hn_throwaway_99
7 months ago
Tell that to Synapse customers. Many millions of dollars are missing.
Banks have to follow strict rules to account for where all the money goes. But the way fintechs work, they usually just have one or a couple underlying "FBO" accounts where all the pooled money is held, but then the fintech builds a ledger on top of this (and, as the article points out, to varying levels of engineering competence) to track each individual customer's balance within this big pool of money. In Synapse's case, their ledger said the total amount of all of their individual customer balances ended up being much more than the actual funds held in the underlying FBO accounts. Lots of folks are assuming fraud but I'm willing to put money that it was just a shitty, buggy ledger.
FWIW, after seeing "how the sausage is made", I would never put money into a fintech depository account. Use a real bank. Fintechs also often put out the fake promise that deposits are FDIC insured, but this only protects you if the underlying bank goes belly up, not if the fintech loses track of your money.
See https://www.forbes.com/sites/zennonkapron/2024/11/08/what-th...
chairmansteve
7 months ago
90 million dollars missing and 250 million dollars frozen. That 250m probably needed by some people to pay rent.
Backed by Andreesen Horowitz who are conducting a scorched earth jihad against all government regulation.
https://finance.yahoo.com/personal-finance/synapse-bankruptc...
abirch
7 months ago
The sad thing is that most people don't learn lessons from history. It took me far too long to start learning lessons from history.
After an asset bubble and collapse people will understand why we have a lot of the regulations from the 1930s.
manquer
7 months ago
Sadly I don’t think it will happen.
In previous crises people could depend being educated by mostly responsible media . Today both mainstream and social are entertainment first don’t care for truth or their role in educating the society .
It is more likely they will be taught to blame some boogeymen who have nothing to do with the problem rather address the real one .
deepsun
7 months ago
Oh no, the medias got actually way more responsible after the World War. Before the war, mainstream media were more like super-biased propaganda machines. Only after the world wars society realized they need more toned-down truth-first analytical medias.
manquer
7 months ago
I agree , I elaborated on this in a child comment.
Just a minor point I would say it is ~120 years rather than 70. There was influential journalism through the early 20th century when professional journalism took shape which influenced policy of note the anti trust actions taken under Sherman Act in early 1900s.
dartos
7 months ago
Media was never all that responsible.
manquer
7 months ago
Media biases and ethics in journalism are masters degrees sized topics of their own.
Very briefly you are not wrong, yellow journalism has a long history is not new. In America from the times of federalist papers through slavery and jim crow and antisemitism of the 30s, to civil rights and into modern times it has been a powerful tool to shape public opinion.
There is nuance to this however, the era of professional journalism has been brief, only 100 or so years. In that time, media had the most impact in shinning the light on the truth, notably with reporting on Watergate, Pentagon papers or Hershey on Hiroshima and so on, that era is coming to an end.
As the cost of publishing drops orders of magnitude in every generation of technology as it happened with cheap and fast printing press, radio, broadcast and then cable TV and finally the internet and mobile, the problem becomes more massive and much harder to regulate, and also drops in the quality of public discourse and nature of truth.
Basically it boils down to we had a good(relatively) 100 year run with media and corresponding improvement in civil liberties and good governance, we can no longer depend on educated public taking decisions sooner or later in the right direction like we have last century or so.
oblio
7 months ago
Conceptually regulation is "not very complicated".
1. Bring back those laws requiring fairness of media representation.
2. Force standardized disclosure of sponsored content of any type (total, segments, placement). Many countries already do this. Standardized = big, high contrast "Ad" sign in the corner with mandatory size proportional to content size.
3. Mandate providing sources.
4. Treat all influencers with an audience above NNN followers (10000?) as mass media.
5. Require that widely shared content is fact checked and that fact checking is automatically included while sharing and provide recourse for fact checking up to the legal system.
6. For sensitive topics (politics, primarily) require AML and KYC disclosures of funding, primarily to find foreign funding sources and propaganda.
However, you know, vested interests, the bane of humanity.
watwut
7 months ago
> Bring back those laws requiring fairness of media representation.
There is no way for this not being censorship and not being used to suppress less powerful opposition. Which is exactly how it was used in the past. Plus, just look what both sidesm currently does - it motivates journalists to write as if both sides were equal in situation where they clearly are not.
> Require that widely shared content is fact checked and that fact checking is automatically included while sharing and provide recourse for fact checking up to the legal system.
Fact checking is irrelevant to public opinion. And again, it is not that difficult to bias it.
HWR_14
7 months ago
Confidential sources are necessary for lots of whistleblower based reporting.
Fairness of media representation seems hard to define and prone to abuse.
But mandating the the financial conflicts be disclosed and ads labeled seems reasonable.
bryant
7 months ago
As much as I agree, you might run into a challenge with case law in the US. IANAL, but I reckon Near v. Minnesota (https://en.m.wikipedia.org/wiki/Near_v._Minnesota) is relevant here.
estebarb
7 months ago
Problem is: some people will demand their free speech rights are being violated. The legal system is a weak guarantee: just check how the legal system works in a dictatorship. Or if a political faction decide to throw a lot of money into fake news and opinion laundering.
sdeframond
7 months ago
It is baffling to me how "free speech" has come to mean "freedom to use mass broadcasting systems".
Of course anyone should be free to publicly say anything, however untrue it might be.
Should they be free to broadcast their nonsense to million of people?
I don't know, but I do feel these are two different things.
isotropy
7 months ago
They are different: in the U.S. that's why "freedom of the press" is also written down in the First Amendment, and historically, that's exactly how the U.S. courts have interpreted the phrase "freedom of the press" - as a (pretty) general right for anyone to use any media technology they can access to spread any ideas they want. There are always some limits, but from the start "the press" meant "the printing press", not "institutionalized news organizations". It's a general technology-usage right, not a specialized right for a certain group. Everyone is allowed to do more than just talk, or even shout. People can have different opinions on how wise that right is, but in the US at least, you are indeed free to broadcast your nonsense to millions of people, if you have the resources.
manquer
7 months ago
> broadcast your nonsense to millions of people, if you have the resources
Spot on, today you can do that as close to free as possible. In the eras past that was not possible it was expensive so only few could do it and that served as a moderating influence, it was not easy for fringe beliefs to become mainstream. The gatekeeping had the downside of suppressing voices particularly minority and oppressed voices so it was not all rosy.
The only thing we know is we can no longer use the past as reference to model how the future of politics , governance or media will be, which institutions will survive and in what distorted versions in say even 10-30 years.
sdeframond
7 months ago
>> broadcast your nonsense to millions of people, if you have the resources
> Spot on, today you can do that as close to free as possible.
Are you sure?
You can author a tweet for free, yeah. Then you let Musk do the broadcasting if he so pleases. Users have no control over the broadcasting, platform do.
figassis
7 months ago
You will. Your kids won’t.
bboygravity
7 months ago
That's not really a lot compared to what Wallstreet is steeling daily.
ozim
7 months ago
Ugh that’s not a quality on its own.
Someone who „steals less” is not better.
Still fucking thieves.
ozim
7 months ago
You do understand what you described is basically Bolshevik/French revolution only different times.
Some men with some power using young starry eyed young people to grab much more power from incumbents.
user
7 months ago
mrfox321
7 months ago
At a big co I worked at, the lack of consistency between trading systems caused money to (dis)appear (into)out of thin air.
Prior to one of these hiccups, I hypothesized, given how shitty the codebase was, that they must be tracking this stuff poorly.
This led to an argument with my boss, who assumed things magically worked.
Days later, we received an email announcing an audit one one of these accounting discrepancies.
JPMC proposed using crypto, internally, to consistently manage cash flow.
Not sure if it went anywhere.
HolyLampshade
7 months ago
At all of the exchanges and trading firms I’ve worked with (granted none in crypto) one of the “must haves” has been a reconciliation system out of band of the trading platforms. In practice one of these almost always belongs to the risk group (this is usually dependent on drop copy), but the other is entirely based on pcaps at the point of contact with every counterparty and positions/trades reconstructed from there.
