The Breakdown - Tether Made More Money Than Goldman Sachs Last Quarter

Episode Date: February 2, 2024

Is Tether the best company in the world? CMS Holdings says so after a banger of a Q4. NLW covers the key crypto news. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Friday, February 2nd, and today we are talking about the surprising fact that Tether made more money last quarter than Goldman Sachs. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation. come join us on the Breakers Discord. You can find a link in the show notes or go to bit. dot L.Y slash breakdown pod. Well friends, like I said, we have a mismatch of news for you here today, and we are going to kick it off with Tether who has reported their strongest quarterly earnings ever. The firm recorded a record profit of $2.9 billion in Q4, according to their latest attestation

conducted by auditing firm BDO. Tether said that their operating profit came in at $1 billion, largely on the back of interest payments from their Treasury bond holdings. Appreciation in their gold and Bitcoin holdings contributed to the balance of profits, contributing to a $2.2 billion increase in excess reserves. Tether's excess reserves now stand at $5.4 billion, which completely offsets their secured loan book, which forms part of the core reserves portfolio. Tether had previously pledged to reduce this loan book to zero, but appears to have decided that, at least for now, offsetting of risk is good enough. The firm wrote in a statement, while such secure loans are widely over-collateralized, Tether accumulated enough excess reserves to cover the entirety

of this exposure. This is in response to the community's past expressed concerns about this part of the portfolio. Tether also accumulated 8,88 Bitcoin in Q4, bringing the total value to around $2.8 billion. If the firm sticks with their plan of buying additional Bitcoin with 15% of profits, their next buy would be around $3,500 Bitcoin at current prices. Tether's consolidated reserves are now reported at 97 billion, including 80.3 billion in U.S. Treasuries and 3.5 billion in gold. Their total liabilities, the market cap of issued stable coins, is around $91.6 billion, with the firm claiming that 90% of tokens are backed by cash and cash equivalents. Tether's CEO, Paulo Arduino said,

Tether's Q4 attestation underscores our commitment to transparency, stability, and responsible financial management. Now, much has been made of this Goldman Sachs comparison, but will Clemente from Reflexivity Research writes, what's even wilder? Goldman Sachs employee count, 48,500. Tether employee count? 60. Greatest profit to employee ratio ever? CMS holding writes, there's a real argument that Tether is the best business on the planet by a whole host of metrics. Now, of course, this is Tether and not everyone is just as jazzed. A new report from J.P. Morgan analysts claims that Tether's increasing market share still represents a risk for the crypto industry. The report said,

Tether is mostly at risk, given its lack of regulatory compliance and transparency. We therefore view the increasing concentration in Tether over the past year as a negative for the Stablecoin universe and the crypto ecosystem more broadly. Now, analysts described Stablecoins as the cash-like instrument in crypto ecosystems, and claimed that increasing supply indicates that more money is flowing in from the traditional financial system, boosting collateral and making the entire crypto market more stable. Incoming Stablecoin regulations across Europe, Asia, and perhaps eventually the U.S. have focused on transparency and standards and reserve accounts. J.P. Morgan said this could mean that

Tether presents a regulatory risk to the industry if it can't adhere to these enhanced standards. Now, Tether CEO, Paulo Arduino picked up on the report, responding that, quote, I'm happy to read that J.P. Morgan acknowledges the importance of Tether and the stable coin technology created by our company. But it seems to me a bit hypocritical the talk about concentration coming from J.P. Morgan, the biggest bank in the world. He added, the success of Tether USDT is driven by its financial reliability, strong reserves, and its commitment towards emerging markets and developing countries, in which entire communities are using USDT as a lifeline to defend their families from high inflation and the devaluation of their

national currency. Now, what about the Tether critics out there? The argument for them is pretty simple, and summed up by Novakali Akami, who writes, Tether is probably the only financial institution in the world of its size that has never been audited. More to the point, Tether's own quarterly management report that BDO attests notes that it does not comply with basic accounting principles. You are welcome to trust, Paolo, but there is no verify in a financial document that does not meet the standards of basic accounting. The real question is why? Why can't Tether provide BDO with financials that comply with accounting principles that every other financial institution in the world does? It's not like they don't have the resources. Tether noted that it spent $1.5 billion on various

investments last year, but not on its accounting infrastructure. I know that Tether Faithful will go full-fut on this, but a $97 billion financial institution that can't keep basic accounting records is not built to last. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, What if? It invites people in instead of leaving them out. It's on 24-7, 365, and moves at the speed of real life. Not everyone believes it. We've got our fair share of detractors, but that's the way it always is when you're building something new. Cracken is a crypto company that has been through the highs and lows of the industry, facing forwards towards progress throughout.

