News: Coinbase Q1 earnings, Signal integrates MobileCoin, GBTC premium in the toilet, Reggie Fowler’s new lawyer  

Bitcoin rose above $60,000 again. It only took 6 billion tethers to make that happen since the last time it hit $60,000 in March—less than a month ago. We now have 44.5 billion tethers in circulation. 

Coinbase set to debut on Nasdaq

Everything looks rosy for Coinbase’s debut on Nasdaq on April 14. The company is worth $91.5 billion, securities filings show. It reached that valuation even before releasing Q1 results of $1.8 billion—9x that of a year ago. (WSJ)

All that glitters is not gold, however. If Coinbase’s regulatory status were to change (and regulatory ambiguity is clocked in the company’s S1 risk factors), the company could be forced to drop many of its hugely profitable activities or be forced to operate at a much higher capital cost. (FT)

Signal, a good thing going bad

Signal is one of the best apps we’ve got for secure communication. But that could all change, as the encrypted app moves into payments with the integration of MobileCoin.

Techies are upset because they associate cryptocurrency with frauds and scams. They don’t want to see Signal become a sketchy money transmitter business. 

A beta version of Signal Payments is now available to UK customers. It’s not available in the U.S., probably because MOB looks like an unregistered security. MobileCoin says it hasn’t worked out all the regulatory stuff yet.  

Turns out, Signal’s creator Moxie Marlinspike has deep ties to MobileCoin. I wrote about the money flows, and David Gerard followed with a story explaining the tech. (My blog) (David Gerard) 

In a blog post titled “Et tu, Signal?,” Stephen Diehl reminds us that we’ve seen this film a few times before.

Telegram tried the same thing in an ICO that imploded when the SEC shut them down. Facebook tried and failed to monetize WhatsApp. And when encryption app Keybase did an airdrop of Stellar lumens, crypto spammers invaded the app, ruining the user experience.

“This association weakens the entire core value proposition of the Signal app for no reason other than making a few insiders richer,” he said.

Grayscale wants to convert GBTC into an ETF

GBTC once enjoyed a healthy premium but is now trading at 9.72% below NAV. Virtually nobody is buying GBTC on secondary markets. 

Can shareholders redeem their GBTC for bitcoin? No, they cannot. Once bitcoin gets locked up in the trust, it is in there for good. (GBTC has ~649,130 BTC locked up to date, roughly 3% of all BTC.) 

In March, Grayscale announced it was going to shore up the discount to GBTC’s NAV with a $250 million buyback. Now, it plans to convert GBTC into an ETF. The conversion would mean GBTC shareholders no longer have to pay a hefty 2% annual management fee. 

For some reason, Grayscale is confident the SEC will approve an ETF, even though the regulator had rejected every single Bitcoin ETF proposal put before it to date. I’m not sure why Grayscale is any different. (Coindesk) (GBTC announcement)

Currently, the SEC is reviewing two active bitcoin ETF applications: the VanEck bitcoin ETF and WisdomTree’s bitcoin ETF.

Fowler has a new lawyer

Reggie Fowler has finally found himself a new lawyer after his previous defense team withdrew from the case because he failed to pay them. His new lawyer is Ed Sapone of Sapone & Petrillo in New York.

Fowler is the Arizona businessman tied to hundreds of millions of dollars in missing Tether/Bitfinex money. He was indicted in April 2019, along with Israeli woman Ravid Yosef, who is still at large. 

Judge Andrew Carter has yet to set a new trial date. He is giving Sapone three months to get up to speed on the case first. And he warned Sapone: “You are going into this with your eyes wide open.” Meaning if Fowler doesn’t pay him, Sapone will not be allowed to withdraw from the case.

Other newsworthy items

Christie’s is grabbing the NFT bull by the horns. The prestigious auction house is selling NFTs of nine rare CryptoPunks by Larva Labs alongside work by Andy Warhol and Jean-Michel Basquiat in a marquee auction.

The single lot—estimated to fetch between $7 million to $9 million—will be sold at Christie’s 21st Century Evening Sale on May 13 in New York. (Artnet) (Christie’s)

Former BitMEX CEO Arthur Hayes has surrendered to authorities. He flew to Honolulu to appear before a judge on April 6. Pursuant to an earlier agreement, he was released on a $10 million bond, secured by $1.5 million in cash, pending future proceedings in New York. 

Six months ago federal prosecutors in New York accused Hayes and his BitMEX co-founders of violating anti-money laundering rules. Hayes is a US resident. Previously, he was living in Hong Kong, but he has been living in Singapore with his Singaporean wife since January 2020. (Bloomberg) (Lawyers’ proposal) (Bail conditions)

The New York Excelsior Pass is a COVID-19 vaccine passport system. It proudly proclaims its use of secure technologies, like blockchain and encryption but it’s doing the wrong thing and badly. (David Gerard)

If you are tracking central bank digital currencies, John Kiff updated his CBDC “explorers” table with new developments out of Russia, Sweden and Trinidad & Tobago. (John Kiff)

Who needs a bitcoin ETF anyway? MicroStrategy just purchased another 253 BTC for $15 million in cash at an average price of $59,339. Saylor’s firm now holds 91,579 bitcoins acquired for $2.2 billion at an average price of $24,311 per bitcoin. (Press release)

HSBC will no longer allow customers to buy Microstrategy stock due to its newly changed policy on virtual currencies. (Tweet)

The rising tide of bitcoin is good for everyone. Following in the footsteps of Coinbase, Kraken is considering going public in 2022, after record trading volumes in the first quarter (CNBC)

BitClout, the decentralized social network that tokenizes Twitter accounts, uploads your keys to their server on every API request. Any employee with access to that server can steal all the money on the platform at any time. Like I said earlier, this project appears to be one bad idea piled on top of another. (Tweet)

Phillips, another London auction house, smaller and slightly younger than Christie’s, is getting into NFTs with the sale of an artwork called REPLICATOR.

The NFT market has been a bust for Mike Winkelmann in so many ways. Now he is coming out with a book on Amazon.

Sleep with Kate. Drive with Kate. Walk with Kate. Model Kate Moss is featuring her own series of NFTs on Foundation. Proceeds go to charity. (Vogue)

Super Bowl champion Tom Brady is launching his own NFT platform called Autograph. (CNBC)

This tweet of a nothing sandwich from the Fyre Festival will be sold as an NFT. The original tweeter will use the money to help pay for a kidney transplant. The sale on OpenSeas ends on April 24. If any NFT deserves your money, this one does. (Verge) (GoFundMe)

Feature image: Beeple everyday posted on Twitter

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Signal adopts MobileCoin, a crypto project linked to its own creator Moxie Marlinspike

Many technologists today were disappointed to learn that Signal, an encrypted messaging service, is adopting MobileCoin (MOB), a new cryptocurrency that went live in December, for payments. 

Signal is hugely popular in the tech world. I use it, and many of the people I correspond with use it as a safe and secure way of communicating. And many prefer it over WhatsApp and Telegram.

Now, the non-profit wants to take the next step into becoming a payments service—so you can send money, and nobody will know who you are sending it to, or why. Here’s the blog post announcing the beta build.

Andy Greenberg wrote up a story in Wired covering the main points of the announcement yesterday. The idea is to have a cryptocurrency designed to work efficiently on mobile devices while protecting users’ privacy—and anonymity. For now, Signal’s payment feature will be available only to users in the UK, and only on iOS and Android—not the desktop. 

What is worth underscoring is that Moxie Marlinspike, the creator of Signal and CEO of the nonprofit that runs it, was a paid advisor to MobileCoin. In fact, he was the original CTO of the company, according to an early MobileCoin white paper.

Insider trading?

The price of MOB surged from $7 to $68 in the last week, according to Coinmarketcap—possibly because word of the announcement had leaked—before taking a dump overnight, dropping to $39. (MOB trades mainly on FTX, an Antigua and Barbuda-based cryptocurrency exchange.)

The price movements look a little like insider trading—just a little.

Interestingly, Signal kept their server code closed-source for a year to hide the integration. It only just recently re-open-sourced it, so who could have possibly known this big announcement was forthcoming?

Marlinspike told Wired he does not hold any MOB, which is hard to believe, given he was involved with the coin’s early development. (It is common practice in crypto for advisers and developers to get paid with the crypto of the projects they are involved in.) But who knows? Maybe he can’t hold any coins right now for regulatory reasons.

Most technologists, except for a vocal few, don’t like cryptocurrency, and for good reason. The space is rife with fraud and scams. So you can start to understand why they are unhappy.

“Signal users are overwhelmingly tech savvy consumers and we’re not idiots, Stephen Diehl, a UK-based software engineer, wrote in a blog post. “Do they think we don’t see through the thinly veiled pump and dump scheme that’s proposed? It’s an old scam with a new face.”

“Signal isn’t integrating just any random shitcoin, it is integrating Moxie Marlinspike’s random shitcoin. Gee, what a coinkidink. I wonder how much he’s unloaded on suckers already as a result of this pump & dump?,” said Nicholas Weaver, a researcher at the International Computer Science Institute in Berkeley.

Funding

One item the Wired article failed to mention: In April 2018, MobileCoin took $30 million in BTC and ETH from Binance Labs, the blockchain incubator of Binance—another popular offshore crypto exchange.

(Both FTX and Binance are huge Tether customers, by the way.)

The money is flowing in from elsewhere, too.

Last month, the project got an additional $11.35 million from venture capitalists Future Ventures and General Catalyst.

MobileCoin is a pre-mined coin. It has a total fixed supply of 250 million MOB. The project sold 35.7 million coins to private investors for $0.80 per coin in order to raise $30 million, according to its 2017 white paper. 

So who is holding the rest of the coins?

Joshua Goldbard, the project’s founder, recently said on Hacker News that half the coins have now been sold, leaving MobileCoin in control of at least half the supply.

“MobileCoin has made over 50% of the coins available for purchase. We are currently figuring out how to give away coins while remaining regulatory compliant,” he said.

A centralized payment system

If Signal is trying to create a private payments system, is MobileCoin even the best choice? There are serious questions about how secure and decentralized it is. 

Mobile is based on the Stellar code, originally derived from Ripple. Stellar is centralized, and has some major security issues. The platform is unproven, even if it’s still resilient.

MobileCoin took the Stellar codebase and added some stuff, including using Intel SGX—a chip that acts as a digital vault for securing users’ sensitive information. That means that users have to put 100% of their trust in Intel chips rather than software-based cryptography.

Also, MobileCoin is running on centralized powerhouse Azure, a cloud computing service created by Microsoft.

Further, if you look at MobileCoin’s “Trusted Nodes,” you’ll see that three entities are handling all of the consensus—and “MobileCoin Worldwide” is one of them. It’s hardly decentralized.

Signal’s non-profit status?

Signal Foundation was founded in April 2018 by Marlinspike and Brian Acton. It is registered as an independent 501(c)(3) nonprofit, meaning it has been approved by the IRS as a tax-exempt, charitable organization.

The firm’s non-profit status is now being called into question, after it became clear it will be getting handouts from MobileCoin.

Goldbard flat-out admitted on Hacker News: “I started MobileCoin to fund Signal. That’s it.” 

Many Signal users are concerned that this represents a conflict of interest. Here you have a non-profit (in this case Signal Foundation) directly integrating MobileCoin in their app as a quid pro quo.

MobileCoin Radio

Just to add another slice of weirdness: MobileCoin has a MobileCoin Radio because “creation” needs privacy. I have no idea how this fits in with anything Signal or MobileCoin is doing. I’m not sure MobileCoin does either.

Here is how they explain it:

“MobileCoin Radio is a place for artists to share their creations with the world, in hopes that our shared struggle with the human condition inspires a heightened exploration of our cultural landscape and of ourselves.”

In any case, Signal is probably going to lose some fans as a result of its foray into crypto. And why use MobileCoin in the first place when there are a host of battle-tested privacy coins to choose from? It makes no sense.

Security expert Bruce Schneier thinks it’s an incredibly bad idea that “muddies the morality of the product, and invites all sorts of government investigative and regulatory meddling: by the IRS, the SEC, FinCEN, and probably the FBI.” He thinks the two apps—crypto and secure communications—should remain separate. In his mind, this is going to ruin Signal for everyone.

And let’s not forget the disaster that ensued when Facebook tried to create Libra (now Diem). Regulators shot that idea down pretty quickly. Why does Signal think it will fare any better?

(Update April 7: An earlier version of this story incorrectly stated that the Wired article failed to mention that Marlinspike was a paid advisor to MobileCoin. Actually, it does mention that he is.)

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News: Coinbase set to go public, Tether releases meaningless attestation, are NFT sales slipping? 

Happy Easter! NFTs of this disturbing Easter bunny series are available on OpenSea. I was looking for more NFT bunnies but couldn’t find too many. Maybe I wasn’t looking hard enough.

In any case, Bitcoin is now at $58,000 and Tether has more than 42 billion tethers in circulation. Here’s the news:

Coinbase set to go public

Coinbase, the largest crypto exchange in the U.S., will start selling shares on Nasdaq on April 14. The company will trade under the ticker symbol “COIN” and offer 114.9 million shares as part of its direct listing. Share price will be determined by orders coming into the stock exchange. 

Currently valued at $100 billion, Coinbase is going public during the biggest Bitcoin bubble yet. The event will make Coinbase CEO Brian Armstrong—who owns 39.6 million of the company’s shares—a very wealthy man indeed. And the VCs backing the company will realize huge profits, as they all dump their shares on retailers.

On April 6, the exchange is expected to reveal its first quarter financial results and full year outlook. (CNBC) (Coinbase statement)

Tether’s meaningless attestation

In its latest PR move, Tether published an attestation verifying that it had $35 billion in assets backing a similar amount of tether for a blink in time on Feb. 28. The attestation was produced by accounting firm Moore Cayman, based in the Cayman Islands.

Bitcoiners are head over heels about this, but the report is meaningless. The document explicitly states that this does not mean tethers were fully backed at any other time—or are now. And the report doesn’t fit what the NYAG required Tether to publish by mid-May, because it doesn’t break out each category of backing asset by percentage. What’s backing tethers could be mainly bitcoin and toxic assets, for all we know. (David Gerard)

Days after Tether produced the attestation, it printed 1.2 billion tethers—one of its largest issuances ever. What’s a few billion more when bitcoiners think you are legit?

The wonderful world of NFTs

Are NFT sales slipping? Average prices for NFTs have fallen almost 70% from a peak in February to about $1,400, according to Nonfungilble.com, which tracks NFT marketplaces.

The NFT bubble hit its all-time high around the time Metakovan bought Beeple’s “Everydays—The first 5000 days” for $63.9 million on Christie’s. (Bloomberg) 

Cointelegraph also reports that the NFT market is experiencing a silent crash. While we can always see what the price of bitcoin is up to, tracking the movements of illiquid markets is trickier. When it comes to NFTs, buyers simply evaporate and sellers fail to move their wares. 

What is causing the drop in prices? “I suspect it is because the secondary sales have evaporated, so the dream of ‘greater sucker’ has gone away in about the same timeframe as the Crypto Kitties NFT bubble,” Nicholas Weaver said.

Meanwhile, Shares of Funko, a toymaker in Washington, are rising after the company acquired a majority stake in TokenWave, a developer of TokenHead, a mobile app for showing NFT holdings. Funko plans to launch its own NFT offerings this summer. (CNBC)

Other companies are jumping into the space. NFT platform Recur announced a $5 million seed round led by the DeFi Alliance, Delphi Digital, Ethereum co-founder Joe Lubin, and Gemini, among others. (Cointelegraph)

Justin Sun, the CEO of Tron, is now buying serious high art. He bought a Picasso for $20 million at Christie’s in London on March 23, where he also picked up an Andy Warhol for $2 million.

Sun, if you recall, was the second highest bidder for the Beeple “Everydays—the first 5,000 days” piece, driving up the price for Metakovan. Apparently, the Christie’s team in Asia reached out to Sun after the NFT sale to talk him into buying real physical art with all his spare change. (ArtNews)

How does OpenSea, an online market for NFTs, deal with copyright violations? They pocket the buyer’s money and tell them they should have done their own research. Buyer beware! (Vice)

John Cleese’s auction for an NFT of a speedily drawn Brooklyn Bridge ended on April fools’ day. The proud owner is now JeffBezosForeskin who paid $35,000 in ETH for it on Mintable.  

SNL is selling an NFT to their NFT skit an OpenSea. The top bidder gets two tickets to a live taping of the show. This gimmick just does more to promote NFTs, imho. (Decrypt)

Other newsy bits

A DOJ investigation into Representative Matt Gaetz and Joel Greenberg—the former tax collector in Seminole County, Florida—is focused on the pair recruiting women for sex. Greenberg is a bitcoiner. At one time, he wanted to start his own blockchain company, but was accused of dipping into public funds to do so. (The Daily Beast)

Greenberg has made a lot of headlines in recent years.

Terror-linked groups in Syria’s war-torn Idlib are changing their crypto tactics to avoid detection by Western law enforcement. (Wired)

Me, quoted in the news

After I wrote my story revealing the mystery Beeple art buyer, I got a lot of calls from the media asking me for comments about NFTs. 

I am featured in Voice of America: “Cryptocurrency Fuels Digital Art-Buying Frenzy”

Ben Munster quoted me in an article for The Art Newspaper: “NFT art bubble? 2017 crypto bust could spell out the future of current boom”

Kenny Schachter quoted me in an opinion piece for Artnet: “Professor Kenny Schachter Is Here to Teach You More About NFTs (and Put the Crypto Critics in Detention).” David Gerard is quoted in the same story. Kenny refers to us as “curmudgeons.” 

I was also interviewed by the Verge: “NFT mania is here, and so are the scammers.”

(Updated April 4 to add info about Recur.)

Feature image: Scary bunny on OpenSea

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News: I’m writing a book, people are minting NFTs for the lulz, Chuck Tingle calls NFTs a ‘scoundrel plot’

I’m working on a book on NFTs and how they became the tulip mania of crypto. As of now, the plan is to self-publish on Amazon, hopefully before the bubble explodes like this dead whale.

I’ve finished the outline—which I’ll continue to update in coming weeks—and I’m playing with ideas for a catchy title. 

If you have thoughts for a title, send them to me! I need as many ideas as possible. Only one rule: it has to be SEO-friendly, so we need the words “NFT” and “art” in there somewhere. Also, I can add a long subtitle stuffed with keywords, too. Here are a few thoughts:

NFTs: The art of the steal

NFTs: When crypto bros entered the world of high art

Since I’m working on a book about NFTs, I won’t be talking about much else for the next few months. Hence, this newsletter is mostly about NFTs. (I promise I’ll return to talking about Tether when this book is finished.)

My goal: 500 high-quality book words a day, starting today. 

Here the news:

BitClout’s content creator tokens are NFTish

I was going to write a big section here on BitClout, the social-media-on-a-blockchain experiment, because I initially thought the project’s creator coins were NFTs, but they’re not really. They are similar to NFTs due to their artificial scarcity and being a way to trade influence. But they are fungible tokens, and it turns out they are HYIPish.

If you want more details on BitClout, I wrote everything up in a separate blog post. Also, note that at least one BitClout investor, Social Capital CEO Chamath Palihapitiya, is building a big portfolio of NFTs.

NFTs don’t convey ownership, case in point

NFTs don’t convey ownership of a digital art piece in any form, shape or fashion. You can create an NFT of a piece of art even if you are not the creator. You can also create multiple NFTs of the same digital art. 

Where this really becomes a problem is when you mint an NFT, auction it off for an absurd amount of money, and then someone claiming to be the rightful owner of the underlying art steps forward. 

This is what happened when an NFT for a virtual house sold on SuperRare for $500,000 worth of ETH. Now the artist and the visualizer—who worked together on the Mars House—have locked horns over the copyright.

Mateo Sanz Pedemonte, a 3D modeler who created the virtual abode for artist Krista Kim, calls the project “a fraud.”

“Krista Kim never owned this project fully,” he said. “I have created the project with my own hands, combined with her direction. I do possess the full intellectual property.” (Dezeen)

People are minting NFTs for the lulz

People are minting NFTs and selling them as a joke. 

A New York Times writer minted a column as an NFT and sold it on Foundation to demonstrate the insane amounts of money people are willing to pay for these things. A bidder going by @3fmusic bought the piece for 350 ETH, worth $560,000. (NYT)

Recently, John Cleese put up an NFT of a drawing of the Brooklyn Bridge on OpenSea. The highest bid is now $35,000 by JeffBezosForeskin.

“The world has gone terminally insane,” Cleese told VanityFair, adding that “This all reminds me of Henry David Thoreau, when he said, ‘Our inventions are wont to be pretty toys, which distract our attention from serious things. They are but improved means to an unimproved end.’”

Author Chuck Tingle put off by NFTs

Chuck Tingle, a self-published writer whose focus is satirical gay porn, looked at the NFT phenomenon and was appalled. He proposed doing a “tingler” as a single reproduction with an NFT, but when he read up on NFTs, he summed up his horrified thoughts in an ebook the same day—now available on Amazon for $2.99.

The title of the book is: “Not Pounded By My Book ‘Pounded In The Butt By My Non-Fungible Tingler That Is Literally This NFT’ Because Of The Current Catastrophic Environmental And Ethical Impact.”

David Gerard wrote up a review of the book. Of course, he had to explain who Tingle is first, because not everybody knows. I sure didn’t, but Tingle is apparently quite popular.

As for Tingle, he thinks NFTs are a “scoundrel plot,” where promoters are “taking money from buds of less means.”

In a separate tweet, he suggested, “instead of trying to support art by buying digital plaques with your name on it that has no meaning or actual connection to the art JUST SUPPORT ARTISTS BY BUYING THEIR ART. NFTs are good example of trying to fix problem that already has had very easy solution for 1000s of years.”

Other newsworthy bits

NFTs are so big and bubblish they’re even featured in an SNL skit. This is a funny skit but sadly it only serves to promote more of the NFT nonsense.

Edmund Schuster, an associate professor of corporate law at the London School of Economics, debated Andrew Steinhold, partner of NFT fund Sfermion. The motion for the debate: “NFTs are dumb.” (The Blockchain Debate)

In a separate debate, David Gerard took on Josh Petty, CEO of startup Twetch. Petty has been experimenting with NFTs for limited edition Twetch hats, which you can buy with BSV tokens. “A crypto token has no intrinsic value,” Gerard argued. “It is a race to the bottom for these things.” (Coingeek)

As I’ve stated, NFTs are simply pointers. And if the thing it points to moves, there’s always a chance down the line that your NFT could point to “ERROR 404!” for the rest of its life.

Verge reporter Jacob Kastrenakes makes a similar point: “NFTs are fundamentally built on trust—trust that a seller won’t screw you over, trust that these tokens magically have value—and that holds true even at the deepest level of the system.”

Is FinCEN aiming for NFTs? FinCEN issued a blue box notice to let art and antiquities traders know they will be held to the same reporting standards as financial institutions. This means that they will have to submit suspicious activity reports, or SARs, for antiquities trade. The question is: Will NFTs be categorized as art? (FinCEN notice, OCCRP)

Do NFT buyers even care about art? Computer scientist Jorge Stolfi thinks not. “If you make an NFT out of your work, its market will be restricted to a few million crypto believers worldwide. And they are mostly not the type of person who appreciates art. The billions who do not care for crypto will not be able to buy it.”

Finally, if you are tired of watching NFTs sell for millions of dollars in crypto and want to see some real art, here’s your chance. The Louvre just put its entire collection online for free.

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BitClout’s social media experiment is one bad idea on top of another

BitClout, a social-media-on-the-blockchain project, is selling a type of token (called “creator coins”) tied to influential Twitter accounts—without account holders’ permission.

And folks are getting understandably pissed-off. 

At first, I thought these creator coins were NFTish due to their artificial scarcity and being a way to trade influence. But it turns out they are more HYIPish.

Creator coins are fungible, similar to ERC20 tokens on Ethereum. And each BitClout creator coin has its own supply. Elon Musk’s creator coin is worth $84,000, for instance, and there are currently 434 of them in circulation.

The BitClout “one pager” tells us a little bit more about how these creator coins work:

“Creator coins are naturally scarce, with fewer than 100 to 1,500 coins in existence for each profile. This is because as more people buy a profile’s creator coin, the price of the coin goes up automatically at a faster and faster rate. This means that, eventually, it could take billions of dollars to mint even one more coin.”

According to the paper, if you want to buy new coins associated with a creator, the profile will “happily mint them out of thin air” and sell them to you according to a price curve.

I don’t understand the formula for calculating price but here it is:

Price in BitClout = .003 * creator_coins_in_circulation^2
Price in USD = .003 * creator_coins_in_circulation^2 * bitclout_price_in_usd

The only value in these creator coins appears to be money coming in from new investors. Also, you are encouraged to hold on to your coins for as long as possible because the value will go up and up. It all sounds very much like a Ponzi, where folks who get in early are able to cash out, but the news is not so good for late investors.

BitClout token

BitClout also has its own blockchain and its own BitClout token (BTCLT). The project actually did a premine of 2 million BTCLT for founders and investors.

If there is an expectation of profits from an investment in a common enterprise based on the efforts of others, that’s generally a good sign something is a security, according to our friend Howey.

The project mints creator coins of Twitter profiles and assigns them dollar values, but you can only buy creator coins with BTCLT. And if you want BTCLT, you have to buy it with bitcoin via the BitClout website.

Your money goes in, but how does it get back out again? The BitClout token so far is not listed on any major exchange, but there is no reason to believe that won’t change very soon.

Big-name investors

BitClout controls a wallet containing nearly $190 million worth of bitcoin, most of it raised from notable VCs, including Andreessen Horowitz (a16z), Coinbase Ventures, and the Winklevoss twins.

Here’s Social Capital CEO Chamath Palihapitiya on a podcast discussing how BitClout is funded by him and others.  

Aside from Coinbase Ventures itself backing the project, a16z is one of the major investors behind Coinbase, so I’m sure there is a plan here somewhere to get that token listed pronto. And its not like Coinbase isn’t already listing a slew of coins that resemble securities.

Diamondhands

BitClout’s pseudonymous founder, who refers to himself as “Diamondhands”—meaning someone who is willing to take risks and hold on to an asset to the bitter end—is allegedly Nadar Al-Naji, the former Basis founder. And we all know how well that project went. 

Basis was a “price-stable cryptocurrency with an algorithmic central bank,” according to its white paper. After raising $133 million, Al-Naji eventually shut Basis down blaming regulatory constraints. He ended up returning 90% of the money. (Andressen Horowitz was also an investor in Basis, by the way.)

Basis and BitClout share a lot in common. Both projects are totally confusing. They both appear to have the same founding team and the same investors. “We are investors. Same team behind Basis [from] a few years back,” Tyler Winklevoss of Gemini Capital told Decrypt.

You could be forgiven for thinking this is just grifters jumping between grifts.

Robert Stevens wrote up a great report in Decrypt describing how BitClout works and where the funds are getting shuffled off to. Brady Dale also penned a good story in Coindesk.

By the way, I love how Diamondhands told Coindesk that BitClout is not a company, it’s a blockchain. As if that will spare it from an SEC enforcement action. Everything about this project is dumb and bad.

Anyhow, last week crypto law firm Anderson Kill sent a warning letter to Nadar Al-Naji, on behalf of Brandon Curtis, for using Curtis’ private information without his consent. I have no idea why VCs are pumping money into this.

Updated on March 29 to add Tyler Winklevoss’ quote from Decrypt.

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News: Metakovan unmasks himself, FATF goes after DeFi and NFTs, Coinbase pays CFTC $6.5M over wash trades

I’ve been traveling around the U.S., visiting friends on the East and West Coasts and in between, and this is my first newsletter since the end of February.

This week has been a busy one, full of interviews and talking to reporters about nonfungible tokens. Who knew NFTs would become the next tulip mania? I’ve gained nearly a thousand more Twitter followers and several more patrons, which is wonderful because I can certainly use the support.

Peanut exploring a stream in Texas

As I write, Bitcoin is above $57,700, after reaching an all-time-high of $61,742 on March 13. Meanwhile, there are now 39.6 billion tethers in circulation—that’s 4.5 billion new tethers in the last three weeks, all helping to prop up the BTC price.

In my last newsletter, I said I didn’t think BTC would ever see $57,000 again. I was wrong, but I also didn’t expect Tether to keep blatantly printing billions more tethers—each one representing a dollar on an offshore exchange—after the NYAG settlement. It just shows this nonsense can go on a lot longer than any of us imagined.

Some quick updates—at the end of February, I did an all-day film interview for another QuadrigaCX documentary. I can’t tell you any more than this, unfortunately, but yes, more documentaries. (Still waiting for someone to do a Tether documentary and an NFT documentary, but we know those are coming.)

Also, fellow nocoiner David Gerard and I got a full viewing of the upcoming CBC Quadriga documentary. It was over a year ago that we met in Vancouver to film this. However, it feels like the Quadriga story is still unfinished, and will be until we know for certain that’s Gerald Cotten’s body buried in Halifax.

Here is the news. 

Metakovan reveals himself

The art world was beside itself on March 11 when a person going by “Metakovan” bought an NFT by Beeple for $69.3 million in ETH—making it the third most expensive* ever sold by a living artist, behind Jeff Koons’s “Rabbit” and David Hockney’s “Portrait of an Artist (Pool with Two Figures)”—if you can get past the fact that it was paid for with magic beans.

In a blog post that went viral, I revealed that Metakovan was Vignesh Sundaresan, an Indian crypto entrepreneur who ran Coins-e, a shady, now-defunct Canadian crypto exchange. My post got 20,000 hits the first day. 

Four days later, Sundaresan admitted he was Metakovan in a blog post on the Metapurse website. Metapurse is his crypto investment fund.

We already know who you are. The question is, why were you using a pseudonym in the first place?

He claims that it wasn’t a pseudonym, just an “exosuit.” He did it, he says, because he wanted to prove to the world that people of color can buy high-art, too. He then delved into a rags-to-riches story about how he made it big in crypto. (This is a common bitcoiner fairytale: buy crypto, and you, too, can become fabulously wealthy.)

In an online auction, I’m not sure a pseudonym proves anything. But it does look like maybe you were trying to hide or distract from something, like the questionable past projects you’ve been involved with?

Also, if Metakovan wanted to make a point about social justice, why did he buy an NFT representing a collage full of angry, racist, misogynistic images? That makes no sense.

Art critic Ben Davis spent an entire day digging through Beeple’s magnum opus—a collection of 5,000 images. His findings, written up in an article for Artnet News, aren’t pretty. In one example, Hilary Clinton with a set of gold teeth and the caption: “Senator Clinton’s last-ditch effort to reach black voters.”

That just tells me Metakovan could care less about the art. He only cares that he gets publicity and can make money off the NFT by packaging and reselling it—in the form of B20 tokens—to retail suckers.