If any discrepancies are found that persist over some time horizon it can be cause to stop all activity.
ajb
7 months ago
Wait, pcap as in wireshark packet capture?
tnlnbn
7 months ago
I'm not the commenter, but yes, often trading firms record all order gateway traffic to from brokers or exchanges at the TCP/IP packet level, in what are referred to as "pcap files". Awkwardly low-level to work with, but it means you know for sure what you sent, not what your software thought it was sending!
pclmulqdq
7 months ago
The ultimate source of truth about what orders you sent to the exchange is the exact set of bits sent to the exchange. This is very important because your software can have bugs (and so can theirs), so using the packet captures from that wire directly is the only real way to know what really happened.
generic92034
7 months ago
But then the software capturing, storing and displaying the packets can also have bugs.
bostik
7 months ago
Among all the software installed in a reputable Linux system, tcpdump and libpcap are some of the most battle tested pieces one can find.
Wireshark has bugs, yes. Mostly in the dissectors and in the UI. But the packet capture itself is through libpcap. Also, to point out the obvious: pcap viewers in turn are auditable if and when necessary.
wjholden
7 months ago
Cisco switches can mirror ports with a feature called Switch Port Analyzer (SPAN). For a monitored port, one can specify the direction (frames in, out, or both), and the destination port or VLAN.
SPAN ports are great for network troubleshooting. They're also nice for security monitors, such as an intrusion detection system. The IDS logically sees traffic "on-line," but completely transparent to users. If the IDS fails, traffic fails open (which wouldn't be acceptable in some circumstances, but it all depends on your priorities).
generic92034
7 months ago
When I think "Cisco" I think error-free. /s
No, really, I get where you and your parent are coming from. It is a low probability. But occasionally there is also thoroughly verified application code out there. That is when you are asking yourself where the error really is. It could be any layer.
kortilla
7 months ago
They can, but it’s far less likely to be incorrect on the capture side. They are just moving bytes, not really doing anything with structured data.
Parsing the pcaps is much more prone to bugs than capturing and storing, but that’s easier to verify with deserialize/serialize equality checks.
chairmansteve
7 months ago
The result of bitter lessons learnt I'm sure. Lessons the fintechs have not learned.
baq
7 months ago
That makes sense - but it's still somewhat surprising that there's nothing better. I guess that's the equivalent of the modern paper trail.
HolyLampshade
7 months ago
It’s the closest to truth you can find (the network capture, not the drop copy). If it wasn’t on the network outbound, you didn’t send it, and it’s pretty damn close to an immutable record.
ajb
7 months ago
It makes sense. I'm a little surprised that they'd do the day to day reconciliation from it but I suppose if you had to write the code to decode them anyway for some exceptional purpose, you might as well use it day to day as well.
thomasjudge
7 months ago
The storage requirements of this must be impressive
bostik
7 months ago
Storage is cheap, and the overall figures are not that outlandish. If we look at a suitable first page search result[0], and round figures up we get to about 700 GB per day.
And how did I get that figure?
I'm going to fold pcap overhead into the per-message size estimate. Let's assume a trading day at an exchange, including after hours activity, is 14 hours. (~50k seconds) If we estimate that during the highest peaks of trading activity the exchange receives about 2M messages per second, then during more serene hours the average could be about 500k messages per second. Let's guess that the average rate applies 95% of the time and the peak rate the remaining 5% of the time. That gives us an average rate of about 575k messages per second. Round that up to 600k.
If we assume that an average FIX message is about 200 bytes of data, and add 50 bytes of IP + pcap framing overhead, we get to ~250 bytes of transmitted data per message. At 600k messages per second, 14 hours a day, the total amount of trading data received by an exchange would then be slightly less than 710GB per day.
Before compression for longer-term storage. Whether you consider the aggregate storage requirements impressive or merely slightly inconvenient is a more personal matter.
0: https://robertwray.co.uk/blog/the-anatomy-of-a-fix-message
tetha
7 months ago
And compression and deduplication should be very happy with this. A lot of the message contents and the IP/pcap framing overheads should be pretty low-entropy and have enough patterns to deduplicate.
It could be funny though because you could be able to bump up your archive storage requirements by changing an IP address, or have someone else do that. But that's life.
oblio
7 months ago
Why? They're not streaming 4k video, it's either text protocol or efficient binary protocols.
w23j
7 months ago
I would also really like to know that!
It generally seems to be a thing in trading: https://databento.com/pcaps
There is also this (though this page does not specify what pcap means): https://www.lseg.com/en/data-analytics/market-data/data-feed...
alexwasserman
7 months ago
alexwasserman
7 months ago
Typically not a literal pcap. Not just wireshsrk running persistently everywhere.
There are systems you can buy (eg by Pico) that you mirror all traffic to and they store it, index it, and have pre-configured parsers for a lot of protocols to make querying easier.
Think Splunk/ELK for network traffic by packet.
cjalmeida
7 months ago
Except it is literal “pcap” as they capture all packets at layer 3. I don’t know the exact specifications of Pico appliances, but it would not surprise me they’re running Linux + libpcap + some sort of timeseries DB
alexwasserman
7 months ago
Well, probably, but I meant more like it's not typically someone running tcpdump everywhere and someone analyzing with Wireshark, rather than a systems configured to do this at scale across the desktop.
kelnos
7 months ago
I don't think that's what anyone was assuming. A "pcap" is a file format for serialized network packets, not a particular application that generates them.
hn_version_0023
7 months ago
The Corvil devices used by Pico have IME largely been replaced by Arista 7130 Metamux platforms at the capture “edge”
HolyLampshade
7 months ago
Which is great for the companies that have made the switch because those corvils were truly terrible.
HolyLampshade
7 months ago
Looks like tnlnbn already answered, but the other benefit to having a raw network capture is often this is performed on devices (pico and exablaze just to name two) that provide very precise timestamping on a packet by packet basis, typically as some additional bytes prepended to the header.
Most modern trading systems performing competitive high frequency or event trades have performance thesholds in the tens of nanos, and the only place to land at that sort of precision is running analysis on a stable hardware clock.
Loic
7 months ago
I suppose Pre-Calculated Aggregated Positions, but I am not an expert in the field.
SnorkelTan
7 months ago
Looking at the order messages sent to and received from another trading system was not uncommon when I worked in that neck of the woods
chairmansteve
7 months ago
The crypto firms are moving fast and breaking things. No need for that kind of safety shit, right? Would slow things down. Reminds me of Boeing.
nobodyandproud
7 months ago
So is this capture used to reconstruct FIX messages?
HolyLampshade
7 months ago
Yeah, FIX or whatever proprietary binary fixed-length protocols (OUCH or BOE for example) the venue uses for order instructions.
Some firms will also capture market data (ITCH, PITCH, Pillar Integrated) at the edge of the network at a few different cross connects to help evaluate performance of the exchange’s edge switches or core network.
phire
7 months ago
Fun fact, centralized crypto exchanges don't use crypto internally, it's simply too slow.
As a contractor, I helped do some auditing on one crypto exchange. At least they used a proper double-entry ledger for tracking internal transactions (built on top of an SQL database), so it stayed consistent with itself (though accounts would sometimes go negative, which was a problem).
The main problem is that the internal ledger simply wasn't reconciled with with the dozens of external blockchains, and problems crept in all the time.
oblio
7 months ago
> Fun fact, centralized crypto exchanges don't use crypto internally, it's simply too slow.
I know you're not arguing in their favor, just describing a reality, but the irony of that phrase is through the roof :-)))
Especially the "centralized crypto".
phire
7 months ago
Yeah, that fact alone goes a long way to proving there is no technical merit to cryptocurrencies.
The reason they are now called "centralised crypto exchanges" is that "decentralised crypto exchanges" now exist, where trades do actually happen on a public blockchain. Though, a large chunk of those are "fake", where they look like a decentralised exchange, but there is a central entity holding all the coins in central wallets and can misplace them, or even reverse trades.
You kind of get the worst of both worlds, as you are now venerable to front-running, they are slow, and the exchange can still rug pull you.
The legit decentralised exchanges are limited to only trading tokens on a given blockchain (usually ethereum), are even slower, are still vulnerable to front-running. Plus, they spam those blockchains with loads of transactions, driving up transaction fees.
naasking
7 months ago
> JPMC proposed using crypto, internally, to consistently manage cash flow.
Yikes, how hard is it to just capture an immutable event log. Way cheaper than running crypto, even if only internally.
imglorp
7 months ago
Harder than you'd think, given a couple of requirements, but there are off the shelf products like AWS's QLDB (and self hosted alternatives). They: Merkle hash every entry with its predecessors; normalize entries so they can be consistently hashed and searched; store everything in an append-only log; then keep a searchable index on the log. So you can do bit-accurate audits going back to the first ledger entry if you want. No crypto, just common sense.