And now they're inviting us to see what crypto can be. Learn more at crackin.com slash the breakdown. Disclaimer, not investment advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, BVI, DBA, Cracken. Now, what about the state of those Stablecoin regulations? Well, according to Senator Cynthia Lummis, that pending legislation is currently the subject of what she calls pretty delicate negotiations. The Stablecoin bill, of course, passed the House Committee stage last July, and is currently awaiting a vote on the House floor. Democrats, have been vocally opposed to certain elements of the bill, in particular the allowance for state

oversight of stablecoins, and a lack of enhanced money laundering provisions. This has meant that the bill is unlikely to be passed in the Democrat-controlled Senate without revisions. Lemus said, I'm optimistic that we will see stable coin legislation this year, and possibly even in the first half of this calendar year. The deeper you get into the calendar year where there's elections, the tougher it is to get members of Congress to concentrate on difficult legislative issues, because their eyes are on re-election and keeping their party in the majority. This mirrors recent comments from House Digital Assets Subcommittee Chairman French Hill, who said, I still am optimistic that you will see those bills come to fruition during 2024. I've been very pleased with every meeting I've been in,

both bipartisan as well as in the administration on those, but there's a timing issue. And you know, timing is everything in politics. When you have so many things on your plate, we're all navigating that. Now, in addition to the stable coin bill, Hill is also working with Senate Democrats to pass crypto market structure regulations. Lummus summed up that the current negotiations are, quote, a pretty dynamic discussion and were not there yet, but there really is light at the end of the tunnel. What's more, it appears that the Bitcoin ETF launch has been a major stepping stone for crypto and Congress, confirming the need for regulations. Senator Lummis said, when you see an Invesco or a Fidelity or a BlackRock getting into the Bitcoin ETF space, it really gives

consumers confidence that this is a more mature asset class now. It's ready for prime time, so to speak, and the adoption is going well. Now, separately, Lemus's leading efforts to overturn an SEC accounting rule, which has functioned as a de facto ban on banking industry involvement in crypto. SEC Staff Accounting Bulletin 121 was published in March of 2022 and required banks to account for customer crypto holdings on their own balance sheet. This increased capital requirements for custody services to a level that was entirely untenable, shutting banks out from offering these services entirely.

SAB 121 was challenged by the Government Accountability Office last October. The GAO found that SAB-121 should have been put through the federal rulemaking process, which includes submission to Congress before it goes into effect. Lumas has now introduced a resolution in the Senate, which would formally disapprove of SAB-121 and concludes that it has no legal force. Bipartisan representatives Wiley-Nichael and Mike Flood have introduced a matching resolution in the House. If passed, the resolution would repeal SAB-121 and help pave the way for traditional banks to launch crypto-custody offerings in the U.S., as many have already done in foreign jurisdictions.

Flood said in a statement, the SEC issued SAB-121 without conferring with prudential regulators, despite the accounting standards effects on financial institutions' treatments of custodial assets. And the SEC issued SAB-121 without going through the notice and comment process. In the face of overreach by a regulator, it is the role of Congress to serve as a check. A statement from Chamber of Digital Commerce CEO Perriand Boring said, mandating custodians to maintain an equal asset on the balance sheet as a liability, it demands parity, meaning that every 100 in Bitcoin held, 100 in a similar asset must also be held on the balance sheet. This stringent requirement has proven to deter institutions from offering

digital asset custody options. Patrick McHenry, the chairman of the House Financial Services Committee, wrote, There is bipartisan agreement, SAB-121 undermines consumer protection and leaves customers' digital assets vulnerable. I look forward to getting this measure across the finish line to overturn it. Staying on the theme of government for just a little bit longer, the energy information in will begin surveying the energy use of U.S. crypto miners next week, following the approval of an emergency data collection request. The agency, which is the Statistics and Analysis Division of the Department of Energy, was granted permission to commence data collection late last week. The EIA said the measure was an emergency, quote, because public harm is reasonably likely if normal

clearance procedures are followed. As evidence, they provided the claim that, quote, the price of Bitcoin has increased roughly 50% in the last three months, and higher prices incentivize more crypto mining activity, which in turn increases electricity consumption. The EIA noted that much of the central United States is currently experiencing a cold snap, which combined with additional mining activity could impact electricity systems operation and consumer prices. They cited events in Plattsburgh, New York in 2018 as a relevant example, where energy bills rose by a third during a cold winter and led to the township banning the local mining operation. Now, typically, actions of this nature would require formal

