> Rather than relying solely on "fiat" methods like government licenses, auditors and examining the corporate governance and the backgrounds of the individuals running the exchange, exchanges could create cryptographic proofs that show that the funds they hold on-chain are enough to cover their liabilities to their users.
So... use crypto to prove that you hold enough crypto to cover the losses if crypto crashes and you can't pay people back without crypto.
This only works to prove that you hold enough Trashcoin to pay back people's Trashcoin that you're supposed to have - but why have their Trashcoin at all if you need to make it available to them?
You can't do anything with it that would make you money while still guaranteeing availability to it's owner, so then you're just providing a free custody service for someone that's worse than them just holding it themselves.
Also, if you're able to cryptographically guarantee Trashcoin holdings then you don't need the exchange anymore. Guarantees + DEX + off-chain transactions replaces your exchange for low fees in that case.
Leaving all that aside though - It's a suggestion to optimise away protections as a problem to be solved when the solution being proposed has time-and-again proven itself unfit for purpose with catastrophic consequences. Regulating financial systems and making them safe is hard, because it's more complicated than anyone who's approached this in crypto seems willing to acknowledge.
Honestly, I think regulators should be approaching this whole space with a view of "we'll get involved to stop criminals that have the potential for non-crypto victims, but we'll not spend time or resources to help anyone that get's ripped off after choosing to put their money in this".
(i.e. The state has a duty to protect it's citizens, but I don't see what burden the state has to protect money that was wilfully removed from the protections of the regulated financial system. If anything, the state has a duty to not waste resources pursuing lost funds in those instances as they have no mandate to do so.)
I have sympathy for people that lost out with FTX and Celsius - I genuinely do - but there were so many warnings that you would have had to dismiss before ending up in that situation and it's hard to believe that people that put money into these platforms (or tokens in general) didn't realise what they were getting into. There's a massive amount of historical experience to draw on - these aren't new schemes.
So... use crypto to prove that you hold enough crypto to cover the losses if crypto crashes and you can't pay people back without crypto.
This only works to prove that you hold enough Trashcoin to pay back people's Trashcoin that you're supposed to have - but why have their Trashcoin at all if you need to make it available to them?
You can't do anything with it that would make you money while still guaranteeing availability to it's owner, so then you're just providing a free custody service for someone that's worse than them just holding it themselves.
Also, if you're able to cryptographically guarantee Trashcoin holdings then you don't need the exchange anymore. Guarantees + DEX + off-chain transactions replaces your exchange for low fees in that case.
Leaving all that aside though - It's a suggestion to optimise away protections as a problem to be solved when the solution being proposed has time-and-again proven itself unfit for purpose with catastrophic consequences. Regulating financial systems and making them safe is hard, because it's more complicated than anyone who's approached this in crypto seems willing to acknowledge.
Honestly, I think regulators should be approaching this whole space with a view of "we'll get involved to stop criminals that have the potential for non-crypto victims, but we'll not spend time or resources to help anyone that get's ripped off after choosing to put their money in this".
(i.e. The state has a duty to protect it's citizens, but I don't see what burden the state has to protect money that was wilfully removed from the protections of the regulated financial system. If anything, the state has a duty to not waste resources pursuing lost funds in those instances as they have no mandate to do so.)
I have sympathy for people that lost out with FTX and Celsius - I genuinely do - but there were so many warnings that you would have had to dismiss before ending up in that situation and it's hard to believe that people that put money into these platforms (or tokens in general) didn't realise what they were getting into. There's a massive amount of historical experience to draw on - these aren't new schemes.