Mt. Gox - are you doing "fractional reserve"?

[ripper234]

Consider this post an appeal to Mt. Gox to reveal whether they are fractional reserve or not.

Given the current lending rates, it is likely that everyone holding a significant amount of BTC is lending some of it out. What are Mt. Gox (and other entities, but let's start with the biggest) doing with clients' money? (USD + BTC)

Do Mt. Gox invest a certain fraction of customer funds? What fraction? On what investments?

If you agree that at least the fraction of the invested vs liquid funds should be exposed, show your support by voting.

(If Mt. Gox ever commented about this issue, feel free to redirect this post to that comment)

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[ripper234]

See discussion on Stack Exchange & its chat.

[N12]

I assume they store 100% of funds and do exactly nothing with them, otherwise I would be outraged.

If they do lend them out, they should be giving interest like banks do, but I doubt they do.

[casascius]

My desired selection isn't available on the list:  MtGox should have an audit done, and a third party with credentials on the line independently assert they have our money.  (I don't necessarily care how much it is, I just want to know that they have it, or if they don't, how much is the shortfall in dollars and/or percent).

[JoelKatz]

I assume they store 100% of funds and do exactly nothing with them, otherwise I would be outraged.

Prepare to be outraged then, because I find it hard to imagine they'd be that stupid. (And that attitude is a big part of the reason nobody is being open about how they manage their finances. People have unrealistic, and frankly silly, expectations.)

If they do lend them out, they should be giving interest like banks do, but I doubt they do.

The interest covers (actually, it probably doesn't even) their costs and risks associated with holding your money. Otherwise, they'd have to charge you a storage fee, raise commissions, or make up the difference somehow. You have a right to expect near 100% security in your deposits. That requires them to hedge, insure, and take other steps that render the interest it is possible for them to get very, very low. (This will change in the future. Right now, interest rates to begin with are near zero. Add risks due to the volatility of bitcoin value and so on, and it's not much over zero.)

My desired selection isn't available on the list:  MtGox should have an audit done, and a third party with credentials on the line independently assert they have our money.  (I don't necessarily care how much it is, I just want to know that they have it, or if they don't, how much is the shortfall in percent).

What is important is that their total liquidatable capitalization (such as money in the bank, bitcoins in wallets) plus market value of assets (such as loans) significantly exceed total obligations (such as deposits). Ideally, this would be audited by an independent entity. Of course, audits cost money and someone has to pay for them.

I can predict with near certainty that Mt. Gox won't give any kind of definite answer. It's not their fault -- there is a genuine market failure causing a race to the bottom.

[acoindr]

You have a right to expect near 100% security in your deposits.

How so?

I've talked about a few things Bitcoin needs infrastructure wise before becoming more mainstream. They include:

1. A simple person-to-person pay service (sort of a PayPal of Bitcoin)
2. A Bitcoin bank

The person-to-person pay service is beginning to take form in the shape of eWallets like WalletBit, and things that act like eWallets like Mt.Gox. However, I specified that such service is NOT a bank, and should perhaps cap stored balances at say 1K bitcoins. It's precisely because of the added risk and responsibility of storing funds that I said that.

A proper Bitcoin Bank (like flexcoin), on the other hand, is different. Such an entity is designed to store funds. Accordingly, they should stipulate in clear terms to their customers what their liability is for stored funds. If none, that's fine, but say so clearly. Otherwise, say how responsibility plays out and charge account fees if necessary to cover it all. Clients would gladly pay it.

The ultimate responsibility of someone's money lies with them and what they do with it.

[doobadoo]

My desired selection isn't available on the list:  MtGox should have an audit done, and a third party with credentials on the line independently assert they have our money.  (I don't necessarily care how much it is, I just want to know that they have it, or if they don't, how much is the shortfall in dollars and/or percent).

All they have to do is sign the addresses they possess. And then have an examiner query their user database to see what the total btc liability is.  Same for USD liability, only all they need to do is give the auditor permission to query the banks where the cash is held.   Not very hard.

[JoelKatz]

You have a right to expect near 100% security in your deposits.

How so?

Because they're demand deposits roughly equivalent to savings accounts. You don't get paid interest and you don't have any control over how they're invested.

A proper Bitcoin Bank, on the other hand, is different. Such an entity is designed to store funds. Accordingly, they should stipulate in clear terms to their customers what their liability is for stored funds. If none, that's fine, but say so clearly. Otherwise, say how responsibility plays out and charge account fees if necessary to cover it all. Clients would gladly pay it.

I wish that last part were true, but it's just not.

The ultimate responsibility of someone's money lies with them and what they do with it.

Certainly I agree with that sentiment, but usually people who say that are expecting people to draw false conclusions from it. It is not true that you can operate an eWallet service, put "we are not responsible for anything" in your terms of service, and then you're not responsible if your negligence causes the loss of other people's deposits. Bitcoins are pretty useless if everyone's best advice is basically, "there's nothing safe you can do with them, no safe way to buy them, no safe way to sell them, no safe way to store them", and if you pick the best options that currently exist to the best of your knowledge and following the advice of recognize experts, if anything goes wrong, it's still your fault.

