Home Business Comment: Crypto Platforms Say They Are Exchanges, But They Look More Like Banks

Comment: Crypto Platforms Say They Are Exchanges, But They Look More Like Banks

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Comment: Crypto Platforms Say They Are Exchanges, But They Look More Like Banks

Traditional stock exchanges, like the New York Stock Exchange, rarely fail. And since they don’t offer account services, if they go bankrupt, their customers aren’t responsible for any losses.

Brokerage firms, like Wealthsimple, sometimes go out of business, but their clients’ portfolios are held in the client’s name and therefore can simply be transferred to another broker. In the event of fraud, Canada and the United States offer automatic insurance for lost property.

Banks, like the Royal Bank of Canada, take on more risk 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 services more than other financial services.

This is where the problem lies. Companies like Celsius and Voyager marketed themselves as both exchanges and brokers, which is how their apps came to be. But if anyone were to read the terms and conditions, it would be clear that they were in fact near uninsured banks.

RISKS IN CRYTO-BANKING

At companies like Celsius and Voyager, client 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 companies) or to engage in its own speculative investments (often in crypto assets).

When depositors cashed out, they were paid from the pool, which was able to cover normal withdrawals on demand, but didn’t have enough money to handle everyone withdrawing simultaneously.

Sound familiar?

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