3AC is Not AOK.

Headline: What is 3-Arrows Capital and what happened to it?

Date:

Body:    Three arrows sounds like a very complicated intersection you might drive through.   But in this case, Three Arrows was a Singapore-based hedge fund that invested in cryptocurrency.  Their’s is an interesting story…

OK, what’s the bottom line anyway?

They went bankrupt, leaving $3.5 Billion in debts behind them.    Now that the Courts are involved, $35.6 Million have been seized from various  accounts associated with Three Arrows.  Earlier in the summer, the top 2 executives involved were actively helping the Court find assets, but, ever since they have remained largely silent.

Thanks for not burying the Lead.   So, now I’m curious.   What happened?

March 2022à 3 AC is now managing more than $10 Billion.

May 11-12, 2022 Lenders inquire about exposure to Luna and Terra, and 3AC reported no problems.

May 18^th 2022 Co-founder tries to minimize margin calls

June 3^rd 2022 Interest rates increased due to “market.

June 7^th 2022 3AC pitches investors a series of methods to  re-capitalize the firm.

June 10^th 2022 3AC receives first margin call

June 13^th 2022 Founder tries to get a new loan from Genesis.

Mid-June 2022à 3AC engages the services of a Security firm with the  intent to make communications more secure and able to entirely delete.

Late June 2022à Filed for Bankruptcy in British Virgin Islands.

July 1, 2022à Three Arrows Capital, (3AC) filed for  bankruptcy in the U.S.

July 6, 2022à Zoom call with liquidators.   The 2 executives were listening, but mic and video were turned off.

Sometime between July and Decemberà Liquidators were permitted to enter the facilities and look for evidence of assets.   It appears that the offices had been “ransacked” and the vast majority of useful information was missing.

December 2, 2022à Liquidators for bankrupt crypto hedge fund Three Arrows Capital(3AC) said on Friday that the company’s founders are refusing to cooperate with asset recovery efforts, hindering the company’s ability to return funds to creditors.  The amount due to creditors totals about $3 Billion.

Well, that’s pretty  bad.   Anything else?

Well, as a matter of fact… One of the executives did purchase a $50 Million boat called Much Wow with company funds.   But later in the financing plan, funds from the firm dried up and the boat went back on the market.  As a result of the sharp decrease in valuation for Bitcoin and Ethereum, there were significant losses for firms that lent money to 3AC.   Blockchain.com claims a loss of $270 Million due to these loans.  Voyager Digital filed for bankruptcy protection after it couldn’t recover $670 Million lent to 3AC.  Genesis (in severe trouble) and Block Fi (bankrupt) also had significant losses on their loans to 3AC.  Court filings indicate that there is no cash left to pay off creditors.  In turn, it would appear that a substantial chunk of the losses that 3AC suffered were attributable to investment in a stablecoin called Terra.  (There is some fingerpointing here, as investors in the stablecoin were promised 20% return, which many others pointed out was not feasible in the long term.)  Many investors sold Terra( and Luna, related) and in the chaotic process, lost $60 Billion.

In response to this loss, the co-founders both received death threats, forcing them to disappear off the grid and stay in hiding.

Has this ever happened before, outside of the cryptocurrency area?

Yes, it has happened before, or something very much like it.   Several decades ago, there was a firm called Long-Term Capital Management.   This firm had a roster of the “Who’s Who” in economics, computer modeling and trading.  In essence, they used computer modeling to find out what securities were mis-priced.  Then, they would purchase the securities that were “too cheap” and wait for them to come back up to where they “should be.”   Selling them would then provide the profits they were looking for.  (Conversely, they could find securities that were “too expensive” sell them short, and then short cover when the securities fell to their correct value.   They could then pocket the difference in price.)   For a while, this system worked wonderfully.  But, over several decades, the market changed, their models didn’t correct for this, and they made a few disastrous trades.  The firm collapsed in 1998.

One reason for the downfall of LTCM was its use of leverage (read as “debt”).   They would know the trade they wanted to make, but, they wanted to make a trade based upon a larger  amount of securities than they currently had money for.  So, to make a bigger profit (hopefully) they borrowed money, lots of money.   Well, when the markets turned against them, this borrowed money amplified their losses as well… and they went into bankruptcy.  3AC seems to have followed a very similar path, but the extent is difficult to gauge as they were very secretive in their dealings.

The Verdict

Jonathan Zeppettini, international operations lead at decentralized autonomous currency platform Decred, believes market conditions played a bare minimum in the 3AC saga and only helped in preventing the fraud further. He told Cointelegraph:

“In reality, they were just participating in other scams such as Terra and acting as a middleman between questionable investments and lenders who thought their record was so impeccable it absolved them from having to do any due diligence. Cascading liquidations caused by the market correcting forced the end of the game. However, in reality, their model was always a ticking time bomb and would have imploded eventually no matter what.”