If you are wondering where Metakovan got all that ETH to buy the Beeple NFT—he claims he was an early investor in the Ethereum ICO. Anyone who bought into that ICO and hodled, could easily be a millionaire today.

But remember, Metakovan and business partner Twobadour (aka Anand Venkateswaran) also raised 50,000 ETH in an early 2018 ICO for their Lendroid project. LST (stands for Lendroid Support Token) is a dead shitcoin that never got listed on any exchange.

NFTs are garbage

Since I wrote my Metakovan blog post, I’ve been getting pushback from artists who want to believe that NFTs bring value to the art world. They don’t want to hear that NFTs are a scam. It’s sad to see artists getting sucked into the crypto cesspool. 

I wrote another post last week where I explain why NFTs are worthless—and how they have opened the door to fraud and money laundering. The only real value of NFTs is speculative—i.e., what the next sucker is willing to pay you for them. 

Artists want to believe that NFTs are an avenue for them to get paid for their work, but in truth, NFTs are simply pointers, expensive URLs on the blockchain. And if the object they point to moves or disappears, those URLs will forever point to nothing.

Some NFTs contain a hash of the artwork they represent. But as computer scientist Jorge Stolfi explains: Copies of a physical work of art are clearly distinct from the original. They are not the same atoms that the artist himself put on the canvas. In contrast, copies of a digital file are exactly the same bits. There is no ‘original’ of a digital file.

In other words, any copy of a digital artwork will have exactly the same hash, so putting the hash on the blockchain is useless.

FATF takes aim at DeFi/NFTs

The Financial Action Task Force, a global anti-money laundering watchdog, released an update of its Draft Guidance on a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers.

Decentralized exchanges, the platforms behind decentralized finance (DeFi) apps, are now considered virtual asset service providers—or VASPs.

The DeFi app, or smart contract, is not a VASP, but the owners and operators of the DEX are, which means they are obligated to ensure these platforms meet the same anti-money laundering requirements as other financial institutions.

This is a clear aim at DeFi founders, investors and VC firms. 

The FATF adds that NFTs that can be converted or exchanged for fiat currency or other virtual assets remain in scope.

In their analysis of the new guidance, blockchain analytics firm CipherTrace said that NFTs that can facilitate money laundering and terrorism financing are “virtual assets” as viewed by the FATF.

As I wrote in my NFT explainer piece, NFTs open the door to money laundering—big money coming from mysterious people to buy outrageously overpriced NFTs with cryptocurrency—so its no surprise that the FATF has NFTs on its radar.

Charlie Lee, the mystery Coinbase wash trader?

Coinbase settled with the CFTC for $6.5 million over claims that between January 2015 and September 2018 the exchange “recklessly delivered false, misleading, or inaccurate reports concerning transactions in digital assets.” 

The CFTC also claims a former Coinbase employee was wash trading LTC/BTC pairs on Coinbase’s GDAX platform between August and September 2016. (GDAX, meant for professional traders, was later renamed Coinbase Pro.) Wash trades are illegal because they make it look like there’s a lot of trade volume when there’s not. (Verge, CFTC press release and order)

The order doesn’t mention who the employee is but we know that Charlie Lee, the founder of litecoin, was working as an engineer at Coinbase at the time—and it looks very much like he got caught with his hand in the cookie jar. 

LTC wasn’t worth more than a few dollars even after it got listed on GDAX in August 2016. The price really took off when litecoin was listed on Coinbase’s retail exchange—called simply “Coinbase”—in May 2017.

Lee left a month later to focus on his litecoin project and then dumped his LTC at the top of the market in December 2017, when LTC saw highs of $360. That was during that last crypto bubble.

Lee got a lot of flak for that. Ironically, he later claimed that he sold because “holding LTC made it a situation where I may do something to pump the value short term. but is bad for the long term success of Litecoin.”

Bizarrely, LTC has never seen the highs in the 2021 bubble that it did in 2017. It’s only at $200 now.

Whistleblower Bitfinexed suspected Lee of wash trading all along. He wrote up his suspicions in a blog post in 2018, which is well worth the read now.

If Coinbase—the leading crypto exchange in the U.S.—allowed a former employee to wash trade up to 99% of the daily volume of a shitcoin, you can bet this is standard practice on all crypto exchanges. 

Coinbase has delayed its public listing to April, according to Bloomberg. Its latest valuation is $68 billion.

Other newsworthy bits

Photographer/writer Andy Day says NFTs are a pyramid scheme. “To many, it’s a means of overthrowing the existing regime; when you look a little closer, you realize that it’s just an extreme manifestation of neoliberalism.” (Fstoppers)

If you still think NFTs are the greatest thing since sliced bread, Monty Python’s John Cleese has a bridge to sell you, specifically a drawing of the Brooklyn Bridge as an NFT. You can buy it on OpenSea. The highest bid so far is for $35,671. (Previously the top bid was $50,000.) (Decrypt)

Not a month goes by where we don’t hear of another DeFi rug pull. TurtleDex, a DeFi app running on the Binance Smart Chain, drained $2.5 million in crypto from liquidity pools on Ape Swap and Pancake Swap. (Who comes up with these names?) The owners immediately deleted TurtleDex’s telegram, the official website, and the Twitter page. (Decrypt)

USDC, the stablecoin issued by CENTRE, a project backed by Circle and Coinbase, has surpassed 10 billion. (The Block)

BofA published a report called “Bitcoin’s Dirty Little Secrets,” wherein analysts said there is no good reason to own bitcoin “unless you see prices going up.” David Gerard reviews the report in full on his blog.

First Trust Advisors and hedge fund SkyBridge Capital, led by former White House communications director Anthony Scaramucci, are pushing for a bitcoin ETF in the U.S. The prospectus for the “First Trust SkyBridge Bitcoin ETF Trust” was published on Friday. While a bitcoin ETF opened in February in Canada, U.S. regulators have repeatedly rejected attempts to introduce them, citing concerns about market manipulation.  (The Block)

Want to flush all your money away? Toilet paper company Charmin has an NFT.

*Update on March 22 — Third most expensive, not first.

WTF is an NFT? Here’s a rundown of the basics

NFTs are all over the news lately.

Recently, I was having drinks with a friend, who knows zip about crypto, and out of the blue, she started asking me about “non-fungible tokens.” 

The next day, a musician friend posted an amateurish drawing of a guitar on Facebook, proudly announcing, “This will soon be available as an NFT.”

If initial coin offerings were the crypto grift of 2017 and decentralized finance (aka “DeFi”) was the grift of 2020, then “nifties” are the grift of 2021, and they do just what crypto grifters need them to do: lure more dumb money into crypto.

How do they do this? By convincing artists that by “tokenizing” their digital art, they can prove ownership and make oodles of money for their work. They just need to buy crypto first, and then sway their friends into believing that crypto and NFTs are the wave of the future. Also, by convincing investors that NFTs are the hottest new thing.

If you are trying to get up to speed on this nonsense, you’ll find answers to your most basic questions below.

What’s an NFT?

NFT stands for non-fungible token. Fungible means interchangeable. It’s the idea that one asset can be swapped out for another and nothing is lost.

Bitcoin and ether, the two most popular cryptocurrencies, are examples of fungible tokens. One bitcoin works like every other bitcoin; likewise with ether.

A non-fungible token is different because only one ever exists. Each NFT contains unique data, so NFTs are not interchangeable with each other. They are not divisible either, whereas fungible tokens are.

This is a wonderful play on bitcoiners’ idea of scarcity. There will only ever be 21 million bitcoin—and there will only be one NFT! Scarcity clearly means something is valuable. Grab it while you can.

Most of the ICO tokens in the 2017 crypto bubble ran on Ethereum and were based on the ERC-20 token standard, so exchanges and wallets would know how to integrate them. NFTs on Ethereum also have their own standard: ERC-721. 

Other blockchains, like Tron, Binance Chain, EOS, and Polkadot, support NFTs but Ethereum is by far the most popular and widely used.

Because NFTs are unique, they are hyped as “collectibles,” rare one-of-a-kinds that will only go up in value over time. 

What are you actually buying?

An NFT is only a pointer to something else on the web. It could be an image, a music or video file, or even a tweet. The object itself does not live on the blockchain.

In fact, the server holding the object could go away or it could change what is displayed at that location—and then your NFT would point to nothing or something totally different, like a rug.

Really, an NFT is simply proof that an object exists.

It doesn’t convey copyright, or for that matter, any legal rights at all. If anything, it is akin to a “certificate of authenticity,” which says this is where this thing is located. Unless you have a contract that specifically spells out you own the rights to this object, you literally just bought the pointer.

In addition to a slew of hitherto unknown auction houses where NFTs are sold, big-name auction houses are getting in on the game. Sotheby’s recently announced it will be selling its first-ever NFT on behalf of digital artist Pak in April.

And last week, Christie’s auctioned an NFT of Beeple’s “Everyday: The First 5000 days” for $69.3 million in ETH. Christie’s even made the unusual decision of accepting its premium in magic beans.

In its conditions of sale, Christie’s carefully points out that NFTs carry no rights:

“You acknowledge that ownership of an NFT carries no rights, express or implied, other than property rights for the lot (specifically, digital artwork tokenized by the NFT). You understand and accept that NFTs are issued by third parties, and not by Christie’s itself.”

Even if you own an NFT, that doesn’t mean you can restrict other people from seeing the object it points to. 

Jack Dorsey, Twitter’s billionaire CEO, is selling an NFT to his first tweet. The bidding is now up to $2.5 million. But you don’t need an NFT to see the tweet. (It’s worth mentioning that Dorsey is a big fan of crypto. His company Square invested $50 million into bitcoin last year, so it’s no wonder that he is shilling NFTs.)

When you buy an NFT, what you are buying is the private key to a crypto-token. The value is mainly speculative. You will only get for it what someone else is willing to pay—if you can find a buyer, and there is no guarantee that you will, when the time comes to cash out.

The problem is that people’s perceptions of what they are buying when it comes to NFTs don’t always mesh with the legal realities. And marketplaces involved in these sales are not always transparent about what they are selling. In fact, the more questions you ask about the real underlying value of an NFT, the vaguer the responses become.

How to create an NFT

If you are an artist who wants to create an NFT to auction, first you want to download a digital wallet that supports the ERC-721 token standard, such as MetaMask, Trust Wallet, or Coinbase Wallet, and put a little ETH in it to pay for “gas.” Plan on spending $50 to $100 worth of ETH to cover the costs of creating your token. 

After that, there are plenty of sites, including OpenSea, Mintbase, and Rarible, that will take your money and step you through the process of “minting” your NFT.

Connect your wallet to one of those sites. Write up a description of your artwork, upload your image, and voila, you’ve created your first NFT.  

Unfortunately, many struggling artists find their NFTs simply languish on these auction sites, and they’ve sunk $100 into nothing when they could have gone out and bought groceries instead.

A short history of NFTs

Where did NFTs spring from? Although the technology for NFTs has been around almost as long as bitcoin, NFTs hit the mainstream in 2017 with CryptoKitties, a game that allowed people to buy and “breed” limited-edition virtual cats with crypto. CryptoKitties was the first NFT to use the ERC-721 standard.

Last summer, game developers got into NFTs in a big way. NFTs enabled gamers to win in-game items (e.g., a digital shield, a digital sword, or digital skins), transfer their assets from one game to another, and then sell their in-game NFTs in blockchain marketplaces—sometimes for impressive sums.

Soon after, NFTs found their way into the art world, hyped by celebrities who weren’t always up to speed on crypto. Lindsay Lohan minted her own token on Rarible, based on an image of her face.

Hours after she put her NFT up for sale, she tweeted, “Bitcoin is the future, happening now,” even though her NFT lived on Ethereum. Lohan sold the image for over $17,000. It was quickly resold for $57,000.

Here are some NFTs making the news in the last two months:

Keep in mind, most of these NFTs don’t sell for real money, they sell for ETH, and the trick is then converting your ETH into fiat, so you can spend it in the real world.  

What are the risks?

NFTs open the door to fraud and general funny business. This is because 1) money is involved, usually in the form of crypto; and 2) regulators haven’t caught up with grift. 

Crypto bros promote NFTs as the ultimate stamp of authenticity, yet for many artists, the NFT market has done the opposite: it’s opened the door for swindlers. Here’s what can happen:

You can create an NFT of someone else’s work. There are no protections in place to ensure that an NFT you are buying was created by the actual artist. Digital artists, ranging from 3D renderers to pixel painters, have all discovered their art on online marketplaces. 

There are literally dozens of bots on Twitter that will allow you to create an NFT of a tweet simply by tagging it, and Twitter has thus far made no moves to block these accounts.

The problem got so bad that Corbin Rainolt, who designs detailed paleo art, had take down all of his dinosaurs and repost them with watermarks. 

“I tried to block all NFT accounts but it seems I can’t block everyone of these accs,” he said on Twitter.

Illustrator Chris Moschler doesn’t get the buzz around NFTs.

“Art theft has never been this aggressive and rampant ever before,” he tweeted, after blocking dozens of Twitter accounts trying to mint NFTs based on his tweets. “I cannot understand how this is still being called a revolutionary movement in the art world.”

It is also possible to create an NFT of a piece of work on one auction site, and then create NFTs on the same piece of work on a plethora of other auction sites. What’s to stop you?

Some NFT marketplaces do better due diligence than others, but they take a cut of anything sold and can easily wash their hands of it afterward.  

Your NFTs can also be stolen. Not your keys, not your crypto, as the saying goes, and when you leave your NFT on an auction site, they have control of the keys.

Recently, several Nifty Gateway customers reported a hacker breaking into their accounts and stealing their NFTs. Some of the victims also said their credit cards on file were used to purchase additional NFTs, which were then transferred to a hacker’s account. (Nifty said those users did not have 2FA turned on.)

Also, NFTs open up big-time opportunities for money laundering. Art is an attractive vehicle to launder money, to begin with. Transactions are often private, and valuations of art can vary widely for unexplained reasons. Art prices can also be extremely high, so there is no reason not to expect that NFTs will be used for the same purpose.

Right now, the NFT bubble is a big one. Crypto grifters promote NFTs because it’s a new avenue to bring fiat money into the world of crypto and to pump up their bags. The problem is, all bubbles eventually pop, and when this one does, retailers will be left holding the bag. 

Feature image: Beeple’s artwork from “Everydays: The First 5000 days.” Courtesy, Christie’s

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Metakovan, the mystery Beeple art buyer, and his NFT/DeFi scheme

Last week, a crypto whale going by the moniker “Metakovan” bought a Beeple artwork via Christie’s auction for $69 million—$60 million in ETH and $9 million in fees, also in ETH*—outbidding a surprised Justin Sun, founder of the Tron blockchain, in the last minute.

After the barest amount of digging, I am going to hazard a guess that the mystery Beeple buyer is Vignesh Sundaresan, a crypto entrepreneur who has been in the crypto landscape for about seven years.  

It’s pretty obvious, really. Metakovan has given a few audio interviews. And if you compare those to previous Sundaresan interviews, like this one, it’s the same voice—and the same crypto origin story.

In a recent interview with the Good Time Show, for instance, Metakovan says he got into crypto in 2013, lived in Canada for several years, and then left for Singapore in 2017 because crypto regulations in North America were too “unclear.” That’s basically Sundaresan’s background as well.

Putting aside the matter of why Sundaresan would want to keep his real identity cloaked in the first place, the next question is the grift—how is he spinning a profit off of non-fungible tokens, or NFTs?

I’ll get to that in a moment, but first… 

Who is Sundaresan? 

According to the bio on his website, Vignesh Sundaresan is behind several crypto startups. 

He co-founded BitAccess, an early bitcoin ATM company in Canada. BitAccess was accepted into the Y Combinator startup accelerator in June 2014, according to Coindesk.  

And then, in January 2017, he founded the Singapore-based Lendroid Foundation. The firm raised $47.5 million (50,000 ETH) in a two-day initial coin offering in February 2018, according to CryptoRank. 

He also founded consulting firm Portkey Technologies and claims to have backed several popular crypto projects, including Ethereum, Polkadot, Dfinity, Omisego and Decentraland.

Going back further, Sundaresan launched crypto exchange Coins-e in Ontario in 2013. (Coincidentally, the same year that Gerald Cotten and Michael Patryn launched their failed Canadian crypto exchange QuadrigaCX.)

Coins-e, a defunct Canadian exchange

Several Coins-e users have taken to social media to complain about losing money on Coins-e, calling it a scam and warning others to watch out. (See Reddit—here and here—and BitcoinTalk.)  

The posts on r/dogecoin are the most alarming. Coins-e clients report having their dogecoin disappear. Wireguysny described watching 1.3 million DOGE evaporate and the frustration of being unable to reach tech support to get to the bottom of the matter.

Xclusive2 wrote: “I’ve had just about enough of of Coins-e millions of coins missing, no reply from support ever! the reason is because it’s a one man operation. the problem is this joker is stealing and trading everyone’s coins when and how he feels to make himself rich he knows that Doge is worth a lot of BTC in large volumes.”

Sundaresan denies being the guy who allegedly ripped people off. According to him, Coins-e was sold to a company called Casa Crypto in Waterloo. The transfer was overseen by law firm LaBarge Weinstein, he claims.

“Since it was sold, I have not been associated with Coins-E. Allegations of a scam are FUD,” he told me.

I am so far unable to confirm that sale. I can’t find any announcement or press release on the sale. The Coins-e website no longer exists, and an archive of the site’s “About” page from 2016 doesn’t reveal who is behind the operation. I can’t find a company called “Casa Crypto” in Waterloo either.

Sundaresan offered to show me proof of the sale via a video call. I told him I was open to that, but he hasn’t gotten back to me to set up a time. He did not comment on whether he was Metakovan.

Meanwhile, I’ve looked up the domain registration for Coins-e.com. The site was registered in May 2013 and the only update was in May 2020—after customers complained about their coins vanishing.

The site was originally registered to Ramesh Vinayagam—the name of a famous Indian composer, per Reddit user xclusive2. Another alias perhaps? And, according to a Paste from January 2014, the site was registered to the man himself shortly before the registration was made private and Sundaresan entered the Y Combinator program.

The NFT connection

NFTs are the big thing now. They took over as the latest grift when decentralized finance, or DeFi, ran out of steam last year. Fellow nocoiner David Gerard wrote a blog post explaining how NFTs work and why digital ownership of art is utter nonsense.

“NFTs are entirely for the benefit of the crypto grifters,” he said. “The only purpose the artists serve is as aspiring suckers to pump the concept of crypto — and, of course, to buy cryptocurrency to pay for ‘minting’ NFTs.”

Stepping back, we first see the connection between Sundaresan’s startup Lendroid and NFTs in a blog post titled “Why DeFi Needs NFTs.” The post, written by his business partner Anand Venkateswaran, describes how NFTs solve the problems of DeFi, such as flash crashes, volatility, and governance. (Venkateswaran, a comms person, also has a pseudonym—he goes by Twobadour Pannar.)

Lendroid powers WhaleStreet, an Ethereum-based platform for swapping ERC20 tokens—that’s the standard for fungible Ethereum tokens. WhaleStreet has its own native “yield-farming token” called Shrimp.

Metakovan is also behind Singapore-based Metapurse, a crypto-based investment firm. Metapurse’s mission, according to its website, is to “democratize access and ownership to artwork.” The firm has been acquiring NFTs. It purchased Beeple’s “Everdays: 20 Collection” artworks for $2.2 million in December.

Metapurse has taken Beeple’s multiple artworks, or NFTs, along with three virtual museums, and combined everything into a “massive bundle.” Would you like to invest in this wonderful package? You can. All you have to do is stock up on Metapurse’s new B20 token.*

This blog post on the Metapurse substack lays out the grand plan:

“We believe we truly achieved this with B.20 — the name of a massive NFT bundle we are fractionalizing so that everyone can have ownership over the first large scale public art project within the metaverse. It is important to note that we’re fractionalizing ownership, not the assets themselves. These fractions will be available as 10 million B.20 tokens, and can be referred to as the “keys” to this digital vault.”

Number go up

The name of this game is “number go up.” This is about pumping B20, so holders and Metapurse can benefit when they go to sell the token—i.e., get more ETH, buy more NFTs, rinse, repeat.

The token distribution is something to pay attention to. Metakovan has 59% of all the B20 tokens. Why does he own the majority of tokens? As he explains it, that is to prevent any single person from owning more than half of B20 tokens—and snatching up all this wonderful artwork for themselves. The idea is to decentralize and democratize art, only Metakovan controls the token supply.

What’s interesting is that Beeple, the creator of the artwork, is actually a business partner of Metakovan’s. He owns 2% of all the B20 tokens. I’m sure there is no conflict of interest here.

WhaleStreet hosted the B20 sale on Jan. 23. Apparently, 1.6 million B20 tokens were sold to the public for $0.36 per token. After the Christie’s auction, B20 shot up to $23. It’s now down to around $16, according to Coinmarketcap. That’s a nice profit for anyone who got in early—and worth over $3 million for Beeple, if he dumps his coins quickly and there’s enough liquidity to actually sell them.

At the end of the day, this is a straight-up initial coin offering-style index fund to speculate on NFTs, with a twist: Metakovan owns most of the tokens—and he has an existing business relationship with the artist.

I wonder if Metakovan anticipated having to pay this much ETH to Beeple for his “Everydays: The First 5000 Days”? Metakovan knew he needed the artwork for his index fund. But did he expect Sun to keep bidding the price up to the very last second?

Also, in an earlier version of this post, I questioned why we can’t see the blockchain transaction—which was supposed to be 42,329.453 ETH. If we can’t see the transaction, how do we know that Beeple actually got paid for the sale and is not in cahoots with Metakovan to make number go up?

I now have a theory.

As Christie’s spells out in its conditions of sale, the transaction needs to come directly from a digital wallet maintained with Coinbase Custody Trust, Coinbase, Fidelity Digital Assets Services, Gemini Trust Company or Paxos Trust Company. And it sounds like the funds may even have gone into Christie’s escrow wallet.

Anyhow, if both parties had Coinbase accounts, the exchange could just change the database records off-chain to flip account balances. In this way, Coinbase acts like a second layer, and you wouldn’t see the ETH transaction.

When all was said and done, the Christie’s auction turned out to be a sweet deal for Beeple who now has a reason to shill crypto to his 2 million Instagram followers. And Metakovan gets publicity for his ICO project, so his own personal B20 holdings rise in value.


Since I published this article, Sundaresan has written to me and asked me to take it down. I refused, but agreed to make edits if he could point to anything specific that was wrong—so far, he hasn’t.

I’m posting Sundaresan’s full comment on the matter below:

Hello Amy, I am replying to address your concern about coins-e as relating to me. Definitely there are several factual inaccuracies in your blog post and your tweets. I would appreciate if you would temporarily pull down the posts until you have the facts right, as such a post causes unnecessary FUD and obviously it is your choice to not take it down. But if you do it will show that your intentions are in the right place and that you are looking to have a conversation. Regarding coins-e, it dates back to days when the crypto industry was very unorganized and the service itself was quite small and did not warrant a press release when the sale was done. The service was not even big enough to attract the crypto media attention, the service started growing bigger as the Casa crypto was taking over. The transfer happened through a well documented process with assistance from lawyers on both sides. Post the sale I had moved on to build Bitaccess, backed by YCombinator and I have had no link to Casa Crypto after the sale and I have repeatedly addressed this issue via newsletters and Q&As. For the other parts of your question, I believe it shall be better answered by contacting @metapurse and @twobadour directly.

————-

*Beeple’s “Everydays: The first 5000 days” is not part of the B.20 collection. Metakovan and Twobadour told the NYT, they have no plans to monetize the 5,000-image collage “yet.” The B20 collection is anchored by a different set of 20 Beeple artworks that Metapurse acquired in December for roughly $2.2 million on Nifty Gateway.

(March 14, 2021—This article has been updated to add comments from Sundaresan and more detail about Coins-e. Additional updates made later in the day to theorize on why the transaction did not show up on the blockchain, add some Gerard quotes and spruce of the ending a bit.)

(*March 15, 2021—Christie’s accepted its fees in ether—the native crypto of the Ethereum network. When Christie’s originally announced the sale, the auction house said it would accept crypto as payment, but the buyer’s premium had to be in real money. Later it changed its policy to accept ETH, according to Bloomberg.)

Related articles:

WTF is an NFT? Here’s a rundown on the basics

News: Metakovan unmasks himself, FATF goes after DeFi and NFTs, Coinbase pays CFTC $6.5M over wash trades

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NYAG to crypto companies: ‘Play by the rules or we will shut you down’

The New York attorney general issued a stern warning to crypto companies and crypto investors on Monday. Crypto firms doing business in the state must play by the rules or face consequences, she said. And to investors, she underscored the hazards of dabbling in the crypto markets.

The two-part warning from NY attorney general Letitia James comes on the heels of a settlement agreement with Bitfinex and Tether, wherein the two closely related companies agreed to pay an $18.5 million penalty. And an effort to shut down Coinseed, a crypto-trading app that prosecutors allege ignored securities laws and defrauded thousands of investors. 

An unstable market

In a warning to investors, the NY attorney general underscored the numerous risks of investing in bitcoin. Namely, volatility, difficulty in cashing out, conflicts of interest, market manipulation and limited protection from fraud.

“I’m warning New Yorkers and investors across the country that investing in this unstable market is not prudent and could cause devastating losses,” she said in a tweet.

“Many operators of virtual currency trading platforms are themselves heavily invested in virtual currencies, and trade on their own platforms without oversight. The financial interests of these operators may conflict with your interests,” she said.

She went on to add that “even if you purchase a well-established virtual currency from a more reputable trading platform, the price could crash in an instant.”

In effect she appeared to be saying that even if you are buying bitcoin on a regulated exchange, such as Coinbase in the U.S., your money could be here today, gone tomorrow.

Heed the law

In the second part of her warning, an industry alert, the NY attorney general warned crypto firms that deviation from the law will not be tolerated.

“If you don’t play by the rules, we will not hesitate to shut down your operations,” Attorney General James in a tweet.

Commodity broker-dealers, salespersons, and investment advisors in New York need to register with the Office of the Attorney General. And under the law, virtual currencies qualify as commodities—or securities. New York crypto firms that don’t register with the OAG, are in violation of the Martin Act.

Penalties include “permanent injunction from selling, offering to sell, or acting as a broker or investment advisor concerning securities or commodities in New York, as well as disgorgement of profits and restitution to victims.”

What does this mean?

Before the hammer comes down on Tether, which could cause a crash in the price of bitcoin and other cryptocurrencies, we can expect to see more warnings from regulators and prosecutors about the perils of investing in crypto.

If Tether is shut down and the price of bitcoin collapses as a result—regulators want to make sure that investors are well aware of the risks they face in buying bitcoin or any other cryptocurrency.

The NY attorney general isn’t the one done playing around. Treasury Security Janet Yellen issued a warning about bitcoin last week, saying it is inefficient for transactions and often used for “illicit finance.”

And if Gary Gensler is confirmed as the new chair of the SEC,* we may see a slap down on coins that fail the Howey test—including some of those listed on Coinbase, a firm that is planning to go public soon.

Updated March 2, 2021, to clarify that Gensler is Biden’s pick for chair. He still needs to be confirmed.

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News: NY gives Tether the boot, Tether leaks, Coinbase financials, MoneyGram dumps Ripple

February is coming to an end. I’m waiting to get vaccinated, so I can travel without worry again. Maybe I’ll go to some crypto conferences later this year? I still have fond memories of Coindesk’s Consensus in May 2018—when you could hear the rumble of lambos coming through midtown Manhattan—and sitting in a coatroom with scant Wifi and a broken water cooler. (It was a big coatroom, but a coatroom nonetheless, and that’s where non-Coindesk journalists were put.)

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So, what’s new? Tether now has close to 35 billion tethers in circulation—the last print was on Feb. 21 and nothing since. Also, the price of bitcoin is $46,300. That’s down 18% from last week. I’m not sure we will ever see bitcoin reach $57,000 again. The nonsense could ebb and flow for a while, but I do think the end is nigh for Tether.

NY shuns Bitfinex/Tether

Last week I said likely nothing earthmoving would happen in the NY attorney general’s probe of Bitfinex and Tether this month, other than maybe a status update, according to what Bitfinex said in its January letter to the court. I was wrong.

In an unexpected turn of events, Tether and Bitfinex reached a settlement with the NY AG.

According to the terms of the settlement, the sister companies agreed to a penalty of $18.5 million—without admitting guilt. They are also banned from doing business in New York, and they have agreed to an impossible level of transparency.

I wrote two stories on this—an overall story covering the details of the agreement and deeper observations. You should read both and also the settlement agreement, which is very readable. 

The bitcoiners are jumping for joy over the settlement because they interpret this to mean that Tether is liberated and we’re back to business as usual. This could not be further from the truth.  

The NY AG has given Tether enough rope to hang itself—with Tether agreeing to publish quarterly updates on what’s backing tethers. I mean, how crazy is this: Bitfinex and Tether are also supposed to reveal who their payment processors are. These payment processors are called shadow banks for a reason.

But the real punishment is not the fine imposed on Tether. The real punishment is that Tether and Bitfinex are banned from doing business in New York—the beating heart of finance and banking in the U.S.

They are prohibited from serving any person or entity in the state—defined as “any person known or believed to reside in or regularly conduct trading activity from New York,” and any business “that is incorporated in, has its headquarters in, regularly conducts trading activity in, or is directed or controlled from, New York.”

If the CFTC and the DoJ follow up—and you can bet they will—then Tether could soon be banned from the entire U.S.—a penalty much more significant than an $18.5 million fine.

In the meantime, the Tether printer has mysteriously paused. The settlement agreement was signed on Feb. 18, and the last Tether print was on Feb. 21 for 800 million USDT.

Why has Tether stopped printing? It may be that providing the transparency reports is proving more onerous than they expected. If they pop out another billion tethers, they have to show what is behind those—cash, a loan, crypto, or whatnot. 

But this is a problem. Tethers are the main source of liquidity on unbanked exchanges where the price of BTC is largely determined. If Tether stops printing tethers—or otherwise ceases to function—the price of bitcoin could take a serious dive.

Tether Leaks

Recently, a Twitter profile called @deltecleaks emerged and posted what looked like evidence of a database dump from Deltec, the Bahamian bank that Bitfinex and Tether have been using since 2018. That Twitter account was quickly suspended.

Then @LeaksTether appeared and posted several presumably leaked emails—conversations between Deltec and Tether execs.

These leaks are unverified. I am not completely convinced they are real, but I am also not convinced they are fake either.

