On The Brink with Castle Island - Weekly Roundup 01/22/21 (Bitcoin's 'double spend', our Tether perspective, Bitcoin as an escape valve) (EP.170)

Episode Date: January 22, 2021

Nic and Matt cover an insane week of deals and market turmoil. In this episode:  The Biden admin freezes the Treasury guidance on unhosted wallets Treasury Secretary Janet Yellen expresses her concern about cryptocurrency for terrorist financing Bitcoin as a monetary escape valve The real reasons behind Treasury's concern about Bitcoin The prospects for monetary repression in the US Prospects for Chris Brummer as the new head of the CFTC Blackrock warms to Bitcoin Our point by point 'debunking' of the anonymous blog post on Tether Why Tether critiques are so popular Why a Tether implosion would emphasize Bitcoin's value proposition We explain the Bitcoin 'double spend' How Bitcoin settlement is probabilistic Content mentioned in this episode:  Nic in NYMag, What Explains Bitcoin's Resurgence? On The Brink, Interview with Ganesh Viswanath-Natraj The Bit Short: Inside Crypto's Doomsday Machine Kraken, On Tether, Journalists Defy Logic

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars, and all of a sudden, people start to worry. So out of this worry, we have something called a Bitcoin.

Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And you're having the radio interference again. This is just a, we need to get a podcast studio. Yeah. I don't know why my microphone picks up the radio, but it does. So that's just like one of those things you deal with. It's one of those things.

We're going to have to maybe get some people that are experts that listen to the podcast, give us some advice on this. Yeah, they don't. isn't in podcasting 101. It's not in the handbook. Radio signal bleeding into the mic. That we had to learn from experience. It's true. It's true. Well, you had a big week. You had a big article in the New York magazine. What explains Bitcoin's resurgence? Yeah. I never thought that I would be writing articles from New York Magazine. That's not like a publication that I read. They asked me to write about Bitcoin for mainstream audience. And I turned in a draft that was really dry and technical, actually. And the

editors were extremely gracious. And they turned it into the thing that you read. So that bears little resemblance to the first draft that I turned in, to be honest. Well, I thought it was good. And then, you know, you also went on what Bitcoin did. You did a little sparring with a no-coiner. Yeah. And, you know, I'm not really one of those people that relish, is, you know, the debates with the no-coiners. That's never been my style. But I thought it would be interesting with Francis. And honestly, she was, she was very gracious during the debate. Like, it wasn't contentious. I'm also doing a debate tomorrow with a well-known macro investor. And it's about Bitcoin. So that one might get more contentious.

That would be, I can't wait to see that one. Yeah. You know, set individuals. has implied that he has like a bombshell in terms of Bitcoin or maybe Tether. I mean, I'm very excited to, I'm interested to hear what the new, you know, a terrible revelation is about Bitcoin. You know, it's like a McGuffin from, in Pulp Fiction, you know, the object of desire that's never revealed throughout the movie, but all the characters are fighting over it and trying to get it. It's like that.

So I'm interested to find out what it is that the revelation is. Well, we're definitely going to have to get into the tether fud. I feel like this is the week of fud. People are just tucking down the price of Bitcoin and that's fine. Yeah, I mean, I'm not complaining, honestly. There is so much synchronous sort of fud in the markets. I don't even like the term fud. I don't know what else to call it.

But, you know, causes of negative sentiment that are hitting us all at once, which is fine as far as I'm. concerned. I mean, a lot of it we know is false. So that's always a great. That's literally the definition of alpha, I would say. If there is something which you know to be not true, which is driving the price, then it's your gain, right? Yeah. Yeah, I agree. Well, why don't we start out with some deals or some big ones this week? Yeah, so number one company, we know quite well, Bison Trails. They're a blockchain infrastructure company. They were acquired by Coinbase. So

congrats to the Bison team. Congrats. It's a great team building infrastructure, New York-based team. So this will be a great compliment to what Coinbase is doing, running all sorts of infrastructure on various platforms. So exciting development there. Yeah. Next up we have Wintermute. They're a market-making firm. There is a $20 million series B from Lightspeed, Pantera, our friends at Avon Ventures, and some others. Yeah, this market-making space is a really hot one right now. We had Yo-on from Winter Mute on the podcast, a few, I guess that was a month or two ago, talking about some of the growth and some of the assets that they're dealing with. And that's a big opportunity. So congrats to Wintermute.