This is interesting because it is quite akin to what happened with LTCM.   They were so crammed with talent, and their track record was so good for a long time, that many of the backers failed to continue asking if their assumptions about the market still held true.   In a similar manner, people saw 3AC as the “adults in the room” and off-loaded their responsibility to do their own research, in favor of trusting 3AC.   For a while, it worked beautifully… until it didn’t.  (Are we sensing a theme here?)  This is likely a cautionary tale.

One more cautionary tale here, I think.    Many of these players who get into trouble in the cryptocurrency area seem to be there largely because of their ownership of a cryptocurrency exchange AND a hedge fund that invests in cryptocurrency projects.  FTX had Alameda Research, and allowed them to use credit more liberally than other firms, and allowed them faster execution times than any other firm.    Now, FTX is QRT, and bankrupt, and people have been arrested.  I found a Reuter’s article that the owner of another major exchange has started a hedge fund of his own, and it makes me quite curious to  see if he follows in a similar path.  I certainly hope not.

REFERENCES

https://www.coindesk.com/business/2022/12/02/three-arrows-capital-liquidators-seize-356m-from-singaporean-banks/

https://www.reuters.com/technology/bankrupt-hedge-fund-three-arrows-liquidator-begins-taking-control-assets-block-2022-12-02/

https://www.cnbc.com/2022/07/11/how-the-fall-of-three-arrows-or-3ac-dragged-down-crypto-investors.html

https://cointelegraph.com/news/3ac-a-10b-hedge-fund-gone-bust-with-founders-on-the-run

https://www.forbes.com/sites/jacobwolinsky/2022/08/24/how-hedge-fund-three-arrows-capital-was-cryptos-long-term-capital-management/?sh=70bd704a633e

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Who got Voted “off the island” this week?

Body: Ever seen one of those Survivor shows on TV?  Over a series of weeks people are “voted off the island” until there are only a very few?   Yeah, what’s happening to cryptocurrency exchanges appears to have approached that level of drama.  Let’s start from the beginning.

I am confused.  Who is the OG here?

Ok, let’s start by introducing the players.    First, there is Gemeni, which is a cryptocurrency exchange and digital asset custodian.  They offered their customers an opportunity to make up to 8% in their Gemini Earn program, the assets of which were propping up Genesis Global Capital (they seem to be acting as a normal hedge fund, but this one focuses upon digital assets.)   Normally this is OK, but, Gemini did not register these loans with the SEC, which would’ve triggered many responsibilities to  provide disclosures to the customers.  Gemini is claiming that these are not securities, so the disclosure done was sufficient.  As a result, the SEC is suing Gemini for supposedly violating investor-protection laws.  Disclosure of the risks was not the only problem, for the honor of earning this amount of interest, Gemini collected a fee that climbed to over 4%.  Now that much of the cryptocurrency world is tanking, there were many consumers asking for their money back (think of an olde-fashioned Bank run here.)  Genesis stopped filling withdrawal requests on November 16^th  and is blaming this inabiliht to pay upon the fall of FTX.

At nearly the same time, the Commodity Futures Trading Commission has also sued Gemini.  (In case you missed it like I did, suit was filed last week.)  In June, the Commodity Futures Trading Commission filed a civil case against Gemini that claimed the crypto firm misled regulators in 2017 about its plans for a Bitcoin futures product. The CFTC said Gemini “made false or misleading” statements during the regulatory review process for the bitcoin futures product.

Is this really a big deal?

Yes.  The loans being made to Genesis amounted to over $900 million.   In its suit, the SEC is suing Gemini for the revenue earned illegally and for a variety of fines.

OK, but in the Court of Public opinion…

Eggs and rotten tomatoes are also being thrown.    The famous Winklevoss twins are the co-founders of Gemini and they have written 2 open letters (shared on Twitter)  to the CEO of the parent company that owns Genesis.   They refer to his “bad faith stall tactics” and urge the removal of the current CEO, Mr. Barry Silbert.   In return, Mr. Silbert referred to the tweets as a “deperate and unconstructive pubilicity stunt.”  For its part, Genesis has laid off over 30% of its personnel and is considering filing for Bankruptcy.

At the same time, Gemini Earn customers who had their assets frozen are suing Gemini.   For their part, Gemini is claiming that the customers have a valid claim against Genesis, aand DCG, not Gemini.  The founder of Gemini issued a letter denying any responsibility for the outcomes of this deal.  In an interview this week, Tyler Winklevoss said Gemini believed customers could be made whole. “There’s a path to getting a deal done that’s a resolution for Earn users,” he said.  We shall see.

Wait a minute, didn’t we see this movie before?

The lawsuit against Genesis and Gemini resembles another case that the SEC and several states filed over BlockFi Lending LLC’s product, which allowed crypto traders to earn a yield for lending their digital assets. The SEC alleged that BlockFi’s interest-bearing accounts were securities and that the firm should have registered the product. BlockFi paid a $100 million fine to settle the allegations. The company didn’t admit or deny wrongdoing.   I don’t forsee any materially different outcome in the cases against Gemini and Genesis.