Some of the alleged emails look interesting. Trolly wrote up a thread on one—in an email (archive) from Tether to Deltec, dated May 28, 2020, Tether asks for help in “presenting their reserves in the best possible light.” Their reserves, according to the email, are crypto and stakes in other crypto companies. Trolly calls this email a “crucial piece of the puzzle.”

Around the same time that the email was sent, crypto exchange Binance—one of Tether’s biggest customers—switched from BTC to USDT as collateral for leveraged trading. In return, Trolly believes Tether got a stake in Binance.

This could explain why USDT’s 1:1 peg never falters. Tether is in cahoots with the exchanges, who are in charge of maintaining the peg, Trolly believes.

In another allegedly leaked email, Tether talked about allowing the exchanges to “ignore the peg and move the price upwards.” If this is real, it means Tether is getting ever desperate to find ways to make money out of thin air.

Oddly, Deltec has removed the bios from their About Us page. (This is silly, because we have the archive.) And Tether has released its official word on the leaks, calling the leaks “bogus” and implying it is an extortion attempt.

Tether adds that “those seeking to harm Tether are getting increasingly desperate.” This is typical of Tether and Bitfinex. They blame “Tether FUDers” for all their problems—as opposed to being upfront and honest about their dealings.

David Gerard wrote a blog post, going into detail on the alleged leaks.

Coinbase releases financials

Coinbase is going public via a direct listing on Nasdaq under the symbol COIN. The San Francisco-based company published its  S-1 filing on Thursday, after confidentially submitting the filing to the SEC in December.

The filing lays out Coinbase’s finances, including a profitable 2020 driven by a huge surge in the price of bitcoin. Coinbase brought in $1.2 billion in revenue in FY2020 for a profit of $322 million—the first time it has turned an annual profit.

In 2019, Coinbase incurred a net loss of $30 million.  

Brian Armstrong, Coinbase CEO, also did well last year, taking home $60 million in salary, stock options and “all other compensation.” He also received $1.78 million to cover “costs related to personal security measures.”

There is no doubt that the skyrocketing price of bitcoin—boosted by 17 billion tethers issued in 2020 alone—helped Coinbase’s profits. But there are many unknowns ahead.

If the price of BTC continues to drop, if Tether gets taken out by the DoJ, or if the SEC cracks down on some of the coins Coinbase lists—many of which appear like they may not pass the Howey test—Coinbase profits could take a hit.

No doubt, Coinbase is timing its listing carefully. The exchange has received more than $500 million in funding, with backers including Andreessen Horowitz, Y Combinator and Greylock Partners. And the VCs will want to dump their Coinbase shares on retail suckers before the bitcoin market collapses.

MoneyGram dumps Ripple

MoneyGram was supposed to have been a big success story for Ripple. Now, it’s just another sign of Ripple’s failures.

Ripple agreed to invest up to $50 million in the money transfers business. In return, MoneyGram was shilling Ripple by saying it would use the startup’s XRP currency and platform in its back office for moving funds across borders.

MoneyGram was essential because it gave XRP a supposed use case, so Ripple execs could argue their business was legit and not simply a way for them to line their own personal pockets with $600 million.

Last year, MoneyGram received $38 million from Ripple, representing about 15% of its adjusted earnings. But after the SEC announced it was suing Ripple, charging that XRP was an unlawful securities offering, MoneyGram stepped back, saying it faced logistical challenges in using the platform—as well as legal risks.

Now MoneyGram is putting its Ripple partnership on hold. That means MoneyGram, which saw declining revenues from 2015 to 2018, is losing a key income stream. (WSJ, MoneyGram PR)

Other newsy bits

After stiffing his previous defense team, Reginald Fowler still appears to have no defense team. He was given until Feb. 25 to line up a new law firm, but so far, no attorney has filed a notice of appearance with the court. (Court filing)

A rumor is afoot that the SEC is investigating Elon Musk for his dogecoin tweets that helped pump the market. Musk says a probe would be “awesome.” More lulz for Musk. (Teslarati)

Fedwire, the system that allows banks to send money back and forth, went down for several hours on Wednesday. Bitcoiners thought this was marvelous, because bitcoin is decentralized, see? How quickly they forget bitcoin is valued in USD. (CNBC)

Grayscale’s GBTC premium went negative for the first time in years. (It was close to 40% at one point in December.) When the premium is down, the arbitrage opportunity for institutions in buying bitcoin dries up—and that means less real money flowing into the system. (Hedge funder Harris Kupperman wrote a blog post last year explaining how the arb works.) (Decrypt)

FT poked fun of Anthony Pompliano, cofounder of Morgan Creek. Pomp is forever shilling bitcoin but his tweets have been inconsistent. At one time he called Tether “the biggest racket ever.” Now he has changed his tune. Apparently, he’ll say whatever to make “number go up.” (FT)

Treasury Secretary Janet Yellen is warning people about bitcoin. She doesn’t think it’s used widely as a payment system. “To the extent it is used, I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.” (CNBC)

Jack Dorsey’s Square purchased another 3,318 bitcoins for $170 million. This adds to Square’s October purchase of 4,709 bitcoins. The company has already lost $10 million on its latest investment. (Coindesk, Square press release)

The Securities and Exchange Board of India tells company owners: before you IPO, sell your crypto. (Economic Times India)

Kraken is reportedly in talks to raise new capital. (Coindesk)

NYAG/Tether, Bitfinex settlement reveals commingling of funds, years of shenanigans

I wrote a quick article this morning about the New York attorney general settlement, wherein Bitfinex and Tether agreed to pay $18.5 million in penalties, stop servicing New York customers, and submit quarterly transparency reports. 

But there are more details to highlight. Namely, the settlement agreement reveals the games Bitfinex and Tether have played over the years—games they will keep on playing until someone puts an end to their shenanigans. 

It also reveals how the firms have long misled the public about Tether’s reserves. From 2014 until late February 2019, Tether advertised that tethers were fully backed 1:1 by cash in some bank accounts somewhere—but that was not true. 

Tether now has 34 billion tethers in circulation—a number that is growing by leaps and bounds every day.

Here are my random thoughts and notes from the 17-page agreement.

Phil Potter

In the agreement, the office of the NY attorney general writes: “During the time period relevant to the OAG’s investigation, and as late as early-to-mid 2018, one of Bitfinex and Tether’s senior executives lived in, and conducted his work from, New York.”   

I’m assuming this is Phil Potter, Bitfinex and Tether’s chief strategy officer, and one of its three top execs. Potter allegedly stepped away from the company in mid-2018, about the time the NY attorney general started its investigation. Though the public did not learn of the investigation until April 2019.

The fact that Bitfinex and Tether had one executive and large customers in the state—and no BitLicense—opened the door to the NY attorney general’s probe. Per the terms of the settlement, Bitfinex and Tether can no longer do any business in the state, which means New York crypto firms can no longer use tethers. 

Previously, although Bitfinex and Tether claim to have barred New York residents (retail investors) in January 2017, they still served eligible contract participants, meaning individuals or trading firms with assets in the millions.

Commingled funds

Tether and Bitfinex lost their banking in March 2017 when they were cut off by Wells Fargo, a correspondent bank. Subsequently, their banks in Taiwan also dumped them.  

Two months later, when Tether had 108 million tethers in circulation, Bitfinex opened an account at Noble Bank in Puerto Rico. (Noble Bank, by the way, was co-founded by Brock Pierce, the child star who also created Tether.)

Tether, however, did not open an account at Noble—or at any bank—until September 2017, according to the office of the NY attorney general’s findings.

Instead, Tether deposited the “vast majority” of its cash into a trust account held by its general counsel, Stuart Hoegner, at the Bank of Montreal in Canada. The account never held more than $61.5 million dollars.

The rest of Tether’s money was mixed in with Bitfinex customer money at Bitfinex accounts at Noble Bank. Between June 1 and September 2017—Bitfinex held hundreds of millions of dollars in Tether’s funds in its accounts, the prosecutor said.

Commingling of funds is a terrible idea—legally and logistically. (Failed crypto exchange QuadrigaCX also commingled funds. And its now-allegedly-deceased CEO used customer money like his own personal slush fund.) 

Mystery NY trading firm

Because Tether had no bank account between March and September 2017, it could not directly take money for tethers. At the same time, according to the NY attorney general, “neither the Tether website or Bitfinex allowed for the direct purchase or exchange of tethers in exchange for any other virtual currency, including the two most popular virtual currencies, bitcoin and ether.”

Between June and September 2017, “Bitfinex’s Noble Bank account received USD deposits from only two institutional trading firms, one of which was located in New York. Neither of those firms purchased tethers directly from Bitfinex or Tether during this time period.”

This part of the NY attorney general’s findings puzzles. Why were these trading firms sending money to Bitfinex if they were not getting tethers in exchange? What were they getting instead? And who was the New York firm?

Mike Novogratz’s Galaxy Digital is based in New York. And we know it was onboarding as a Bitfinex customer in October 2018, based on court documents that point to letters Galaxy sent to Bitfinex. But it is not clear if Galaxy was a customer of Bitfinex or Tether in 2017. (In April 2019, Novogratz claimed Galaxy had “zero exposure” to Bitfinex and Tether.)

Staging the Friedman audit

According to the office of the NY attorney general, until September 15, 2017, the only U.S. dollars held by Tether backing 442 million tethers in circulation was $61 million at the Bank of Montreal. 

Whatever other money Tether had was held in Bitfinex accounts.

In the summer of 2017, rumors were afoot that tethers were not fully backed. To quash those rumors, Tether and Bitfinex arranged for accounting firm Friedman LLP to perform an attestation on September 15, 2017.

They had to move quickly to set things up though.

On that morning, Tether opened an account at Noble Bank. And Bitfinex transferred $382 million from Bitfinex’s account at Noble Bank into Tether’s account at Noble Bank. Friedman conducted its verification of Tether’s assets that evening.

“No one reviewing Tether’s representations would have reasonably understood that the $382,064,782 listed as cash reserves for tethers had only been placed in Tether’s account as of the very morning that Friedman verified the bank balance,” the NY attorney general wrote. The attestation included the money at the Bank of Montreal as well. 

Friedman’s relationship with Bitfinex ended a few months later. 

It’s never a good sign when your auditor quits. Worse, there was no official announcement—Friedman simply deleted all mention of Bitfinex from its website, including past press releases.

Massive loss of funds

In 2017 and 2018, Bitfinex began to increasingly rely on Crypto Capital to handle its customer deposits and withdrawals. Oz Yosef, was Bitfinex’s contact at the Panamanian payment processor.

By 2018, Crypto Capital held over $1 billion of Bitfinex funds. That’s when the real trouble started.

In April 2018, the government of Poland froze a Crypto Capital bank account holding $340 million. Adding to that, Oz told Bitfinex that a Crypto Capital account in Portugal containing $150 million of Bitfinex client funds also had been frozen. 

These events threw Bitfinex into a liquidity crisis. And in the summer of 2018, Bitfinex began dipping into Tether’s cash reserves to fund customer withdrawals. Bitfinex told customers that rumors of its insolvency were false, but behind the scenes, the crypto exchange was pleading with Oz to release the money. 

(Later we learn that another $350 million in missing Crypto Capital funds were linked to 60 accounts held by Arizona businessman Reginald Fowler, who was indicted in April 2019 for bank fraud. Some of these accounts were frozen in 2018. Oz’s sister, Ravid Yosef, was also indicted for her role in assisting Fowler set up those accounts. She is still at large.)

(And in October 2019, Crypto Capital President Molina Lee was arrested by Polish authorities in connection with laundering money for Columbian drug cartels via Bitfinex.)

Deltec Bank & Trust

In October 2018, Bitfinex and Tether ended their relationship with Noble bank. Soon after, they announced they were banking with Deltec in the Bahamas. 

In a letter dated Nov. 1, 2018, Deltec said Tether’s account held $1.8 billion, enough to back the tethers in circulation at the time. The letter was signed but had no name under the signature. The signature itself was illegible.

The following day, Tether began moving hundreds of millions of dollars out of its bank account at Deltec to Bitfinex’s bank account at Deltec. And as part of a “loan arrangement,” between the two closely related firms, Tether assumed Bitfinex’s losses on its own balance sheet. (We can’t be sure of the total loan amount, but an estimate is $750 million.) 

Tether’s misrepresentation that tethers were fully backed continued to Feb. 2019 when it updated its terms of service to say that tethers are backed by “traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”

Bitfinex says it paid off the loan to Tether in January, and the firms now claim tethers are fully backed—but the question is, backed by what? Loans? Bitcoins? We’ll find out in 90 days when Tether and Bitfinex publish their first transparency report. Per the terms of the settlement agreement, the firms will need to publish these reports quarterly for two years.

Also, $18.5 million—the amount of the settlement—is no small number. We have no idea how much cash Tether and Bitfinex actually have on hand.

The bitcoin community is calling the settlement a win for Tether and Bitfinex. They say the fine is nothing but a slap on the wrist. In reality, it’s another way for Tether and Bitfinex to buy time. The NY attorney general has set its trap; now we wait.

Updated Feb. 24 to note that Novogratz claimed zero exposure to Bitfinex and Tether in 2019.

Also read: NYAG to crypto companies: ‘Play by the rules or we will shut you down’

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Tether, Bitfinex to pay $18.5M to NYAG, cease trading in New York

Bitfinex and Tether have settled with the office of the New York attorney general in an investigation that began two years ago. 

The sister companies will pay $18.5 million in penalties to the state for violations of the Martin Act, according to a statement issued by the NY attorney general. Per the terms of the settlement agreement, Bitfinex and Tether are banned from trading in the state and must submit quarterly reports to ensure they are complying with the prohibition.

Tether claimed that tethers were backed by real dollars, when they were not backed by real dollars, the NY attorney general alleges.

“Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” NY Attorney General Letitia James said in a statement. “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie. These companies obscured the true risk investors faced and were operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system.”

The investigation was made public in April 2019, when the NY attorney general revealed that Bitfinex, an unregulated crypto exchange, dipped into Tether’s cash reserves to cover up the fact that it had lost access to $850 million held by its Panamanian payment processor Crypto Capital. Having lost access to those funds, Bitfinex struggled to meet customer withdrawal requests. 

Tether and Bitfinex neither admit or deny the findings in the settlement. And their attitude is one of “We have put this matter behind us now.” Here is their official statement, which emphasizes that they have repaid their loan to Tether—an estimated $750 million—though they still won’t say how much they “borrowed” exactly. 

Per the terms of the settlement, the office of the NY attorney general cannot bring any claims or lawsuits against Tether or Bitfinex for matters relating to findings in the petition. However, it still has the right to enforce the settlement, if the companies fall short.

And falling short is something that could well happen.

If you read closely, these provisions are a big ask from two companies that have been highly secretive about their financial dealings from the get-go. To continue on, they will need to submit to an impossible level of transparency.

For the next two years, Tether and Bitfinex will have to show proof that they segregate client, reserve, and operational accounts. The NY attorney general claims the firms have commingled funds in the past—and at one point, $61.5 million of Tether’s reserves were kept in a trust account held by its general counsel at the Bank of Montreal.

On a quarterly basis, the two firms have to publish the categories of assets backing tethers—e.g., cash, loans, securities, etc. They will also need to specify the percentages of each category, and spell out whether a category constitutes a loan or receivable.

This is something Tether has never done before. It has never been clear about what is backing tethers, whether those are third-party loans, cryptocurrencies—such as bitcoin—shares in a Bahamian bank, or whatever.

Tether and Bitfinex also need to provide the office of the NY attorney general a list of their payment processors, along with location and contact information for those entities, and information regarding what due diligence procedures they are putting in place to ensure the payment processors don’t leave them high and dry as before. They will also need to provide that same information to their customers upon request when associated with a deposit or withdrawal. 

Crypto payment processors run shadowy operations, and this stipulation is going to make Tether and Bitfinex a difficult client. Recall, the firms had no formal agreement with Crypto Capital when they handed over $1 billion for safekeeping.

Crypto media outlets and bitcoiners are painting the Tether and Bitfinex settlement like it is a big win and $18.5 million is pennies for a company that has so far issued $34 billion worth of tethers—but I could not disagree more.

The NY attorney general is effectively saying, pay the fine and go right ahead with your legitimate business. The problem is, Tether and Bitfinex may have no legitimate business—and fulfilling these obligations may turn out to be impossible.

Also read: NYAG/Tether, Bitfinex settlement reveals commingling of funds, years of shenanigans

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News: MicroStrategy needs more cowbell, Tether surpasses $34B, those laser eyes, Tether collapse doomsday scenario

I nearly ventured to Austin Wednesday, but my flight was canceled due to the storm, havoc, and general disaster in the area. I found another flight later in the day and was headed out the door, when I thought, nah. Turned out to be a good decision, since I probably wouldn’t have survived more than a day without wifi.

Last week, Tether issued another 2.2 billion tethers, so you can buy bitcoin with real cash at a higher price. As of today, Feb. 21, there are now $34 billion worth of tethers in circulation—all backed by Tether’s good word. Oh, and they just printed another 800 million this morning.

More lulz for Mr. Musk—this time a double entendre.

Bitcoin is over $57,000. Why? Because it is a Ponzi scheme, and people who put their money into a Ponzi or MLM scheme get excited when numbers go up because they think they are getting hilariously rich. When bitcoin reached $1 trillion market cap earlier this week, it was an occasion for celebration in the bitcoin world. All of the bitcoiners on Twitter gave themselves laser eyes—in the hopes of pushing bitcoin to $100,000—and posted pictures of raw, juicy steaks.

Market cap, as I have explained, is a delusional number when it comes to crypto. A trillion-dollar market cap assumes everyone who owns bitcoin bought it for $55,000 and could sell it for that. That is nowhere near the truth. Many bitcoiners bought bitcoin for a fraction of what it is today. And if everyone sold at once, the market would collapse. It’s all fantasy.

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Okay, let’s talk about bitcoin’s newest crazy god, who also has laser eyes on his Twitter profile.

MicroStrategy: More cowbell

Every single day, MicroStrategy chief Michael Saylor is on Twitter—or elsewhere—shilling bitcoin. This has literally been his new day job since he staked the future of his entire company and his reputation on “number go up.” His tweets are bizarre and often make no sense. Lately, he has been taking random quotes from famous people and attributing them to bitcoin.

In his latest move, Saylor has taken MicroStrategy deeper down the debt hole. Last week, the company sold $1.05 billion in convertible senior notes, which it plans to invest in more bitcoin. The notes mature in February 2027. (Decrypt, MicroStrategy PR)

This is on top of the firm’s $650 million bond offering in December, which MicroStrategy also used to buy bitcoin. Those notes mature in December 2025. The company owns 72,000 bitcoin per a February regulatory filing. And don’t forget, Saylor has his own personal stash of bitcoin, though we don’t know how much he still has—or if he was selling when MicroStrategy was buying.

If the price of bitcoin collapses, MicroStrategy could literally go bankrupt. But remember, Saylor owns 70% of the company’s voting stock, so he calls the shots. The other MicroStrategy board members can only sit back and watch in horror.

Big companies buying bitcoin and putting them into cold storage means more bitcoin getting pulled out of circulation so that the already small supply of circulating bitcoin grows smaller and the market becomes easier for whales to manipulate—even if those whales bought their hoards of BTC via alias accounts funded with tethers.

So what if MicroStrategy puts another $1 billion into bitcoin and Tesla buys $1.5 billion worth? Tether issues that much fake money in a week. Meanwhile, all the real cash in bitcoin goes out the door as miners sell their 900 newly-minted bitcoin per day for fiat. Bitcoin itself generates no revenue. It’s simply investor money going in one end and out the other.

Jorge Stolfi, a Brazilian computer scientist, estimates that the accumulative amount that bitcoin investors have lost so far is at least $15 billion. When you invest in bitcoin, you immediately lose money, just like all those who invested in Bernie Madoff’s fund, though they went on for years thinking they were making money.

NYAG / Bitfinex—status update

We should be hearing something soon on the New York attorney general’s investigation into Bitfinex/Tether, but probably nothing big, or earth moving—not yet at least.

Bitfinex’s law firm Steptoe filed a letter on Jan. 19, saying Bitfinex/Tether needed more time to send in their documents. Here is what they said exactly: “We will plan to next contact the Court in approximately 30 days to either provide a final status update or to schedule a conference with the Court to discuss any open items.”

The office of the attorney general still has to take a position on the material it receives, and Bitfinex boasted that it had spammed them with some 2.5 million documents. My guess is that Bitfinex, like failed Canadian crypto exchange QuadrigaCX, hasn’t kept accurate records of their financial dealings and they are flying by the seat of their pants. Quadriga operator Gerald Cotten kept no books, commingled funds, and viewed customer money as his personal slush fund.

Tether doomsday scenario

Some people—Nouriel Roubini in particular—have predicted that Tether will get taken down this year, though it will take a much larger effort than the NY AG alone. Still, what will happen if Tether’s operators are arrested and its bank accounts seized? If Tether collapses, we may see something like the following unfold:

  • Panic ensues on offshore exchanges, like Binance and Huobi, as traders begin dumping USDT and buying up BTC at any price.
  • The price of BTC on banked vs. unbanked exchanges begins to diverge. BTC goes up on unbanked exchanges and drops on banked exchanges, like Coinbase, as people start selling their BTC for cash en masse.
  • Banked exchanges face liquidity crises as they can’t keep up with withdrawals. We start to see system outages and paused trading—similar to what happened with Robinhood on Jan. 28.
  • The price of BTC collapses to the point where bitcoin miners cannot pay their monstrous power bills.
  • At some point, the bitcoin hash rate will drop, and bitcoin will go into a death spiral. When miners can’t pay their electric bills, they unplug from the network. This leaves bitcoin vulnerable to attacks, and the virtual currency becomes worthless.

Mind you, bitcoin will never die off completely. Unlike other Ponzi schemes, which disappear when they collapse, bitcoin will spring back to life from time to time. This is the fourth—and by far the biggest—bitcoin bubble since 2009.

Bitcoin’s sick energy consumption

After Tesla announced it bought 1.5 billion worth of BTC, bitcoin’s grotesque energy consumption has come under fire. Based on some estimates, the network consumes as much energy as the entire country of Argentina with 45 million people. Christmas lights are literally a more productive use of electricity to bring joy to people’s lives than bitcoin. (This is a joke. In 2018, bitcoiners claimed that Christmas lights consumed more energy than bitcoin.)

Bitcoiners like to argue this is all green energy, but that is simply not true. Two-thirds of bitcoin mining is based in China, a country that relies heavily on coal-fired electricity. Some miners in the Sichuan province get power from hydro, but only during the wet season. The rest of the time, they turn to fossil fuels. (My blog)

And for those still claiming bitcoin uses clean energy, Trolly had a few more points to add: 

  • The Three Gorges Dam—a gargantuan structure straddling the Yangtze River in China’s Hubei province—has long been criticized for its environmental impact and displacement of two million people. The dam generated a record 112 terawatt hours of electricity in 2020. According to Digiconomist, bitcoin consumes 79 TWh of electricity per year—more than half that.
  • You need one million Bitmain’s Antminer 19s Pros to reach the current bitcoin hashrate of 110M TH/s. That means there are at least one million nodes on the bitcoin network—more if miners are using Bitmain’s outdated S17 model. These machines are good for two years max before they get tossed into landfills and replaced with more efficient ASIC rigs.
  • Bitcoin processes 300,000 transactions per day. The all-in cost of a single bitcoin transaction is $20 for infrastructure and $40 for electricity. Miners currently break even when the BTC price is $20,000. (That’s based on energy and other costs.)

Coinbase behind Tesla’s BTC purchase

Coinbase facilitated Tesla’s recent $1.5 billion purchase of bitcoin, according to The Block. An unidentified source told the outlet that the San Francisco-based crypto exchange made the purchase on behalf of Tesla over the course of several days in early February. The price of BTC in the first week of Feb. was around $38,000.

Similar to how it helped MicroStrategy make its big BTC purchase, Coinbase broke up Tesla’s order into small pieces and routed those to over-the-counter trading desks to minimize the impact on the overall bitcoin market.**

Coinbase wrote up a case study on how it bought bitcoin for MicroStrategy.

Motley Fool’s ship of fools

Another ship of fools has headed off to sea.

The Motley Fool is a private financial and investing advice company based in Alexandria, Virginia. It’s been around since 1993, so you would think they actually do their due diligence. Apparently not. Also, regular folks rely on them for sage investment advice, which is why I was shocked to learn Motley Fool was putting $5 million into bitcoin. (Fool announcement)

Motley Fool justified the investment with these three reasons:

  1. We believe it will store value more effectively than gold over the long term.
  2. We believe it may become a medium for transactions, as/if pricing stabilizes in the decade ahead.
  3. We believe it can act as a productive hedge against inflation.

All three reasons are blitheringly stupid. Medium for transactions? If the price stabilizes in the future? Name one time in the past decade where the price of bitcoin has stabilized. As I explained earlier, the more people who hodl bitcoin, the less stable it becomes. It will never be a stable asset. And you can’t call bitcoin a “store of value” if you get only 20% of what you paid for it.

At least one sensible Motley Fool contributor explained why investing in bitcoin is a horrible idea.

GameStop hearing #1

I spent two hours on Thursday watching the first half of a five-hour GameStop House Financial Services Committee hearing. Most of the questions were not that interesting. This is the first of three hearings. I’m not sure I can watch anymore, unless someone from the SEC, such as Gary Gensler, joins in on the questioning.

The nut is that Robinhood CEO Vlad Tenev apologized to his users for stopping customer trading during the peak of the madness, but says he wasn’t colluding with hedge funds. “We don’t answer to hedge funds,” he said. “We serve the millions of small investors who use our platform every day to invest.” (NPR)

He also would not admit there was a liquidity problem when he limited trades in January.

David Portnoy doesn’t like Vlad’s hair. He thinks it makes him look untrustworthy.

And Keith Gill (Roaring Kitty), who made $48 million from a $53,000 investment in GameStop, came off as a likable, honest guy. Although, he may need those profits to defend himself against at least one proposed class-action. (Complaint)

Other newsy bits

Cynthia Lummis (R-WY) added laser eyes to her Twitter profile pic, confounding the political press and turning bitcoiners into a bunch of cooing babies (Slate)

A few years ago, the SEC shut down the entirely fraudulent ICO market. A sudden shutdown of the DeFi money market (DMM) may be the start of the next regulatory wave. (David Gerard)

The U.S. Treasury Department accused crypto payments platform BitPay of facilitating over 2,100 transactions with individuals in sanctioned nations. BitPay will pay $500,000 to settle the charges. (Coindesk, enforcement notice)

JP Morgan calls Tether an unbacked wildcat bank. “A sudden loss of confidence in USDT would likely generate a severe liquidity shock to Bitcoin markets, which could lose access to by far the largest pools of demand and liquidity,” analysts said. (Bloomberg)

FTX, one of Tether’s biggest customers, claims on Twitter that its volume and customer numbers are real. All you need is an email to set up an account—no KYC for tier 0, 1 accounts with up to $9,000 USD daily withdrawal,* which means anyone can set up any number of alias accounts. Trading volume is a meaningless number due to robot trading and probably wash trading.

Stephen Diehl on Bitcoin mining: “The Crypto Chernobyl.” (blog post)

BitMEX’s Arthur Hayes—who was indicted in October and is still at large—has resurfaced to argue the Robinhood shutdown was orchestrated by financial elites. This is a sign that retail investors should buy crypto, he said. (Cointelegraph) (Tweet)

*Updated to note FTX has no KYC on both tier 0, 1 accounts. In an earlier version of this newsletter, I said you did not need KYC to withdraw up to $1,000. But it’s actually up to $9,000 per day for high-volume accounts.

**Updated March 2: An earlier version of this story incorrectly stated that Coinbase routed the Tesla order to OTC desks, so as not to “crash” the price of BTC. This is incorrect. A large order would lift the market. Story has been altered to reflect that.

Feature image: Ship of fools depicted in a 1549 German woodcut

Proof of work—the reason behind Bitcoin’s horrendous energy consumption

Any company that supports bitcoin is making one thing clear: they don’t care about the environment. At a time when global warming is a real threat to the planet, bitcoin is one of the worst offenders. 

The global network of computers that “mine” bitcoin consumes an entire country’s worth of energy in their race to win the next block on the blockchain—and get the 6.25 bitcoin block reward, currently worth $300,000. 

Since PayPal, Square, MicroStrategy, and Tesla got onto the game—and started shilling bitcoin on social media—the price of bitcoin has soared to new heights. And the higher the bitcoin price, the greater the lure for people to invest in warehouses full of power-hungry rigs to mine bitcoin for profit.

Digiconomist’s Bitcoin Energy Consumption Index, run by Alex de Vries, a blockchain specialist at Big Four accounting firm PwC, estimates bitcoin’s energy consumption to be 79 terawatt-hours of electricity per year, on par with the entire country of Chile. Per his index, bitcoin also emits 37 megatons of carbon dioxide per year, comparable to that of New Zealand.  

Researchers at the University of Cambridge Judge Business School figure bitcoin’s power consumption to be even higher. According to their Cambridge Bitcoin Electricity Consumption Index, bitcoin consumes 124 terawatt-hours of electricity a year, bringing it inline with countries like Argentina and Norway.

In October, just before PayPal announced it would allow users to buy and sell bitcoin via their digital wallets, bitcoin’s power consumption was 75 terawatt-hours per year, according to the CBECI. Since then, bitcoin’s price climbed from $10,000 to upwards of $50,000, increasing its energy consumption by 40 percent the process.

In 2018, all of the world’s data centers consumed 205 terawatt-hours of electricity, or 1% of all of the world’s electricity. Bitcoin accounts for half of that.

Can the world’s power grids tolerate this added demand for electricity in the midst of global warming? In the U.S., we are already seeing the impact of extreme weather on our power grids—millions in Texas shivering in cold, dark homes this week. And rolling black outs in California last year. In Iran last month, authorities blamed massive blackouts on bitcoin mining.

Coal powered  

And bitcoin’s energy consumption isn’t green either—though bitcoiners like to say that it is. Bitcoin miners are tuned to profits. That means the fastest rigs and the cheapest energy available, mostly in the form of fossil fuels. 

“Coal is fueling bitcoin,” Christian Stoll, an energy researcher at the Technical University of Munich, told Wired magazine a few years ago.  

In a paper published in Joule in June 2019, Stoll and his researchers examined bitcoin mining based on where miners are located and the types of rigs they use. Two-thirds of all bitcoin mining is centered in China, 17% is in Europe, and 15% in North America, the researchers found. 

In China, bitcoin’s mining is spread throughout the country’s sprawling western provinces, Sichuan and Yunnan, and also in the north, in Xinjiang and Mongolia. In the Sichuan province, where about 58% of the world’s bitcoin mining takes place, miners take advantage of cheap hydroelectric power—but only during the rainy season, which lasts about six months. 

