Hacker News Reader

Jan 3rd is Proof-of-Reserves day, and all of the larger actors have ignored it for far too long. I believe Kraken has committed to it now, which is great.

Also: obligatory "not your keys, not your coins" and "don't keep your coins on an exchange".

> Also: obligatory "not your keys, not your coins" and "don't keep your coins on an exchange".

Unless lobbying can still stop it the EU parlement will outlaw self hosted wallets. Only coins on exchanges will be allowed.

That's just evil, but also, likely not terribly enforceable.

It would just bring crypto back to its roots as a government resistant alt currency. Being uncontrollable was the whole point. Particularly regarding Bitcoin and Monero.

At least at this point in time, if you control all of the on/off-ramps, you can very effectively make any cryptocurrency non-viable as money.

I think it could slow adoption, but I've been primarily buying offline. Soon I'll have a lightning node too--improving my BTC privacy.

Defi exchanges are the next major advancement to government resistance as well. This space would rapidly mature under government regulating away self custody.

If all of that ends up working out, and considering no other restrictions are put in place: How are people going to pay their taxes?

Being the exclusive currency accepted for tax payment is an important part of what makes fiat currencies money.

> How are people going to pay their taxes

The government is going to have to suck it up and accept taxes in cryptocurrency. In my country such laws have already been proposed.

I love this. Yeah, they'll have to allow for off ramps or accept crypto for tax payments.

I say have to as otherwise a rich private currency economy will grow unmolested by tax collectors.

> rich private currency economy will grow unmolested by tax collectors

Honestly I wouldn't mind that either. Governments in general are absurdly corrupt and taxes finance that corruption the same way drug users finance cartels.

> EU parlement will outlaw self hosted wallets

Isn't it self-hosted anonymous wallets?

Yes but it’s gonna unworkable in practice to verify your own wallets. It’s a de facto ban.

It's hardly "unworkable". There are already systems in place for verifying your own wallets; you just need to sign a message using your key to verify that the wallet is actually yours.

So far I haven't seen any proposed rules about what you can do with the crypto once it's in your wallet, so all this means is that you need to withdraw to your own wallet first before sending the funds anywhere you want.

So how does it work? Where do I link my national ID to my wallet and how do I tell the government about it?

The national ID link happens at the exchange, via the normal KYC process. You prove your identity to the exchange, and you prove that you have the private key for the wallet by signing a challenge message. That's it. The relevant proposed regulations can be found here[0] (linked from [1]):

> (29) This Regulation applies not only to transfers of crypto-assets where both the crypto-asset service provider of the originator and beneficiary are involved but also to transfers of crypto-assets to or from a distributed ledger address not linked to a crypto-asset service provider, so called “unhosted wallets”, as long as there is at least one crypto-asset service provider involved in the transfer of crypto-assets.

> (29a) In cases of a transfer of crypto-assets made from or to a distributed ledger address not linked to a crypto-asset service provider, the crypto-asset service provider will have to obtain information both on the originator and the beneficiary, usually from their customer. However, the crypto-asset service provider will have to verify the accuracy of only the information on their customer and not on the originator or beneficiary with the distributed ledger address not linked to a crypto-asset service provider.

So when a transfer is made to or from an external, non-hosted wallet the exchange is responsible for identifying the wallet's owner.

Also note this clause in the proposed text of the regulation (under Article 2 paragraph 4):

> This Regulation shall not apply to person-to-person transfer of crypto-assets as defined in Article 3(14) of this Regulation.

So transfers between two unhosted wallets are unaffected.

This regulation has been widely misreported, so don't believe everything you read, especially if it doesn't cite the actual text of the regulation.

[0] https://data.consilium.europa.eu/doc/document/ST-14259-2021-...

[1] https://www.consilium.europa.eu/en/press/press-releases/2021...

> Isn't it self-hosted anonymous wallets?

Yes, and the proposed restrictions only apply to transactions which directly involve an exchange. You can still have an anonymous self-hosted wallet, you just can't withdraw to it directly; you have to move the funds to a verified wallet address first.

"Unless lobbying can still stop it the EU parlement will outlaw self hosted wallets."

Absurd and laughable.

I can't wait to start printing and handing out long random numbers.

Now what ?

