Coppola Comment

This is the story of a bank that put all its eggs into an emerging digital basket, believing that providing non-interest-bearing deposit and payment services to crypto exchanges and platforms would be a nice little earner, while completely failing to understand the extraordinary risks involved with such a venture.  On 1st March, Silvergate Capital Corporation announced that filing of its audited full-year accounts would be significantly delayed , and warned that its financial position had materially changed for the worse since the publication of its provisional results on January 17th, when it reported a full-year loss of nearly $1bn. The stock price promptly tanked, falling 60% during the day:   Platforms, exchanges and other banks halted or re-routed transactions on Silvergate's SEN payments network, and customers that had other banking relationships removed their deposits. In response, Silvergate halted the SEN network. A banner on its website now reads: Effective i...

Proof of reserves is all the rage on crypto platforms. The idea is that if the platform can prove to its customers' satisfaction that their deposits are fully matched by equivalent assets on the platform, their deposits are safe. And if the mechanism they use to prove this uses crypto technology, that's even better.  Crypto tech solutions have surely got to be much more reliable than traditional financial accounts and audits - after all, FTX passed a U.S. GAAP audit .  No, they aren't. Proof of reserves as done by exchanges like Binance does not prove that customer deposits are safe. It is smoke and mirrors to fool prospective punters into relinquishing their money, just like claims that exchanges and platforms are "audited" or have "insurance". There are no audits in the crypto world, there is no insurance, and as I shall explain, proof of reserves proves absolutely nothing. The biggest crypto exchange, Binance, uses a Merkle tree proof of reserves. H...

Coinbase recently filed its interim financial report. It makes pretty grim reading. A quarterly net loss of over $1bn, net cash drain of £4.6bn in 6 months, fair value losses of over 600k... To be sure, Coinbase is not on its knees yet. It still has $12bn of its own and customers' cash (both are on its balance sheet), and a whopping asset base. In fact its assets have increased - a lot. As have its liabilities. Coinbase's balance sheet is five times bigger than it was in December 2021.  Here's Coinbase's balance sheet, as reported in its 10-Q filing . I've outlined the relevant items in red:   There's a new asset called "customer crypto assets" worth some $88.45 bn, matched by a new liability called "crypto asset liabilities". This asset and its associated liability are by far the biggest items on Coinbase's balance sheet. Footnotes to the balance sheet describe these new items as "safeguarding assets" and "safeguarding lia...

Martin Wolf is the latest in a long line of people to propose full reserve banking and removal of banks "money creation" powers. But as I noted when I reviewed the IMF researchers Benes & Kumhof's proposal for full reserve banking, this would mean the death of commercial banking. Maybe that's not such a bad thing.....but wouldn't it be better to say so directly? Oh, and money creation by committee IS a bad thing. Definitely. More here . (Pieria)

I've now read three different proposals for full reserve banking - respectively from the IMF , Lawrence Kotlikoff and Positive Money . Each is slightly different, but they all share the following essential characteristics: 100% backing for deposits with cash and/or government debt. The IMF proposes cash backing for ALL deposits, including wholesale ones. Kotlikoff and Positive Money propose cash backing for sight deposits (current/checking accounts) only.  Serious restriction on the nature and scope of bank lending All money issued by the central bank only. The proposals differ as to whether the money supply should be directly managed for macroeconomic benefit or whether there should continue to be indirect control via interest rate policy.  I've both written about and had extensive debates with Positive Money about their proposals, and I recently wrote about the IMF proposal. Kotlikoff's proposal is similar to both of these, in that it fundamentally changes the...