Yeah. And lastly, we had Saddle, which is a Defi automated market maker trading platform. There is $4.3 million from Framework Ventures, Polly Chan, electric capital, and some others. So those are the deals. You know, let's get into the news. I guess the big news for me this week, maybe there's a bunch of, you know, actually candidates to be the top story of the week. But I would say the Biden administration coming in and immediately freezing all agency rulemaking pending their further review is probably the biggest one for the crypto industry. So this basically means that Treasury Secretary Manukin's proposal on unhosted wallets is going to be put on ice here for a little bit.

So we'll see if it gets revisited. But for now, it looks like it won't be going through as planned. And no other way to say that I just think it's a big win for the industry here that all of those comment letters were able to push that rulemaking time frame back enough, you know, past the 20th that the Biden administration was able to essentially freeze it out. Well, it wouldn't be popping champagne just yet because it strikes me as quite likely that the new treasury comes up with something similar. Well, we'll see. So that kind of dovetails into some comments that incoming Treasury Secretary Janet Yellen said this week, basically saying that cryptocurrencies are a concern for terrorist financing. And this not surprisingly got sort of, I think, blown a little bit out of proportioned by the media.

You know, and it was picked up as quite a negative. I'd say her actual comments in the written testimony were far more nuanced, talked about industry's development and trying to be supportive of the industry. So didn't seem like she was painting it with just one brush. And I will say, you know, this is kind of a lazy argument in some ways. So I guess there's two ways of seeing it. One is just there's a talking point around illegal activity happening with blockchain technology and, you know, people that haven't gone through the IDMAs and haven't realized that this is a fully traceable technology. It's really a terrible way to engage in terrorist financing.

Or maybe she's playing kind of a longer game, 3D chess type of a thing. And she sees this industry, specifically Bitcoin, potentially being a real alternative to sound money. And maybe she's trying to talk that down. So I don't know. I mean, I think maybe the truth is that, you know, she's more concerned about the AML terrorist financing. But what do you think? Well, she might be. But just from a number's perspective, you know, cryptocurrency is used for malign purposes far less than other payment systems on an absolute and a relative. basis. So perhaps that's what she's really concerned about, but my guess is that she's more nervous about Bitcoin being an escape valve for monetary repression. If the Treasury and the Fed need to keep interest rates low and need to crank up inflation in order to de-leverage, obviously gold and Bitcoin would be the clear beneficiaries. They would be assets that people would flee to.

So I think this is, she's kind of forewarning, you know, a set of moves that make it more difficult to get exposure to Bitcoin, if I had to guess. I mean, this has got to be a fascinating time for the incoming administration because you have to think, you know, Biden and his team are going to be sitting in a bunch of rooms talking about a variety of topics over the next month here. And there's going to be national defense issues. But there's also, there has to be a meeting at some point around just the status of the dollar as the global reserve asset. And there's going to be a meeting where he's in, we're talking about, all right, are we just going, who's buying the treasuries? And are we just going to monetize this debt and have sort of this soft devaluation event? Let's take a look at oil trade between Russia and China and the fact that dollars are increasingly not being used as a settlement. mechanism for those transactions. So I think this is a fairly kind of existential question around

the future of the dollar on a geopolitical scale. Yeah. And I mean, if you listen to what Lin Alden or Luke Groman have to say, it's very compelling. I mean, foreigners started divesting their treasury position just in the last few years. So foreign central banks are now net sellers of treasuries. The entity that's picking up the slack there is the Fed. So it's kind of, Lynn Alden made this great analogy. It's like a restaurant where the chef eats all of the cooking instead of the clientele. If the treasury is the biggest buyer of, if the Fed is the biggest buyer of treasuries and China stops buying treasuries and starts selling treasuries, and Russia stops buying treasuries and starts buying gold, at that point, you're, you're a

effectively plundering the dollar in order to de-leverage and reduce the kind of debt position. So I think it's kind of inevitable. I mean, the Biden administration inherited a really terrible fiscal setup here, debt to GDP in the kind of 130 range, and foreigners are not buying our debt anymore. So a lot of people are now talking about going back to the post-World War II strategy of effectively letting inflation run high to reduce the real value of the debt and holding interest rates slow

because quite frankly, the U.S. Treasury cannot afford interest rates to rise because that would then be the largest expense by far in the federal budget. So I think a lot of people are expecting this now. And actually, as we speak, inflation expectations as measured by Treasury inflation index securities are at an,

