Absolute Must Read
I agree with Fred Hickey and thank Grant Williams.
You can read the entire transcript or listen to a 1:23 hour-long podcast here: THE GRANT WILLIAMS PODCAST: BENNETT TOMLIN & GEORGE NOBLE
The interview is a three-way discussion between Grant Williams, Bennett Tomlin, and George Noble
The aim of this conversation is to try and bridge the gap between the finance community and the crypto community. To help one understand the other’s concerns and hopefully highlight the potential threat posed by Tether to the crypto ecosystem. I’m sure it will generate as many questions as it does answers, which is another point of these types of discussions.
I read the entire transcript. It's long but well worth the time. Here are what I found to be the key snips.
Key Snips - Emphasis Mine
Yeah. I think what’s particularly striking to me in this story is Bitfinex and Tether ended up giving over $1 billion of commingled client and corporate funds. So each Bitfinex and Tether each co-mingled their clients and corporate funds, then Tether and Bitfinex co-mingled their separate commingled funds together and gave over a billion dollars of those to Crypto Capital Corp without signing a contract or agreement of any kind, which sounds absurd to me.
And when you look, the closer you get, peel back the layers of the onion, the smellier it became. And so I realized, “Ah, they’re printing all these stablecoins, which as I came to understand that basically the digital equivalent or cyber equivalent of a money market fund, and I’m like, “Wait a second, what’s the backing?”
At some point during this, they get subpoenaed by the New York attorney general, and they start interacting with the New York attorney general’s office. In February of 2019, they finally update their website and their terms of service to make clear that Tether is not backed by traditional currency, which hadn’t been true since March of 2017. But they finally admitted it. So February of 2019, about two years later, they changed their website, changed their terms of service and said Tether will be backed by cash, cash equivalents, loans, receivables, and other assets or something like that. Then in March of 2019, Bitfinex and Tether enter into what they described as an arms length agreement to enter into a revolving credit facility where Tether would extend up to $900 million to Bitfinex at a rate of like 6%, I want to say, and Bitfinex would be able to access that at any time. And this loan would now be a critical part of the backing of Tether.
So it’s all very strange. So if it’s not backed, it’s all made up. The question then becomes, well, so what? So if the amount of Tether outstanding went from a few billion up to 64 billion in the last nine months, let’s call it 60 billion increase in Tether. And I believe the bulk of that is not backed. But here’s the point. Today, the market cap of Bitcoin is roughly, I think, 18 and a half million coins outstanding at a price of 35,000. …. And so, I actually believe that the counterfeiting of Tether has played a material role in the price evolution of Bitcoin.
The vast majority of Tether holders have no path to redemption. They’re not registered clients of Tether, and there’s no real way for them to become registered clients of Tether because Tether keeps that group relatively small.
Let’s talk a little bit about the patterns of Tether printing because that’s something else that fascinates me. We’ve seen enormous amounts of Tether get printed at very interesting junctures in the market, and the pattern of what the Bitcoin price does is highly predictable.
Part of the issue with me is fraudulent printing of Tether looks a lot like a whole bunch of new money legitimately entering the ecosystem. If someone just happened to actually give Tether $20 billion or whatever, it would look a lot like Tether printing 20 billion fake dollars. And so just those patterns alone for me are not sufficient evidence that there’s anything amiss there. But what’s more strange to me is how rarely you see the market cap of Tether go down. From 2014 through 2018, there was only one or two minor redemptions that actually dropped the market cap of Tether, and then there was a few in 2018 where we actually saw the market cap of Tether decrease. And then since then, I do not believe the market cap of Tether has ever decreased.
When we did the calculation the other day, it’s like two weeks old, the number of Bitcoins being created was about 900 a day. It’s lower now. 900 a day, which at today’s price would be about $30 million a day, which for an entire month would be running upwards of $900 million. Let’s call it a billion, I like round numbers. And then if you just then figure out and then look at it’s only half the market, and then there’s all the other coins, maybe two billion, but just humor me for a second. So you’re talking two billion a month need of extra supply coming on, which if so, is going to push down prices. This is the way a Ponzi works. You need ever increasing amounts of money to sustain the price. And then to your point, not only has the amount of Tether never gone down, it’s kind of interesting.
