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Author Topic: Interest on deposits  (Read 2250 times)
Isosceles
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January 01, 2012, 09:49:51 PM
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I believe giving interest on fiat deposits is a regulated activity. Does anyone know if this would prevent a BTC exchange from offering interest?
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repentance
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January 01, 2012, 10:36:57 PM
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I believe giving interest on fiat deposits is a regulated activity. Does anyone know if this would prevent a BTC exchange from offering interest?

I suspect that the regulation relates to the deposits being loaned to other people.  I doubt that there's any legal regulation which says you can only pay interest on deposits if your give loans to others.  My PayPal agreement specifically states that they don't pay interest on money deposited with them - although they no doubt receive interest from the financial institutions where they keep the majority of user deposits.

How would you see a BTC exchange funding interest payments to depositors?  To some extent, that's going to affect the answer to your question.


All I can say is that this is Bitcoin. I don't believe it until I see six confirmations.
mcdett
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January 02, 2012, 12:25:29 AM
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I believe giving interest on fiat deposits is a regulated activity. Does anyone know if this would prevent a BTC exchange from offering interest?

Its only regulated that that most who partake are FDIC insured institutions (banks).  IANAL, but I don't see why two parties can't enter into a private contract in which the holder of some asset agrees to give the assets to another for a fee and a promise to redeem that initial asset at some later contract defined period.  Governments are more interested in your role in MOVING assets (money) around and less interested in if you pay out fees for holding it... but IANAL.

btw... how does your idea involve paying out interest on btc holding?
Isosceles
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January 02, 2012, 02:30:50 AM
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Possibly related EU/UK legislation, which might affect an exchange in the EU when issuing USD coupons similar to MtGox.

"electronic money issuers will not be allowed to grant interest or other benefits related to the length of time e-money is held"
http://www.fsa.gov.uk/smallfirms/resources/one_minute_guides/systems_controls/e_money.shtml

You also have to be authorised if you take deposits, in the UK & the US. http://en.wikipedia.org/wiki/Non-banking_financial_company No idea about Japan / Singapore.
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January 02, 2012, 03:03:19 AM
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Possibly related EU/UK legislation, which might affect an exchange in the EU when issuing USD coupons similar to MtGox.

"electronic money issuers will not be allowed to grant interest or other benefits related to the length of time e-money is held"
http://www.fsa.gov.uk/smallfirms/resources/one_minute_guides/systems_controls/e_money.shtml

You also have to be authorised if you take deposits, in the UK & the US. http://en.wikipedia.org/wiki/Non-banking_financial_company No idea about Japan / Singapore.


You have to be an authorised deposit taker in Australia too - that's the FSL licence PayPal holds here - but the issue often doesn't arise until an organisation becomes large enough to come to the attention of regulators, usually when a lot of people complain about the company or taxation issues arise.  PayPal argued for years that it didn't need to be licensed and lost that fight in many jurisdictions - even today, how it's licensed and the services it can offer varies from one location to the next.

Private loan contracts exist pretty much everywhere in the Western world but I don't think that's what the OP is talking about.  He seems to be talking more about the exchanges paying interest on user balances while the users still maintain control over their deposits - pretty much the same way as banks pay interest on whatever money is in your transaction account.  Banks get the money to pay interest by lending money out at a higher rate than they're paying you, and I've seen no support at all here for the idea of the exchanges being able to lend out user funds.

All I can say is that this is Bitcoin. I don't believe it until I see six confirmations.
Isosceles
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January 02, 2012, 05:13:30 AM
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After Googling, I think the key is these are "demand deposits", i.e. the firm agrees to pay the account holder when demanded. Usually other investments that pay an interest (bonds, loans, preference shares, etc.) have some capital risk or illiquidity. I'm not a lawyer & this is probably the danger of doing your own legal research, as I would have expected Paypal to immediately fall under this category.
repentance
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January 02, 2012, 07:39:43 AM
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After Googling, I think the key is these are "demand deposits", i.e. the firm agrees to pay the account holder when demanded. Usually other investments that pay an interest (bonds, loans, preference shares, etc.) have some capital risk or illiquidity. I'm not a lawyer & this is probably the danger of doing your own legal research, as I would have expected Paypal to immediately fall under this category.

The exchanges would probably argue that they are not deposit holders - they don't want to be classified as such because the licensing requirements are onerous and expensive.  They're not merely escrow services either, because users do keep balances with them for future transactions - that's the reason why PayPal had to become an authorised deposit taking institution in some jurisdictions and was unable to successfully argue that it was just an escrow service or money transmitter (both of which have lesser regulatory requirements) in those places even though it's regulated mostly as a money transmitter and payment intermediary in the US.

The exchanges offering interest would bring them closer to acting more like financial institutions and in some jurisdictions that's going to create problems that they don't want - no matter what they call themselves, regulators will look at what they're actually doing and whether that activity is subject to licensing and regulation.  I recall someone posting an answer from one of the UK regulators which specifically addressed the issue of what things UK regulators would look at in deciding what kind of licensing might be required for exchanges.

Another issue is whether the exchanges want people using them as online wallets - something which the payment of interest would encourage.  MtGox has said in the past that they don't.  I doubt that any of the exchanges want to open themselves up to liability if funds or Bitcoin go missing en masse when their ability to insure against such a possibility is limited.

