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Here’s what’s happening in the land of crypto. 

Regulations 

A new academic paper on stablecoins is up on the Social Science Research Network. It’s called “Taming Wildcat Stablecoins.” The 49-page paper was co-authored by Gary Gorton, a finance professor at Yale, and Jeffery Zhang, an attorney at the Federal Reserve.

The pair say that Tether is an equity contract, similar to a money market fund, while other stablecoins, such as USDC, Paxos Standard, and the Gemini Dollar, are more like debt. Liberty Reserve isn’t mentioned anywhere in the paper but the authors draw parallels between stablecoins and 19th Century wildcat banks — which is saying a lot because wildcat banks needed corralling. 

Frances Coppola, a UK freelance writer who spent 17 years in banking, tweeted some harsh criticisms of the report. Overall, I think it is worth a read. FT Alphaville has their own take on the paper.

Secretary of the Treasury Janet Yellen met with the President’s Working Group on Financial Markets — aka “The Plunge Protection Team” or the “holy shit guys” — to discuss stablecoins. The group includes the heads of the Federal Reserve, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. (Treasury Press Release; WSJ, paywalled)

Their discussion builds on a document the PWG published in December outlining regulatory issues regarding stablecoins — back from when former Treasury Secretary Steven Mnuchin brought them all together to discuss Facebook’s Libra, now Diem. That paper, in turn, grew out of the Financial Stability Board’s final report on the regulation of stablecoins in October.

SEC Chair Gary Gensler spoke about crypto exchanges at the Piper Sandler Global Exchange and FinTech conference. “When you go into one of these exchanges, you don’t know whether the order book is accurately reporting the bids and the offers,” he said. “You don’t really know if there is front-running. You don’t know whether some of the trading that is reported is real or fake.” (WSJ, paywalled)

Elizabeth Warren, a Senator from Massachusetts — so famous, she gets into international news slightly more than most senators — sent a letter to Gensler about crypto exchanges telling him that “the lack of common-sense regulations has left ordinary investors at the mercy of manipulators and fraudsters.” She wants the SEC to use its “full authority” to address these risks.

El Salvador and bitcoin

Bitcoin will officially become legal tender in El Salvador on Sept. 7. The fast-approaching deadline has left the country’s President Nayib Bukele and his team scrambling to figure out a way to pull this off without landing on their collective rear ends. 

“So far, it looks like Bukele will be getting everyone onto the government’s official Chivo custodial wallet, using that as an officially-supported payment system, and saying that’s ‘Bitcoin.’” David Gerard wrote in a recent blog post spelling out how Chivo is coming along. Hint: not very well.

In a normal world, you would create the payment system first and then add in the crypto later once you made sure everything was working properly. El Salvador is going about it ass backwards — taking bitcoin, and trying to build a payment system around that. 

The challenge is that bitcoin doesn’t really function as a payment system — and the Lightning Network, a second layer solution that was meant to scale bitcoin, can’t handle a small country with 6.5 million users. 

The Chivo wallet is the one thing that Bukele and his buds can’t afford to screw up on. It’s their wallet, so they’ve hired someone named “Lorenzo” to get the job done right. I assume that Bukele and co’s first instinct was to find someone they could trust to do their bidding — not necessarily someone competent. 

The weird thing is you don’t really need to build a payment system. You can literally hire a white label payment gateway and use it under your name while the processing is done by a third party.

Anyhow, it looks like “Lorenzo” is Lorenzo Rey, the Venezuelan developer from Dash — a crypto that started off as a fork of bitcoin. I’m sure the bitcoin maxis will love that.

El Faro reports that the Bukele regime is now planning to launch a national stablecoin called “colón-dollar.” Colón (Columbus) was the name of El Salvador’s currency before it was replaced by the dollar. It’s technically still legal tender in the country, but nobody uses it. 

According to the plan, the colón-dollar will be issued by El Salvador’s Central Reserve Bank, backed by a reserve of US dollars, and integrated with the Chivo wallet. “The move would restore a key element of monetary policy, which the country lost when it adopted the US Dollar in 2001: the ability to issue national currency,” says El Faro.

A stablecoin makes sense given that Bukele needs greenbacks to pay for the national debt, finance his new party’s campaigns, and pay back owed favors to shadowy figures like José Luis Merino, a high-ranking government official in El Salvador. 

You’ll find Morino’s name — along with several others associated with the Bukele regime — on the US Corrupt and Undemocratic Actors report.

Bukele doesn’t like El Faro — which translates to “The Lighthouse” — a publication that for two decades has dug into corruption, human-rights abuses, and gang violence. 

