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Comment by wpietri | Hacker News Reader

> No customers experienced a loss of funds.

I mean, there's still plenty of money in other people's accounts they can use to cover the losses.

Does anybody know whether the regulatory regime they operate under is sound? If a US bank lost this kind of customer money in a theft, I'd have some confidence that the the FDIC and the Federal Reserve would make sure they actually had all the money they were claiming they had. But personally I'd hate to bank purely on the internal controls of a Singaporean subsidiary of a Maltese company.

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Please explain how they can use the money from other people account to cover the losses. If i had a account there, i wouldn't allow them to use my money to cover this.

That's touchingly innocent.

As an example, take Bernie Madoff. He took in people's cash and then sent them regular statements about how much money they had. But they were just statements doctored to look good. When some people withdrew money, he just gave them money that was handy. At some point, the difference between the numbers on the statements and the actual assets was over $50 billion. More details here: https://en.wikipedia.org/wiki/Madoff_investment_scandal

None of the Madoff investors "allowed" it. I don't know anything about Crypto.com, but the same thing is surely happening with other "crypto" companies. It doesn't even have to be malice; often a failure starts out with some event like a sudden loss to theft. Insiders believe they can make the money back, so they just keep on operating and hope nobody notices.

This opportunity for divergence between reported and actual funds is one of the big reasons US banks are highly regulated. The FDIC is on the hook for large sums in the event of failures, so they're quite vigorous in making making sure that doesn't happen too often.

Like tether swears All the money is in their accounts..

> If i had a account there, i wouldn't allow them to use my money to cover this.

They're...not going to ask your permission?

If you have an account there, they have a large central pile of assets, and a database row saying that you are entitled to X amount of those assets. Someone else has a database row saying that they are entitled to Y amount of those assets.

If someone breaks into the other account, and makes an illicit transfer, then Y goes down and the central pile of assets goes down. If crypto.com makes the other account whole, they simply increase Y back to the original amount. But the central pile of assets hasn't gone up accordingly. They just used "your money" to cover this, and they don't ask you for permission.

When you go to them later and say: "I want to withdraw my X somewhere else", they might say: "I'm sorry, we don't have X right now". That's a run on the bank.

Fortunately, we have protections around specific institutions to prevent these kinds of situations. Capitalization requirements, FDIC, etc. Unfortunately, if you have an account with crypto.com, none of those protections exist for you. You're banking on them having the funds when you ask to withdraw them.

Ok, i get it now.

This is exactly what Bitfinex did back in 2016. They were 'hacked' for $72M, or about 36% of their assets at the time. They logged in, and removed 36% of everyone's account balances and replaced them with IOU tokens. [1] In fact it was believed that Coinbase was a Bitfinex customer at that time - and that they were one of the few accounts not actually given a haircut because I assume their lawyers mumbled something about 'fraudulent conversion.' [2]

[1] https://www.reuters.com/article/us-bitfinex-hacked-hongkong/...

[2] https://definitions.uslegal.com/f/fraudulent-conversion

> Please explain how they can use the money from other people account to cover the losses.

Once it enters their hands, the money isn't really “from” a particular account in any tangible way.

> If i had a account there, i wouldn't allow them to use my money to cover this.

An account is just a record of funds to which you are entitled; there are certain types of relations where someone keeping money for you legally needs to keep it segregated from other funds of theirs, but crypto.com doesn't have that kind of relationship with account holders. If they don't provide you with your funds when you ask, you can try legal action to recover it, but you don't have a veto on whether they update the entry recording someone else's balance to make them whole after a hack, even if that increases the risk that they won't have your money when you want to withdraw it.

Easy: imagine one of the poor sobs decides to withdraw, hop a bit of creative accounting and your money is borrowed to pay for the withdrawal.

It s not each of the user individually seeing their balance go down, it s the company lying even more about its ability to liquidate all accounts.

Your number on their html page they graciously present to you will go unchanged. It s not a new phenomenon, every bank does it, except crypto.com does it to pay losses for a theft while banks would do it to lend to a baker buying a bakery on mortgage. If said baker screws up and cant repay, and many more others as well, clients cant all withdraw the pretty number.

Another interesting difference is that a bank pays you for lending to them with your savings account, at market rate (very low these days), while I dont think crypto ponzis do because you re suppose to just wait and moon.

Also, banks are insured by the government (FDIC) and heavily regulated to reduce the risk of failure. Crypto exchanges are not, which is why they seem to fail about as often as a 19th century bank would.

Being insured by the gov for up to a certain amount will not solve the default issue (this is what crypto.com is pretending with their eerily similar worldwide protection thing), it was made to save poor people from complete ruin, not protect your savings.

If you re retiring and expect the bank to be good on a million $ worth of some sort of instrument, you're fucked minus 250k.

And this is totally fine: you re compensated for a low risk of default when you lend to your "savings account" and must accept this could happen. There s no way to make money waiting doing nothing risklessly. Creeptards know that well, they all in on wind, there s no worse risk.

Banks pay out losses from the profits generated by other account holders all the time. Just gotta hope their losses never exceed their profits.

You're aware your bank (not crypto bank, just Bank of America or whatever competitor) uses your money to invest and doesn't just keep in into a vault, right?

This was the path Mt Gox went after they were hacked. Didn't work out so well for them in the end.

This... Is literally how banks work.

Banks do not work this way. Banks have insurance policies, both private and federal, that would cover the losses.

> Banks do not work this way

Yes, they do.

> Banks have insurance policies, both private and federal, that would cover the losses.

The federal insurance policy covers you if, after operating this way (or for some other reason) the bank ends up without money to cover your account (and, the regulation that comes with the insurance means that it's more likely that the Federal government will force the sale of your bank to one that does have extra money to cover your account even before that happens.)

But banks still operate as described (and using some of their pool of assets to buy private insurance is functionally the same as just adjusting the balances of people it is compensating for losses and increasing risk to others by doing so, except it smooths things a bit over time at the expense of higher average cost.)

Banks do not take money from other accounts to cover operating losses, lol, thats almost certainly several crimes. [citation needed].

> But banks still operate as described (and using some of their pool of assets to buy private insurance is functionally the same as just adjusting the balances of people it is compensating for losses and increasing risk to others by doing so, except it smooths things a bit over time at the expense of higher average cost.)

It's really not. Customer deposits are segregated from the operating accounts in accordance with applicable law. You're not suggesting they're taking payroll out of customer deposits are you?

> Banks do not take money from other accounts to cover operating losses

Banks don't keep money segregated in accounts.

Banks have reserves, and accounts basically record the right of people to draw money.

When they cover a fraud loss from one account by increasing the balance for that account to make the owner whole, they are doing exactly what crypto.com would be doing. Neither involves taking balances from others accounts, but both increase the risk of inability to cover accounts (including those of other people) as a result. Now, yes, banks provide consumers with more protection against the risk this creates, and are regulated in ways which make them less likely to do it to an extent which would create as much risk as a hype driven crypto exchange in the first place, but in terms of the basic mechanics, it is not any different than what has been suggested.

The model of money actually being held segregated in an account works for things like lawyers holding client funds and a very few other specific things, but it doesn't really capture what goes on with banks at all.

Banks might be protected under some federal legislation, but overall it doesn't really make much sense for any sizeable bank to insure themselves with some other party. For any non-rare event it's much easier to just keep some emergency money at hand. The only thing it'd make sense to insure themselves against are large scale damages that exceed the amount they can reasonably write off, but if the damages exceed the amount of funds a bank has readily available then there's little chance anyone else can cough up that amount of money other than the government.

Ever heard of Mt. Gox?

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