/biz/ - Business & Finance

>>56544722
SAFEMOON

Absolutely not, come on:

>The Securities and Exchange Commission [Wednesday] charged SafeMoon LLC, its creator Kyle Nagy, SafeMoon US LLC, and the companies’ Chief Executive Officer, John Karony, and Chief Technology Officer, Thomas Smith, for perpetrating a massive fraudulent scheme through the unregistered sale of the crypto asset security, SafeMoon. According to the SEC’s complaint, the Defendants promised to take the price of the token “Safely to the moon,” but instead of delivering profits, they wiped out billions in market capitalization, withdrew crypto assets worth more than $200 million from the project, and misappropriated investor funds for personal use.

>“Decentralized finance claims to deliver transparency and predictable outcomes, but unregistered offerings lack the disclosures and accountability that the law demands, and they attract scammers like Kyle Nagy, who use these vulnerabilities to enrich themselves at the expense of others,” said David Hirsch, Chief of the SEC Enforcement Division’s Crypto Assets and Cyber Unit (CACU).

BITCOIN HITMAN USER EXPERIENCE

There are three classic problems that you might encounter if you try to use Bitcoin to pay for goods and services. The first problem is that your Bitcoins might go astray: Bitcoin transactions are irreversible and involve sending money to long complicated addresses, and people are constantly trying to steal them. So if you send someone Bitcoin to pay for something, there will probably be a typo in the address and the person won’t get it and you’ll have to send it again and your first payment will just be permanently lost.

The second problem is that Bitcoin is very volatile, and even people who accept payment in Bitcoin tend not to denominate it in Bitcoin. So if you send someone $100 worth of Bitcoin to buy a $100 thing, the price of Bitcoin might drop 10% while you’re sending it, and then they’ll say “you only sent me $90” and you’ll have to top them up with more Bitcoin.

The third classic problem is that, if you are using Bitcoin to pay for goods and services, there is a good chance that you are paying for something illegal, and Bitcoin payments are traceable. So if you send someone $16,000 worth of Bitcoin to buy a $16,000 thing, (1) some of your money will go missing in transit, (2) the Bitcoins you send won’t be worth $16,000 and you’ll have to send some more, and (3) the $16,000 thing was a murder and now you are in prison.

SBF Stuff

I am about halfway through Going Infinite, Michael Lewis’ book about Sam Bankman-Fried, and I am very much enjoying it. Many of the reviews that I have read of the book complain that Lewis does not sufficiently explain that Bankman-Fried is Guilty and Bad, Actually, but that is not the book that he wanted to write or the one I want to read. [1] He wanted to understand and explain Bankman-Fried’s psychology and tell a good story. If you want to read a moral condemnation of crypto theft, you can get that anywhere. You go to Michael Lewis for character and story.

Also, reading those reviews you would think that the book is a defense of Bankman-Fried, but it is actually quite damning. (Less damning than most of what is written about Bankman-Fried these days? Sure.) There is an anecdote (which has been reported before) from the early days of Alameda Research, the crypto trading firm that Bankman-Fried started before his crypto exchange FTX, the firm whose trades with FTX customer money ultimately brought down the whole thing. At some point Alameda lost track of $4 million of investor money, and the rest of the management team was like “huh we should tell our investors that we lost their money,” and Bankman-Fried was like “nah it’s fine, we’ll probably find it again, let’s just tell them it’s still here.” The rest of the management team was horrified and quit in a huff, loudly telling the investors that Bankman-Fried was dishonest and reckless.

SEC v. Crypto
“A decent rule of thumb,” I wrote in March, “is that all cryptocurrency exchanges are doing crimes, and if you’re lucky your exchange is doing only process crimes.” Like:

1. Is your exchange operating an illegal securities exchange in the US? Yes! Yes it is! The view of the US Securities and Exchange Commission, at least, is that every crypto exchange in the US is illegal. You might disagree — plenty of crypto exchange executives disagree, and we will talk more about the arguments below — but realistically, if you are trading crypto, you simply cannot be too squeamish about strict adherence to US securities law.
2. Is your exchange stealing all of its customers’ money? It might be! Some are! Others are not! This is the one you should mostly care about, if you are a customer.