In another recent legal blockbuster, Genesis itself had a starring role.  Stay with me here.   Genesis loaned money (a lot of money) to Three Arrows Capital (3AC) which, in turn, purchased shares in the Grayscale Bitcoin Trust, creating collateral for the loan, as the shares were trading at a premium to the Bitcoin they represent.   However, in 2021, the bottom started to fall out from under cryptocurrency, and the collateral lost value.  There were many margin calls from nervous investors, and Genesis itself lost at least $1.2 Billion, and 3AC went into Bankruptcy.

The Verdict

A spokesman for DCG added in a statement emailed to Forbes: “This is another desperate and unconstructive publicity stunt from Cameron Winklevoss to deflect blame from himself and Gemini, who are solely responsible for operating Gemini Earn and marketing the program to its customers. We are preserving all legal remedies in response to these malicious, false, and defamatory attacks.”  This is the problem I have with cryptocurrency firms.    There is a lack of leadership.   Don’t be fooled, these executives  have the business credentials, for sure.   But, so few of them have the emotional  intelligence needed to be a corporate leader over the long term.  And this long-term scotoma in their vision is what makes me very leery  of 99% of cryptocurrency projects.  So, I guess the lesson here is this.   When you read the whitepaper, by all means, feel free to diagram out the capital flows and understand all that.   But, at the same time, please also understand that plans for the long term should also be visible.   If this long-term planning is not in evidence, I think you must wonder about how they plan to stay in business.

REFERENCES

SEC Sues Crypto Firms Genesis and Gemini Over Lending Product – WSJ

SEC sues Gemini and Genesis over crypto asset-lending programme | Financial Times (ft.com)

SEC Charges Crypto Companies With Offering Unregistered Securities – The New York Times (nytimes.com)

As Gemini And Genesis Trade Barbs Over Failed Product, SEC Sues Them Both For Selling It (forbes.com)

 Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Binance or Buynance (or Byenance?)

Headline: Why is Binance being removed from the SWIFT network?

Body:  OK, buckle up because this one is an interesting one.   Several months ago, I published an entry about the SWIFT network.   To summarize a summary, SWIFT is an international network between banks, and what is sent back and forth is information about transactions.  Now, cryptocurrency is not fiat currency, and Binance was able to use this network as a reliable way to make all of their transactions, large and small.  The trick is, they needed an actual bank to act as their partner.   That partner is Signature Bank.

What are we talking about?

SWIFT is a network that acts as an on-ramp and off-ramp for cryptocurrency transactions.  Up to now, Signature Bank would get a commission every time they turned around a transaction using the SWIFT network, no matter how large or small.  Now, it appears that Signature Bank is refusing to do any transactions for less than $100,000.  This change is effective February 1^st.  Corporate entities are also unaffected.

When and how was this change announced?

Binance announced the news via a January 21^st e-mail to its customers.   In the letter, Binance emphasized a few things:

1.  Binance was not the only one affected.  Signature Bank is applying this decision to all cryptocurrency exchanges with which they do business.
2. Changing cryptocurrencies into other fiat currencies (e.g. Euros) are unaffected by this event.
3. Binance is actively looking for a new partner bank.
4. Binance said that customers would still be able to use a credit or debit card to buy and sell cryptocurrencies.

Interestingly, ETH was also temporarily barred from transactions, pending the outcome of The Merge.   (The 2 chains of ETH transactions will be merged.)

Why is Signature Bank doing this?

In a previous entry, I suggested that the FTX blow-up and several other exchanges  declaring Bankruptcy were making retail investors anxious and so they were often selling off their cryptocurrency positions, leading to a slide in valuations.  In a very similar manner, many financial intermediaries have also been  cutting back on their exposure to cryptocurrency.    (Signature Bank is cutting back by about half, to $10 Billion.)  Silvergate is a similar financial intermediary, and reported a billion dollar loss in the final quarter of 2022, and 90% of that loss was attributed to investment in cryptocurrency firms.   But, there are some transactions that are too juicy to pass up, and these are the corporate ones and the individual transactions over $100,000. (Interestingly, this was an important topic at a New York conference hosted by Goldman Sachs.  This is interesting because Goldman has already invested in 11 digital currency firms, and plans to spend millions more in this area.)

Is this at all related to the efforts of Russia?

The short answer is I don’t know.   What I do know is that in April 2021, Russian finance officials met with Binance and tried to get names and other information related to transactions by political dissidents.  Binance did decide to share this client data.  Binance has continued to operate in Russia since Putin ordered his troops into Ukraine on Feb. 24, despite requests from the government in Kyiv to Binance and other exchanges to ban Russian users. Other major payment and fintech companies, such as PayPal and American Express, have halted services in Russia since the Kremlin launched what it calls a “special operation” to demilitarise and “denazify” Ukraine. One of Binance’s main rivals in Russia, EXMO.com, said on Monday it would no longer serve Russian and Belarusian clients.

