Home Technology Crypto Platforms Say They’re Exchanges, But They’re More Like Banks

Crypto Platforms Say They’re Exchanges, But They’re More Like Banks

Crypto Platforms Say They’re Exchanges, But They’re More Like Banks

There is a well-known saying shared by both crypto experts and skeptics alike: “Not your keys, not your coins”. The phrase, popularized by Bitcoin entrepreneur Andreas Antonopoulosrefers to how the contents of a crypto wallet are owned by whoever has access to the digital “keys” to that wallet.

This means that unless you personally have the keys to your crypto assets and store them offline, you are vulnerable to hacks, scams, and bankruptcies. The endless stream of crypto scams has been well documented. So have it security failures — and not to mention the mind-boggling carbon emissions.

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Of course, offline storage requires an extra level of understanding, technological sophistication, and inconvenience. Enter crypto exchanges like Coinbase and Crypto.com, which offer easy and convenient platforms for users to buy and sell cryptocurrencies and NFTs.

However, the crypto crash revealed that these companies are not just stock exchanges, they are more like banks. Except defunct crypto exchanges like Celsius Network and digital travel were just banks if you read the fine print. Most customers, of course, did not.

A hand holding a mobile phone with the Coinbase app open on it in front of a laptop with the Coinbase website open
Crypto exchanges like Coinbase and Crypto.com provide easy and convenient platforms for users to buy and sell cryptocurrencies and NFTs.

Who needs deposit insurance?

Until very recently, crypto exchanges were all the rage. They had Famous spokespersons, stadium naming rights and public endorsements by top politicians.

Crypto exchange companies market themselves as platforms for users to buy and sell crypto. But they also operate as stockbrokers and, more worryingly, their core business models quite closely resemble banking.

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 liable for any losses. Brokerage firms, like Wealthsimple, sometimes go bankrupt, but their clients’ wallets are held in the name of the client and, therefore, can simply be transferred to another broker. In case of fraud, the two Canadas and United States provide automatic insurance for lost assets.

Banks, like the Royal Bank of Canada, are taking on more risk and fail more often. Because banks use customer deposits to make loans, banks are vulnerable to panics. 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, this is how their applications appeared. But if someone were to read the terms and conditionsit would be clear that these were in fact quasi-uninsured banks.

Risks in crypto banking

At companies like Celsius and Voyager, customer accounts were not held separately in their own wallet, but rather held in a pool belonging to 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?

A stack of bitcoins is placed in front of the logo of the Voyager cryptocurrency company
Crypto giant Voyager lied to its clients about being insured by the Federal Deposit Insurance Corporation (FDIC).

When crypto prices crashed, loans from these companies went bankrupt and some were forced to suspend withdrawals. When Celsius asked Chapter 11 Bankruptcytheir depositors learned that their accounts were worthlesshaving been hijacked by the company.

These companies have deliberately concealed this reality from their customers. In the case of Voyager, they outright lied about being FDIC insured. The snake oil sellers of these companies are convinced their customers that regulated banks were the problemonly to find out exactly why these regulations exist in the first place.

To make matters worse, the lack of transparency in the crypto markets makes it relatively easy for executives and developers to dump their positions long before they suspend withdrawals. By the time customers realize their money is gone, managers have cashed in with a handsome profit.

The future of decentralized finance

So where do we go from here?

At the micro level, the answers are obvious. Crypto exchanges should be regulated the same as brokers. Client assets should be held separately and securely, with clear rules on risk exposure in the companies’ own transactions.

Crypto assets themselves should be clearly marked as securities and therefore subject to oversight. Exchanges should be required to hold sufficient liquidity in government-issued currency. If it seems to violate the ethics of decentralized finance, that’s because it should.

The macro level is trickier. After 2008, we demonized big banks and fetishized technology. Crypto enthusiasts claim that Wall Street is only there for itself, and they are right. But they’ve recreated the same system, except it’s even more risky.

The latecomers to the crypto party – those now holding the bag – are not the wealthy investor class. They are ordinary peoplerightly distrusting banks and, by extension, our institutions, and desperately looking for ways to protect themselves from skyrocketing inflation.

Restoring that trust takes time and energy. It takes a willingness to address the inequalities caused by the rising cost of living and an extractive financial system. And, above all, effective regulation is needed. If it looks like a bank and behaves like a bank, it should be treated like a bank.


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