Oddly enough, I worked at a well known fintech where I advocated for this product. We were already all-in on AWS so another service was no biggie. The entrenched opinion was "just keep using Postgres" and that audits and immutability were not requirements. In fact, editing ledger entries (!?!?!?) to fix mistakes was desirable.
to11mtm
7 months ago
> The entrenched opinion was "just keep using Postgres" and that audits and immutability were not requirements.
If you're just using PG as a convenient abstraction for a write-only event log, I'm not completely opposed; you'd want some strong controls in place around ensuring the tables involved are indeed 'insert only' and have strong auditing around both any changes to that state as well as any attempts to change other state.
> In fact, editing ledger entries (!?!?!?) to fix mistakes was desirable.
But it -must- be write-only. If you really did have a bug fuck-up somewhere, you need a compensating event in the log to handle the fuck-up, and it better have some sort of explanation to go with it.
If it's a serialization issue, team better be figuring out how they failed to follow whatever schema evolution pattern you've done and have full coverage on. But if that got to PROD without being caught on something like a write-only ledger, you probably have bigger issues with your testing process.
rdpintqogeogsaa
7 months ago
Footnote to QLDB: AWS has deprecated QLDB[1]. They actually recommend using Postgres with pgAudit and a bunch of complexity around it[2]. I'm not sure how I feel about such a misunderstanding of one's own offerings of this level.
[1] https://docs.aws.amazon.com/qldb/latest/developerguide/what-...
[2] https://aws.amazon.com/blogs/database/replace-amazon-qldb-wi...
imglorp
7 months ago
Yeah. I'm surprised it didn't get enough uptake to succeed, especially among the regulated/auditable crowds, considering all the purpose built tech put into it.
naasking
7 months ago
I think you're forgetting how many businesses are powered by Excel spreadsheets. This solution seems too advanced and too auditable.
baq
7 months ago
I'll just leave that here for no particular reason at all:
https://www.sec.gov/enforcement-litigation/whistleblower-pro...
chipsa
7 months ago
> Merkle hash every entry with its predecessors; normalize entries so they can be consistently hashed and searched; store everything in an append-only log;
Isn’t this how crypto coins work under the hood? There’s no actual encryption in crypto, just secure hashing.
limit499karma
7 months ago
Theoretically they even have a better security environment (since it is internal and they control users, code base and network) so the consensus mechanism may not even require BFT.
hooverd
7 months ago
It's all merkle trees under the hood. I feel like the crypto coin stuff has overshadowed the useful bits.
trog
7 months ago
Is a Merkle tree needed or is good old basic double ledger accounting in a central database sufficient? If a key requirement is not a distributed ledger then it seems like a waste of time.
Onavo
7 months ago
Merkle tree is to prevent tampering, not bad accounting practices
nly
7 months ago
It only prevents tampering if the cost of generating hashes is extremely high.
Internally in your company you're not going to spend millions of $'s a year in GPU compute just to replace a database.
xorcist
7 months ago
"Prevents tampering" lacks specificity. git is a blockchain that prevents tampering in some aspects, but you can still force push if you have that privilege. What is important is understand what the guarantees are.
limit499karma
7 months ago
? If I use something like Blake3 (which is super fast and emits gobs of good bits) and encode a node with say 512 bits of the hash, you are claiming that somehow I am vulnerable to tampering because the hash function is fast? What is the probable number of attempts to forge a document D' that hashes to the very same hash? And if the document in structured per a standard format, you have even less degrees of freedom in forging a fake. So yes, a Merkel tree definitely can provide very strong guarantees against tampering.
oconnor663
7 months ago
Fwiw, increasing the BLAKE3 output size beyond 256 bits doesn't add security, because the internal "chaining values" are still 256 bits regardless of the final output length. But 256 bits of security should be enough for any practical purpose.
limit499karma
7 months ago
Good to know. But does that also mean that e.g. splitting the full output to n 256 chunks would mean there is correlation between the chunks? (I always assumed one could grab any number of bits (from anywhere) in a cryptographic hash.)
oconnor663
7 months ago
You can take as many bytes from the output stream as you want, and they should all be indistinguishable from random to someone who can't guess the input. (Similar to how each of the bytes of a SHA-256 hash should appear independently random. I don't think that's a formal design goal in the SHA-2 spec, but in practice we'd be very surprised and worried if that property didn't hold.) But for example in the catastrophic case where someone found a collision in the default 256-bit BLAKE3 output, they would probably be able to construct colliding outputs of unlimited length with little additional effort.
benlivengood
7 months ago
Certificate transparency logs achieve tamper-resistance without expensive hashes.
agentultra
7 months ago
Write-Once, Read Many drives also prevent tampering. Not everything needs crypto.
chaboud
7 months ago
In a distributed setting where a me may wish to join the party late and receive a non-forged copy, it’s important. The crypto is there to stand in for an authority.
trog
7 months ago
> In a distributed setting where a me may wish to join the party late and receive a non-forged copy, it’s important. The crypto is there to stand in for an authority.
Yeh, but that's kinda my point: if your primary use case is not "needs to be distributed" then there's almost never a benefit, because there is always a trusted authority and the benefits of centralisation outweigh (massively, IMO) any benefit you get from a blockchain approach.
chaboud
7 months ago
100% agreed there. A central authority can just sign stuff. Merkle trees can still be very valuable for integrity and synchronization management, but burning a bunch of energy to bogo-search nonces is silly if the writer (or federated writers) can be cryptographic authorities.
jchanimal
7 months ago
We launched Fireproof earlier this month on HN. It’s a tamperproof Merkle CRDT in TypeScript, with an object storage backend for portability.
See our Show HN: https://news.ycombinator.com/item?id=42184362
We’ve seen interest from trading groups for edge collaboration, so multi-user apps can run on-site without cloud latency.
hluska
7 months ago
What disrespectful marketing. We don’t care that you use Merkle trees because that’s irrelevant. I guess I can add Fireproof to my big list of sketchy products to avoid. It’s embarrassing.
jchanimal
7 months ago
I figured the responses would be more interesting. Questions about CRDT guarantees etc.
Perhaps worth seeding the convo with a remark about finality.
hluska
7 months ago
While your intentions may have been around discussion, I don’t want to be marketed to when I’m trying to understand something unrelated. I have a business degree so I intimately understand that HN is technically free and it’s nice to get free eyeballs, but we are people too. I’m so much more than a credit card number, yet you’ve reduced me to a user acquisition in the most insulting way possible.
Perhaps instead of your ideas, it’s worth seeding your own personal make up with a firm statement of ethics??
Are you the kind of person who will hijack conversations to promote your product? Or do you have integrity?
Just purely out of concern for your business, do you have a cofounder who could handle marketing for you? If so, consider letting her have complete control over that function. It’s genuinely sad to see a founder squander goodwill on shitty marketing.
jchanimal
7 months ago
In founder mode, I pretty much only think about these data structures. So I am (admittedly) not that sensitive to how it comes across.
Spam would be raising the topic on unrelated posts. This is a context where I can find people who get it. The biggest single thing we need now is critical feedback on the tech from folks who understand the area. You’re right I probably should have raised the questions about mergability and finality without referencing other discussions.
Because I don’t want to spam, I didn’t link externally, just to conversation on HN. As a reader I often follow links like this because I’m here to learn about new projects and where the people who make them think they’ll be useful.
ps I emailed the address in your profile, I have a feeling you are right about something here and I want to explore.
wasabi991011
7 months ago
> Spam would be raising the topic on unrelated posts.
I think you need to reread the conversation, because you did post your marketing comment while ignoring the context, making your comment unrelated.
If you want it distilled down from my perspective, it went something like this:
> Trog: Doubts about the necessity of Merkle trees. Looking for a conversation about the pros and cons of Merkle trees and double ledger accounting.
> You: Look at our product. Incidentally it uses Merkle trees, but I am not going to mention anything about their use. No mention of pros and cons of Merkle trees. No mention of double ledger accounting.
nearting
7 months ago
This doesn't address the question in any way except to note that you also use Merkle Trees. Do you reply to any comment mentioning TypeScript with a link to your Show HN post as well?
gr4vityWall
7 months ago
Sorry, but your post came off as blatant advertising. There is no need to link to your company announcement just because it benefits you.
jchanimal
7 months ago
Thanks y'all -- feedback taken. If I were saying it again I'd say something like:
Merkle proofs are rad b/c they build causal consistency into the protocol. But there are lots of ways to find agreement about the latest operation in distributed systems. I've built an engine using deterministic merge -- if anyone wants to help with lowest common ancestor algorithms it's all Apache/MIT.
