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Comment by Barrera | Hacker News Reader

This article gives some context, including this:

> At the end of 2021, Babel Finance had an outstanding loan balance of over $3 billion, up from $2 billion the previous February. It averaged $800 million in monthly derivatives trading volume and had structured and traded over $20 billion in options products.

https://www.coindesk.com/business/2022/06/17/babel-finance-s...

The ripple effects here are going to be substantial and unpredictable. This was a toy bank/hedge fund that grew to monstrous proportions. Now that bank is experiencing a run and it has done what every bank before it facing a similar problem has done: blocked withdrawals.

Please explain to me the difference between a bank and a Ponzi Scheme.

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>Please explain to me the difference between a bank and a Ponzi Scheme.

Banks are forced to abide by regulations and laws dictating how fractional-reserve organizations are allowed to operate. In return, peoples' deposits are backed by the government up to $250k (in the US).

Ponzi schemes ignore regulations and laws, and their customers' deposits are not insured or backed by any organization.

The laws that banks are forced to follow may be woefully insufficient, but the government is incentivized to prevent serious collapses because they would be on the hook for a lot of money. Retail customers are also less likely to start a run if they trust that someone will be there ready to hand over their cash when the dust settles.

250k is per entity, per bank — perfectly legal to use multiple banks and banks publicly offer this as a service to businesses and high net worth individuals.

Example: https://www.sec.gov/oiea/investor-alerts-bulletins/ib_banksw...

> Banks are forced to abide by regulations and laws dictating how fractional-reserve organizations are allowed to operate. In return, peoples' deposits are backed by the government up to $250k (in the US).

Depositors also have first claim against assets in insolvency, so even uninsured accounts will be paid back before bondholders or equity owners. Even a well-intentioned crypto security has no such strict prioritization.

> Please explain to me the difference between a bank and a Ponzi Scheme.

The story of the 3 little pigs comes to mind. "The first pig made his house out of straw...".

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