[hn_throwaway_99]

It's the same dynamics, though, and "bank run" is the historical term used for these dynamics, i.e. institution takes depositors funds, institution loans out funds to other parties (the difference in the crypto case is that it appears this was done illegally, while in banking it's the underpinning for our financial system), and then there is a crisis of confidence where people run to take their money out, with the fear that you don't want to be last in line when the run starts.

[c7b]

i) that's not how banks work [0]

ii) that's not how these exchanges work. if they are non-fraudulent, they'd have to hold cryptocurrency and cash on behalf of their clients. they'd never have a problem meeting withdrawal requests (the critical element of bank runs)

iii) crypto exchanges, if they are non-fraudulent, would be an equivalent to stock brokers, not banks

[0] https://www.imf.org/en/Publications/WP/Issues/2019/12/20/Mon...

[hn_throwaway_99]

That absolutely is how banks work. Yes, there are fundamentally complexities under the covers, but banks take deposits and make loans - that is their fundamental purpose.

Your points about "that's not how these exchanges work" is just a rephrasing of the point I made where the assets were loaned out illegally.

[c7b]

Have you even had a look at the article that I linked? You are making a claim without providing any backup whatsoever for your position, after it's already been pointed out to you with a scholarly reference that your belief is wrong.

[hn_throwaway_99]

Suggestion: if you're trying to make a point, state it. Linking to 40 page article about the theory behind monetary creation in the modern world is not exactly a good way to make your argument against the statement that "banks take deposits and make loans".

I honestly don't know how one can argue against that, it is simply true to anyone who has used a bank. I did not make any larger statement about the mechanics of modern-day money creation.

[c7b]

It's in the abstract already: money creation is a result of bank's loan creation - the two are connected. Banks don't take deposits that they then lend out, they instead create those deposits ex nihilo when they make a loan.

[hn_throwaway_99]

The difference is still useless pedantry for the purposes of a discussion about bank runs.

If a bank makes a lot loans, and those loans go bad, and then depositors are fearful for their money and make a run on the bank, it is the depositors who are still shit out of luck unless their deposits are insured. You can argue all you want that the traditional model of fractional reserve banking isn't how today's money creation works, but at the end of the day there is a direct line between the quality of a bank's assets (its loans) and the ability for it to service its liabilities (its deposits).

[criddell]

“Banks take deposits and make loans” in the context of this thread seems to imply that the money loaned by a bank belongs to depositors.

[krinchan]

> if they are non-fraudulent

Considering that FTX is a fraudulent exchange and the rate at which fraud has been perpetuated by crypto exchanges historically, I don't know that this is any more than theoretical pedantry.

For all practical purposes at this point in time, if you don't assume your exchange is lying about their reserves and at high risk of a run you're in for a massive loss.

I am heavily against crypto, but I will be the first to point out the decentralization purists were right: not your keys, not your coins. If you're going to play this game, putting complete trust in mostly unregulated entities who have conflicting self-interests from you...yikes.

[wizeman]

> For all practical purposes at this point in time, if you don't assume your exchange is lying about their reserves and at high risk of a run you're in for a massive loss.

I'm a cryptocurrency advocate and I agree. This is why users should 1) never put more funds at risk in an exchange than they are willing to lose (at least, not at the same time), and 2) should demand Merkle-tree based proofs of crypto reserves, like the Kraken exchange has done out of their own initiative, or some other kind of proof of crypto reserves by cryptographic signature and 3) should demand periodic financial audits of their exchanges from reputable financial auditing firms (not the clown show that FTX's financial auditor was, which had offices... IN THE METAVERSE).

Points 2) and 3) are not infallible (especially because exchanges can get hacked) which is why point 1) is so important.

I also think that crypto exchanges should require new customers to pass a relatively strict test about crypto, investment and trading basics, before they could start operating with cryptocurrencies or with any other such trading products. Especially since crypto exchanges are the most common onboarding vector for new crypto users.

Because it's obvious that many crypto users do not know what they're getting into and all the risks that they are taking.

> I am heavily against crypto, but I will be the first to point out the decentralization purists were right: not your keys, not your coins. If you're going to play this game, putting complete trust in mostly unregulated entities who have conflicting self-interests from you...yikes.

Agreed, although I would nitpick in that by itself, regulation is hardly a guarantee that the risks have been eliminated. In fact, many bank failures and financial crisis, for example, have happened despite massive regulations. Also, many regulations are pointless burocracies or even have massively detrimental and/or have unintended consequences in many ways, such as limiting competition unnecessarily, promoting inequality and unfairness by preventing savvy investors (with non-massive amounts of funds) from being able to invest, etc, etc, etc.

But yes, in general I agree with you and I think more transparency for crypto exchanges is definitely needed and maybe should even be required by regulation, given that most exchanges are not doing it themselves out of their own initiative (even though it would be in their collective best interests in the long term).