While deterministic merge with an immutable storage medium is compelling, it doesn't solve the finality problem -- when is an offline peer too out-of-date to reconcile? This mirrors the transaction problem -- we all need to agree. This brings the question I'm curious about to the forefront: can a Merkle CRDT use a Calvin/Raft-like agreement protocol to provide strong finality guarantees and the ability to commit snapshots globally?
Apologies for the noise.
csomar
7 months ago
Crypto/Blockchain makes it harder to have an incorrect state. If you fk up, you need to take down the whole operation and reverse everything back to the block in question. This ensures that everything was accounted for. On the other hand, if you fk in a traditional ledger system you might be tempted to keep things running and resolve "only" the affected accounts.
delfinom
7 months ago
It's a question of business case. While ensuring you are always accounted correctly seems like a plus, if errors happen too often potentially due to volume, it makes more business sense sometimes to handle it while running rather than costing the business millions per minute having a pause.
necovek
7 months ago
It's mostly a different approach to "editing" a transaction.
With a blockchain, you simply go back, "fork", apply a fixed transaction, and replay all the rest. The difference is that you've got a ledger that's clearly a fork because of cryptographic signing.
With a traditional ledger, you fix the wrong transaction in place. You could also cryptographically sign them, and you could make those signatures depend on previous state, where you basically get two "blockchains".
Distributed trust mechanisms, usually used with crypto and blockchain, only matter when you want to keep the entire ledger public and decentralized (as in, allow untrusted parties to modify it).
koolba
7 months ago
> With a traditional ledger, you fix the wrong transaction in place.
No you don’t. You reverse out the old transaction by posting journal lines for the negation. And in the same transactions you include the proper booking of the balance movements.
You never edit old transactions. It’s always the addition of new transactions so you can go back and see what was corrected.
necovek
7 months ago
Right, thanks for the correction: I wanted to highlight the need for "replaying" all the other transactions with a blockchain.
olddustytrail
7 months ago
In git terms, it's like `revert` Vs `rebase`.
lelanthran
7 months ago
> With a traditional ledger, you fix the wrong transaction in place.
That's not how accounting works. You post a debit/credit note.
solatic
7 months ago
> With a blockchain, you simply go back, "fork", apply a fixed transaction, and replay all the rest.
You're handwaving away a LOT of complexity there. How are users supposed to trust that you only fixed the transaction at the point of fork, and didn't alter the other transactions in the replay?
necovek
7 months ago
My comment was made in a particular context. If you can go back, it's likely a centralized blockchain, and users are pretty much dependent on trusting you to run it fairly anyway.
With a proper distributed blockchain, forks survive only when there is enough trust between participating parties. And you avoid "editing" past transactions, bit instead add "corrective" transactions on top.
im3w1l
7 months ago
If its for internal why not just use a normal append only log. x amount transferred from account y to account z. A three column csv oughta do it.
sneak
7 months ago
Any time your proposal entails a “why not just”, it is almost certainly underestimating the mental abilities of the people and teams who implemented it.
A good option is “what would happen if we” instead of anything involving the word “just”.
qazxcvbnmlp
7 months ago
“Just” usually implies a lack of understanding of the problem space in question. If someone says “solution X” was considered because of these factors which lead to these tradeoffs however since then fundamental assumption Y has changed which allows this new solution then it’s very interesting.
jknoepfler
7 months ago
Sure. When I ask "why don't we just" I'm suggesting that the engineering solutions on the table sound over-engineered to the task, and I'm asking why we aren't opting for a straightforward, obvious, simple solution. Sometimes the answer is legitimate complexity. Equally as often, especially with less experienced engineers, the answer is that they started running with a shiny and didn't back up and say "why don't we just..." themselves.
PittleyDunkin
7 months ago
Counterfactuals strike me as even less useful than underestimating competency would be. Surely basic double-entry accounting (necessarily implying the use of ledgers) should be considered table stakes for fintech competency.
foobarbecue
7 months ago
Lots of threads on this here, most recently https://news.ycombinator.com/item?id=42038139#42038572 . I think this example is perfect, with the "oughta do it"
tonyhart7
7 months ago
it literally ledger, its only show where money went but not showing "why" the money move
double entry with strong check that ensure its always balance fix this
user
7 months ago
foobarbecue
7 months ago
DanielHB
7 months ago
> I hypothesized, given how shitty the codebase was, that they must be tracking this stuff poorly.
That is like half of the plot of Office Space
mlloyd
7 months ago
This sounds like a situation that I know about at the placed identified by name in your comment. It took months to track down the issue.
phonon
7 months ago
Synapse says that it was actually the Bank (Evolve) that made the accounting mistakes, including missing transactions, debits that weren't reported, sending in flight transaction to Mercury while debiting Synapse incorrectly etc.
https://lex.substack.com/p/podcast-what-really-happened-at-s...
hn_throwaway_99
7 months ago
Thanks for posting this, I will definitely listen to it.
While I haven't listened yet, one thing I don't really buy when it comes to blaming Evolve is that it should fundamentally be Synapse's responsibility to do reconciliation. This is what completely baffled me when I first worked with another BaaS company - they weren't doing any reconciliation of their ledgered accounts with the underlying FBO balances at the partner bank! This was insane to me, and it sound likes Synapse didn't do it either.
So even if Evolve did make accounting mistakes and have missing transactions, Synapse should have caught this much earlier by having regular reconciliations and audits.
phonon
7 months ago
They claim they did, Evolve kept putting them off, until they ran out of money.
There's a full transcript (with some images) below the player btw.
rawgabbit
7 months ago
Rambling interview. As best as I can tell Synapse said there were technical issues with Evolve the bank.
Meanwhile this article said Synapse withdrew from Evolve the end user funds. Mr. Holmes of Evolve said the bank “transferred all end user funds” to other banks at the request of Synapse, but declined to identify them
https://www.nytimes.com/2024/07/09/business/synapse-bankrupt...
phonon
7 months ago
I'm sure the spokesperson for Evolve who then says "“It’s complicated,” he wrote in an email Friday, declining to elaborate further."" is fully trustworthy and not eliding any important details.
zimbatm
7 months ago
Wise also recently switched their US bank provider from Evolve to Community Federal Savings Bank. Maybe they had similar issues?
Aspos
7 months ago
I see no reason why CFSB would be in any way different from Evolve, they are just not caught up in the mess yet.
Synapse problem was fundamental and it stems from the same mistake OP is making: never ever build your own, homegrown ledger if you can avoid it.
kdmtctl
7 months ago
You can't avoid this. It is either your client or bank's client. And no bank will take the burden to account every $0.2 transaction for you, spending its own computing power. It just a quite expensive thing to do. That is why banks often separate the main ledger and retail ledger[s]. Each system tuned for a different performance profile.
Aspos
7 months ago
One should not build their own cryptography, one should not build their own ledger, that's what I am saying.
kdmtctl
7 months ago
I've seen a lot of ledgers. Crypto is much more complicated.
In the end of the day you provide a full stack or just do UI/marketing. This is a good old vertical integration dilemma.
abenga
7 months ago
From a cursory look at how it describes itself (BaaS, etc), Evolve is hardly a "bank" in the traditional sense of the word.
hipadev23
7 months ago
Sankaet is full of shit.
hgomersall
7 months ago
I had money disappear from my HSBC account. As in, the double entries didn't match by a small amount (it was a payment between two of my accounts that didn't match up, which I couldn't trivially reconcile in the books). I pursued this for a while but they never even properly acknowledged it let alone fix it.
I had my unfounded suspicion it was some internal subtle theft going on, but incompetence is probably a better explanation.
tossandthrow
7 months ago
If you live in a developed country it should be sufficient to ask them to account for it with a note that a formal complaint will be sent to relevant authorities if nor dealt with in timely manner.
