- Get your signed copies of Attack of the 50 Foot Blockchain and Libra Shrugged, for £25 the pair plus postage — £6 UK, £10 Europe, £12 rest of world. See the post for details.
- Get in quick, and you’ll get a sticker with your books! “It can’t be that stupid — you must be explaining it wrong.” See below. All the pints to Hammerite on SomethingAwful for the design, and Vortmax on the SA Buttcoin thread for printing these up just for the heck of it.
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Bitcoin is anti-fragile, except against governments
The recent US Senate infrastructure bill has a provision to require digital asset brokers to file the same sort of tax information with the IRS that dealers in other electronic assets have had to file for some time now — and that Coinbase, for example, already files on behalf of its customers.
The people who need to file this information, from the 2022 tax year on, will be:
any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.
This means a sale on behalf of someone else. That is, the rule is written to be applied to brokers.
The crypto world went into a performative frenzy of shrieking dismay at the slightest possibility of regulation of any sort.
Most of the shrieking centred around the dire possibility that crypto miners might count as brokers for this regulation — which is really a bit of a stretch.
Though if you’re processing transactions of value-that-substitutes-for-currency, and you’re being paid in transaction fees to do so, then I’d have a hard time seeing how you weren’t quite literally in the business of processing transactions for money. If it really hurts that much to be literally in the business of transaction processing, you could always mine empty blocks.
One notable tweet thread came from Jake Chervinsky, who expresses the crypto industry’s concerns quite clearly. You’ll see crypto people cheering him on and retweeting him widely — and non-crypto people suggesting that businesses that can’t exist in regulatory compliance should perhaps not exist, and that crypto could perhaps consider dying in a fire. [Twitter, archive]
The “crypto industry” is threatening to get up and leave the US, which is ludicrous — as cool and good as that would be. The US is where the US dollars are. As the SEC and CFTC keep finding, the hard part is keeping crypto operations even slightly compliant with US regulation, in crypto’s ardent pursuit of the US dollars that operate under said regulation.
Special points go to the guy who tweeted a thread saying that the IRS collecting the same information on crypto businesses as they collect on other asset businesses was just like the Holocaust, and doubling down when called on his coiner levels of historical understanding. [Twitter, archive]
After the crypto industry started yelling, crypto-friendly senators proposed various amendments, opening loopholes of various sizes — including a proposal to exempt only proof-of-work miners from the provisions, because encouraging the Bitcoin ecological catastrophe is just what you want an infrastructure bill to do, right?
Bitcoin mining is bad. It’s not a business that should exist, let alone a business that deserves special carveouts to encourage it.
Anyway, the amendments all failed, skewered by one senator who wanted more military spending. The bill passed, and is now off to the House for consideration.
Because here’s the big secret: nobody with power gives a hoot about crypto.
The Senate bill is likely to be blocked behind the House Democrats’ bill on social programmes. The House Republicans are pretty much devoid of moderates — bipartisanship isn’t big with Q followers — so the present bill will need near-unanimous Democratic support. But the House progressive Democrats consider the present bill a waste of time unless the House Democrats’ bill passes. So the sky may not fall on crypto for a couple of months. [Politico]
Slightly tethered
Tether has issued the attestation — not an audit — on the reserves supposedly backing its stablecoin, as of 23:59 UTC, 30 June 2021. [press release; attestation, PDF]
Having realised that being named in Treasury discussions might be a bit more attention than they’re used to from the crypto world, Tether now break down the commercial paper that is claimed to make up half of the reserve.
The commercial paper issuers are still not named — in the way that every money market fund details who their commercial paper is from — but most of it is apparently rated A-3 or better. “Ratings refer to Standard & Poor’s (“S&P”) short-term credit rating, where available. Where a rating is unavailable, publicly available industry standard conversion tables have been used to convert ratings from Moody’s or Fitch to the S&P equivalent.” This seems to read like it’s all rated by S&P, Moody’s or Fitch. I’m sure there’s a weasel in there somewhere, though.
The report notes: “Other assets and liabilities are valued at cost plus any accrued interest or, otherwise, the redemption value, where applicable.” This suggests that if Tether bought a pile of distressed commercial paper cheap, they’re listing it at face value. What do you do with distressed paper? Roll it over for next time! Patrick McKenzie has some theories. [Twitter]
Tether has also bought a massive pile of US treasuries, bringing these up from $1 billion to $15 billion. So at least there’s a lot more genuine cash money in the reserve.