Two weeks ago, Binance was averaging 71% interest rates [on borrowed coins]. Grant, wait, there’s more, then it went to 81%. The last one I saw was 100%. If you’re walking down the street and you see a bank offering the 70% interest rate, forget about 100% interest rate, you would run out, walk as fast as you can away from that bank. Move along, nothing to see here. This is a madness. If it looks like a fraud, smells like fraud, quacks like a fraud, it’s a fraud.
George, this is interesting. Let me dig into this because this speaks, I think, to the point you made about each of the sides not understanding the other. This is, I think, at the very heart of this, because those double-digit interest rates, people do get paid them. People do get paid them. There are people who have staked their coins and who have been paid 70% interest rates over a short period of time. They have been paid 20, 30, 40, 50%. And it works right. But this is why I think it’s important for people who are doing this to understand the point you’re making, because you can get 70% on your fiatst Bitcoin, you can get 70% on your second Bitcoin. You can get to 70%, on your third Bitcoin, but when the fourth one goes, boom, and the whole thing goes away, you lose your Bitcoin.
And also if you have to stake it for a long period of time, you can’t get it out.
Well, it’s always a question of definition of a Ponzi is robbing Peter to pay Paul, right? So it’s like you said, we’ll pay at 70% on the first coin, the second, and the third coin. And as more and more people get attracted to this whole scheme, we need more and more inflows to keep paying people off to make to lend the appearance that it’s okay. And as long as money keeps coming in, it works.
Let’s go back to Lehman and Bear going bankrupt in ‘08. It was the mortgage backed securities market that was their undoing. What it was, was the loss of confidence in their solvency, which of course was tied to the mortgage backed securities market. But what really brought them down was their inability to roll their paper. They were 40 or 50 times levered.
Yeah. The idea of financial history again, is such an important one for people to understand. But the other thing I think is Jim Chanos has called this the golden age of fraud. The golden age of white collar crime. The other part of this seems to be regulatory. There’s a component of this that seems to be not just in the crypto space, but there seems to be a dereliction of duty on the part of regulators right across financial markets, whether it be the kind of slap on the wrist that Elon Musk had for his securities fraud. Let’s face it, it was securities fraud, and for the rest of his life, he can never deny having committed it, but it was a slap on the wrist. It wasn’t this idea that we’ll pay the fine, but not admit any wrongdoing.
So I think the wagons are circling. And as Michael Green said, the bear has been poked. The regulators have woken up. I’d frankly would be surprised if we don’t see something happening relatively soon, whether we measure that in weeks or months, I don’t know. And speaking to some major financial institutions, they’ve got a problem now because this KYC thing has landed on their lap. What do they do? Sorry, the Bitcoin thing, the crypto issue has landed on their lap. What do they do? And you have the SEC, which turns down one Bitcoin ETF application after another, and for good reason. So this is square and center in front of the regulators now. They can’t ignore it. So I think they’re keenly focused on it.
Look, clearly, there’s an amount of deduction that’s required here. But one thing I would say, given all the risks involved, even if you… For those who still like crypto, without hesitation, get your coins off the exchanges by all means. Even the Bitcoin acolytes will tell you that because I know there’s a risk when this thing goes down, given that exchanges are the same as the brokers, they all owe each other and they’re cross-collateralized all this other nonsense. If you have any money stuck in those exchanges, good luck getting paid out. It’ll take years before they can untangle all this stuff.
And I’m reminded of like Brad Mills comment about Max Keiser where Max Keiser is a Bitcoin promoter who has also created a couple of his own coins and promoted those and done some less than savory things in that regard. And when Max was being criticized for some of that after he spoke at the Bitcoin Conference, Brad mills, who’s another Bitcoinner immediately came to his defense and was like, “Well, yeah, but that was 2015. Everyone was scamming back then.” And it’s just such an expected part of the crypto ecosystem that if you scammed six years ago, you’re clean by now. So that just speaks to crypto more broadly.
