Nov 2022

November 28, 2022

FTX Bankruptcy: Wen Regs?

Here’s hoping retail wasn’t duped by whitewashed FTX puff pieces posted on MSM sellouts like the NYT, Forbes, WSJ, and Bloomberg, the latter of which allegedly ignored calls from Mark Cohodes to investigate FTX in July 2022. SBF is still without silver bracelets and openly speaks at events; yet, the developer of Tornado cash remains behind bars with a court date in February 2023. After FTX’s $32B earthquake, aftershocks are expected. Now with a 40 caliber in the chamber, crypto bystanders fear Congress has an excuse to overlegislate digital asset controls for in the midst of chaos, there is opportunity – Sun Tzu.

How did we get here? Simply, there was a Madoff copycat in the kitchen. Without any parental supervision the cookie jar ran out of chocolate chips and $10B+. US Congress twiddled its thumbs when it came to digital asset regulation for several years, so Web 3.0 companies opened abroad in other financial hubs like Singapore, London, and Zurich/Zug. Not only do they have regulatory frameworks in place, they provide the veil of legitimacy. FTX was an upstart crypto exchange seeking just that to onboard US consumers and regulators. Queue the marketing blitz to convince the former through celebrity endorsements and superbowl ads. For the latter, FTX headquartered a smidge outside US purview with direct flights to DC under 6 hours.

The Bahamian government was one of the first to have digital fiat issued in October 2020 with the Bahamian Sand Dollar. They created a regulatory framework with the DARE Act the same year. CBDC? Check. Regs? Check. All we need now are customers. Let’s cajole an exchange. With FTX in the mix, the Bahamas became a cutting-edge crypto locale and FTX was fawned over as a legitimate exchange formed under a jurisdiction with a digital asset framework. The circulus in probando was so convincing, FTX’s CEO was cast to play C-SPAN lobbyist pleading US Congress for regulations against corrupt crypto exchanges. I-R-O-N-Y.

Now you may be wondering, when VCs receive pitches and portfolio companies pass the first round of overpaid investor interns, due diligence is supposed to ensure the investments are sound, right? That depends. Did a woke vegan westerner put up a front and say all the right shibboleths? No corporate governance? Whatever. Auditor in the metaverse? Awesome sauce. CEO playing video games during an investor call with Sequoia? SHUT UP AND TAKE MY MONEY! FTT tokenomics and illiquid collateral be damned. Fast forward to one CZ tweet induced bank run. FTX files for bankruptcy. 

This proceeding is going to take a hot minute. First off, we don’t know where they will take place. The Bahamas recently challenged venue and jurisdiction, trying to claw everything back from DE to Nassau. Second, it’s a crazy web of entities with opaque money trails, missing documents, and possible political corruption. Were those SOL halts a front for money laundering? Where’s the money Sam? When you see BitBoy tell him I say hey! In FTX’s bankruptcy declaration, JR3 said he had never seen “such a complete failure of corporate control”. This is the man that handled Enron post scandal. That bankruptcy took 3 years to finalize. Creditors did not receive final payments until 2011, 10 years after Enron filed for bankruptcy in 2001. Justice luckily came quicker for Kenneth Lay, fraudster Enron CEO, when he was convicted in 2006. Moral of this trip down memory lane? If you’re an ex-FTX customer with funds stuck and pitchforks out for SBF, don’t hold your breath. 

In the aftermath we play the blame game. Republicans scream about SBF’s political donations to Dems. What’s $40M between friends? The left retorts the right received the same from Ryan Salame. Even Terry Duffy is playing Freudian slip bribe hot potato on FOX. FTX users file a civil action against the GOAT and Larry David. MSM yells words like contagion, bankruptcy, and polyamory to scare retail away from investing in the digital asset revolution. In the midst of the nonsense, U.S. Congressman Tom Emmer (R-MN) tweets some sense into the abyss: “FTX’s collapse is not a crypto failure. It’s a failure with CeFi, Gary Gensler, and Sam Bankman-Fried. Decentralization is the point.” Agreed, decentralization is the point, but that’s not the current state of affairs. It’s an aspiration. As for today, our industry anxiously microwaves popcorn as DCG, Binance, and Tether dance around catch phrases like proof of reserves and WAGMI. 

Crypto executive orders, haphazard SEC oversight, promise of legislation for bills like the DCCPA. Been there, done that, got the T-shirt. Wen regs? Will the 118th US Congress work together without worrying about catching cooties from the other side of the aisle and get the floor to vote on something Biden will put ink to? 

The worry from Web 3.0 developers, bitcoin maxis, and degens are that the powers that be will go too far. Financial players are typically not fans of restraint. Our neighbors to the north recently enacted annual net buy limits for certain jurisdictions. Our neighbors to the south technically still prohibit financial institutions to authorize public operations with virtual assets. We have a regulator on the loose wasting US tax dollars suing irrelevant players like LBRY and Kim Kardashian. Apologies LBRY, you’re not irrelevant. Say hi to Ripple for me. 