Running in Circles
Not to be outdone, Circle’s latest attestation — also not an audit — for its USDC stablecoin breaks down its reserves. They’ve given up entirely on claiming that USDC is backed one-to-one by dollars. [Circle, PDF]
There’s obvious problems there — the risk factors in behaving like some sort of free-wheeling money market fund are rather greater than if you just have a pile of dollars or treasuries. Regulators are starting to talk about Circle in much the same worried tones as they’re talking about Tether in.
So, Circle plans to become an actual regulated full-reserve bank!
Circle mentioned this in their S-4 for their planned SPAC — “As part of our strategy to reduce our dependence on third parties, we may in the future consider pursuing a U.S. national bank charter or evaluate the acquisition of a national bank. This would allow us to access the Federal Reserve System directly, reducing the costs and time for settling transactions” — and have elaborated in a blog post. [Circle blog; SEC]
The trouble is that USDC is an ERC-20 token on the Ethereum blockchain. That means you can self-host it on your PC or hardware wallet, and move it anonymously. And that violates OCC rules on stablecoins: “As noted in a recent statement of the President’s Working Group on Financial Markets, stablecoin arrangements ‘should have the capability to obtain and verify the identity of all transacting parties, including for those using unhosted wallets.’” [OCC, PDF]
Regulatory clarity
Circle also owns a crypto exchange — Poloniex — if at one remove. And the SEC has just settled with Poloniex on charges of operating an unregistered exchange for digital assets that constituted securities — i.e., ICO tokens — between July 2017 and November 2019. The total penalty is $10,388,309. [press release; order, PDF]
Per the settlement, Poloniex tried very slightly to keep securities off the platform — but the exchange also “determined that it would continue to provide users of the Poloniex Trading Platform the ability to trade digital assets that were at ‘medium risk’ of being considered securities under Howey.”
Circle has footed the bill. Amy Castor runs through the history of Poloniex, Circle and dodgy ICO tokens. [Amy Castor]
I noted in February that the SEC had called up DeFi Money Market, and DMM had immediately ceased operations. The SEC’s investigations have concluded in a settlement, for activities from February 2020 to February 2021 — $12,849,354 disgorgement, and $250,000 in penalties. [press release; order, PDF]
This is our first example of a DeFi settlement with full cooperation from the offenders. The SEC’s legal analysis applies to pretty much any DeFi protocol with a governance token.
Some crypto-pumpers are now loudly proclaiming that this totally doesn’t count as real DeFi. Really real DeFi. But somehow, the crypto-pumpers didn’t start saying this until the SEC busted one of the totally-not-real DeFi protocols.
BitMEX has settled with the CFTC and FinCEN for $100 million for illegally offering a commodity derivatives platform to US traders, and for money-laundering violations. Up to $50 million of the CFTC fine may be set off against penalties paid to FinCEN. [CFTC press release; CFTC consent order, PDF; FinCEN press release; BitMEX blog]
The settlement is with HDR Global Trading Limited, 100x Holding Limited, ABS Global Trading Limited, Shine Effort Inc Limited, and HDR Global Services (Bermuda) Limited — it does not cover BitMEX executives Arthur Hayes, Benjamin Delo or Samuel Reed themselves, who are still dealing with charges brought by the Department of Justice.
BitMEX has 90 days to remove all staff from the US, with limited exceptions. The CFTC will be checking BitMEX’s compliance going forward — “Settling Defendants shall cooperate with the Commission, including the Commission’s Division of Enforcement, in this action and in any current or future Commission civil litigation or administrative matter related to, or arising from, this action.”
Kentucky has joined everyone else in sending a cease and desist to BlockFi as of 29 July, because it’s all in now. Honestly, how crooked do you have to be that a red state will bust you for white-collar crimes? [press release, PDF; order, PDF]
Everybody still hates Binance
I’m shocked to hear that Binance might have at any point said things that were not 100% cryptographically assured truth — the exchange’s claimed figures from the liquidations from the 19 May bitcoin crash aren’t possible. [Carol Alexander]
Brian Brooks resigns as CEO of Binance US — “Despite differences over strategic direction, I wish my former colleagues much success. Exciting new things to come!” Here Brooks was thinking this was an ordinary revolving door, and then the abyss stared back. CZ tweeted confirming the news. Do you think Brian jumped quickly enough not to get any on him? I expect Brooks is in active dialogue with regulators about the current compliance journey. [Twitter; Forbes]
Code is LOL
The vast majority of blockchain tokens are written in Solidity, the usual programming language for the Ethereum blockchain. So most blockchains just use the Ethereum Virtual Machine, to encourage developers to move their token smart contracts to that chain as easily as possible. This makes it easy to run your token on multiple chains.
Poly Network is a smart contract running on multiple chains, allowing you to easily substitute a token on one chain for its equivalent on another chain.
