- May 17, 2021
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Okay, so fractional reserve banking? How would that work without a central bank? And as far as I can tell, there would never be a "central bank of cryptocurrencies". Ratio of "what" to "what" needs to be in reserves?
Lets say customers deposit 100 BTC into some ... security, or bank, or entity. The bank lends out 80 BTC to someone else, in return for... what? What is the bank allowed to trade for? Shares? Bonds? Other cryptocoins? Derivatives? Commodities? Futures? 80 BTC worth of FTT tokens? It doesn't matter, its all "not BTC", meaning you open up the bank to market risk. Lets say you trade the 80BTC for US dollars, what happens when BTC skyrockets +20%? Well, your 20 BTC + 66.6 BTC worth of dollars is now insolvent. (86.6 BTC in the vaults, but there are 100BTC deposits you need to return).
Because if its too open-ended, you simply allow the FTT for BTC trade that ruined FTX. There's no entity out there that can "print BTC" like the Fed can print dollars into existence, so there's no central bank whose promises we can rely upon for a fractional-reserve like system. The entire concept falls flat on its face immediately.
A bank sells short-term liquidity to trade for long-term bonds. That is: the $100,000 people put into a USA bank can be traded away for $20k in cash, and $80k in highly rated bonds (ex: a promise that the $80k will come back), likely sometime between 1-week and 12-weeks. Even in a bank-run situation, the central bank can just print money to tide us over until the 4-week bond (or whatever) turns back into cash, and all is well.
The very concept of central reserve banking just doesn't work in the cryptocoin world, because no one can be a reliable printer for BTC to serve as the basis of these promises. The concept of selling short-term liquidity and buying long-term bonds (and skimming off the excess money from that) just doesn't exist in the cryptocoin world yet.
Exchanges are not banks, and aren't supposed to. They aren't supposed to do nothing with your coins. They should make money from the fees. FTT was making a lot of money, it was the other shit that lost the money, Alameda, derivatives, the hundreds of other companies they had. And Celsius fiasco shows it's not really a good idea anyway. The price is too volatile and they have no real way to get money back or manage guarantees like real banks. One simple swing in crypto value and it all goes to shit.
But if they are going to do something with your money, and Coinbase lends money for example, there should be a minimum ratio of guaranteed deposits to "investments". That's why regulation is needed.