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> 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).

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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.

[1]: see this paper, which found that "disaster damages play a significant role in bank failures": https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2506710

bad loans have nothing to do with loosing deposits at banks. see post below.

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.

> 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?

Users/holdings going down aren't good for the company and stock, even if a run doesn't hurt them financially.

Coinbase claims not to do anything with deposits: https://help.coinbase.com/en/coinbase/privacy-and-security/o...

I’m getting a gateway error on your link.

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.

No, but the users would be last in liquidation preference, so would end up screwed anyways.

> No, but the users would be last in liquidation preference, so would end up screwed anyways.

Cite please, because if true that would be mind-boggling.

not so mind boggling, if you regard it as any other company.

Say you ordered a pair of jeans from Sears, via the catalog. And unfortunately your cash transfer cleared on the day they went bankrupt.

They owe you a pair of pants, or your money back if they cannot deliver the product you ordered.

They also owe their employees money, if they have not issued payroll yet for that month.

They also owe their bondholders money.

They may have also taken out bank loans.

You, as the client, are in line behind the employees and bondholders and other creditors.

probably last in line.

In which case you've lost your pants.

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”.

coinbase has the decryption keys to the wallet, so they have full control over the currency.

users of coinbase never "owned" or "have" anything. You gave money to coinbase, they have the money now.

If you had the decryption key offline, then you could control the cryptocurrency.

this is cryptocurrency 101 - the very basic nature of the blockchain itself guarantees whoever has the key to have ultimate control.

Coinbase is not a bank, they don't have to give you anything.

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?

> you sent them back to be repaired

You will probably get them back, but that is far from guaranteed [1].

[1] https://www.nytimes.com/1991/02/23/news/if-a-shop-closes-wit...

I think a shirt would have been more apt. As in, Coinbase blew up and I lost my shirt....

This is literally the topic of the article.

“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…”

Welcome to capitalism! The billionaires always eat first. And don't you forget it.

The billionaires always eat first

And possibly second and even third, depending on liquidation preference terms.

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]

[0] https://www.investopedia.com/ask/answers/09/corporate-liquid...

If you're suggesting billionaire investors are never bond holders I'm confused where you got that impression.

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.

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.

[1] https://d18rn0p25nwr6d.cloudfront.net/CIK-0001679788/89c60d8... page 5

[2] https://www.mondaq.com/unitedstates/investment-strategy/6631...

deleted erroneous comment about shorting on Coinbase.

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.

Whoops, it turns out it's tokenized, not an actual short. I'll delete the comment (really edit, since delete is now removed.)

https://www.coinbase.com/how-to-buy/1x-short-bitcoin-token

It seems you can no longer directly short on Coinbase but they still offer options contracts that let you bet the price will go down.

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.

> As such, your views come across as the kind of statement that are illegal to distribute concerning regulated investment.

What kind of nonsense is that? I'm just some rando on the internet.

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