype and experiments but there is no reason why it would not mature in the next decade or two.
> you still need a bank to take care of your money if you don't want to be one hard drive failure away from losing access to the entirety of your funds.
That is just not true. Multi-sign with variable weights and quorum exists. Storage of the private key(s) also does not need to be digital at all. It's just a number often represented as string of chars and numbers or as mnemonic phrase usually just 24 words long. It is rather trivial to store multiple times in different places just make sure no one can find the full key or enough keys to sign a transaction.
For the record i'm not particularly a crypto fan boy, I have a degree in economics, and I've worked in finance so I don't think I fall into your clueless crypto enthusiasts bucket.
Wyoming passed new laws to address that. There were home grown laws in a state that routinely updates its business laws to be attractive. Wyoming is like the western US version of Delaware, but better in my opinion.
Wyoming often passes laws for things other people are ignoring or don't respect yet because their business school didn't tell them to respect it yet.
Instead of SPDI attracting existing banks, an existing cryptocurrency exchange decided to become a bank.
This conveys full access to the US and international financial system: ACH, Fedwire, SWIFT.