Remember the aspiration here: decentralization. Today we have voting rights and the US Constitution. Tomorrow, decentralized governance. If the right regulatory framework is put in place, maybe that reality comes 100 years sooner rather than later. What matters is the framework which will allow the USA to keep the Pax Romana in place and USD #1. Eventually winter will come, the bear will take his spoils, hibernate, and the markets will inexplicably melt up as they always do to the chagrin of retail day traders. Only this time around, it looks like we’re getting new adult supervision. How chill will the new homeroom teacher be? Only time will tell if they’ll increase our test scores in a semester or make us watch Of Mice and Men for the fifth time on VHS. 

Crypto is still a bright-eyed teen with its 14th birthday coming up; that determined, ambitious Capricorn. Like many adolescents, it never listened much to their parents. But who’s to blame crypto? When it came to passing digital asset regulations for the past several years, it was as if US lawmakers and regulators were out getting a pack of cigarettes. Laissez faire was great while it lasted, but for too long were grifters like SBF taking all the other kids’ lunch money and causing playground famines. MSM talking heads are pissed. Crypto talking heads are pissed. Hell, I’m pissed. I’m hungry for regs. I hope you are too. 

by Philip A. Bildner

Fighting the Fed

It may seem like an eternity, but it was just a scant three years ago that markets experienced a ripsaw of events that would change the world as we knew it. I recall sitting in my office on the floor of the Bank’s mortgage operations center, word trickling in by the hour of investors going belly up. Liquidity was evaporating like a drop of water on a Saharan cactus, as the risk environment quickly elevated to panic mode. Markets were being ravished as a new pathogen, Covid-19, was eviscerating every corner of the world, and had sunk its claws into US soil. The calls for the Federal Reserve to act grew louder and louder, and they hastily threw together a plan. 

On March 15th, Jerome Powell and the FOMC embarked on the most aggressive economic backstop in Central Bank history, lowering the Fed funds rate within two sessions to zero percent, and the discount rate to a quarter percent. This would be the first time they had moved interest rates in increments greater than a quarter since the Great Depression. Even myself wondered at the time, could the market shrug off the implications of millions of Americans, if not the world abroad, being homebound, unable to show up for the jobs that are the backbone of the economies domestically and abroad? As markets did an about face, the screams were loud, echoing through every trading floor, reverberating across the internet, and every home office “DON’T FIGHT THE FED!”. 

Indeed, the wisdom was sage advice. Equities ripped upwards, pulling back if only a moment to catch their breath, before continuing onwards to new heights. Anyone brave enough to short the rips, dips, and everything in between, quickly found themselves insolvent. Markets were awash with capital, and the gettin’ was good. It was REALLY good. As stimulus checks hit Americans’ bank accounts, many cabin fevered individuals rushed in to try their hand at day trading. Meme stocks were born, and once orderly markets started to resemble Caesars Palace on fight night. For two and half years, the table was rife with food and drink, and the gluttonous bulls feasted daily. 

However, the music always stops eventually, and the first warning shot came as inflation marched higher and higher, catapulted by this party of the century. At first, many refused to believe the Fed would cut rates. The economy was soaring, the job market sound as a pound, and everything was right in the world of humanity that had just shrugged off an unparalleled epidemic. How could they let the music stop now? But so it goes that every excess has its vice, and in this case, that vice is the threat of entrenched high inflation. 

Just as everything is good in moderation, inflation is no different. The Fed’s current mandate has a target rate of 2%. Inflation is necessary for any currency that aims to foster commerce. If the value of something is rising (deflationary), it is less likely to be spent, and more likely to be hoarded. However, left untamed, runaway inflation can become sticky, wreaking havoc on economies as growth stagnates via the purchasing power of the population sinking like a rock. 

Once the pain of high inflation began to set in, it became clear that the Fed would have to put the brakes on quickly, and force the dollar into a deflationary environment, before rapidly rising inflation could embed itself into our economy. The bulls cried in dismay, refusing to believe that the drug dealer would take away the needle that provided such good times. But the Fed gave fair warning, and the mighty bulls began their fight. 

At first, it seemed they would prevail. Markets continued to rip higher, even as the Fed levied the fine of a rate increase unto them, many unwilling to believe the Fed would make it past the first miniscule twenty five basis point hike, before turning back. In peculiar fashion, these individuals began to defy the very war cry they screamed from the mountain tops. They had gone from friend to foe, and the battle was on. But why had they abandoned the motto that had served them so well? If you wouldn’t fight the Fed on the way up, why would you attempt to fight them on the way down? A market so addicted to the Fed’s drug, they refuse to believe that Powell and company will follow through with their plans to extinguish inflation back to a nominal level. 

I believe that to be a mistake. Now, I am not one to doubt the bond market. Historically, they are usually on the right side of history, and the bond market has made it clear they believe the Fed will continue to raise rates in the first quarter of 2023. The issue is, however, historically there isn’t really much precedent to draw on for the current situation. We have never faced an incoming recession (if not already here) with rates previously so close to zero bound. The best example is the great inflation of the 1970s, a battle that took the better part of two decades to reign in, with Fed Chair Volcker finally successfully doing so in the 80s. We can however draw one key takeaway from that situation, and that is that high inflation can be very, very difficult to tame.

by Erik Englerth