Bitcoin is a 24/7 business, however, and when green energy isn’t available—and the price of bitcoin is high enough to reap a profit in the dry season—the miners in Sichuan turn to coal, the country’s most abundant energy source. Sixty-five percent of China’s electricity comes from coal. Bitcoin miners in the Xinjiang province and inner Mongolia also rely heavily on coal-fired electricity. 

Even when bitcoin uses clean energy, that pushes the use of dirty energy elsewhere. A few years ago, HyperBlock, a bitcoin mine in Missoula County, Montana, struck a deal with a nearby dam for cheap renewable power. They thought they were doing it right, until county officials noted that if energy from the dam went to bitcoin mining, the county as a whole would end up using more coal.

That was the end of that. In April 2019, Missoula required all future mines to purchase or build their own renewable power. And soon after the price of bitcoin crashed in March 2020—slipping down to below $5,000—HyperBlock declared bankruptcy because it could not pay its power bills.

Bitcoin mining and proof of work

Why is bitcoin so inefficient? It turns out that the system uses copious amounts energy not by accident but by design.

Satoshi Nakomoto, bitcoin’s pseudonymous creator, had to figure out a way to solve the double-spend problem. We don’t have this problem with paper money. But with digital money, someone could copy the file and use it to spend the funds over and over, rendering the currency useless. 

In a centralized system, a trusted third-party, like a bank, checks the digital money you spend against a central ledger to make sure there’s no funny business going on. But bitcoin’s ledger (the blockchain) is decentralized, which makes the double-spend problem harder to solve.  

The solution Satoshi came up with was a clever hack that involves bitcoin mining and proof-of-work. In bitcoin, mining is the process of adding new transactions to the blockchain, and proof-of-work secures the network so transactions can’t be reversed. You would need more than half of all the computing power on the bitcoin network to double-spend a bitcoin. 

It wasn’t a perfect solution, but Satoshi solved what computer scientists had long thought was unsolvable: how to build a decentralized payment system. The irony is, unless you are collecting payments for ransomware, bitcoin has proven unusable as a payment system. No merchant wants to risk their profit margin on bitcoin’s volatility.

Today, bitcoin functions mainly as a speculative investment, getting scooped up by retailers and venture capitalists—and now big companies and hedge funds—in the hopes the price will go ever skyward.  

Winning the lottery

Bitcoin miners have their eyes feasted on the bitcoin block reward.

Every 10 minutes, the bitcoin network adds a new block to the blockchain, minting 900 new bitcoins a day in the process. That block reward is reduced by half every four years. Prior to May 2020, the bitcoin block reward was 12.5 bitcoins—double what it is now—and the network produced 1,800 new bitcoins per day. And around February 2024,* the block reward will be 3.125 bitcoins.

When you request a transaction on the bitcoin blockchain, your transaction goes into the bitcoin mempool, a waiting area for unconfirmed bitcoin transactions. Miners select transactions from the pool—usually the ones with the highest transaction fees—and package those into a block ready to process as the next block in the blockchain.

Any server can produce a “candidate block,” but if it were too easy to do, the network would be spammed. So there had to be a financial cost to creating a block, hence the work. 

In the case of bitcoin, that work involves solving a hash puzzle; the cost is computing time and electricity. The hash puzzle is very difficult to solve, but easy for peers in the bitcoin network to verify, so they can prove you did the work and the block is valid.

Some people refer to this puzzle as a complex math problem, but it’s really not. Working out a hash is easy, but in bitcoin, working out a hash that meets certain conditions is tricky. Finding the solution is a bit like winning a lottery.

Solving the hash puzzle

A hash is a fixed-length output calculated from a piece of data. Whether you hash Herman Wouk’s “War and Remembrance” or a grocery store list, the resultant hash will always be the same length. And you will always get the same hash for the same string. But if even one letter changes in “War and Remembrance,” the resultant hash will be different.

Bitcoin uses the hashcash proof-of-work, originally developed by cryptographer Adam Back in 1997 as a way to prevent email spam and denial-of-service attacks, and the SHA-256 hashing function, which has been around since 2001.

When you hash a bitcoin block, you also track the hash of the previous block—which “chains” a block to the one before it, and so on down the line to the first bitcoin block ever created—and a random number called a nonce. The idea is to produce a hash that is lower than the numeric value of the network target. (This target changes periodically to adjust the mining difficulty, thereby assuring only one block gets created every 10 minutes.)

When you mine bitcoin, you repeatedly hash the block while incrementing the nonce. Each time you change the nonce, you also change the value of the resultant hash. The number of hashes that a miner makes per second is called the hash rate; the higher your hash rate, the better your chance of solving the puzzle. A single bitcoin mining rig can make up to 14 trillion guesses per second.

If you discover a hash value that is small enough before anyone else does, you win! Your block is then transmitted to the rest of the network, and the other nodes begin work on the next block using the hash of the accepted block. 

Powerful computers

As bitcoin went up in value over the years, miners found faster and faster ways to win the bitcoin lottery. When bitcoin was first introduced in 2009, you could mine bitcoin with the CPU on your own personal computer.

Those days are a distant memory. As bitcoin mining became more profitable, miners switched to graphic processing units (GPUs). And in 2011, they migrated to field-programmable gate arrays (FPGAs). But starting in 2013, the field was taken over by application-specific integrated circuit equipment (ASIC) rigs—which is the only way to make a profit mining bitcoin these days. 

Over the past decade, bitcoin miners have set up thousands of warehouses of computer hardware dedicated to performing trial-and-error computations in a race against each other to win the block reward.

The result is a massively inefficient coal-powered monster that consumes the same amount of energy as a country (Argentina) with 45 million people, all in the name of “number go up,”

*This is an approximation. The next bitcoin halvening event could happen before or after this date.

If you like my work, please support my writing by subscribing to my Patreon account. Every little bit helps!

News: Tether prints $1B at a time, Tesla buys bitcoin, Roubini calls Saylor a cokehead, scammers hijack QuadrigaCX website

We are midway through February. Tether has surpassed $32 billion in tethers and appears to be quite proud of the fact. BTC is scratching $49,000 and ETH is over $1,800. There is so much craziness now in the crypto markets with shitcoins pumping galore, and big companies getting in on the bitcoin Ponzi.

In the meantime, I am concerned crypto is going retail again. Friends are calling and asking about bitcoin. One of my friend’s offspring was talking up dogecoin on Facebook. And I am overhearing conversations about crypto in grocery stores and parking lots—flashbacks of 2017, but this is worse. Retailers are going to get hurt all over again.

Another reminder, I have a Patreon account. If you want to support my writing, please consider subscribing. I’m currently making $572 a month on Patreon, which is fantastic because I can now buy decent bottles of wine. But at some point, I would love to bring that up closer to $2,000 or find a way to make a living doing this.

Tether: We’re done with the baby prints

On Thursday and again on Saturday, Tether issued $1 billion in tethers. These are the biggest single prints of USDT ever—and there were two in a row. Previously, the biggest prints were $600 million, which was rare. Normally, bigger prints were $400 million, and if Tether needed more, it would simply issue several in a row. But that’s clearly not enough to feed the monster now. 

By monster, I mean this snowball is getting so big, Tether is struggling to manage it. Seventy percent of bitcoin is traded against tethers, and as real money keeps getting siphoned out of the system, Tether needs to create more and more fake dollars to fill the ever-widening chasm. Tethers are counterfeit. They are not real dollars, but they are treated as such on offshore exchanges.

You can’t have a system built entirely on fake money. Eventually, it will collapse under its own weight. We saw this with QuadrigaCX. As soon as enough people tried to cash out, the exchange’s founder Gerald Cotten flew to India and pulled off what appears to have been one of the most bizarre exit scams in history—unless you believe he is really dead.* I’m still getting calls from reporters and filmmakers wondering what the hell happened.

Tether CTO Paolo Ardoino says the $1 billion prints were for replenishments and chain swaps—wherein a customer sends in tethers and gets them reissued on a different blockchain. If it were a chain swap, you would see a corresponding burn. But we aren’t seeing any burns, meaning those tokens went almost immediately into circulation.

Luca Land tracked the first 1 billion print and found that the entire amount—previously, I said “majority,” but Luca says all of it—went to Bitfinex, Huobi, RenrenBit, Binance, and FTX.** The largest recipient was FTX, followed by Binance. Those of us who follow @whale_alert are accustom to seeing tethers flying off to “unknown wallets.” Luca thinks those unknown wallets serve as intermediate wallets to throw us off the trail.

The Block published a story on Thursday, right after Tether’s first monster print, with lots of quotes from Ardoino, who explains that big companies are buying USDT from over-the-counter desks and high-frequency trading firms. This explains the demand for all these tethers, he claims.

“When clients of these firms want to buy bitcoin, they send USD, and then these firms convert USD to USDT to bitcoin. This method is faster and most convenient,” he told The Block. 

Why would someone go to the trouble of converting cash to USDT to buy BTC when they could simply buy BTC directly with cash on a regulated exchange? That makes no sense—unless it involves money laundering and capital flight. Tether does have a big market in Asia, Ardoino said.

Another explanation is that Tether is printing USDT out of thin air, using those to buy bitcoin with alias accounts on unregulated exchanges and cashing out via banked exchanges and OTC trading desks. Or else, they buy BTC and hold onto it as a way to make the markets more illiquid and easier to manipulate. (If they sold all the bitcoin they were buying with tethers, they would crash the markets, so until a new influx of cash comes into the system, they have to hold onto it.)

Coindesk interviewed Nouriel Roubini on CoindeskTV. Of course, he gave it to them straight, calling Tether a criminal enterprise and Michael Saylor a cokehead. The three reporters broke out into giggles. The questions they asked were naive, for instance, how is Tether printing tethers different from what is going on in Washington with all their dollar printing? Roubini made important points and predicts Tether will be dead within the year—read the transcript on my blog.

NY AG Tether investigation update

Tether has agreed to hand over a slew of documents to the NY attorney general showing how they issue tethers, what’s behind tethers, and so on. The original deadline was Jan. 15, but they needed another 30 days and the NY AG was okay with that. We are looking for another court filing to drop at some point after Feb. 15.

Don’t expect miracles anytime soon, though. The NY AG will still need time to take a position on what she has received. I’m sure her office is working with the Department of Justice in their investigation—and passing all the material along to them.

Someone was asking me on Reddit, what can the NY AG actually do to Tether? Answer: She has sweeping investigatory and prosecutorial powers, and she can issue a cease and desist. But ultimately, the U.S. Department of Justice and Homeland Security will be instrumental in taking Bitfinex/Tether down.

To put things in perspective, Tether has been in operation for six years. It took seven years and the coordinated effort of law enforcement in 17 countries to bring down Liberty Reserve. (ABC News)

Tesla buys BTC with clean car credits

The big news of the week was Tesla purchased $1.5 billion of bitcoin, as revealed in its 10-K filing. Here you have a company dedicated to clean energy buying one of the filthiest assets in the world. The bitcoin network requires the energy of a small country like Argentina, Norway or the Netherlands. Musk doesn’t give a hoot about the planet. (My blog)

Just to be clear, $1.5 billion is peanuts. It will support the bitcoin miners for about a month. Of course, on the news of Tesla buying bitcoin, the price of BTC shot up from 39,400 to 48,000 in less than 24 hours. The higher the price of BTC, the faster real money exits the system when the miners sell their 900 newly minted BTC per day.

Michael Burry, the investor from “The Big Short,” said in a series of deleted tweets (apparently, he routinely deletes tweets) that Musk bought BTC to distract from Chinese regulators looking into quality complaints with Tesla vehicles. Burry is shorting Tesla and has called on the electric-vehicle company to issue more stock at its ridiculous price. (Business Insider)

But wait! It’s green energy!

Most of the world doesn’t realize that bitcoin uses a country’s worth of electricity. They think it’s mainly used for ransomware and by criminals to buy drugs and such, so when they learn about bitcoin’s horrendous CO2 production, they become alarmed.

As a result, bitcoiners are desperately scrambling to declare that bitcoin consumes renewable green energy. Most of what they are spouting is blithering nonsense with no facts to support their claims. They are also trying to say that bitcoin consumes less energy than the rest of the financial system, which is simply dumb, as Frances Coppola points out.

Other interesting newsy bits

Gerald Cotten may be dead and buried—or more likely, sipping cocktails on a beach somewhere—but QuadrigaCX sprung to life again! However, it turns out scammers set up an imitation Quadriga website to lure in potential victims. EY, the trustee for the failed exchange, sent out a warning notice. The website has since been taken down. (EasyDNS)

India is set to ban cryptocurrency investments completely. Investors will be given a transition period of three-to-six months after the new law goes into force to liquidate their investments. (Bloomberg Quint)

Crypto Capital money mule Reginald Fowler has three more weeks to find new counsel after he stiffed his previous attorneys. (My blog)

Dogecoin has been pumping thanks to r/wallstreetbets and Musk and others tweeting about it for the lulz. David Gerard wrote a wonderful piece on dogecoin explaining its unique history. (Foreign Policy, paywalled)

Apparently, Elon Musk was tweeting about DOGE for the lulz back in April 2019. (Financial Times)

Dogecoin creator Billy Markus said on Reddit that he sold all his dogecoin in 2015 after he got laid off. He wanted dogecoin to be a force of good, and he is disappointed to see the nonsense “pump and dumping, rampant greed, scamming, bad faith actors.”

The Sydney Morning Herald did a feature on Australian-born-and-raised Greg Dwyer, one of the founders of Bitmex, who was indicted last year for violating anti-money laundering laws, but is still at large. “As recently as July, social media posts suggested Dwyer was in Bermuda, and enjoying all it had to offer.”

Miami Mayor Francis Suarez (R) wants municipal workers to get paid in bitcoin. Aside from the legal and tax ramifications and all the difficulties in setting this up, I’m sure employees will be so happy to wake up and find their paycheck lost 30% of its value whilst they were sleeping. No, this is a terrible idea. (The NY Post)

BNY Mellon, the world’s largest custody bank, said it will hold, transfer and issue bitcoin and other crypto on behalf of its asset-management clients. The bank will begin offering these services later this year. Because they are a state-chartered bank, they can do this in NY without a BitLicense. (WSJ, Coindesk)

Mastercard is planning to support crypto natively on its network. However, it’s only going to support cryptocurrencies that meet certain requirements—including stability, privacy and compliance with anti-money laundering laws. The problem is that no cryptocurrencies meet Mastercard’s criteria. (Arstechnica, Mastercard announcement)

BitPay’s bitcoin cards can be added to Apple Wallet, giving crypto holders a new way to spend via Apple Pay. BitPay converts your bitcoin to cash, so it’s no different than selling your BTC first, and merchants won’t know the difference. (Business Insider)

This Valentines Day, consider giving that special someone a CryptoFlower! It will only set you back 4 ETH ($7,200). Each flower is genetically unique and immutable. And they don’t need water or sunlight because they live on the Ethereum blockchain. (FT)

Last but not least, the CBC QuadrigaCX documentary is coming soon! It was nearly a year ago that David Gerard and I met in Vancouver for the filming. It was also one of the last times I enjoyed a meal inside a restaurant sitting next to people.

*Update, Feb. 14—Someone on Reddit was giving me a hard time, arguing that I can’t say Cotten pulled off an exit scam unless I explain that he might actually be dead. I won’t believe he is dead until someone exhumes the body and proves it’s him. See my Quadriga timeline for details.

**Update, Feb. 15—The unidentified tether customer in Luca Land’s diagram turns out to be FTX.

Nouriel Roubini: ‘Tether is a criminal enterprise,’ SEC should probe Elon Musk’s bitcoin tweets

Nouriel Roubini, an economics professor at New York University, thinks Tether is issuing fake money. And that nothing short of an audit will prove the $30 billion in USDT the BVI-registered company has spewed out into the crypto markets thus far are even 74% backed. (Stuart Hoegner, the firm’s general counsel, claimed they were three-quarters backed in April 2019 court documents.)

Tether is a “criminal enterprise,” he bluntly told reporters on Coindesk TV. In a 10-minute interview, Roubini predicted Tether’s looming demise, called for the SEC to look into Elon Musk’s bitcoin tweets, and claimed that central bank digital currencies will spell the end for crypto.

Dr. Doom, as Roubini is called, talks quickly, doesn’t mince words, and his face barely changes expression. He has a reputation as a perpetual pessimist. Ask him a question, and he will give you a straightforward, often bleak, answer. Though he might argue, he is simply being a realist.

I am not sure why Coindesk had him on their program. Roubini hates bitcoin and his responses elicited laughter—though it wouldn’t be the first time. Roubini “sounded like a madman in 2006,” when he stood before economists at the International Monetary Fund and announced a crisis of solvency was brewing, IMF economist Prakash Loungani told the NYT in August 2008. “He was a prophet when he returned in 2007.”

Anyhow, I transcribed the talk only because I thought Roubini’s points made sense. He was interviewed by Coindesk’s Lawrence Lewitinn, Christine Lee, and Emily Parker.

Lee: The narrative on bitcoin has shifted from a means of payment to a store of value for some. It is not so much used as a currency as a digital gold. Institutions and public companies are buying this thesis and we are seeing bitcoin hit records as a result. What do you make of this institutional and corporate interest in bitcoin, underlined by Tesla’s $1.5 billion bitcoin investment on Monday? 

Roubini: As you suggested, bitcoin and crypto is not a means of payment. It is not a currency. It is not a unit of account. Is not a scalable means of payment. It is not a single numeraire. Now, people say it is an asset. But think of it. What are assets? Assets like stocks, bonds and real estate give you income or give you some use, like real estate. And, therefore, they give you capital gain. Gold does not give you income but it has other uses,—industrial activity and jewelry—and therefore, has some value. It used to be used as a means of payment. 

In the case of bitcoin, it does not have any income. It doesn’t have any use. It doesn’t have any utility. So the value of it based on what? Based on no intrinsic value and purely a speculative bubble. That is why I argue that bitcoin, like all the other shitcoins, are worth zero. [Coindesk reporters giggle.] 

Actually, negative given the hogging of energy and the environmental cost. If there was a carbon tax on crypto, the value of these assets would be negative. 

So what is the fundamental value? What is the use? What is the utility that justifies the capital gain? None. It is a speculative bubble that is based on pump-and-dump, spoofing, wash trading and manipulation by Tether, which is a total scam. [More giggling from Coindesk crew.]

So, for institutional investors, saying we are going to invest in crypto doesn’t make any sense. You have a failing company that had a flat stock market like MicroStrategy for a decade, and its head was a coke addict who decided to bet the entire house on bitcoin. [CoinDesk crew really losing it.] That is irresponsible behavior. It is not gonna be any corporate head that is going to put his cash, as you point out, into something that is so volatile. You put your cash into something that is stable. 

And for someone like Elon Musk who knows he has a market impact to manipulate to first, take an individual position to bitcoin, pump the price up, and then say that Tesla is invested. And Tesla doesn’t make money yet. It is also irresponsible and it is market manipulation. [Note: Musk was tweeting about BTC, pushing up the price, before Telsa announced it had purchased $1.5 billion worth.]

The SEC should be looking at people that have a market impact that manipulate the price of assets. That is also criminal behavior. It is totally a criminal enterprise. Tether is a criminal enterprise, and a bunch of whales and insiders are manipulating the price of bitcoins and other shitcoins day in and day out. That is a fact.

Lewitinn: Dr. Roubini, always a ray of sunshine, of course. The question about Tether is this: We have known for a while now that it has been backed entirely by dollars. It is something like 70-some-odd percent. That came out a while ago. There have been questions about its backing for some time, for several years. Yet it is still trading on par with the US dollar. Conceivably, they have enough assets at least for a while to keep the peg going with the dollar. How much of a real worry is it for crypto if there is even a small run on tether?

Roubini: First of all, we don’t know if it is backed 70% or not. Their lawyer says 70% but we have no idea. It doesn’t mean any[thing] absolute independent audit of it. [A bit garbled here, but he is saying, outside of a third-party audit, which Tether has never had, there is no way of knowing what’s backing tethers.]

We also know they are really issuing, literally, at an exponential rate, new tethers. In the last year alone, something like 25 billion. And in the last few weeks, a billion per week. So it looks like they are getting desperate, and it is a typical Ponzi scheme, in which you maintain the value of something by issuing more of it and more of it and so on. 

Lewitinn: How different is that from what is going on right now from the money printing happening in Washington? 

Roubini: The money printing in Washington is happening at a rate that is much less than the issuance of fiat by Tether and other shitcoins. If you look at the chart of it, literally, the case of Tether is exponential. Second, central banks, if you know, their assets are matching their liabilities. For every dollar of currency in excess of reserves that are in the central bank balance sheet there is an asset, foreign reserve, or gold or treasury assets. 

So the idea that fiat currencies are not backed by anything is utterly false. If you look at the balance sheet of any central bank, there are assets and there are liabilities. And actually, there is a positive net worth most of the time. But in the case of Tether there is nothing backing it. Again, even 70% is not true. And we know that every fixed exchange rate that is based on not-full-backing and not fully collateralized eventually collapses. 

The entire monetary history, every fixed exchange that is not backed has collapsed. It is only a matter of time. And the trigger is gonna be when the indictments of Tether and Bitfinex are going to occur, and it is only a matter of time this year. Because we know that there are investigations occurring. 

Parker: Let’s move to central bank digital currencies for a moment. We know that China is moving quite rapidly in this area. Do you think that the US dollar will remain the world reserve currency?

Roubini: I think that the Chinese are going to go ahead. [Sweden’s] Riksbank bank is going to go ahead. The [European Central Bank] is going to go ahead. And until now the US was behind the curve, but they realize that the Chinese had a plan to dominate the global financial system. It’s their e-commerce. It is their own platform of private payment systems like AliPay and WeChat Pay and that is going to be the e-RNB. And it is only a matter of time before we are going to phase out cash all over the world. And if the US wants to maintain the role of the US dollar as a major global reserve currency, they will have to move to an e-dollar. 

The problem with that is that people get excited in the crypto world when central banks end up talking about a central bank digital currency. A CBDC, first of all, has nothing to do with blockchain. It is going to be private. It is going to be centralized. It is going to be permissioned. And it is going to be based on a bunch of trusted authority verifying transactions.

It has nothing to do with blockchain. It has nothing to do with crypto. And as a payment system, it is going to dominate, not only crypto, which has absolutely no payment services, but also any private form of payment system that is digital, from credit cards to bank deposits to AliPay to WeChat pay to Venmo to Square to PayPal, and so on. Because it is going to be cheap, it is going to be instantaneous clearing and settlement. It is going to be a system that is going to dominate any form of private money

If and when a central bank currency is going to be introduced, the problem is going to be that any form of private digital payment system is going to be crowded out, starting with crypto, which doesn’t have any payment service in the first place. 

Lee: Dr. Roubini, it sounds like you believe that the technology underlying bitcoin is at least sound and that governments and central banks around the world will adopt it, and if that is the case, what happens to privacy? And you also mentioned something about negative rates becoming the norm. Tell us about that?

Roubini: First of all, I said the opposite of the technology. The central bank digital currencies will not be based on blockchain. They are going to be private, not public. They are going to be centralized, not decentralized. They are going to be permissioned, not permissionless. They are going to be a bunch of central banks and private banks that are trusted verifiers of the transaction, rather than being trustless. So the technology is not going to be blockchain. It is not going to be crypto. That is my point. 

Secondly, the advantage of having a central bank digital currency is that right now, if there is a very severe economic recession, central banks cannot go very negative with the policy rates. That is why they do quantitative easing. They do credit easing. Because if you go lower than, say, 75 basis points, people are going to switch their excess reserves into cash if there is a nominal zero interest rate. So they are not going to pay the tax. 

However, if you phase out cash, then you have no option than to keep your money in the digital form. And then the negative policy rate in a severe recession or depression can go to minus one, minus two, minus three, minus four, minus five, whatever you want it to be. So if and when that happens, and if there is a recession that is severe enough, central bank digital currencies are going to allow you to have much more [of an] easing monetary policy with much more negative policy rates. That is the direction we are going to go. 

Lee: Is there anything that can happen that would change your mind about bitcoin? 

Roubini: So far, no. As they say, it is not a unit of account. It is not a means of payment. It is not a single numeraire. It is not a stable store of value. And with proof-of-work, you get five transactions per second. And if it was to be adopted as a means of payment, you would have deflation. Because the quantity of it is limited in the long run. If you want to create a digital currency that actually works as a means of payment, its growth has to be the growth of nominal GDP, so that the demand can be satisfied by supply that increases as much as nominal GDP, meaning the inflation target plus the growth of the economy. Otherwise, you are going to get permanent deflation on every price in goods and services, so it’s fundamentally flawed even from that point of view. 

Update: In an earlier version of this story, I mentioned Musk had deleted some of his BTC tweets. So far, I haven’t found any hard evidence of that, so I removed my comment.

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Tesla spent $1.5B in clean car credits on bitcoin, the filthiest asset imaginable

Tesla bought $1.5 billion worth of bitcoin, the company said in a regulatory filing on Monday, effectively putting nearly all of the money it earned on clean car credits towards the world’s filthiest asset.

Where to begin? Let’s start with the firm’s SEC filing. As of January 2021, the Silicon Valley-based company updated its investment policy to allow it more flexibility in diversifying its returns on cash. Those changes allow Tesla to buy bitcoin and other cryptocurrencies, which it immediately did.

“Thereafter, we invested an aggregate $1.50 billion in bitcoin under this policy and may acquire and hold digital assets from time to time or long-term. Moreover, we expect to begin accepting bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt.”

The filing does not say how Tesla bought the bitcoin or how they are custodying it. It also does not tell us how many bitcoin it purchased or for what average price. We only know Tesla bought bitcoin sometime between Jan. 1 and early February, when the price was between $30,000 to $41,000. 

Tesla says its customers will be able to buy its vehicles with bitcoin. However, “liquidate upon receipt” means that if you purchase a Tesla with bitcoins, the company is likely to sell those bitcoins for cash immediately, something that is usually done by sending the funds through a payment processor first.

This is what most large merchants do when they say they are accepting bitcoin. They convert it to cash, so they don’t have to deal with bitcoin’s wild volatility. So if you buy a Tesla with bitcoin in the future, it will likely be the same as selling your bitcoin for fiat and then handing the cash over to Tesla.

Clean car credits for bitcoin

Tesla earns tradable credits under various regulations related to zero-emission vehicles, greenhouse gas, fuel economy, renewable energy, and clean fuel. It then turns around and sells those credits to other automakers when they can’t comply with auto emissions and fuel economy standards.

In 2020, Tesla reported making $1.58 billion in selling these tradable credits it received. And here is the important bit: without those tradeable credits, the company would not have been profitable. Tesla would have lost money. So what does it do with that money? It turns around and buys bitcoin.

Bitcoin is an environmental disaster. The bitcoin network currently burns around 116.87 terawatt-hours (TWh) per year, according to the University of Cambridge’s Centre for Alternative Finance. To give you an idea of how devastating that is to our climate, that is as much energy as a small country or seven nuclear power plants.

Keep in mind, bitcoin’s energy consumption increases right alongside the price of bitcoin. As bitcoin goes up in price, more people want to mine the virtual currency for profit, leading to greater energy consumption as they pile more money into power-hungry ASIC rigs.

Bitcoin is not only filthy for its energy waste but also because it is the currency of choice in underground economies. Ransomware would probably not exist if it were not for bitcoin.

And bitcoin fits the very definition of a Ponzi scheme. It has no intrinsic value—any money new investors put into the system immediately goes out via bitcoin miners selling their 900 newly minted bitcoin per day. Tesla’s massive influx of cash will fund the bitcoin miners for about a month and a half, at most.

Elon Musk shilling crypto

Two years ago, Musk and Tesla paid a combined $40 million penalty to the SEC after Musk’s cryptic tweets about taking Tesla private led to stock fluctuations. The regulator charged him with securities fraud. As part of the settlement, Musk agreed to step down as chairman of the company, although he continued to hold the title of CEO.

Apparently, Musk has learned nothing from that experience. Last month, presumably around the time Tesla was buying up hoards of bitcoin unbeknownst to the general public, Musk caused the price of bitcoin to go up 20% when he changed his Twitter bio to include the word “bitcoin.”

Soon after changing the bio, Musk said in a tweet: “In retrospect, it was inevitable.” In retrospect, that tweet looks like an early hint that Tesla was funneling money into the digital asset.

Will Musk get into trouble for his bitcoin tweets?

It is unlikely, Columbia University Law Professor John Coffee, Jr., told the Wall Street Journal, especially given that a federal judge rebuked the SEC when it sought to hold Musk in contempt in 2019. “I don’t think the commission would dare push it that far,” he said.

The latest Tesla news caused bitcoin to spike 18% this morning, sending the price to over $44,000, and setting a new all-time high.

Updates Feb. 8: Bitcoin topped $44,000 on Monday, even higher than the $43,000 I mentioned earlier. I added that in the SEC settlement Musk agreed to step down as chairman of Tesla. And I added the Coffee quote from WSJ.

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News: Bitfinex pays off Tether loan, Tether mints $1.8B in a week, Nigerian central bank cuts off BTC services, Elon Musk tweets send DOGE soaring

It’s Feb. 7, a year since the pandemic entered the US, and bored people with lots of stimulus money are gambling it all on crypto casinos and stocks. And to get things extra frothy, Tether spit out more than $1.8 billion in tethers last week—enough to push its market cap over $28 billion.

Amazing how things have evolved. It was big news in December 2017 when Tether reached its first $1 billion in tethers. Now the BVI-registered company is issuing that kind of money every few days. Why? Because they can. So far, nobody has stopped them. Also, because they have to. If they were to stop now, the price of bitcoin would collapse, exposing Tether for what it is—a massive fraud, the likes of which nobody has seen since Madoff. 

The price of bitcoin is now over $40,000, up from $32,800 a week ago. So if you bought bitcoin last week, you made money without ever having to get up off the living room couch. Just remember that you have to actually cash out via a banked exchange like Coinbase to realize those gains.

Bitfinex says it’s paid off Tether ‘loan’

Bitfinex announced on Friday that it’s paid off the remaining $550 million balance of its loan to sister company Tether in one fell swoop—in fiat currency and with interest.

Where did the money come from? Bitfinex won’t tell us. (The announcement was only three sentences long.) They just want us to believe—based on their word alone—that the entire matter is behind them. So I guess the New York attorney general can drop its probe?

That loan was at the center of the NY AG’s investigation into Bitfinex. After losing access to $850 million via its payment processor Crypto Capital, Bitfinex gave itself access to $900 million of Tether’s reserves—without telling its customers. And that’s after years of Tether saying that tethers were backed 1:1 with real dollars.