rulemaking and a period of public comment before getting enacted. The emergency authorization will last for six months, and the EIA has agreed to solicit public comment at some point during that period. In a press release on Wednesday, the EIA said, we intend to continue to analyze and write about the energy implications of cryptocurrency mining activities in the United States. We will specifically focus on how the energy demand for cryptocurrency mining is evolving, identify geographic areas of high growth, and quantify the sources of electricity needed to meet cryptocurrency mining demand. Now, the Miners, who already share a ton of information about their electricity consumption, felt about this probably the way that you can imagine. Marty Bent, a director of mining firm Cathedral Bitcoin,

dug into the details of the proposed survey and wrote, When I read the press release and the filing, my initial thought was, interesting, maybe this will turn out to be a net positive for the industry. After reviewing the plan, however, he said, the agency appears to be attempting to, quote, create a hyper-detailed registry of mining operations in the United States, getting as granular as to request specific information about mining fleets and hash rate data. The survey includes requests for a detailed list of mining equipment, energy usage, and utility providers. Marty concluded that this is, quote, one of the more Orwellian things I've seen come out of this administration. A particular

interest was a warning to the top of the survey forms, explaining to miners that their participation in the survey is mandatory and that failure to comply can result in civil or criminal penalties. Alex Brammer, director of the Bitcoin Today Coalition, looked into the documentation which has been prepared for this survey, pointing out, they have pre-formatted delinquency notices for these companies that do not respond, which include threats of criminal and civil penalties for noncompliance, including a $10,633 fine per day for failure to report. This is egregious and needs to be met with immediate action. Parker Lewis really summed it up when he asked, which U.S. Bitcoin miner is going to sue the EIA?

Now, just a couple more before we get out of here. After more than three weeks of trading, the Bitcoin ETF frenzy is beginning to die down, and a clear pecking order is being established. Black Rock is, perhaps unexpectedly, the clear leader of the new products, with a slight edge in both daily volume and AUM. Their ETF is likely to have crossed $3 billion in assets by the time Friday totals are tallied. Fidelity's product is following closely behind, with only $300 million in AUM separating the two. Both ARC and BitWise have captured a meaningful chunk of the market, both exceeding $650 million

in assets, Invesco, Vanek, and Valkyrie have all accumulated more than $100 million in assets, which would be viewed as a massive success in any other ETF category, and likely means their products will be here for the long run. Grayscale outflows, meanwhile, have slowed to a trickle, at least comparatively. When trading commenced, GBTC was regularly losing over half a billion dollars in assets per day. Over $5 billion is now left the fund, but daily outflows have stabilized that around $200 million. BlackRock also appears to be pulling ahead in terms of liquidity. Their fund traded more volume than Grayscale for the first time on Thursday, even further diminishing the usefulness of GBTC. Spreads have continued to tighten, suggesting that market makers have

improved efficiency since the ETFs were launched. The top six funds are now all trading below a five basis point average bid-ask spread, demonstrating how effective the ETF structure is in driving down costs for traders. Total net inflows after 14 trading days is $1.7 billion, and the new products are now easily outpacing GPTC outflows on a daily basis. This level of inflows has also surpassed the same period at the beginning of gold ETFs, albeit not adjusted for inflation. By all accounts, asset managers are satisfied with the launch, heralding it as a massive, of success that vindicates the role Bitcoin has to play in the mainstream investment world. Twitter commentary, on the other hand, continues to be slightly negative, with the ETF launch

failing to send Bitcoin prices to the moon. Lastly, today, OPNX or OpenX announced that their exchange will shut down within two weeks, advising customers to settle their positions and withdraw their money as soon as possible. Withdrawals will be closed on February 14th. OpenX was a derivatives in bankruptcy claims exchange launched last April. It was a collaboration between Suu and Kyle Davies, the co-founders of Bankrupt Hedge Fund, Three Arrows Capital, alongside Mark Lamb, the founder of bankrupt crypto exchange, coin flex. As David Z. Morris sat on a Coindex TV interview at the time the exchange launched,

quote, this is a bad thing, a bad idea, run by bad people. Now, it's unclear whether the exchange ever saw significant volume in neither bankruptcy claims or derivatives trading during its brief period of operations. However, it did manage to rack up $2.7 million in fines from Dubai regulators. An exchange token was launched last summer, rising by 7X over the first two months, before collapsing below initial levels by October. The token fell another 40% following the shutdown announcement. Now, of course, the liquidators of Three Arrow's capital are currently pursuing Sue and Davies directly for $1.3 billion after claiming the pair took on, quote, significant leverage

despite knowing the firm was already insolvent. To paraphrase Suzu's comments on its recent time behind bars, everyone should spend time in prison at least once. So friends, that is going to do for today's breakdown? One more big thank you, as always, to my sponsor for today's show, Cracken. Go to crackin.com and see what crypto can be. Until next time, be safe and take care of each other. Peace.