Virtual currency brokers: cryptocurrency platform supervision -Part 5

Similarities between securities companies and cryptocurrency platforms

(1) Cryptocurrency platform as a broker

The cryptocurrency platform functions as a cryptocurrency broker. Specifically, like brokers, they provide two key functions: as a custodian of client assets and execute transactions for clients.

According to the Securities Exchange Act of 1934, entities "engaged in the securities trading business of other people's accounts" are regarded as brokers. Cryptocurrency platforms "engage in the business of conducting transactions" on behalf of their clients: like brokers, they profit by receiving and executing client orders, usually charging clients per transaction.

(2) The issue of "partial reserves" and the risk of bankruptcy of cryptocurrency platforms

1. Partial reserve

Like securities companies, cryptocurrency platforms hold assets on behalf of clients. When customers own cryptocurrency on the platform, what they really have is an "IOU" from the platform. This brings up the same trust issues faced by brokers in the late 1960s. Therefore, abuse and improper management of customer assets may also occur in cryptocurrency platforms. Just as a securities firm holds client assets in its own name, a cryptocurrency platform may hold its client assets in its own name by managing private keys. In addition, cryptocurrency platforms can also use customer assets to fund their own activities (this part of the funds is called partial reserves), so there may not be enough assets to satisfy all customer claims.