Banks usually borrow short-term from depositors, lend/invest long-term, and make money due to (i) the upward sloping yield curve, and (ii) profitability pricing credit risk.
If that's how you understand what banks are, then SPDIs seems less like banks (which borrow from depositors) than to safe deposit box operators (which provide a place where depositors can keep valuables they don't want disturbed).
So what is Kraken getting from the SPDI designation? Access to bank payment networks like ACH etc.?
"Broad money is made up of bank deposits — which are
essentially IOUs from commercial banks to households and
companies — and currency — mostly IOUs from the central
bank.(4)(5) Of the two types of broad money, bank deposits
make up the vast majority — 97% of the amount currently in
circulation.(6) And in the modern economy, those bank
deposits are mostly created by commercial banks
The information you yourself linked says that 97% of broad money is made up of bank deposits, and that bank deposits are 'essentially IOUs from commercial banks to households'. This supports what I said: that bank deposits are loans from depositors to banks.
A bank can create an unlimited amount of money by issuing a loan: through a simple journal entry, it can create:
- a loan for $1 billion (owed by customer X)
- a deposit account for customer X (containing $1 billion)
But an SPDI can't do that, as it has to have liquid cash for the total amount among all deposit accounts.
As you note, creating a deposit is just a balance sheet expansion, limited only by reserve requirements and capitalization and not at all by the presence of any depositors. And currently in the USA there are no reserve requirements and as far as I can tell capitalization is largely a shell game of packaging loans into various financial instruments that satisfy the legal requirements and trading them with other banks.
I didn't know that about SPDIs, thanks. It certainly does diminish the value of the banking license if they can't create USD deposits like a normal bank.
Regarding your earlier statement: "in aggregate the bank doesn't borrow deposits from its customers, it creates deposits for its customers"... I think it's true in aggregate across ALL banks, but less true in aggregate for an individual bank.
Imagine there are 1000 banks in the country. Customer A borrows money from Bank X, which creates a loan and a deposit balance. Presumably, A wants to spend that money (otherwise, why borrow it?), so she transfers it to Customer B, who has a 99.9% chance of banking with a different bank, let's call it Bank Y.
Now imagine this being repeated many many times, across many customers, at each of the 1000 banks. In the end:
- all of the deposits were created as the result of a bank loan, but
- for any individual bank, 99.9% of the deposits came as the result of customers receiving transfers from other banks
The obvious next question is: what, if any, mechanism puts a limit on bank X's ability to lend? If it considers a borrower credit-worthy for a $1 billion unsecured loan, can it just make the loan, even if the loan is much larger than the bank's existing balance sheet? What will happen when the borrower tries to spend some of the money with a customers of bank Y or Z?
As I understand it, crypto-currencies are treated by the SEC like commodities, not cash, and your original comment...
> ... SPDIs seems less like banks (which borrow from depositors) than to safe deposit box operators (which provide a place where depositors can keep valuables they don't want disturbed).
... makes sense since in a crypto-currency-as-commodity world the wallets would be treated more like safe deposit boxes than bank accounts.
- increase your current account balance by $10k (credit your current account)
- increase your loan account balance by $10k (debit your loan account)
That $10k deposit appeared from nowhere. You didn't 'put the deposit in', and it wasn't transferred from another customer or another bank. And the bank does not need to have $10k sourced from somewhere else.
Of course, when you want to withdraw that that $10k, or transfer it to someone who uses a different bank, the bank will have to come up with $10k from somewhere.
But maybe whatever they are called up to transfer to customers of other banks will be balanced out by transfers from other banks' customers to their own.
- increase your current account balance by $10k (credit your current account)
- increase your loan account balance by $10k (debit your loan account)
This is not correct. A bank lends against its cash assets, not against nothing.
