Crypto platforms are more like banks

Posted: Post Date – 11:38 pm, Friday – 12 Aug 22

Representative image.

By William D O’Connell

There is a well-known saying shared by crypto experts and skeptics alike: “Neither your keys, nor your coins.” The phrase, popularized by Bitcoin entrepreneur Andreas Antonopoulos, refers to how the contents of a crypto wallet are owned by whoever has access to that wallet’s digital “keys.”

This means that unless you personally hold the keys to your crypto assets and store them offline, you are vulnerable to attacks, scams and bankruptcies. The endless stream of crypto scams has been well documented. So have security breaches, not to mention staggering carbon emissions.

Of course, offline storage requires an additional level of understanding, technological sophistication, and inconvenience. Enter cryptocurrency exchanges like Coinbase and, which offer simple and convenient platforms for users to buy and sell cryptocurrencies and NFTs.
However, the collapse of cryptocurrencies has revealed that these companies are not just exchanges, but more like banks. Except defunct crypto exchanges like Celsius Network and Voyager Digital were just banks if you read the fine print. Most of the clients, of course, did not.

deposit insurance

Until very recently, cryptocurrency exchanges were all the rage. They had A-list celebrity spokespeople, stadium naming rights, and public endorsements from top politicians.

Cryptocurrency exchanges market themselves as platforms for users to buy and sell cryptocurrencies. But they also function as stockbrokers and, more worryingly, their core business models closely resemble banking.

Traditional exchanges, like the New York Stock Exchange, rarely go bust. And since they don’t offer account services, if they go bankrupt, their customers aren’t at risk of any loss. Brokerage firms, such as Wealthsimple, sometimes go bankrupt, but their clients’ portfolios are held in the client’s name and may therefore simply be transferred to a different broker. In the event of fraud, both Canada and the United States provide automatic insurance for lost assets.

Banks, like the Royal Bank of Canada, take more risk and fail more often. Because banks use customer deposits to make loans, banks are vulnerable to runs. This is why most high-income countries have deposit insurance and regulate banking more than other financial services.

Herein lies the problem. Companies like Celsius and Voyager marketed themselves as stock exchanges and brokers, which is how their apps appeared. But if someone were to read the terms and conditions, it would be clear that they were actually almost uninsured banks.

Risks in crypto banking

At companies like Celsius and Voyager, customer accounts were not held separately in their own wallets, but instead were held in a pool owned by the platform. The platform would use this pool of money to make loans (often to other crypto businesses) or to engage in its own speculative investment (often in crypto assets). When depositors withdrew money, they were paid from the pool, which could cover normal withdrawals on demand, but did not have enough cash to handle all the withdrawals simultaneously.

Sounds familiar?

When cryptocurrency prices crashed, lending from these companies tanked and some were forced to suspend withdrawals. When Celsius filed for Chapter 11 bankruptcy, its depositors learned that their accounts were worthless, since the company had gambled them away.

These firms deliberately hid this reality from their clients. In the case of Voyager, they openly lied about being FDIC insured. Snake oil salesmen for these companies convinced their customers that regulated banks were the problem, only to find out exactly why those regulations exist in the first place.

To make matters worse, the lack of transparency in the crypto markets makes it quite easy for executives and developers to unload their positions long before withdrawals are suspended. By the time customers realize their money is gone, those responsible have cashed in with a handsome profit.

Future of decentralized finance

So where do we go from here?

At the micro level, the answers are obvious. Cryptocurrency exchanges should be regulated in the same way as brokers. Client assets should be kept separate and secure, with clear rules on exposure to risk in the companies own trading.

The crypto assets themselves must be clearly designated as securities and therefore subject to supervision. Exchange platforms should be required to hold sufficient cash in government-issued currency. If this sounds like it violates the spirit of decentralized finance, that’s because it should.

The macro level is more complicated. After 2008, we have demonized big banks and fetishized technology. Cryptocurrency enthusiasts claim that Wall Street is only in it for itself, and they are right. But they have recreated the same system, only it is even riskier.
The latecomers to the crypto party, the ones who now hold the bag, are not the class of wealthy investors. They are normal people, who are rightly suspicious of banks and, by extension, our institutions, and are desperately looking for ways to protect themselves from skyrocketing inflation.

Rebuilding that trust takes time and energy. Willingness is needed to deal with the inequalities caused by the rising cost of living and an extractive financial system. And, more importantly, effective regulation is needed. If it looks like a bank and behaves like a bank, it should be treated like a bank.

(The author is a PhD candidate, Political Science, University of Toronto.