107 Exchange Invest Weekly Podcast August 14th, 2021

Transcript:

This week in the parish of bourses and market structure:

SEC Chief Gary Gensler will likely deem this week’s DeFi failures as his dream invitation to distribute the DeFi marketplace in his own inimitable way throughout the Federal penitentiary system, we suspect.

My name is Patrick L. Young, welcome to the bourse business weekly digest.

It’s the Exchange Invest Weekly Podcast 107.

Good day ladies and gentlemen, this is a very brief reduction of highlights amongst the key headlines from the week in market structure. All the analysis of the week’s many events and happenings can be found in Exchange Invest’s daily subscriber newsletter, the unique guide to the bourse business sent daily to your inbox.

More details are in ExchangeInvest.com.

Networks are funny things, they are after all fundamentally interconnected things. At the same time, some people get so drunk on the power of the networks that they seem to ignore the commonality of the nodes themselves. To that end, we had a story from the Bangkok Post in last week’s Exchange Invest discussing “The Curious Case of Binance”.

An apt headline one might think, as the article noted:

“Despite Thai regulators filing a criminal complaint this month against Binance — the world’s largest digital asset exchange — for operating without licence, many users are determined to keep trading on the site and doubt the government’s ability to prevent them from doing so.”

Binance may be the most popular crypto exchange in the country, surpassing its competitors such as Bitkub based solely on anecdotal evidence. While the company does not release data on how many users it has in Thailand, the largest Thai Binance Facebook group boasts more than 250,000 members.

One uncertainty for traders is how the Securities and Exchange Commission (SEC) would stop trade on Binance if it moves forward with the criminal complaint.

Ladies and gentlemen, this is arguably fair if you are the Thai SEC. If Binance avoids the Baht and management doesn’t suddenly do any trips to the nation, they could be okay, BUT the problem is what happens when everybody’s regulator is similarly pursuing the decentralised CZ machine?

We’re approaching a singularity there and moreover, into the whole affair the cavalry in the shape of Gary Gensler and his SEC cohort are about to bring the US to the party.

Folks in Singapore may think they are ‘oh so safe’ but the scope to fly a C-130 into the military side of Changi Airport is considerable and the ability to take some folks (back) to the US of A strapped to the vehicle deck are positively plausible. Thus, the Thai SEC may just be making noise about a cohort of traders on Binance, which is large 250,000 (but smaller than Thailand’s Manchester United supporters fraternity). However, the US SEC is looking deadly serious.

Ultimately folks need to get the crypto into usable cash – usually at eye-popping haircuts – and that tends to involve a trip through the US dollar clearing system. Exchanging US dollars through electronic means without touching a node which is either in or closely related to the USA, is broadly impossible on more than an isolated transaction (Say for example, you bump into a friendly chap from the Sinaloa cartel outside a bank in Panama City and agree to swap your crypto for his suitcase full of cash – that’s easy enough to achieve, of course, if the coincidence arises – but generally a tricky deal long-term as you know, UBO, AML, KYC, there’s a whole nexus of acronyms at play here which can be spelt – 20 years in ADX ( ADX is also known in long-form as: “SuperMax”).

Thailand is playing a supporting role, but sooner or later whether or not looking like Kevin Costner in “The Postman”, in what he likely sees as a crypto apocalypse for regulation: the SEC Chairman Gary Gensler is about to ‘clarify’ a lot of the cryptoverse with hiding spots limited to points where the Taliban reserves the right to lop your head off, or North Korea, whose gross exports are now down below UD $100 million per annum.

That was one view of the crypto world this week and actually it got worse. “Welcome to the DeFi Destruction Derby”, a headline apiece this week.

“Who needs regulators to destroy things, bro’s are doing it for themselves”, went the subtitle.

DeFi: nice idea, but the whole notion of Decentralised Finance sucks for the simple reason that well, you know, the legal system – (even if you think the modernised Roman thing works as opposed to, in my humble opinion, the far superior Common Law) however codified the law relies on a simple concept of centralization in some way, shape, or responsibility.

Now, the new age folks who are more falangists for a crazy hippy commune version of technology nirvana, rather than revolutionaries, have been taking pot shots for years are ‘we in the original Capital Market Revolutionary cadre’ who were around long before the crypto kiddies were mostly born. Libertarianism is cool, but it just doesn’t cut the mustard when the burgers are being overseen by Gary Gensler and Elizabeth Warren.

So GG has awoken to the best news since he became SEC chairman during the course of the last week. DeFi shot itself in the foot, on the head simultaneously. (Well Decentralised networks have a kind of Schroedinger’s cat phase state thing going, I suppose).