That stuff like this is in order is the foundation of kapital societies and is taken quite seriously.
hgomersall
7 months ago
You'd think so wouldn't you? But alas, the effort required to solve this was at least more than I was willing to make.
sailfast
7 months ago
If in the US, the CFPB would handle this for you.
hombre_fatal
7 months ago
Funnily enough, that's an agency Musk wants to gut: https://www.politico.com/live-updates/2024/11/27/congress/de...
pera
7 months ago
I had a similar situation with Santander many years ago: it was a small amount and happened when I was closing my account, bank manager couldn't explain it and escalating the problem was a pain - especially because I was about to move to another country and had more urgent things to do.
I wonder how common issues like these are...
imp0cat
7 months ago
I think it's quite common, it's just that people do not notice these things.
I also had it happen one time, the bank eventually figured it out and fixed some error on their part.
lores
7 months ago
You're likely correct it was theft. I was told by a CTO there that topping up accounts with bank money where it has been hacked away was daily routine and cheaper than fixing the systems. Incompetence would not manifest on routine operations like this.
DanielHB
7 months ago
> I had my unfounded suspicion it was some internal subtle theft going on
Had you watched Office Space recently?
user
7 months ago
TexanFeller
7 months ago
I’m skittish about real banking institutions as well. Vanguard for example outsourced a bunch of their dev work to India a few years ago. Had a friend that worked as a sysadmin for BoA. They were required to keep certain logging for 7 years but he would just delete it anyway when disks were starting to get full.
hn_throwaway_99
7 months ago
But the fundamental difference is that the regulatory structures are in place to recover your money if a bank loses it. That's not the case with fintech middlemen. Take the Synapse case:
* End customers are really a customer of Yotta, a (silly IMO) fintech where interest was essentially pooled into a sweepstakes prize.
* Yotta was a customer of Synapse - they used Synapse BaaS APIs to open customer accounts (again, these accounts were really just entries in Synapse's ledger, and they underlying funds were supposed to be stored in an FBO account on Evolve).
* Synapse partnered with Evolve, who is the FDIC insured bank.
Synapse went bankrupt, and Yotta customers are finding out they can't access their money. But the bankruptcy court is at a loss as to really what to do. FDIC isn't getting involved, because as far as they can tell, Evolve hasn't failed. Synapse is basically out of the picture at this point as they are bankrupt and there isn't even enough money left to do a real audit, and Yotta is suing Evolve alleging they lost customer funds. But, in the meantime, Yotta customers are SOL.
If you had a direct relationship with an FDIC-insured bank, and they lost your money, there would be a much clearer path for the FDIC to get involved and make you whole (up to $250k).
HWR_14
7 months ago
There are regulatory structures in place for if your bank goes insolvent. AFAIK there is no regulatory mechanism for "I think The bank owes me $1MM dollars; they think I am not a customer". That's just a lawsuit.
itake
7 months ago
FDIC would only get involved if the bank was insolvent?
If your bank and you have a disagreement over how much money should be in your account, then FDIC wouldn't be involved?
hn_throwaway_99
7 months ago
Banking regulators definitely would get involved, but you'd have to do some research on who you'd complain to first. For example, with national banks, you would first file a complaint with the Office of the Comptroller of the Currency: https://www.consumer-action.org/links/articles/office_of_com...
But, in all cases, there is a clear process to ensure no money goes missing, either through fraud, mistakes or insolvency. Banks require the blessings of their regulators to operate, so they are highly incentivized to ensure all of their accounting is accurate. With fintechs no such regulatory framework exists (at least not yet).
manquer
7 months ago
Yotta or its customers don’t have relationship with the bank though .
This case is like FDIC be involved because say Robinhood or stripe or Shopify or any other saas app went bankrupt and their customers are mad they lost money
Thorrez
7 months ago
How about Wealthfront Cash accounts? Wealthfront provides me a statement that shows how my deposited money is distributed among its FDIC insured partner banks, and each transfer they do to and from one of those partner banks. Wealthfront does use a middleman, somewhat similar to how Yotta used Synology as a middleman. But Wealthfront's middleman is FDIC insured: Green Dot Bank.
Spooky23
7 months ago
Wealthfront is a broker iirc, so you have some private insurance to protect you in the event of Wealthfront becoming insolvent.
The difference between them and some bullshit thing like Yotta is you are the customer of record for the account. The bullshit aspect of Wealthfront is they front real services with automated investment services. Yotta was pooling customer funds at some other bullshit fintech who was then putting those funds (or not) into one big account.
Personally, handling cash is an old business and I’m really conservative about who handles mine. Innovation is risk, especially when the money behind it is focused on eliminating accountability. Yotta should have been illegal. Keep accounting boring.
Thorrez
7 months ago
Wealthfront has multiple offerings. Wealthfront investment accounts are for stocks. Wealthfront Cash accounts are for cash. I was talking about Wealthfront Cash accounts, which don't have automated investment services, and I don't think involve a broker.
manquer
7 months ago
Some are better than others at bookkeeping, however FDIC only insures against risks of the bank they regulate. They don’t regulate the risks at the fintech co and they don’t insure it .
There is always residual risk between the bank and you with the fintech company. That’s what got Yotta in trouble ,they basically outsourced the heavy lifting of managing ledgers to synapse which you as customer have no control over.
For most people that risk is not worth losing their already modest savings over , that is why banks are regulated and FDIC exists after all.
tw04
7 months ago
> They were required to keep certain logging for 7 years but he would just delete it anyway when disks were starting to get full.
I’m highly skeptical of this claim. Every bank I’ve worked with adheres to their records requirements like it’s life or death (because it kind of is for the bank).
Tell your friend he’s exposing himself to hard prison time if he’s not just making up a story. If his boss tells him that they don’t have budget to retain the logs he should be whistle blowing, not violating federal banking laws to save what is a rounding error in their IT budget.
user
7 months ago
superzamp
7 months ago
Coincidentally written something about this yesterday [1], but the gist of my take summed up is that the nature of accounting oriented data models doesn’t help when dealing with multiple FBO accounts.
The main problem is that accounting defaults to full fungibility of monetary amounts represented in a ledger, which has the effect of losing track of the precise mapping between assets and liabilities, so you end up in a position where you simply cannot tell precisely to a bank _who_ are the actual customers they owe money to.
[1] https://www.formance.com/blog/engineering/warehousing-promis...
ThinkingGuy
7 months ago
I like Cory Doctorow's saying: "When you hear the term 'fintech,' think 'unlicensed bank.'
chairmansteve
7 months ago
"Fintechs also often put out the fake promise that deposits are FDIC insured, but this only protects you if the underlying bank goes belly up, not if the fintech loses track of your money".
Would you count Wealthfront as a fintech? I was finding their marketing compelling, but this thread makes me think twice.
hnthrowaway7394
7 months ago
There is a pretty fundamental difference, and it’s that Wealthfront (and M1, Robinhood, Fidelity, etc) are registered broker-dealers. Broker-dealers are regulated just as stringently as banks, but by the SEC and FINRA as opposed to the Fed. Broker-dealers have been running passthrough FDIC programs for decades, and in a lot of ways have more stringent regulations than banks. The most notable is that they are forced to segregate assets (can’t put client assets on the balance sheet, they have to custody them separately), which is the ultimate way banks fail and need the FDIC to bail them out. Source: used to work in broker-dealer auditing
dmoy
7 months ago
Yes, it's the same basic principle going on at Wealthfront/etc.
It's possible (probable?) that they have better accounting controls. But I personally wouldn't keep anything above SIPC limits at Wealthfront (or any near competitor like Robinhood, M1, etc). And I'd be keeping records on my own.
And I'd make peace with the fact that SIPC resolution is a completely different ballgame from FDIC turnaround for assets held directly at an insured bank (which is like single business day don't-even-notice fast). I.e. not use it as the sole source of emergency funds, have months of expenses at a different institution, etc.
dmoy
7 months ago
> same basic principle
Well yes and no - synapses pass-through-banking wasn't covered by SIPC, and neither would wealthfronts comparable product. But keeping it just in a standard Wealthfront (or synapse even) sweep account with no underlying banking shenanigans happening, is different from SIPC's perspective.
Just keeping stocks (up to $500k) or sweep (up to $250k) at a SIPC broker is probably okay, even if it's a new fintech. Fooling around with their weird passthrough stuff, less so.
eweise
7 months ago
In addition to a ledger, fintechs need a reconciliation system to ensure the ledger is correct. Does the card processor audit files match your ledger? Does your ACH and check processing systems match the ledger? What about external money movements at the sponsor bank. Are they recording in the ledger?
ajuc
7 months ago
> In Synapse's case, their ledger said the total amount of all of their individual customer balances ended up being much more than the actual funds held in the underlying FBO accounts. Lots of folks are assuming fraud but I'm willing to put money that it was just a shitty, buggy ledger.