eight-year high. So, you know, people are expecting inflation now, although it's not, we're not seeing it in CPI just yet, but I think it's coming. Yeah. So, I mean, what does this look like? We're going to end up seeing a 5, 10% CPI print here in 2021, later 2021. Well, I don't know if it'll be that quick. But yeah, at a certain point, Biden and administration will probably crank out some more stimulus. I think the notion of stimulus as an ongoing phenomenon has been politically normalized. I think that's part of the social contract right now. So if that continues and if foreigners continue to not want to buy treasuries, then it's kind of inevitable, although it could take a few more years, that's for sure. And people wonder why Bitcoin is at

the top of mind for a lot of global macro managers. Yeah, and if you think about the 30s and the 40s, the last time this happened, private ownership of gold was illegal, right? So gold had been 6102 already at that point under FDR. So this is why they were able to engage in this monetary repression basically punish savers because nobody was allowed to own gold privately. Yeah, you did not have that escape valve back then. Exactly. That's why it worked. So now one wonders how it'll work now that obviously gold is a financial asset. The people, people can own, but also Bitcoin is this, it's like gold on steroids. It's this truly cross-border asset that you can truly own. You don't have to own the financialized version. You can own the

thing itself, you know, privately possess it. That's an easy escape valve for monetary oppression. So it's no coincidence. It's no wonder to me that this administration's, we're seeing, you know, some of these talking points about Bitcoin being dangerous, you know, et cetera. I think they're concerned about Bitcoin facing off against the dollar and the dollar coming off worse. I think there needs to be a crypto czar. Well, three of our top regulators are now crypto savvy. So maybe we can talk about that.

Yeah, well, if a Reuters report here is believed, then it looks like Chris Brummer, who's a professor at Georgetown, runs a popular podcast called FinTech Beat. It looks like he is in line here to be the next head of the CFTC. And I guess my takeaway on that is that he's someone who's very, very knowledgeable about blockchain and crypto assets. So I would think this would be a great replacement for Tarbert. Yeah. And important to note, Chris Brummer had already been nominated by Obama to head up the CFTC,

and his nomination was Stonewold, I believe, by Mitch McConnell. He just didn't get confirmed before Trump's term. So Brummer would be a very clear and sound pick for CFTC. He's very sharp when it comes to crypto, wrote a book called Crypto Assets. Yours truly wrote a chapter for that book. It's true. I highly recommend you pick it up. I don't get any royalties from it, though.

So it's just good reading material. So Chris is super sharp about this stuff. His podcast is cool. I've been on his show before. So it's interesting now. We obviously had SEC and CFTC commissioners that understood crypto before, but it's encouraging that this new class is also very smart when it comes to crypto. Yeah, it's very exciting.

Another thing that happened this week is that BlackRock filed to add Bitcoin futures to two of its funds. So not that they went out and bought them, but that they filed with the regulators saying that they would be able to. It would be within the funds per view. This is quite similar actually to what a bunch of hedge funds had started doing a couple years ago. I believe Renaissance actually was one of them. So we'll see. More to come, I'm sure. But a couple of weeks ago, we were talking about BlackRock hiring for crypto R&D people. So it looks like things are accelerating over there. Well, I mean, fundamentally, it's a new asset class. So what does the world's largest asset manager do about it?

they try and get smart about it to figure out how to create financial products based on crypto, I mean, and even invest directly in some cases. So it seems like it's taking them a long time to come around. But Larry Fink has gone from a skeptic to, I wouldn't say an enthusiast, but he seems to understand it now at least. Another asset manager, so Guggenheim Partners, which I don't know if you remember this, But a few weeks ago, Guggenheim, CIO, Scott Minnert, came out and said that he thinks Bitcoin's fair value is 400,000. And people went nuts.

He broke the internet. He came out this week and he said that he thinks we'll see 20,000 in the near future. So, I mean, this just sounds to me like a guy who's got a fund to deploy and would rather be buying Bitcoin at 20,000 than 100,000. Yeah, I find that kind of entertaining. you know, you always have to be careful about taking advice from people that are about to or in the midst of deploying into the asset class in question. Yeah, absolutely. A couple other news items this week.

