Finally, another newsletter! I am trying to find a way to write a crypto newsletter that doesn’t take all day to write. This is a (failed) attempt at that. Going forward, this sporadic newsletter will assume you know a thing or two about the crypto space. (If not, read the articles I link to!)

First some housekeeping—I’ve been working to update my blog and move it over from WordPress.com to WordPress.org. My main challenge is finding a WordPress theme that I like, preferably one that is free. If you have any recommendations, please let me know.

Also, the crap butterfly keyboard on my Macbook Pro is failing me, so I’ve ordered a Mac Air with the M1 chip, which will arrive in a few weeks. I’m hoping it makes my life easier.

If you want to support my work, a reminder that I have a Patreon account. Think of it as buying me a cup of coffee, a bottle of wine, or a case of wine once a month, depending on what level you subscribe to.  

Now, on to the news, starting with Tether.

Tether conversations reveal things

I wrote two blog posts recently—these are both transcripts with annotations. If you are interested in Tether and Bitfinex, I recommend you read both, as they contain a lot of good information.  

The first is an interview with Tether frontmen Stuart Hoegner and Paolo Ardoino hosted by bitcoin maxi Peter McCormack. The point of the interview was clearly to attack the “Tether FUD.”

Remember, it’s very important that Tether keep up the illusion that real money is behind tethers and all is well in Tetherland. If the charade crumbles, so does Tether’s dollar-peg and along with it, the bitcoin market.

To that end, Hoegner is claiming that the now $24 billion worth of tethers in circulation are fully backed. What a switch. He told us in April 2019—22 billion tethers ago—they were 74% backed. The question is what are they backed with? He won’t tell us. (Deltec is their off-shore bank in the Bahamas, by the way.) 

Peter: You mentioned Deltec. Are you shareholders in the bank? 
Stuart: We don’t talk about the investments that we have on the Tether side.
Peter: Okay, so are tethers fully backed?
Stuart: Look. The short answer is yes. Every tether is 100% backed by our reserves. And those reserves include traditional currency and cash equivalents, and may include other assets and receivables from loans made by tether to third parties. 

The second transcript I wrote up hasn’t gotten as many views but it is also interesting. It’s a debate between The Block’s Larry Cermak and blogger Bennett Tomlin. They argue whether Tether is acting in good faith. Cermak thinks they are. He believes tethers are fully backed—and wants you to believe that, too.

One question we have to ask is why Cermak, who was a staunch Tether skeptic in the past, has suddenly pulled a 180 and joined the campaign to prop up Tether? Assuming good faith, it appears he has fallen for the same con one Bloomberg reporter did two years ago.

Questions around Tether’s Deltec Bank

Another curiosity that sprung up from Paolo and Stu’s interview: Who is Deltec’s banking partner? If Tether keeps its reserves at Deltec and its largest customers have accounts there too, one would think Deltec needs a U.S. bank partner to store USD. In other words, a nostro account in a foreign bank. 

This should not be a secret. When Bitfinex was banking with Noble Bank in Puerto Rico, Noble openly stated on its website that it doesn’t actually hold the money. Instead, it used BNY Mellon as its custodian.

Presumably, Deltec has a custodian, too. This might explain why the Bahamian Central bank is not reporting inflows that match what Tether claims to have in its reserves. (The central bank publishes a quarterly statistical digest that looks at the total assets that all the country’s banks are holding.)

Of course, another explanation as to why the country’s central bank isn’t showing a large inflow of funds could be that Tether doesn’t have the reserves it says it does—or else, maybe, a good portion are in BTC?

In a year-in-review video, Deltec’s CIO Hugo Rogers dropped a bomb. He said, with the straightest face you can imagine, that the bank has a “large position” in bitcoin.

“We bought bitcoin for our clients at about $9,300 so that worked very well through 2020 and we expect it to continue working well in 2021 as the printing presses continue to run hot.” (He is referring to the U.S. printing press, but we know Tether has been running hot, too.)

Hoegner denied that any of those funds were Tether’s, according to The Block.

The Bit Short

An anonymous blogger published a Medium post on Tether titled “The Bit Short: Inside Crypto’s Doomsday Machine.” It’s full of great quotes and insights, like this one, describing how Tether’s core moneymaking engine may possibly work:

  1. Bob, a crypto investor, puts $100 of real US dollars into Coinbase.
  2. Bob then uses those dollars to buy $100 worth of Bitcoin on Coinbase.
  3. Bob transfers his $100 in Bitcoin to an unbanked exchange, like Bybit.
  4. Bob begins trading crypto on Bybit, using leverage, and receiving promotional giveaways — all of which are Tether-denominated.
  5. Tether Ltd. buys Bob’s Bitcoins from him on the exchange, almost certainly through a deniable proxy trading account. Bob gets paid in Tethers.
  6. Tether Ltd. takes Bob’s Bitcoins and moves them onto a banked exchange like Coinbase.
  7. Finally, Tether Ltd. sells Bob’s Bitcoins on Coinbase for dollars, and exits the crypto markets.