Kraken is the least shitty of the actors in the space.

True, probably due to the founder being one of the OG crytpocurrency individual.

Couldn't this just be that they keep some amount in cold storage that's not super easily accessible?

8h? Iceage storage.

It is entirely reasonable to use hardware security modules that enforce timelocks for signing.

If it were entirely reasonable they probably would have disclosed that as the reason.

They're an exchange. Cold Storage is not their job. It isn't much of an exchange if I have to wait 8 hours to put in a sell order.

I wonder what your statement would be if a hacker compromised the hot wallet and drained all of the funds?

I would expect them to have insurance against theft like everywhere else I store money.

Hmm. I would expect them to have layers of security, with one of those layers being funds in a cold wallet with serious access control around it. If I were asked to insure them, the premiums and coverage would hinge on security layers and mitigations in place to prevent loss. I don't think it's unreasonable to have funds in a cold wallet.

They don't need hot wallets for exchange trading. That's just normal accounting, numbers in a centralized database. They could have zero reserves and it'd still work. Only when you withdraw cryptocurrency from the exchange and into your own wallet do they need to produce actual coins for the transaction.

Coinbase definitely doesn't keep all their funds in a hot wallet. They keep enough readily accessible to cover the projected volume of withdrawals; the rest can be kept offline. They even specifically offer a "vault" service for managed cold storage.

When you put in a sell order through the normal "retail" interface you're trading with Coinbase itself. Those coins can stay offline in cold storage, as they're just moving numbers around in their database, off-chain. Only withdrawals and periodic internal rebalancing operations (making up for an imbalance between buys & sells) strictly require online access to the keys, and those only affect a small part of the total.

Coinbase regularly "goes down" or at least large amounts of users unable to login whenever there seems to be a "bank run" - which conveniently will help reduce the downward pressure on the price plummeting, so whatever billion dollar buffers or reserves waiting to buy during large selloffs they have - to also counter a total crash - would have pressure reduced on them as well; it might be a very short period of time that a user might need to be blocked out from selling in order to stop "hysteria" or panic selling.

Interestingly, trading for regular stocks on US exchanges is halted for many reasons including when the price moves too fast, a 10% move in 5 minutes automatically gives a 5 minute halt. https://www.nasdaqtrader.com/Trader.aspx?id=tradehaltcodes

Yeah, the conventional financial markets are rigged, despite (or because?) of layers of regulation and "oversight" - the Robinhood-GME incident and banks/individuals that contributed to the 2008 crash getting off scott-free should have been enough to convince most individuals of this.

2008 crash is a decent example of finance being rigged. Robinhood's handling of GameStop is not. They may be a pretty shit brokerage, but DTCC collateral requirements hit everybody, and they just didn't have enough money lying around to deal with that in the way a lot of customers would have wanted.

So you agree the DTCC doesn't know how to manage their collateral requirements? It's one of their primary reasons for existing. It seems like something they should've been able to foresee or handle, rather than force brokerages into PCO when they already lost control of the situation.

It's really akin to the LME trade halt fiasco, which then became even worse when they retroactively reversed trades. The point is, when they're about to lose money they'll change the rules of the game. If you don't recognize that then you're the sucker at the table.

They know full well how to handle their collateral requirements; that's exactly what they did! The idea that they "lost control" of the situation is pretty wild; how would they have exerted control over it? GME went nuclear in a day, and nobody a week before then would have told you it was going to happen the way it did. Should they require near 100% collateral from brokers on every trade, and everything that comes along with that? And no, them biting the bullet on trades that don't clear isn't a real solution. The ideal situation that would have mitigated it and kept them safe is same-day settlement cycles, but that's not a choice they alone get to make.

The LME situation and the DTCC/meme stock situation have very little in common, besides both of them being triggered by extreme price movement. It's much easier to argue that LME was rigging the game, but commodities are a different market that hit a little closer to home when things go bad. If the LME let short hedges get vaporized, the idea that they should have been left out to dry would be very unpopular in the fallout of that situation. Maybe they should have, but you're going to have a hard time convincing people not involved in finance of that.