So, let’s review.     The government of Russia persuaded Binance to turn over a lot of their customer data.   Binance turned over this client data to the Russian government, ostensibly to ensure future business within the massive markets of Russia.  President Putin then asked the government agencies to come to “unanimous opinion” on cryptocurrency regulation, because they want to encourage firms to do business in Russia.   Toward this end, he cited their “certain competitive advantages” like a very healthy supply of electricity, vital to cryptocurrency firms.  Then, Putin invaded Ukraine.   Many western nations decided to freeze assets.  Six days later, the rouble trading increased 400%.

The Verdict

Binance is in a delicate situation here.   One hallmark of decentralized finance is that there is no central authority.   However, when doing business with an authoritarian-controlled country, this is likely an impossibility.  But, Russia is an exceedingly tempting target for expansion of such a business because of their exclusion from some of the Wester-based banking networks; As a result of this exclusion, the government and businesses are salivating over any way to get money to international  locations.  Binance has apparently made their stand, shoulder to shoulder with any regulators.   I guess what we all have to ask is do we feel comfortable doing business with this exchange, given their track record.   There is no right or wrong answer here, and since we are in the U.S., the sharing of information with regulators is not nearly as frightening.    But, it does violate the prime directive of decentralized finance, so one must be very clear about one’s objectives, and the red lines one is unwilling to cross.

REFERENCES

https://cointelegraph.com/news/binance-s-swift-banking-partner-set-to-ban-usd-transfers-below-100k

https://www.coindesk.com/business/2023/01/23/binance-says-signature-bank-wont-support-transactions-for-crypto-exchange-customers-of-less-than-100k/

https://fortune.com/crypto/2023/01/23/crypto-industry-losing-banking-partners-heres-why-it-matters/

https://www.reuters.com/technology/how-crypto-giant-binance-built-ties-russian-fsb-linked-agency-2022-04-22/

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Did Gronk get Zonked?

Headline: Is Gronk being zonked by cryptocurrency?

Body:  Ok, usually, I really don’t think about sports at all, and I certainly don’t write about it.  I might catch the odd portion of a football game, maybe a few innings of a baseball game, I really don’t care.  (Sumo wrestling, though?    Yes!!  2 500-Lb. guys in diapers wrestling in mud, with matches scripted a la WWE?    Yes, please)  But I digress.   Usually I won’t write about sports.  That said, this is the exception.  Cryptocurrency has collided head on (almost a targeting call here) with sport.  Rob Gronkowski (hereinafter, Gronk) has been subpoenaed  in a class action suit against owner of the Mavericks, Mark Cuban.

What?

Good question, actually.   It seems that a whole class of people have sued Mark Cuban for promoting a, now bankrupt, cryptocurrency brokerage, Voyager Digital.  They are following in the footsteps of the class who sued a number of celebrities (think Shaquille O’Neal, Larry David and others) for their promotion of FTX.    The suit against Cuban and the Mavericks will follow much of the same logic.    Essentially tying their famous personalities to the  opaque business practices perpetrated a fraud upon investors.  For right now, Gronk has been served a subpoena as a third party and not a defendant, but that could change.  Gronk was a “brand ambassador” for Voyager Digital, and arguably, an important portion of the alleged fraud.  As of July 1, 2022, Voyager has stopped all withdrawals and very soon after, filed for bankruptcy protections.

Why did Gronk get into cryptocurrency?

He was following the lead of long-time friend Tom Brady, who also began to promote cryptocurrency.    Companies in the space are hoping to use Gronk to promote the idea that cryptocurrency is for everybody.  To this end, he will make a series of commercials featuring Gronk working out with a dog on his back (a la many TikTok videos.)  Eventually, Gronk will be selling off some NFTs to help support his children’s charity.  Previously, Gronk has offered NFTs to memorialize his greatest SuperBowl moments.  Events continue, as Tom Brady has started a company to mint NFTs related to other world-known athletes.  Even Coinbase is getting in the action, as they partner with the NBA to be the “exclusive cryptocurrency platform partner” of the NBA.

OK, but is it just the U.S.?

No, the craze appears to have gone worldwide.    After one particularly significant bout, English boxer, Tyson Fury minted an NFT and sold it for just less than one million dollars.  In Europe, there are several  soccer players who have their own NFTs.   But, even more interesting, even the fantasy sports “atheletes” have NFTs.  Adidas began minting their own NFTs and buyers will be able to use proprietary wearables.   Some soccer clubs in Europe have even offered NFTs that allow the buyer to vote on issues important to that club.  This binge has even stretched to Africa.   South Africa is beginning to mint NFTs related to their rugby players.

This all sounds GREAT!!

Yeah, no.  This mass-adoption of NFTs is not without issue.  Several large soccer teams in Europe have had to cancel agreements with cryptocurrency firms.   Meanwhile, Spanish soccer star Andre’s Iniesta was warned online by Spanish officials that there are risks when people promote unregulated products.

