News about Bitcoin
Today, there are still similar risks. For example, the paper points out that the terms and conditions of Coinbase, one of the largest US exchanges, do not guarantee that customer funds will not be mixed. Nor would users have any assurance about which part of the Coinbase Group actually manages the funds.
The researchers conclude that the efforts of the early cypherpunks to create a value transport network free from interference by governments, banks and other intermediaries were unsuccessful. After all, many bitcoiners still manage their BTC at Mr Bitcoin Exchange bitcoinsd with the help of intermediaries, with all the associated risks.
“The founding fathers of cryptocurrencies wished to free value transfers from the interference of governments, banks, brokers and other intermediaries. It was the control by, and frequent failure of such intermediaries, as well as the high transaction costs arising from their involvement that created a fertile environment for Bitcoin’s origins. In reality, however, disintermediation has not occurred. A large number of bitcoins and other cryptocurrencies are stored with crypto-exchanges. While such custody may be attractive because it is (usually) free of charge and user- friendly, it creates significant risks related to the possible insolvency of crypto-custodians. “
Much has been written about the risks of exchanges and their role, but a little nuance may be appropriate here. Data from Glassnode Studio shows that exchanges currently manage an estimated 2.5 million BTC. That’s about 12% of the total amount of bitcoins that will ever be there and about 13.5% of the current circulating number. That is not a small amount, but whether that is a failure as the title of the paper implies is perhaps debatable.
The paper concludes with a number of suggestions for improvements. For example, exchange users should be informed in advance whether exchanges may use customer funds for other transactions. In addition, clarification and international coordination is desirable with regard to which law applies: contractual or property right.
To protect users, the researchers propose banning exchanges from reusing customer funds for other purposes. To mitigate the risk, exchanges should be required to keep client funds in separate bitcoin addresses. In addition, users should have some sort of right of precedence over their digital currencies.
Such a policy would likely have significant technological implications for exchanges and would be impractical in many cases, as the base layer bitcoin network has a 10 minute block time and transaction fees. If funds are kept separate and unmixed at separate bitcoin addresses, this would mean that transactions on the bitcoin network should take place when two exchange