For anyone who doesn't quite understand why some of us see the potential for an actual scam, despite the fact that PayPal are a "
respected and recognised company" or whatever, I'll see if I can make it clearer:
If we're talking about national currencies and custodians (i.e. banks), it's a widely accepted practice for such custodians to operate fractional reserve schemes. Laws and/or regulations say it's fine for them to do that. If we work on the assumption that it is highly unlikely all of their customers will attempt to withdraw their entire balance in cash at the same time, there is no issue.
But when it comes to cryptographic currencies and custodians, fractional reserve suddenly becomes a very perilous gamble. If the company in question are not capable of signing a transaction for every BTC they claim to own, they are technically insolvent. Bitcoin doesn't
do debt. It's not a thing in our ecosystem. A valid transaction must take place on the blockchain in order for a customer to withdraw funds from that custodian to their own wallet. There is no way to fake it. Meaning that if PayPal
do eventually decide to offer BTC withdrawals, they better make damn sure they have sufficient funds in place, or they're going to have some very upset users, making some very legitimate allegations of scamming.
And until/unless they offer BTC withdrawals, we can't know for sure if they're solvent or not. Paxos, the actual custodian, do have a NY "Bitlicense", but in terms of capital requirements, that merely means:
Each licensee shall maintain at all times such capital in an amount and form as the superintendent determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of the specific risks applicable to each licensee. In determining the minimum amount of capital that must be maintained by a licensee, the superintendent may consider a variety of factors, including but not limited to:
(1) the composition of the licensee’s total assets, including the position, size, liquidity, risk exposure, and price volatility of each type of asset;
(2) the composition of the licensee’s total liabilities, including the size and repayment timing of each type of liability;
(3) the actual and expected volume of the licensee’s virtual currency business activity;
(4) whether the licensee is already licensed or regulated by the superintendent under the Financial Services Law, Banking Law, or Insurance Law, or otherwise subject to such laws as a provider of a financial product or service, and whether the licensee is in good standing in such capacity;
(5) the amount of leverage employed by the licensee;
(6) the liquidity position of the licensee;
(7) the financial protection that the licensee provides for its customers through its trust account or bond;
(8) the types of entities to be serviced by the licensee; and
(9) the types of products or services to be offered by the licensee.
(b) Each licensee shall hold capital required to be maintained in accordance with this section in the form of cash, virtual currency, or high-quality, highly liquid, investment-grade assets, in such proportions as are acceptable to the superintendent.
Or, in plain English, some random dickhead with a fancy job title gets to decide how much BTC they need to keep in reserve. And that person probably doesn't understand the risks of not being fully backed either. Hence my cynicism.
TL;DR - Don't operate fractional reserve with Bitcoin. It will fuck both you and your customers.