These things are not especially correlated because, again, every crypto exchange is violating US securities law. “Oooh I shouldn’t trust my money to those guys because they are violating US law”: Sure, yes, a reasonable position that would save you from a lot of crypto disasters, but also one that would prevent you from trading crypto entirely. Your choice!

I am overstating all of this but not by much, man, not by much.

Matt Levine is worth the subscription of bloomberg itself. Read his articles, I think you can get them for free if you sign up to his newsletter.

Twitter is where all crypto news comes from

Financial times and Australian Financial Review are the superior English speaking finance coverage, bloomberg is pretty mid except for Matt Levine desu

>>54377825
Gruenberg’s testimony helps clear up one small mystery of the recent bank failures: What happened to Signature Bank of New York? Signature was taken over by the FDIC the same weekend that SVB was, and while SVB had clearly run out of money, it was less clear that Signature had. Signature board member (and former congressman, author of the Dodd-Frank Act, etc.) Barney Frank complained that Signature was actually doing fine, that its outflows had stabilized, and that “if we’d been allowed to open tomorrow, that we could’ve continued.” But its state regulator said that it had had “a significant crisis of confidence in the bank’s leadership,” and shut it. Since Signature was one of the main banks for the crypto industry, this led to theories that the takeover of Signature was part of a regulatory crackdown on crypto rather than an actual bank failure.

from 3 hours ago:

Binance
A decent rule of thumb is that all cryptocurrency exchanges are doing crimes, and if you’re lucky your exchange is doing only process crimes. Today the US Commodity Futures Trading Commission sued Binance Holdings Ltd., Changpeng Zhao’s big crypto derivatives exchange, for letting Americans trade crypto derivatives. There are no accusations that Binance is stealing customer money, or even taking big risks with it, which makes Binance look better than some other crypto exchanges I could name. There are … look, there are not no accusations that Binance is laundering money for terrorists or secretly trading against its customers, but there are relatively few accusations like that; again, as crypto exchanges go, that’s pretty good.

No, the CFTC’s case is mainly about letting US customers trade crypto derivatives. It is illegal to run a crypto derivatives exchange in the US without registering it with the CFTC, and it’s not exactly easy to do that either; if you have a crypto derivatives exchange abroad but have not registered it in the US, it is illegal to let US customers trade on it. So the basic rule is that US customers can’t trade crypto derivatives, and big international crypto derivatives exchanges (Binance, FTX before it blew up) sometimes have US-only platforms (Binance US, FTX.us) that let US customers trade a limited set of products, but not most derivatives.

For retail customers this is probably fine: A crypto exchange can make a bit more money from retail gamblers if it offers them high-leverage futures trading, but there are plenty of gamblers in the world, and also you can make decent money from US traders just by letting them trade crypto for cash.

>>54314381
COINBASE
3/23/23

I don’t know what the US Securities and Exchange Commission’s Wells notice to Coinbase Global Inc. is about. The notice itself — a letter that the SEC sends saying that it intends to bring an enforcement action — is quite bare-bones and doesn’t say what the issue is, though presumably the SEC has given Coinbase some more detail over the phone. Quite possibly the problem is something fairly contained, like, “recently you launched a new product that we think violates the securities laws, so we are going to bring an enforcement action focused on that product.”

