FTX Collapse Accelerates Bitcoin Regulation

One of my pet conspiracy theories made a rather convincing and decisive step into reality last week with the collapse of FTX.  It is probably the single most destructive event to descend on the entire crypto universe so far and will be remembered as the inflection point that catalyzed the write-down to zero of all crypto offerings. Including Bitcoin.

The essence of the theory, as outlined in this video earlier this year, is that regulators in the United States had been directed to maintain a hands off approach toward crypto until the Fed had mobilized its own CBDC, the launch of which will render Bitcoin a worthless digital collector’s item. The powers that be (PTB) appreciated the ability of the crypto space to soak up the liquidity plague that was last year threatening to trigger soaring interest rates in response to soaring inflation.

We suggested at the time that the other subtle strategy behind the PTB syndicate was that by letting the crypto space remain in wild west mode, they could count on a growing chorus of cries for regulation as more and more fraud and losses were heaped on investors.

The FTX event, however, accelerated all of these timelines into the current mad dash to contain the contagion of the imploding crypto universe, with none other than Kevin O’Leary – a paid spokesperson for FTX – publicly demanding more regulation over the entire crypto sector.

“I want regulation. I want it now!” – Kevin O’Leary speaking with CNBC Television

So Sam Bankman-Fried, the offspring of two connected Stanford profs with ties to SEC Chairman Gary Gensler among others, was actively lobbying to receive “no action” exemptive relief in advance of a full blown US launch. Exemptive relief no action letters are where the SEC issues a letter to the company that lays down parameters by which the recipient may safely wander into a grey area of securities regulated activity without fear of repercussion from the SEC. This typically occurs in areas of securities law where the law is yet undeveloped or remains vague and subject to wide interpretation.

The SEC declined to provide such relief.

This incident, however, goes a long way toward illuminating SBF’s intent in trying to block competitors from accessing US customers by being the only exchange to hold such a letter. The exemptive relief sought was likely in reference to allowing FTX to accept deposits and trading on its exchange by US citizens, something that no crypto exchange is currently licensed to do. Hardly an act of altruism.

This is one of the key indicators of how regulators will treat cryptocurrencies in the future. Are they securities, as Gensler et al assert, or can they be classified as money? If the latter, its crypto game on. If they are securities, its game over for crypto as money. Currently, the trend is toward classifying crypto as “digital commodities”.

No government of any developed nation will ever permit the privatization of its money in any form outside of the government approved (ostensibly private) central banks that currently enjoy that status. This is the premise upon which I base my 2013 prediction that Bitcoin will never be legal tender and why I think it will go to zero. Digital Commodity Consumer Protection Act notwithstanding. But more on that later.

SBF Fatal Flaw: Overextension and Raiding Customer Accounts to Cover

So SBF morphs from altruistic genius arb trader to misanthropic financial predator in one fell swoop. How did this happen? Was SBF always harbouring this dark and cynical contempt for his customers and just waiting to unleash his evil predation before disappearing without a trace?

Or was he just a little bit too young and ideological and inexperienced to handle the sudden attention that was showered on him because he figured out that buying Bitcoin in Indonesia and selling it in Venezuela could yield a profit? If you look at his Twitter thread and various leaked interviews, his inexperience in all of this is excruciatingly obvious, as he continues to respond to questions with highly unsophisticated remarks that will no doubt appear as evidence against him in the mountains of civil and likely criminal actions headed his way.

Here’s the thing I’ve noticed about young dudes who enjoy early financial success at scale early on in their careers: they invariably develop a mantle of arrogance and antisocial contempt for humanity as they mistake the convergence of good fortune and circumstance with the idea that they are somehow special. Whenever anybody starts to believe this internal narrative, they start to think they can get away with anything.

SBF rather famously claimed he wasn’t building wealth for the sake of wealth but so he could give it away to charity. His biggest philanthropic act to date, however, was the contribution of $50 million to the democratic campaign of Joe Biden. So not exactly a charitable act, considering political donations of such size are often undertaken as a hedge against deprivation of freedom as a result of behaviour deemed criminal. The proverbial “get out of jail free” card.

Failing that, there is and always has been an expectation that large political donations automatically come with a commensurate amount of influence on policymaking by the donee for the doner. Quid pro quo, in Latin.

I’m a little bit shocked at how the crypto community has turned on SBF and now labels him a POS – quite the vicious response to the guy who was everybody’s crypto hero until last week. The number of social media accounts now claiming to have been warning about SBF and FTX are growing daily. But I don’t think anybody outside of FTX inner circle could possibly have known this was going to happen. And even they were caught by surprise.

The aforementioned arrogance brings a sense of entitlement and in some cases, even a sense of divine destiny. So while I believe SBF genuinely started out as an altruistic but ambitious over-compensating for perceived physical deficiencies innocent, the process of being wildly successful and the ensuing corrupting thought process led him to believe that raiding customer funds to cover wrong way bets appeared to him internally as justifiable. When things have worked so well for so long, one often overlooks the fact that fortune is a fickle mate.

Sam Bankman-Fried (SBM), founder and CEO of FTX, and Changpeng Zhao (CZ), CEO of Binance are two birds of similar feather. They are both products of the Bitcoin phenomenon, whereby a digital – yet nonetheless fiat – monetary alternative has arisen as a result of nonenforcement of federal US laws pertaining to the creation of money.