Unless you are an institutional trader, the market isn't out to get you specifically. You aren't even shit on their shoe. You're shit three counties over, if that. They barely think about you. They barely even know you exist. You're background noise that most large players need to filter out to find out who is actually on the other end of the trade. Financial markets are rigged in the sense that big players will be bailed out and cut loose no matter what. They are not rigged in the sense that a retail investor can be on the losing end of a trade because they didn't understand what's actually happening.

This is absurd. If you make a bet that you're unable to honor which forces you to shut down the market, you've lost control. If they can't account for this then they can't account for the trades they're supposed to honor.

Yes, it's literally their job to account for situations like this. They failed. Pointing out how insane the situation was only points out how poorly they predicted what might happen with private information they still haven't shared publicly. If they can't account for the bets placed then we don't have functioning markets. They knew what the short interest was, they knew what the options chain was, they have data about trades the public can't even see. There were multiple traders pointing towards a potential short squeeze in GME going back well into 2020, so if they could see it why the fuck couldn't the DTCC?

Your stance is "their job was hard therefore it's not their fault." That's quite frankly batshit insane when we're talking about the stock market which is an enormous functioning part of our economy. Yeah man, I'm concerned they don't know what the fuck they're doing because they've already proven they don't. If they didn't care they wouldn't have changed the collateral requirements - you're contradicting reality with your argument.

You can have the last word, I'm not going to respond any further.

I'll go ahead and have my last word:

- A clearinghouse cannot halt a market

- A clearinghouse's job is to ensure that trades settle, which requires adjusting collateral, which is exactly what they did

- A clearinghouse does not honor a trade, the buyer and seller (via their brokerage) do; if there's an increased risk of the trade not being honored, the clearinghouse raises collateral requirements

- DTCC controlled the situation the best they could from their end by raising collateral requirements, which is basically all they can do

- A market can be functioning perfectly fine even if clearinghouse collateral is at 100%

- A clearinghouse doesn't definitionally know what the outstanding short interest is; short positions are on broker's books and it is the broker that reports that data to FINRA, not the clearinghouse

- A clearinghouse preemptively "dealing with" with all outstanding options positions (or any position, for that matter) that they (there is not just one clearinghouse) know about boils down to collecting 100% collateral

- The OCC clears options, the DTCC (by way of the NSCC) clears equity; the data that the DTCC has regarding options is presumably very limited

- A clearinghouse is not going to require 100% collateral because somebody on the internet believes there's going to be a short squeeze

- I don't exactly know what you think you think they "don't care" about, but if you're implying that a clearinghouse requiring high collateral to deal with brokers not being able to make good on a trade because of activity on that broker's books is somehow rigging the market, you've completely lost the plot

I think you misunderstand what a clearinghouse does.

you should learn from the seabird, instead of railing against stuff you dont understand.

We both think the other is an idiot. I'm going to trust my friends that are securities lawyers and professional traders over an internet stranger regurgitating commonly held misunderstandings on how the market works. Believe whatever you want.

For whatever it's worth, I don't think you're an idiot. It just sounds like you think a clearinghouse can do a lot of things that they cannot do.

I apologize for calling you an idiot - that was a bit much on my part. I still disagree and don't want to continue the conversation, but saying "you don't understand" is different from an accusation that you're incapable of understanding.

Agree to disagree. Cheers.

They absolutely do that. Binance itself imposed limits on cryptocurrency withdrawals not too long ago. If people leave their money in the exchange, they'll lend it out to borrowers which means they're generating inflation. They even have savings accounts and everything.

Exchanges are banks. They have the exact same problems, only with less regulation.

The above is not an indication of fractional reserve. Likely explanation: Customer funds are divided between hot/cold wallets where only a fraction is immediately available for withdrawal, and a separate process (at most exchanges involving manual approval, not sure about Coinbase) is required to move top it up with funds from cold storage. It's a security thing to limit impact of hacks etc.

If you need assets to be immediately available to make on-chain transactions, you should not keep them under custody of centralized exchanges - they can and will delay withdrawals for a variety of reasons and most of them (including CB) do make this clear in ToS.

Now with Travel Rule regulation coming in (CB already started enforcing this in some countries but it will become mostly global over time), you need to specify name and physical address of recipient when withdrawing and this can be subject to manual checks as well, so withdrawals being delayed will become the norm IMO.