The Verdict

The first to fly through the air in a powered conveyance were the Wright Brothers.  Just a few decades later, there were some rather substantial companies offering flights that went between continents.  But, a significant issue that these young airlines faced was marketing.  Flying was seen by many as very risky  Even though that airplane could deliver you to California in less than 6 hours, it could also conceivably blow up on landing, or have an engine flame out midflight, according to the public  The airlines had to launch a very diligent and deliberate marketing campaign to explain to the public that their airplanes were very safe, and were even safer than the cars that they loved so much.  To be warmly embraced by the public, cryptocurrency firms and groups minting NFTs  really have to explain to members of the public the value of their products.   This is especially tricky for cryptocurrency and N/FTs.   An airplane you can see, touch even (If you can outrun Security.)  Cryptocurrency and NFTs are nothing but ones and zeros, so they have a much more comprehensive task of explaining to investors how their “product” has value.  A case has to be made forcefully, and I don’t think anybody has gotten closer than NBA TopShot.  All others might learn a thing or two from their example.   Just don’t watch the NBA representatives eat.   They are always dribbling.

REFERENCES

https://www.si.com/nfl/2023/01/17/rob-gronkowski-issued-subpoena-cryptocurrency-lawsuit-mavericks-mark-cuban

https://www.coindesk.com/business/2021/09/08/rob-gronkowski-follows-tom-brady-into-crypto-in-ambassadors-role-with-voyager-digital/

https://cointelegraph.com/news/touchdown-goal-knockout-crypto-and-sports-collide-in-2021

https://cryptonews.com/news/super-bowl-champion-gronk-set-to-auction-his-own-nft-collect-9480.htm

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Is Coinbase in Treble?

Headline: What just happened to Coinbase?

Full Disclosure: In full disclosure, I do own a small volume of shares in Coinbase.   The value of this equity is not significant with respect to my net worth and is in no way significant to the corporation.

Body:  A little while ago, I outlined ways to invest in crypto without investing in crypto.   Buying shares in Coinbase was one of the ways I spoke of as a method to participate in the hot craze without being excessively endangered by cryptocurrency shenanigans.  So, I took my own counsel… and have lost a moderate amount.   (My first purchase was in May of last year, and I just placed an order.  In May, I paid over $125 per share, and at the end of December, I paid just $34 per share.)  I am staying in mainly because I have a firm belief in the (what’s the word?) craziness of gamers.   In short, Bitcoin and Ethereum are not perfect, but, they do remain financial “on-ramps” to other cryptocurrencies.     Each game seems to have its own native currency, and can usually only be purchased using ETH.   The easiest way for the lay person to obtain ETH is to purchase it.   And, likely the easiest place to purchase it is at Coinbase.  My time horizon is pretty long and I view the current very low valuation as being able to purchase stock on sale.  Of course, this might be self-delusion or just WRONG.   Do your own research, always.

Sorry, got off on a little tangent.   Coinbase stock has been going steady, in the downward direction for the majority of its existence.    I have to wonder what’s prompting this?

So, don’t bury the lead.   What’s happening?

Pure and simple, investors are afraid.   Not long ago, they witnessed the bankruptcy of FTX (remember them?) and the arrest of the executives of that company.  Further stoking the fire of fear, Coinbase is closely related to USD Coin, and now, rival Binance is encouraging investors to re-think investment in USD Coin after the joint venture (between Coinbase and USD Coin ) decided not to go public..  This makes investors quite nervous about Coinbase. 

That sounds reasonable… so why do you own stock here?

I very much like their first-mover advantage in this space.  I also like the future prospects in the gaming space as mentioned above.  But, even right now, Coinbase is no FTX for a few reasons:

1.  Its books are audited by Deloitte
2. Coinbase is  capitalized with $5 Billion in cash.
3. They advertise that they hold 90% or more of their cryptocurrency deposits in cold wallets, offline.   This suggests a very clear mindset to security and safety.

But, didn’t I just read about huge workforce reductions?

Yes, you did.   Coinbase is firing about 20% of its workers in an effort to “rightsize” the organization.  Certainly, for the people who are laid off, this is nothing less than a tragedy.  But, if you are a heartless investor, this adherence to a lean organization might indeed be a  good thing.  This has happened in many nascent industries before, like the railroads and the utilities.  One critic pointed out that companies in new industries often have a similar employment pattern.

So, what was the response in the market?

Coinbase’s stock price increased  about 9%, just after the news of the layoffs struck the general public.   Oppenheimer still gives Coinbase an evaluation of “outperform” for its prospects.  Further, their partnership with USDC is seen to be a potential boon, as USDC just became the 4^th largest cryptocurrency with a market capitalization of $44 Billion. 

