Quote from: NotATether on Today at 08:21:34 AM

Quote from: Konfusioon on May 13, 2022, 07:56:23 AM

I agree that in many ways this has been blown out of proportion. However I do think that there is value in this article reminding people that you don´t strictly own the money on sites such as Coinbase. Mostly I think that some people live under the impression that sites like Coinbase etc are similar to a bank in sense that yes - Coinbase and bank could go under, but it´s purely theoretical.

As far as bankruptcy proceedings are concerned, crypto exchanges are not treated in the same way as banks. Banks are usually in the "too big to fail" category and that owes to the fact that most people use banks. So the government would usually step in to save the banks from bankruptcy & liquidation as in the case of Fannie and Freddie.

In much of the world, banks are insured by some kind of insurance fund. Banks will pay a portion of their deposits into the insurance fund and will guarantee customer deposits, up to certain limits. This gives confidence to deposit holders of banks, even when the bank is doing badly financially. It also effectively socializes losses that banks incur after the bank goes bankrupt among all banks in proportion to their size.

There is no similar insurance fund for crypto exchanges. Although some exchanges are starting to offer deposit-like products that pay interest, whose deposits are used to provide loans, most exchanges do not make loans with deposits intended for trading. This means that exchange losses will typically come from hacks/exploits, which is difficult to insure against.