Bugs are as likely to show more and less money than there really are. But bugs in production will almost always show more :)
e40
7 months ago
I had been debating the merits of using Flourish, but I'm sticking with SNOXX on Schwab. Same rate and I think SNOXX has to be safer, right? Even with the Flourish FDIC guarantee, as others have pointed out, it's only for the underlying back not Flourish itself.
bradleyjg
7 months ago
In Synapse's case, their ledger said the total amount of all of their individual customer balances ended up being much more than the actual funds held in the underlying FBO accounts. Lots of folks are assuming fraud but I'm willing to put money that it was just a shitty, buggy ledger.
If there was no malfeasance then no money would be gone. The totals would add up, they just wouldn’t no know who was owed what. Since the totals don’t add up, someone got the extra.
throwaway2037
7 months ago
> Fintechs also often put out the fake promise that deposits are FDIC insured
Does this still happen?koblas
7 months ago
Many fintechs are not licensed to hold funds and work with bank partners who hold your actual funds. That allows them to say they're insured because they're not co-mingled with the corporate funds in the event of insolvency. This doesn't stop them from making accounting errors.
zie
7 months ago
The FDIC said you can't do this anymore starting Jan 1, 2025. So I expect it to stop in about 30 days. The FDIC will probably find a few laggards and throw some fines at them, and the process will then probably completely stop.
fragmede
7 months ago
the problem is the discrepancy between what the Fintech means when they say fdic insured, and what the customer hears when they're told fdic insured. the customer (erroneously) assumes it means that if the Fintech or anyone else has problems, the customer is covered up to the 250k fdic limit. what the Fintech means, is that there's someone they're partnered with that is a bank and is fdic covered. How the money is deposited into the bank is up for interperation. if there Fintech is being dishonest, they have one bank account at a bank, and all of the customers money goes into that one shared account, they're not technically lying - the money is fdic insured. unfortunately for the customers, that's not the same as each of them being fdic insured is the Fintech goes under. fdic doesn't seem to want to clarify this issue either, which is a problem.
moffkalast
7 months ago
The fact that practically all funding most of the world runs on these days is just a bunch of variables in some shitty program never stops being weird to think about. All it takes to create or destroy trillions is one (or maybe a few) CPU ops.
It really stretches the belief into fiat money to the absolute limit.
bitwize
7 months ago
Dade: This is every financial transaction Ellingson conducts, yeah? From million dollar deals to the ten bucks some guy pays for gas.
Kate: The worm eats a few cents from each transaction.
Dade: And no one's caught it because the money isn't really gone. It's just data being shifted around.
PittleyDunkin
7 months ago
> Lots of folks are assuming fraud but I'm willing to put money that it was just a shitty, buggy ledger.
I'm not sure there's much difference. Intent only matters so much.
taeric
7 months ago
I mean... Fraud is defined by intent.
You can argue negligence over mistake. But fraud definitely requires intent.
user
7 months ago
PittleyDunkin
7 months ago
I guess my point is it's as harmful as fraud regardless if we can throw someone in prison.
taeric
7 months ago
Oh, for sure. But treatment/remediation will heavily change between the cases. Right?
serbuvlad
7 months ago
> In Synapse's case, their ledger said the total amount of all of their individual customer balances ended up being much more than the actual funds held in the underlying FBO accounts.
When the banks do this it's called "fractional reserve banking", and they sell it as a good thing. :)
Aurornis
7 months ago
I’m constantly amazed by how much the crypto community thinks they understand fractional reserve banking while getting it so completely wrong.
In fractional reserve banking, money that is loaned out is accounted for as liabilities. These liabilities subtract from the overall balance stored (reserved) at the bank. The bank is not printing money new money, no matter how many times this idea gets repeated by people who are, ironically, pumping crypto coins that were printed out of thin air.
I think it’s incredible that cryptocurrencies were literally manifested out of bits, but the same people try to criticize banks for doing this same thing (which they don’t).
simula67
7 months ago
> The bank is not printing money new money, no matter how many times this idea gets repeated by people who are, ironically, pumping crypto coins that were printed out of thin air.
It is now widely accepted that bank lending produces new money[1][2]
[1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
hgomersall
7 months ago
There's an inordinate amount of nonsense being espoused in this thread, when the answer is in that first link. I can only assume it's the miseducation that economics textbooks perpetuate.
Agingcoder
7 months ago
Yes. That’s how it was taught to me years ago, that’s how it’s understood in the banking industry as well, incl the private sector.
From a large eurozone bank : https://group.bnpparibas/en/news/money-creation-work
jnwatson
7 months ago
The "liabilities" aren't subtracted from the deposit amount when counted as M1 supply. (Actually loans are accounted for as assets and deposits are liabilities, but that's beside the point).
If customer A deposits $100 in cash, and customer B borrows $100 from the bank and deposits it back in the bank, M1 goes up because there are now two checking accounts with $100 in it. That the bank's internal bookkeeping balances doesn't change the fact that the Fed considers that more money exists.
notahacker
7 months ago
> That the bank's internal bookkeeping balances doesn't change the fact that the Fed considers that more money exists.
The Fed considers that more M1 exists and the same amount of M0 exists. Both are considered monetary aggregates, but M0 is the "money" the bank needs to worry about to stay solvent, and it can't "print" that.
Whilst it's semantically correct to refer to both M1 and M0 as money, it's pretty clear that it's wrong for people people to elide the two to insinuate that banks are printing themselves balances out of thin air like token issuers or insolvent companies that screwed up their customer balance calculations, which is what the OP was covering.
And the Fed wouldn't consider more money to exist if the bank's internal bookkeeping didn't balance...
gus_massa
7 months ago
I agree. The main point is that if B knows that they don't have to repay the $100 until 10 years in the future, then for the 10 next years everyone can pretend there are $200 in total.
throw0101a
7 months ago
> In fractional reserve banking, money that is loaned out is accounted for as liabilities.
Yes, that is how a fractional reserve banking works. But that is not how the current banking system works.
* https://www.stlouisfed.org/publications/page-one-economics/2...
* https://www.pragcap.com/r-i-p-the-money-multiplier/
Banks do not lend out deposits. This was called the "Old View" by Tobin in 1963:
* https://elischolar.library.yale.edu/cowles-discussion-paper-...
The Bank of England has a good explainer on how money is created:
* https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
See also Cullen Roche:
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625
notahacker
7 months ago
Money that is loaned out is still accounted for as liabilities.
Sure, those liabilities are accounted for in an eventually consistent matter by reconciling imbalances on interbank lending markets at the end of the day with the government topping up any systemic shortfall rather than by counting out deposit coins in the vault
But that's fundamentally much closer to the "Old Money" view than to the OP's claim about fractional reserve being like an FBO inflating customer deposits by failing to track trades properly. All the credit extended by the bank is accounted for, and all of it that isn't backed by reserves is backed by the bank's obligations to someone else.
throw0101a
7 months ago
> Money that is loaned out is still accounted for as liabilities.
To be clear:
* Money is "loaned out" in the sense that a bank credits your account.
* Money is not loaned out in the sense that which "goes into" your account did not come out of someone else's account. Rather it was created 'out of thin air' by the bank without reference to anyone else's deposits.
notahacker
7 months ago
To be clear:
I am familiar with your links, for quite some time actually.
I never said that the money came out of someone else's account.
What I did say was that it was accounted for as liabilities. It's the bank's liability to the loanee (or their bank), which the bank absolutely can be obliged to pay with reserves or cold hard cash (and it can only get these from borrowing, selling assets or customers paying cash into their account).
And so banks lend it out to people attached to a slightly larger liability repayable to them and keep track, because if they don't all this money they're "printing" represents losses in terms of obligations they can't "print" their way out of. That's quite different from the ledger screwup its being compared with, or indeed people creating tokens (not backed by debt or anything else) out of thin air to sell to other people
hgomersall
7 months ago
You're going to have to show the balance sheet movements because your wordy description is very woolly.
nradov
7 months ago
No. Banks classify outstanding loans as assets, not liabilities.
notahacker
7 months ago
Yes, the loan is the bank's asset. The deposit created aka "the money" is the bank's liability. I don't think we're in disagreement here.
