Notes 11/25: Thankless Thanksgiving for Crypto, Binance’s White Knight Act, and FTX Gift Cards

There was not too much to be thankful for this year in cryptocurrencies. The pandemic’s excesses, during which crypto markets set two price records in a single year, are still working their way through the system.

A precipitous double-digit decline in crypto prices since the start of this year would be sufficient to generate headlines in ordinary times. But we live in extraordinary times.

A series of scandals have rocked crypto’s foundations, exposing fraud at major players and leading to bankruptcy filings. Even as FTX filed for the industry’s biggest bankruptcy this week, discussions about the next domino to fall are already dominating conversations.

A report Wednesday points to stablecoin giant Tether, arguably crypto’s most controversial and profitable venture. The stablecoin’s banker – Bahamas-based Deltec Bank and Trust – shares management with a small Washington-based bank that received a $11.5 million investment from Alameda Research, disgraced FTX CEO Sam Bankman-Fried’s (SBF) other company.

Considering that Alameda was the biggest buyer of Tether last year, the connection raises important questions about the nature of their relationship. The establishing of a trail between FTX’s missing millions and Tether’s profits could provoke a run on the token and destabilize its peg.

As I mentioned earlier, Tether’s possible downfall will have systemic implications across the entire crypto ecosystem because it accounts for more than 50% of all transactions at crypto exchanges. Such a threat of systemic failure generally spurs introspection and self-regulation in other industries. Not so in crypto, where it is business as usual with fantastic yields and extravagant pronouncements.

But one arena where fears of a continued contagion are evident is crypto markets.

Bitcoin price already plumbed its lowest depths, below $16,000, in two years on Monday. While it has recovered since, prices are still on edge. Over the Thanksgiving holiday, bitcoin price fell to $16,333. The cryptocurrency has remained in the $15,000 to $17,000 range for most of last month and observers say the next price move catalyst could be more bad news from the crypto ecosystem. Traders are, obviously, not waiting with bated breath for that move. As of this writing, bitcoin is changing hands for $16,518.05, down roughly 4% from its price a day earlier.

A New White Knight for Crypto  

A big crypto player has taken on the leadership mantle from FTX. Binance, the world’s biggest exchange by trading volume, is corralling partners for an industry recovery fund that will be deployed to aid “strong projects” in the ecosystem.

According to reports, the fund already has a size of $2 billion, with $50 million coming in from other players in the industry. At the same time, Binance is bidding for assets from troubled crypto entities like Voyager. The exchange’s US arm has also launched an “Innovation PAC” to influence crypto legislation in the United States. FTX CEO SBF had similar priorities (and even drew comparisons to JP Morgan) before his fall from grace.

In fact, Changpeng Zhao, Binance’s CEO, has charged into the arena like a white knight, raising his media profile and exhorting industry players to come together through Twitter. But his playbook looks suspiciously like the one followed by SBF.

Binance’s FTX Playbook

The similarities extend beyond public utterances and appearances.

Like SBF, Zhao heads an operation that is a financial black box. Binance may have the largest trading volumes among crypto exchanges, but it has achieved that dubious distinction on the back of trades for illiquid token pairs.

A significant portion of those volumes also involve Tether, meaning it is directly affected by problems at the stablecoin. Binance’s insurance fund for customers – money set aside to refund customers in case of a hack – also has the company’s own tokens in its reserves. A run on those tokens could empty the fund’s coffers.   

In the past, Binance’s platform has been called a ‘shitcoin casino’ and a ‘ticking time bomb’. Regulators have banned it from their jurisdictions and the company doesn’t seem to have a fixed address that it can call headquarters.    

The company released a Proof of Reserves (PoR) report, a faulty document being promoted by industry players as a means for transparency, yesterday. But there is not much to see except a hashed address without individual account balances.

CZ wants to “build more transparency and scrutiny” into crypto. It might be an idea to start with his own exchange.

‘Tis the Season for (FTX) Gift Cards  

The folks at Brooklyn Institute of Social Research have come up with an ingenious gift card to…um…commemorate the latest developments in crypto.

An FTX Gift Card. “This holiday season, invest in learning instead of a multilevel marketing scheme,” they write. A photo of Sam Bankman-Fried stares at you from the page. The card is worth $315, possibly more than the current value of FTT tokens.

I am thinking of buying the card with my stash of Tether and Luna tokens.

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