{"id":23361,"date":"2022-07-05T23:05:55","date_gmt":"2022-07-05T23:05:55","guid":{"rendered":"https:\/\/davidgerard.co.uk\/blockchain\/?p=23361"},"modified":"2024-08-29T21:24:40","modified_gmt":"2024-08-29T21:24:40","slug":"canadian-pension-funds-are-losing-big-at-the-crypto-casino-by-simon-spichak","status":"publish","type":"post","link":"https:\/\/davidgerard.co.uk\/blockchain\/2022\/07\/05\/canadian-pension-funds-are-losing-big-at-the-crypto-casino-by-simon-spichak\/","title":{"rendered":"Canadian Pension Funds are Losing Big at the Crypto Casino \u2014 by Simon Spichak"},"content":{"rendered":"

Guest post by Simon Spichak<\/b><\/a><\/em><\/p>\n

Pension plans and funds are supposed to put the money that will take you through retirement into capable and diligent hands. Managers of these multi-million and multi-billion funds invest into promising businesses that will provide you with stable returns. But more and more of these funds are looking to the volatile world of cryptocurrency to maximize their returns.<\/p>\n

In March of 2022<\/a>, the U.S. Department of Labor warned employers against using pension funds that included bitcoin or other cryptocurrencies, warning plan providers that they could be investigated for these offerings. The report added that these assets were prone to \u201cextreme volatility\u201d because of speculative trading, market manipulation, theft and fraud.<\/p>\n

But in Canada, there\u2019s been less critical coverage scrutinizing these decisions from pension funds and plans. In October 2021, one of Quebec’s largest pension funds \u2014 the Caisse de Depot et Placement du Qu\u00e9bec \u2014 invested $150 million<\/a> into the crypto-lending company called the Celsius Network \u2014 which may now be facing bankruptcy<\/a>.<\/p>\n

That same month, the Ontario Teachers\u2019 Pension Plan (OTPP) announced its investment in FTX Trading Ltd<\/a>, supplying at least $50 million into a meme-inspired fundraising round \u2014 raising $420.69 million from 69 investors<\/a>. FTX hasn\u2019t crashed like Celsius Network just yet, but the investment is putting teacher pensions in danger.<\/p>\n

 <\/p>\n

\"\"<\/a><\/p>\n

 <\/p>\n

But who could have seen the collapse of the Celsius Network coming?<\/h3>\n

Celsius Network stopped all customer withdrawals on Monday 13 June 2022.<\/a> The company has since engaged lawyers for “restructuring.”<\/p>\n

The founder of Celsius Network, Alex Mashinsky, regularly makes ill-founded claims that he invented voice-over-internet protocol<\/a>. An early advisor to Celsius, Moshe Hogeg<\/a>, has been sued numerous times since 2018 for misleading and defrauding crypto investors. Hogeg was arrested<\/a> in 2021 on 21 offenses, including money laundering, theft, and fraud.<\/p>\n

Two of Celsius Network’s executives are currently suspended from the company as a result of investigations revealing their ties with money laundering<\/a>. The chief revenue officer was suspended by Celsius in May of 2021 \u2014 before the CDPQ investment \u2014 because of a police probe<\/a> into his side business which he started with a known money launderer.<\/p>\n

Meanwhile, data accessible through the blockchain revealed that the Celsius Network placed user funds into other lending protocols and decentralized finance applications<\/a> \u2014 code that promises your crypto will generate more crypto! \u2014 some of which were hacked<\/a> or structured like Ponzi schemes<\/a>.<\/p>\n

FTX\u2019s risky relationship with tethers<\/h3>\n

FTX is an overseas cryptocurrency exchange founded by Sam Bankman-Fried. As well as cryptocurrency, FTX provides access to equities markets through crypto-token versions of stocks which function like tethers. These so-called \u201ctokenized<\/a>\u201d stocks track to real-world share prices \u2014 similar risky financial offerings from the Binance exchange have already been banned in Germany<\/a>.<\/p>\n

FTX does not collect Know Your Customer (KYC) information from accounts that trade USD$2000 or less daily<\/a>. The KYC process is required of banks and financial institutions by law, to prevent fraud. FTX and his other business, Alameda Research, are heavily reliant on tethers<\/a> (USDT). A report from Protos<\/a> revealed that Alameda Research received more than 36.7 billion USDT and 30 billion of that was sent to the FTX exchange. What could possibly go wrong?<\/p>\n

\u201cIt\u2019s well accepted throughout the industry that Tether is a giant fraud,\u201d financial journalist and cryptocurrency expert Amy Castor said.<\/p>\n

Since many cryptocurrency exchanges are unregulated, they are unable to secure a banking partner. According to a JP Morgan report, stablecoins like USDT function similarly to banks, but with minimal supervision and oversight<\/a>. Tether Holdings was fined $41 million<\/a> by the U.S. Commodity Futures Trading Commission for falsely claiming that their virtual dollars were fully-backed by US dollars. This is the latest development in a well-documented timeline<\/a> of lawsuits and fraud linked to Tether and its parent company iFinex.<\/p>\n

