Fractional Reserves? Vouchers Issued By Bitcoin Exchanges Increase Credit Risk

Fractional Reserves? Vouchers Issued By Bitcoin Exchanges Increase Credit Risk

While deposits at CCTFs have to be kept in reserve in the full amount of each depositor's funds, vouchers are a form of debt. They are a promise. In the worst case vouchers could be even used by CCTFs to build a fractional reserves-based system.

In a recent analysis of Central Counterparty Exchange Facilities (CCTFs) - the most popular business model to sell and buy Bitcoin into fiat currencies - the International Monetary Federation (IMFED) warns that vouchers issued by CCTFs like Mt.Gox, BTC-E and Bitstamp could increase both, financial and regulatory risk.

Vouchers that are in most cases issued in U.S. Dollars increase the liabilities and lower the equity ratio by expanding the balance sheet of issuing companies. While deposits at CCTFs have to be kept in reserve in the full amount of each depositor's funds, vouchers are a form of debt. They are a promise. In the worst case vouchers could be even used by CCTFs to build a fractional reserves-based system.

The individual financial risk for customers who hold vouchers rises dramatically in the event of bankruptcy. In contrast to other customers who might be able to recover part of their funds, owners of vouchers will probably loose their complete funds. Vouchers might - if not fully backed by reserves - also impose high financial risk for the whole company, which increases the risk in trading with CCTFs that offer vouchers even if customers do not use vouchers themselves because fractional reserves-based systems are generally more likely to default. Further more - if not only excepted by the issuer as a means of payment - vouchers could impose a systemic risk for the virtual currency system.

In addition to the financial risk, issuing companies are exposed to a highly increased regulatory risk i.e. the risk of an exchange being shut down by a government for regulatory reasons. Especially vouchers nominated in fiat currency that are excepted by other companies or payment processors like Bitinstant could be seen as electronic money at least within the European Union.

IMFED request more transparency from CCTFs and suggests that companies who issue fiat money vouchers that are accepted as a means of payment by others should get authorized as an e-money issuer.


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