The Verdict

“We are encouraged by this morning’s news, as it shows the company is taking financial discipline seriously in a very challenging crypto/macro environment,” analysts from Barclays wrote. However, they said the layoffs could also be a sign the crypto exchange company is preparing for a tough year ahead.  I chose to put this quote in the wrap-up section because I think it neatly summarizes some of the problems and opportunities with the cryptocurrency investment industry.  Many analysts are looking at this shedding of employees as potentially good in the long run.  Please focus upon the last 4 words, “in the long run.”   Look at the stock chart for Coinbase on 1/10/2023, and you will see a large increase in value, over the course of the day.   But, look at it in the broader (5 year) frame and the pattern quickly becomes an obvious downward curve.   Now think about how you think about a new car.    At first, you are ever so careful about who rides in it, what you haul with it, and you probably park it in the far corners of the Wal-Mart lot.  As time goes on, it becomes your vehicle to get from A to B, and the fact that you used it to haul mulch for the Church really doesn’t bother you.  Near the end, you get pretty numb when you get the very low estimate from CarMax or a ridiculously low value from a private buyer.  I think cryptocurrency is pretty similar.   At the beginning, it went way up (when people were extremely excited), and then relatively slowly went pretty far back down (like the “new” car after 3 years.)   Before the inherent value of Coinbase can be widely seen, I think that cryptocurrency needs to become like that “new “ car, at the end of Year 6.  Said another way, before Coinbase can go up a lot, I think people need to begin to see cryptocurrency as just another investment.  I don’t know if we’re there yet; I think we might be 2-3 years out from a transition to that point.  So, in the parlance of the finance bros, I am going to HODL (Hold Onto Dis Long-term.)  But, I promise you that my investment here won’t exceed 5% of my portfolio.

REFERENCES

https://www.fool.com/investing/2022/12/13/why-coinbase-stock-plunged-to-an-all-time-low-toda/

https://www.cnbc.com/2023/01/10/coinbase-to-slash-20percent-of-workforce-in-second-major-round-of-job-cuts.html

https://www.coindesk.com/business/2023/01/10/analysts-encouraged-by-coinbase-layoffs-as-they-show-company-is-being-financially-disciplined/

https://www.nerdwallet.com/article/investing/coinbase-vs-coinbase-pro

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

I Love it When a Plan (Eventually) Comes Together!

Headline: What is NCET?

Body:    So, I grew up in the 1980s, and I loved watching the A-Team.  Each team member would have different skills, and added up, all of the efforts would serve to magnify their effect.   This seems to be the idea behind National Cryptocurrency Enforcement Team (NCET) with respect to the $2 Trillion cryptocurrency area.

Do they ride around in a black van, or did they have jobs before?

They all worked for the Federal Government before.   Specifically, they come from a few sources:

1.  Money Laundering and Asset Recovery Section (MLARS) within the DOJ
2. Computer Crime and IP Section
3. Personnel detailed from the U.S. Attorneys’ Office

The leader within NCET will report to the Assistant Attorney General (Criminal Division.)

Interesting…

Yes, it is interesting.   The mission statement for the NCET is full of the verbiage you might expect, but it interestingly focuses upon recovery of ill-gotten gains.  NCET will also focus upon providing specialized assistance to State and local municipalities to help them as they struggle to control these technology-linked crimes.    Later in the Press Release, the exact functions of the NCET is discussed and all the bullet points are kind of as expected.  But the last one is special.  It says that NCET personnel will be working with many different cryptocurrency firms to help understand and guide the self-governance of the industry.  So, they seem to have a rather intriguing portfolio.  They have to  prosecute crimes perpetrated by people who are almost their colleagues.      I know that this might not pass the sniff test.   But, with any nascent technology, I think government really has to begin in this posture.  Before we had the FAA, pilots and executives  from the small airlines were doubtless advising the regulators.

BREAKING NEWS!!!

The DOJ announced the appointment of the Director of NCET, Eun Young Choi.   She is a prosecutor with almost 10 years experience within the DOJ.  She seems to have been genetically engineered for the job.   She attended Harvard Law and served as a Cryptocurrency coordinator within the Courts.    She also has a Bachelor’s Degree in Economics.  She certainly has the technical chops for the job, and seems to have the leadership experience.  Beyond this, colleagues refer to her as “EYC” which sounds akin to a WWF wrestler’s moniker.  So, she seems especially prepared to put the smackdown on cryptocurrency schemes.

So, it’s ALL good?

Well, maybe not.  Admittedly my research is not canonical, but, it seems like the small team might have a portfolio out of proportion with their size.   The information I read talked about going after narcotics, hacking exploits and ransomware in addition to the enforcement of more standard Federal Regulations.  This seems like a very unfocused mandate that could quickly become unmanageable.  I think Ms. Choi will have her hands full.

The A-Team had an almost equivalent squad of Army MPs chasing them.   Is this happening here?

Yes.    The FBI is in the process of creating their Virtual Asset Exploitation Unit.  The particulars of this office also seem to be in a developmental phase.  But, even now, it appears that the FBI team will be focusing on the  state actors like North Korea and Iran, and tumbling or mixing companies in cryptocurrency.  (Mixing and tumbling are just ways to help disguise the source of funds used in cryptocurrency.) Regardless of the focus of each group, they both appear to be well-designed for effectiveness, as the Federal Government has a pretty good record overall.  The Government recovered almost all of the money paid to the perpetrators of the Colonial Pipeline incident.

