They're Not Your Assets

Some might ask, why buy Bitcoin?

If one has followed the news in crypto through 2022, they've likely heard the stories of Celsius and FTX using customers funds. People might question how this is possible or could have been done. Unfortunately, it's not abnormal in traditional finance, just more heavily regulated.

Brokerage firms are generally allowed to use securities held in customer accounts as collateral for loans, a practice known as rehypothecation. This allows brokerage firms to use the securities as collateral to borrow money, which they can then use to finance their operations or to make loans to other customers. However, brokerage firms must disclose their rehypothecation practices to their customers and obtain their consent before rehypothecating their securities.

If a brokerage firm defaults on a loan that is secured by securities held in customer accounts (i.e., rehypothecated securities), the lender may be able to seize the securities as collateral and sell them to repay the loan. The owner of the securities would still retain legal ownership of them and would be entitled to receive any remaining proceeds after the loan has been repaid. Brokerage firms are required to follow certain risk management practices to ensure that the securities they hold as collateral are safe and that their value is adequately protected. If a brokerage firm is unable to meet its financial obligations, it may be required to seek protection from its creditors through a bankruptcy proceeding. In this case, the securities held in customer accounts would be protected by bankruptcy law and the owner of the securities would generally be entitled to receive the value of their securities, subject to any claims of the brokerage firm's creditors.

Realize, the FDIC was created to restore public confidence in the banking system and to encourage people to keep their money in the banks, even during times of economic crisis. Prior to the creation of the FDIC, depositors in failing banks often lost their savings when the banks went bankrupt. This caused widespread panic and further exacerbated the economic downturn. It's not your money, it's a loan to the bank and thus interest is accrued.

A "bail-in" is a process in which a financial institution facing financial distress or bankruptcy is rescued by having its creditors and depositors bear some of the costs of the rescue, rather than taxpayers. This is typically done by converting some of the institution's debt or deposits into equity, effectively making the creditors and depositors shareholders in the institution.

The Cyprus bank bail-in refers to the bail-in of several Cypriot banks in 2013 in response to the financial crisis in the country. The crisis was fueled in part by the banks' heavy exposure to Greek sovereign debt, which had lost significant value following the Greek debt crisis.

As part of the bail-in, the Cyprus government implemented a "haircut" on uninsured deposits at the troubled banks, effectively seizing a portion of depositors' funds to help pay for the banks' restructuring. This caused widespread public outrage and triggered a run on the banks as depositors tried to withdraw their funds before they were "bailed-in."

The Cyprus bank bail-in was controversial and has been widely criticized for its impact on depositors and the broader economy. It was seen as a departure from the traditional practice of bailing out failing banks, which involves using public funds to stabilize the institutions and protect depositors. The bail-in of the Cyprus banks was seen as a test case for a new approach to bank bailouts, which is now being adopted by some countries as part of their financial stability frameworks.

It was learning this information that brought me to Bitcoin and the concept of self-sovereignty. Knowing that one day, we may no longer be able to trust our financial institutions.

Portions of this content was generated via prompts using GPT-3  with edits by the publisher. It should be noted that GPT-3 uses training data up to 2021 and will not reflect current or real-time data.

OpenAI. (2021). GPT-3: The third generation of OpenAI's general purpose language model. Retrieved from https://openai.com/blog/gpt-3-apps/