All I can say is that this is Bitcoin. I don't believe it until I see six confirmations.
PatrickHarnett
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January 02, 2012, 08:07:48 AM
 #8

I have a loan contract paying interest denominated in AUD between myself and a private individual - it is currently over due.  My legal advice (about $5k worth) is that it will cost me $15,000 to proceed with bankruptcy in the local courts.  It is not regulated as a loan, but is covered by law.
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January 02, 2012, 08:47:05 AM
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I have a loan contract paying interest denominated in AUD between myself and a private individual - it is currently over due.  My legal advice (about $5k worth) is that it will cost me $15,000 to proceed with bankruptcy in the local courts.  It is not regulated as a loan, but is covered by law.

There's no doubt that private loan contracts are enforceable, but the OP didn't make clear how they envisage the exchanges being able to make interest payments.  Would it be by lending out money/BTC on deposit with them?  Investing money/BTC on deposit with them.  Something else entirely?  If it involved combining user deposits for lending or investment then the laws which applied could well be those which apply to businesses which undertake those commercial activities - such as banks and building societies, managed funds, stockbrokers and investment advisors - rather than those which apply to individual private contracts.

The model which the exchanges would use to generate the revenue with which to pay interest seems key here.  It's what's going to determine any regulatory requirements might apply in various jurisdictions.

All I can say is that this is Bitcoin. I don't believe it until I see six confirmations.
Isosceles
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January 02, 2012, 08:18:03 PM
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I was envisaging the exchanges paying interest to build their reserves. For example. Bitcoinica is short of USD at the moment.

Currently, lending Bitcoins to a person you met on the internet seems insanely risky, there is no enforceable way to make the receiver repay the funds. Maybe if they signed a contract it would help, or had other assets in escrow as security for the loan.
Lending BTC to a company (eg. an exchange) might be possible for small amounts, as they put their reputation at stake.
repentance
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January 02, 2012, 09:12:24 PM
 #11

I was envisaging the exchanges paying interest to build their reserves. For example. Bitcoinica is short of USD at the moment.

Currently, lending Bitcoins to a person you met on the internet seems insanely risky, there is no enforceable way to make the receiver repay the funds. Maybe if they signed a contract it would help, or had other assets in escrow as security for the loan.
Lending BTC to a company (eg. an exchange) might be possible for small amounts, as they put their reputation at stake.


Ah, OK.  From a business standpoint, there are much better ways of them increasing their reserves than accessing user money and paying interest on it.  They could obtain an outside loan, exchange equity for investment, issue debentures, and a shit load of other stuff which wouldn't raise the same kind of issues as pooling uninsured user funds and using them for other purposes.

A huge issue surrounding them keeping user funds on deposit - even if they quarantine those funds - is that those funds are currently uninsured.  If those funds are lost, then it's not economically viable for small deposit-holders to sue for compensation even if they had valid legal grounds for doing so.  I'm sure that one reason why the exchanges discourage people from using their accounts as online wallets is the potential liability issue if those funds are lost or stolen.  More users leaving more money on deposit would only increase that potential legal exposure.

Shortages of particular currencies are more a function of allowing users to use the service as a currency exchanger than they are of acting as a pure exchange.

All I can say is that this is Bitcoin. I don't believe it until I see six confirmations.
triplehelix
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March 15, 2012, 04:52:24 PM
 #12

can anyone give me a quick overview of the regulations or lack there of of personal loans providing no liquidity for the loaner, and the payment of principal plus interest at a specific date or before?
PatrickHarnett
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March 15, 2012, 07:21:21 PM
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As agreed between the parties
Risk it
You're on you own
triplehelix
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March 15, 2012, 07:25:18 PM
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As agreed between the parties
Risk it
You're on you own

thanks.  is there any recommended set up to protect (as much as possible) those lending the money and to a lesser extent, the receiving party that will be paying back the principal plus interest?

i'm thinking i'll have to touch base with a lawyer before moving on an idea i have, but would like as much information walking in as possible.
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March 15, 2012, 07:33:25 PM
 #15

As agreed between the parties
Risk it
You're on you own

thanks.  is there any recommended set up to protect (as much as possible) those lending the money and to a lesser extent, the receiving party that will be paying back the principal plus interest?

i'm thinking i'll have to touch base with a lawyer before moving on an idea i have, but would like as much information walking in as possible.

I wasn't sure what you were really after as it looked like an invite for trolling.

Are you talking about real money, real money as BTC, anonymous forum lending, or OTC/in person stuff.  If you're doing it regularly as a business there are normally tax implications, and taking security tends to be a good idea.  Different jurisdictions have requirements too - such as licenses.
triplehelix
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March 15, 2012, 07:57:01 PM
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i'm talking about bitcoin only.  i or a company i will form, (most likely offshore where regulations are more accepting and authority less likely to try and interfere) would receive personal loans from individuals.  the terms would be a set interest rate that would be paid in addition to repayment of the principal, by a set date but possibly prior.  incoming principle would be btc, outgoing principle and interest would be btc.

i want to structure it as private loans, not investment vehicles as i imagine there would be far less red tape.
PatrickHarnett
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March 15, 2012, 08:21:55 PM
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oh, ok.  No regulations.  All risk held by the person lending.  I suggest you read the "lending" section of the forum.  You'll see the competing "banks" and occasional lenders.
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March 15, 2012, 08:30:10 PM
 #18

cool.  thanks pat.
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