#48 The Context: SBF: White Knight or King of Chaos?
SBF’s funders lost faith ‘in weeks’ over book-keeping
Hi, this week we grab some interesting investigative pieces exploring the FTX scandal and more particularly, the role of its co-founder Sam Bankman-Fried in the months and years before it all blew up. Some interesting stuff, and kudos to the reporters doing the digging. The Context wouldn’t be The Context without some contrarian elements, so we take a look at whether there’s still life in DeFi (answer there is: one or two surprises in there) and whether CBDCs are DeFi’s digital twins or evil cousins.
The usual disclaimer: This newsletter collates the main themes and headlines of the week in DeFi/crypto/metaverse/web3/NFT land and tries to provide unbiased context. It’s aimed at anyone who wants to keep an eye on the space. It’s put together by a team at YAP and doesn’t contain any promotion of our clients (if one is mentioned, we’ll flag that).
The team: founder Samantha Yap and Jeremy Wagstaff, formerly of the journalism parish, with Ruby Wu, Sam O’Donohoe, Becky Corbel, Delon Chan, Ewan Brewster and Tiffany Mac Sherry. Your feedback is as always welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
[tl;dr]
SBF is talking a lot, but investigators and journalists are digging out more
The crypto crash is not deterring wannabe hubs, but regulators promise crackdowns
Central banks are pushing their digital currencies hard, but who will benefit?
[The enduring mystery of SBF]
Naturally, a lot of the focus is on Sam Bankman-Fried, and what he did or didn’t do. Some interesting stuff is coming out. Here’s a snapshot:
Most intriguing is the idea that SBF wasn’t a white knight back when TerraUSD and Luna were first in trouble, but may have been manipulating the market for profit. That's what federal prosecutors are investigating, according to the New York Times. If true, does that elevate SBF to super-villain levels?
The FT’s Jemima Kelly is annoyed by his constant refrain that he is embarrassed about what happened, noting that it’s “simply a kind of emotional virtue-signalling, without any of the heavy moral baggage that comes with taking accountability.” Or maybe it's a form of deflection before other pieces of his past are recovered?
Semafor’s been digging up ancient history, finding out where SBF got his money. (Semafor states clearly in its stories that SBF is an investor in Semafor.) Turns out the Effective Altruism movement, led by Luke Ding and co-founder of Skype Jaan Tallinn, lent $6 million and $110 worth of Ether in January 2018 with sky-high interest rates. By late March the relationship had soured as Ding and Tallinn discovered a serious lack of book-keeping and risk controls, demanding their loans back, according to the piece by Reed Albergotti and Liz Hoffman. If only we’d known.
And, as a sort of Scroogian Ghost of Christmas Yet to Come, the Celsius bankruptcy case is slouching its way through the courts, providing a glimpse of what lies ahead for SBF, FTX and Alameda. The judge has ordered Celsius to return some $50 million of crypto to customers, further draining the already scant coffers of funds. Journalist Amy Castor is taking notes in court so you don’t have to. Her comment: “We know very well that Celsius is a shambling zombie — but while it’s in Chapter 11, the judge probably has to treat it otherwise.” (Her Patreon account is here. Bloomberg story by Jeremy Hill)
[Ob-La-Di, Ob-La-Da]
Does DeFi life go on? Yes, it does, through winters both crypto and winter. And from surprising quarters:
The FTX collapse doesn't seem to have put off countries and city-states from vying to become a global hub of crypto. It won't derail UK's crypto agenda according to U.K. Economic Secretary Andrew Griffith. But he says it in the same breath as saying he is the government “will be consulting on a world-leading regime for the rest of the crypto-asset market later this year." There's not much of a year left so watch this space. (Story by Camomile Shumba of CoinDesk)
It's unlikely we’ll see a strong revival of crypto (or whatever you want to call it) before the regulators get their act together, and advantage presently sits on the side of the get-toughers, like U.S. senator Elizabeth Warren, who is crafting legislation that would go beyond just trying to prevent the next FTX. To give an idea of how she feels about crypto, she sees herself as one of those “blowing the bullshit whistle”. (Stories by Joseph Zeballos-Roig of Semafor)
But the bullshit whistleblowers are not the only game in town. Democratic Rep. Ritchie Torres, a DeFi advocate, has introduced crypto legislation to bring transparency to exchanges, arguing that “Sam Bankman-Fried is not representative of crypto finance any more than Bernie Madoff is representative of traditional finance." SBF might not appreciate the comparison but it's probably inevitable.
Indeed, the usual refrain from DeFi quarters that FTX etc. was a failure of centralised finance, not the decentralised variety, presents its own challenges. The main one is whether DeFi is ready for that. Some companies are still trying to build better on- and off-ramps so custodial wallets -- i.e. truly DeFi wallets -- can work as well with TradFi as CeFi exchanges. Stripe, for example, has announced a fiat-to-crypto onramp widget. But are these steps enough? Are decentralised exchanges fast and liquid enough for the kind of trading to replace their CeFi counterparts? Not yet, concludes Kenneth Rapoza writing on Forbes.
