OPINION: Junseth: GoCelery’s Cute Way of Admitting Insolvency

FinTech, Innovation, Investing, Regulation | May 22, 2017 By:

A few years ago, I remember picking up a brochure that listed all the places a person can buy bitcoin. When I picked it up, the brochure was about a year old. It listed five different exchanges one could choose from. A year later, only one of the exchanges was still around. The rest went belly up.

GoCelery’s announcing an “imbalance of assets,” is a cute way of admitting insolvency. And it’s another great chapter in bitcoin history.

Bitcoin industries operate in an area of law that is still undefined. It’s a sort of Wild West vigilantism that attracts Libertarians and Anarchists. But lost exchange funds are a simple reminder that sometimes regulation isn’t so bad after all. Interestingly, much of this “imbalance” seems to have been GoCelery’s reliance on people’s kindness.

While Bitcoin is an engine of final settlement, many of the on-boarding tools that GoCelery used, like ACH or credit cards, are not. They are highly regulated instruments that allow users to pull funds back under a multitude of circumstances. In most cases, this is a good thing. But GoCelery was doling out bitcoins to its users before these instruments finalized. This is a hard lesson that banks know all too well. It is a lesson about risk exposure, settlement operations, netting, and more.

It is a lesson about business opportunities as well. Finding efficiencies where the efficiencies have been hard-fought isn’t simple. In the meanwhile, bitcoin exchanges should find that they have many of the same costs as banks. In GoCelery’s case, they are discovering that “making settlement faster” can cost everything.

When young, inexperienced kids start bitcoin exchanges, they often do it with a childlike innocence. In some ways, I have more sympathy for the inexperienced exchange operators than those who knew what they were doing (Cryptsy). I can imagine the “oh, fuck!” moment. Looking at a balance sheet, realizing that your users aren’t going to be made whole. Then the arrogance of youth sets in and you devise a fool-proof way to return everyone’s money. And that’s when everything goes wrong.

This is what GoCelery means by “imbalance of assets.” It was the “oh, fuck!” moment. An imbalance of assets means that someone was getting paid someone else’s money. Yes, I have sympathy for the operator of the exchange, because they are young guys. But value holding is a hard job, and those who believe they should be doing it are in for a rude awakening.

While the details have not been fully released, I’m going to make a bet. The arrogance of ignorance, and the obfuscated language describing the exchange’s shortfall as a simple “imbalance of assets,” means that this turned into a Ponzi scheme at some point. I suppose that’s for the lawyers to suss out. But it goes to further prove that scammers rarely know they are scamming. Also, never underestimate the difficulty of a job that looks easy. Every Bitcoiner knows that holding value is the hardest job God created (apart from being a mother… just kidding… holding value’s harder).

Incidentally, insolvency is the exit plan for most bitcoin exchanges. Corporations backed by VCs exit through IPOs. Bitcoin exchanges exit when the business suddenly becomes “insolvent.” But then, who could have known? Sure, Coinbase and Poloniex have been reliable mainstays (though who knows how long that will last)?

Becoming a long-standing, reputable bitcoin exchange is definitely possible. But then, what can one expect, when they put their money in an exchange named after a vegetable?