If the price of tethers drops significantly below USD$1.00, many tether holders will want to panic-sell their USDT and exchange it for real cash. Castor explained that \u201canybody who has money on that exchange is going to have trouble getting money off, because there isn’t a lot of actual cash on the exchange.\u201d<\/p>\n

What Bankman-Fried told banks to get an account, and how yield farming works<\/h3>\n

Bankman-Fried founded Alameda Research<\/a> in October 2017 after he became frustrated that Japanese banks would not open accounts for his other cryptocurrency-related ventures. These companies had to jump through extra hoops to get an account.<\/p>\n

\u201cYou have to go through the enhanced process and I don’t want to bother with that right now,\u201d he said in an interview with RealVision<\/a>. The name “Alameda Research” came about because he didn\u2019t \u201cwant to give banks reasons not to give us accounts,\u201d and he thought they would be more permissive to an entity that sounded like a research institute.<\/p>\n

Recently on a Bloomberg podcast, Bankman-Fried explained<\/a> to Bloomberg finance columnist Matt Levine<\/a> how a central function within the cryptocurrency ecosystem, yield farming, works.<\/p>\n

“Like this is a valuable box as demonstrated by all the money that people have apparently decided should be in the box,\u201d Bankman-Fried said. \u201cAnd who are we to say that they\u2019re wrong about that?\u201d<\/p>\n

He elaborated:<\/p>\n

And they\u2019re like \u201810X\u2019 that’s insane. 1X is the norm.\u2019 And so then, you know, X token price goes way up. And now it’s $130 million market cap token because of, you know, the bullishness of people’s usage of the box. And now all of a sudden of course, the smart money’s like, oh, wow, this thing’s now yielding like 60% a year in X tokens. Of course I’ll take my 60% yield, right? So they go and pour another $300 million in the box and you get a psych and then it goes to infinity. And then everyone makes money.<\/p><\/blockquote>\n

\u201cI think of myself as like a fairly cynical person,\u201d Levine responded. “And that was so much more cynical than how I would’ve described farming. You\u2019re just like, well, I\u2019m in the Ponzi business and it\u2019s pretty good.”<\/p>\n

Bankman-Fried later clarified<\/a> that his “valuable box” example was oversimplified, saying that “in context it was a toy model of what yield farming is if you remove all useful parts of the protocol.<\/em><\/span>” However, Bankman-Fried’s “toy model” is literally how many DeFi schemes work.<\/p>\n

Why did the OTPP invest in FTX?<\/h3>\n

The OTPP participated in a funding round for FTX that aimed to raise $420.69 million \u2014 haha, like 420 and 69, get it? That\u2019s a weed joke and a sex joke \u2014 from 69 investor groups. A spokesperson from the OTPP did not respond when asked whether they were aware of this.<\/p>\n

\u201cWe care about building sustainable companies with good governance, set up to successfully go public if they choose to,\u201d as the OTTP website describes the Teachers\u2019 Venture Growth fund.<\/a> \u201cAs a global, technology-driven innovator in the financial sector, FTX fits well with our mandate,\u201d Olivia Steedman, the senior managing director of the investment fund stated<\/a> in a press release.<\/p>\n

But FTX is not financially or ecologically sustainable. FTX is financially reliant on tether, which is not credibly backed by the US dollar \u2014 threatening its financial sustainability. The platform further trades cryptocurrencies, assets which are responsible for enormous amounts of electronic waste and pollution<\/a>. Bankman-Fried may not be synonymous with good governance either.<\/p>\n

Unsurprisingly, FTX.com does not operate within Ontario, while tethers are banned from trading<\/a> in the province by the Ontario Securities\u2019 Commission. A spokesperson from the Financial Services Regulatory Authority (FRSA) of Ontario wrote:<\/p>\n

FSRA\u2019s supervisory approach encourages portfolio diversification and robust risk management practices, rather than emphasizing any specific investment. Pension plan administrators are expected to understand and manage investment risks as per the standard of care required by the Pension Benefits Act. The Act requires pension plan administrators to oversee the plan with the same care and diligence expected when an individual deals with someone else\u2019s property.<\/p><\/blockquote>\n

The spokesperson made reference to a clause in the Pension Benefits Act which states that: \u201cThe administrator of a pension plan shall exercise the care, diligence and skill in the administration and investment of the pension fund that a person of ordinary prudence would exercise in dealing with the property of another person.\u00a0 R.S.O. 1990, c. P.8, s. 22 (1).” This leaves it ambiguous as to what one considers to be \u201cordinary prudence\u201d.<\/p>\n

Gambling pensions in the crypto casino<\/h3>\n

There are numerous red flags associated with the Celsius Network and FTX, and huge risks with these investments. While the Caisse\u2019s investment in Celsius has already failed, OTPP is left in a precarious position. In Australia, a plan provider called Rest<\/a> initially signaled their interest in cryptocurrency options for retirement portfolios but changed their mind later saying they had no plans<\/a> to do this in the immediate future.<\/p>\n

This may be due to a fear of backlash \u2014 as an example, gaming companies<\/a> were met with angry responses when they tried to dip their toes into the crypto and NFT space. If the OTPP\u2019s decision isn\u2019t widely covered in the media, there can be no organized backlash or scrutiny.<\/p>\n

I am still curious to hear from the OTPP, and have many unresolved questions:<\/p>\n