Brian Armstrong from Coinbase was on the latest All-In podcast and talked about this. It sounds like they're not at much risk as they are US based and are regulated to have much higher standards of keeping reserves
If they are truly holding customer funds and crypto 1:1, then you cannot do a bank run on them. They will just pay out. Which is what Armstrong says.
Frankly, after all this shit if an exchange can prove they are reliable and reputable, which Coinbase has so far, they are likely to emerge quite well out of all this (unless the entire crypto market loses all credibility or gets regulated into nothing).
I have no idea how Coinbase operates, so please forgive my ignorance: How do they prove that they are trustworthy?
This is MUCH more transparency than some corp in the bahamas.
Obviously it's not complete security, Enron was a public company and audited, but it's still considerably better than FTX or Binance.
I don't believe that is entirely accurate. Coinbase used to have a pro account with margin trading. Unless they managed to clearly unwind that business there is a risk that something went wrong at one point.
If they steal customer funds, then all is off, but same when there is no margin trading involved.
https://en.wikipedia.org/wiki/Mandy_Rice-Davies#%22Well_he_w...
https://www.bloomberg.com/news/articles/2022-04-25/sam-bankm...
Though it then, by definition, makes it not a Ponzi (at that specific point), since Ponzi implies deception : banks are also unable to pay everyone at once, yet they typically aren't called "Ponzi".
It's not clear at what exact point FTX became insolvent, but I think the CEO writing an $8bn disguised accounting entry for tokens he'd lent to his girlfriend may have been it.
Not sure what to call this since I assume this has been regulated to death in normal finance ?
But it wouldn't surprise me if it had happened at some point at FTX, considering all the greed and hype around crypto...
Though I guess it might be a moot point : information doesn't travel instantly, and a judge might still deem you "guilty of Ponzi" (or whatever term is appropriate) if you haven't literally been shouting "We are insolvent !" from the rooftops ? See again : regulation.
There will probably be a lengthy argument in court (but which court - Bahamas?) as to whether they should have realized this earlier and whether their accounting was deceptive or incompetent.
(those interested should read "Lying for Money" by Dan Davies, it's an entertaining and escalating history of fraud)
There's a distinction between liquidity and solvency. Banks can run into liquidity issues, but in theory if they do their job right they should stay solvent, and will be backed by insurance / reinsurance and such. Basically a very different world from these yolo crypto outfits running out of offshore tax havens.
The bank can have done nothing "wrong", yet if the situation is bad enough : bank run + entities it has been lending to going bankrupt + entities that could bail it out going bankrupt too ; then the bank IS going bankrupt, and taking most of the opposite fraction of the money it claimed to "hold" with it...
The UK ended up owning RBS: https://commonslibrary.parliament.uk/royal-bank-of-scotland-...
Ireland got hit pretty hard: https://www.irishtimes.com/business/financial-services/2022/... but did at least manage to send Sean Quinn to actual jail.
Cyprus had too large and too dodgy a banking sector for its government to cover, so there depositors did incur real losses ("haircut").
If your assets are real and not shitcoins, there is a difference. If I have $200 in my bank, the bank takes $100 from me and buys AAPL stock (and adds their own cash); and then I go to withdraw my $200 on Saturday:
1. The bank is illiquid. I want $200 cash, but the bank only has $100 and 1 AAPL stock.
2. The bank is (likely) solvent. Unless AAPL crashes below $100 on Monday morning they are likely good for the money (AAPL, a blue chip stock, is unlikely to crash below $100) on monday morning. In this case a lender of last resort will step in (like the Fed) and bank may pay some premium for an emergency loan.
The banks are just on a different level of grift when compared to crypto exchanges
A bank with liquidity problems borrows newly printed money from the central bank and repays them with the profit generated from its loans. An insolvent bank that made too many loans that won't be repaid can't repay loans the money printers might offer it and so still gets wiped out. (Its customers get bailed out, but its shareholders don't).
Banks openly lend money to a people who are not the bank's CEO and companies which are not run by the bank's CEO and make a profit on the vast majority of them repaying the money, though typically over a time frame of years, not days. This means the lender of last resort providing funds for those days also expects to get repaid
FTX secretly lent customer funds to a single company run by its CEO to bail it out, and there was no realistic prospect of that money ever being repaid.
If you honestly think that's "equivalent", I'll happily share Paypal details so I can look after some of the money in your bank account in what you consider to be the same way the bank does...