Bank accounting works like so: when you deposit $1 at the bank, the bank’s assets increase by $1 (the $1 you just gave it), and its liabilities also increase by $1 (the bank owes you your dollar back when you want it). A bank’s loans are financed by its assets; each dollar it lends is a dollar taken from the asset side of its balance sheet. When a bank lends you $1, it (1) decrements its asset balance by $1, (2) increments your bank account by $1, (3) creates a new asset representing a $1 loan on its own balance sheet, and (4) creates a new liability for you representing a loan of $1 owed.
Point is, a bank does not create money from absolutely nothing when making loans in the way you describe. All loans are financed by the bank’s assets, and a bank cannot originate a larger value of loans than the value of its cash assets. Bank “money-creation” refers to the fact that the total bank account balances in the economy increase when a bank makes a loan; this happens after what I described in the previous paragraph, since the $1 loan now increments your bank account, while nobody else’s bank account balance decreases.
(To see how this works in more detail, imagine the process begins with Alice depositing a one-dollar bill at the bank, and then the bank loaning Bob one dollar. Keep track of the distinction between who has the one-dollar bill and who has a one-dollar bank account balance. The loan proceeds as follows: first the bank gives Bob the one-dollar bill it took from Alice as a deposit, then Bob turns right around and deposits the one-dollar bill back at the bank. The result is that Alice and Bob now both have $1 bank account balances after the loan is made, whereas only Alice did before; the bank still has the one-dollar bill. Summing either bank account balances alone or balances plus dollar bills shows $1 more after the loan was made.)
1. Credit asset account X (which one?)
2. Credit customer's bank account
3. Debit customer's loan account
4. Debit liability account Y
I agree with #2 and #3, which I described in my earlier comment. But:
#4 is already handled by #3
#1 is some unspecified 'asset' account; which one? It can't be cash (as they're not paying out cash) and it can't be a balance they hold with another party (as nothing in this transaction involved anyone but the customer and the bank)
Please take another look. Maybe defining which exact asset and/or liability accounts you believe are affected by each of the entries #1 to #4 will help me understand your point better.
I meant to make two points. First, that IMO it is misleading to say that a bank simply creates new money ex nihilo when making a loan, counter to what you wrote ("the bank does not need to have $10k sourced from somewhere else"). There is in fact a bound on the amount of new lending a bank can undertake, one related to its assets, and in that sense the money lent does "come from somewhere." My attempt at a (poorly) stylized accounting was meant to illustrate what sort of thing makes up a bank's cash assets and how they relate to lending, but I'll try a new approach below. Second, I was trying to clarify what "bank money" means, to explain how it gets created, as much of the broader confusion in this thread seems to be around what "[bank] money-creation" really entails.
Let me try to make my first point again. In modern banking systems, fractional reserve has been mostly replaced by capital requirements, which limit a bank to holding an amount of (risk-weighted) assets no greater than some multiple of its capital. A bank's capital is its assets less its liabilities, which we'll write A - L. Let's call the regulatory capital multiple M, then capital requirements essentially say that A <= M(A - L). When a bank makes a new loan, its assets and liabilities increase equally in the way you described. That means that for a loan of X, if the lending bank is not already bounded by capital requirements, that the capital adequacy inequality becomes X + A < M(A + X - (L + X)) = M(A - L). That is, the left side of the inequality increases but the right side of the inequality is unchanged, so the capital requirement binds more tightly. In particular, it must be that the loan amount X < M(A - L) - A; in other words, new loans are constrained to be less than the excess of regulatory capital over pre-existing assets. So a bank cannot just create arbitrarily large new loans; loans are constrained by capital, the positive component of which is assets. That's where loan money "comes from": a bank's assets.
The second point I meant to make about bank money-creation was not directed at your comment specifically. But I wanted to point out that "bank money" simply means the sum of all bank deposits, and that it, too, is constrained to be a finite number. In this sense also banks cannot poof into existence arbitrarily large loans (with corresponding deposits) in the way I read your comment to imply.
