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Comment by beefield | Hacker News Reader

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.

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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.

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