The Verdict

“The department has been at the forefront of investigating and prosecuting crimes involving digital currencies since their inception,” said Director Choi. “The NCET will play a pivotal role in ensuring that as the technology surrounding digital assets grows and evolves, the department in turn accelerates and expands its efforts to combat their illicit abuse by criminals of all kinds.”   This quotation is what is expected from a leader within the Federal Government.   But, I am a little concerned about the latter portion.  “Grows and evolves…accelerates and expands.”  It’s always something of a sport within the Federal Government to engineer your mandate to be very broad and command a larger portion of the budget.  Unless carefully shepherded, this ambiguity in mission could either provide them the flexibility that they need, or, such a large portfolio, that they are courting disaster.  I sincerely hope it’s the former, and not the latter.

REFERENCES

https://www.justice.gov/opa/pr/deputy-attorney-general-lisa-o-monaco-announces-national-cryptocurrency-enforcement-team

https://www.justice.gov/opa/pr/justice-department-announces-first-director-national-cryptocurrency-enforcement-team

https://www.cooley.com/news/insight/2022/2022-02-24-us-justice-department-appoints-first-national

https://news.bloombergtax.com/daily-tax-report/doj-amps-up-crypto-scrutiny-naming-head-of-new-enforcement-team

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

Sybiling Rivalry?

Headline:  What is a Sybil attack?

Body: 

In the field of psychology, there is a disorder called dissociative identity disorder, or more commonly, multiple personality disorder.  These poor people have almost uniformly experienced an elongated period of physical and psychological trauma, and it is very serious.  One of the best known case studies is “Sybil” (a.k.a. Sybil Dorsett.)  The outfall is that, seemingly randomly, different portions of her personality would come forth, out of proportion with the situation.  This is the crux of dissociative identity disorder.    In cryptocurrency, some people have taken over several nodes within the network (like multiple personalities in our example) and this has become known as a Sybil attack.

Can this really cause problems?

Yes, it can.   People who take over several nodes on the blockchain, can artificially expand their voting power.   They can even extend to refuse validation  of transactions, and this can be harmful to the currency.  If they control over half of the nodes on the network (a 51%  attack) they can significantly affect the order of transactions being validated or even reverse  some of the already validated transactions.  Scientists have been working diligently to come up with a solution to not allow these attacks, but, their attempts have yet to be successful.

Are there defenses to prevent Sybil attacks?

Yes, there are defenses.   Primary is the consensus algorithm used with that cryptocurrency.  Whether it be Proof of Work, Proof of Stake or some other model, they are all designed to make Sybil attacks expensive enough to be unfeasible.

Do these consensus models really work to keep people honest?

I think it does.    Not long ago, a University of Michigan professor did a study of the impact of reputation upon E-bay results.  The Swansons sell vintage postcards, and have an exceedingly high score for customer satisfaction.  Professor Resnick asked them to set up several fake accounts that would later go on to have either neutral or negative reputations.   During the period of the experiment, their main page made an average of 8.1% more than even the best of the fake accounts.  The point is that a good reputation tends to maximize your profit, snf  you would be wise to do what you could to preserve your good name.    This belief underlies the whole idea of decentralized finance.

Similar gaming of reputation has happened all over the Web.   Yahoo shopping had a store that had many reports of bad experiences, but they still had a stellar score since their network was setting up fake sales, attached to glowing recommendations.  They booted the vendor from the network, they changed names, and came right back.  A news aggregator called Digg also had a similar artificial reputation boosting problem, and this affected which stories were placed on the valuable front page.  Would anybody be surprised that there are businesses that make their money helping people to game these systems?   Yes, there are many of these.

The Verdict

Sybil attacks appear to be very real, and we need to strive to find ways to make them less effective.   This is all true.   What strikes me, though, is how similar this attack is to the others we have discussed.  Yelp has been attacked in a similar manner.   There are 2 restaurants, Restaurant A and Restaurant B, and they are the only 2 within one town, so they are competing.    The owners of Restaurant A might contact their friends and say, “Please give us a glowing review on Yelp.   At the same time, please give Restaurant B a terrible review.  Thus, through no fault of their own, the reputation of Restaurant B will go down.  My point is that you have to be very careful when considering investment into a cryptocurrency.  They could be artificially hyping their own currency (think FTX) or downgrading another currency.   Read the whitepaper, read the trustworthy blogs about this cryptocurrency, investigate the management team, and then ask yourself if you feel comfortable to give them some of your hard-earned money.

REFERENCES

https://academy.binance.com/en/articles/sybil-attacks-explained

https://www.wired.com/2007/03/herding/

https://www.sciencedirect.com/topics/computer-science/sybil-attack

https://coinsbench.com/having-difficulty-understanding-consensus-and-sybil-attacks-on-the-blockchain-read-this-1b112845a8b1

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

Blockchain is Growing Like Weed.

Headline: What is Mile High Labs and how do they use blockchain?

Body: 

What is Mile High Labs and how are they using blockchain for compliance?

