Funny how the replies are full of people explaining how bank deposits work. An exchange is not a bank. They're a custodian that holds something on the customer's behalf and facilitates trades. That crypto "exchanges" act like banks, but without any of the banking regulation we spent the last 100 years learning the hard way is why they keep failing.
My stock broker and the NYSE can't secretly sell my shares and loan out the proceeds. They just hold the stock.
That Crypto "exchanges" think of deposits as assets makes it clear they're more like a hedge fund than a bank or exchange.
The hard distinctions between different types of financial institutions and their services, and most particularly the thing that makes every thing that holds money or other valuables on your behalf not effectively, like a (very sketchy) bank, are mostly a product of regulation.
> My stock broker and the NYSE can't secretly sell my shares and loan out the proceeds. They just hold the stock.
Not in the business so I could be wrong but I believe they can loan shares to short sellers to sell and pocket the interest but they are also regulated which turns out is important.
Customer deposits are liabilities, but if the exchange acts as one would expect, each $ of liabilities has a corresponding $ of assets (ideally, in a segregated account, so that they're not considered the company's asset in the case of a default). But one may always doubt whether things are as they should, afaik Binance has never had a full audit report (not just proof-of-reserves or similar).
Banks work a bit differently, btw, they should also have more $ assets than liabilities, but there's generally no direct 1:1 link as described above.
> Banks work a bit differently, btw, they should also have more $ assets than liabilities, but there's generally no direct 1:1 link as described above.
The total difference between assets and liabilities is the common stock (equity). This also shows why it's a very bad thing when the stock of a bank goes to zero, it means some liability will not be covered and thus the bank can be considered bankrupt. I'm simplifying here.
From this point we can take a history tour to the 2008 meltdown, when we had this situation everywhere: bank A would short the common stock bank B because bank A had a lot of assets in bank B (which show up in bank B as liabilities). Bank B did the same thing to bank A for the same reasons. This is not as stupid as it sounds, because banks are not the only players in capital markets, using those shorts they essentially spread the default risk all over the equity markets. While this whole clusterfuck of nobody-trusts-nobody is going on the SEC comes out all of a sudden and bans the short sale of bank stocks, because shorting is evil or something. Imagine how much that made things worse after the only way to hedge entire banks going under was suddenly removed.
I think you're confusing market capitalization and (accounting) equity here. What the stock price does does not directly affect the balance sheet (where you see the equity).
> ideally, in a segregated account, so that they're not considered the company's asset in the case of a default
Correct, they should be parked in an escrow account on which the exchange has limited control. Also, such accounts are monitored by third party auditors, banks as well as government regulators. At least that’s how it’s in India.
Not quite. Your deposits are usually redeemable on a short notice, while most of bank's assets are usually loans and mortgages and other long term debt.
> Is the money in my checking account included in the assets for my bank?
The money in their vault is an asset, the balance in your account is a liability. When you deposit money, it creates both, though the asset by design doesn’t sit there for long in that form.