Popsicle – crazy name, crazy network, has essentially self-destructed over some coding errors.

In essence, it had a liquidity additive model but instead due to a bug, delivered what can only be described as a “taker taker” wormhole for hackers to extract cash where investors thought they were making markets. Painful.

IMHO that’s the cue for GG to Do La Warren’s bidding. Extraordinary rendition from Singapore of US citizens and DeFi? “You got it!”

Of course, it also leaves the legacy media looking somewhat egg-faced. The absolute classic of the genre must be Fortune which published this nonsense as Popsicle melted. It was headlined: “Why DeiFi could prove to be less risky than traditional finance”.

It was written by the man who heads Bianance’s US exchange, one Brian Brooks, who clearly left his common sense behind when he took CZ-geld and departed the US OCC (that’s the currency one, not the options one).

Mr. Brooks, his article had started on a safe enough path and I quote:

“However, when innovation comes to finance, it is often met with scepticism over safety and suitability – an issue faced by finance over the past decade.”

Albeit, I suspect, Mr. Brooks shows his neophyte tendency here, think what it was like 25 years ago, when “do you think email will really catch on?” was asked of me by several folk, several folk I might add, who are (all now self-styled ‘FinTech experts’). Anyway, the Binance boss went on:

“The information on trust asymmetries that banks existed to intermediate centuries ago has been significantly displaced by technology, particularly blockchain and artificial intelligence. The need for great central repositories of information, commerce, and finance is being reduced by technologies that allow decentralised peer-to-peer networks to perform the same functions more quickly and cheaply.”

Ladies and gentlemen, much is made of the $80 billion invested in DeFi – which just goes to prove that dumb money comes in big and small sizes, I suppose. What is misunderstood throughout this tedious assault on historical logic, is the fundamental part that centralised regulation plays. The fundamental problem remains: Disintermediation IS a thing. Decentralisation to remove the central focus/locus and legal standing of a financial process – is NOT conducive to the finely honed pre-existing legal system.

However, alas, one might call them charlatans, like Mr. Brooks are presumably being paid far too much by Binance to clearly concern themselves with the fabulously fundamental flaw in their logic.

Another problem arising is the future problem created on big blockchains. Frankly, I just find it laugh out loud, funny that so much money is ‘invested’ in ‘assets’ which are stored via the likes of Etherium. A brilliant college dorm project, but not something which will survive long-term. (Go ahead, just ask a crypto kitty, they have nearly taken the network down for years after all.)

Anyway, in the wake of this article, perhaps Mr. Brooks read something that his PR department had produced under his name, and suddenly had a change of heart. Whatever happened, the fortune supplement now looks like a remarkable legacy of the time before the SEC intervened.

Indeed, Mr. Brooks resigned as Binance US chief the day after his fabulously ill-timed and misconceived article was published in fortune. Then, the Poly network was exploited for $600 billion this week, albeit nearly half was apparently soon returned. The total picture was unclear as this podcast was being recorded, but it seems safe to presume that at least $100 million has gone missing. And as I mentioned earlier, that was the total amount exported by North Korea during the course of the last year.

Meanwhile, Binance itself produced a delicious euphemism in the story headline: Binance Plans to Break its Decentralised Structure.

“Decentralized structure”, that’s presumably “decentralized structure” as in, “I’m terribly sorry, the accused couldn’t come to court because he is currently living in a decentralized structure far from the jurisdiction in which he is being investigated.”

Back in the old days, court papers preferred “of no fixed abode”, as that particular phrase.

Elsewhere Coinbase was on the receiving end of a class action suit.

And back to Binance, they announced in a news story headlined: Binance To Wind Down Hong Kong Derivatives Trading In Switch To ‘Proactive’ Compliance Stance.

There’s another whole new phrase for the Binance buzzword bingo card, “proactive compliance”. In other words, I would imagine the SEC’s counsel might deploy this as an admission of pure-play guilt. Anyone spotted those C-130’sbuzzing overseas ads in an apartment in Singapore yet?

By the time Bloomberg and the Wall Street Journal ran headlines last week:

Well, Matt Levine‘s money stuff mentioned the SEC has its eye on crypto.

The SEC Chief Gary Gensler Braces For Clash With Crypto Traders, went the journal headline.

It was clear that the regulation “trailers” are now advertising: Coming soon: The Empire Strikes Back. I’m not sure the CFTC have perfected the carbon freezing machine yet, but other elements are falling into place whether it’s the SEC or the CFTC taking you to court.

Law360, meanwhile, ran a headline, Gensler Is Ready To Make SEC The Crypto Cop. But How?

In one word, ‘brutally’.