So Galaxy Digital launched a new business unit dedicated to mining. It's called Galaxy Digital Mining. And it's led by our friend Amanda Fabiano, our former coworker at Fidelity. Yeah, this is really exciting to see. It seems like they're putting a lot of resources into the, and this is kind of the trend of mining, becoming more and more U.S. base and more onshore, which is great because we need to kind of flip that narrative a little bit. And spoiler alert, I did a podcast this week with Amanda, a really good one,

just about the landscape for mining in the U.S., and so we'll be releasing that, I think, next week. Yeah, so stay tuned on that front. All right, so we let's talk about Tether. cannot remember getting so much inbound around a topic from people that are outside the crypto industry than this week on Tether. I've gotten so many people asking me my opinion that we actually had to write a memo that we started to send out. So maybe we'll post this. Maybe we won't. But let's get into it. Much of this reaction over the past few days has been a result of a blog post. It's called the Bit Short inside Crypto's Doom Day machine.

written by an anonymous person who goes by crypto anonymous. And it basically just, you know, posits that tether is this big Ponzi scheme and that it's not one-to-one backed and that they're propping up the price of Bitcoin. And it makes all sorts of arguments that are, honestly, they're not new arguments. They're kind of, a lot of these arguments have been debunked over the years. So when I read this blog post before it kind of went viral, I didn't think this was going to be that big of a deal. It didn't seem like there was much new information, but this thing really took off.

Yeah, and I think the reason is ultimately is that obviously Bitcoin had an unbelievable rally. And a lot of people were on the sidelines watching it. They thought it was dead in 2017, 18. And they see Bitcoin recovering. They're like, well, this doesn't make sense. Like, why is Bitcoin back? And clearly they didn't read my article in New York Magazine, which explained at all. and they needed an excuse to justify Bitcoin's resurgence because they didn't want to feel like suckers

from missing out on the rally. And tether's the perfect excuse because if you buy the claims of the tether truthers, apparently, Bitcoin's entire rally is artificial and it's due to this sort of external third party fraud effectively. And so it's a perfect way for people to ignore. more, Bitcoin's rally and not engage with the substance and kind of dismiss it effectively. So I think that's why people have such an affinity for these conspiracies. So anyway, why don't we go through some of the key points in this largely erroneous article and talk about them? Yeah.

So, I mean, the first critique, I guess, would be just a poor understanding of how Tether actually works. And so the article sort of mischaracterizes the create and redeem process, so how you would get fiat currency into tether and vice versa. And I guess like a lot of these critiques, the author just clearly doesn't know how the market structure works and just assumes that these things are printed indiscriminately. But we know for a fact that large OTC desks and prop trading firms are on the record saying we've created and redeemed billions of dollars worth of tether. We've had Ryan Robaglia from OSL on the show. We've had Dan Matashefsky from CMS, formerly of Circle. And they tell you kind of how it works. And so to suggest that that isn't happening

and that this create redeem mechanism is not functional, like that's just flat wrong. Yeah. And it's always interesting to hear these critiques of tether emanating from people that are just fundamentally not market participants. So it's like, how could they possibly know how it works if they've never placed a trade and never engage with like the institutional infrastructure and the industry? So, you know, not to gatekeep, but like listen to people that are active in the markets for God sakes, you know, anonymous outsiders, you should wait their opinion, you know, alongside the size of their trading book. I mean, it's, it's, crypto is very, very, complex. So you kind of have to be involved in the markets to really have a firm grasp of how it works.

Yeah, agreed. My second big issue with it was just the reliance on coin market cap and coin lib data. So the blog post is just really full with trading volume data that is very overstated. And so it's kind of a known issue. Back to knowing this market structure, it's very well known that some of the shadier exchanges that are unregistered offshore, they manipulate their trading data so that it looks like they have more liquidity so that they can get more customers on the platforms. They publish bad data. And outfits like coin market cap and coin lib, they just publish whatever data they get. And so there's no screening. This is not like a coin metric style professional institutional grade data where they're using IOSCO compliant reference rates and things like that that you

would see in traditional capital markets. And by the way, this has been documented. all over the place. So bitwise, in their presentation to the SEC for their last ETF proposal, they went through and they showed how this data was being manipulated. You've written about these kind of alt-coin casinos in the past. And it's worth noting that the base trading asset for all of these exchanges is USDT. So the volumes are just naturally going to be way out of whack. So my kind of gripe with this is that all of the data in the blog post is wrong. Yeah. I mean, that's not an exaggeration. Literally, all of the data in this post is false, erroneous, or contrived. And we can 100% attest of this. Okay. I know data. I've been

immersed in it in the crypto industry for years and years. I can absolutely attest to the fact that the exchange data coming from the derivatives and the offshore exchanges, they're the ones that use tether a lot is overstated by orders of magnitude in some cases. So if you're going to look at these volume figures and you're going to see that tether ostensibly has a huge share of market liquidity, you're looking at noise. Right. Because it's those offshore exchanges that are tether based that are the ones that lie about their volume profile to make themselves look more liquid. but we know for a fact that there's incredibly liquid onshore fiat to Bitcoin markets. Grayskill does not use Tether. They're connected to Fiat directly.