His government recently expelled an El Faro editor who was Mexican, saying it could not verify his work credentials. (Washington Post, paywalled)

El Faro is co-owned by Jose Simán, Bukele’s rival, so of course, Bukele hates them. The paper has fought a tough battle, but its toughest battle yet may be against the Bukele regime. (Global Investigative Journalism Network)

Circle’s sly plan to go public

I wrote about Jeremy Allaire’s Circle, how it plans to go public via a special purpose acquisition company, and why SPACs are bad. (My blog) 

Circle hasn’t been transparent about what is backing its now 26.4 billion USDC. They haven’t released their Q1 financials to the public, so now we are waiting for the SPAC to file an S-4 sometime in Q4. The S-4 will be the real test of transparency. 

[Update, moments after I published this newsletter, Circle came out with its May attestation. It’s a step toward greater transparency, but we still have questions. Why no full audit? Why the delay in making this info public?]

In his recent article, “A Stablecoin Applies to Become a Stonk,” Doomberg says he thinks SEC chair Gary Gensler is unlikely to let Circle pull off its terrible SPAC. “Under [former SEC chair] Clayton’s watch, the SPAC boom soared to historic heights. But from the early signs, Gary Gensler is no Jay Clayton.”

Here’s something I missed earlier: On page 52 of Circle’s Q4 2020 financials, there is a vague mention of a dispute with a “financial advisor” who claims they are entitled to “9% of any value issued to the Company’s shareholders in connection with the proposed business combination.”

Circle hasn’t disclosed who this financial advisor is, although there is some speculation as to whether Circle tried to go public with a different SPAC company earlier, and that didn’t work out. 

Here’s the text:

“The Company is currently in a dispute with a financial advisor regarding advisory fees in connection with the potential consummation of a proposed business combination. The advisor believes it would be entitled to a fee of approximately nine percent (9%) of any value issued to the Company’s shareholders in connection with the proposed business combination based on the advisor’s interpretation of its engagement letter with the Company. The Company disputes this and maintains that the advisor would receive, at most, a reasonable fee reflecting the custom and practice among investment bankers in similar size and type of transactions. At this time, no business combination has been entered into, and there is no fee owing. However, if any such transaction is completed, and a fee becomes payable to the advisor, we cannot determine the ultimate outcome of this dispute.”

Binance CEO: This is fine. Everything is fine

Binance is fast becoming a train wreck. Regulators around the world have been issuing warnings about the exchange, fiat off-ramps keep shutting, and users are complaining they can’t get their funds out. I wrote about it here and here.

Meanwhile, amidst the smoke and fire, Binance CEO Changpeng Zhao — aka “CZ” — continues to behave like everything is going swimmingly.

“A new chapter awaits us, as we embrace compliance and regulations,” he tweeted — after his Brazil director abruptly quit, and Italy, Lithuania, and Hong Kong issued notices about its questionable stock tokens.

CZ talks a big game when it comes to compliance, but that’s all it is — talk. In a June press release, the exchange bragged about helping to take down a Ukrainian crypto money laundering group.

If Binance was following proper KYC/AML procedures, it likely wouldn’t be a target for money laundering groups to begin with. 

Binance routinely reaches out to law-enforcement agencies to request thank-you notes after it cooperates with criminal probes as a way to show how law-abiding it is. The habit has become so disingenuous that the US Department of Justice straight out told federal agencies to stop signing the letters. (Bloomberg)

A bit of trivia — six years ago, CZ was the head of OKCoin’s Singapore branch, registered as a separate company during the infamous Roger Ver vs OKCoin dispute over the bitcoin.com domain. CZ was the go-between who transmitted — or fabricated — the version of the contract with a grossly forged digital signature. The saga was comedy gold on r/buttcoin in 2015.

Oh, and in case you’ve ever wondered about those “maintenance shutdowns” on leveraged exchanges, this Youtube video by Francis Kim, an investor and founder of 80bots, is a must see. “The biggest mistake I made that night was trusting Binance — that my open position would be safe with them.”

Tether printer still on pause

Tether hasn’t printed a darn thing in 50 days. They are stuck at 62.3 billion tethers. Actually, it looks like they even burned 400 million tethers since two weeks ago.

Bitcoin has lost more than half its value since April 14. Down from nearly $68,000, it’s now below $30,000. The concern is that the price of BTC will continue to drop if the Tether printer does not start up again soon.

Keep in mind, there are still a lot of tethers out there moving around between unknown wallets. And we have two other popular stablecoins — USDC and BUSD — to pick up some of the slack. 

In my last newsletter, I offered three theories on why Tether had stopped printing. Now, I am beginning to suspect some regulator may have sent them a cease-and-desist notice.  