On the other hand if the problem is, like, “you are operating a crypto exchange, and we think that operating a crypto exchange is illegal, so we are going to bring an enforcement action to stop you from doing that,” I would not be entirely stunned either. I mean, it’s probably not quite that broad. But the SEC has made it clear, over and over again, that it thinks almost all crypto tokens (except Bitcoin, Ethereum [1] and maybe a handful of others) are “securities” within the meaning of US securities law, and if you run an exchange for trading securities you need to register it with the SEC and comply with a lot of rules. [2]

CREDIT SUISSE 3/2023

It is sometimes useful to think that the shareholders of a bank are not its owners; they are just renting it from its creditors. Schematically, a bank borrows a bunch of money from depositors and other creditors and uses the money to make loans and buy securities and do other risky investments. If the investments end up being worth more than the deposits, the shareholders keep what’s left. If the investments end up being worth less than the deposits then, uh, that’s bad. Then the shareholders don’t own the bank anymore, for one thing, but that’s really the least of your problems. The real problem is that the depositors can’t lose money; the banking system relies on bank deposits being usable as money. “Banks are speculative investment funds grafted on top of critical infrastructure,” Matt Klein wrote last week. The liabilities (deposits, etc.) are the critical infrastructure; the assets (loans, securities) are the speculative investment fund. The bank is a machine for turning safe deposits into risky investments. If the investments end up being worth less than the deposits, then regulators and central banks step in and there is some sort of rushed rescue to make sure that the depositors still get paid.

>>54146729
SVB: M&A
Would you want to buy Silicon Valley Bank? You get three main things:

1. A big portfolio of Treasury bonds and agency mortgage-backed securities. These are worth what they’re worth: There’s a pretty liquid market for them and not much dispute about their value. They’re worth a lot less than SVB paid for them, which is a big part of why SVB failed last week, but they’re worth a lot more today than they were last week, because SVB failed and so everyone panicked and rushed to buy safe assets like Treasuries.

2. A portfolio of loans. The loans are frankly pretty cool? If you buy this portfolio you will have a lot of mortgages on fancy vineyards? And on a lot of tech execs’ fancy houses? But also you will have a big book of capital-call financing for venture capital firms, a bit of financial engineering that seems to produce safe loans. Also a smaller book of loans to risky startups. [1]

3. A, look, somewhat tarnished, but still interesting brand and set of relationships. Silicon Valley Bank was the leading bank of the huge and exciting ecosystem of startups and venture capitalists, until the VCs all turned on it last week out of boredom and a desire for Twitter clout. But they’re sorry for what they did and have promised to come back to SVB and support it, and maybe that’s worth something. SVB was the cool bank for tech startups, and maybe if you buy it you can be the cool bank for tech startups?

>>54126015
BANKING AS A MYSTERY

I wrote yesterday about the Fed’s Bank Term Funding Program. Banks buy long-term bonds, mark them “held to maturity,” and then when those bonds lose value the banks ignore it for accounting purposes. But that only goes so far: The banks disclose the losses in footnotes to their financial statements, people sometimes notice, and when the losses get too big there are runs. The BTFP is a way for the Fed to take over the job of ignoring those losses instead: The Fed promised to lend against those bonds at 100 cents on the dollar, as though they hadn’t lost value. The Fed is not subject to bank runs. The Fed can credibly ignore those losses; banks can only mostly ignore them.

I also wrote about Tether:

>Another possible understanding, though, is that banking requires mystery! My point, in the first section of this column, was that too much transparency can add to the fragility of a bank, that the Fed is providing a valuable service by ignoring banks’ mark-to-market losses.

>>54101114
This is an obvious problem and much of the business of banking is about managing it. Here are some simple things that you can do:

1. Your loans and bonds have laddered maturities: Some mature next week, some in 3 years, some in 6. So as rates go up, your loans and bonds are constantly rolling off and you are reinvesting the money in new loans and bonds at higher rates.