Coinbase, GDax, Crackin, Gemini, PayPal, cash app. These are onshore U.S. entities. They connect to the bank sector to Fiat directly without intermediation. None of these entities are touching Tether. So we know they're incredibly liquid onshore markets. This just doesn't stand. This analysis is just wrong. Yeah, it's just completely incorrect. My next gripe is, you know, this Bahamas deltech thing. So, yeah, they went through the exercise here of looking at Bahamian FX reserves.

And I thought that was kind of an interesting idea. But that presupposes that the banking partner for Tether, which is Deltac, among others, is their only provider. And it also doesn't take into effect that the way banks work is that Deltech probably has depository accounts all over the place. And so, you know, if Deltech has a depository account with a U.S. bank, this analysis doesn't really tell us much. It's sort of an interesting thought experiment, but you have no way of actually validating

the data. Yeah. I mean, the whole point of correspondent banking is the banks have accounts with other banks in other countries. So there's such a simple and easy explanation here. The betrays the author's complete ignorance of how banking works. So looking at the Bahaman Forex reserves is completely irrelevant. One of the biggest cornerstones of these analyses, and we've seen many of them, would be the kind of econometric analysis, where you look at the correlation of returns between tether issuance and Bitcoin price.

And you know, you often see people posting the Tether supply chart alongside the Bitcoin market cap chart and as if there's something sinister there. And it's so funny because Tether and other stable coins are just a proxy for the balance sheets of trading firms and crypto-native institutions. Right. So if you could see regular balance sheets of exchanges, they would look the same. And in fact, Cracken had a blog post where they pointed this exact same thing out, right? So of course, crypto-native firms grow as the underlying assets grow.

That completely stands to reason. So the increase in Tether or USDC or Dye or other stablecoin issuance alongside the increase in capitalization of the industry at large completely makes sense. But then even beyond that, if you actually look at the quantitative analysis, they'll cite one paper from, Griffin and Shams. They're not the only academics that have looked at this. In fact, there's three credible papers, each of which I've read. And in fact, I've interviewed the authors of two of these papers now that say, no, there's no correlation between tether issuance and Bitcoin returns. There's none whatsoever if you actually look at the data. So that would be the Viswanath Netraj paper, which again, we've done this episode with the author. So it's in our Cryptodollarization

series. There's a Wang Chan Wei paper. And more recently, there's a Chris Dufack paper. And the Chris Dufax sample period is five years instead of one year for Griffin and Shams. And it's all stable coins instead of one stable coin for Griffin and Shams. So fundamentally, we have better sample periods and more robust analyses that find no correlation between Tether issuance and Bitcoin price. So that cornerstone of the argument is also debunked. Yeah, he gets no credit for that one. How about lot sizes? I mean, this is basically an anonymous blog post that is pointing out just that the lot sizes of tether creation, which are typically $100 to $400 million around numbers, that this is just

suspicious. It's like, no, dude, that's how the thing works. Yeah. So, again, this betrays a complete ignorance about how tether works. So the way it actually works is tether will create X many tethers and then they'll distribute a fraction of that out to the market. They don't typically always distribute 100%. They have a treasury.

So if you want to see the difference between the treasury and the freely floating tether, go to coin metrics, open up their network data charting tool, and compare free float of tether with current supply of tether. And you'll see there's a difference. And the difference is often, sometimes it's been up to $800 million in the treasury tether versus the freely floating market available tether. So they create these tether in round lots, but they don't typically distribute all of it out to the market. And you can see that difference graphically.

But again, you have to sort of understand Tether to know these things. And if you're not in any way active in the market, of course you're going to be ignorant about it. But in that case, you probably shouldn't be writing about it. Yeah. And I want to be very clear here that I'm not saying that I know 100% for sure that Tether is one-to-one backed. It could very well be that there are some legal issues here and that the New York Attorney General is going to find something at fault with Tether and Bitfinex. I'd go so far as to say, tether going away, like, within a year or two, wouldn't surprise me at all. But that doesn't mean that it's not one-to-one backed, if that makes sense.

