Commentary: Crypto platforms say they’re exchanges, but they’re more like banks

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Tra­di­tion­al exchanges, like the New York Stock Exchange, rarely go bank­rupt. And since they do not offer account ser­vices, if they do go bank­rupt their clients are not on the hook for any losses.

Bro­ker­age firms, like Wealth­sim­ple, do some­times go bank­rupt, but their clients’ port­fo­lios are held in the client’s own name and, accord­ing­ly, may sim­ply be trans­ferred to a dif­fer­ent bro­ker. In the event of fraud, both Cana­da and the Unit­ed States pro­vide auto­mat­ic insur­ance for lost assets.

Banks, like the Roy­al Bank of Cana­da, take on more risks and fail more often. Because banks use cus­tomer deposits to make loans, banks are vul­ner­a­ble to runs. This is why most high-income coun­tries – includ­ing Cana­da – have deposit insur­ance and reg­u­late bank­ing more than oth­er finan­cial services.

Here­in lies the prob­lem. Com­pa­nies like Cel­sius and Voy­ager mar­ket­ed them­selves as both exchanges and bro­kers, so that is how their apps appeared. But if any­one were to read the terms and con­di­tions, it would be clear that they were actu­al­ly unin­sured, quasi-banks.

RISKS IN CRYTO-BANKING

In com­pa­nies like Cel­sius and Voy­ager, cus­tomers’ accounts were not held sep­a­rate­ly in their own wal­lets, but rather held in a pool owned by the plat­form. The plat­form would use this pool of mon­ey to make loans (often to oth­er cryp­to firms) or to engage in its own spec­u­la­tive invest­ing (often in cryp­to assets).

When depos­i­tors cashed out, they were paid from the pool, which was able to cov­er nor­mal on-demand with­drawals, but did not have enough cash to han­dle every­one pulling out simultaneously.

Sound famil­iar?

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