And indeed, the brutality began swiftly thereafter. The SEC charged Decentralised Finance lender for the first time. The top executives have been raising $30 million through what was bluntly perturbed by the SEC a fraudulent offering. That case was the agency’s first involving securities using DeFi technology. It begins ladies and gentlemen. Just days after the SEC Commission’s Chairman, Gary Gensler had called the crypto markets the “Wild West”.

That said that didn’t stop a turf war breaking out immediately with CFTC rather aggrieved that the SEC seem to be on their turf.

Now I told you when Gaza G was made SEC Chairman that he was likely to do a broad panzer move across his remit and the niceties of regulatory agencies that aren’t under his suzerainty would become an issue. CFTC is going to need the full force of the Ag committee to stand full square behind its mandate as Mr. Gensler attempts to grab power on all fronts.

Anyway, however you look at crypto this week:

Big change is afoot – and a lot of folks have just squandered the better part of $80 billion on DeFi investments. Ah the joys of youthful hubris – in this case they may not have realised that when they decentralised, they didn’t disintermediate the greater fool.

Elsewhere in the parish this week, it was a busy week for results. And actually, we don’t have time to cover them today. In case you missed all of the comments on SGX results, the LSEG’s results, the TMX’s results and others. You need a subscription to Exchange Invest, the daily newsletter of the bourse business. Get in touch via social media or contact us via the website ExchangeInvest.com so we can get you signed up for a free trial, so you too can catch up at the watercooler of the bourse business.

Don’t forget if you’re looking for some longer form reading there’s also my book “Victory or Death”– Blockchain, Cryptocurrency and the FinTech world, which will help you understand how to profit in this marketplace going forward.

On a positive story from crypto land this week:

Yahoo Japan, they’re introducing NFT trading in partnership with Line.

Now this is something. Line is a (delightful), super Kawaii networking app (it’s a bit like Telegram but rather anime-fungible). That makes for a very fertile NFT marketplace. Line moreover, has some 218 million users with two-thirds of them in Indonesia, Japan, Taiwan, and Thailand.

Product news this week:

Howard Lutnick is taking aim at the CME’s dominant US rates market.

Oh! it’s that story one more time, the return of the ELX or perhaps a whole new platform. The biggest difference of course is this time the CME has stopped doing strategy.

Microfocus of CME aside, we saw one huge macro trend coming to an end this week, Japan is going to end 300 years of trading rice futures.

Japan’s Osaka Dojima will end trading in rice futures nearly 300 years after they began trading as the first product on the world’s oldest futures exchange.

Samurai era futures murdered by Japanese bureaucracy in a shortsighted move we called it in Exchange Invest. Rice needs to be freely traded and not government subsidised. At the same time, the exchange should have the right to decide what to list, not the blob

In career paths this week, just eight months since he left the chief executive officer job of Hong Kong Exchanges and Clearing Limited, Charles Li launched his platform Micro Connect, a venue that will seek to link foreign capital to small businesses across China.

Elsewhere, congratulations to Chairman Mohammed Farid. He’s got another term of four years as the boss of the Egyptian Exchange.

And then we come to the BMLL market lens, a really useful tool for some watercooler discussion, BMLL have been stirring up some interesting facts with their market lens series in the latest one:

“How does investor behaviour change in volatile markets, and how can the BMLL Market Impact Framework provide insights into these changes?

Well, diving into that amazing 15 petabyte lake of data, the good folks at BMLL noted that “during the COVID sell-off of March 2020, traders reduced posted volumes by 90% despite trading twice as much as they had done at the beginning of 2020. In the meantime, average Market Impact increased significantly to 0.91 bps compared to 0.19 bps in post-pandemic markets.

And on that mysterious and magnificent note ladies and gentlemen.

My name is Patrick L. Young, thank you for listening to this EI weekly podcast number 107.

Have a great week in life and markets.

LINKS:

Binance Plans To Break Its Decentralized Structure
Nasdaq

LAWSUIT FILED: Coinbase Global Sued For Securities Fraud; Investors Should Contact Block & Leviton For More Information
Yahoo Finance

Binance To Wind Down Hong Kong Derivatives Trading In Switch To ‘Proactive’ Compliance Stance
Yahoo Finance

Matt Levine’s Money Stuff: The SEC Has Its Eye On Crypto
Bloomberg Law

SEC Chief Gary Gensler Braces For Clash With Crypto Traders
The Wall Street Journal

Gensler Is Ready To Make SEC The Crypto Cop. But How?
Law360

SEC Charges Decentralized Finance Lender And Top Executives for Raising $30 Million Through Fraudulent Offerings – Case Is Agency’s First Involving Securities Using DeFi Technology
SEC

SEC Files Charges In First DeFi Technology Case
Fortune