Nobody knows for sure how much of Tether’s money Bitfinex helped itself to. Bitfinex indicated—here and here—that it had previously paid off $200 million, leaving us to assume that the total loan amount was $750 million. But Bitfinex isn’t being upfront about how much it borrowed. And thus far, we have no audits, loan documents, or other evidence to prove the repayment was anything more than a story-book fantasy.

The fact of the matter is that Bitfinex was insolvent in 2018. Rather than crash and burn, it helped itself to Tether’s customer’s money to cover up for its massive losses. Are we to believe now that those losses magically disappeared? Just as we are to believe that tethers are now fully backed?

Let’s face it, Bitfinex probably started going down the tubes as early as August 2016 after it was hacked to the tune of $72 million worth of BTC and then lost its banking. The company’s operators have been playing a game of cat and mouse ever since. (See my Tether timeline for more details on past shenanigans.)

Mainstream media gets wise to Tether

Tether is getting more coverage in mainstream media. In his WSJ story, “What’s behind the bitcoin bubble,” columnist Andy Kessler covers all the Tether basics, including the NY AG probe and even the “Bit Short” article by Crypto Anonymous. (That story really is getting around, isn’t it?)

Word is getting out. Reporters are asking questions about Tether, and they are starting to document the funny business. Probably as a way to get up to speed on the topic before the shit really hits the fan—a day we all know is coming, wherein Tether gets exposed for what it really is.

In contrast, crypto media is trying desperately to fight the “Tether FUD.” Earlier, we had a reporter from The Block going on a podcast to try and convince us those billions of tethers are all backed with real cash. And I’m seeing nonsensical stories like this one in Bitcoin Magazine on “debunking the Bit Short.” Here’s one in another crypto rag about how the loan repayment will put an end to Tether FUD.

Bitcoiners and many crypto outlets—that are directly funded by the crypto industry—believe that Tether needs to be protected at all costs. How do you defend a company that won’t tell you what tethers are backed by? That refuses to submit to an audit? That is being investigated for fraud by one of the most powerful attorneys in the nation? You can’t, but they do.

I should mention that Jeremy Allaire has also come forward as a Tether apologist. Allaire is the CEO of Circle, which is part of the Centre Consortium, a collaboration with Coinbase that manages the USDC stablecoin.

USDC is growing rapidly. There are now $6.5 billion worth of USDC in circulation. The regulated stablecoin gets monthly attestations—but no full audit. Grant Thornton’s attestations say reserves are in cash and “other approved investments.” We don’t know what those investments are or who approved them. And it’s December attestation is over two weeks late, compared to earlier months. I’m sure it’s nothing to worry about though.

Nigerian banks cut off crypto services

The Central Bank of Nigeria (CBN) ordered banks on Friday to close the accounts of anyone involved in crypto services and to stop facilitating payments for crypto exchanges.

Bitcoin’s popularity in Nigeria was driven largely by a Russian Ponzi scheme called MMM. This connection, along with a few fraud causes, made African governments and regulators leery of crypto. The CBN warned banks in January 2017 that bitcoin and other cryptos were used primarily for money laundering and funding of terrorist activities. And then in February 2018, CBN warned Nigerian citizens they would not be able to get legal help if the crypto markets collapsed.

The CBN’s recent move impacts fiat on- and off-ramps, but peer-to-peer platforms like OTC desks remain unaffected. As a result, Binance temporarily suspended deposits in Nigeria naira. (Binance letter, Coindesk)

Musk tweets about DOGE, number go up

Dogecoin—a coin that was designed as a joke—made the WSJ after billionaire Tesla chief Elon Musk kept tweeting about it, causing the price to go parabolic.

Musk is doing this for the lulz. Watching people scramble to buy an asset after he tweets about it is his idea of amusement. Imagine, if you will, a rich guy throwing dollar bills onto the street and watching poor, wretched fools dive for it. This is Musk’s sense of humor.

The SEC has warned him that he can’t tweet things about Tesla for the lulz, so he is now applying the same douchebaggery to something he isn’t interested in simply because he can.

Kiss frontman Gene Simmons (the guy with the tongue) also announced he was stocking up on DOGE because he thinks it will increase in value. Why not? If Musk keeps tweeting about it, certainly number will go up.

Other newsworthy stuff

Trolly wrote a blog post about how the “Bitcoin economy” is just an illegal casino run by the mob. Leverage is the lifeblood of crypto, he says. And regulated exchanges like Coinbase are feeding the monster.

David Gerard wrote a blog post spelling out how Tether works for those who are still getting up to speed.

Yearn DeFi was exploited in the usual manner—smart contracts and not-so-smart people. A hacker made off with $2.8 million after draining $11 million from one of Yearn’s deposit pools. For the uninitiated, Yearn.Finance is a “yield aggregator” where users deposit funds in pools, which are then deployed to other DeFi protocols to generate yields for those depositors. DeFi—or decentralized finance—is based on smart contracts—bits of “unstoppable” code that run on a blockchain. (Cointelegraph)

German prosecutors have confiscated more than $60 million worth of bitcoin from a fraudster. But they can’t access the funds because Mr. Fraudster won’t give them the keys. How do you confiscate bitcoin if you have no access to it? (Reuters)

Miller Value Funds, run by veteran hedge fund manager Bill Miller, may invest up to $337 million in GBTC through its flagship fund, the Miller Opportunity Trust. GBTC’s premium to NAV is currently 6.5% — not the great arb opportunity it once was, so I’m wondering how much they will actually invest. (Decrypt)

Antonije Stojilkovic, a Serbian man, along with his coconspirators allegedly defrauded crypto investors out of more than $70 million. He has been extradited to the US. (DoJ press release)

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News: Tether surpasses $26B, Elon Musk pumps BTC, Gregory Pepin’s magic trick

It’s been three years since the last bitcoin bubble. And as I write this newsletter, I can’t help but feel this is getting so tiring. Where are the regulators? Why did they not step in long ago to put an end to so much nonsense in the crypto space? Things just seem to keep getting crazier.

Tether has now surpassed 26 billion tethers—after minting 1.3 billion last week alone. How does an outfit get away with creating $1.3 billion worth of a stablecoin without being subjected to an audit? Without a cease and desist? It’s been more than two years since the NY attorney general started investigating them.

Bitcoin slipped below $30,000 on Wednesday, but then climbed to $37,800 on Friday after Elon Musk added #bitcoin to his Twitter bio, apparently just for the lulz. The move sparked $387 million worth of short liquidations on Binance, Bitfinex, BitMEX, ByBit, Deribit, FTX, HuobiDM and OKEx.

Today Bitcoin is back down to $32,800.

In general, it’s been a week of madness in the markets. Reddit group WallStreetBets has been pushing up lousy stocks like GME and AMC to squeeze the shorts and wreak havoc on certain hedge funds. And to take the joke even further, they even pushed up the price of dogecoin 800% in a 24-hour period. Unsurprisingly, the DOGE pump was fueled mainly by tethers.

Still sore about that Bit Short story?

Are tethers backed? Nobody will give you a straight answer and certainly not Stuart Hoegner, Tether’s general counsel, who spends all day retweeting tweets and trying to convince folks that tethers are worth real money.

He is apparently still upset about the anonymous “Bit Short” article, which I mentioned in my previous newsletter. He keeps saying it’s all FUD, and now claims it’s not only hurting Tether, but all of bitcoin. Of course, the reason the story is gaining popularity is because it is largely true.

“But beyond its false claims about @Tether_to, this post really amounts to an attack on the entire cryptocurrency ecosystem. Bitcoin has a market cap of above US$600B, and the growing number of major institutions investing in bitcoin is a tribute,” he said in a Twitter thread.

Hoegner keeps complaining. (Also, we already know market cap is nonsense when it comes to bitcoin and the reason institutions have been jumping in is mainly because they see an attractive arb opportunity via GBTC.) But the one thing Tether won’t do is come clean and audit its reserves, which would put the whole matter to bed once and for all. Do those reserves consist of cash that Tether got from real clients? Or is Tether simply buying bitcoin with tethers and selling them for USD on OTC desks and banked exchanges?

Instead of giving out real answers, Stuart and Paolo and their friends at Deltec keep trying to obfuscate, distort, and push the blame on “disbelievers” and “salty nocoiners.”

Gregory Pepin’s disappearing act

Tether is a perpetual PR disaster machine. After delivering a disastrous interview with Laura Shin, where he tries to convince listeners Tether is legitimate, but comes off sounding like a used car salesperson, Gregory Pepin, the deputy chief executive officer at Deltec (where Tether does its off-shore banking), suddenly disappeared from Deltec’s website. But after Twitter noticed and started making jokes, he suddenly reappeared again.

Clearly, Deltec was monitoring Twitter and thought, well, maybe removing Pepin from the website wasn’t such a good idea after all? So they put him back. But his brief disappearance brought up questions: Were Pepin’s colleagues upset with him? Did he even consult with his colleagues before he went on the podcast? Surely they would have worked out a plan for what he would say and all come to an agreement on it. Did he forget to follow the plan? 

For the last time, Tether is NOT regulated

Tether keeps telling everyone that it’s regulated. Well, it’s not. No government agency is overseeing Tether and making sure they behave properly, which is why Tether and its sister company Bitfinex have been for years doing whatever they want. They make up the rules of the game as they go along, and put forth whatever nonsense narrative they feel like, simply because they can.

JP Kroning wrote a piece in Coindesk, where he points out that Tether is not regulated. Tether has made numerous claims that it is regulated because it is registered with FinCEN. But “registered” and “regulated” are two different things. “Tether isn’t regulated by FinCEN,” Kroning writes. A registration is not a seal of regulatory approval, and it shouldn’t be advertised as such. “Yet, this is what Deltec and Tether executives seem to be doing on Twitter and in podcasts.”

Ripple responds to SEC; the XRP pump

As I wrote in a recent post, Ripple responded to SEC charges that XRP is a security. They are using the same lame defense that Kik used to try and convince the SEC that kin wasn’t a security. It’s a strategy that is likely to fail miserably, and Ripple will most likely end up settling. It’s just a matter of when.

In the meantime, a group on Telegram called Buy and Hold XRP pumped the price of XRP to its highest number since December. The group’s membership hit Telegram’s 200,000 limit within hours, forcing everyone to head over to a new channel with a similar title. The granddaddy pump is scheduled to start on Feb. 1 at 8:30 EST. (Update: The organized pump turned out to be a miserable failure.)

Is XRP a security? All cryptocurrencies are investment contracts because they pass the Howey test. You can’t buy anything with XRP, BTC, ETH, or any of them. There is virtually no merchant adoption for crypto. For most people, a cryptocurrency is an investment of money in a common enterprise with an expectation of profit to be derived from the efforts of others. But the SEC has accepted the claim of bitcoin fanatics and cultists that Bitcoin is not a security, therefore, putting BTC outside of its jurisdiction.  

Coinbase going public via direct listing

Coinbase says it plans to go public via a direct listing. The U.S. crypto exchange confidentially filed its registration with the SEC in December. Now we know for sure they are not going the traditional IPO route.

In an IPO, a block of new shares are created and sold to institutional investors at a set price. The advantage of an IPO is it gives companies a way to both go public and bring in fresh capital at the same time. If a company doesn’t need fast cash, it can go with a direct listing, in which only existing shares are sold.

Direct listings have become popular of late because it gives companies a way to go public without the bank’s help. Palantir, Asana, Slack, and Spotify all went public without a traditional IPO. (Coinbase blog, Techcrunch)

The big question: What will Coinbase stock be worth once Tether is shut down and the price of BTC collapses?

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Ripple shoots back at SEC claims, takes the Kik route

Crypto firm Ripple has filed its response to U.S. Security and Exchange Commission charges claiming that Ripple and two execs conducted a $1.3 billion illegal security offering. Ripple made the filing public on Friday. And its general counsel was tweeting about it. 

San Francisco-based Ripple, which launched its XRP token in 2012, looks to be taking the ineffective Kik route in effectively arguing, “Hey, people use our token like real money; therefore XRP doesn’t satisfy the Howey test for being a security. And also, we are decentralized, so…”

Canadian messenger app Kik initially said it would fight the SEC tooth and nail after the regulator claimed its kin token was a security. But after a lot of bluff and bluster, Kik ended up settling for $5 million in October.

Stephen Palley, a lawyer in the cryptocurrency space, calls Ripple’s response to the SEC “delusional.”

Ripple’s 93-page letter does sound like the long-winded rant of someone with a loose grip on reality. But keep in mind, you need a certain level of hubris to pull something like Ripple off. According to the SEC, Ripple’s Brad Garlinghouse and Chris Larson personally pocketed $600 million off the sale of XRP.

And it’s not like they didn’t know they might run into problems down the road. Lawyers warned Ripple early on that there was some risk XRP would be considered an investment contract, the SEC said.

‘Ill-conceived legal theory’

Ripple calls the SEC complaint “unprecedented and ill-conceived legal theory.” It goes on to state that XRP functions as a “medium of exchange,” therefore, the SEC has no authority to regulate it as a security.

Similar to Kik, Ripple will likely have a tough time convincing anyone its token works like money. What can you buy with it? XRP is mainly bought by traders in the hopes “number go up.”

Sometimes it goes up, and sometimes it goes down. In 2017, XRP hit an all-time high of $2.7. It currently trades at $0.27, down from $0.68 in November after several regulated exchanges, including Coinbase, suspended trading of XRP after the SEC filed charges in December.

Ripple also argues that in the eight years that XRP has existed, no securities regulator anywhere has claimed XRP is a security. So what?

That is not an effective defense, said Edmund Schuster, a professor of corporate law at the London School of Economics. He wrote on Twitter: “Regulators operate under resource constraints, so they tend to start paying attention once people lose enough money. In new areas, they take time to pick strong cases and then sequence [enforcement] action strategically.”

What about Ethereum?

Ripple also points to the case of Ethereum, which held an initial coin offering for its ether (ETH) token in 2015. ETH is the second most popular cryptocurrency next to Bitcoin. For a long time, XRP held third place, but recently it slipped to number five.

In its current form, ETH has not been deemed a security. In 2018, SEC official Bill Hinman famously stated that although ETH started out as a security, it is now “sufficiently decentralized,” like Bitcoin so that it no longer is one. (Hinman stepped down from the SEC last year.)

Ripple, on the other hand, started off completely centralized. When it initially created its 100 billion fixed supply of XRP, 80 billion went straight to Ripple and the other 20 billion to Ripple execs. To this day, Ripple still holds a vast quantity of XRP.

But Ripple apparently feels that any rule that applies to Ethereum should also apply to Ripple—and that XRP could also be deemed “sufficiently decentralized.” 

Along with the court filing, the company has submitted a Freedom of Information Act request with the SEC asking how the regulator determined ETH evolved from a-security to not-a-security. The FOIA is a law that requires the disclosure of previously unreleased information controlled by the U.S. government upon request.

“We’re simply asking for the rules to be 1. stated clearly 2. applied consistently,” Ripple general counsel Stuart Alderoty said in a Twitter thread.

Assuming they’re sure that the SEC won’t go after Ethereum, this isn’t that unusual, Schuster said. “Lawyers often say ‘but then X is also A’ when they know X≠A to bring the other side to distinguish and thereby narrow down the attack surface. Unlikely to be of value here IMO, but [I] may be wrong.”

You’ll hurt all our users

Ripple also argues in its letter that calling XRP a security will harm everyone who uses the token. (Probably most especially, Garlinghouse and Larson.)

“To require XRP’s registration as a security is to impair its main utility. That utility depends on XRP’s near-instantaneous and seamless settlement in low-cost transactions. Treating XRP as a security, by contrast, would subject thousands of exchanges, market-makers, and other actors in the gigantic virtual currency market to lengthy, complex and costly regulatory requirements never intended to govern virtual currencies.”

Lawyers for Ripple also claim that XRP is a “store of value,” not a share of Ripple’s profits. The “store of value” narrative stems from Bitcoin. In reality, you can’t call anything a store of value if it loses 60% of its value in two months.

At one point in its letter, Ripple asserts that holding massive amounts of XRP does not, in and of itself, qualify the token as a security.

“Many entities own large amounts of commodities and participate heavily in the commodities markets—Exxon holds large quantities of oil, De Beers owns large quantities of diamonds, Bitmain and other Chinese miners own a large percentage of outstanding bitcoin. Such large commodity owners inevitably have interests aligned with some purchasers of the underlying asset. But there is no credible argument that substantial holdings convert those commodities or currencies into securities, nor has any case so held.”

It’s important to point out that Exxon did not create oil out of thin air, nor did De Beers create diamonds out of thin air. XRP, on the other hand, is a number in a database, and Ripple made up 100 billion of them.

The rest of Ripple’s response consists of going through every one of the 400 paragraphs of the SEC’s complaint and offering a denial or some sort of rebuttal to every claim.

I don’t see how Ripple is going to get anywhere fighting the SEC. The case for XRP being a security is a strong one. And as the saying goes, if it walks like a duck, quacks like a duck, looks like a duck, it likely is one.

The best Ripple can do at this point is buy time. But ultimately, it will probably wind up settling with the SEC to avoid going to trial, and for a lot more than Kik’s $5 million.   

News: Tether extends doc deadline, resumes printing; GBTC’s premium melts away; Ken Kurson pardoned

We are three-quarters of the way through the first month of the new year. We have a new president in the Whitehouse, and people are getting vaccinated—a glimmer of hope at the end of a long dark tunnel. I’m doing some volunteer work for VaccinateCA, making calls to pharmacies. (I saw @patio11 tweeting about the project and wanted to contribute.)

Maybe toward the end of 2021, we’ll see more in-person crypto conferences, but for now, it looks like Coindesk’s big money-maker Consensus will be virtual again—only $50 to register compared to $2,500 for the real thing in past years. Currently, bitcoin is trading at around $32,000 after climbing to an all-time high of nearly $42,000 earlier this month, and Tether is closing in on $25 billion worth of tethers.

A reminder that I have a Patreon account. If you find my work useful, informative, entertaining, please become a subscriber for as little as $5 a month. I could certainly use the support.

Tether needs 30 more days, restarts presses

Jan. 15, the big document deadline day for Bitfinex/Tether in the NY AG fraud investigation, came and went. On Tuesday, after a three-day weekend, Tether’s law firm requested a 30-day extension to give them more time to turn over documents. The request was on behalf of all parties, so NYAG was apparently okay with this.

We won’t get another status update until mid-February. Until then, Tether has agreed to maintain the status quo, meaning the injunction is still in effect, and Bitfinex cannot dip into Tether’s reserves. (Court filing)

For now, it’s back to business as usual. After what appeared to be a short reprieve, Tether is once again printing tethers with abandon. (On Jan. 19, Tether printed another 400 million USDT.) They literally can’t stop, won’t stop, because they are too deep into the game.

In lieu of an audit, which would put this whole matter of “Are tethers backed?” to rest, Tether continues to recruit reporters, bank execs, and other gullible parties to profess to the world that tethers are fully backed. Meet the next actor in this ongoing charade: Gregory Pepin, Deltec Bank’s deputy CEO. Deltec is an offshore bank in the Bahamas where Tether has been doing its banking since 2018

“Every tether is backed by a reserve and their reserve is more than what is in circulation,” Pepin told Laura Shin on the Unchained Podcast. “We can see it firsthand, so I can confirm that,” he said, while repeatedly dismissing the anonymous “Bit Short” article,” mentioned in my last newsletter, as FUD.

Tethers are fully backed, but backed with what? Before they were called tethers, realcoins were supported by “one-to-one fully auditable stores of dollars,” according to a July 2014 article in the Independent Investor. “The bearer of these realcoins will have the first right to redeem them for subsequent U.S. currency.”

A reasonable assumption at this juncture is that tethers are backed by loans to third parties, bitcoins, equity in an offshore bank, a pile of shit coins, and increasingly fewer real dollars.

So far, we’ve heard from Stuart Hoegner, Paulo Ardoino, and a reporter from The Block, all talking up Tether lately, while the triad—Phil Potter, J.L. van der Velde, and Giancarlo Devasini—have slid off into the hills. (Granted, Potter claims he stepped down a while back.)

Tether invests in Fleet

Tether has invested $1 million of its customer’s money into an ICO. Game publisher Exordium, the company behind Infinite Fleet—a name perhaps borrowed from a popular saline enema product—has launched a public security token offering. It is unclear if Tether invested USDT or real dollars, but public participants can put in euro, BTC, or USDT, according to a company press release. (Decrypt, Infinite Fleet)

Infinite Fleet is Samson Mow’s blockchain game. Coincidentally, Mow is the chief strategy officer at Blockstream, a company responsible for a huge chunk of Bitcoin’s source code. Bitfinex is also a Blockstream investor. These types of incestuous relationships help explain why so many Bitcoin-related company execs are so fiercely defensive of Tether.

Is Tether partnering with startup exchanges?

There is reason to suspect Tether is partnering with startup exchanges by giving them USDT. Over the past year, all kinds of smaller exchanges have been announcing sizable tether giveaways. Alex Dreyfus, CEO and founder of Chiliz, for instance, said he was preparing for a 100,000 USDT giveaway. He also admitted he is a client of Tether and Deltec Bank.

Do a search for “USDT” and “giveaway” on Twitter and plenty will come up. Kucoin is one example. (Binance, an established Tether customer, is also giving away tethers.)

GBTC’s premium melts away

Here is something that hasn’t gotten enough attention. Grayscale Investments has played a role in fueling the bitcoin bubble. By convincing institutional investors they could buy into GBTC at net asset value and sell on secondary markets at a 20% to 30% premium after a six-month lock-up, it has created a self-reinforcing market dynamic.

Accredited investors looking to take advantage of an arbitrage opportunity, bought into GBTC, pushing up GBTC assets under management, which was then used to promote the idea that institutional investors, dominated by hedge funds, were scooping up bitcoin products. All this, in turn, lured more retail suckers into the market. “Look, all the big companies are rushing in! This must be a safe bet!”

But now that premium has dried up as fewer retailers are showing an interest in bitcoin, given the price has dropped by $10,000 in recent weeks. GBTC was recently trading at just 2.8% over NAV, leaving accredited investors stuck with GBTC in an illiquid market. (Bloomberg, Trolly’s thread)

Meanwhile, it looks like Barry Silbert has left the chatroom. He stepped down as CEO two weeks ago.

Just like that, Kurson off the hook

Surprise, surprise. Former Ripple board member Ken Kurson was one of the 74 people Donald Trump pardoned at the last minute on Jan. 19. Kurson is also the co-founder of crypto rag Modern Consensus, where I worked for an intolerable six weeks. It’s just unbelievable this guy, who was criminally charged with cyberstalking, got a pardon. (Full list of pardons, NBC)

While many of Trump’s pardons went to political pals—including Steve Bannon, another pro-bitcoin guy—Kurson’s was an obvious favor to Jared Kushner, whose father, Charles, also received a pardon. Kurson’s pardon stands out, in part, because of the risk it poses to some of the women he stalked and harassed. (The Daily Beast, paywalled) 

“Suffice it to say, what he was actually arrested for was part of an ongoing pattern of abuse, revenge, & sociopathy,” Deborah Copaken, a contributing writer at the Atlantic, said on Twitter. She worked for Kurson in the past, wrote about the experience, and helped the FBI with their investigation. “All jokes aside, I am worried about my own safety. @FBI – How do you protect those who helped you but who are now totally exposed because of a presidential pardon?”

Other newsworthy bits

“How can $24 billion worth of tethers move a $650 billion bitcoin market cap?” The is an insufferably dumb question, and I explain why in a recent blog post. (My Blog)

David Gerard wrote about the history of wildcat banks and early “stablecoins” with excerpts from an 1839 Michigan Bank Commissioner report. (Gerard’s blog)

Craig Wright is at it again. He is now claiming the Bitcoin white paper and Bitcoin.com are his. He is trying to force Bitcoin.org to take down the white paper, which they now refuse to do. (Coindesk)

Balaji Srinivasan outdid himself on Twitter when he compared bitcoin, one of the world’s biggest energy hogs, to a battery, setting off the “bitcoin is a battery” meme.

Stephen Diehl, a programmer, compares crypto to a “giant smoldering Chernobyl sitting at the heart of Silicon Valley which a lot of investors would prefer you remain quiet about.” His thread went viral.

Gary Gensler is officially named for SEC chair. (NYT) We can expect greater crypto oversight from him. (Bloomberg)

Meanwhile, Allison Herren Lee was sworn in as SEC acting chair until Gensler takes over. (SEC, Decrypt)

MicroStrategy bought another 314 bitcoins for $10 million cash. Saylor’s company now holds 70,784 bitcoins acquired at an aggregate $1.135 billion. (SEC Filing, Coindesk)

Circle has surpassed $5 billion worth of its USDC stablecoin. They produce regular monthly attestations. But as Frances Coppola points out, if Circle/Centre were a bank, they would have to produce actual audited accounts.

Updated on Jan 24 with more info on Kurson’s pardon and a quote from Deborah Copaken. Also added the bit about Craig Wright.

‘How can $24B in tethers move a $650B Bitcoin market cap?’ and other mathematically illiterate questions

A question, or some version of it, that keeps popping up on social media lately is, “How can $24 billion worth of tethers move a $650 billion bitcoin market cap?”

This is “a blitheringly stupid question on multiple levels, starting with basic arithmetic,” bitcoin hater David Gerard said on Twitter. “It’s also a perennial dumb question.”

The question is being put forth by bitcoiners in an attempt to put people’s minds at ease about Tether. The thesis is that if tethers were to vanish—something that could happen if the U.S. Department of Justice were to give Tether the Liberty Reserve treatment—it would have little impact on bitcoin’s price, so you should stop worrying and keep buying bitcoin.

Someone posed the query recently on r/buttcoin. I am going to take a stab at sensibly answering the question in three parts starting with, What is market cap?

1. Market cap is meaningless nonsense

Market cap is a nonsensical number when it comes to bitcoin. It’s calculated by multiplying the last transaction price of bitcoin by the number of bitcoins in circulation—currently $35,000 x 18.6 million.

That doesn’t mean that people bought every bitcoin in existence for that price. The vast majority of people who own bitcoin bought it at a far lower price than what it is today. It also doesn’t mean that if everyone suddenly decided to sell all of their bitcoins, each bitcoin would bring them $35,000.

In fact, it doesn’t mean that bitcoin has any value at all other than the hope that some bigger dummy will stroll along who is willing to pay more for it than you did. Bitcoiners like to imagine that bitcoins are valuable because there will only ever be 21 million of them. That makes them scarce.

Beanie Babies were scarce in the 90s, too, with some fetching upwards thousands of dollars on eBay. But by the end of the Beanie Baby bubble, no amount of scarcity could make them desirable. They became worthless

Market cap is just another way to make something that is worthless appear valuable.

Market cap came out of the traditional finance world. And then websites like CoinMarketCap came along and began applying the term to bitcoin. In the stock market, market capitalization refers to the total value of a company’s share of stock. But while companies have an intrinsic value, bitcoin does not. There is nothing behind bitcoin. It’s not a company. It is not a thing. It is simply a number in a database.

Here is an example of how silly market cap is when applied to crypto. Say I create 1 million CastorCoins and start listing them on some little-known offshore exchange for $1. Suddenly CastorCoin has a market cap of $1 million dollars. Does that mean I have a million dollars? No, it does not. 

Or, as u/Ifinallycracked puts it on r/buttcoin: “If a bog roll contains 100 sheets and I manage to sell one sheet for a dollar, that doesn’t make it a $100 bog roll. Apply same logic to Bitscoin market cap. Success.”

Once you grasp that the bitcoin market cap does not mean that people have spent $650 billion on bitcoin, $24 billion worth of tethers—which represents 3% of the total bitcoin market cap—becomes a lot more significant.

2. Price is determined at the margins

The price of bitcoin is determined at the margins. If you want to drive up the price of bitcoin, you don’t have to buy every single bitcoin at the current price level. You simply have to scoop up the ones that are for sale. 

Money flowing into bitcoin is what keeps the price afloat. If demand increases and people are willing to pay more for bitcoin, that pushes the price up. The more dollars people throw at it, the higher BTC will go. And it doesn’t matter if you are buying bitcoin with real dollars on a banked exchange like Coinbase—or fake dollars on an offshore exchange like Binance, Huobi, or Bitfinex.

Image: CoinCompare

Right now, the latter is more prevalent—there are far more tethers flowing into bitcoin than actual dollars. In fact, 55% of all bitcoin is currently traded against tethers while only about 15% trade against real dollars, according to CoinCompare.

This is what makes the current bitcoin bubble different than the last. In 2017, when the price of bitcoin ran up to nearly $20,000, there were a lot more real dollars in the system and only 1.5 billion tethers in circulation. Now, it’s mostly tethers pushing up the price of BTC.

3. Bitcoin is illiquid

Bitcoin is relatively illiquid. According to data from Glassnodes, 78% of all bitcoin are not moving. In other words, of the 18.6 million bitcoins currently in existence, only about 4.2 million are in constant circulation.

At least 3 million bitcoin are lost because people like this guy can’t find their keys. (Just because you are the former CTO of Ripple, that doesn’t make you clever when it comes to safekeeping bitcoin.) And there are still plenty of folks holding on to their BTC in the hopes it will go stratospheric. Strong hands!

As a result, it doesn’t take a large buy or sell request to move the price of bitcoin. Printing billions of dollars out of thin air and using it to put supply-side pressure on a market as thin as bitcoin forces the prices up. Conversely, if enough people were to get panicky and rush to sell their bitcoin—weak hands!—the results could be catastrophic. Literally, the entire market cap can go to zero in a moment.

The whole point of Tether is to push up the price of bitcoin and other cryptocurrencies, and then move those assets to OTC desks and banked exchanges, where they can be turned into fiat. As @Baskee puts it: “Tether is a ladle; Bitcoin and USD are ashes and bullet casings, respectively.”

You can support my work by subscribing to my 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.  

News: Tether’s offshore Deltec Bank, the Bit Short, NYAG’s document deadline, Tether truthers compare skeptics to QAnon

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)

Larry Cermak and Bennett Tomlin debate Tether’s solvency—transcript with notes

Richard Yan of The Blockchain Debate podcast held a debate between The Block’s Larry Cermak and Bennett Tomlin, a data scientist and blogger with an interest in fraud. Patrick McKenzie, a Tokyo-based entrepreneur, who wrote one of the best articles describing Tether to date, joined as a co-host. 

The motion on the debate was, “Is Tether acting in good faith?” Tomlin argued that no, they are not. While Cermak argued for the motion, giving Tether a generous benefit of the doubt.

Cermak is a bit of a puzzle to nocoiners these days. He has recently taken to defending Tether, stating that he believes the BVI-registered stablecoin issuer, which has so far issued $24 billion in tethers, is fully backed. In the past, he took a hard stance against Tether and its sister company, crypto exchange Bitfinex, causing them quite a bit of trouble. In October 2018, for instance, he disclosed in a tweet that Bitfinex was banking with HSBC under a shell. Soon after, the feds froze that bank account. The shell, as it turned out, was registered to Arizona businessman Reginald Fowler, who was indicted the following year on bank fraud charges.