[acoindr]

Because they're demand deposits roughly equivalent to savings accounts. You don't get paid interest and you don't have any control over how they're invested.

But Mt.Gox is not a bank, and doesn't solicit deposits. They are an exchange. People don't have to store their funds there. If they want interest for their money, or don't want it invested don't store funds there. The only reason people store funds there is because it's convenient and (currently) free.

A proper Bitcoin Bank, on the other hand, is different. Such an entity is designed to store funds. Accordingly, they should stipulate in clear terms to their customers what their liability is for stored funds. If none, that's fine, but say so clearly. Otherwise, say how responsibility plays out and charge account fees if necessary to cover it all. Clients would gladly pay it.

I wish that last part were true, but it's just not.

Why would you think not?

http://money.cnn.com/2011/09/26/pf/bank_fees/index.htm

The study found that only 45% of non-interest checking accounts don't have fees, down from 65% in 2010, after hitting a peak of 76% in 2009.

And that's talking about dollars. You know, those paper things that can be put under your mattress and next to a shotgun - low tech storage, in other words. Bitcoins are a lot harder to understand and know how to secure.

The ultimate responsibility of someone's money lies with them and what they do with it.

Certainly I agree with that sentiment, but usually people who say that are expecting people to draw false conclusions from it. It is not true that you can operate an eWallet service, put "we are not responsible for anything" in your terms of service, and then you're not responsible if your negligence causes the loss of other people's deposits. Bitcoins are pretty useless if everyone's best advice is basically, "there's nothing safe you can do with them, no safe way to buy them, no safe way to sell them, no safe way to store them", and if you pick the best options that currently exist to the best of your knowledge and following the advice of recognize experts, if anything goes wrong, it's still your fault.

People need to learn to take responsibility for their own actions and stop expecting their hand to be held. Bitcoins are not useless because of scammers and theft. Bitcoins allow people to send millions or more worth of value around the world at little or no cost, and without permission. That won't change.

As far as services go people should have a right to expect that services will do everything they can to protect assets and the trust given to them for doing that. Of course there are safe ways to buy, sell, and store bitcoins. For example, face to face purchases remain an option, and bitcoinarmory.com is IMO the safest way to cold store bitcoins in existence.

[Bitcoin Oz]

Someone just transferred 40 000 btc and 40 000 USD from bitcoinica so Mt Gox has that much just sitting there at least.

[casascius]

Someone just transferred 40 000 btc and 40 000 USD from bitcoinica so Mt Gox has that much just sitting there at least.

It has yet to be disclosed whether 40k USD left MtGox in the form of a transfer (wire, LR, etc.), or whether just as a liability.  (Example: hacker redeems MtGox code somewhere else that accepts it, and buys BTC with it, and runs... that "somewhere else" didn't receive any money, only 40k in "gox dollars" backed by nothing more than the full faith and credit of gox).

[MagicalTux]

Consider this post an appeal to Mt. Gox to reveal whether they are fractional reserve or not.

Given the current lending rates, it is likely that everyone holding a significant amount of BTC is lending some of it out. What are Mt. Gox (and other entities, but let's start with the biggest) doing with clients' money? (USD + BTC)

Do Mt. Gox invest a certain fraction of customer funds? What fraction? On what investments?

If you agree that at least the fraction of the invested vs liquid funds should be exposed, show your support by voting.

(If Mt. Gox ever commented about this issue, feel free to redirect this post to that comment)

We do not offer any kind of lending at this point. We are considering allowing people to have "saving accounts" managed by one of our financially-licensed subsidiaries at some point, which would come with some kind of interest rate, but we haven't been able yet to find any company willing to help with insuring and recovering bitcoin debts.

Anyway should it happen, it will be a voluntary process that will require acceptation of specific terms of services first. For more details you can read our current terms of service:

Mt. Gox represents and warrants that [...] it will hold all monetary sums and all Bitcoins deposited by each Member in its Account, in that Member's name as registered in their Account details, and on such Member's behalf.

[Bitcoin Oz]

Someone just transferred 40 000 btc and 40 000 USD from bitcoinica so Mt Gox has that much just sitting there at least.

It has yet to be disclosed whether 40k USD left MtGox in the form of a transfer (wire, LR, etc.), or whether just as a liability.  (Example: hacker redeems MtGox code somewhere else that accepts it, and buys BTC with it, and runs... that "somewhere else" didn't receive any money, only 40k in "gox dollars" backed by nothing more than the full faith and credit of gox).

Do you still need a verified account to do that ?

[ripper234]

We do not offer any kind of lending at this point. We are considering allowing people to have "saving accounts" managed by one of our financially-licensed subsidiaries at some point, which would come with some kind of interest rate, but we haven't been able yet to find any company willing to help with insuring and recovering bitcoin debts.

