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Peter R’s Theory on the Collapse of Mt. Gox

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Re: Peter R’s Theory on the Collapse of Mt. Gox

#31

Post by tdees40 »

tlrobinson wrote: post #16

tl;dr: Mt Gox had a lot of coins stolen in 2011 and has been running a fractional reserve ever since. Mark tried to delay the inevitable insolvency by creating a bot to manipulate the price, and eventually tried to cover it all up by blaming "transaction malleability" attacks. One of many plausible explanations. It's going to be really interesting seeing how this actually plays out.

Bitcoin folks need to understand that fractional reserve banking doesn't mean holding less in assets than you have in liablilities; it simply means that you hold less cash (or very liquid assets) than you have liabilities. What the author of this post describes is just fraud, not fractional reserve, and while libertarian types love to conflate the two, they are emphatically not the same thing.

Re: Peter R’s Theory on the Collapse of Mt. Gox

#32

Post by joe_the_user »

gpcz wrote: post #14
joe_the_user wrote: post #7

Well, Regardless of how exactly it happened, I think the big thing is that anything that operates as "just an exchange" has the potential to operate as a fractional reserve bank instead (IE, just operate with enough money to cover day-to-day transactions and not-have/use-for-something the remaining funds people think you have in your vault). So basically, trusting any unregulated entity that claims to have stuff in i…

It also shows what happens in an environment without insurance. If Mt.Gox was insured, this catastrophe would have been avoided for the customer by either the insurance company paying out or by Mt.Gox never getting hacked due to the security controls that the insurance company would have demanded. This, of course, raises the questions of "who insures the Bitcoin insurance company" and "how do the insurance companies…

It also shows what happens in an environment without insurance.

I'm not sure why you raise this issue considering it's effective meaninglessness.

There are a raft of private insurance entities for things like pension funds and stock brokers (there used to be ones for state level "Thrift" banks. There used a mortgage bond insurance company too - it became insolvent in 2008. The pension and stock broker ones stay solvent by not necessarily fully guaranteeing any entity, etc).

None of the finance institution insurers are going to be large enough to actually insure against systemic failure. Essentially, these entity also, in supreme irony, operate with the fractional reserves principle. They only insure against a small failure every once and a while. Only the state, with it ability to print money, can provide real insurance for things that operate like a bank. So private financial failure insurance is a fancy fig leaf, it gave no comfort during 2008 crisis, etc.

And fricken really insure bitcoin exchanges? They would have to have enough dollars just sitting around doing nothing to do that and no one would provide these dollars. At best, all you're doing is asking for someone to sue if things go bad (OK, that's something but not much).

Re: Peter R’s Theory on the Collapse of Mt. Gox

#33

Post by baddox »

TrainedMonkey wrote: post #29
glesica wrote: post #24

Earlier quoted context omitted.

Which is why government insuring bank deposits isn't such a crazy idea. If the government collapses and can't stand behind the policies, then you have some really big problems on your hands and it is likely that private insurers wouldn't have fared much better. If the government doesn't collapse, everyone gets made (more or less) whole again. Basically, when the government is your insurer, there is no "Who insures th…

Right, because if government does not collapse there is nothing stopping them from printing all the money they need to cover their obligations.

Your point illustrates why government-backed currency is also a bad idea, at least when competition from private currencies is prohibited.

Re: Peter R’s Theory on the Collapse of Mt. Gox

#34

Post by skue »

TrainedMonkey wrote: post #29
glesica wrote: post #24

Earlier quoted context omitted.

Which is why government insuring bank deposits isn't such a crazy idea. If the government collapses and can't stand behind the policies, then you have some really big problems on your hands and it is likely that private insurers wouldn't have fared much better. If the government doesn't collapse, everyone gets made (more or less) whole again. Basically, when the government is your insurer, there is no "Who insures th…

Right, because if government does not collapse there is nothing stopping them from printing all the money they need to cover their obligations.

The consequences of printing excess money during major financial meltdowns is something famous Nobel laureates still debate. The consequences of letting large segments of the population lose their life savings is a bit starker.

Re: Peter R’s Theory on the Collapse of Mt. Gox

#35

Post by joering2 »

tlrobinson wrote: post #16

tl;dr: Mt Gox had a lot of coins stolen in 2011 and has been running a fractional reserve ever since. Mark tried to delay the inevitable insolvency by creating a bot to manipulate the price, and eventually tried to cover it all up by blaming "transaction malleability" attacks. One of many plausible explanations. It's going to be really interesting seeing how this actually plays out.