Body:  OK, time for complete honesty.   I was attracted to this topic most quickly by the title.  But, as I thought about it a  little, it made a lot of sense that blockchain might be used in this application.   Mile High Labs is based in Colorado, where pot is legal, and this company was formed to help growers track their products from seedling to plant to dispensary to customer.  Given that marijuana is so tightly controlled in most states, it seems clear that there should be some sort of evidence that certain products were grown, dispensed and enjoyed in a jurisdiction where it was legal to do so.  Customers would feel better knowing where the products came from.   Banks would be more likely to make loans to farmers and dispensaries if the provenance of the products could be proven.  Regulators could feel better that they made a good decision (and justify it to taxpayers) if there were some way to prove where the product came from and was used.  Everybody would benefit. 

Are they serious?

Most of the time, yes.   But, some of the language used in the articles mentioned have some very entertaining turns of phrase.    I thought I might just quote one piece

Supply chain transparency provides yet another example of blockchain applications in the cannabis industry alongside financial services, which are currently difficult to come by for cannabis enterprises. According to a joint (no pun intended) press release, the budding cannabis industry leaves many consumers for want of information on how their products were grown, transported and handled.

OK, back to business

When you’re in the grocery store, do you ever wonder  the difference between “organic” produce and the “non-organic” produce?  Many times, I have stood in the grocery store and looked at 2 displays of bananas.    One had a large sign that says, “Organic” and these bananas are significantly higher in price.    The ones to the right are not labeled organic.   Both look identical to me, and a taste test came to the same result.  Some people would probably appreciate knowing where the bananas were grown, picked, their  shipping history, and how long they had been at the store, among other details.  (I don’t, but some people do.)  And there is some logic behind their demand for more information about their fruit; If your body is a temple, you want to make sure that only true believers are admitted.     If this is true of bananas, what if somebody is contemplating the rather expensive purchase of an herb that will temporarily change their neurology?   I can easily imagine the desire to understand the purity of this product, even more than bananas, which normally do not change your neurology (If they do, I suspect monkey business.)

Are there other firms doing this work?

Of course there are, God Bless capitalism.  Within the U.S. alone, there are at least 2 others trying to do the same thing.   One is TruTrace Technologies and the other is Paragon in Los Angeles.  At the bottom of the globe, there is an Australian company, Parsl, doing nearly the same thing.

Does the blockchain record information related to purity?

Yes, the results of many state-mandated lab tests are encoded into the blockchain.  Those lab tests speak to the processes and ingredients found in every batch of cannabis from every grower, producer, and dispensary. The cannabis has to be tested for heavy metals, pesticides, mold, and other contaminants, combined with potency and terpene levels.   In an ideal system, all of this information could be encoded into a QR code and scanned by the customer.  This technique was originated by the TruTrace company with their StrainSecure technology, applied to “cannabis water.”  A consumer can walk into the dispensary, scan the code, and learn everything about the product.  

Are there problems to be solved?

Certainly there are problems yet to be solved.  Apparently one issue is that the product information should be accessible 24/7,  and apparently uptime can be less than 100%.  Regulators not keen on legalization of pot have often seized on this perceived weakness.  As we speak, ‘Rhode Island is thinking of legalization and sent out an RFP to companies who maintain blockchains related to marijuana.   In that debate, uptime percentage was a major point of contention.

There is a second problem, too.  Standardization of dosage, knowledge of duration of effect and side effects, etc. are linked to a drug’s NDC number within the U.S.   Cannabis-products have no   similar index to help patients understand what to expect from their experiences.

In my research, I came across a Press Release from Mile High Labs announcing their new Innovation Lab.   Each of the problems I have already identified facing the industry were addressed within the body of the release.  The gist is that Mile High Labs is looking for up to 10 partners to take on all of these problems together, in a collaborative manner.

The Verdict

“The novel consumer products that will define the next phase of this industry are waiting to be made, and the Mile High Innovation Lab exists to bring these innovations to life,” adds Hilley. “I’m excited to see what magic we create together.”  This encapsulates the need for blockchain to reasonably regulate this market.    There is great enthusiasm for the growing and dispensing of these products, largely because of the “magic” they impart to the user.   But, to do so safely, we must have a system to inform the consumer of exactly what they are purchasing and putting into their body.    Given that the uptime problem mentioned before can be solved, it seems to me that blockchain represents a good compromise.  It would allow us to reap the many very real benefits of cannabis, but do so with complete transparency.  I think that this solution is pretty spliffy.  

REFERENCES

Huobi Adds TRON Derivatives Trading – Crypto Briefing

Can Blockchain Solve Some Of The Aches Of The Cannabis Industry? (yahoo.com)

Cannabidiol (CBD) Logistics Service Market Size, Share, Growth Statistics, Latest Trends, and Forecast 2030 – MarketWatch

Mile High Labs and Brightfield Group Launch Innovation Platform to Fuel Next Generation of Novel Consumer Products — Mile High Labs

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.