Your point about capital requirements is well made. This is what I was hinting at (but did not explain) in my other comment here: https://news.ycombinator.com/item?id=24538786
> The obvious next question is: what, if any, mechanism
> puts a limit on bank X's ability to lend? If it
> considers a borrower credit-worthy for a $1 billion
> unsecured loan, can it just make the loan, even if the
> loan is much larger than the bank's existing balance
> sheet? What will happen when the borrower tries to spend
> some of the money with a customers of bank Y or Z?
The answer is, of course, the capitalization requirements you described above mean that (i) no, it can't make arbitrarily large loans, and (ii) the bank should hopefully have enough liquid assets to satisfy redemption of demand deposits.
No, the ability to create money out of thin air is related to the act of lending itself, it has nothing to do with a banking license. I wrote about this at length here:
Promissory notes are a thing and occasionally used for real estate transactions among other things, so it's not like it's just theoretical, but most private individuals will never issue an IOU, written or otherwise, for more than the cost of dinner.
Edit: Also your article is a nice introduction to the concept.
Another good example is when the State of California started paying its bills with Registered Warrants when it ran out of money a few years back. They don't have a banking license, but they do have taxing authority over a trillion dollar economy so banks were actually willing to allow warrant holders to deposit them. In large part this is because they can be transferred and can be used to extinguish California tax liabilities. Needless to say a sovereign State also has other ways to coerce banks operating in its territory, but to my knowledge no such measures were necessary.
Another fun example is Amazon gift cards. Their effective value can be up to whatever planned spend you can offset. It's basically an IOU redeemable for goods or services. I imagine it wouldn't too to hard to talk a private individual into accepting an Amazon gift card at near par to settle a debt.
A) $10,000 of cash.
B) Seeing my balance at a bank (e.g. entering the bank URL on a device you control, and then watching as I log in and navigate to the statement).
C) Proof that a non-bank company owes me $10,000.
Most people would only count A and B, because they're perfectly liquid.
If you want to build the SPDI with us -- we're actively hiring for Engineering, Product, Design and more.
Given that an SPDI isn't a deposit-taking license (like a traditional banking license), what building blocks will the Kraken SPDI give you, that you don't have today? Is it mainly the ability to interface with the banking system/plumbing, without being subject to a third-party's AML and risk management processes? Or something else?
Is it a no-op? Does it increase safety of fiat and/or crypto deposits, or increase e.g. the risk that you'll be forced to lock an account for months to comply with some banking laws?
Unfortunately our service does not currently support residents of WA. The SPDI should help with this in the future.
Re: working at Kraken, we hire in all US states including WA and most countries globally. We're one of the few global companies that was already fully remote before Covid19. Any engineers in Washington state are encouraged to apply!
Some of our team has also expressed interest in visiting Cheyenne to work for a period of time, even if they are not moving there full-time! We will continue to have many fully remote positions open for hiring globally (as we always have).
Not necessarily. See the existence of crypto-only exchanges like Binance. In fact, I think that's the default form of crypto market.
Anyway, there's quite a leap between being a middleman for trades, and emulating a traditional bank with all its associated services.
Considering the volatility of crypto currencies, plus the tendencies of crypto companies to go bust or simply disappear, what is the value of not just going with a regular bank?
30 days is unheard of for an unsubscribe system. Usually it's not mentioned or it's 48 hours. Very very few websites claim they need thirty days, and it's ridiculous.
More than likely will get their ESP's attention.
I'm sorry to hear about this and would like to apologize for the inconvenience.
Could you please share your public account ID? Please see this support article for more information on how to find it:
I'll then make sure you're being removed from the mailing list as soon as possible. Thank you in advance.
Walter from Kraken
Ah yes- Cryptocurrencies are definitely going to put money laundering crooks out of business.
Legalizing drugs doesn't make drugs go away. Legalizing drugs makes the middle men go away. If you're trying to stop drugs, this is a dreadful way of doing it. The argument implicit in legalization is there's no reason to stop people using drugs, and that the real harm comes from the middle men. This is not the case against money laundering.
There's good reason to stop money money laundering. If you're intent on concealing the original source of your funds it's because you're attempting to conceal criminal activity and/or tax evasion. This criminal activity is what AML laws are attempting to stop.