A corollary of this is that contra popular suggestions otherwise, the accounts net to zero and the bank obtains no gain from "printing money", only from interest earned on repayments.
kevin_nisbet
7 months ago
This is a good explanation, I've had to explain this topic a few times as well, it seems like it's one of those topics that is very missunderstood.
To just expand a bit, I believe some of the confusion around printing of money comes from the way some economics reports are built. As a micro example, Assume a 10% required reserve, If Alice deposits $100 and the bank lends $90 to Bob. Alice ($100 deposits) + Bob ($90 cash) think they have $190 in total.
This is mainly useful for economists to understand, study, and report on. However, when the reports get distributed to the public, it looks like the banks printed their own money, as we now see $190 on the report when there is only $100 of cash in our example system.
Whether the system should work on a fractional reserve is it's own debate, but we need to know what it is to debate the merits and risks of the system.
neilwilson
7 months ago
And how does that work when the 'required reserve' is zero as it is now, and has been in the rest of the world since time immemorial?
Nobody deposits in a bank - it's just a retag of an existing deposit. The bank Debits a loan account with the amount owed, and Credits a deposit account with the advance. It's a simple balance sheet expansion in double-entry bookkeeping.
I'm really not sure why this myth persists given that central banks debunked the concept over a decade ago.
Loans create deposits, and those deposits are then converted into bank capital when a deposit holder buys bank capital bonds or equity.
[0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
immibis
7 months ago
Most people deposit in a bank by transferring from another bank. There is more than one bank.
neilwilson
7 months ago
Now do the balance sheet journals for such a transfer. [0]
Then you'll see that for a bank to transfer to another bank the destination bank has to take over the deposit in the source bank (or swap that liability with another bank somewhere).
You have an infinite regress in your thinking.
[0]: https://new-wayland.com/blog/why-banks-pay-interest-on-depos...
immibis
7 months ago
In fractional reserve banking, the total deposits at a bank can be greater than the amount of physical money it holds. Since the rest of society is willing to accept bank deposits as an alternative to physical money, this is a form of printing money. Physical currency is not printed, but bank deposit currency (which is money, by de facto agreement) is.
user
7 months ago
stackghost
7 months ago
>These liabilities subtract from the overall balance stored (reserved) at the bank. The bank is not printing money new money
Hi, this is factually incorrect and you should educate yourself before attempting any further condescending comments on Hacker News.
no_wizard
7 months ago
I just want the gold standard back.
It worked as an actual check on money supply and went implemented properly was harder to manipulate
dumah
7 months ago
The US Government formerly fixed gold prices by statute and prohibited US citizens from owning or trading gold anywhere around the world.
The idea such a system could function in todays world is strange to me.
serbuvlad
7 months ago
First of all, I take offense to being thrown in as part of the crypto community, with which I have nothing to do, and for which I do not have much hope.
So now if you are unhappy with the monetary system you are automatically a crypto bro and can be dismissed?
Secondly, the problem with fractional reserve banking is as follows: Suppose Larry makes a deposit of one dollar, which the bank guarantees can be retrieved at any time. The bank loans this dollar to Catherine, which uses it to buy something from Steve. Now Steve has one dollar, which he deposits with the bank. The bank lends this dollar to Catherine2, which uses it to buy something from Steve2. And so on, up to CatherineN and SteveN
Now, in so far as transactions can take place in the economy with bank IOUs, which are considered perfect money substitutes, the amount of money in the economy has been multiplied by a factor of N. Where before only Peter had a dollar (or a dollar IOU, which are supposedly the same), now Pere AND Steve, Steve2, up to SteveN all have a dollar IOU. This leads to an inflationary pressure.
Now it is true that upon the Catherine's repaying of the debt, these extra dollars will go away. However, in reality there is no such thing as negative dollars. The supply of money has been increased by the bank.
An objection could be raised that Catherine's extra demand for money to pay off her debt will exactly offset the extra supply of money. This is nonsense! Everyone demands money all the time. If Catherine did not demand money to pay off her loan, she would demand money in order to satisfy her next most urgent want which could be satisfied by money. The increase in the demand for money is negligible.
nly
7 months ago
Your explanation of fractional reserve banking is somewhat correct, but missing the big picture
Licensed banks can and do write loans at any time without having any deposits to 'lend out'. In doing so they create both the loan (an asset) and a deposit (a liability) simultaneously from thin air. The books immediately balance.
The deposit created is then paid to the borrower and the liability vanishes. The bank is left with only the asset - the one that they created from thin air.
For short term liquidity a bank can always use the overnight lending facility at the central bank. Doing so just makes all their loans far less profitable as this is at a floating daily rate.
In reality the limit to which the money supply grows is not dictated by 'fractional reserves', but solely by interest rate policy and the commercial viability of being able to make loans and demand in the economy.
neilwilson
7 months ago
Not quite. The deposit is paid to the borrower as an advance, and the deposit is transferred to the payee (or the receiving bank if the payee is at another bank)
The liability can never vanish - balance sheets have to balance. Bank liabilities are what we call 'money'. Hence how you are 'in credit' at the bank.
immibis
7 months ago
And when we look at the bank assets which back those liabilities, we find that (say) 10% are government-printed money, and the remaining 90% were created by banks.
neilwilson
7 months ago
We don't. What we see is both of those are loans made.
Technically the commercial bank lends to the central bank. That's why they receive interest on it.
That's just a loan like all the other loans on the asset side. The difference is that the interest rate is set by the borrower not the lender.
Holding a deposit is just different name for a particular type of loan.
ta12653421
7 months ago
Not really:
The loan will be accounted to loan book and deposit book on the local(!) banking system level; if the money moves out of the bank, it has to go through central banking money circle - on this level, the loan amount is _NOT_ created, this account can be "filled" only with incoming transactions from other banks (customer deposits!) Thats the reason why a bank needs deposists: to make payments possible, since the number on the central banking account is always smaller than the number of all loans on the local banking system level.
nly
7 months ago
You might want to read this paper from the Bank of England
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Choice quote from page 1:
"Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposit"
The part you are talking about is illustrated in Figure 2.
The transfer of central bank reserves between banks doesn't change the fact that once a loan is written new money enters circulation.
namaria
7 months ago
Your mistake was saying Synapse merely did what banks do. Banks don't lose track of money when they increase the money supply.
serbuvlad
7 months ago
My comment was meant as a tounge-in-cheek joke, with a dig at the banking system. It was not meant as a serious equivocation between what Synapse did and what banks do.
victorbjorklund
7 months ago
But Banks are increasing the money supply with fractional reserve bank. But that is of course on purpose and account for by the govt.
willmadden
7 months ago
The bank IS printing new money. You are ignoring the money multiplier effect where the money lent by bank 1 is deposited into bank 2, bank 2 lends 90% of that deposit, which is deposited into bank 3, ... repeating the process over and over.
With a 10% reserve requirement, a 1,000,000 USD deposit will result in up to 10 times that much money being lent out.
The formula is 1/r, where r is the reserve requirement.
neffy
7 months ago
That´s not correct unfortunately, although it has been widely taught in economics text books, and you can blame Keynes for that. Keynes used that example to try and explain the process to parliament, and also to argue that the system didn't expand the deposit money supply over time. Ironically even the data (in the Macmillan report) he supplied contradicted him. It´s confusing as well, because the fundamental rules have changed over time.
Banks can lend up to an allowed multiple of their cash or equivalent reserves (gold standard regulation), and in the Basel era are also regulated on the ratio of their capital reserves to their loans. This acts to stop hyperflationary expansion, but there is a feedback loop between new deposits and new capital so the system does still expand slowly over time. This may be beneficial.
In engineering terms, Banks statistically multiplex asset cash with liability deposits, using the asset cash to solve FLP consensus issues that arise when deposits are transferred between banks. It´s actually quite an elegant system.
user
7 months ago
itsoktocry
7 months ago
>Banks can lend up to an allowed multiple of their cash or equivalent reserves
And what is the current reserve requirement in the US? Zero.
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
Edit: Whoops, someone beat be to it below.
tripletao
7 months ago
The important part is:
> and in the Basel era are also regulated on the ratio of their capital reserves to their loans
Reducing the reserve ratio to zero doesn't mean that banks can create unlimited amounts of money out of thin air. It just means that regulation by capital requirements has now fully superseded regulation by reserve ratio.