Cermak has also admitted to owning crypto and making money in DeFi markets. He recently bragged on Twitter about gifting his fiancee $1,000 in crypto to gamble in the futures markets. Tomlin, who is working on a book on Tether, told me he does not currently own any meaningful amount of crypto. (At one point, he owned about $500 worth of bitcoin and ether.) “I want to stay as unbiased as possible,” he said.

Tomlin does a good job presenting facts in the debate. He clearly has read through all of the related court documents, and knows what’s in them. Whereas, Cermak tends to rely on “somebody told me this” type of information. His sources appear to be Tether frontman Paolo Ardoino and large Tether customers, such as OTC desks, exchanges, and high-frequency trading firms, who stand to make big profits in the crypto space.

What follows is the transcript with my annotations. I’ve removed filler words (such as uh, basically, you know, right, so, etc.). Brackets indicate words I’ve inserted for clarity. I’ve added links where appropriate and edited out most of the intro. Overall, there’s lots of good info in here, and I recommend reading the full transcript. 

Richard: Bennett, please go ahead and tell us how Tether has been acting in bad faith all this time since they started in 2014.

Bennett: The easiest way to go about this is to look at a specific example that will show many of the patterns that have persisted over this period. Bitfinex gave over $1 billion to payment processor Crypto Capital Corp without a contract or an agreement. This payment processor was not a registered money servicing business or a licensed money transmitter. This payment processor lied to the banks about what the accounts would be used for. And when the principal for this payment processor was arrested, he had in his possession, counterfeit U.S. currency and fake bond certificates

(The “principal” Tomlin is referring to is Reginald Fowler, who allegedly served as Crypto Capital’s money mule, setting up bank accounts under shell companies and moving money for Bitfinex. It is worth mentioning here that Tether and Bitfinex have the same operators: CSO Phil Potter, CEO Jan Ludovicus van der Velde, and CFO Giancarlo Devasini, who are barely heard from these days. Nocoiners refer to them as the triad.)

When this payment processor stopped responding to Giancarlo and Bitfinex’s requests to withdraw funds and the DigFinex executives believed that these funds were potentially lost, Bitfinex publicly insisted that withdrawals were working fine and there were no problems.

(DigFinex is the parent company of Bitfinex and Tether. Here is an org chart for reference. The “lost” funds included $850 million, some of it tied up in a network of 60 bank accounts set up by Fowler and some of it seized by the Polish Ministry of Justice from Crypto Capital’s Polish subsidiary, Crypto Sp. z. oo.)

However, privately, in order to combat this effective insolvency of Bitfinex, the executives of Bitfinex and Tether orchestrated a swap of multiple hundreds of millions of dollars from Tether’s bank accounts to Bitfinex in exchange for a ledger notation saying that tether now possessed the inaccessible funds at Crypto Capital, effectively making Tether insolvent.

This fact was not disclosed and Tether’s homepage and terms and conditions at this point still claimed every tether was fully backed by the equivalent currency, despite this effective insolvency. These are not the actions of good actors in the cryptocurrency space.

(The NY attorney general has been investigating Tether and Bitfinex since late 2018 for violating the Martin Act. Most of the details of what Tomlin is referring to can be found in a court filing.)

Richard: Thanks Bennett. That was very thorough. And I would say you’re probably one of our first guests that have actually prepared a statement and read from it as if this was a hearing or something. But anyway, thank you, Bennett. I definitely don’t think you are in the minority there when you accuse Tether of being in bad faith. So I’d love to hear what Larry has to say next. Larry, please go ahead with your opening statement.

Larry: First of all, Bennett’s statement was great. There’s a lot of merit to it. That being said, Tether has seen tremendous growth this year. It’s important in several different products. It’s incredibly important for the current market structure. Basically all the futures are collateralized by Tether. Now the majority of volume is coming from tether pairs, and we’ve seen legitimate growth from Tether this year. Some people argued that growth is pumped by Tether itself, where you can see similar growth in USDC and competing stablecoins. 

(USDC is a US regulated stablecoin that has also seen a lot of growth, but that growth is dwarfed by Tether, which since March 2020, when BTC plunged to below $5,000, has issued 20 billion tethers.)

There is, at least in my experience, overwhelming evidence that there is money going into Tether and there’s money being redeemed by several different parties. These parties are usually OTC desks, market-makers, and exchanges. The reason why there isn’t much public evidence of this is because these parties tend to be more on a private end and they don’t have much of a reason to actually tell people that they’re redeeming for hundreds of millions of dollars.

I do think that Tether used to act questionably and Bennett highlighted that really well. I do think that they’ve changed significantly in the past year and a half. I’ve been watching Tether for the past four years now. And the behavior has changed a lot. 

They are much more transparent publicly. They are much more transparent in their goals, how they operate. And I do think that right now, my belief is that they are fully backed. And my belief is that they are not acting in bad faith. Quite the opposite. I think they are super important to the crypto space. And I agreed that it’s important to consider the possibility that Tether might at some point stop existing. But I don’t think it’s fair to say that they’ve been acting in bad faith, especially in the last couple of years.

(Tether has not been transparent at all. In a recent podcast, Tether frontmen Poalo Ardoino and Stuart Hoegner refused to say what assets were backing tethers. However, one thing they were clear on—it wasn’t all cash.)

Patrick: If I can jump in here. Assuming, arguendo, that Tether is fully backed, Tether has said a few definitions over the years as to what constitutes backing. Under which definition do we believe that they are fully backed? What is the collateral? Where is it?

Larry: That’s a good question. I think that they are fully backed when it comes to dollars on bank accounts. Tether has the mandate to invest in super low-risk yielding opportunities. So as far as I know, the vast majority is in US dollars on their bank accounts and they don’t just have one, it’s possible. Some of it is in some bonds or really low-yield investment vehicles. I don’t believe that any of that backing is in cryptocurrencies or some kind of other more risky vehicle.

(In his recent podcast, Hoegner counted Tether’s remaining $550 million loan to Bitfinex as an asset backing Tether. In an April 2019 affidavit, Hoegner said the 2.1 billion tethers in circulation at the time were only 74% backed. Tether/Bitfinex have never said anywhere publicly that they’ve invested in bonds. Also, Tether’s terms of service says tethers are backed by “traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”)

Richard: And when we say bank accounts, are those bank accounts at Deltec Bank in the Bahamas or are those bank accounts at Deltec Bank somewhere else? Are there banks that the world doesn’t know [about]?

Larry: Absolutely. As far as I know. The last time I talked to Paolo was maybe a month ago when we were working on a stablecoin report. I asked him this question as well. He did say that the majority of funds are at Deltec and there are also some other banks that they’re working with, but only for smaller amounts. I assume that’s mostly just to make the redemptions and the transfers easier for customers. But I do think that the majority of the funds is at Deltec in The Bahamas.

Bennett: If I can ask a question, because I’ve been curious about that too, just as an outside observer, as to where the funds might be held.

The Central Bank of the Bahamas publishes a quarterly statistical digest that looks at the total assets that all the banks in the Bahamas are holding. And if you look at it, with the most recent one being released in November, you do not see any increase in assets held at Bahamian banks over the last year. Either there must be comparable outflows from somewhere else to match any inflows from tether, or there’s some reason Deltec Bank would not be counted among those statistics. Do you have any insight into why that would be?

Larry: I don’t. I really don’t know. I’ve looked into those documents as well. I’m not sure if it even encompasses all the money that is in the Bahamian banking system. I’m not sure why that is honestly.

Basically the reason why I believe that Tether is fully backed is not just because I talked to Paolo and they feed me this marketing stuff. It’s because I talked to a lot of different actors in the crypto space, those being massive OTC desks, large traders, exchanges directly, and basically anyone who deals with Tether directly, and they have redeemed tens of millions of dollars. I mean, I’ve seen proof of that.

I trust these people, and I’ve talked to so many of them at this point that it’s beyond reasonable doubt that Tether is operating as it should when it comes to redeeming money. The frequent argument that I hear from people on the other side is, why isn’t the supply decreasing at all? Basically, why is it only going up?

The simple answer is that the demand is just so much higher, and they don’t do these redemptions every week or something. They have a system, where if more money is coming in then is coming out, they obviously don’t reduce the supply. And this happens in fairly long periods of time. So that’s why it’s not happening. 

And if what you guys are conferring is that if Tether was not back fully or only had a really small amount of the backing, they would not be able to serve these redemptions. And basically without any issues, these things are happening quickly. And to the point where a lot of these large traders or institutional customers have started their own bank accounts in Deltec, just so they can make the process more efficient. 

(Paolo and Stu confirmed in their podcast that several of their customers also bank at Deltec. Yet, we have no idea what type of arrangement Tether has with its large customers, whether Tether is in fact loaning USDT to them and counting those loans as backing, or what the deal is.)

And so that’s the basis for my argument that Tether is backed. And then also just talking to Paolo and having conversations with people that are close to the business. At this point, I would be shocked to find out that it was less than 98% or 99% backed.

Bennett: I have a couple of things I want to add to that. The initial document released in the New York attorney general investigation said, at that point, the largest redemption was $24.2 million. So Do you think that Tether’s documents that they were handing over before the ex-parte order were incomplete, that the average size of the redemption has gone up significantly in the intervening two years? What would explain that dynamic? 

Larry: Oh, absolutely. I think it has gone up way significantly in the last two years, to the point where now a hundred-plus million dollar redemptions are completely normal. 

That’s because the space has just grown quite a lot. Like I said, the dynamic with Tether has changed significantly. Bitcoin used to be the main reserve currency when it comes to crypto, both for futures and derivatives. Now it’s tether and the same is happening for the pairs. It used to be all bitcoin, now it is tether. 

So Tether is much more important now. The supply is much higher and these parties are using it unquestionably because if they want to get access to futures, and these features are extremely liquid, they do have to have access to tethers. So these redemptions are definitely increasing in size. There’s no doubt about that. 

Also, one thing I would like to point out is that you have to understand that Tether obviously doesn’t want any of their information to be public. And that is not only because they are covering something shady, which could be the case, but it’s also because they just don’t want their own business information to be out there for everyone like you and me. So that’s my basic response to that. I do think that the redemptions are now significantly larger. That still means that they’re not acting in bad faith.

Bennett: There’s one other point I wanted to make there before we move on. You said that you were confident tethers were fully backed because they’ve been able to service these large redemptions. But you also said that there are more deposits actively coming then going out, which would mean to service these redemptions, until there’s a whole group of them, they could in theory, service them with a small amount in reserve and the incoming deposits, correct?

Larry: Yes. It’s hard to estimate how much they would need to have to justify this condition. So I agree with you. Again, I guess the main question here is: What do you think they’re doing with the money? Do you think they’re just taking it for themselves or what do you think they’re doing with it?

Bennett: We know from the New York attorney general investigation, that Tether executives do receive large, aperiodic payments from comingled client and corporate funds out of the Tether account. That was discussed when they were arguing for the initial injunction against them, with the limits on related party transactions. So I do think there is the possibility that money has been exfiltrated by Tether executives.

Their lawyers also argued that their mandate is not just to invest in easy yield or things like that, but that Tether has the ability per Tether themselves to keep zero in reserves and invest anywhere they see fit, including—and the lawyer made very clear that they had done this—in bitcoin and crypto assets. So it is conceivable to me that a meaningful portion of their backing is currently invested in extraordinarily volatile assets.

Larry: I think that’s definitely not true. And again, I’ve had conversations with Tether executives and talked to different people. And as far as I can tell, that’s not true. They’re not investing in bitcoin and volatile assets. They are investing in low-yielding opportunities. 

(It is interesting Cermak would say this, considering he literally wrote an article for The Block in March 2019 with the headline “Tether admits in court to investing some of its reserves in bitcoin.”)

And to your point that some of the money used to go out to some of the executives. I do agree that’s a terrible look. I think it can mostly be explained by the fact that they just had so much trouble banking themselves that they used their personal bank accounts, which is a terrible practice, I agree. I don’t necessarily think that they’re acting in bad faith, but they acted in a careless way. I don’t think at this point that they’re just taking money out of it for their own personal gain. And that’s mainly because Tether now has more than $20 billion [worth of tethers] in supply.

Even if you say that they’re yielding about maybe 0.05% or around 0.01%, that’s a lot of money and the business is really treating them well in that regard. They’ve grown significantly this year and they’re generating a lot of money from it. And that’s while Bitfinex itself, as an exchange, has struggled this year. 

Now it’s picking up again. Early this year and late last year, the volumes really dropped significantly. And that again is another argument against people that think that Bitfinex is just faking value. They’re just creating a lot of Tether, and then the volumes are going up. 

That’s definitely not the case. And the clear evidence against that is because in 2017 and 2016, Bitfinex was one of the most important exchanges when it comes to spot. Now it’s not even in the top five and the volume has dropped significantly compared to other exchanges. So I don’t agree with that fully.

Patrick: It is extremely curious that their lawyers wouldn’t bring up that we only invest in low volatility as zero-custodial-risk assets when asked that in the course of investigation as to whether they were dissipating client funds and instead chose to tell the court that they had the right to invest it in absolutely anything they wanted, including cryptocurrencies. And we’re doing that. These seem difficult to square for me.

Larry: I was the one that read the document first. And I was the one that led the coverage on that first. So I know what the document said. It wasn’t as clear. It was a little bit more ambiguous. 

They’ve said they’ve previously invested on small amounts of cryptocurrencies. Again, I don’t believe that to be a significant amount. And if it was, I still believe that it was a very small amount of the total. And again, it’s hard to explain some of these things because that’s just by talking to people and understanding how Tether works in the background. 

But you keep coming back to the point that they basically can do anything, and that the lawyers don’t want to disclose what they don’t want to tell people. And that to me makes a lot of sense, right? Tether can do almost anything. It’s in their best interest not to disclose the information because they feel like the US people and the United States overall, they don’t have any jurisdiction. Tether claims to not function there. So I would say that kind of explains that.

Patrick: The jurisdictional point is an interesting one for me, because I’m not super familiar with banking regulations in the Bahamas, but if hypothetically Tether is holding large amounts of dollars at Deltec and not in the Bahamas, then the natural thing for me to assume is that they’re holding it in some sort of correspondent banking relationship elsewhere. And so it would matter a bit whether those jurisdictions would care whether the US believes that Tether is subject to a US court order.

So do we actually know what those jurisdictions are? Are they ones like, without loss of generality, Russia, which don’t care about us court orders? Or are they ones like Japan or the United Kingdom, which would happily enforce one?

Larry: I don’t think we know the details. Again, what do you think would have to happen for the money to be frozen by the US authorities?

Patrick:  A polite request to? 

(Banks don’t like dealing with crypto money, so if an onshore bank knew that it was holding Tether money, they would likely freeze the accounts. This is exactly what happened with CIBC and QuadrigaCX in Canada. And it’s why Wells Fargo cut Bitfinex off in early 2017. Bitfinex tried to sue Wells Fargo for it, but later dropped the suit.)

Larry:  Why do you think that would happen? There will have to be significant evidence of some sort of fraud or the money not being used in the right way. And we haven’t seen that yet.

(The NYAG is literally investigating Tether and Bitfinex for fraud at this moment. They have already uncovered evidence, in the form of Bitfinex hiding from its customers the fact that it lost access to $850 million in 2018, leaving the exchange insolvent.)

Bennett: I remember a case where an analyst published some evidence that Bitfinex was using global trade solutions at HSBC. And shortly after that, their accounts got shut down and they had to switch to new banking.

Larry: Oh, absolutely. And I used to be in the same boat as you are. What I realized later is that they’re doing this because they are having so much trouble finding a bank. And that’s why when they find a banking relationship that works for them, they tend to stick to it. And Deltec seems to be the one that has stuck. 

I one hundred percent agree with you. It is really weird when you see they open a new bank account, and then all of a sudden, after everyone finds out, it gets shut down. And that’s because no bank really wants to associate themselves with Tether because they’re risking way more than they would be gaining out of it. That’s just a natural response. 

(Banks have to comply with strict KYC/AML rules. If they touch dirty money, they face huge fines, and crypto money is often dirty, so naturally, they don’t want to do business with Tether, for that reason.)

And also because Tether—and again, I don’t think this is necessarily a bad faith, it could come across as that—but when they start these bank accounts, it’s because they basically are forced to. I want to make sure that everyone who listens understands my position isn’t to defend Tether. They’ve made several major mistakes before, but I do think that they’re super important to the space. And I do think that they’re acting well now. But they were in a difficult position because no one would give them bank accounts. So at that point, you really have no other choice almost.

Patrick: That’s the answer to my question on what the United States government would likely take issue with. If one assumes, arguendo, that tether has not been entirely candid with what it said to prior banking relationships, and then gotten frozen out of their accounts. That record of being less than entirely candid might not just go away because they got a new bank that was willing to say, politely, have a broader risk tolerance, not that a lawyer couldn’t speculate, but that would be a thing that I would not want in my history if I wanted a stable US dollar banking in the future.

Larry: I think that the response to that from Tether would be that they have not really been involved with a lot of the US customers directly. And the US court system doesn’t really have much of a jurisdiction over what they’re doing. I want to be clear again, I do think that something like this is possible. And I’ve warned people about it. Tether at this point is massively important to the crypto space. And if something like a black Swan event were to happen, it’s important to be ready and to be prepared to do something about it, and make sure that you don’t get completely screwed over if something like this happens. I don’t think it’s likely at this point.

(Cermak is on one hand defending Tether, and on the other, he is telling traders “to be ready” in the event something catastrophic happens.)

Richard: Can we take the debate in a different direction? Let’s talk about the fact that institutions do business with Tether. What is the nature of the business relationship between these businesses and Tether? Why do they not do business with USDC on a similar scale, for example. And when they obtain their USDTs, given the fact that Tether had this history of not being fully backed to put it politely, what kind of discount, if any, do the hedge funds or OTC desks get when they get the tethers?

Larry: They get no discount whatsoever. And that was the one point I was going to bring up as well before. If you guys believe that they’re not fully backed and if you believe that they might be acting in bad faith, why do you think there is no discount? And why do you think there is no premium? The discount only happened twice, if I recall correctly. And it was always about 10% maximum, then went back quickly. 

So why do you think that there is no premium, there is no discount. Why do you think it’s trading at par? It’s actually less volatile than USDC, for example, or at least comparable.

Bennett: Generally, if you look at the USDT/USD markets, it trades pretty even at 1:1. And there hasn’t been a major premium since, say, the end of 2018, like comparing tether to spot exchanges. And just speaking more broadly, the OTC quotes I’ve been able to see for tether do generally have it priced right around a dollar. 

I don’t think there’s any major discount in the market for tether like that. And even accepting that tether is not fully backed, I don’t necessarily think there would be a discount, so long as you believe that it’s redeemable or that, at that moment, you’ve got more need for it than you would for the comparable dollar. And so I still think even a potentially fractional reserve tether could still trade one-to-one without that being evidence of it.

Larry: I don’t agree with that myself. I agree with Bennett saying that if it’s only like 85% backed, 90% backed, they would still trade at 1:1. It’s only trading at 1:1 because there’s a future expectation that it will be back 1:1 at some point in the future. Not just because you can redeem it.

These large traders, again, they’re not idiots. They have to hedge their risks. And if they do think that at some point in the future, there might be a background on tether and they won’t be able to redeem all their money, they’re not going to even deal with it. So I don’t agree that. 

Richard: And what about the earlier part of my question? Why don’t these OTC desks do business with USDC, which also has experienced dramatic growth?

Larry: To your earlier point, and then maybe then Bennett can jump in. The biggest reason is because Tether has been the first and it has by far the biggest network effects. 

I brought this up earlier already, but the majority of futures is now collateralized by tether. And that wasn’t the case early this year before BitMEX really started to be affected. And now effectively it’s not even important anymore. BitMEX was all collateralized by bitcoin. And it was by far the largest futures exchange, the most important one by far. 

(Four BitMEX operators were indicted in October for Bank Secrecy Act violations. One was arrested, three remain at large.)

It’s not anymore. Now you have Binance, you have Huobi, you have OKex, you have Deribit, most of them are collateralized by USDT. So that dynamic itself, that shift, has already happened. And those network effects are why these OTC desks and these large institutional players have to get exposure to Tether because the products that they’re available on only function in tether. There are no futures that are collateralized by USDC.

Really the only alternative you have is bitcoin, but then you’re not trading the most liquid futures. The same thing can be said about crypto exchanges. The role of Binance has also grown so much this year, and that’s actually another thing I’m a little bit concerned about. Tether and Binance are by far the two most important companies right now in the space. And if something happens to either of them, we are definitely in trouble. 

I want to make sure that people understand that. And those risks need to be understood and prepared for, if they do happen at some point, even if it’s a low chance of happening. To answer your question, it’s because the market structure just demands tethers. And it’s mostly because of the network effects.

Patrick: Are we seeing some fragmentation of the network where half of the network exists, or some percentage of the network exists in, let’s say the United States and tightly aligned countries and some percentage of the network exists everywhere else. Because it would seem to me, if you want futures exposure, you can get futures exposure at the Chicago Mercantile Exchange at the price of having to be credible to the CME and deal exclusively in regulated dollars. And what I hear you saying is that you would want futures exposure at an exchange that is more flexible with respect to how one funds that futures exposure. Does this portend well for those networks continuing?

Larry: The biggest reason why these funds and these clients are interested in trading on these venues is because they are more liquid. And that’s because, like you said, they’re a little bit more lenient when it comes to which clients they take. It’s hard for someone in China to trade on CME. It’s not hard if they want to trade on Binance or Huobi. 

And naturally, the products with the most liquidity, they end up attracting the most liquidity, and it compounds the debt. CME is not a perfect product. It’s cash settled. But for example, there are pretty high limits of how much you need to get exposure to. And a lot of these exchanges, like Binance or Huobi, they also have a ton of retail clients. And needless to say, some of these funds do want to trade against those people because they’re less sophisticated and it’s easier to market make and all that. CME right now is not a product that is really an alternative to something like Binance or Houbi because you don’t have the same possibilities.

Bennett: I agree almost completely with Larry’s last two answers. Tether’s got the largest market cap and the most adoption because it was the earliest and it is the most used [stablecoin]. It’s been integrated at the most exchanges, it’s used as collateral for the most things. And I do think there is an appeal for a lot of people that Tether is less willing to serve at the beck and call of US regulators. So you see adoption for tether out of China and out of Russia, but even for online gambling and stuff in the Chinese mainland. And the kind of people who would be interested in tether there would not be probably interested in USDC because they would expect there to be a larger risk of funds being frozen or inaccessible, in the sense that Circle would freeze the tokens or block the redemption more so than Tether would.

Larry: I absolutely agree with that. And USDT is viewed by some people, like Bennett said, as less friendly to US regulators and the US overall jurisdiction. The influence of the United States is viewed as much smaller than USDC or Paxos or Gemini dollar. 

Also, one thing I want to point out and I’m sure Bennett will agree as well. The first massive growth of tether initially, end of 2017. We have to remember the reason was that Chinese exchange has got cut off from the fiat systems. And a lot of that money ended up flowing into tether. First couple of billion, or the majority of the money early on, has come from the Chinese exchanges. What that means is that because of these early network effects, there are massive OTC markets in China that use USDT and China was super important early on in crypto, and it still is and those network effects are at this point super hard to destroy. 

And so I do think that when it comes to trading, unless there is some regulatory intervention, Tether will remain the stable candidate it’s used by far the most.

(China told all of its crypto exchanges to shut down in 2017. After that, the only way for traders to on-ramp from the yuan into the crypto world has been via OTC exchanges, which enable peer-to-peer trading by connecting buyers and sellers.)

Richard: Let’s take an audience question. So this is from Nevine Mishra [spelling ?], and this is a question for everyone here. What would be the ratio of bad transactions in Tether? So the bad here basically refers to money laundering, and Tether is basically on-ramp outside of the USD payment system. Just not sure if tether has necessarily instituted the mechanisms to do the proper KYC/AML and so forth. Even though recently they did put out a tweet affirming that they do so. So can you guys speak to basically the possibility and the extent to which these transactions are of the money-laundering nature facilitated by tether?

Larry: I tend to start and then maybe Bennett can answer after me. I do think because of the dynamics that we talked about, it’s by far the most used by trading, it’s also viewed as the most lenient when it comes to just allowing stuff to happen. 

It does end up being used for nefarious activities and activities that are illegal. But it is my belief that Tether’s KYC/AML system internally is as advanced as USDC, as advanced as Paxos. I do think that the compliance is on always the same level, if not the same model.

Their compliance team is great. You can find all the people associated with Tether and the ones that they work on compliance. Also, it’s important to realize that they have frozen a lot of money this year, and a lot of transactions. By far more than USDC, far more than Paxos, and far more than any regulated stablecoin.

(I am not aware of any evidence that points to Tether’s superior KYC/AML system. As noted in the Ardoino and Hoegner podcast, Tether says it does check the identities of its customers, but what about the thousands of other users that tether trickles down to? My theory is that Tether’s large customers are akin to Liberty Reserve exchangers, acquiring tethers in bulk and distributing them in smaller quantities to individuals who require anonymity in their payments.)

Richard: Can you elaborate on that point? The freezing.

Larry: Because it’s more likely to be associated with these activities. And when tether finds out about it, especially this year, they have been really ruthless. When they think something weird is going on, they block it. Some people do believe that they’re more lenient, but actually they do end up blocking a lot. If there is any suspicion that it’s involved in some money laundering activity, they freeze it immediately. 

That has happened a lot this year, and it’s not really happening with USDC and Paxos. The best thing about stablecoins on Ethereum is that all of this data is public. You guys can, after this podcast, go and find the number of blocked addresses on USDC and Paxos, and you’ll see it’s much, much lower than Tether. So the argument that they are less active, it’s like weird that way. But yeah.

Bennet: Larry, you mentioned something that’s one of my biggest frustrations with Tether, and that is that they are at their essence, a finance company that is supposed to be keeping track of all these records of tethers issued, assets in their bank accounts, and all of that. And on their transparency page, on their website, for years, they’ve listed for Omni, their quarantined USDT, the stuff that was frozen, either as part of the initial hard fork after the hack or later after the Omni devs added the freezing ability to Omni. And that number, the number of quarantined USDT they have in their transparency page does not match with what happens if you add up what you can find in the Omni blockchain. And that’s been true for years. So talking about ostensibly, a company where this type of record is the most important thing they keep, and it’s been publicly wrong for years. And it took me like 45 minutes of scanning the blockchain to figure that out and Tether hasn’t done that.

Larry: Again, I do think that Tether has been extremely negligent early on, and to some extent still is, in small ways. So I do agree with that. It is behavior that doesn’t come across. 

The contra agreement to that is that Tether simply doesn’t care about you and me. That’s the thing that Tether skeptics don’t realize. They just don’t care about what’s viewed publicly. They care about one thing, and that’s if they can find counterparties to actually trust them enough, to send them real money and then work with them to redeem their money as well. 

One thing that we didn’t touch on yet, and it’s really important for this to be known, is that Tether functions in a B2B way. It only works with large clients, like exchanges, like OTC desks, like traders, and it only redeems [tethers] with them. 

Whenever there is an argument on Twitter [where someone says] I tried to redeem tether with them directly, it is just not possible. And I agree that early on, [Tether] stated that it was possible—and that’s a major mistake—but they don’t function that way. They don’t care about Tether skeptics at this point. They only care if the tether peg actually remains the same, and they only care if they can find more clients to put in more money and earn more yield. That’s their point of view. And they don’t care about me and Bennett. Why would they?

Bennett: There’s a couple of things here I want to look at. One is yes, they’re B2B. And they really always have been, but that leads to the question of why they publish their stated minimum, which is only $100,000 to redeemed, and why they made such a big deal of reopening their verification platform, supposedly for clients to redeem tethers.

(In November 2018, Tether announced that customers could once again redeem tethers directly via Tether, but all accounts needed to have a minimum issue and redemption of $100,000. At one point, customers could redeem tethers via Bitfinex, but that is no longer possible.)

Also, Tether, themselves, are the ones who still proclaim on their website that they are the most transparent, that they will provide this look inside. And so I don’t think it’s unreasonable to hold them to their own statements.

Larry: I totally agree. And I do think that it makes almost no sense why they would do that. I think initially, it was for people to trust them. Because early on, you have to remember, all this was new and you had a couple of tens of millions in it. It was hard to trust it. And they had to gain the trust somehow. I do think they made some of these statements up because they just wanted people to trust it more, so the peg would actually hold.

One thing that’s important for fiat-backed stablecoins. It’s really the only thing that’s important is trust in that stablecoin itself, because when the trust breaks, it’s very hard to get it back. I think they just were super careless, super negligent, made several of these mistakes before, where they claimed that something was true and that they couldn’t follow up on it. Another example we didn’t bring up yet is they used to claim that they are a hundred percent audited and there was never any audit. There was barely any proper attestation. And I do think that was in some way acting in bad faith—pretending to do something just to gain early trust so it would work at a larger scale. 

Bennett: The curious thing to me is that when they were banking in the Taiwanese banks, they had an accounting firm who did give them a monthly attestation that is in large form similar to what Grant Thornton gives to Circle. And then they stopped that. And a couple years later we got the Friedman report. And then a little bit after that, we got the Freeh report and then the Deltec letter and then nothing. So at one point they were able to get monthly attestations saying that the balance in their accounts was greater than the number of tethers issued. And then they stopped.

Larry: Yeah, that’s a really good question. And when I talked to Paolo and if someone at Bitfinex is listening to this, I one hundred percent agree. Attestations should be the bare minimum of what they publish, especially because it’s fairly easy to do and it’s reasonable, cheap. Everyone else does it. 

I think the reason why they don’t do it goes back to the point that they just don’t have to. It just functions well enough without that the attestations and people at this point trust it enough that they just feel like it’s not even worth their time, right? 

Tether is still a relatively lean team, similar to Bitfinex. And they just probably feel, who cares? Unless the peg starts breaking, we’re not going to release any attestations. And there’s precedent to this before. I’m sure you recall, Bennett, but whenever there was some sort of a break to the peg, historically, pretty much like clockwork, like a week or two afterwards, they started doing some sort of a relationship that confirmed some of these reserves, and they work with Bloomberg as well. So my view on this is that they only do the bare minimum because they just don’t feel like they have to. They feel like at this point, they’re trusted enough that they just don’t have to go to these lengths and spend the money. But if someone, again, if someone at Bitfinex is listening right now, I think this would be the bare minimum. They make enough money right now to justify it and it’s really a no brainer.