When CZ found out that SBF was badmouthing Binance as part of his strategy for gaining US exclusivity, CZ tweeted out that he was going to liquidate his FTX. The rest is now history.

But if you follow CZs Twitter account, you will note the metamorphosis of his originally altruistic tone into something that smacks a little bit more of God complex as well. Why else would he volunteer to invest $200 million in a competitor? Why else would he spontaneously offer to buy him out?

Evidence of his own cynicism exists in the act of catalyzing the downfall of FTX, all while proclaiming his lack of intention to do so.

Note that CZ casually wrote off his $200 million investment in FTX. Are there more pending right-offs in Binance’s future? Just as SBF embraced a self-image of crypto-saviour, so too does CZ’s comments carry the tone of God complex.

We have been warning, since 2013, (long before Warren Buffet or Jamie Dimon) that crypto is a dangerous speculative synthetic asset whose eventual destruction will be assured unless aligned with a central bank offering. This is now even less likely than it was even then, as Central Bank Digital Currencies are expected to replace the current system, 20,000 crypto projects notwithstanding.

The lack of regulation is fostering ongoing iterations of fraudulent bad actors in the racket, and at some point, the SEC and DOJ are going to start looking negligent in their lackadaisical approach to protecting investors from these predatory schemes.

Digital Commodity Consumer Protection Act

The bi-artisan bill wending its way through the avenues of Washington that was being lobbied for bySam Bankman-Fried is called the Digital Commodity Consumer Protection Act. It is being driven by Senate Agriculture Committee Chairwoman Sen. Debbie Stabenow (D-Mich.) and ranking member, Sen. John Boozman (R-Ark.), both of whom have received campaign donations totally US$26,600 and $8,600 respectively.

Here is a link to a leaked version of the bill-in-progress.

One can see by the edits in this bill that the momentum is firmly in the direction of classifying crypto products as commodities that don’t meet the definition of “security”. The evident contradiction in the term “digital commodity” with the definition of commodity apparently is lost on all of the promulgators of the bill. And the language also clearly is trending toward ensuring that no crypto product is going to ever be called a currency.

But let us reiterate for those preferring their own cognitive dissonance: There will be no global unit of trade not backed by a government central bank. End of story. The destiny and power of nations are directly correlated to their currencies. Since before the Medici’s.

Tip of the Iceberg

What the  SBM-CZ saga reconfirmed (since the Luna debacle) is that most crypto projects are ultimately promotional vehicles that wouldn’t survive a year if it weren’t for a) the lack of regulation and b) the undisclosed pumping of prices to retail investors by project founders using other cryptos to pump up the volume.

This utterly fraudulent culture of pseudo-innovation is precisely why the SEC and the Department of Justice will ultimately conclude that all cryptos – including every flavour of bitcoin – are securities. This will result in their use as money being deprecated incrementally as they can never go mainstream as long as there is no legal basis for it acting as a unit of trade. (I know, I know…Ethereum is not cryptocurrency, and many of the crypto projects are more concerned with a utilitarian use case other than purely a medium of exchange of value).

Pay no attention to the current conviction that Bitcoin has been deemed a commodity. Of all asset classes under the sun, commodities especially are tangible things. Bitcoin does not meet that definition by any stretch of the imagination.

Current state of regulation in the US

Remember, Bitcoin is designed to be anonymous and immutable at the same time. The beneficial owner of the asset itself is able to be anonymous while the transactions are public. This is both its appeal and its Achilles heal. Data analytics make it child’s play to determine the owner of wallets held by large players. And stealthier surveillance software can theoretically ultimately identify any wallet owner by cross-referencing wallet transactions with IP pathways and cellular data.

What crypto believers lack in all of this is a grounding in monetary history and law.

There is a historical quote of unverified origin (but widely attributed to be a maxim of the Rothschild banking family)  to wit; “Permit me to issue and control the money of a nation, and I care not who makes its laws.” Theoretically, that would have originated pre-1800s, but it captures one of the unspoken tenets of bankers throughout human history.

Governments, and the more powerful banking families who exert the greatest influence over them, will never allow for the privatization of the monetary system of the world because within the system of debased fiat currencies lies actual control over the financial system. So watching this generation of crypto kids is like watching a car stuck in the mud…the wheels will keep spinning, but the car is going nowhere.

It would be prudent to bear in mind the words of one of the architects of the Federal Reserve Act  James Paul Warburg, who intoned “We shall have World Government, whether or not we like it. The only question is whether World Government will be achieved by conquest or consent.”

How Sound are Crypto Exchanges Generally?

Now that FTX is ashes, we should consider the structure and soundness of Binance, BitFinex, Coinbase, etc. Besides the fact that they have all seen a dramatic drop in volume, the bigger issue is that they are almost entirely offshore and unregulated.

Here is a list of the top ten global centralized crypto exchanges by dollar volume traded.

Most of these are offshore entities. Most of these offer various forms of leverage/margin, meaning they are all entirely exposed to a potential “run on the bank” of the sort that wiped out FTX.

The charts at right demonstrate a clear abdication of faith as volumes have dropped precipitously in the last year. Gemini, the exchange founded by the Winklevoss twins of Facebook fame, has ceased processing withdrawals, and BlockFi has filed for Chapter 11. The immediate fallout from the FTX meltdown has claimed these victims, but there are very likely a great many more to come.

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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