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Comment by petesergeant | Hacker News Reader

I don't think it solves that at all, but, as I understand it, that's not been the problem _so far_. If someone has lent an exchange assets against its users' assets then it's not at all clear that they have the superior claim to those assets if the exchange goes bankrupt can't repay those liabilities.

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What? I just checked news last week and there was a small thing about an exchange called FTX that seemed to have exactly this problem.

My understanding is that FTX lent customer deposits to Alameda, who lost them, not that FTX owes money to Alameda. In that scenario, FTX wouldn't have been able to prove they held customer deposits.

Didn’t FTX just hold the customer deposits in a scam token after some financial shenanigans? You would still need auditors to determine what assets on a company’s books were worth their stated value and attest to their liquidity.

Right, but "hold the customer deposits in a scam token" means they no longer hold them in the real tokens, which would be obvious using the method in the linked article.

Wouldn't this effectively reduce the role of the custodian from "bank-ish entity" to "safe deposit box operator"? The custodial entity would need to hold on to the exact assets provided by the customer (the equivalent of your bank holding on to the exact $ bills you originally deposited), which means they couldn't be used for revenue generating activities like investing or lending, which in turn means the custodian could only make money through user fees.

Once the custodian is allowed to do anything that causes the exact tokens a customer deposited to be exchanged for another asset, that opens the door to FTX-style malfeasance.

Yes, and I mean I think that's exactly the point: people aren't expecting their exchanges to be a bank that puts their assets at risk, they're expecting them to be a custodian only, and ding them with fees when they trade, or possibly to actively charge them fees for holding deposits. The only reason actual banks get with putting customer funds at risk is that deposits (up to a certain point) are insured by the government.

If the exchange wants to offer interest-bearing deposits (eg: loan out your crypto), well then you'd expect to no longer be able to verify your deposits because you'd know they were loaned out, or that the exchange was trading with them, or whatever else. You'd also be forced to confront the fact that your assets are at risk at that point.

> If someone has lent an exchange assets against its users' assets then it's not at all clear that they have the superior claim to those assets if the exchange goes bankrupt can't repay those liabilities.

Right, but if an exchange took out a bank loan, the loan was recalled, and the exchange repaid it with customers' deposited cash and later goes bankrupt - possession is nine-tenths of the law.

Especially if the exchange intentionally has a structure that can avoid international tax laws - who's to say it won't also avoid international bankruptcy laws?

> and the exchange repaid it with customers' deposited cash

Then in this scheme depositors would be able to see that straight away, and force bankruptcy and asset recovery on the exchange while those assets still existed. This would (presumably!) stop the exchange repaying debts with customer deposits, because those customers would know straight away and could seek legal recourse against the bank and the exchange.

> Then in this scheme depositors would be able to see that straight away,

If you trust the fiat bank account statements, certainly.

This is explicitly addressed in the article: use stable coins for that. I'm very much a crypto-skeptic, but I do think this particular solution will provide some level of increased safety for coin-heads.

If you trust the solvency of the likes of Tether and Luna, certainly.

Seems to me the problem of solvency at the boundary between the worlds of fiat and cryptocurrency is always present, and shuffling it around doesn't make it disappear.

But that's a choice for customers to make, at the end of the day. The exchange says "we're holding dollars in Tether and we can prove it" and if customers aren't happy with that, then they can not store fiat on the exchange.

Other creditors may or may not have preferential claims over depositors. The point is that you can't prove that the exchange is solvent (which was the entire point of this exercise) unless all assets and liabilities are considered.

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