Yeah, this does bring us on to the characters in the space. And I find myself really puzzling about this because in amongst people who I think are just flat out shills in this space, and there are a lot of them, and look, any nascent corner of the financial markets like this is always the Wild West, George. You and I have seen this for years. It’s always the Wild West until some kind of sheriff puts on a badge and wanders in the stars to clean up Dodge.
Before we wrap this up, there’s a couple of bits of this story that… And I hate to jump around, but I have forgotten to bring those into the discussion because they are important. And again, they speak to the smoke surrounding Tether. And the first one of those Bennett is the way the Tether audit has gone. This is something that has been promised for… I don’t know how many years this has been promised, but the story of that promise and how it’s played out and also how it turned into an attestation, and then the kind of machinery that went around that attestation.
Yeah. So the best place to start with is actually in late 2016 when Bitfinex is hacked. One of the largest Bitcoin hacks in history. They end up having to haircut their customers take like 36% off of what they claimed at the time was everyone’s account and replace it with this BFX token, which was meant to be valued at a dollar. Bitfinex promised that they would share the methodology for the haircut, which they never did because they can’t. They can’t show that they didn’t haircut everyone. And they also promised a full security and a full financial audit. Tether had been promising an audit since 2014 when they first started and never provided one. Complicating things right around this same time, Wells Fargo cutoff Bitfinex and Tether from banking. So March of 2017, Bitfinex repays all their BFX tokens and immediately loses banking in the same week. The timeline’s a little unclear what was happening that week, but Bitfinex claims to repay all the BFX tokens. Wells Fargo cuts them off and Tether is now without banking for the next several months. Ostensibly, the backing that they claimed to have was about $61 million that they held in trust at the account of Stuart Hoegner, their general counsel.
Stuart Hoegner was holding $61 million in his personal account of Bitfinex and Tether’s money, are you serious?
Yes, that’s exactly true.
The other problem during this period from March to September when we’ll finally get to the attestation, the number of Tethers in circulation increases from about 50 million to about 440 million. Meanwhile, the only ostensible backing under Tether’s control is the amount held in trust at Stu’s account, which is never greater than 61 million. They claim the rest of their backing, during the New York attorney general investigation, is held at Bitfinex’s account at NobleBank. Now, NobleBank is not a bank. It’s an international financial entity started by Tether co-founder Brock Pierce and John Betts. So allegedly, the money is held at this account at NobleBank. That account during that period receive deposits from only two Bitfinex clients, neither of who purchased Tethers. Nonetheless, the number of Tethers in circulation increased from 50 million to 442 million, I think it was.
As I said earlier, Grant, sorry to interrupt, but it’s like, again, when things aren’t obvious, it’s usually for a reason.
And that was the whole reason why I wanted to have this discussion. And I’m so grateful to both of you for taking all this time to do this, because look, there are things that we have proof of, and the NYAG ruling is the first place perhaps people should start if they want to dig into this further, but there is no proof of fraud. However, when I started looking into this story and I came across you Bennett and I started looking at your extraordinary work, as someone who is au fait with the world of finance, there is no doubt in my mind that there is something horribly wrong with this.
Recently, I approached two or three Bitcoin guys who I know who I think are great guys and I have a lot of respect for them, and their thought process, and the way they do evangelize Bitcoin. And I approached them to say, “Look, I’m writing a piece about Tether. I’m skeptical about it. It’s going to be a skeptical piece. Do you want to actually write anything that I can quote you in to provide the other side to it?” And nobody came forward and nobody volunteered anything. And I offered up at the end of that conversation the chance for any bulls to come on the podcast, I’d give them equal air time for them to lay out exactly why this bear case which seems so compelling was wrong. And forget the stock price, this wasn’t about the stock price. The stock price of Tesla has done what the stock price of Tesla has done, but a lot of the accusations made about the company still stand unrefuted. And so, in closing this podcast with you guys, I would absolutely make the same offer here. I don’t want to be accused of being biased. I know what I think about this having done a lot of reading. I know what I think about it having done a lot of research into it, and it’s stinks to high heaven to me. But if there are any guys out there who can come on and give a credible refutation as to why this is all okay, and it’s not… Anyone who wants to come on and say it’s all FUD, I’ve got no time for that.
