[sillysaurusx]

Does anyone know how Coinbase avoided this fate? I really thought it would be them to fall, but they proved everyone wrong.

There’s some key difference between Coinbase and an exchange like FTX. Is it because FTX had a token, and then leveraged themselves using their own token?

Binance has a token too. Are they in similar danger? It would be an interesting contrast to know why one exchange is safe vs another.

Here’s SBF testifying in front of congress in Dec 2021 that FTX is completely transparent and therefore safe: https://www.tiktok.com/t/ZTRxC7XrT/

Consumers need to be able to research claims like these. Is there a way to make a “Warning: this exchange is over leveraged” indicator? Or is it just impossible to know?

[hailwren]

Coinbase avoided this fate by being a us regulated company. FTX.us is still above water. It’s the Bahamas based company that was able to cook the books and is now defunct.

As for Binance, they have the SAFU (https://academy.binance.com/en/glossary/secure-asset-fund-fo...) which they just topped up to $1B at current market prices (today). You can verify the balances on chain, but there aren’t any statements about outstanding obligations, and there are no guarantees that those funds haven’t been earmarked for other things.

[TedDoesntTalk]

Coinbase is listed on NASDAQ and has significant reporting requirements because of that. Civil and maybe criminal penalties for the board if they lie on SEC filings.

[denlekke]

$1B doesn’t rly reassure me unless I’ve misunderstood. Ftx had $6B in withdraws in 72hours (which they fulfilled) so I don’t rly think binance has shown anything that would provide real protection against a bank run like we just saw.

[hanniabu]

> FTX.us is still above water

FTX.us has been under SEC investigation for security fraud for months, so still too early to make this call

[djbusby]

They making the claim of "above water" for $NOW. It's not to early call $NOW but it is too early to call $NOW+30D

[paxys]

> FTX.us is still above water

I wouldn't be too sure of that. Sequoia just emailed all their LPs saying that they are marking down their investment in FTX.com and FTX US to $0.

[dav43]

So their "Secure Asset Fund for Users (SAFU)" are crypto funds. If that's not pulling the wool over everyone's eyes. This industry needs to die.

[015a]

About 40% of the SAFU is in BNB; their own FTT-like token. Its literally the same reason FTX collapsed; BNB just still has value.

[matheusmoreira]

BNB isn't a token though. It's a real cryptocurrency like ETH.

[015a]

Sure, but the point is that if Binance were ever in a position to where they needed to start liquidating the SAFU, its reasonable to assume that the market for BNB would be in a very poor state; either because of whatever caused them to need to liquidate the SAFU, or because of the liquidation itself. BNB's typical 24h volume is only around 8x the total amount of BNB in the SAFU.

More broadly, the existence of the SAFU should raise eyebrows. If they're acting as a depository trust, in other words maintaining a 100% reserve ratio, then why does the SAFU need to exist? Maybe just marketing? Giving cryptobros something to point at to say "Binance is safe"? I guess that's fine. I don't know; just weird.

Its like, imagine if JP Morgan only dabbled in 0% interest checking accounts, literally just took your money and put it in a box, then said "we've got a billion dollars here to pay out in case we go bankrupt. Half of it is in JP Morgan Stock, that should be fine right?". The situation doesn't make much sense to me, but I may be missing something.

[55555]

Yeah agreed. This seems needlessly risky.

[digianarchist]

How are they insulated from each other? I always assumed that one holds the other. Correct me if I'm wrong?

[RC_ITR]

Coinbase makes money on fees and doesn’t lend out deposits.

Seriously look at their balance sheet!

They have zero risk of this kind of insolvency, their only risk is people stop using them to trade.

Say what you will about that being a weird/dumb model but here we are.

[graeme]

> They have zero risk of this kind of insolvency, their only risk is people stop using them to trade.

US regulated companies can, in fact, go bankrupt, and frequently do. They can also misuse funds or make foolish decisions that cause them to to under even if customers keep using them.

There is even have a system for scoring this risk, called the Altman Z score. A good score is above 3. A grey zone score is 1.8-3.0.

Coinbase’s current score is 0.15!

In the distressed zone with serious possibility of bankruptcy within the next two years.

https://www.gurufocus.com/term/zscore/COIN/Altman-Z-Score/CO...

Anyone who disagrees with this solvency risk assessment is free to purchase some of their outstanding bonds. Their bond coming due in 2028 goes for 53 cents on the dollar.

If they don’t go bankrupt, you’ll double your money in five years. A yield of 13.3% per year!

https://markets.businessinsider.com/bonds/coinbase_global_in...

[RC_ITR]

I don’t want to cite Dunning-Kruger, but Coinbase’s core business model (if you looked at their balance sheet as I suggested) leads to them segregating customer assets from everything else (there’s a special line with a footnote and everything). Those assets line up exactly with the liability line for deposits.