C'mon now, a full 1/3 of Tether's bankroll was seized by regulators due to their having been a massive party to laundering.
You can't really be making this argument with a straight face... can you?
Over $9 billion is now locked in DeFi apps - https://defipulse.com - Instead of being like the ICO bubble, in DeFi you lock your money up (not exchange it for a worthless token built on vaporware).
Those ICO issuers have a great business model, haven’t cracked recurring revenue yet, but alot of revenue!
There is also a large services sector, no different than the adtech sector or any other sector with questionable utility.
I worked on many mobile apps that weren’t worth it for the company, and was praised for it. But crypto is the one that has to convince you of...... what?
“There are alot of customers, go where the customers are - Except if it’s crypto, then I’ll just spend all my energy talking about unrelated crypto issues in a incoherent tirade.“
I completely understand how to hold seizure-free assets, some of that involves the discretion of a judge with cash and physical property held in trust's name, some of that involves the permissionless nature of crypto, stored properly. Its just a tool and it's actually pretty okay at what it does.
In other areas, 10 years ago I couldn't convert an international wire transfer into a domestic wire transfer, now I can and it avoids greater compliance scrutiny and speed, while retaining unlimited amounts, and inherits same day settlement. (corporate transaction another country paid in crypto, converted to fiat in local bank, transferred to local brokerage account, 6-7 figures or higher.)
Without crypto, I as of recently have transferwise and now Revolut to do the same thing, which both have an extremely long list of unsupported businesses and transfer limits that are pretty decent but not as good.
There is a slower regulatory process of making any of this practical, which is still happening, such as the processes that allowed Kraken to get that bank charter. Wyoming's laws were passed in 2018, went into force 2019, and Kraken was in regulatory approval since then. On the federal level, of OCC just gave its gracings to national banks to custody digital assets, this year! This will be challenged, primarily by Wyoming lobbyists, who wants Congress to make that order or not. Only Bitcoin has risk management financial products, not even Ethereum yet, in 2020.
There is also a large market of customers in the crypto arena, and high margin business models that don't require that many customers in order to book 7 figures of revenue.
As it stands today, you can lend at your coins at a yield rate close to the borrow's lending rate. That effectively makes all lenders, collectively, "the bank". It also means that borrowers will get a competitive rate for borrowing against their collateral.
This will end the days of getting 0% in your savings accounts while the bank is getting 10% lending out your money once people realize they can lend out their dollars themselves for a much higher yield.
It also lets you lend out your speculative crypto investments. Imagine if you could buy AMZN or NFLX and also lend it out to other people on margin. That's exactly how a margin account works, but of course your brokerage isn't going to let you do it. Crypto lets you play the role of issuing the margin rather than borrowing it, if you so choose.
People that are dismissing crypto have no idea what a revolution in finance this is going to cause.
And you can't buy and hold but also lend AMZN or NFLX with crypto. Sure, you can buy assets that don't have real profit streams attached and lend them to short sellers, but I have no idea why anyone would think that revolution would be a net benefit to them....
I think the analogue is Ally bank, which is known to give the largest returns on savings accounts, currently yielding a whopping 2%. Compare that with a crypto-ecosystem lender like Nexo which is yielding 8-10% on the same asset (USD).
> Sure, you can buy assets that don't have real profit streams attached and lend them to short sellers, but I have no idea why anyone would think that revolution would be a net benefit to them...
That's one of the profit streams my stock broker uses. Why shouldn't it be available to me?
The reason why you don't have access to any of these money-making "institutional" products (like lending stocks, underwriting insurance, or serving as a market-maker) is because they require a lot of administrative overhead. When you replace them with smart contracts, you democratize all of these services.
In a few years, it will be common for people to buy/sell/lend/insure all kinds of assets (physical, virtual, derivatives) from their phone without a middleman.
You can do it today if you're an advanced user with enough money to overcome the currently high transaction costs.