But then again, some see buying opportunities, which require a degree of confidence in the underlying system. Goldman Sachs is on the hunt for bargain crypto firms, now that assets are "priced much more sensibly", Reuters quoted Mathew McDermott, Goldman's head of digital assets as saying. Goldman has previously invested in 11 digital asset companies that provide services such as compliance, cryptocurrency data and blockchain management. (Story by Iain Withers and Lawrence White of Reuters)
And then there are NFTs and Fan Tokens and other bits and pieces of DeFi that aren’t exactly immune to winter, but have different users and use cases and so are playing to a different drum. The Fan Token of the Spanish national team tanked after their humiliating exit from the World Cup, showing that while their intrinsic value remains unclear, fan tokens may have already parted company from more traditional DeFi. Similarly, many image-based Non-Fungible Tokens represent a market that more closely follows the ups and downs of a traditional art market, where buyers view purchases as status symbols they can display as profile pictures. (Stories by Jason Nelson of Decrypt and Rizzn Hopkins of Ask Doctor Bitcoin)
[If CBDCs are the answer, what was the question again?]
DeFi doesn’t spend a lot of time thinking about central-bank digital currencies (CBDCs), as they have largely been seen as feeble efforts to challenge the inevitable success of decentralised currencies. But maybe it’s worth a closer look. Many governments rationalise CBDCs as a way to support their country’s digital economy, boost financial inclusions and make the system as a whole more efficient. There are several problems with this, all of which point to CBDCs less as natural allies of DeFi, but as evil twins hostile to not only crypto but its underlying principles of decentralisation and financial freedom.
Governments aren’t very good at this. Technical glitches have afflicted launches and onboarding, especially in Jamaica, and the public has often been left in the dark about how to use the system. Hardly the financial inclusion promised by their creators.
Some of the countries pursuing CBDCs are indeed hostile to DeFi, alienating the very folk most likely to embrace it. India, for example, has one of the highest uptakes of crypto in the world, despite efforts to ban the practice. Much of this trade is for remittances, one purpose for which the digital rupee was designed. Response to India’s pilot program from banks has been tepid.
Limiting the public’s options: Nigeria's eNaira has been so unpopular that the central bank has capped ATM cash withdrawals at $45 a day in a bid to boost digital payments. Downloads of the eNaira app are about 0.25% of the population.
There’s something else: monetary control. Ordinary digital payments do not involve cash, obviously, meaning they do not entail liability of the central bank (which would thereby make them ‘safe’). And as digital transactions become more popular, governments gradually lose a key lever of control: safeguarding financial stability by being a lender of last resort (i.e. 'printing' money). CBDCs would recover this role because the digital currency involved would be central bank-issued money.
Privacy: China is the one place where CBDCs have taken off, perhaps unsurprisingly. But what is less often explored is the degree to which the digital yuan can be tracked and monitored in ways that existing digital money and cash can’t. China plays this down, arguing that the e-CNY comes with “controllable anonymity” (可控匿名, kěkòng nìmíng), but this is only true up to a point, Lord Copper. The 'controllable' (or a better translation might be ‘managed’) element is referring to the government, not the user. Enough data could be extracted from any transaction, however small, for the central bank to be able, via law enforcement, to determine the transaction wallet holder's identity. ‘Nuff said.
Sources:
Nobody's using CBDCs. India's piloting one anyway. - Tech Monitor
Nigeria Caps ATM Cash Withdrawals at $45 Daily to Push Digital Payments - Bloomberg
Cold hard (digital) cash: the economics of central bank digital currency - European Central Bank
China's digital currency to offer ‘controllable anonymity' - The Register
[Reading]
For those of you feeling the media has focused too much on Sam Bankman-Fried, Protos has put together what we know about his partner in, er, stuff: From Alameda chief to bankrupting FTX, meet Caroline Ellison
Don’t worry, Boris is backing blockchain: Is Boris Johnson really the emissary that blockchain needs right now? asks the Financial Times’ Mercedes Ruehl
In last week’s Context we mentioned the grim toll of disappeared crypto kings and queens, to which we have to add Spanish scammer Javier Biosca, who apparently threw himself to his death fearing retribution from Russian, Bulgarian and Romanian mobsters who lived in the country. (Story by Tom Mitchelhill of the Chainsaw)
[Events]
Taipei Blockchain Week | December 12th - 17th 2022 | Taipei, Taiwan
World Blockchain Summit | December 13th - 14th 2022 | Bangkok, Thailand
[DeFi Definitions]
An occasional segment exploring one particular aspect of DeFi.
This Week: “Rug Pull”
A rug pull, taking its name from “pulling the rug out,” is a type of scam that involves a team pumping their project’s token before disappearing with the funds, leaving their investor with a valueless asset.
Rug pulls are common with DeFi projects as well as NFTs. Rug pulls occur when fraudulent developers create a new crypto token, pump up the price and then pull as much value out of them as possible before abandoning them as their price drops to zero.
There are three main types of rug pulls: liquidity stealing, limiting sell orders and dumping. Liquidity stealing happens when token creators withdraw all the coins from the liquidity pool. When this occurs, it removes the value injected into the currency by investors, driving its price down to zero.
Limiting sell orders is a subtle way for a malicious developer to defraud investors. In this situation, the developer codes the tokens so that they’re the only party that is able to sell them. Finally, there is dumping, which occurs when developers quickly sell off their own large supply of tokens. Doing so drives down the price of the coin and leaves remaining investors holding worthless tokens. “Dumping” usually occurs after heavy promotion on social media platforms.