Smart contracts are just computer programs. In DeFi, a smart contract is correctly understood as a piñata filled with crypto tokens — if you whack it in just the right spot, you get the money.
So someone whacked Poly in just the right spot, and bagged $611 million notional value of various tokens, on the Ethereum, Binance and Polygon blockchains — the largest DeFi hack to date. Mudit Gupta of SushiSwap has done a technical writeup of the hack. [Mudit Gupta]
Poly Network asked Ethereum miners and exchanges to intercede and block the hacker’s addresses for them — sort of giving the game away that crypto miners are transaction processors. [Twitter, archive]
The attacker has already been tracked down — having the operational security of a coiner — and has been returning at least some of the funds. [The Block]
No news from El Salvador
There’s no news on El Salvador’s Bitcoin Law — and no news is bad news, because whatever system they have needs to launch on 7 September. I hear that the Secretary for Innovation is working frantically with private contractors to get something into place in just three weeks.
Nor is there news on how banks are supposed to handle bitcoins. Some have guessed the banks are talking with the government privately — but there’s no information as yet, and certainly no systems in place.
A letter to the Financial Times: “Your report (August 4) concerning the imminent adoption of bitcoin as legal tender in El Salvador failed to ask the crucial question: will you be able to buy land with it? Because if you can, El Salvador has just booked itself a one-way ticket to hell.” Real estate as a super-effective way to launder dirty bitcoins — if accepting them becomes mandatory — and boom, your country is now owned by Bitcoin whales. [FT, paywalled, archive]
Carpe Diem
Federal Reserve Governor Christopher J. Waller: CBDC: A Solution in Search of a Problem? Yeah, you need a use case before you start. [Federal Reserve]
The Bank of Jamaica will be running a consumer CBDC trial. [BoJ]
Crypto News: Stablecoins Reign Among Top Coins: Why and What It Might Mean — with quotes from me. [Crypto News]
Christian Catalini and Alonso de Gortari: On the Economic Design of Stablecoins — and why algorithmic stablecoins are still trash. A fair bit of this implies (though does not directly state) “and this is why my design for Libra/Diem was so good,” but it’s still a useful overview. [SSRN, PDF]
Things happen
Black Rock Petroleum plans to relocate “up to 1 million” Bitcoin mining rigs to Alberta, Canada, to run on fossil fuels. It is possible — and just hear me out on this — that Bitcoin is 0% green in any regard whatsoever. [CBC]
Computer hardware manufacturer Gigabyte is participating in the Bitcoin enterprise use case, via the RansomEXX ransomware. “We have downloaded 112 GB (120,971,743,713 bytes) of your files and we are ready to PUBLISH it. Many of them are under NDA (Intel, AMD, American Megatrends).” Does this mean all hardware will be open hardware in a short while? [Bleeping Computer]
Coinbase made a big fuss earlier this year about how they’d grabbed former SEC head of capital markets Brett Redfearn! Anyway, he just left after four months. I wonder what he saw gazing back from the abyss. [WSJ, paywalled]
The People’s Bank of China takes care to reassure the crypto world that Bitcoin can absolutely and comprehensively continue to just bugger off, and they have no intention of making crypto traders’ lives any easier. [Bloomberg]
Shocked to hear that a cryptocurrency developer has been arrested for … what was that? Previous alleged frauds, in 2009 and 2011, skimming money with forged invoices? Anyway, shocked. This time it’s Riccardo “FluffyPony” Spagni from Monero. Alleged only — it is, of course, unthinkable that a crypto person could ever have a history of fraud. This is clearly an FBI/CIA/FinCEN joint operation against Monero. [South African Police Service; Amy Castor]
Hot takes
Kevin Werbach: “I thought markets always react to news too. So Brian Feinstein and I tested it, with years of granular data on BTC & ETH trades around the world. Under every model, no significant impact of regulatory announcements on volume; virtually none on price.” [SSRN, PDF]
I’m on Guardian columnist Tim Dowling’s new podcast Insult My Intelligence, talking about NFTs. [Twitter]
Hard Drive: Grand Theft Auto VI Delayed Until Rockstar Can Come Up with a Scrotum-Based Pun Name for Bitcoin. [Hard Drive]
My son is taking a summer class on investing. The homework was to present and analyze a stock. I hereby present his pick and analysis for Dogecoin pic.twitter.com/eLtldZex0R
— Alex Rampell (@arampell) July 30, 2021
"We have completely sidestepped the Howey test by dint of being extremely stupid and terminally online"
— Quantian (@quantian1) August 10, 2021
— Bad Financial Advice (@notfinancialvic) August 10, 2021
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