Patrick: Do you feel that their reticence with regards to attestations might be related to their reticence with regards to disclosing banking relationships? If I recall back in the day on the UI for requesting a wire from them, they put in red text that they didn’t want you to disclose the wiring information to or from them because it would put the entire cryptocurrency economy at risk. I think I read that in a tweet of yours, if I’m not mistaken. Are we allowed to take them at their word? Is that the reason why they don’t want to disclose this?

Larry: I don’t agree with this approach as well. Their argument is that they have these banking relationships that at least back then used to work in a way that had to be in almost a shady way. And they believed that was the case. 

I don’t think that’s the case anymore, by the way. I do think that all the banking partners that they have now are aware of the relationship. And I do think that at this point, they’re functioning in a much more legit way that they were before. Back then that’s why I was a Tether skeptic as well because they had literally, no one was associated with each other. No one really was able to answer these questions that I had. That has changed. So I’ve changed my mind on a lot of these things because of their approach and because of the information I’ve been provided by other third parties. But I was in the same boat as well.

Richard: We’re seeing a lot more institutional interest in Bitcoin, but the counter narrative to Bitcoin right now is just that it’s heavily manipulated with tether possibly being the biggest manipulator. What do you think is the level of due diligence these institutional investors have performed on this particular matter?

Larry: The first thing I would like to address is that this is like one of the laziest arguments that people make on Twitter, that Tether is manipulating the markets, that they’re creating tethers to pump the price of Bitcoin. There have been several papers debunking the system. And it’s apparent from data that they’re not doing this.

I track data on a daily basis. I track pretty much all the indicators that are there and every indicator this year has been going up. Everything like spot inflows, [just talking to?] exchanges that support fiat. There’s no evidence whatsoever that Tether is creating USDT to pump the price of Bitcoin. 

You can do some fairly simple data analysis by how the market reacts based on when the tethers are created. Really, the simplest explanation to why some people are confused is because when new money comes into Tether, they have to create USDT and that money ends up going into some sort of a cryptocurrency because otherwise they wouldn’t even put it in tether. 

They conflate the relationship of training tethers to market going up. It’s just a natural reaction when you put more money in the system, the price will go up. I would like to just make sure that people actually study this relationship more closely because that’s one of the latest arguments. And I think that Bennett agrees on this point.  

Bennett: I largely do. Generally when people are talking about tether manipulating the market, they’re referring to the paper from University of Texas that was published in 2018, “Is Bitcoin Untethered?” And that paper has some methodological issues, specifically, if I remember right with periodicity, meaning that to get the results they get, it’s very dependent on which periods you look at and how you analyze the flows with respect to that.

I don’t necessarily think that’s we’re seeing. The common conspiracy theory is: unbacked tethers are printed, and they’re used to buy bitcoin. The bitcoin is then inflated, sold. Money goes back into each Tether’s bank account [while they’re backed?]. The market I think is too liquid for that to really effectively work.

Tether can’t move the market enough to get back enough to make that effective. However, there is still again, we get back to the question of backing and what’s really behind the tethers. Because if there’s a general belief in the marketplace that there are 23 billion real dollars behind this tether purchase, seeing this bitcoin and whatever, if that is not fully backed, if that amount of dollars did not actually enter the ecosystem, I think that could fairly be called manipulation.

Now as to the size of that effect. I don’t necessarily think it’s a large effect. I don’t think tether is responsible for any of the bull runs in bitcoin or anything like that. But I do think that tether could have still slightly inflated the price if they were not fully backed.

(I asked Tomlin later what he meant in saying that tethers aren’t responsible for bitcoin bull runs. “It’s just a highly leveraged frenzy,” he said. “Bubbles are always caused by some amount of organic interest. Bitcoin is exacerbated by being a relatively, or historically at least, thin market that now is loaded with leverage.”

I disagree. I think large tether issuances have a huge impact on the market. Unlike in 2017, I believe the bitcoin price, which recently went as high as $41,000, is mainly pushed up by tethers in this bubble. Price plays a huge part in fueling the frenzy. Read my story, “Are pixie fairies behind Bitcoin’s latest bubble?”)

Larry: To some extent, I agree with that. One thing I would like to add is a fun consequence of the paper being published from manipulation is that, I don’t know if you guys will notice, but now Tether basically like they don’t disclose whenever they create new tethers exactly. They basically give it like a week in advance or something. So they prevent people from actually conflating these two things that’s happening at once.

Richard: You mean they authorize first, right? So they basically mint and then they say they authorize it, but it hasn’t been deployed. And then they distribute them to various places.

Bennett: I feel like you could still do much the same analysis. Instead of tracking the issuing address, you could just check movements from the treasury. 

Larry: You probably could, but it’s just like a funny consequence. 

Richard: Going back to that paper Is “Bitcoin Really Untethered” by John Griffin and Amin Shams that Bennett was referring to, what did you say specifically was the issue with their methodology? And also about other papers that have been debunking this? 

I actually have the papers here, but I am not sure where the debunking part is. One of them is called “The Impact of Tether Grants on Bitcoin,” by Wang Chun Wei. And then the other one is, “What keeps Stablecoins Stable,” by Richard Lyons and Ganesh Viswanath-Natraj.

The first paper, “The Impact of Tether Grants on Bitcoin,” conducts an independent study as to whether Tether prints prior to bitcoin pumps. If there’s any kind of statistical relationship and basically says, there’s none. But it doesn’t directly debunk “Is Bitcoin Really Untethered.” So when Bennett says there’s some kind of methodology problem, I’m not familiar as to what exactly the issue is there.

Bennett: It’s been a while since I looked at that paper in specific. But if I remember, and they even mentioned this in one of the appendixes for the paper. If you change the way the period is measured or something like that, you see the impact from the tether flows decreases significantly. 

The other thing we do need to talk about is what Larry said is you expect when tethers enter the market, when legitimate money enters the market, that generally the prices of things are going to go up because there’s more money coming in. And so I’ve looked at a bunch of data around tether and I can push it and tweak it and get statistically significant results that are potentially interesting. But in order to get them, you have to pick magic numbers. So you’re picking a certain period, a certain cutoff, a certain something in order to make sure that your data looks the way it does. And the paper has some of those kinds of things in it.

Richard: As you’re saying the statistical finding isn’t sufficiently robust. If you pick a particular window in construction of your variable, you get a favorable result. And if you just move that a little bit, you no longer have a favorable result. Is that what you were saying?

Bennett: Yeah. If I remember even with the change in the periodicity, it was still directionally correct, but the impact became much smaller. And just looking at it, as a skeptic and as someone who tries to observe this market, it was not convincing enough to me and I was predisposed to be convinced by it.

Richard: The other interesting thing that’s been happening lately is that some of the Tether executives seem to have become a little bit more open in terms of appearing on podcasts and having conversations with the public. First of all, do you agree with that assessment that they’re being a little bit more open these days and second of all, if so, why do you think they’re doing that?

Larry: It’s one hundred percent by design and that’s one thing, like I mentioned before, that led me to trust into Tether more than I did before. They are public for one simple reason. And that’s to make sure that people stop spreading conspiracies. It’s for marketing purposes. When  you have a person that can go directly against some of these claims early on, it’s much more effective than letting someone like Bitfinex’ed just go with these theories that sometimes don’t have any merit. Sometimes they do. Sometimes they don’t. 

But they’re doing it because they want people to think of Tether as more legitimate than it has the rep for right now. Paolo keeps claiming that Tether is as regulated as other stablecoins. It’s a marketing move and it’s a good move as well.

(To be clear, the Tether/Bitfinex triad haven’t been seen at all in a long while. Paolo Ardoino, Tether’s CTO, took on the role of Tether frontman starting around November 2019. He constantly tweets reassurances that Tether is fully backed, regulated and is following KYC/AML protocols.)

Bennett: I am not necessarily convinced that they are more public. If you go back in time to earlier Bitfinex and Tether history, like I’ve saved the entire post history of Raphael Nicolle, the founder of Bitfinex on Bitcoin Talk. I’ve got the same for Giancarlo Devasini, and “myself” [a pseudonym for] one of the early consultants for Bitfinex, and Phil Potter would frequently show up, not on podcasts and stuff like this, but if you’re looking back to 2016, 2017 on the Whalepool teamspeaks and in other places like that, where they were still trying to reach out to crypto traders and stuff like that. 

And I agree with Larry, it definitely is a marketing move, but it’s also interesting to me that not all the executives have been more public, like Paolo. He’s probably the most public face of both. And  Stuart, Hoegner, the general counsel for both Bitfinex and Tether, is probably the one you hear from next often. You will almost never hear from [J.L. van der Velde], the CEO of both Bitfinex and Tether, who originally came over from Perpetual Action Group Asia, or you’ll occasionally hear from Giancarlo now, but you hear from him a lot less even than you used to. I don’t necessarily buy that they’re more public or more open about this stuff now than they were historically. 

Richard: The weird thing is, if you are going to spend the time to go on all these podcasts and try to assuage the public about your legitimacy, why not just spend the money and do the report? Obviously, we have just been through this point and it sounds like both of you actually agree that some attestation should be in order.

Larry: Like I mentioned briefly before, Bitfinex hasn’t been doing so well in the past two years and they attribute that to marketing as well. Because they haven’t done much of marketing before and volumes went down significantly. Liquidity went down. So I don’t think it’s just about Tether, it’s about Bitfinex as well. And it’s about overall just having a face that you can connect to Bitfinex and Tether that is more public facing. 

Richard: Let’s take another audience question. This is from someone called EastMother: Does a stablecoin issuer, such as Tether, have fiduciary duties towards the people to whom issuances are made and, or the secondary market token holders, any opinion on us.

Bennett: This was a matter of debate of law in the New York attorney general case when Bitfinex was trying to appeal it. They basically claimed even in the initial transcript that they had no responsibility to secondary market participants, meaning tether holders who were not directly contracted with Tether Holdings Ltd. 

I think it’s reasonable to say that Tether, if they don’t have a legal responsibility, at the very least as a moral responsibility, that if they are issuing this asset that they say will maintain this value, that the asset does that, whether or not there’s a legal obligation fiduciary obligation towards any secondary market holders. I’m not qualified to answer.

Larry: I totally agree with Bennett there. I don’t think that legally they do. I do think that ethically that they do, but also one thing to realize that we haven’t touched on it much yet, but the collapse of Tether, if it were to happen at some point, and if we are assuming that they’re acting fraudulently, it would be terrible for their business and Bitfinex and Tether as well. They’re pretty profitable. 

So that argument to me never made too much sense. Yeah, you can probably make more money more quickly if you just rug pull and take all the money now, but you’re sitting on a business that’s generating millions dollars in revenue. You have Coinbase going public this year and likely trading at more than $40 billion and all these exchanges are going to be worth gold soon. So you would have to be shooting yourself in the leg, if you were doing this. Like why not just run the business for 10 years and probably end up making even more money? It seems ridiculous to me that some people think that this would be a legitimate strategy.

Richard: Back to the fiduciary duty part. So there have been recent regulations put forth by the US government. And one of them is the [proposed] STABLE Act, which basically says, if you are a stablecoin operator, you need to be regulated like a bank. And the second one is more of a rumor in that stablecoins might be classified as security and as such an SEC would have jurisdiction over them. Neither of them actually is law, but if they were to become law, what would be the implication on tether and then second order effect on the crypto market?

Larry: The first thing, I believe that stablecoins will never be considered securities. I don’t think that will ever happen, but I am not a lawyer, so I can’t say that for sure, but I think that’s extremely unlikely. The STABLE Act, I think, is a little bit more realistic, and it would definitely affect in a lot of ways, because if you do have to have a banking charter, if you do have to have to essentially be a bank to operate stablecoins in US dollars, that would put Tether in a really difficult spot. And it would be interesting to see if they would continue operating.

Richard: That would conflict with an earlier point in that the Tether folks basically think that the US doesn’t have jurisdiction over them. If so, then the STABLE Act or whatever the SEC wants to do, as long as they claim Americans aren’t touching this stuff, then it’s fine.

Larry: That’s a really good question. Maybe Bennett has some views here. I’m not an expert on this, and I’m not sure if they would continue operating if they were directly against one of these laws. I think they might, but not so sure, honestly.

Bennett: This is a tricky question. So I don’t think currency backed stablecoins, like a one-to-one backed, or pegged coin will be considered a security anytime soon. Now, there were more complicated algorithmic models like Basis before they were shut down. I thought there was the potential for parts of that model to end up being considered a security, but that necessarily an acute worry with something like Tether.

Richard: Why is that though? With stablecoins, there’s no expectation to profit from the effort of others. So that particular component of Howey Test wouldn’t work.

Bennett: When I mentioned before was a multi token system involving Basis bonds and a couple of other pieces all working together in order to allegedly maintain a pegged value, which ended up accruing a larger number of Basis coins, the stablecoins, to the holders of the Basis bond.

Larry: Basically what Bennett is trying to say that it’s a multitoken system where one of these tokens is very similar to security.

Bennett: It’s a functioning part of the stablecoin system. And I could even see the argument being made that Maker is a security, but I can’t necessarily see the argument Dai [is a security.]

Larry: Right. I absolutely agree.

Bennett: As for the STABLE Act, this is always where I get conflicted with tether because they try to act as though they’re not regulated by US regulators, but in early 2016, Bitfinex was willing to sign a settlement with the CFTC and collaborate with regulators in those respects. 

My guess is a more restrictive, stablecoin law, like the STABLE Act would be somewhat similar to a regulatory shutdown of Tether with the difference being, they would probably be able to spin it down more gracefully, so there’d be a lot less collateral harm to the market and to holders. 

But I would agree with Larry and say that with a regulation like that, it is unlikely to me that Tether would continue to offer a dollar-backed stable coin. They initially tried to diversify with the Euro tether, which was never popular. They kept trying again and they’ve got the Tether Gold and the Chinese yen tether and all that. My guess is that is part of the reason they have those other coins.

Patrick: One of the other risks for any regulatory regime is that there’s a sort of regulatory contagion where regardless of whether a Bitfinex or Tether—which are alter egos of each other—regardless of whether they are subject to US law or jurisdiction, some people who would like to be involved in the cryptocurrency ecosystem are subject to US law, or jurisdiction, and they might not be able to interact with US counterparties, which interact with tether because of the risk of, basically the tether cooties, attaching to those counterparties. 

And potentially I know people in the cryptocurrency ecosystem don’t think this is likely because it’s so technically easy to mix funds via distributed finance, et cetera, et cetera, but potentially that sort of contagion risk could cause… If your regulated stablecoin is fungible for a non-regulated stablecoin via any mechanism you can reasonably foresee, then you have to solve that problem for the government, basically.

Bennett: This proves Tether’s claim that they’re not subject to US regulation that they’re separate from all that doesn’t hold up. They are a dollar-backed stablecoin. And fundamentally, if you’re working in dollars, the long arm of the United States government will extend to you. And I mean, that’s part of the fundamental risk of Tether is that at some point that long regulatory arm of the United States government, whether it be the CFTC, the Department of Justice or a state government, like the New York attorney general, will find something that justifies them seizing a large amount of tether’s funds and leaves them deeply insolvent.

Larry: I do agree that’s a significant risk that’s worth considering. I think that Bennett’s totally right. I do think that if the US government and the US system wanted, they can take out Tether, probably fairly easily. But one thing that I don’t necessarily agree with, maybe Bennet has more information on this, but I don’t believe that they claim they’re less affected by US regulation and the United States itself. I think that’s what people assume, but I’m not sure that actually claims this. 

Bennett: This is where you get into their public statements in press releases, blog posts and things Phil Potter says in a Whalepool teamspeak because you’ll see the Bitfinex executives try to make arguments like that, that they’re not subject to certain US regulations because of where they’re domiciled. And you saw Giancarlo making these back on Bitcointalk a couple of years into Bitfinex’s existence and stuff like that. So there are public statements by DigFinex executives making those kinds of claims. But the press releases, the blog posts, marketing materials on the website will generally be carefully worded to give them the impression that they’re compliant with all relevant US regulations.

Larry: And are you aware of any of these statements being made more recently versus early on in Tether’s functioning?

Patrick: The litigation with the NYAG at oral argument, they were asked point blank, who is your regulator? And they said, we are not regulated.

Larry: This is a really nuanced topic. We’ve been working on a stablecoin report for almost two months. And we talked to several different stablecoin providers, like USDC, Paxos, all of those. But when we asked them about this, what does it mean to be regulated as a stablecoin? And everyone has different answers. It’s like when you use the word regulated, it’s just so ambiguous. 

You have to think of several different ways of how you regulate it. One is, do you have AML and compliance teams? There are several other aspects. Where are you keeping your funds? Is someone monitoring that? Do you have the compliance manual? 

It’s just so many different things like that. And so Tether publicly claims that they are as regulated as a USDC. I think that’s questionable. They are registered with FinCEN, which means that they have to report when some activities out of the ordinary happen. 

But it’s probably not as stringent as when you are registered with the New York Department of Financial Services, like Paxos or Gemini Dollar. It is difficult to say what regulated means in this sense, because there are no clear rules. And because these things function globally and every jurisdiction has different rules and different regulations.

Richard: As far as the NYAG lawsuit goes, and I’ve asked this question in a previous podcast as well, but I’m curious to hear your thoughts. What do you think is the timeline for some kind of outcome and some kind of resolution. And what do you think would be the knock on impact on the Tether ecosystem?

Bennett: So the next due date for a document production is January 15th, which is coming up right around the corner. What will be included in that? If documents will be provided. [Here is the NYAG’s letter to the NY supreme court.]

Richard: Which documents are the prosecutors looking for?

Bennett: Financial records for Tether going back to 2017 showing KYC, AML history of redemptions and history of issuances. But I do not have that in front of me.

Larry: My question for you, Bennett, is do you think that the NYAG  has the right to ask for these documents while. Bitfinex has pretty publicly said that no customers can have access to Tether.

Bennet I am a New York resident. The Block was very recently able to register an account on Bitfinex and trade with the name “I am NY resident.”

Richard: I’m not familiar with what you were saying about The Block registering as a New York resident. Can you guys elaborate on this?

Larry: It was an article that we published a year and a half ago, or almost two years ago, where some user registered with a name that said, “I’m a New York resident.” And as part of registration, when you go through the registration process, there’s a box that says that you have to tick that says, I’m not a resident of New York, or I’m not a resident of the United States. 

And that user ticked that box, even though the name said, I’m a NY resident. And it was supposedly to test if the compliance would pick up on it. But the reason why I’m bringing it up is because sure, your customers definitely had exposures to Tether, but it is probably reasonable to say that Bitfinex is not interested in those customers, unless they are based outside of the US with their own subsidiary.

Bennet: That’s irrelevant for New York jurisdiction, Bitfinex being interested in them. Doesn’t matter to the New York attorney general. 

Larry: I agree.

Bennett: And going back, this is particularly striking because if you read the 2016 CFTC settlement that Bitfinex signed, they agreed to ensure that they would stop violating sections 4A and 4D of that act. And part of that was making sure they were at no point offering non-physically delivered futures to US citizens. 

And I think it’s pretty safe to say that they continued to do that for a while after early 2016. And I think if you look at what the New York attorney general has found, meaning that there are several professional firms that Tether has hired in New York, that there are tether traders in New York that you’ve got Giancarlo emailing the head of Galaxy Digital and telling him that he should meet up with Phil Potter because they’re both in New York. I think it becomes under the Martin Act, it would appear that New York has the jurisdiction to ask for these documents. I think the better question is, what happens if Bitfinex chooses to ignore the New York attorney general, and not produce the documents? I do not know how far their ability to enforce goes.

Patrick: It’s worth mentioning that this possibly be a legal tactical move to ask for the document production. That question was put to them at oral argument and by the judge, if I recall, and they were given the opportunity to not deny that they were solely looking for Martin Act violations. So it’s possible that they’re using a statutory authority that they have to compel the production of documents, which would allow them to uncover evidence of other things that they could throw at Tether later.

Bennet: Which I think is actually an interesting thing for us to come back to because the New York attorney general launched their investigation into Tether before the really conflicted transaction — where they transferred the [$700 million] out of tether into Bitfinex in order to deal with the insolvency. So there was something before that that triggered a New York attorney general investigation, and Bitfinex and Tether were both producing documents and cooperating with the New York attorney general up until the time of this transaction. 

And that’s when then the Tisha James and [Assistant Attorney General] Brian Whitehurst had to go for the ex parte order. And then Bitfinex has been endlessly appealing and they are now out of appeals. You’re right, the Margin Act violation is not the only thing they’re potentially interested in, but they thought it gave them the best argument for document production.

Larry: I agree with that as well. I will say, some of these New York trading firms have subsidiaries in jurisdictions that allow them to get exposure to these instruments, even if they are officially based in New York. And similar can be said about what The Block published on the NY resident. Yeah, it is true compliance wise. I think it’s probably improved since then. That being said, someone basically had to take someone, who was  not the resident of New York. So technically you are still breaching the registration form.

Patrick: I know I’ve been intervening too much on one side of this debate. Bennett, what would you be satisfied with? Is there a way that tether could demonstrate their operating above board?

Bennett: If they were to start getting regular attestations by a qualified auditing firm, that would go a long way towards assuaging many of my fears. I still think that the history of tether has left them with enough detritus that they’ll never truly be compliant. And that eventually one of those albatrosses around their neck will pull them under water. But if I started seeing a true good faith effort like that to be publicly transparent and show that they are living up to their own promises, that would make me feel a lot better about them.

Richard: There’s an article from Decrypt last year about how a lot of us USDT on-ramp is done by Chinese nationals looking to move their wealth overseas because of the tight capital control there. Can you speak to the extent that this is true and whether you see this trend continuing?

Larry: From my experience and from the data that I’ve seen, I don’t think it’s as much of a problem as Decrypt made it out to be. Tether does have a lot of clientele in China and a lot of the money that was sitting on Chinese exchanges that then got cut off the fiat system. Some of it is now sitting in Tether. So there’s a very large Chinese ecosystem when it comes to tether. 

I don’t think it’s being used that much for fleeing capital controls. It definitely is to some extent, I don’t think it’s one of the biggest use cases of tether. Because there’s already a lot of money that was previously in these Chinese exchanges now with tether. But it’s important to say, the OTC markets for tether is the primary on-ramp for crypto in China right now. Basically running exchanges in China is illegal. You can argue whether that’s being enforced or not, but a lot of these exchanges like Huobi, Binance, and OKex, they have OTC P2P desks that allow people to convert their fiat to tether a Bitcoin directly. It is definitely being used. I don’t think it’s used at a massive scale. 

Richard: If I can summarize our debate so far, it seems that what Larry is saying is that tether has had these unprofessional practices, to put a charitably, in the past, where they also had constraints with banking access and so forth. But ultimately they crossed the line in various different ways in the past. But now the situation is slightly different. 

Number one is they’re a B2B business. They have enough institutional flow as it is. So they don’t really care so much for the retail opinion. Therefore, they don’t have to worry about attestation reports and so forth. And secondly, they have made up their mind, or at least taking comfort in the fact that they are outside the relevant jurisdiction that is pursuing legal action with them. That’s why they basically continue to operate the way they do. But ultimately, Larry’s arguing that they’re no longer acting in bad faith because they’re just doing enough to satisfy their existing clientele. Is that a fair summary of your position, Larry?

Larry: Yes. That’s a very good summary. Did a great job.

Richard: I think a big question on my mind is whether Tether is playing these games to pump the market with unpacked collateral. I know we’ve run around on this, but so far, I don’t think I’m thoroughly convinced that they’re not doing this. So if Larry, you could summarize in one or two sentences to convince somebody that this is not the case, what arguments would you use?

Larry: When new money comes into the system, you can expect the price to go up and evidence here is that when new tether is created and deployed, the price of Bitcoin goes up and even this relationship can be true while not manipulating the market. That’s really the only argument that I have.

Richard: The biggest hole I see in that argument is that there’s no proof that there’s money coming to the market. If there’s proof, which is probably what the attestation report can provide, then I think that whole logic will flow. But right now the problem is just that there’s no proof that money is coming in, right?

Bennett: That’s largely my problem is that we don’t have any public attestation, audit, or anything like that to suggest that the $23 billion in US dollars are actually there. And other oddities, like the fact that you don’t see those show up in the Bahamian central bank report and other things like that. Again, Tether making a better effort to be more public on that stuff would assuage lots of those fears.

Richard: I think the most favorable view with regard to this under collateralization problem is something like, even though there’s a lot of issuance of tether, right after a bearish movement in Bitcoin price and after the tether issuance, the Bitcoin price comes up. Even though that’s all true, that doesn’t mean there’s foul play. It could very well be that there’s authentic demand that is rushing into the market to take advantage of a temporary price dislocation. But the issue is that somehow still not sufficient to change people’s skepticism. 

Larry: It’s almost impossible to change their mind, honestly. [Their thinking is that] it’s beyond reasonable doubt that tether is manipulating the price. And if you believe this, your bias is too much to be objective. 

Richard: Let’s move on to the concluding remarks stage. Starting with Bennett, synthesize your thoughts and tell us how you feel after having this debate regarding your initial.

Bennett: I still believe tether has at many points in their history been a bad faith actor. You see this as early as 2015, when they’re lying about their ownership. You see this continuing through with the frivolous lawsuit against Wells Fargo. You see it continue with the interactions with Crypto Capital. You see it compounded by some of their opacity surrounding the tether hack and the forced hard fork of the Omni network. And just this continued pattern of behavior combined with just the public incompetence of failing to track their own assets on their public transparency page makes me believe that Tether does not at this point deserve the benefit of the doubt. And there is not sufficient evidence that they are making a good faith effort to be a good member of the crypto community and to be publicly transparent about both their functioning and their backing.

(Bennett has provided additional notes on his blog, as a follow up to this debate.)

Richard: Okay, great. Larry, go ahead with your closing remarks. 

Larry: I agree with Bennett that Tether has acted in, what someone, can call bad faith. I think I would call it bad faith early on, as well. I think they were forced to act in this way to basically survive and to find the product market fit early on, and then to grow that business early on.

I think some of it was necessary for the business to function. I don’t agree with a lot of these practices and I do think that they’ve made several mistakes. They’ve behaved in a negligent way. They behave unprofessionally. That being said, recently it has changed drastically. I don’t think they’re acting in bad faith anymore. I think they’re a really important actor in the crypto space. And I think that with all that I’ve said, and it might sound like I’m defending tether, but I still think that there is a chance that there is a regulatory intervention at some point, which would put the markets into chaos for some time.

And I do think it’s a possibility that even people like me that don’t think Tether is acting in bad faith should consider because the US government can do something about Tether and can if they really want to and let it set. And this one, it’s a reasonable possibility. I still think it’s fairly low chance that something happens, but whoever’s listening to this, it’s important to, consider this closely. And if it does happen, make sure that you’re prepared for that possibility. 

That being said again, I think this was a good debate and I agree with a lot of Bennet’s points, but I do not think that Tether is acting in bad faith now. And I don’t think it has been in the past year and a half. 

Richard: Okay, great. Thanks for joining the debate today, Bennett and Larry, and thanks for co-hosting Patrick.  

# # #

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Tether’s Paolo Ardoino and Stuart Hoegner do a podcast—transcript and my comments

Avid bitcoiner Peter McCormack released a podcast interview (archive) with two Tether/Bitfinex frontmen today—CTO Paolo Ardoino and General Counsel Stuart Hoegner.  

McCormack is a well-known Tether apologist whose podcasts are funded almost exclusively by bitcoin companies. Tether is also paying his legal fees in a libel suit brought against him by Craig Wright. Despite that, McCormack claims to be completely objective, although he makes it clear he believes all the “Tether FUD” circulating on Twitter stems mainly from “salty nocoiners,” who are upset because everyone is getting hilariously rich with bitcoin but we’re not.

I’ve transcribed the interview and added my comments. I skip the first few minutes of the interview where McCormack lists his numerous crypto sponsors and goes on to say he thinks Tether is legit. I’ve also edited out the “uhs,” and some repeated words to make reading easier.

Peter: Can you just explain to me and for other people who are listening, because they probably don’t really fully understand it, how tethers are issued and redeemed?

Stuart: Let’s be clear on our terminology, if we’re going to talk about issuances and redemptions. We use four principal terms when we talk about this: authorized tethers, issued tethers, redeemed tethers, and destroyed. 

Authorized tethers are tokens that are created on a blockchain, and they’re available for issuance to the public. This process involves multiple blockchains and multiple persons participating to sign creation transactions. Once created, they’re available for sale to third parties, but until then, they sit in Tether’s treasury as authorized but not issued.

These authorized-but-unissued tokens aren’t counted—or [are] not counted—in the market cap of tethers as they have not been issued or released into the ecosystem. You should think of them a little bit like an inventory of products that are sitting on the shelf that are awaiting purchase. 

Issued tethers are authorized tokens in actual circulation, and they have been sold to customers by Tether and are fully backed by Tether and the reserves, unless, and until they’re redeemed. 

As tokens are issued, the stock of authorized-but-not-issued tethers, is depleted. And they’re replenished through authorization of new tokens based on market demand. When that happens, this is what Paolo is referring to in his PSA on the replenishment of the tether inventory. This is adding to the authorized and unbacked and ready for sale, but not issued, sold and backed tethers.

(I love how Hoegner makes it clear that authorized tethers in the hundreds of millions, like this one here, which we see going out via @whale_alert, are not actually backed. They’re just tethers on the shelf. Tether has issued $24 billion in tethers to date—and nearly 20 billion of them since March 2020.)

Peter: Okay. Why do you need to do that? Because I would have thought the creation of tethers is a very simple and easy job. Why do you need to leave them on the shelf?

Stuart: It’s a straightforward job, but it’s an important job. And it’s one that comes with security risks, and Paolo can speak to this a little bit. But there are security risks involved in using sensitive private keys to create new tethers, authorized. And to have those at the ready, and not in the marketplace, not backed. That exposes those keys to less risk. That’s not just a theoretical risk—there’s a serious security risk associated with that. Paolo, do you want to speak about that?

Paolo: Yeah, I believe that we can think [of] Tether authorization, private keys as among the most important sets of private keys in our industry. If you get hold of the private keys, you can really issue any amount of tethers you want. What we want to do is to limit the number of times per week when these private keys get accessed by signers. 

So, having an unsigned [ro? roll?] transaction that gets prepared with a fixed amount and then signed when they need to, that really helps tether security. Because then you can see that we are issuing round numbers, like $200 million, right? 

It means that we pre-prepared a [ro?] transaction that is an authorization transaction. Then tether signers, sign that transaction and broadcast it. And as Stu said, we are leaving a bit of inventory on the shelf in order to fulfill what we think that future requests from customers could be.

