The capitalization of Coinbase

Consumers who sign up with Coinbase must feel sure that their online wallets will not be hacked, its executives say. To minimize the risk of a catastrophic data breach, Coinbase stores roughly 99 percent of its customers’ funds in formats that are not connected to the Internet. The remaining 1 percent — the liquid funds that Coinbase uses to carry out trades — comes from the company’s reserves, so that customer funds are never directly connected to the marketplace. That 1 percent is privately insured by Lloyd’s of London, Hirji said, offering another layer of protection.

Here is more from Brian Fung at WaPo.


'Consumers who sign up with Coinbase must feel sure that their online wallets will not be hacked, its executives say. '

Which is hilarious, considering that the weakest link in a security scheme are those self-same consumers.

That Coinbase does not to be the next Mt. Gox is understandable, of course. But Coinbase is extremely unlikely to hold itself responsible for customers who have their devices hacked.

Seems reasonable to me, not hilarious at all, particularly when applying the same (similar) statement to the automobile sector:

"Consumers must feel sure that their car is safe, that it will hold up in an accident and keep harm to the occupants to a minimum."

Which is 'hilarious' considering that the weakest link in automobile safety is those self-driving consumers.

Well, the point I was making did not

a. involve fatalities

and instead

b. concerned the fact that the security that company offers is not the same as the security necessary to ensure that consumers do not have their devices hacked. In other words, as pointed out, Coinbase is doing its best to not repeat the problems that beset Mt. Gox. This is something very different than 'their online wallets will not be hacked.'

Ours is becoming an economy of facilitators. Michael Cohen is a famous facilitator, having facilitated the payoff of Trump's porn star lover. Facebook is a facilitator, providing a platform to facilitate users' obsession with sharing the details of their lives with all of their "friends". Coinbase is a facilitator, providing a secure platform for people to invest in cryptocurrencies, the platform being sort of secure even if the investments aren't, cryptocurrencies an alternative to money to facilitate business transactions; Coinbase is a facilitator of a facilitator, a facilitator squared. I'm an old-fashioned facilitator, a paper shuffler (a/k/a lawyer) facilitating business transactions. In times past, facilitators were viewed as a necessary evil, necessary in the sense that they helped the transaction of real business like building things. Today, the business of America is not business, as stated by Calvin Coolidge, but facilitating. In Calvin's day, wealth was created by people who built things, whereas today wealth is created by people who facilitate. Indeed, the two most economically thriving regions are dominated by facilitators, bankers in NYC and boy wonders in Silicon Valley. I recall a Star Trek episode in which a planet of highly intelligent facilitators couldn't do anything other than facilitate, relying on AI to do all the actual work of building the stuff that supposedly proved they were highly intelligent.

I’m old enough to remember when middlemen were a Bad Thing, and the Big Thing was to eliminate them.

Taking a look at banking reveals we are overdue for a rerun

I would be remiss if I didn't point out that Donald Trump is the facilitator in chief: he doesn't actually build hotels and condos, he facilitates them by licensing his name to those who do.

Yeah, and he facilitates the Russian takeover of the USA!

sorry, couldn't resist...

What technology giveth it also taketh away.

I have been anticipating this moment,: having migrated their entire lives and livelihoods onto the internet, people start to realize that the only way to protect themselves from it is to evacuate back off again.

We are the 99%! Down with the 1%!

The liability chain is keeping accounts under control of traders. Exchanges and brokers will not 'own' accounts under management. This is a significant legal shift and eliminates the front running problem. But is also means traders delegate power of attorney to autonomous bots. We see this shift happening now on the asset swap nets like Telegram. The result is the great simplification, regulations especially become easily monitored, though voluntary.

Okay, so how will it be gamed?

I have a couple eponymous rules. One of them, McMike #7, is that anything involving money, sex, or prestige that can be gamed, WILL be gamed.

Yes, gamed. That is where we go, automatically game the rules to keep all the arbitrage moments shut. But it still works for central banks because traders get the cheap government rates when the agree to regulations. Regulated central banking is much improved, all the regulations become prequalifying contracts, already enforced at trade time.

"because traders get the cheap government rates when the agree to regulations."

What are these cheap government rates you speak of? Do you agree that investors will rationally loan money to well-capitalized firms at better terms (read lower interest rates among other conditions) than they will lend to leveraged firms?

Pretty sure the discount window is not very discriminating.

Broker-dealer entities cannot borrow from the discount window. Only trading going on at bank entities is pretty much FX and Interest Rate derivatives.

You grant a higher degree of segregation that I understand there to be

Just because you are ignorant of current Federal Reserve regulation doesn't mean it is non-existent. The wonkish folk refer to it as Reg W...

lol. written regs regarding Wall Street. Nothing to see here folks, it's covered by The LAW.

I see, McMike is sitting in his parent's basement with a tin foil hat on his head.

Right, because concern about bank corruption and subsidies is a baseless conspiracy theory. Watch out, your rainbow unicorn horn is showing.

There goes your credibility.

