Crypto loses its tie


The launch of the first bitcoin-focused exchange-traded fund last week proves that crypto bulls must meet John Law. The Scottish gamer, economist and financier is probably the reason why so few major French banks have Banque in their name. Instead, there is Crédit Agricole, Société Générale and Crédit Mutuel. Banque Générale de Law, later renamed Banque Royale, issued banknotes out of thin air, then exploded royally in 1720 and destroyed the French economy. The reputation of French banks has never fully recovered.

Law’s relations gave him exclusive rights to trade between France and his territory of Louisiana. The Mississippi Co. was funded by the sale of new General Bank shares that could be paid for with banknotes issued by – wait – General Bank. The shares soared, going from 500 # to 10,000 # from January to December 1719. Soldiers had to be sent to maintain order in the frenetic financial district.

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Law’s failure was to issue banknotes willy-nilly, with no real support for their value, to keep stock prices rising. The French government ultimately made the huge mistake of making these banknotes legal tender, thus doubling the French money supply. Inflation raged, reaching a monthly rate of 23% in January 1720. In September 1721, stocks returned to 500 and the French economy imploded.

Fast forward 300 years. Crypto had an important October, bitcoin rose from nearly $ 44,000 to a peak of $ 66,000 in anticipation of the ETF ProShares Bitcoin Strategy, which is not actually buying bitcoin – it is buying bitcoin futures contracts. Meanwhile, the stablecoin issuer Tether Ltd. paid a $ 41 million penalty after the Commodity Futures Trading Commission discovered that the company falsely claimed it had enough dollars in reserve to back up its tokens.

The New York attorney general’s office conducted a similar investigation into Tether’s claim of 1-to-1 support with US dollars. It ended, unsatisfactorily if you ask me, with an $ 18.5 million settlement paid in February and an agreement to produce reserve reports for the tether. Why not dig deeper? Tether has neither admitted nor denied the attorney general’s findings.

I wanted to find out more, so I submitted a Freedom of Information Act request to the New York attorney general’s office asking for Tether’s reserve statements, books, and bank statements. This was denied, citing a disclosure that “would constitute an unjustified invasion of privacy” and “interfere with law enforcement investigations or legal proceedings”. Thanks for nothing.

Tether released vague pie charts of its $ 42 billion in “reserves” in May. Only 5% was in cash or treasury bills, and about half of Tether’s backing was unnamed commercial paper. Is this a AAA rated paper from JPMorgan Chase or an IOU backed by Dogecoin? They don’t say. When Coindesk filed a FOIL request for documents detailing Tether’s reserves, Tether attempted to block it, arguing: “The competitive advantages that Tether derives from its investment strategy would be erased if competitors had full visibility into the investments. from Tether.

The Attorney General’s Office released details of a fascinating cat-and-mouse game in its settlement agreement after stating that “Bitfinex and Tether fooled customers and the market by overestimating the reserves”. Until September 15, 2017, an account at the Bank of Montreal held most of Tether’s money, with some $ 61.5 million supporting the 442 million tethers then in circulation. Step 1 to 1. Sister company Bitfinex held $ 382 million in a [sic] account, ”which Tether called a“ debt. ”Tether was claiming money from another company’s balance sheet as its own reserves.

This is where it gets funny. Tether engaged Friedman LLP for “advisory services” “to analyze our bank balances” on September 15, 2017. That morning, Tether opened an account at the Puerto Rico-based Noble Bank, and later that day, Bitfinex transferred over $ 382 million to Tether’s Account. Friedman checked Tether’s assets that night.

According to the settlement agreement, in October 2018, Bitfinex and Tether abandoned Noble Bank and opened an account with Deltec Bank & Trust Ltd. in the Bahamas. On November 1, 2018, Tether produced a letterhead letter from Deltec stating that as of October 31, the cash value of its account portfolio exceeded $ 1.8 billion. On November 2, the attorney general’s office notes, Tether began transferring a total of $ 475 million to Bitfinex accounts at Deltec, clearly an asset transfer game.

Can we trust Tether, which has grown from 21 billion tethers to 69 billion tethers in circulation this year? Doesn’t that sound a bit like John Law’s Royal Bank issuing banknotes? And what is Tether buying? It’s not clear. The most recent disclosure from an independent accountant in the Cayman Islands – not an audit – for Tether reserves shows a lot of commercial paper and certificates of deposit and secured loans. Only about a third of its reserves are cash and treasury bills.

How about a real audit? Recently, the Biden administration announced that it is considering regulating stablecoin issuers as banks. Forcing transparency for crypto would go a long way. But it could get ugly for crypto investors. In June, the so-called “soft-pegged” dollar stablecoin IRON fell from $ 1 to less than 70 cents after TITAN, its guarantee token, fell from around $ 64 to near zero in just a few minutes. hours of frantic sales that caused $ 2 billion in losses.

Like Law, are stablecoins issued willy-nilly and the increasing volatility of bitcoin and other cryptos? What is the leverage effect in the crypto world? The Bahamas-based crypto exchange FTX allowed 100 times the leverage for margin trading, although in July the company reduced it to 20 times. According to Bloomberg, part of Tether’s reserves includes a $ 1 billion loan to Celsius, a crypto-lending startup. If cryptocurrencies are to become the backbone of a modern financial system, let’s open them up to scrutiny before a Royal Bank bubble bursts in the real world.


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