Im sorry but what is there to "play out"? The show is over. There is a bankrupcy filed protection that will decide what to give to whom but thats about it. We will never find out the truth. Even after extensive investigation, if any, you dealing with anonymous wallets over period of years that been sicking coins out of gox. Definite answer who did it, who knew it, even how they did it, will never come.

Re: Peter R’s Theory on the Collapse of Mt. Gox

#36

Post by sqs »

The risk that something like this is what happened is why Bitcoin companies (and other companies that deal with money) should have mandatory vacation policies for employees. With a mandatory vacation policy, it's much harder to a single person to commit fraud, since keeping up a fraudulent scheme requires daily attention to create fake books and records.

https://sourcegraph.com/blog/mandatory-vacation

Re: Peter R’s Theory on the Collapse of Mt. Gox

#37

Post by baddox »

tdees40 wrote: post #31
tlrobinson wrote: post #16

tl;dr: Mt Gox had a lot of coins stolen in 2011 and has been running a fractional reserve ever since. Mark tried to delay the inevitable insolvency by creating a bot to manipulate the price, and eventually tried to cover it all up by blaming "transaction malleability" attacks. One of many plausible explanations. It's going to be really interesting seeing how this actually plays out.

Bitcoin folks need to understand that fractional reserve banking doesn't mean holding less in assets than you have in liablilities; it simply means that you hold less cash (or very liquid assets) than you have liabilities. What the author of this post describes is just fraud, not fractional reserve, and while libertarian types love to conflate the two, they are emphatically not the same thing.

Well "fraud" implies deception. I think the argument that "libertarian types" make is that very few people understand how money works at a high level (namely that the money supply can increase up to the money multiplier), and perhaps that the people who administer high level finance deliberately set things up to benefit themselves at the cost of the "common man." I don't think many people argue that fractional reserve banking literally constitutes fraud in the traditional civil or criminal justice system.

Re: Peter R’s Theory on the Collapse of Mt. Gox

#38

Post by anigbrowl »

joe_the_user wrote: post #32
gpcz wrote: post #14

Earlier quoted context omitted.

It also shows what happens in an environment without insurance. If Mt.Gox was insured, this catastrophe would have been avoided for the customer by either the insurance company paying out or by Mt.Gox never getting hacked due to the security controls that the insurance company would have demanded. This, of course, raises the questions of "who insures the Bitcoin insurance company" and "how do the insurance companies…

It also shows what happens in an environment without insurance. I'm not sure why you raise this issue considering it's effective meaninglessness. There are a raft of private insurance entities for things like pension funds and stock brokers (there used to be ones for state level "Thrift" banks. There used a mortgage bond insurance company too - it became insolvent in 2008. The pension and stock broker ones stay solve…

Insurers buy insurance from reinsurers, and this works quite well most of the time. Sure, government is the insurer of last resort in situations like the 2008 financial crisis, but that sort of systemic failure tends to only occur at generational intervals. In the meantime, governments also impose things like capital adequacy ratios and so forth to avoid bailout situations, even though banks don't like those very much.

I think you're taking the example of a systemic failure to mean that all such insurance is a waste of time. But most failures aren't systemic or massive.

Re: Peter R’s Theory on the Collapse of Mt. Gox

#40

Post by joe_the_user »

DerpDerpDerp wrote: post #26
joe_the_user wrote: post #7

Well, Regardless of how exactly it happened, I think the big thing is that anything that operates as "just an exchange" has the potential to operate as a fractional reserve bank instead (IE, just operate with enough money to cover day-to-day transactions and not-have/use-for-something the remaining funds people think you have in your vault). So basically, trusting any unregulated entity that claims to have stuff in i…

Couldn't a bitcoin exchange publish a list of accounts that they use to hold coins for customers, and similarly, request that their bank confirm that the sum of customer funds is greater than X? I mean, we might not see exactly the number of things we expect, but if it's holding over 95% of the value expected (through those mechanisms), and shows a successful trend of having increases when it claims and decreases whe…

Well,

Dollars are held in bank accounts that can be verified.

Bitcoins are not held in bank accounts. They are long strings of numbers in essence and "storing" bitcoins involve putting these numbers on a hard disk that isn't connected to anything.

I don't know enough about the bitcoin protocol to say this is possible but if an exchange could exhibit the public keys of their bitcoins without exposing the private keys, they could at least prove that either they or no one owns bitcoins of a given value.

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