At the 5:20 mark of this video

What Maxine Waters is trying to ask - and because she doesn't use the proper language the bank exec are confused - "Why do you book intercompany investment banking fees when your bank entity issued bonds into the market place". If asked this way the execs would have respond with 2 points A) bank entities are forbidden from underwriting debt/equity B) our broker dealers are allowed to underwrite debt equity on behalf of the bank entity BUT we must remain in compliance Reg W which requires us to treat the transaction as if it is a 3rd party transaction and book the appropriate fees on an intercompany basis from the bank entity to the broker dealer.

McMike you might be as dumb and ignorant (on US banking) as Maxine Waters. The only difference is you are a commenter on this blog misleading a small number of people dumb enough to believe your lies in the face of all the facts provided to the contrary and Maxine Waters sits on the House Financial Services Committee and her lies are heard by a lot more people.

You remind me of a caricature Indian Agent in a John Wayne western. You have this masturbatory notion that the distinctions you are raising are relevant to the conversation.

BTW, graph of discount window borrowing vs total bank assets. I know it is hard to see but discount window borrowing is on the graph it is just really close to the X-axis.

You just reminded me of the time when Maxine "Mad Max" Waters gets the Fed Funds and the Discount Rate confused.

The fact that CBS labeled this video "Maxine Waters Spars with Bernanke" instead of "Congress Critter on House Financial Services Committee Knows Nothing About the Fed's Discount Window".

You are the one who seems to be confused, and to be totally frank, I have no idea what your point seems to be except that banking writ large is compartmentalized and tightly regulated.

Which is of course utter nonsense.

Sorry, the primary source of funding for trading businesses - even those that are wholly owned by bank holding companies - is short dated repo.

I've posted enough evidence that people will be able to see through your lies.

I must have missed the gripping evidence you presented, which reveals your command of this important point about lending mechanisms, regulation, and collateral, thus revealing my LIES . I am certain though that it involves a Glenn Beck white board.

Rules and regulations enacted Fed enforced by the OCC which performs regular reviews of bank data, including intercompany transactions. I fail to see where you provided any evidence that legal entities engaging trading receive funding at an interest rate similar to the discount rate - per your original argument that I responded to.

I am sure that makes sense to you in the narrow vacuum of the point you are trying to make

Member banks get the cheap rates because they obey reserve requirements. Shadow banking still exists for trader skipping government reserve requirements. Somethings change. Since entry and exit to central bank accounts is priced by reserve ratio and seigniorage ratio, the member who join will likely take more advantage of central bank lending.

What folks fear is free entry and exit, but the reserve rules are well known there is no reason any trader meeting the reserve requirements cannot be a member.

And just wait until Coinbase pulls a FullTilt.

Well, full-tilt was caused by the government making it very difficult for them to collect deposits and them wanting to allow people to continue playing while they collected the deposits so that they could earn their rake...

I wonder how many Coinbase users have 'password' as their password. Anything that is linked to v the internet can be hacked and crypto currency is no exception

I would imagine that of the 100+ million accounts hacked from Experian, some number had real passwords.

It took me 8 seconds to google this:

Passwords must be at least 8 characters long and have an estimated offline crack time over 6,000 seconds. We do not enforce arbitrary restrictions on numbers, special characters, or maximum password length. However, any passwords longer than 72 characters will be truncated.

You can still attack people's credentials if they don't have some kind of good 2FA on, but the most promising long term attack vector is precisely to intercept wallets that are destined to become cold. There's just way too much money there, and none of the protections that are there in the technically insecure, but humanly decently protected interbank system.

Compare the risk profile from the attack on Bangladesh's central bank vs the equivalent to Coinbase. An attacker as sophisticated as the one on the bank would get through Coinbase's defenses (and pretty much anyone's, mind you). But getting to the keys and taking all the money is different: A lot of the Bangladesh hack's money was never sent away, or was recovered. If you do the same to Coinbase's BTC wallets, it's all going to be gone pretty quick: An attacker would just make all the transfers happen more or less at once, and with high enough fees to take the 7 transactions per second that are available. This limitation actually gives a window to do something to Coinbase, if they have someone looking at the balances of the wallets, but I'd expect even the fastest response team to take 15 minutes from first transfer to first action, and that's if the attacker hasn't sabotaged their tools. And the best they have is probably to try to transfer everything to new wallets, competing with the attackers for those very same 7 transactions per second: If two people have the same wallet's private key, the first one to move it all away wins.

It'd be a very scary attack to a bank or a payment processor, but to an exchange, it is company ending. The plan is so simple, and getting hired in coinbase to scout the details of their internals easy enough, that it's surprising that it's not been done already: It's the safest bank heist possible.

It’s an impressive system, but again illustrates how all the talk about crypto-enabled disintermediation is just hype.

Note the Straussian title that Tyler gave to this blog post.

Coinbase has pretty serious multi-factor authentication to protect users from themselves.

and they lock users accounts for months at a time, whenever anything is the slightest bit fishy... google and see the huge number of frustrated users... they locked my account for 2 months (of course during the peak) as they somehow got the idea I was under 18.. I had to send them multiple pictures of drivers licenses, passports... many emails and calls to get them to unlock.

a feature?

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