2. When the Fed raises rates, in actual fact, banks mostly don’t pass along the whole rate increase to depositors. It’s a pain to switch banks, and most depositors don’t pay that much attention to rates. The “deposit beta” — the sensitivity of bank deposit rate increases to Fed interest rate increases — is lower than 1. So if the Fed raises rates from 0% to 3%, you might end up paying only, say, 0.5% on deposits. [1]

3. You can try to match your assets and liabilities somewhat. Make some short-term loans, and some floating-rate loans, so that your assets are more sensitive to rising rates. Borrow some money with long-term bonds, so that your liabilities are less sensitive to rising rates. Do interest-rate swaps to hedge.

4.You can make money in ways other than net interest margin: Charge overdraft fees or do investment banking or trade securities or whatever.
This is not, however, the biggest problem with borrowing short to lend long. The biggest problem is that your depositors might all ask for their money back tomorrow, and you might not be able to get the money back from your borrowers for years. This problem is known as a “bank run” and is famous from, you know, the Diamond-Dybvig model that won a Nobel Prize last year, or from It’s a Wonderful Life. “The money’s not here. Why, your money’s in Joe’s house,” etc.

>>54062029
Matt's Newsletter can be read free on Newsletterhunt.com. It's great stuff from an ex-Goldman insider who isn't trying to sell anything or offer investing (or legal) advice.
Notes:
[1] Similarly in crypto, on 2021, crypto exchanges had tons of cash that they needed to park at a bank, but were not really in the business of taking loans from banks. There was a lot of lending in the crypto world, but it was all loans secured by Bitcoins and stuff and that is mostly too spicy for a bank; it was mostly done by crypto shadow banks (including exchanges themselves). Though Silvergate did some of it.

[2] Here I am sort of summarizing SVB's discussion of its loan portfolio on pages 70-71 of the 10-K.

[3] Oh it’s way too crude. Here is “Banking on Deposits: Maturity Transformation without Interest Rate Risk,” by Itamar Drechsler, Alexi Savov and Philipp Schnabl, in the Journal of Finance in 2021, making the case “that maturity transformation does not expose banks to interest rate risk — it hedges it,” even in a model where banks lend long at fixed rates, because depositors are not very sensitive to interest rates.

[4] Oh I am exaggerating for effect, please do not email me to be like “by summer 2022 there had been a string of actual and projected Fed rate increases” or “actually there is still crypto,” I know.

1/10 SVB

The lesson might be that there are some industries that are bad to bank. Imagine that it was 2021, and someone was like “do you want to start the Bank of Crypto? What about the Bank of Venture-Backed Tech Startups?” You’d be tempted, right? Those industries had so much money! They seemed cool. If you were their bank — if you were the specialized bank that exclusively focused on those industries — influencers on Twitter would tweet nice things about you, and you’d get invited to fancy parties. Also, as their bank, you’d probably find a way to get a cut of growing industries with lots of potential. Provide banking services to tech startups, get warrants in those startups, get rich when they go public. Provide banking services to crypto exchanges, start some sort of blockchain-based payment network, get rich through the magic of saying “blockchain” a lot.

But the structure of being the Bank of Crypto or Startups was a bit rickety. Traditionally, the way a bank works is that it takes deposits from people who have money, and makes loans to people who need money. The weird problem with focusing exclusively on crypto or startups in 2021 is that they had too much money. If you were the Bank of Startups, the main service that you provided to startups is that equity investors would give them a truck full of cash and they’d deposit it at your bank. Here is how SVB Financial Group, the holding company of Silicon Valley Bank, describes the vibe of 2021 and 2022 in its Form 10-K two weeks ago:

>Much of the recent deposit growth was driven by our clients across all segments obtaining liquidity through liquidity events, such as IPOs, secondary offerings, SPAC fundraising, venture capital investments, acquisitions and other fundraising activities—which during 2021 and early 2022 were at notably high levels.