I mean, I think that there's a nuance here where it's possible that there have been some impropriate, improprieties, but that doesn't necessarily mean that tether itself is a Ponzi scheme being used to manipulate the entire market. Does that make sense? Yeah, I mean, there's completely different flavors of skepticism here. You have completely warranted skepticism, which is our view, which is that tether should absolutely do more in terms of transparency. In fact, you could say they have a moral obligation to do more because the tether issue clouds the whole market. So yeah, I would love more transparency, and they should absolutely engage an audit firm to join the rest of the stable coin issuers in providing those routine out of stations. But there's a gigantic gulf between that, which is a defense well position, and alleging, without evidence, that Tether is fully unbacked and, in fact, influences the price of Bitcoin.

I mean, that is a completely different allegation. We don't have evidence for that latter allegation. The former skepticism of the former critique, yeah, I mean, it's completely rational to insist that they become more transparent. So far as the market leader, they haven't needed to. They haven't had an economic incentive to be more transparent. That's not to say they shouldn't. We've always encouraged them in our limited interactions with them to be more transparent. And I'm encouraging them again. And the tie between Tether and Bitcoin here, it just doesn't make any sense. So to suggest that a tether implosion would change the value proposition for bitcoin is crazy i mean if i were to venture a guess there would definitely be let's just say that tether is um gone tomorrow

and whether it's a you know an enforcement action it's deemed to be unreserved or just ceases to exist uh i think what you'd probably see there is a lot of people and institutions rushing into bitcoin uh because they would need to find a new base trading pair you'd also have have just a lot of capital flight use cases, you know, places where Tether is being used to move and evade capital controls, for instance, in China. All of that liquidity would need to find the next best option, which could be Bitcoin, could be Ethereum, could be Dye, if, you know, if you believe that's big enough. So I find the tie between the two assets to be tenuous at best. Yeah, and I mean, initially Tether was issued on Bitcoin, on Omni, and so you could say, okay, well, maybe there's a relationship there.

Tether is mostly issued on Ethereum and Tron today, so the conspiracy should really be leveled at those blockchains. But your point is a good one. A Tether failure or an insolvency or any sort of anomaly with Tether would just reinforce the value proposition of Bitcoin. and it would cause some capital flight towards Bitcoin because Bitcoin is the next most liquid asset or even more liquid that is native on crypto rails. So if Tether starts trading at a discount to the peg, people get nervous about it. You can be certain that a lot of that capital will flow into Bitcoin. So I think in the immediate short term, a Tether failure would actually be immensely positive

for Bitcoin and certainly in the long term too, it would be. Yeah, I guess my last thing on this is that this is a very asymmetric argument to be having because the people that could actually come out and defend Tether and define how it works and shine that light on it, they're all under investigation right now by the New York Attorney General. So why would they come out and say something on the record? Yeah, it's like in any lawsuit situation, you are told by your lawyers, no, don't go blabbing about the lawsuit, right? So because there's this outstanding NYAG investigation, no one involved with Tether is going to say anything about it. Their hands are all tied.

That's not evidence of guilt. It's just evidence of an active lawsuit. And even like people like us who have, we have no skin in the game. We've never transacted in Tether. We don't use it. But, you know, we're kind of coming out with what could potentially be portrayed as like a defense here. But it wouldn't be very clear. Like this thing could blow up tomorrow and I wouldn't be surprised.

I just don't think that there's. any evidence in this anonymous blog post to support that this is a fictitious Ponzi scheme. Yeah, there really isn't. And like, look, okay, there's a burden of proof on Tether to show that they're, you know, fully solvent. But there's also a burden of proof on the conspiracist to demonstrate that literally any of the facts that they allege are true. And so far they haven't done any of that.

They just rely on this flimsy statistical analysis, which is completely debunked by other more comprehensive statistical analyses. Yeah. So that's the biggest fud of the week. It's not the only one. No, I mean, we're completely immersed in fud right now. But as you know, markets climb a wall of worry. So I wouldn't be surprised if Bitcoin recovers here. What do you make of the, let's talk about the double spend, quote unquote? Yeah, I completely forgot there's this whole other issue. So I spent a fair amount of time on the phone with some journalists today. morning explaining to them how Bitcoin consensus works and how finality is probabilistic.