If you’re even a little bit familiar with bankruptcy law, you know that those depositors are the top of the stack (by a mile) and part of the reason Coinbase scores so low on those tests you cite is because the customer deposits get ignored (since they legally can’t touch them).

This is different from A) FTX which lent out those customer deposits irresponsibly and B) Thinking they are a good business whose corporate debt I want to buy.

Like I said in my original comment, that’s a stupid/weird business model that no one else follows because it’s so stupid and weird!

It’s also based on a Ponzi scheme!

But anyway…

[graeme]

Coinbase has those assets listed nice and separately but that is unlikely to hold up in bankruptcy court.

SEC specifically forced Coinbase to disclose the following:

“ "Because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors”

“Deposits” legally are a banking term and coinbase is not a bank.

The money given to Coinbase is more akin to a gift card balance. Starbucks segregates customer gift balances on its balance sheet but if they go bankrupt gift card holders are in line with other unsecured creditors.

[RC_ITR]

1) I love the energy of taking a risk disclosure at more than face value (they are clearly speculating and write that because it is free to do so and it covers their asses, not because the SEC “forced” them).

Show me the precedent where bankruptcy courts considered depositors as general creditors, since you are so sure that’s what will happen.

2) Will you please please please read the balance sheet.

As a favor to me?

In it you will see that of Coinbase’s $105bn in liabilities, $101bn of it is owed to depositors. That is offset by $101bn of depositor assets.

So even in your worst case scenario, depositors get what, a <4% haircut?

I’d love to see the number of FTX depositors who’d take that deal rn…

EDIT: Maybe this will help. What’s special about Coinbase isn’t the fact that deposits are a line item on their balance sheet (FTX did the same), it’s that Coinbase actually keeps the assets.

So whereas FTX not only lost solvency in its core business, it also lost solvency in deposits, Coinbase can only lose solvency on its core business, which is minuscule relative to the scale of deposits.

[graeme]

Alright so I read the balance sheet:

1. The numbers you refer to are from the unaudited quarterly report

2. The last audited numbers are from their annual report, end date Dec 2021, during the tail end of bull market

3. $95 billion of the assets on the balance sheet are crypto assets. This is an unaudited figure, but there is no obligation to hold crypto 1:1 from what was deposited

4. Concentration of credit risk was a significant risk listed. This would apply to non insured funds at banks in excess of $250,000 and they also face risk of Tether or USDC imploding. We do not know the composition of their crypto assets. About 1/3rd of their audited crypto assets are classed as “other”

There’s plenty of room there for saying “I am shocked, shocked that our assets were not redeemable at market value en masse in the flash crash”

We’re talking about a company which has been repeatedly and publicly slapped by the SEC, in an industry full of accounting fraud, in a bear market, and which the markets rate as highly distressed.

Perhaps they risk criminal prosecution for missteps, but there are plenty of examples of that not being sufficient deterrent, of companies trying to dig themselves out of a hole.

You were referring to their unaudited 2022 balance sheet correct? I am not an expert so please tell me if I have missed something

[wmf]

The point is that if Coinbase goes bankrupt their customers will not lose any money because customer assets are segregated from Coinbase's assets.

[iseeyou]

  Because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors

https://finance.yahoo.com/news/coinbase-warns-customers-coul...

[RC_ITR]

>may

There’s no precedent. Disclosures are always worst case scenarios

And again, will anyone please read their fucking balance sheet?

Liabilities of $105bn, $101bn which are deposit liabilities vs. $101bn of customer assets.

Even in a worst case scenario depositors get a <4% haircut.

THIS IS VERY DIFFERENT FROM WHAT FTX DID

[stephen_g]

In theory they make money on fees... They posted a net loss of $544.6M on a 64% decline in transaction revenue in the quarter ended Sep 30 [1]. This next big drop probably doesn't bode very well for them...

Coinbase may eventually run out of money and go out of business because their operating costs presumably exceed their revenue, but the customer funds won't evaporate if/when they do, unlike the shadier exchanges.

1. https://www.reuters.com/technology/coinbase-reports-third-qu...

[gonzo41]

They are facing a systemic risk of crypto having such bad PR that no one will be willing to go near them.

[RC_ITR]

>their only risk is people stop using them to trade.

[gonzo41]

ahh my bad. Moving a bit quick. So much is going on.

[Thorrez]

Another risk is if they get hacked.

[colinmhayes]

Coin base doesn’t offer margin loans?

[RC_ITR]

They stopped in 2020.

Like I said, the model is sort of stupid and weird but it’s less stupid than FTX’s at the moment!