People kept flinging money at SVB’s customers, and they kept depositing it at SVB. Perfectly reasonable banking service

>Latest Money Stuff Newsletter on SVB
The lesson might be that there are some industries that are bad to bank. Imagine that it was 2021, and someone was like “do you want to start the Bank of Crypto? What about the Bank of Venture-Backed Tech Startups?” You’d be tempted, right? Those industries had so much money! They seemed cool. If you were their bank — if you were the specialized bank that exclusively focused on those industries — influencers on Twitter would tweet nice things about you, and you’d get invited to fancy parties. Also, as their bank, you’d probably find a way to get a cut of growing industries with lots of potential. Provide banking services to tech startups, get warrants in those startups, get rich when they go public. Provide banking services to crypto exchanges, start some sort of blockchain-based payment network, get rich through the magic of saying “blockchain” a lot.

But the structure of being the Bank of Crypto or Startups was a bit rickety. Traditionally, the way a bank works is that it takes deposits from people who have money, and makes loans to people who need money. The weird problem with focusing exclusively on crypto or startups in 2021 is that they had too much money. If you were the Bank of Startups, the main service that you provided to startups is that equity investors would give them a truck full of cash and they’d deposit it at your bank. Here is how SVB Financial Group, the holding company of Silicon Valley Bank, describes the vibe of 2021 and 2022 in its Form 10-K two weeks ago:

>Much of the recent deposit growth was driven by our clients across all segments obtaining liquidity through liquidity events, such as IPOs, secondary offerings, SPAC fundraising, venture capital investments, acquisitions and other fundraising activities—which during 2021 and early 2022 were at notably high levels.

>>53722924
Central crypto
Imagine that you are a financial regulator, and consider the general proposition:

1. There is some crypto entity, some company that does something in the crypto industry.
2. Regular people give it their dollars or crypto for some purpose.
3. It gives them back some sort of crypto receipt, saying “we owe you one dollar” or “we owe you one crypto” or whatever.
At a very high level of generality, what do you think about that? What I would say is:

- In 2013, you probably thought “ah, yes, this entity is doing a fraud, and plans to steal the money or crypto.” But (1) you didn’t think about it that much, since these entities tended to be small and cater to a small niche of crypto enthusiasts, and (2) it is not like the crypto entity was coming to your office to have meetings with you.

- In 2021, you probably thought “ah, yes, innovation, let us work with this crypto entity to build the future of finance on the blockchain.” Unless you were the US Securities and Exchange Commission; they never really thought that. But otherwise. The New York Department of Financial Services was out issuing “BitLicenses” to crypto entities. Crypto entities were regularly walking into your office, accompanied by reputable high-powered lawyers who probably used to work at your office, with suggestions for how you should best regulate crypto. They seemed nice and earnest, and you took their suggestions seriously.

- In 2023, you probably think “ah, yes, this entity is doing a fraud, and plans to steal the money or crypto.”

>>52752118
New Money Stuff Newsletter from today 12/5/22
-The crypto financial crisis of 2022
-Meanwhile, FTX
-Bribes
-Goose eggs

Long Newsletter as usual for the start of the week.

>>52657900
But back over the summer, FTT was totally a thing! And so it is possible that when FTX extended a loan to BlockFi to shore up its customers’ confidence, it loaned BlockFi tokens. “Here, have some magic beans we made up, people really believe in them,” FTX could have said to BlockFi, and over the summer that would have been enough. “Ah, BlockFi has some FTX magic beans, everything is fine,” customers could have said, and the bank run would have halted. Now the beans no longer work, and BlockFi is bankrupt.

BLOCKFILES

One lesson of traditional finance that crypto is learning these days is: “If you’ve got a bazooka, and people know you’ve got it, you may not have to take it out.” For instance:

1. There is a small opaque crypto lending platform that is rumored to be in trouble.
2. Its depositors want their money back.
3. It doesn’t have their money, either because the money is locked up in long-term loans or because it lost the money or some combination or otherwise.
4. There is a “run on the bank.”
5. To solve the problem, the lending platform agrees to take a desperation bailout from some bigger, more stable, better-known crypto exchange. The big exchange agrees to guarantee the lending platform’s customer deposits, or at least gives it an ample line of credit to pay out depositors. In exchange, the exchange gets to take over the lending platform, and its existing owners get more or less nothing.
6. The run on the bank stops. The depositors don’t want their money back, because now instead of being depositors at the small lending platform, they are depositors of the large stable crypto exchange. Their money is safe, backed by the deep pockets of the large exchange, and they can go back to earning crypto interest or whatever.