There’s also Binance, one of Tether’s biggest customers. Binance is holding 17 billion tethers — about 30% of all the USDT out there. California-based Silvergate Bank terminated their relationship with the exchange in June. (Coindesk)

This means users can no longer transfer US dollars from their US bank to Binance, likely often used to fund purchases of USDT.

Faisal Khan, a banking and payments consultant, thinks that USDT demand probably came from leveraged traders (aka degenerate gamblers) who needed more chips for the Binance casino. (Startups and Econ)

The FT did a profile on Giancarlo Devasini, the 57-year-old CFO of Bitfinex and Tether. A former plastic surgeon, at one point, Devasini got into trouble for “unwittingly” loading unlicensed Microsoft software onto computers he was selling. He goes by the handle “Merlin.”

In communication logs from April 2018 to early 2019 shared with the New York attorney general, Merlin pleaded with “Oz” at Crypto Capital to return funds. Bitfinex had lost access to hundreds of millions of dollars of customer money entrusted to the shadow bank. The exchange had to eventually dip into Tether’s reserves to fund user withdrawals.

“Please understand, all this could be extremely dangerous for everybody, the entire crypto community. BTC could tank to below $1K if we don’t act quickly,” said Merlin. (Court document)

So, to all those who think Tether has nothing to do with the price of bitcoin, Devasini would argue differently. 

Other newsworthy stuff

BlockFi just got hit with a cease and desist from the New Jersey attorney general. The high-yield crypto lender has to stop accepting new clients in NJ as of July 22. (Order)

BlockFi has been funding its lending through the sale of BlockFi Interest Accounts, or BIAs. You put your crypto in and get BIAs in return that earn interest. The NJ AG claims these interest earning accounts are unregistered securities.*

High-yields come with high risks. Still, BlockFi CEO Zack Prince says customer funds are safe. The question is, how safe will your funds be now that BlockFi is not getting as much new money coming in?

Dogecoin dropped below $0.2, so Elon Musk stepped in to do his part. He changed his Twitter profile pic to doge eyes, which helped lift the price back up to $0.19. (Decrypt)

Dogecoin creator Jackson Palmer returned to Twitter briefly to post a scathing thread on why he left crypto. According to him, crypto is an “inherently right-wing, hyper-capitalistic technology built primarily to amplify the wealth of its proponents through a combination of tax avoidance, diminished regulatory oversight and artificially enforced scarcity.” He is 110% correct, of course. (Twitter)

Remember Virgil Griffith, the former Ethereum developer who went to the DPRK against all better judgment to speak at a conference? Virgil doesn’t really listen when people tell him not to do something. He got himself into trouble again, this time for trying to access his crypto — a violation of his bail conditions. (Court filing)  

Reggie Fowler — the person linked to $371 million in missing Bitfinex and Tether funds — has ditched plans for renegotiating a plea deal that he got very, very close to in January 2020. He’s headed to trial with his new defense team early next year. Hopefully, his new lawyer demanded payment in advance. (My blog post)

Trading volumes at the largest crypto exchanges, including Coinbase, Kraken, Binance, and Bitstamp, fell more than 40% in June, according to CryptoCompare. The cause? Bitcoin’s dropping price and China’s renewed crackdown on crypto. (CNBC)

As an article in WSJ points out, China arrested more than 1,100 people suspected of using crypto to launder dirty money in the month of June. That’s enough to put a damper on any exchange volume.

David Golumbia, a professor of digital studies at Virginia Commonwealth University and the author of Politics of Bitcoin, has a new podcast out where he talks about the right-wing politics of crypto. (Tech Won’t Save Us)

The Beijing Civil Affairs Bureau has banned an organization called China Blockchain Application Research Center. The founder is OKEx founder Star Xu, and its members include Huobi founder Lilin, Bibox founder and other giant whales of Chinese crypto. (Wu blockchain)

Hong Kong authorities have arrested four men allegedly tied to a money-laundering racket that used tethers to move $155 million through shell companies. (South China Morning Post, paywalled.)

Image: A one colón note. The colón was the currency of El Salvador between 1892 and 2001, until it was replaced by the US dollar. It is still legal tender, however.

*(July 20, 2021 — Updated to clarify that the NJ AG claims that BlockFi’s BIAs — interest earning accounts — are illegal securities. It doesn’t matter what type of crypto you buy those BIAs with, be it bitcoin, ether, or assets tied to Chainlink or UniSwap. It’s the BIAs. Also added link to the order.)

Related stories:
Binance: Italy, Lithuania, Hong Kong, all issue warnings; Brazil director quits
The curious case of Tether: a complete timeline of events
Tether’s first breakdown of reserves consists of two silly pie charts
NYAG/Tether, Bitfinex settlement reveals commingling of funds, years of shenanigans
Michael Peterson, El Salvador, and Bitcoin Beach

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