Chillax on Robinhood Crypto – CoinGeek
It’s easy to go after the latest target of social media outrage. Satisfaction is seductive; the justification can be yours in a few clicks! You can easily support the misinformation about Dr. Craig Wright, shame those involved in Harambe’s death, share the hatred against Johnny Depp (to pick up on it later), protest Wendy’s spicy nuggets, or join the culture of cancellation for the disaster day. This is not to say that there are no reasonable grounds for indignation, but when all is a cause of moral outrage, indeed, none of it is. Rabies also re-targets quickly, most often leaving problems unresolved. Did you know that the hunt for Joseph Kony ended in 2017?
With the above statements in mind, I wish to express the unpopular opinion that Robinhood’s recent decisions are reasonable. Robinhood (NASDAQ: HOOD) has no obligation to provide market access as requested by its users. Broker-traders regulated by the US Securities and Exchange Commission (SEC) are already restricting thousands of securities; it is only because of the megaphone of social media that we care more about GME. Even if you don’t like their actions, they don’t deserve the social media crowd. Since this is a Bitcoin-focused medium, let’s focus on the digital currency decision to restrict access to digital currency purchases through ‘instant deposit’.
Robinhood is the brand name we use to refer to all companies that experience Robinhood. Digital currency trading is done exclusively through Robinhood Crypto, separating it from the traditional broker-trader side. This is a common strategy for many companies looking to gain exposure to the “crypto” space. Suppose you take into account the various risks that need to be considered for a successful traditional investment broker. In this case, the risks of digital currency are just a different animal that deserves to be quarantined in a subsidiary.
We expect digital currency trading to have 24 hour access, but in providing this there is a plethora of operational risks that the average user has no appreciation for. Most digital currency brokers work with many Liquidity Providers (LPs) who broadcast quotes alongside internal client orders. Transactions that match LPs are pooled and are typically settled once a day as a net settlement. These regulations are very complicated for the broker, and there are too many reasons to detail much here. (but we will try a few!)
24-hour availability and trading create immense fluctuations in intra-day credit risk, so much so that most broker-LP agreements include special settlement clauses under certain conditions (especially when settlement has reached a threshold. maximum.) Under these conditions, the broker (or LP) would prevent quotes, thinning the broker’s order book. It also makes new trades more likely to match (now less) other LPs, snowballing the settlements crisis. Special settlements occur under the most extreme market conditions and should be resolved as soon as possible.
The scenario is even more complicated when the special settlement is triggered to run after hours (a term that many Bitcoin-heads are unfamiliar with). Silvergate bank or exchange network bookmark. These are probably not platforms where the parent company does most of its banking (a platform like JP Morgan is more likely). This means that while USD settlement platforms can technically facilitate after-hours settlements, most of the liquidity will be stuck in traditional banks.
A risk-based decision must be made to determine the amount of operating capital to have idle on the platform after hours. Among many things, this decision also includes the amount of risk to be absorbed by allowing “instant deposits”, which are nothing more than after-hours ACH requests (a system so slow it rivals trial runtime). ‘a low-cost BTC transaction.) For example, what happens when thousands of users conspire to flood the product with an unprecedented amount of instant deposits and coordinate DOGE orders? it breaks ! (duh!) No risk model will be able to handle a near-instantaneous spike in trade volume of 130x that can support both an open entry of USD and a closed exit outside of business hours.
Additionally, digital currency brokers are responsible for protecting coins and typically use cold storage which may not be accessible after hours. The same types of liquidity crises for the USD can also occur for digital currency settlement. In complicated settlements, a broker can always fall back to a “steal Peter to pay Paul” scenario, but it helps if the coins are not already on a fractional reserve. If you didn’t already know, many digital currency brokers would monetize assets outside of trading. Much to Robinhood’s credit, they don’t. The underrated custodial article (# 9) of the Robinhood Crypto User Agreement explains that all digital currencies purchased are stored and held by Robinhood Crypto in their clients’ FBO wallets.
Limiting digital currency purchases to cleared funds only was not Robinhood’s choice to demean anyone or manipulate the market, but a necessary decision to continue trading in a controlled environment. If we want a better product, we’re going to have to build one. Can I suggest a real-time gross settlement system? If only there was something ledger-y blockchain-y already capable of scaling to meet this kind of claim …
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