And this great quote here:

“Forget the activity on the offshore exchanges for a moment, and just think of a simple mental picture. Imagine you could stand at a metaphorical booth, where Coinbase’s exchange connects with the US financial system. If you could do that, you’d see two lines of people at the booth. One line would be crypto investors, putting dollars in—and the other line would be crooks, taking dollars out.”

If you can visualize the image above with Coinbase, you can start to understand why FinCEN is so anxious to push through its proposed “unhosted” wallets rule.

Tether’s document deadline has passed

Jan. 15 was the deadline for Bitfinex/Tether to submit a trove of documents to the NYAG, which has been investigating them for Martin Act violations. A lot of folks were hoping to see a court filing drop on Friday with the NYAG taking a position on the documents that it has received. The injunction, which limits Bitfinex from dipping into Tether’s reserves, also ended Friday, according to the NYAG’s letter from Dec. 8.

(Update: This is a bit confusing. I am not completely sure if the injunction ended on Jan. 15, according to the NYAG’s December letter, or it is implicitly extended until the next court order, per the original order.)

The NYAG hasn’t filed any new court documents yet, but we are waiting anxiously. Tether says they’ve so far sent 2.5 million docs to the NYAG—I believe that’s called a document dump.

In the meantime, Tether has mysteriously stopped printing tethers. The last big print was 400 million tethers on Jan. 12, and prior to that, 400 million on Jan. 9, according to @whale_alert.

Understanding GBTC

There has been some confusion on Twitter as to how Grayscale Bitcoin Trust (GBTC) works. Grayscale doesn’t buy bitcoin directly. Grayscale customers send Grayscale their bitcoin—or cash to buy bitcoin with—and Grayscale issues shares in return. But why do the shares consistently trade at a premium to net asset value?

This November 2020 article by investor Harris Kupperman explains it well. “Think of GBTC as Pac-Man. The coins go in, but do not go out,” he said, going on to describe how GBTC functions as a “reflexive Ponzi scheme.”

Coinlab cuts a deal with Mt Gox creditors

Coinlab, a former U.S. company that has a $16 billion claim against Mt. Gox, has proposed a deal with Mt. Gox creditors over their claims. If creditors choose to go forward with the deal, they can agree to get back 90% of their BTC ahead of the settlement, according to Bloomberg.

Kim Nilsson of WizSec says Coinlab was never acting in good faith. “CoinLab was insisting on continuing to hold up the process for everyone while they litigate to try to steal everyone’s money, and had to be essentially bribed so as not to obstruct this arrangement.” (WizSec blog)

Other notable news

FinCEN has extended the deadline for comments on its proposed crypto wallet rule. Starting from Jan. 15, you now have 15 days to comment on reporting requirements, and 45 days to comment on proposed rules for reporting counterparty information and record-keeping requirements. (Coindesk, FinCEN notice)

Good-bye and good riddance. Brian Brooks has stepped down as acting commissioner of the OCC. (Coindesk.) The former Coinbase exec recently posted an editorial in the Financial Times shilling DeFi. (FT, paywalled)

The European Central Bank calls for regulating Bitcoin’s “funny business.” (Reuters)

Gary Gensler is reportedly President-elect Joe Biden’s choice to lead the SEC. Gensler is a crypto savvy guy, who taught a course on blockchain at MIT Sloan. Crypto folks can expect greater oversight from him. Hopefully, he will bring the hammer down an all those 2017 ICOs. (Bloomberg)

Tether apologists are now comparing (archive) Tether skeptics to unhinged QAnon conspiracy theorists—an example of what lengths they will go to discredit reasonable questions about Tether’s reserves. Remember, the burden is on Tether to prove they have the assets they say they do.

USDC, a U.S. regulated stablecoin issued by Circle, now has a circulating supply worth $5 billion—far outpacing that of any other U.S. regulated stablecoin.

Frances Coppola debates Nic Carter about bitcoin. (What Bitcoin Did podcast)

Bitcoin mining was partly to blame for the latest blackout in Iran. (Washington Post)

Ripple’s ex-CTO loses access to $200 million in bitcoin. “This whole idea of being your own bank—let me put it this way, do you make your own shoes?” said Stefan Thomas. “The reason we have banks is that we don’t want to deal with all those things that banks do.” (New York Times)

Bitcoin may have helped finance the pro-Trump Capital riots (Decrypt)

Twitter has banned the account of former Overstock CEO Patrick Byrne after he posted conspiracy theories relating to the Presidential election. Byrne is a longtime bitcoiner who led Overstock’s decision to originally accept bitcoin and invest in the space. (Decrypt)

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