After the Binance hack and Bitfinex/Tether disaster, does it mean crypto exchanges are becoming ‘too big to bail’? So also, should we see the idea of ‘Central Bank Of Bitcoin’ as a possible solution?
Tuur Demeester (a Bitcoin economist) explained why he feels the idea will be a bad one. As custodians and crypto exchanges grow in size they risk becoming too big to bail out. Without a ‘lender of last resort’, the only alternative is to consider private insurance solutions.
Some are establishing their own insurance funds i.e. BitMex, which has more than 25,000 BTC reserved. Bitfinex thought it wise that it could make use of Tether’s US dollar reserves as its personal slush fund, with predictable results. If custodians become over-leveraged, then we could expect more ‘bank-runs’ just like the ones we witnessed on Tether at Bitfinex.
Demeester sees some similarity to the situation with the pre-Federal Reserve era gold-backed banks of 1913. Although ultimately, for HODLers, the lack of socialization of risk is a positive aspect. Assuming, that is, you choose the right custodian.
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Bitcoin-skeptics who see centralization as a desirable and vital quality may call for such an entity as BTC becomes more pervasive. But an army needs to defend a federal reserve, and cryptocurrency doesn’t work this way.
Demeester points out that a ‘Bitcoin Fed’ also faces a risk of being hacked. Also, the desire for private profits and the socialization of the risk would inevitably lead to bureaucracy.
Saifedean Ammous, who is a professor of economics said that the idea of central banks buying into Bitcoin is unlikely anyway. He adds:
“Central bankers believe in the ridiculous idea that government needs to manage the money supply, otherwise, they’d be in a different line of business.”
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