Only if you think that due diligence and actually collecting the repayments is inefficient. Someone like LendingClub will do all that for a 1% overhead with plain old fiat though if you don't want maturity transformation and deposit insurance.
I'd say it's a bug rather than a feature of the crypto ecosystem that people who sneer at 'numbers on spreadsheets' can 'earn 10% interest' if they buy enough tokens from a website whose 'institution license' page tells you what a license is but doesn't tell you which country they're headquartered in, never mind what licenses they actually hold. It's not removed the middleman so much as anonymised him and made it more likely he's running a Ponzi scheme.
I do think that! The due diligence you're describing is only necessary because the custodians can actually improperly handle the money. Embezzlement is a real thing in the traditional system.
Give smart contracts a few more years, and you're going to be more skeptical of the existing system of due diligence with custodians (which we know can be abused) when compared provably secure smart contracts (which we know can have bugs, but will eventually be stable).
If you think crypto is all a Ponzi scheme, you probably haven't been following it for the last couple of years.
Also if you think the traditional system is not a Ponzi scheme, you probably don't understand how it works.
Due diligence with loans has nothing to do with 'embezzlement' and everything to do with evaluating the creditor's probability of repayment from future earnings. You can't assess whether someone's business plan is high or low risk with a smart contract.
Embezzlement is more likely to be a problem when you're giving your money to a service as obviously shady as Nexo (a website which in addition to having the unusual model of borrowing fiat at 10% to lend it out at 5.9%, pointedly avoids saying where its based even in its legal documents, or what licenses it holds on its 'view licenses' page, but is very keen to promote what licenses and audits its founders' other business has in its marketing material...)
Firms like Nexo use the yield farming services to make their questionable business plan viable! We will never know exactly what they were doing before but now they use decentralized versions of themselves.
Now this inevitably requires you to move the goal post to the critique that customers money is being put in smart contracts, good news there is also smart contract insurance that many people buy. I’m not kidding, 70% serious, that’s it’s own nuanced discussion but requires you to get off of a hill stuck in 2018.
But it is incredible how much crypto has changed since 2018. Back then I thought, well, maybe some day this will work. Now it's obvious that it will work, and I think adoption will be rapid once it starts happening.
I won't be surprised if there's a big wave of crypto stuff on HN/reddit/elsewhere again soon. Just like 2017, but this time it's actually useful for something.
I don't think anyone was disappointed with where the Internet was in the early 80s and 90s, and that's because it fundamentally opened up new avenues for people to express themselves, new ways to interact. It wasn't perfect, but it created something new nobody had before. Many things!
The ability to move money online has been with us for decades. It's not new, either. Crypto doesn't open up any new capabilities except harder-to-track ransomware payments.
Imagine if Facebook did something like this with $FB stock to reward it's early users: https://www.theblockcrypto.com/linked/78255/140k-addresses-u...
As a software engineer you know bugs exist. Software as immutable monetary contract law which cannot be appealed to anyone is a doubly bad idea as any bug is a vector for literally everyone losing literally everything, forever. Plenty of examples exist. Remember the DAO? Nothing's changed since then except people decided to "be more careful next time."
> Imagine if Facebook did something like this with $FB stock to reward it's early users.
Why would a company do that? It doesn't make sense. If a service is valuable you don't need to pay people to use it, they pay you to use it. You know, business, where money is exchanged for goods and services?
OpenZeppelin has this in their deployment packages now
People have often been giving the keys to update to multiple community members now
Yes, fraud can be a good business if you don't get caught. So can lots of crime.
I don't see much of that to be honest. Lots of fears about the impact of things like AI, broken VC system having a net negative impact, advantages of limiting freedom of speech on online platforms, abuses by large software companies, etc, etc. If anything there's a pervasive view against rampant unrestricted capitalism and crypto generally ties itself to rampant unrestricted capitalism.
1) > “Disrupt incumbents! Software eats the world! Through the Internet all things can be made better!”
Yes, through the internet lots of things can be made better. That hardly means that every attempt is right, good, or laudable. That hardly means that every attempt should be free of judgement, free of having to stand on its own merits, free from being challenged. You get that yeah?