(The inventory does fly off the shelf pretty quickly. You can literally watch in realtime tethers shooting off to crypto exchanges Binance, Huobi, Bitfinex, and lots of unknown wallets, where they are quickly put to work.)

In our day-to-day activity, we are always in talks with customers. So, we [have] a good sense of what they might need, or they ping us in advance and they say, okay, we might need a certain [of] this amount or we might need that amount of tethers. In time, we learned how much tethers we should authorize in advance and keep it on the shelf in order to make these tethers available as soon as they are needed. But at the same time also protecting the security of tether, not continuing to touch the private keys every single time there is just one insurance.

Peter: Okay, I’m going to just push back on you saying they’re the most important private keys in the industry. I would say, personally, my private key is the most important one. Outside of that, I would probably say wherever the biggest honeypot is, maybe it’s Satoshi, his private keys, are the most important because Bitcoin is completely censorship resistant—but Tether isn’t, right? You can, if required, censor transactions. You can, if somebody issued a bunch of fake tethers, you could block those, I believe.

Paolo: First of all, I agree that bitcoin private keys are, well, everyone’s private keys are like their own babies. No doubt about that. The difference as you said is that if someone gets ahold of the private keys in tether, they can issue anything that they want. While in Bitcoin, if someone gets hold of the private keys, they can just steal the funds of the people that got hacked, rather than minting fake bitcoins. 

So this is really important, and this is the reason why we want to keep these private keys so secure and touch them as little as possible. 

So, yes, we can freeze, fake tethers. But at the same time, you can imagine if someone gets ahold of the…in order to freeze tethers, someone has to have the private keys. But if someone already has the private keys, then he can unfreeze our attempt to freeze tethers. 

So we will become an endless attempt of freezing and unfreezing and trying to save tether. That is not ideal. The responsible thing to do is touch the private keys as little as possible and use, of course, for our blockchain, we use a multisig approach. So there are multiple private keys held by different signers in geographical different [locations] so that we can ensure the highest security possible in all our operations.

Peter: Stuart, I interrupted you, you were going to talk about redemptions. We should finish that bit off.

Stuart: Sure. So redemptions are just when customers send their tokens back to tether and they get fiat back and return. Those tokens then go back into inventory, like their products that have been returned to inventory, awaiting future purchases. And then those tokens can be held by tether and its treasury or destroyed. 

And then destruction is just, multisig transactions being broadcast to reduce the number of outstanding tokens existing on the selected blockchain. And those tokens are forever eliminated. Basically, that’s the reverse of authorization. So those four concepts you have the lifecycle of the tether.

(The only time we’ve seen Tethers destroyed was in October 2018 when Tether burned 500 million USDT. This was just after Bitfinex lost access to $850 million in the hands of its Panamanian payment processor Crypto Capital, and the NYAG began investigating Tether/Bitfinex for fraud. Hoegner confirms our suspicions that once tethers are created, they are generally never uncreated.)

Peter: So, Paolo, who is using tethers. What are they using it for and what is the KYC process for people who want to use tether? And actually I’ll throw another one in there: who can’t [use tether]? Who applies and who do you turn down?

Paolo: Let’s start with who uses Tether. I think Stuart can speak better about the KYC/AML process,

Tether was born in 2014. It started from the Omni Layer. And the reason why it was born is because there was an issue among crypto trading exchanges. In 2013, Bitcoin reached, for the first time, $1,000, but across different exchanges, you [could] see that the spread was $200 to $300. And the reason was pretty simple.  

Bitcoin moves with the pace that is every 10 minutes because that is the average block time, while dollars and fiat in general move much slower. So you send a wire and you can take one day, five days, and that was not allowing proper arbitrage across platforms. And that is really important for healthy markets. You don’t want to have OKCoin to be $1,000 and Bitfinex to be [$1,300] and so on. That is the job of arbiters. They step in and try to close these gaps. 

But with just fiat, it was really difficult in 2014. It is slightly a bit better now, but you want both legs of a trading pair, like BTC/USD, to move at the same speed, at the same pace. And the only way to do that was to use the same underlying technology. So, the Omni Layer was and is using Bitcoin transactions to move tethers on-chain. That was the perfect use case. And so tether was born for that specific reason—to solve a problem

Recently, of course, we started to look into different use cases because I believe that is the time that tether should outgrow the crypto market. That is still our main market, but we are looking to work with [inaudible] businesses that offer remittances, businesses that want to optimize their payment solutions—payments for salaries, for inventory, for anything. So we got bombarded on a daily basis [with] requests. And that’s pretty awesome because we don’t want to be only for crypto. We were born in crypto, but we want to go on a global scale. So, Stu, you may or may want to touch base about our process onboarding customers.

(Tether first started issuing tethers in large quantities in 2017, after Bitfinex lost its banking. Note that Ardoino is trying to say that Tether’s massive issuance of tethers over the course of 2020 was due to expanded growth—e.g., we want to go global. Of course, there is no evidence of Tether being used outside of crypto except for online gambling in China. And the idea that businesses would want to use tether to pay salaries makes no sense, as you can’t pay rent and buy groceries with tethers.)

Stuart: Sure. I’m always happy to discuss this, because contrary to the online characterizations in some quarters, tether has an outstanding compliance program. Our AML and our CTF sanctions program is built to exceed or meet the standards of the U.S. Bank Secrecy Act and applicable BVI laws. We work hard to detect, monitor and deter AML/CTF violations. And our program is tested periodically by independent third-party auditors. We always work to understand the identity, business type, source of funds, and the related risks of each and every customer on tether. And we conduct enhanced due diligence on all customers. We risk-rate every customer. We monitor all customers using World-Check and we deploy Chainalysis to detect potential crime related to our services and users. 

We regularly help international law enforcement agencies with investigations in order to trace and potentially freeze wallets. Also, tether will share information with law enforcement when given valid legal process, and we’ve helped law enforcement and victims to freeze and return millions of USDTs. That’s a bit of an overview of our compliance and what we look to do.

(Hoegner claims Tether does due diligence and knows who its customers are, but who are its customers? Further along in this interview, he hints that Tether’s customers consist of a small group of “large customers,” likely exchanges and OTC desks, that bank with Deltec Bank & Trust. What about the hundreds of thousands of tether users? They are apparently not counted as customers. This leads me to think that Tether’s “big customers” serve a function akin to Liberty Reserve exchangers—acquiring tethers in bulk directly from Tether and then distributing them in smaller quantities to individuals who require anonymity in their transactions.)

Peter: Have any customers ever lost their account?

Stuart? Lost their account? 

Peter: Yeah. Have you ever closed people’s accounts? They can’t work with you anymore. Have there been in any instances where you’ve tracked behavior and, like, you can’t work with us anymore. Or has everyone kept a clean relationship? 

Stuart: We have ended relationships with customers in the past. Sure.

Peter: Okay. Interesting. In terms of the issuance of tethers, there’s a lot that seems to happen on times when banks essentially would be closed, right? So weekends and holidays. There was certainly some over the holiday break, and I’ve seen people commenting on that. How come that’s happening? How are you able to do that?

Paolo: I will take this one. So you’re right. There is a lot of misconception and FUD around this very point. You would expect that to go to HSBC on Sunday and it is closed, so you cannot move your money. Right? We, as Tether, are using Deltec as a primary bank, and most of our biggest customers are banked into the same bank. 

(They claim Deltec Bank & Trust is their main bank. If most of their “biggest customers” have accounts at this tiny bank in the Bahamas, that likely means Tether doesn’t have a lot of what it considers customers.)

During the weekends, during all the days, there is always personnel from the bank that allows internal transfers between accounts. So, Tether has its own accountant, and let’s say, customer A has his own account. Customer A wants to acquire new tethers. So they ask the bank personnel to do an internal transfer from their account to Tether, a Deltec account. And that gets settled and is available immediately to tether. 

So, when we issue tethers, they are fully backed because we already received the internal transfer. So, the problem that people are making fun of—the fact that we are issuing over weekends—is just pure [mis]understanding on how the financial market and the banking system works.

(It sounds here that one of the advantage of being a big Tether customer with a Deltec account is you have a close, trusted relationship with Tether. Also, we are definitely seeing a trend where the BTC price is pumped on the weekends, followed by a selloff on Mondays.)

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. 

(Essentially, tethers are backed by cash and a bunch of other stuff that Tether won’t disclose. For years, Tether claimed that tethers were backed “1-to-1” by U.S. dollars held in cash reserve. Tether changed the rules of the game in 2019, after Bitfinex lost access to $850 million and had to dip into Tether funds. Tether’s terms of service now states that reserves means “traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”)

Now that lending includes the loan to Bitfinex, which currently stands at a principal balance of $550 million. The principal having been paid down ahead of schedule. The loan is on commercially reasonable terms. All interest is prepaid to the end of this month, and it’s otherwise in good standing. 

(Bitfinex indicated previously—here and here—that it has already paid off $200 million of the funds it took out of Tether’s reserves in early 2019. If the remaining balance is $550 million, that means the total was $750 million.* Also, he is including the loan as a legitimate part of Tether’s reserves, which makes absolutely no sense at all. This is missing money, so how can it be used to back anything? Also, note that Hoegner keeps referring to Tether’s original loan to Bitfinex and claiming it is insignificant and paying interest. But his language does not exclude the possibility that Tether has made other loans to other customers or even to Bitfinex itself.

Here’s how the “loans” part might work: Even though Tether could say that it issued USDT—say to Bitfinex—in exchange for USD or BTC, Bitfinex does not have to actually hand over the USD or BTC right away. It can just promise to do so. Then that promise can be counted as a loan that backs those USDT.

And one more thing—what happened to the $1 billion that Bitfinex raised when it sold all those LEO tokens? I would have thought that would have been plenty to cover the $700 million loan.)

Every USDT is also pegged one-to-one to the dollar. So USDT is always valued by tether at one USDT to one USD. Tether has always been able to honor redemption requests, and to put it simply, there’s never been a single instance in which tether could not honor a redemption and our detractors can’t point to one because one doesn’t exist.

And in fact, there’s considerable evidence of USDT being redeemed by our customers, freely. [Cofounder of CMS Holdings] Dan Matuszewski has talked about this before. [Head of OTC-APAC at Alameda Research] Ryan Salame just recently spoke about this, confirmed. 

We can’t share specific information about customers because of confidentiality concerns. But they are free to share that information with the market, if they wish. 

(Ryan Salame said in a tweet that he has been redeeming tethers for three years, but he doesn’t say for what, so we don’t know if it was an actual dollar redemption. Matuszewski said in the past that he “created and redeemed billions of tethers” when he was head of Circle’s OTC desk.)

So let me just ask if anyone seriously believes after we, you know, that we could be put under the microscope in the way that we have and still be operating if we weren’t backed. Defies logic. 

Let me touch on one issue here that might be of interest to your listeners. The 74% number that’s come up from time to time, specifically in the context of tether’s backing. This is another number that’s been talked about a lot, and I want to be clear about this and give some context.

I swore out an affidavit in New York, in the New York litigation with the AG on April 30th of last year. And that affidavit contained a number of items, including touching on tether backing. 

And in a statement, I said that of the then $2.1 billion in reserves. And today, just for context, that amount has grown to $22 billion. 

Tether had cash and cash equivalents on hand representing approximately 74% of the current outstanding tethers. And that referred to issued tethers. You remember, we were talking about authorized and issued tethers, et cetera? That was issued tethers. 

People took from that, that I said, this means they’re only 74% back. But that’s not correct. And that’s not what I said. It meant and means that the reserves were 74% cash and cash equivalents. Tethers were and are 100% backed by reserves. 

So the loan to Bitfinex is still good backing. Interest has been paid ahead of schedule, as I said, and the principal has been repaid again, ahead of schedule. 

So that forms part of tether’s reserve backing. So maybe people object to the amount of the backing, but it’s not nothing. It’s a valuable and productive asset. And just note that that loan is now $550 million, out of almost $22 billion in reserves, or 2.5% of the total. So I just want to be clear about the nature of the backing and the context and our overall asset mix on that point.

(Hoegner is backtracking and doing his own math to now claim that Tether has always been 100% backed. This is nonsense. He said in an affidavit in April 2019 that tethers were 74% backed. The truth is nobody really knows what is behind tethers and what difference does it make anyway? Tether makes it clear that it is not obligated to redeem tethers at all, and if it does, it can hand you back whatever useless assets it wants.

According to its terms of service, “Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves.” 

Peter: Okay. So you talk about the backing of currencies and different currencies. Is any of the backing in Bitcoin?

Stuart: We were very clear last summer in court that part of it is in bitcoin. And if nothing else, there are transaction fees that need to be paid on the Omni Layer. So bitcoin was and is needed to pay for those transactions, so that shouldn’t come as a surprise to anyone. And we don’t presently comment on our asset makeup overall as a general manner, but we are contemplating starting a process of providing updates on that on the website in this year, in 2021.

Peter: But you have to manage the assets that back the tether. Are there any instances where you are buying bitcoin because you think it’s a good asset to hold within the basket?

Stuart: Again, we don’t comment on the basket of assets in a general manner, but we are exploring providing updates on that on the website in 2021.

(Hoegner won’t reveal what sort of assets are backing tethers. If it’s only partly cash, what part is cash? And what is the rest made up of? Tether has so far issued $24 billion worth of tethers, but it is not telling customers what is behind those tethers—for all we know, nothing but a lot of worthless assets.

Peter: Okay. Because that’s one of the areas where people will be like, hmm, they can issue tether. They can buy the bitcoin, which backs the tether, at the right time in the market. And that’s where people might say that you have the ability to essentially pump the market.

Stuart: Well, hold on, we don’t have the ability to buy the bitcoin at the right time in the market. We’re not prognosticators about whether the market’s going to go up or down. That presumes some level of clairvoyance that we know when markets go down, which we don’t have.

Peter: No, it doesn’t mean that. I just mean that if you have to manage your basket of assets and if bitcoin, was say…any investment you have to make, you have to make a decision. You could make a decision and say, look, we believe that bitcoin would be a good investment right now. And you could issue tethers to buy bitcoin.

Stuart: No, no, we don’t issue tethers to buy bitcoin. We issue tethers to customers that want tethers.

Peter: So how does bitcoin end up within your basket?

Stuart: Well, as I said, if nothing else, bitcoin is there to pay for transactions on the Omni Layer.

Peter: No, no, but how does it get there? How does, what’s the process of the bitcoin reaching your basket?

(This is a good question. If bitcoin is backing tethers, what is Tether using to buy those bitcoin with? Notice how Hoegner is being very careful not to say that they are buying BTC with tethers. Well, what else would they be buying them with? Why not hand tethers out to Tether customers in exchange for BTC? Or you could set up an account on Bitfinex, fund it with tethers, and use those to buy BTC from your own customers on the exchange.)

Stuart: Oh, Paolo, do you have any comments on that?

Paolo: I’m not sure if the question is really clear. We talked about the fact that how we acquire the bitcoin that we need in order to fulfill the Omni Layer transactions.

(Ardoino is pretending like he doesn’t understand the question.)

Stuart: So how do we get that bitcoin, Paolo?

Paolo: I would say that [there] are a good amount of bitcoin remaining from past acquisitions that we likely did in 2015, 2016. That with the fact that the Omni Layer is slowing a bit down compared to the other blockchains that we are supporting…the amount of bitcoins that we luckily got a really good price in 2015 and 16, is probably enough for perpetuity.

(Now he is saying that they happened to have a stash of BTC lying around from five or six years ago, and that’s what they are using to back tethers. If Tether had a stash of bitcoin that large, it could have sold them long ago and taken care of the $850 million hole left when the money disappeared from its payment processor.)

Stuart: But again, Peter, let me emphasize, this has been in the public records since at least last summer. In my view, this isn’t new or shouldn’t be new to anyone. 

Peter: What I’m trying to understand is, if it’s only bitcoin, that’s held for transactions on the Omni Layer. I understand that. But if bitcoin is held within the basket because it’s seen as a good asset to hold, then how does it end up there? I’m just trying to understand that.

Paolo: So, but why we should issue—even in the case someone would like to add the bitcoin to its own basket. Why issuing tethers to do that? Right. So there are fiat exchanges. So why, if someone wants to manage his portfolio would just take part of dollars and buy bitcoins. So why issue tether to do so?

Peter: I don’t know. That’s why I’m asking. 

Paolo: In any case, the entire concept of us issuing tether to buy bitcoin for ourselves, doesn’t make sense. So why issuing tethers when we already have the dollars and we have the ability to manage our inventory and our portfolio, so we could just use the dollars, right? So the entire narrative is completely nonsense, right? So why we have to do two steps when we can do one?

(Ardoino wants us to believe that if Tether wanted to buy bitcoin, it would simply go to a banked exchange and buy BTC with cash. But why would Tether use cash to buy its stash of bitcoin if it has copious tethers on hand? He is doing a terrible job of trying to evade this question. )

Peter: That’s fair. Okay. Okay. 

In terms of an audit, this is something that comes up over and over. And I discussed this with Phil Potter a long time ago. I know you’ve got it on your website, but people don’t trust your own lawyers providing the audit. Is there anything stopping you from having a full and independent audit? 

(The only thing that would remove all doubt that Tether has any cash or reasonable assets backing tether at all, would be an independent audit. But Tether and Bitfinex have consistently avoided this over the years, and they always have some excuse.)

Stuart: We spoke about this two and a half years ago when we said that we couldn’t get an audit in part because of the amount of business that we had at a single financial institution at that time. 

We have provided consulting reports from our accounting firm. I think you’re referring to these in your question, from a law firm, Freeh Sporkin Sullivan, a firm of ex-federal judges and an ex-director of the FBI, and a letter from our bank. 

And those were good faith efforts to try to provide transparency, and some of the comfort that assurance services would provide. We said at the time that we continue to search for new ways to bring more information to the community. I mentioned Ryan Salome’s remarks earlier, that’s part of those efforts. Interviews like this are part of those efforts, public comments from our bankers are part of those efforts. 

So we continue to look for useful ways to share information with the community, to be more open and transparent. And we have important plans in that regard for the coming year. But I can’t get into specifics on that just now. So all I can say on that one is stay tuned. 

Peter: Well, we can keep talking. Okay. So the reason I reached out to you is I get a lot of DMs, a lot of emails, and just suddenly over the last couple of weeks, I’ve had so many about tether and I’m posting things online and people say, it’s tether manipulation, and I haven’t seen it in a long time. 

Now that I’ve done my own research. I don’t believe tether is manipulating the market.

Stuart: Few serious people do.

Peter: And that’s what I realized, few serious people do. So my question really is for you is where do you think this is coming from?

(I love how McCormack is acting like it is a complete mystery why anyone would think Tether is anything but a completely legitimate operation.)

Stuart: That’s a good question. I couldn’t hazard a guess. I think it’s probably nocoiners that just don’t believe in the bitcoin project and by extension, they don’t believe in Tether. It could be people with their own agenda. That’s really not for me, for us to speculate.

But, we’ve noticed the same thing, Peter. Like this comes up from time to time. It’s almost a six months schedule. Every six months or so, there’s some kind of huge push to get a whole bunch of FUD out there. And it can vary as to the reasons why. This current batch might be related to the January 15th date that people have been talking about in the NYAG litigation.

Peter: Well, I’m going to ask you about that, but you’ve got people like Nouriel Roubini, Amy Castor, Frances Coppola, all quite openly accusing you of manipulating the market and running a pump with tether to pump bitcoin. So they’re quite serious allegations from quite known profiles. Have you not considered any litigation against them for libel?

(I’m truly flattered my name would come up here. Nocoiners believe Tether has printed billions of unbacked tethers out of thin air because Hoegner has flat out admitted in court documents that tethers are not fully backed. And he is telling us here, again, in this interview, that they are backed by mysterious assets, nonsense loans and goofy math. We believe Tether is manipulating the markets because we know for a fact that more BTC are traded against USDT than fiat. I find it amusing McCormack is suggesting Tether sue us all for libel.)

Stuart: Look, we don’t believe in suing our critics into silence. We have never made a claim against anyone for defamation. It’s not to say that we wouldn’t ever, but it would be a high bar. We think it’s better to try to counter fiction with facts and truth. And in fact, contrary to what some may think we’re not particularly litigious people. And that obviously, for what it’s worth, extends to journalists as well. We’re not about to hail Forbes media into federal court in New Jersey. As to why Nouriel, why Frances, why Amy, are engaging this kind of discussion, these kinds of statements. You’d have to ask them.

(We engage these kinds of discussions because Tether/Bitfinex have failed to provide evidence that Tether is fully backed and the companies have a long history of shenanigans. Also, the NYAG is investigating you for fraud.)

Peter: Yeah, fair enough. Okay. If you look back historically, because you’ve had all these accusations, you have to deal with all this pressure. Is there anything where you look back and you think, okay, we did that wrong? We’ve handled this in the wrong way. Are there things you should have done better, should have done differently?

Stuart: Absolutely. Look, for people out there that are true skeptics, and I’m not talking about deniers, not haters, that it will never be convinced. I think one thing that we could have done better in the past and we’re getting better at now is communications. 

And that’s not a reflection on anyone. Paolo’s brilliant at this stuff, just like he is with everything else. He’s a brilliant guy. Joe Morgan is great whom, you know. And we have very capable defenders out there, making our case for us. But we’ve been so focused on building cool things that we have—and I’ve said this publicly–we have neglected our comps. We have always known that we are a tech firm or not a law firm. We’re not a PR shop. We’re not a compliance shop. Although compliance is very important.

And mea culpa. I want to be clear I’m as guilty of this as anyone else to the extent that I haven’t prioritized public communications. And I’ve said in the past, some of the FUD, it will just go away. You know, let’s not give it oxygen. I was wrong about that. So you can blame me for that. But we are getting better at communicating with people. We’re getting better at this. We’re learning. We’ll continue to learn, and we’ll continue to improve and get the facts and evidence out there.

Peter: All right. Let’s talk about the NYG case. For those people who don’t know, because it is quite complicated, how would you summarize the accusations?

Stuart: Let’s start with some baseline information on NYAG. First, there is no lawsuit or complaint that’s been filed against Bitfinex or tether in New York by the AG. 

Second, this is not a criminal investigation. And third, the special proceeding is only directed at getting information and keeping the injunction in order for the AG to conduct her investigation. 

Now, Bitfinex and Tether have cooperated with the AG’s office for over two years and have produced approximately 2.5 million pages of materials. While the AG’s office originally obtained an injunction relating to Tether’s reserves, in April of 2019, that injunction was substantially narrowed in the ensuing weeks and has not disrupted the day-to-day business of either Bitfinex or tether. And the injunction in the order for information is what we’ve been referring to online when we speak about the 354 order.

So the injunction set to expire by its terms on January 15th, which is the January 15th date that I referenced earlier that people have been talking about. And by that time, the companies expect to have finished producing documents to the attorney general. 

So we’ve seen a lot of FUD and fear-mongering about January 15th, much of it by those who hate, not just tether, but the entire digital token ecosystem. Despite those rumors and attacks, let me assure you that the business of tether and Bitfinex will remain the same after January 15th. I think our discussions with the AG are going well. I think they’re constructive. And we look forward to continuing that conversation with them.

(The Jan. 15 date he is speaking of refers to the date Tether/Bitfinex are supposed to handover their financial records to the NYAG, so the investigation into their business can proceed. The NYAG letter to the court is here.)

Peter: But what is it they’re pursuing here, particularly?

Stuart: The original order had an injunction component, enjoining us from doing certain things, which doesn’t affect our day-to-day business, at this time. It also sought information. So if you go through all of the requests that were in the original order from last April, they set a series of things that they wanted, a series of documents, information they wanted from us. 

We pushed back on that. We appealed the New York Supreme Court’s ruling on that. We lost. We accept that, and we’ve mediated our disputes as the attorney general said in their letter to the courts a few weeks ago. So again, they’re looking for that information. We are in the course of providing that. That’s going to be done by the 15th and we’re continuing to talk with them.

Peter: So what, what happens after the 15th? What are the next steps in this, because two years is a long time. I’m sure you want this wound up as quickly as possible. What are the next steps after that?

Stuart: Time will tell. Again, our discussions with them are constructive. We’re on track to give them everything they’re looking for. And we’ll see where it goes.

Peter: Okay. I’m trying to understand what the various possible outcomes are from this and whether you can even talk about them. Is there a scenario where Tether is wound up? Is there a scenario where Tether is just fine and is there a scenario where they actually complete their investigation, and there’s no action to be taken?

Stuart: Certainly. They may complete their investigation and they may bring a complaint. They may complete their investigation and think that there’s nothing further to be done. There may be some kind of settlement between the parties. There are any number of things that could happen.

Peter: What about the other lawsuit? What about the other one I read about, there’s a class-action lawsuit regarding the traders. Where are you at with that? You applied to have that ended, right?

Stuart: Yeah, so we have filed our motion to dismiss and the plaintiffs have given a reply in that, and we are waiting at this point to see if there’s going to be oral argument on the motion.

Peter: Okay. Just on the regulation side. It’s quite an interesting time for, I’m going to say crypto, and I hate that word, but crypto slash bitcoin slash stable coins and very interesting things that happened with the OCC recently. It feels like there’s more regulation coming, but some of it’s quite open regulation that’s actually allowing this industry to continue, but with a lot of oversight. Specifically, regarding Tether, what are the regulations you have to follow? What are the agencies you have to work with?

Stuart: Tether is registered with FinCEN as a money services business. That means the tether has to make reports up to FinCEN, have a compliance program, which I referred to earlier, just in passing, subject to examination by FinCEN, that kind of thing. 

Tether also makes reports to the BVI’s financial investigation agency under applicable law there, as most of the corps in the Tether group are BVI companies. So the bottom line is that Tether is regulated. So this notion, you’ll see sometimes that tether is quote “unregulated,” which a big word in some mouths, in my view is just flat wrong. And it’s a little bit irritating, but those are the baseline rules that that Tether has to follow. And our compliance program has been built to match or exceed those standards.

(Tether is not regulated in any meaningful sense. The company is registered in the British Virgin Islands. In fact, the reason it got into hot water with the NYAG, is because it was allegedly doing business in NY without a BitLicense, required for crypto companies to do business in the state, and it violated the Martin Act by misleading customers into believing that tethers were fully backed when in fact, they were not.)

Peter: So what did you make of the OCC letter? Because it was quite interesting, the idea that banks can start issuing stablecoins. I imagine for someone like you guys, that’s quite interesting because could you see a scenario where they’re working directly with Tether?

Stuart: I think it’s premature to say that. I agree that the OCC letter was very interesting. Other people far smarter than I am, have talked about that and opined on it already. And I’ll certainly defer to our U.S. counsel on that. But it’s very interesting and look, we always are interested in working with and cooperating with and teaching and learning from regulators and policy-makers and law enforcement agents around the world, not just in the United States. 

That’s another step on that road. I think you’re right. I think increased regulation in this space is coming. I think it’s going to be different, depending on where it is. We don’t take U.S. customers. But we are still registered with FinCEN, so that’s something that we need to pay attention to. And we’ll continue to engage on a worldwide basis with anyone who wants to work with us to help develop their own policies, help develop their own regs and figure out what they can learn from us and what we can learn from them.

(If you are registered with FinCEN but you don’t take U.S. customers, what is the point of being registered with FinCEN?)

In that kind of context. We just think that other people are better qualified to do the last mile and we’re happy to cede the field to them. 

Peter: This might be a question for you Paolo, but are there scenarios where Tether can fail, any form of catastrophic failure?

Paolo: I think that the only one that I’m not worried about, but due to my technical nature, I’m working every single day and second of my life to prevent, is ensuring that the private key stays safe. That’s it, right? So what we do is choose the blockchains that we allow tether on in a really careful way. So we choose blockchains that are, first of all, supported by a wide community. We choose blockchains that have a native type of token support, if possible, that has a built-in multisig pattern that we can use and have support for hardware wallets. 

So these are basically the key requirements for us to operate safely on a specific blockchain. We do have the capability of freezing accounts on most of the blockchains. That is really important. As Stu said, we save tens of millions of dollars. Part of those were also some of these situations were public when we did that. Recall one exchange hack, for example. So, yeah, basically my life is all about thinking how things can go wrong and try and make sure that we can prevent those from happening.

Peter: Which blockchains are you currently supporting?

Paulo: We support bitcoin two ways, from Omni Layer and Liquid. Then we support EOS, Ethereum, Tron, Algorand. [Speaking to Peter] Don’t do that face please. [Laughs]

Peter: Fucking Tron. 

Stuart: On a podcast called What bitcoin did, you’re going to get the grimace, Paolo.

Paolo: Ethereum fees were $16, mate.

Peter: In fairness, you’ve answered all the questions that I wanted to ask you, and these were based on a lot of the questions that were coming out in Twitter, when I put it out there. Most of them are related to, is it fully backed, blah, blah, blah. I personally still think there’s work to be done there. So I’m going to keep pushing you on that. 

Stuart, is there anything I’ve not asked that you kind of wish I had?

Stuart: No, I don’t think so, but I do want to just jump back to your comment. I actually agree with you. I think that there is work to be done. I think you should continue to push us and nothing is perfect. We can always do better and we look forward to doing better this year and beyond, but we’re really excited about 2021. And we look forward to being pushed. We look forward to these questions. We look forward to engaging with the community and putting the facts out there on the table.

Peter: How comfortable would you be doing one in the future, give a couple of months and perhaps allow people to submit questions in and take the questions submitted?

Stuart: I would have to talk to our PR folks. But personally, I’m very comfortable with that. I’m fine with that.

Peter: I think we should do that. As I said in the start, and for full transparency, people should know that I’m in a legal situation and Tether has helped support that at some points

But, at no point, does that change the line of questioning. I told you beforehand, I’m only doing this if I can ask any question I want. People should know that. I wanted to do it because whilst people say, Oh, you’re a journalist Pete, you should be completely impartial. 

I think this is all FUD. And, I’m finding it really annoying. And I’m finding a consistent pattern and who it’s coming from. And it’s coming from people who’ve had an agenda against bitcoin for a long time. And it’s coming from people who I think are nocoiners and they’re salty. 

I haven’t found anyone, I actually respect doing this, so I can be impartial at best with my questions, but I’m not impartial because I believe this is FUD. But I will continue to push you. I’ll continue to ask you questions. And I appreciate you coming on, man. And yeah, hopefully, we’ll do this again in a couple of months and, if that’s okay with you guys, I’ll open up to the floor and see if questions in the community.

*Update Feb. 6: Previously, I said Bitfinex borrowed $700 million of Tether’s money, but it looks like they are now saying it is $750 million. (The NY AG said in April 2019 that Bitfinex had taken “at least $700 million.”)

Update Jan. 12: An earlier version of this story stated that Tether had minted 20 billion tethers this year alone. That’s incorrect—it’s 20 billion since March 2020.

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