Just the other day, there was an article in the FT about "stablecoins" describing them as a "link" between traditional curriencies and cryptocurrencies.
There is quite a lot of manifest absurdity in the world these days, economics, politics, and matters financial.
To set the stage for today's exploration, a review of the "logic" for cryptocurrencies.
Proponents argue that:
Government-issued currencies are not "backed" by real assets. e.g., gold.
Governments can therefore issue as many "fiat" currency notes as they wish. Thus eroding value via inflation.
Electronic payments made with "fiat" currencies are subject to (a) surveillance and (b) seizure by pressumably intrusive and untrustworthy governments.
Cryptocurrencies are the "answer" because:
They are created by private sector entities and thus free from the "malign" behaviour of governments.
A key assumption (delusion) here is that private sector entities' honesty is beyond question.
While like fiat currencies cryptocurrencies are not backed by real assets, their value depends on and is obtained through the operation of the market.
A key assumtion (delusion) here is that the "market" never misvalues an asset either because of irrational exuberance, manipulation, market failure, etc.
Electronic payments made with cryptocurrencies are immune to (a) surveillance and (b) seizure by those presumably malign and untrustworthy governments.
A key assumption (delusion) is that movement via a trading platform from "fiat" currencies to "cryptocurrencies" and vice versa is not subject to (a) surveillance and (b) seizure by untrustworthy and malign governments.
Elliptic a blockchain/crypto security company claims to have traced Colonial Pipeline's ransom payment to a BTC wallet to which apparently other such payments were directed. And then payments out of that wallet. Another delusion hits the wall.
So now to the "stablecoin"
Having trashed "fiat" currencies as unreliable and potential unstable, some stablecoins offer the investor the proposition of indirectly holding "fiat" currencies, e.g. tether.
In such cases, the stablecoin claims to hold one unit of fiat currency for each unit of cryptocurrency. So let's get that straight. It's backing its "currency" with the "real" asset of a "fiat" currency. But with the holder of the stablecoin assuming the risk of the intermediary between the Central Bank issuer of the fiat currency.
Some stablecoins are tied to bitcoin or other sh*tccoins. Exactly how the underlying volatility of those "assets" is managed is no doubt a combination of "naive belief", "magic", and derivatives. The latter being the last (valuation) refuge of scoundrels and conmen.
Some stablecoins can in the words of Celsius pay interest 100X what one can earn in the bank market for fiat currencies. As of August 2020, capable of earning up to 16% per annum!
A key assumption (delusion) is that such returns make economic sense from investing in a non-productive asset. At least Tesla has a "real" business selling emission credits to third parties, even though that market appears to be shrinking!
So let's look a bit closer at the first class of stablecoins – those "tethered" to a fiat currency.
As background, here's a link to the settlement agreemen effective 18 February 2021 between the NY State Attorney General and iFINEX INC., BFXNA INC., BFXWW INC.,TETHER HOLDINGS LIMITED, TETHER OPERATIONS LIMITED, TETHER LIMITED, TETHER INTERNATIONAL LIMITED.
The pattern of behaviour recorded in the settlement agreement should demonstrate the fallacy of several of the assumptions (delusions) cited above.
It should also demonstrate the additional risk that such entities face in obtaining the services of creditworthy financial institutions.
When one is forced to deal in the “odd and out of the way corners” of financial markets, with undercapitalized institutions in less than ideal jurisdictions, including non banks, one’s business is subject to greater risks.
And those risks ultimately flow to the “wise” investors who have placed their funds with “one”.
Bitfinex is a cryptocurrency trading platform that allows its clients to trade between fiat and cryptocurrencies.
Tether is a stablecoin which claims to hold one US dollar in reserves for each “tether” issued.
It is by most accounts the “largest stablecoin in the cryptospace”!!!!
The companies are related parties.
Initially, Bitfinex and Tether worked through banks in Taiwan that had correspondent relationships with Wells Fargo Bank. In early 2017 WFB stopped processing transactions for Bitfinex and Tether.
In June 2017 Bitfinex opened an account with Noble Bank International Puerto Rico.
NBI was formed under Act 273 of Puerto Rico which provides for the creation of offshore financial entities. Such entities enjoy tax benefits and may not offer services to residents of Puerto Rico. They must have a minimum capital of US $5 million of which US $250 thousand must be paid in, and four employees.
Just the sort of financial “institution” one might think a good place to plunk down US $500 million of one’s “spare” change. Or more precisely one's customers' hard earned money.
Tether for its part kept its US dollar reserves at the Bank of Montreal but the account was in the name of its attorney.
Presumably, that was because BoM didn’t want to “entertain” an account from Tether.
Until September 2017, Tether (or more precisely its attorney) held some USD 61 million in that account. At that point some 442 million tethers (worth US $442 million) were in circulation.
Even without a calculator you should be able to determine that the "collateral" coverage was less than 1 to 1.
During that time Bitfinex held US $382 million of Tether’s funds in its account.
After 15 September Tether opened an account at NBI and Bitfinex transferred the funds to Tether’s account.
Between 2018 and 2019, Bitfinex had problems finding an FI willing to handle its transactions.
So it turned to Crypto Capital in Panama to hold its funds.
By 2018 CC held some US $ 1 billion of Bitfinex's funds or more accurately its customers' funds.
No doubt it sounded like a great idea to plunk down US $1 billion in a non bank.
What could possibly go wrong?
Bitfinex's contact there was "Oz Yousef" or just "Oz".
I'd hasten to add that it's not clear from the settlement agreement whether Oz was a wizard or not.
Oz responded to Bitfinex's subsequent requests for its funds with a variety of excuses as to why the funds couldn't be moved.
Bitfinex nevertheless continued to direct new clients to remit funds to CC!
Apparently when you've got a guy like Oz handling your money, you can't let a few bumps in the road disturb the relationship.
During the summer of 2018, Bitfinex "borrowed" US $ 400 million from Tether.
Oz still was holdiing on to CC's money.
The two entities relationship with NBI was terminated and funds shifted to Deltec Bank Bahamas.
Bitfinex repaid Tether's initial US $400 million "loan" by redeeming an equal amount of Tethers.
Oz still wasn’t releasing Bitfinex’s funds.
2 November 2018 Tether remitted US $475 million from its account at Deltec Bank to Bitfinex’s account at Deltec bringing the total “loan” to some US $ 625 million.
In February 2019 Tether updated its website to state that “[e]very tether is always 100% backed by our reserves, which include 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 (collectively, ‘reserves’).”
Tether did not announce that it had changed its disclosure, and indeed there were no media reports about the change until several weeks later on March 14, 2019.
It also did not provide a breakdown of its "reserve" holdings which would have shown that the bulk of these were in the form of loans to Bitfinex.
Subsequently, Bitfinex and Tether agreed a “credit” agreement under which Bitfinex could “borrow” up to US 900 million of Tethers funds (the supposed reserves for Tether). This appears to be part of a “regularization” on an existing US $625 million existing loan.
As of the date of the settlement agreement, Oz still hadn’t released any of Bitfinex’s cash or as noted above more precisely Bitfinex’s customers’ cash.
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