I will give microphone time to anybody that wants to come on and provide a credible counter argument to what Bennett just laid out, to what George has laid out and to all these guys have done. So that is an open offer to anybody.
Those are snips I find both fascinating and disturbing.
Some Bitcoin backers presume that because it's gone on so long and hasn't matter yet that it never will matter. This is quite similar to belief in Bernie Madoff.
Others call the whole matter nothing but Fud. Still others believe they can escape the trap on time.
A Word About Fud
Every week I am accused of spreading "FUD" (Fear Uncertainty Doubt) by asking simple questions.
The latest of my questions regards the Bitcoin Lightning Network which allegedly allows supports lightning fast transactions.
My question though, was not how fast someone can send a Bitcoin, but how fast one can convert Bitcoin to Dollars in a secure fashion.
Given its massive volatility, in order for merchants to accept Bitcoin, those merchants need to instantaneously convert Bitcoin to dollars and not via Tether either.
Note that the Lightning Network has a miniscule $69M in transactions.
Bitcoin Has Failed
Even if there is an answer to the speed question, it's all irrelevant. People primarily buy Bitcoin for speculation or fraudulent activities.
Because of immediate tax consequences, no one routinely uses Bitcoin as a transaction mechanism, nor will they ever, no matter how fast it is or becomes.
Bitcoin has permanently failed as a transaction system and as a monetary system.
Few Bitcoin supporters will admit that. They fool only themselves.
What About Fraud?
The above interview makes fraud a serious issue. Tether and Binance stand accused.
On July 3 I noted Cyber Attack Infects 40,000 Computers, Ransom Demands Up to $5 Million
Bitcoin is the preferred payment method of criminals. That is simply a statement of fact. Bitcoin itself is not fraudulent, but Bitcoin certainly facilitates fraud.
And it's because of fraud and energy use, I eventually expect a widespread coordinated government attack on crypto usage.
Bitcoin proponents mock me on that. "So what?" they ask. Governments won't ban Bitcoin, is one battle cry. They can't, it's distributed is another cry.
That's the wrong way of thinking. Governments do not have to ban Bitcoin or confiscate it. All they have to do is end convertibility into dollars.
Such a move would immediately render crypos worthless. You can keep your Bitcoins, you just cannot convert them to hard currency. I do not know how far off that day is, but I believe it's coming.
Moving to cold storage will not help one bit.
- “Bitfinex and Tether recklessly and unlawfully covered up massive financial losses to keep their scheme going and protect their bottom lines. Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie.”Letitia James, New York Attorney General
- “Tether is a big deal because it is a $60 billion pile of liquidity that collateralizes a whole bunch of the futures and leverage embedded in the cryptocurrency system, and it’s run by a group of dishonest people who are willing to cheat and defraud the public as a whole in order to advance their own aims.”Bennett Tomlin, June 02, 2021
- “If decentralized non-trust stablecoins are accepted as 1:1 to the dollar, then they are close to replacing the dollar as the reserve currency. This will happen when the dollar is pegged to stablecoins, or the opposite of now.This might not be that far away.”Jim Bianco, Bianco Research, June 03, 2021
- Now, if you’re not already subscribed to things that make you go hmm, but you’d like to read my report, Schrodinger’s Coin, you can download a free copy.
Whereas Schrodinger’s Coin is complicated, there is nothing complicated about the preceding interview.
I strongly suggest reading it all if you have any interest in cryptos.
Meanwhile, I leave you with a philosophical question.
Where is Where?
Following a price collapse Bitcoin Bettors Want Their Money Back.
Kate Marie, a 59-year-old healthcare technology consultant in Sydney read “Trend Trading for Dummies,” and watched YouTube tutorials. Starting with $10,000, she built a nest egg of $450,000 losing a lot of that gain back. Then on May 19, she lost the rest, about $170,000. “I feel cheated,” Ms. Marie said.
She wants her money back. Back from "where?" I wonder.
There is no "where".
And in light of the excellent discussion by led by Grant Williams, it's possible if not likely the entire supporting foundation of cryptos is nonexistent.
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