The recent collapse of QuadrigaCX has shown that not only crypto funds are unsafe when the private keys are mismanaged but even the cash reserves sitting with unknown banks may not exist. We desperately need a solution where cash controlled by exchanges and stable coins (tether) is sitting either directly with central banks.
Where is all the money held by exchanges and Stable coins?
Exchanges and now stable coins hold a huge amount of cash for over a million users worldwide. We know form tether that the fiat side of where money is held and how it is total mirky.
Where are the billions of dollars sitting on exchanges and stable coins like tether actually sitting?
In my experience most top tier banks like Barclays, Goldman, JP Morgan don’t want to work with stable coins or exchanges. Which leaves these exchanges setting up their banking with higher risk banks in eastern Europe and tax havens with very shaky banking .
It is just a matter of time before one of these banks goes bust. Think about tether, most people don’t even trust that they hold the dollar value they claim to hold, but what happens when their bank which is not a tier-1 bank goes bust?
Size of problem.
At last count, there were over 600 exchanges on coinmarketcap.com and there are expected to be 300–400 stable coins being issued in the next couple of years. And the biggest issue is that all these are underpinned by shaky banks.
What can we do about this?
Central banks and top banks don’t want to work with crypto but they need to think about the greater good. When an exchange like QuadrigaCX goes down, its the 100,000 real like people who suffer. Central banks and large banks have a responsibility to help and protect these funds. This is the reason why it is always advised to not keep your money in exchanges and it in wallets. But if the exchanges can be made safer people can keep their money in them itself.
Fiat Cold Storage
What we need is a cold option for fiat. Excess cash and capital that is sitting in exchanges and stable coins bank accounts should be put away safely with the central bank or in a consortium of top tier banks so that in case of failure the of these exchanges or stable coins can retrieve these funds.
What we propose is not hard to achieve. The main issue these banks have is the money laundering risk. The reason why top banks don’t work with crypto is the AML risk we keep hearing about. And the fact is no top bank is going to work with most exchanges especially for making transactions.
But there is absolutely no harm if the exchanges can hold part of their funds with these banks just for safety. Tether should be able to part $2 billion with either the federal server or at least a bank like JP Morgan with the restriction that funds are held purely for safety and they can only give back to their or in case of bankruptcy to the liquidators.
How can we set up a cold store for fiat fast:
Here are some options for making this a reality
1. Setting funds with central banks
Based on economic theory keeping funds with the central bank is the safest thing you can do. Normal banks park their excess funds with central banks like the federal reserve bank, the bank of England or the European Central Bank.
Crypto exchanges and stable coins should be allowed to do this also. These banks can also provide wallets for cold storage. This would guarantee that if the worst thing happened at least the money is safe and can be recovered.
2) Buying government bonds
Keeping money in government bonds like the ones issued by the US and Uk is the next best thing. Buying bonds are actually very simple and easy.
We need to set up a system where crypto exchanges convert their USD/EURO/GBP holdings into government bonds for excess capital. Now, this might not sit well with most of the crypto world as they distrust governments but this is a better option than XYZ bank in the Bahamas (no offense intended). And also the main idea of decentralization is intact when it comes to transactions and exchange, it is just the cold storage that we are relying on for recovery purposes.
3) Cold with large banks.
Banks like Barclays JP Morgan, Goldman Sachs by global standards have a very small probability of going bust. Most of these banks don’t want to work with crypto but allowing depositor accounts purely for holding cash does not carry the same AML risk as providing full transactional banking. Currently, top tier banks only work with a few exchanges like the circle, coin case. Which leaves 99.9% of the others working with second tier banks.
We all know the value of money and the least we can do is to keep our hard earned money in safe hands.
Published at Sat, 06 Apr 2019 07:13:33 +0000
