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Comment by ibejoeb | Hacker News Reader

Huh. I'm about to go read the the books, but that sounds like a wild interpretation. That sounds like some odd parity reserve, rather than the fractional reserve system common in almost any other domain.

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No, it's standard for "money transmitters" to have to maintain 100% reserves. Coinbase isn't a bank. They're not a lender. "Fractional reserve" means that a fraction of a bank's assets are in cash, and the rest are in loans owed them. That's fine unless a lot of loans go bad all at once, as in 2008. Even then, it eventually worked out when the economy came back.

Here's Wyoming's law:

"Each application shall be accompanied by a surety bond, irrevocable letter of credit or other similar security device acceptable to the commissioner in the amount of ten thousand dollars ($10,000.00) or two and one-half (2) times the outstanding payment instruments, whichever is greater. The commissioner may increase the required amount of the bond or security device to a maximum of five hundred thousand dollars ($500,000.00) upon the basis of the impaired financial condition of a licensee as evidenced by a reduction in net worth, financial losses or other relevant criteria."[1]

For most money transmitters, this isn't a big deal. They don't hold the money for long. The whole point of the business is to get funds from A to B quickly. So they don't have a large obligation to their customers at any one time.

Coinbase's "hosted wallet" service makes them a depository institution - customers have funds on deposit with them. Given the track record of Bitcoin "hosted wallet" companies, most of which have failed, requiring reserves as a consumer protection measure makes good sense. Coinbase could post a bond from an insurance/bonding company, but they'd have to convince the insurance company of their financial soundness. That they can't easily do so is a bad sign.

Coinbase should still be able to do their business of converting Bitcoins to dollars for merchants. They only hold the money for a few hours, and should be able to have reserves for that float.

If Coinbase became a bank or a broker, they'd be subject to US Federal regulation and audits, but would no longer need state licenses. They're trying to sleaze by as a "money transmitter", while acting as a depository institution, and it's not working out for them.

[1] http://legisweb.state.wy.us/statutes/statutes.aspx?file=titl...

Untrue. It's standard for money transmitters to obtain surety bonds, but never have I seen a 100% reserve requirement flat out.

That being said, given Bitcoin's history, I don't think Wyoming's interpretation is unreasonable.

California requires 100% reserves up to $7 million.[1] For a real "money transmitter", this isn't a big deal, because money stays in their system for about a day, often less. For Coinbase, which is trying to be a broker on a money transmitter license, it's a problem. They hold customer assets for long periods.

Coinbase ought to register with the SEC as a broker/dealer. That would free them from state regulation. Then their customers would have SIPC insurance. Of course, Coinbase would have to accept FINRA audits and regulation. Right now, they don't even publish financial statements.

[1] http://www.leginfo.ca.gov/cgi-bin/displaycode?section=fin&gr...

That's not what it says, and that's not any of the sections where it says it. §2037(e) says you need a surety bond.

http://www.leginfo.ca.gov/cgi-bin/displaycode?section=fin&gr...

Surety bonds are not 1:1 reserves.

CA Fin. Code sec. 2037(e): "A licensee that engages in receiving money for transmission shall maintain securities on deposit or a bond of a surety company in an amount greater than the average daily outstanding obligations for money received for transmission in California, provided that such amount shall not be less than two hundred fifty thousand dollars ($250,000) nor more than seven million dollars ($7,000,000)."

A surety bond is an insurance policy good for the full amount of the bond. A bonding company[2] will have a lot of questions to ask a Bitcoin business before taking on that risk.

[1] http://www.leginfo.ca.gov/cgi-bin/displaycode?section=fin&gr... [2] https://suretygroup.com/surety-bond/money-transmitter-bond

So if I put 1m Bitcoin in my CB wallet, CB should have to match it with $250m? That seems rather unreasonable to me.

This is kind of odd, and one reason I'd like to see the actual interpretation from the Division of Banking -- and not just Coinbase's "understanding" of it.

There's nothing there that seems to support the 100% reserve requirement identified as Coinbase's understanding of Wyoming rules. Even with the next section after the bit you quote [0] that allows substituting deposit for the security bond, it uses the same amount. Since the amount is actually $10,000 or 2.5 times the "outstanding payment instruments", whichever is greater (and, on renewal, is calculated based on the average daily balance of the prior year [1]), I don't see where any 100% requirement comes from. If we assume that bitcoins held in hosted wallets are "outstanding payment instruments", it would actually be a 250% requirement -- either for the amount of the surety bond or the deposit in lieu.

[0] WS 40-22-106(b)http://legisweb.state.wy.us/statutes/statutes.aspx?file=titl...

[1] http://soswy.state.wy.us/Rules/RULES/8983.pdf

> Huh. I'm about to go read the the books, but that sounds like a wild interpretation.

Well, its not an interpretation from anything that Coinbase is willing to publicly point to from the relevant agency, its what Coinbase "understands" to be the agency interpretation, these three things are all potentially different:

1. Regulation,

2. the Division of Banking interpretation of regulation,

3. Coinbase's understanding of the Division of Banking interpretation.

Reading #3 and #1 isn't going to tell us if #2 is reasonable.

Fractional reserves are typically only allowed where regulations exist.

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