And it's times like these when I'm glad that I wrote my post on settlement assurances. But I also think that a lot of people didn't read that post. So unfortunately, a lot of people think Bitcoin settlement is kind of final immediately. And so they're always taken by surprise when they learn that it's actually probabilistic. And that's why you wait six confirmations for a spend to be valid. This was a kind of a particularly confusing one, though. So there is, you know, why don't we set this up a little bit? So this had to do with replaced by fee transactions.

And so there was three separate transactions. So there was a transaction attempt. And then there was a replaced by fee transaction, which is basically that there wasn't enough transaction fee to get the block processed or to get the transaction processed. And so there was a second transaction. And then there was actually a third replaced by fee with a higher fee. And then we had a chain split. And so this was sort of a maybe this happens a lot.

This was the first time that I had really seen the replaced by fee transactions fall into it. Yeah. So I mean, to be clear, sometimes two Bitcoin blocks are mined at the same time under the same parent block. And by definition, only one of those blocks can be included in the final chain. So one of those blocks is ignored and that one's called a stale block. So that's what we had. That's very common.

It happens every couple weeks, right? And in this case, there were two similar but subtly different transactions across both of those stale blocks and only one of those was included. So in a very, very narrow kind of technical sense, you could maybe call this double spend. But they're both transactions concerning the same entity. and clearly there is no merchant those defrauded. Now, in my view, the term double spend refers to a situation where I make a deposit on an exchange or pay a merchant. They deliver me a service or something of financial value in reaction to that deposit

or payment. And then I reorg the blockchain to create a version of the blockchain where I never made that transaction in the first place. and I leave with the good or service, and I retain my money. So in my view, that's a double spend. That requires a reorg that exceeds their confirmation threshold, typically six blocks, or it could be 100 blocks. That's basically impossible on Bitcoin today.

Doesn't happen, right, to be very clear. In this case, there was no merchant that was defrauded. We're talking about a one block stale block that happens all the time. Now, if this had been a six-block deep reorg, and we're seeing really big transactions be reorged out of the chain, yeah, alarm bells are going to go off and I'm going to start to get concerned. That's not what happened here. So in my view, this doesn't fit the criteria of what I would describe as a double spend. So, you know, I think that's the key point is to call out that this is a very normal type of an occurrence. It happens about once a month. And the way that

most infrastructure providers will deal with this is that they'll just wait six conforms on transactions in and out. So I don't think there's a lot of new news there. Yeah, none whatsoever. It's just that this was a really interesting edge case to see someone transacting on both sides of a stale block. But it's a curiosity, really. And everybody that uses Bitcoin knows that Bitcoin payments are not final within a block. Satoshi said this multiple times on the mailing list. He said it even before the Bitcoin protocol was live. He explained this. Section 11 in the white paper is dedicated to an analysis of when Bitcoin payments are safe.

It's in the white paper. So if you're into Bitcoin and you're concerned about probabilistic settlement, you haven't done your homework. Yeah. Well, it's just one of those weeks. There's a lot of fear, uncertainty, and doubt in the market. I'm sure there's going to be many more of these. That's the price we pay. You know, it's like suffering from success.

The bigger Bitcoin gets, the more it becomes a target. And there's going to be a lot more of this. We haven't even talked about the fact that Craig Wright is trying to sue Bitcoin developers for posting the white paper online. And did you see how all of the large market participants, Fidelity, Square, many, many others, just started hosting the white paper in response today? And me too. It's on my personal website.

You're with the rebels. Come and take it, Craig. Come and take it. We try not to talk about him on this podcast. Yeah, but unfortunately it's something that Bitcoin developers have to deal with legal harassment, which is very, very a huge shame. So I think that's it for the week. It was a pretty eventful one.

Yeah, it was an active week. Hopefully next week is calmer. That would be nice. What do we got next week? So next week we are going to be talking with an academic who wrote a rebuttal of this econometric theory of tether and effectively investigated to see whether Tether grants have an impact on the price of Bitcoin, so very timely. Well, I'm looking forward to that one.

Maybe we'll debunk some more of this fud. I think we've debunked it successfully at this point. I mean, again, we're not saying Tether won't fail. It could well be shut down by the state at any point. We just wish that the critiques of Tether were slightly more erudite. Well, that's it for this week. Everyone, have a great weekend.