So, just to make thing crystal clear, are you stating that Mt. Gox is in possession of (at least) 100% of its customers funds? (In Hot/Cold wallets)

If a "bank run" were to happen tomorrow", then within a reasonable time (e.g. 1 week), all customers would be able to withdraw their funds?

[traderjoe]

From the terms of service:  

it will hold all monetary sums and all Bitcoins deposited by each Member in its Account, in that Member's name as registered in their Account details, and on such Member's behalf.
-----------------------------------------------------

A normal fractional reserve bank, also holds all monetary sums deposited by each Member in its Account (these are "held" as a Liability in its Account), in that member's name, etc.  I'm afraid the terms of service aren't really clear enough to answer the poster's question.

I think you need to ask if customer funds are segregated from the parts of Mt Gox's Account used for its own, internal business activities.  And then if the customer funds remain 100% funded at all times, and what they are funded with (e.g. demand deposits at Mt Gox's bank, bitcoins on special addresses that aren't available to the Mt Gox for other uses, junk bonds, stock options, lottery tickets, etc).

There have been a string of mainstream wall street firms that apparently used customer funds required as initial margin in futures accounts for their own business needs, I would say any firm not explicitly saying they segregate customer funds AND the segregated (liability) is fully funded at all times, you should assume they are not.

I really wish Mt Gox revealed the most basic stuff that any business wanting a credit rating or to do business as a broker must disclose, basic things like a balance sheet (!).  I am not likely to leave anything on deposit there for any longer than necessary due to the lack of disclosure of the things needed to answer questions such as the one you are asking.

  

[JoelKatz]

I really wish Mt Gox revealed the most basic stuff that any business wanting a credit rating or to do business as a broker must disclose, basic things like a balance sheet (!).  I am not likely to leave anything on deposit there for any longer than necessary due to the lack of disclosure of the things needed to answer questions such as the one you are asking.

The problem is that people have unrealistic expectations and beliefs. Even if Mt. Gox were very stable financially and had assets that significantly exceeded deposits, I suspect a lot of their customers wouldn't be happy with the numbers because they expect complete segregation and 100% funding of Bitcoin deposits in Bitcoins. That's very expensive, and if Mt. Gox were to do it, it would likely cost them a lot of money that they would have to compensate for by raising rates. And all this would do is put them where most people assume they are anyway.

I believe this is a genuine market failure. We'd all be better off if at least the reputable firms disclosed this information and customers rationally evaluated them. But actually all this would do is make people assume the firms who didn't disclose are perfect and they'd see all the imperfections of the firms that did disclose. People expect to pay no storage fee. People expect to pay no account maintenance fee. People compare exchanges largely on commission rates.

And when an exchange or eWallet absconds with deposits, everyone blames the customers.

[repentance]

Someone just transferred 40 000 btc and 40 000 USD from bitcoinica so Mt Gox has that much just sitting there at least.

And the reason some people got so badly burned because they treated Bitcoinica like a bank offering interest on their savings.  Mark has consistently said that people should not treat MtGox as a wallet service, but people will do so nonetheless.

[deepceleron]

MtGox previously showed they still controlled 424242 bitcoins after the hack a year ago by transferring them. At that time (and still) there isn't anyplace you can really invest your BTC without a decent probability they go poof. Likely a decent amount of government currencies are constantly tied up in transferring funds to and from different bank accounts and funding services.

[traderjoe]

A serious problem is, even taking delivery of your bitcoins from Mt Gox, won't really protect bitcoin holders from the possibility that Mt Gox has a problem.  Just look at what happened to the bitcoin market prices last summer.  

I think, even if its more expensive to do complete segregation of customer funds and 100% funding of all customer deposits (in whatever currency the customer has deposited as demand deposits at highly rated banks), for Mt Gox to take that step, would be a huge service both to themselves and to the bitcoin community.  

As an exchange, it's in Mt Gox's long term interest as it would enhance the sustainability of their business model--they have a vested interested that no one lose confidence in their exchange or in bitcoin in general (the latter two can't really be separated for now since Mt Gox has such a large share of the exchange market).

Short of that, a reputable CDS market for Mt Gox might help.  

Or if someone would step forward some day to form a clearinghouse for settlements that operates with separation of customer deposits and full disclosure, all the exchanges could start using it.

[Rygon]

Not to sidetrack the thread, but I think the same question should apply to other exchanges and sites that host a lot of BTC. It's not a question of IF, but WHEN fractional reserve banking will emerge. There is an enormous amount of BTC flowing in and out of GLBSE also. As investors become more comfortable with the service, there will be a larger amount in constant cold storage. The temptation to use a portion of that for investment purposes will only get larger, and could create more of a fractional reserve system.

I'm not trying to accusing anyone, I'm just convinced it'll eventually happen at one of these sites (MtGox, Intersango, GLBSE, etc). In order to create a more stable market, we need to insist on independent audit of the books. Otherwise our funds will be used against us and devalue the Bitcoin.