In theory those capital requirements are a better and finer-grained regulatory tool, capturing the different risk of different classes of asset. In practice that can fail--for example, the SVB collapsed insolvent because it was permitted to value bonds above their fair market value if it claimed they'd be held to maturity. That failure was in the details though, not the general concept.
ArnoVW
7 months ago
interestingly, the Fed's page on Reserve Requirements states:
As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
So in effect, the multiplier is infinity.https://www.federalreserve.gov/monetarypolicy/reservereq.htm
gastonmorixe
7 months ago
I remember this. Have they ever rolled it back?
neffy
7 months ago
The Basel Capital rules dominate at the moment. If that ever gets rolled back... buy gold immediately.
gastonmorixe
7 months ago
Oh ok. So there’s a difference between reserve requirements and capital requirements. Capital requirements are still in place Basel III (Basel Capital Rules) 4.5% among other requirements https://en.m.wikipedia.org/wiki/Basel_III
hgomersall
7 months ago
Basel III also specifies liquidity requirements, which basically means banks need to hold sufficient loan assets in the government or central bank (generally bonds or reserves respectively), which act as a backstop if other banks stop lending to them (i.e. stop accepting deposit transfers without also being given an equivalent asset).
ta12653421
7 months ago
not really infinity:
there are tons of balance-sheet-metrics which have to be aligned, in theory you are right; in practice, there are a lot differences.
zmgsabst
7 months ago
Clarifying question:
So for every $1 deposited, I can lend $0.90 but must hold $0.10 as my reserve?
hectormalot
7 months ago
It’s a bit more complicated than that.
At the point I make a loan, 2 things happen on my balance sheet: I have a new liability to you (the increased balance in your account), and I have a new asset (the loan that you’re expected to pay back). They cancel each other out and it therefore seems as if I’m creating money out of thin air.
However, the moment you actually use that money (eg to buy something), the money leaves the bank (unless the other account is also at this bank, but let’s keep it simple). Liabilities on the balance sheet shrink, so assets need to follow. That needs to come from reserves because the loan asset keeps its original value.
The reserve comes from the bank, not from you. Added layer here: Banks can borrow money from each other or central banks if their cash reserves runs low.
Finally: it tends to be the case that the limit on lending is not the reserves, but on the capital constraints. Banks need to retain capital for each loan they make. This is weighed against the risk of these loans. For example: you could lend a lot more in mortgages than in business loans without collateral. Ask your favorite LLM to explain RWAs and Basel III for more.
AnthonyMouse
7 months ago
> However, the moment you actually use that money (eg to buy something), the money leaves the bank (unless the other account is also at this bank, but let’s keep it simple). Liabilities on the balance sheet shrink, so assets need to follow. That needs to come from reserves because the loan asset keeps its original value.
"Everything should be made as simple as possible but no simpler."
You're omitting the thing that causes the money to be created out of thin air. If the other account is at the same bank, now that customer has money in their account that didn't previously exist. And the same thing happens even if the money goes to a customer at another bank -- then that bank's customer has money in their account that didn't previously exist. Even if some reserves are transferred from one bank to another, the total reserves across the whole banking system haven't changed, but the total amount of money on deposit has. And the transfers into and out of the average bank are going to net to zero.
The created money gets destroyed when the loan is paid back, but the total amount of debt generally increases over time so the amount of debt-created money goes up over time as banks make new loans faster than borrowers pay them back.
ta12653421
7 months ago
Not correct:
Your loan is loan+interest; when your loan is created, we do not create the interest-part on it - the interest-part is the rest that you have to pull from someone else, since bank gives you loan X - but asks loan X + interest Y back from you -> thats the reason why there needs to be another fool somewhere else who is then again taking a loan.
its one of the main architectural choices of our money architecture :-D
AnthonyMouse
7 months ago
Only the loan principal is destroyed when it's paid back. The interest goes to the bank, which then gets to spend it or distribute it to shareholders who then get to spend it etc.
Suppose a mechanic takes out a mortgage to buy a house. The bank uses the interest on the loan to pay part of the bank manager's salary. Then the bank manager pays the mechanic to fix his car. Nobody inherently has to take out another loan for the borrower to pay back the bank.
The main reason debt keeps going up is that housing prices keep getting less and less affordable, requiring people to take on more and more debt to buy a house or pay rent.
ta12653421
7 months ago
>> The reserve comes from the bank, not from you. Added layer here: Banks can borrow money from each other or central banks if their cash reserves runs low. << Not correct: it can be both - on your central banking account, you can receive money from other banks (lending on the "interbanking market") _or_ customers (when they send money to your bank).
gastonmorixe
7 months ago
The bank could also sell the loan instead of borrowing if they are in need of capital.
throw0101a
7 months ago
> So for every $1 deposited, I can lend $0.90 but must hold $0.10 as my reserve?
The GP is completely wrong on how modern finance works. Banks do not lend out deposits. This was called the "Old View" by Tobin in 1963:
* https://elischolar.library.yale.edu/cowles-discussion-paper-...
The Bank of England has a good explainer on how money is created:
* https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
See also Cullen Roche:
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625
ta12653421
7 months ago
Partially untrue:
Yes, they do not need customer deposits to create loans and increase their balance sheet, there are just some guys like you and me, putting the amount in the balance sheet and clicking save (simply put)
But yes, they need to have at least some customer deposists to make payments happen, since if they do not have any deposits, their central banking account would be empty, therefore none of your loans could actually leave your bank since the transaction wont happen. (i'm talking from perspective of TARGET2 / ECB / EURO system)
ianburrell
7 months ago
That is exactly what happens. Reserve ratio used to be 10%, same as your example. The reserve ratio is currently zero, lowered in 2020 during pandemics. But banks still can't lend out more than deposits.
dataflow
7 months ago
> The reserve ratio is currently zero, lowered in 2020 during pandemics.
I saw this during the pandemic, and it bewildered me how little coverage of it there was. How is this not going to cause another financial catastrophe? And if we're so sure it isn't, then what makes people think they under economics so well, given that they clearly thought a minimum was necessary just a few years ago?
throw0101a
7 months ago
> I saw this during the pandemic, and it bewildered me how little coverage of it there was. How is this not going to cause another financial catastrophe?
The banks in Australia, Canada, etc have had zero reserve requirements for thirty years:
* https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...
The US had reserve requirements leading up to the 2008 GFC which started off with mortgages/loans, and yet those requirement didn't stop the disaster. Canada et al did not have requirements, and yet it didn't have a financial meltdown (not itself, only as 'collateral damage' to what happened in the US).
schnitzelstoat
7 months ago
Many central banks like the Bank of England don't even have a reserve requirement and rely on the bank rate to control it instead.
The equivalent for the USA would be the Federal Funds Rate, I suppose. The reserve requirement is just one tool among many.
AmirS2
7 months ago
Because what matters is _Capital_ requirements, which differ by the _risk_ of the loan. A bank's Capital is what limits their ability to lend. Reserve requirements are irrelevant in the modern banking system.
ta12653421
7 months ago
Technicaly not accurate:
the do lend out more than they have _currently_ as deposits on their central banking accounts, you have to care about "duration transformation" - JPM has billions of loans and deposits, though most of the deposits may be currently "out of the house" (borrowed) Now, for sure could JPM increase the balance sheet even more by another loan, if they still meet whatever balance-sheet-restrictions and if they have enough money on their central banking account. (sure, if the loan is for a customer within the same institution, then there is no difference)
immibis
7 months ago
Deposits≥Loans is a tautology since every time loans increase, so do deposits. It doesn't mean anything or provide any insight.
hgomersall
7 months ago
Even deposit liabilities matched by deposit assets in other banks are essentially inter-bank loans. That is, deposits=loans in all cases.
immibis
7 months ago
I deposit $20. Deposits: $20. Loans: $0. Cash: $20.
hgomersall
7 months ago
Fortunately, loans create deposits, so they are always in balance.
thaumasiotes
7 months ago
There's more to it than that; balances are exceeded by the sum of "assets held by the bank" and "assets owed to the bank".
user
7 months ago
Shalah
7 months ago
@serbuvlad: “When the banks do this it's called "fractional reserve banking", and they sell it as a good thing. :)”
How dare you criticize our holy banking system /s