>>52498999
[1] I'm kidding, obviously it is boilerplate. But still.

[2] “The FTX Group’s approach to human resources combined employees of various entities and outside contractors, with unclear records and lines of responsibility. At this time, the Debtors have been unable to prepare a complete list of who worked for the FTX Group as of the Petition Date, or the terms of their employment. Repeated attempts to locate certain presumed employees to confirm their status have been unsuccessful to date.”

[3] Maybe it’ll work. I too can read third-party sources, and here is Liz Hoffman at Semafor reporting that “Sam Bankman-Fried shopped a $4.7 billion grab-bag of venture investments, ranging from fintech firms to crypto assets, around Wall Street in a bid to raise money,” and listing some of the investments. I suppose Ray will call up those companies — “Dave, a mobile-banking app aimed at younger customers,” “Stocktwits, an online forum for traders to share ideas and make investments,” etc. — and say, like, “hey, uh, I’m at FTX, weird question but do we … own … your stock?” See what they say!

Latest Money Stuff on Newsletterhunt dot com.
Matt's has written good stuff on FTX for the last week, all of it can be read there. He's someone who's interviewed Bankman-Fried in person a couple times, and has enough background to decipher a lot of What H-A-P-P-E-N-E-D.

>>52437880
Hijacking your thread for today's Money Stuff newsletter from Matt Levine, a Bloomberg contributor who's interviewed Bankman on occasion and had a good impression of him.

His newsletter can be read for free at Newsletterhunt.com. In this third newsletter, he discusses the Bankruptcy.

So how could this happen? I don’t know, but let me speculate a little bit.

Let’s start with Coinbase. Coinbase Global Inc. runs a cryptocurrency exchange. When FTX.com, one of the largest crypto exchanges, was instantaneously vaporized yesterday, Coinbase put out a statement, the gist of which was “don’t worry, we are not going to be instantaneously vaporized.” The part that I want to focus on is this paragraph:

>There can’t be a “run on the bank” at Coinbase. As you can review in our publicly filed, audited financial statements, we hold customer assets 1:1. Any institutional lending activity at Coinbase is at the discretion of the customer and backed by collateral. We have no gating for client loan recalls or withdrawals.

>>50307792
Three Arrows
It’s a good thing that everyone in crypto got rich enough to buy their own islands because they’ll need places to flee to:

>The founders of bankrupt crypto hedge fund Three Arrows Capital haven’t been cooperating in the firm’s liquidation process and their whereabouts were unknown as of Friday, according to court papers.

>Representatives tapped to liquidate Three Arrows by a British Virgin Islands judge had “not yet received any meaningful cooperation” from Kyle Davies and Zhu Su, lawyers said in US bankruptcy court filings. Advisory firm Teneo is attempting to round up and preserve the assets of the hedge fund. …

>The liquidators spoke with lawyers for Davies and Zhu via videoconference last week, according to court papers, but did not speak to the founders directly.

>“While persons identifying themselves as “Su Zhu” and “Kyle” were present on the Zoom call, their video was turned off and they were on mute at all times with neither of them speaking despite questions being posed to them directly,” Teneo’s Crumpler said in his court declaration.

Zhu responded by tweeting about this from an undisclosed location and, incredibly, telling the liquidators that to preserve value at Three Arrows they need to make sure to buy another crypto token called StarkWare. Just absolutely legendary behavior. It’s all a misunderstanding, see, everything will be fixed if you put some more money into this crypto token, trust me, have I ever steered you wrong before?

Hahahahahoohooheehahahahaha