2) > But when it comes to crypto “No! We love our stodgy ancient corrupt banking system and the money laundering crooks that run them and extract ridiculous fees for terrible service!”
"Stodgy, ancient, corrupt" is a strong judgement you have not provided any support for whatsoever. Portions of the system folks assume fit that description they frequently simply do not understand and love to use as their perennial whipping boy.
For instance, inflation. There's nothing corrupt about inflation. Inflation is designed to incentivize investment. Money as designed is meant to be a temporary, lossy store of value. Inflation is designed to push you towards investment. That can frequently even just be a savings account -- which collateralizes loans. Inflation is the benchmark "rate to beat" in order to make your capital allocations, and pick winners.
3) > "... extract ridiculous fees for terrible service!”
Do... do they? My bank charges me nothing. Ally charges nobody anything for, well, anything. So does this entire generation of online banking. Schwab. Just check out nerdwallet for a list.
I've had nothing but good experience with them.
4) Permanent “psyduck confused” look on my face.
Let me try and explain with a few salient points.
- Bitcoin has a worse wealth distribution than any banana republic. This means that a small few folks possess literally all the wealth there is to be had and the rest of the plebs are playing with pennies. This is not the "new money" people deserve.
- No centralization means all sorts of garbage things are permitted: money laundering, crime facilitating, scams, schemes, separating folks from their wealth.
- It uses more power than an average country to record 7 transactions per second. BTC uses 70TWh per year of power and generates 12kT of e-waste. For nothing. Each transaction requires as much power as an average US household uses in 21 days, and generates 105g of e-waste. TWO transactions is the same as chucking an iPhone out the window. This is intended behavior.
- 15,000 coins are lost per day. Massive deflation results, or as the community puts it "SFYL". This is intended behavior.
- It's a user-hostile technology that punishes users in the amount of their net worth if they make tiny understandable mistakes. This is intended behavior.
- More than 50% of the hash power is centralized in 5 mining pools in the PRC. Using BTC would be the equivalent of giving China control of the currency. This is a natural consequence of proof-of-waste schemes.
- At an average $0.14 per kWh, a single BTC transaction actually costs $84, which is currently being socialized across the block reward. As the reward drops fewer people will mine it, this in turn reduces the security of the system. The system will not survive.
There's really truly nothing to like. It's old, crap tech that supports money laundering and speculation. Nothing more.
I would argue, they dont trust ether either.
I thought banks were the enemy of Bitcoin? Guess it's market cap is high enough that it too must be corrupted by the powers at be.
Wyoming passed new laws to address that. There were home grown laws in a state that routinely updates its business laws to be attractive. Wyoming is like the western US version of Delaware, but better in my opinion.
Wyoming often passes laws for things other people are ignoring or don't respect yet because their business school didn't tell them to respect it yet.
Instead of SPDI attracting existing banks, an existing cryptocurrency exchange decided to become a bank.
This conveys full access to the US and international financial system: ACH, Fedwire, SWIFT.
The funny part is that I've often seen crypto enthusiasts (including here on HN) claim that cryptocurrencies are the future and not as hard to use as people say, and then they go on to talk about their Coinbase provided Visa card how convenient it is. Good work guys, you've reinvented banks with extra steps.
DeFi is currently just hype and experiments but there is no reason why it would not mature in the next decade or two.
> you still need a bank to take care of your money if you don't want to be one hard drive failure away from losing access to the entirety of your funds.
That is just not true. Multi-sign with variable weights and quorum exists. Storage of the private key(s) also does not need to be digital at all. It's just a number often represented as string of chars and numbers or as mnemonic phrase usually just 24 words long.
It is rather trivial to store multiple times in different places just make sure no one can find the full key or enough keys to sign a transaction.
For the record i'm not particularly a crypto fan boy, I have a degree in economics, and I've worked in finance so I don't think I fall into your clueless crypto enthusiasts bucket.