[colinmhayes]

I mean really it seems like FTX’s issue is that it got raided to serve as a hedge funds piggy bank. They’re not stupid, they wouldn’t accept such a massive amount of collateral in their own token if it wasn’t mostly owned by their hedge fund that they want to funnel assets too.

[paxys]

Coinbase is a perfectly normal company. They take your money and exchange it for crypto (and vice versa), taking a cut in the process. There's no funny business with tokens or lending out customer deposits. They are also regulated as a public company by the SEC and Delaware courts. If they do go out of business it'll be due to good old fashioned operating losses.

[sanxiyn]

Note that Coinbase does have lending business. The reason it's not visible in their balance sheet is because it's not popular.

https://www.coinbase.com/borrow

[paxys]

I didn't know that, but considering that half the page is disclaimers and legal notices I guess they at least somewhat know what they are doing.

[rnk]

I'm not an expert, but the reason this keeps happening is the financials of these firms are opaque. No one really knows how much they have, how much they have leveraged various investments to make new investments with loans on them. They are not audited. They all claim they are in excellent financial health and then boom they are gone because there are too many withdrawals and they can't pay back all their customers. Of course normal supposedly well-regulated companies also fail like ltcm. But that's systemically limited from regulation mandated from previous problems (like us 1930s).

I'm curious about why was he buying out all those other failing crypto firms? Did he not understand his own situation? Was it binance's triggering via the sale of ftx that triggered customers pulling their money out? Who knows about binance now. Any external investments they had went down in value, their crypto holdings went down. There's not particular reason to worry about binance. I've never bought into these inexplainable crypto giants anyway. How many more are left to fail?

[sanxiyn]

CZ says the primary lesson is "never use a token you created as collateral", and Binance has never used BNB for collateral, and (by implication) FTX did use FTT for collateral.

https://twitter.com/cz_binance/status/1590103159506341888

As far as I can tell, this seems to be the correct analysis. The technical term for why you should avoid this is "wrong way risk".

[denlekke]

Devils advocate: how do we know binance hasn’t used BNB for collateral other than a tweet (which isn’t proof at all)

[sanxiyn]

We don't, but it's good for Binance, so we can expect Binance to do so out of self interest. Avoiding wrong way risk is standard part of risk management.

[rnk]

if it was a mistake for ftx to avoid that, it was a mistake for all the other firms, yet the other firms did it like ftx. Probably all these other firms would have claimed they did standard risk management, yet so many have died, one after another.

So it's not satisfactory to say surely binance wouldn't do that, because it seems many of these companies were doing similar things but always claiming they were safe.

[djbusby]

Aren't they publishing their books, or audits? IIRC them and CoinBase has/have/had audits to show 1:1.

[denlekke]

i don't think they've done either. binance has just today linked to some wallets of some of their holdings but haven't provided any info on any liabilities they have

[zoklet-enjoyer]

Binance has a token, but it is a lot more useful than FTX's coin. Binance has their own blockchain with a lot of applications. Their coin, BNB, is used to pay for fees on that network. As far as I know, FTX's coin FTT was used by FTX customers to get cheaper trading fees and for price speculation.

[rich_sasha]

It sounds like FTX wasn't unfortunate but fraudulent. The business model of running an exchange is pretty solid, and reasonably risk-free financially. Crypto exchanges could be hacked, there are technology risks, counterparty risks against individual traders etc. but in general an exchange takes very little financial risk. Exchanges merely facilitate the shuffling if money and assets between people, risk-free for them (mostly). Same as bookmakers, who mostly match off people betting on opposite sides.

In the bookmaker analogy, it sounds like FTX took the betted cash and spunked it away to prop up Alameda. Nominally this was a loan backed by the FTT token, but at best this was a risky asset, and FTX could no longer promise they can pay out all the bettors - because FTT could, and did, drop in value.

Note that at no point during the various crises of past 15 years has any fiat exchange been under financial pressure. Banks, funds and insurers, yes, but they take outright financial risks. But not a single exchange.

[cuteboy19]

Binance's claims about 1:1 backing for BUSD seem legitimate but then again FTX also seemed like a legitimate exchange.

People who use exchanges should withdraw their crypto asap. Does not matter if it's binance or coinbase or kraken. There is 0 benefit to keeping it on any exchange and unlimited risk for doing so

[TedDoesntTalk]

> There is 0 benefit to keeping it on any exchange

Conversion to/from fiat

[cuteboy19]

Keeping as in long term, more than a day or so

[wmf]

We don't know what happened at FTX (if anyone says they know, they're speculating). FTX said, right up to the weekend, that they weren't leveraged at all. Maybe that was a lie or maybe the problem is elsewhere. It may take a few months for the truth to come out.