The Breakdown - The State of Play in Fed Commentary and the Crypto Contagion

Episode Date: November 19, 2022

This episode is sponsored by Nexo.io, Circle and Kraken.   On this edition of the “Weekly Recap,” NLW follows the path of the crypto contagion including the latest from FTX, Silvergate Bank and Genesis Lending. He also looks at the slate of officials the Federal Reserve trotted out to tamp down market enthusiasm following signs the pace of inflation may be slowing.  - Nexo Pro allows you to trade on the spot and futures markets with a 50% discount on fees. You always get the best possible prices from all the available liquidity sources and can earn interest or borrow funds as you wait for your next trade. Get started today on pro.nexo.io. - Circle, the sole issuer of the trusted and reliable stablecoin USDC, is our sponsor for today’s show. USDC is a fast, cost-effective solution for global payments at internet speeds. Learn how businesses are taking advantage of these opportunities at Circle’s USDC Hub for Businesses. - Kraken, the secure, trusted digital asset exchange, is our sponsor for today’s show. Kraken makes it easy to instantly buy 185+ cryptocurrencies with fast, flexible funding options. You’re covered by industry-leading security and award-winning Client Engagement, available 24/7. Sign up and trade today at kraken.com. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsors today is "Back To The End" by Strength To Last. Image credit: Brooks Kraft/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.  

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. The breakdown is sponsored by nexus.io, circle, and crack it, and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, November 19th, and that means it's time for the weekly recap. Now, before we dive in, there are two ways to listen to the Breakdown podcast. You can find us on the CoinDesk Podcast Network, which comes out every day in the afternoon and also features other great coin desk shows, or you can listen on the breakdown-only feed, which comes out a few hours later. Wherever you are listening, if you would take the time to

leave a rating or review, I would so appreciate it. All right, guys, this is the last news-style show before the holiday and the Grateful for Bitcoin week. Tomorrow we have another long read Sunday, which is, coincidentally, a follow-up in some ways to last week's Proof-Rerve show. To again give you guys a preview of Grateful for Bitcoin, it is exactly what it sounds like. It's a six-part interview series on all sorts of different aspects of Bitcoin, from mining to lightning and beyond. This is my second year of doing grateful for Bitcoin around Thanksgiving, but we're expanding the series this year alongside the broader Back to Basics theme that we've got here at the breakdown for the rest of the year. And thanks once again to Cracken for being a partner in that series. The point is that coming starting Monday, we will have a new interview every day except Thanksgiving Day itself.

That means a week with no breaking news, but I kind of think everyone is ready for that, and And even if you're not, I clearly am. But because of it, let's try to give a big, broad state-of-play update on everything heading into this holiday week. Let's start on the crypto side of things. And let's first do the FDX update and get this out of the way. Kicking off, and here's a little fun one because the hits just keep coming. Remember that cute little meme venture round of $420 million from 69 investors?

Turns out $300 million of that went straight into Sam's pockets. He's claiming that it was a partial repayment for buying out Binance's stake early in the summer, but given how nothing on the FTX books was clearly marked or identifiable really, it's extremely difficult to actually know. In any case, I'm sure those 69 investors will love learning that 75% of their investment went directly into the effective altruous pocket. In other news, according to reporting from Semaphore, the White Shoe law firm representing SBF has fired him as a client. They've cited conflicts of interest arising from the FTX bankruptcy proceedings. Anonymous sources familiar with the matter told Semaphore that SBF would now be

represented by Greg Joseph, the former president of the American College of Trial Lawyers, who will be advised by David W. Mills, who teaches criminal law at Stanford Law School, where both of Sam's parents work. As you well know, no charges have been filed yet. The DOJ, the SEC and the CFTC are all investigating. CFTC Commissioner Kristen Johnson has told reporters that they have, quote, boots on the ground at Ledger X, which served as FTX's U.S.-based CFTC registered clearinghouse. Former head of enforcement at the agency, Aiton Goldman, said, quote, there's a chance this case could go criminal. The outgoing lawyer, Martin Flumenbaum of Paul, Weiss, Rifkin,

Wharton, and Garrison was a dean of the white collar bar and had extensive experience defending financial crime. He acted for Michael Milkin, the father of the junk bond market, in his defense against securities fraud charges, and AIG in its post-2008 collapsed dealings with the DOJ. Now, not that this is an area that I have much experience with, but a white shoe law firm conflicting themselves out of this is highly suspect. To me, it suggests that they either think they won't get paid or that they don't think they'll be able to control their client. This is a firm that has a long history of defending financial and white-collar crime. So for them to reject Sam as a client, I think speaks volumes on what they want

associated with their firm, especially if other clients have lost money on this. FtX has named Kroll Restructuring Administration as its agent in navigating the bankruptcy process and dealing with creditors. New filings cite hundreds of companies and people affected by the collapse. One of the banks affected Silvergate Bank is someone will come to in just a moment. Now, in one of the craziest parts of the story, the Securities Commission of the Bahamas put out a press release on Thursday night. It claimed that the regulator had taken, quote, the action of directing the transfer of all digital access of FTX digital markets to a digital wallet control by the commission for safekeeping. It said the, quote, urgent interim regulatory action was necessary to protect the interest

of clients and creditors of FTM. The action by the Bahamian regulator was taken on Saturday, November 12th, and seemingly refers to the quote-unquote hack, which drained wallets shortly after FTCs filed for bankruptcy in the U.S. At the time, it was noted that there seemed to be two actors, one which merely moved some tokens into safe custody, and another which consolidated tokens by trading for Ethereum across multiple dexes in what appeared to be an exceedingly sloppy process. It's unclear which actions the Bahamian authorities are claimed to be involved with, and how much of the funds are custodied by them. Also, last Saturday, the Bahamian regulator put out a press release

stating that they had not authorized the release of funds to Bahamian residents, which was an action that FTC said it was undertaking at the behest of local regulators, and which now appears in retrospect as yet another thing that Sam had lied about. We discussed the other day how in the U.S. bankruptcy filings, John Ray claimed that the competing bankruptcy case in the Bahamas was a, quote, blatant attempt to avoid the supervision of this court and to try to keep FTCDM isolated from the administration of the rest of the debtors. The filing made the direct accusation that SBF was colluding with the Bahamian government, stating that, quote, he appears to be supporting efforts to expand the scope of the FTCDM proceedings in the Bahamas to undermine, to undermine the fact that

undermine these Chapter 11 cases and to move assets from the debtors to account to the Bahamas under the control of the Bahamian government. John Wu from Aztec Network, who was a guest a couple weeks ago, pretty much summed up how everyone on crypto Twitter was interpreting this news. Pirates of the Caribbean Six Blackbeard's revenge. The Bahamian Securities Commission instructed FtX to withdraw all funds into their custody, and now they're telling U.S. bankruptcy court to go f*** themselves. This is now a jurisdictional fight between the U.S. and the Bahamas over the nearly $400 million that was quote-unquote hacked from FTX last week. Attorney Collins Belton wrote,

This is more interesting to me than the Zinger about their accounting practices floating around. Looks like John may be setting up a PVP battle between Bahamian and U.S. liquidators and alluding to the very real possibility that they're embroiled in FTX malfeasance. My IR senses are tingling. This could be really interesting precedent for cross-border liquidations and international law. About Bahamian regulators being caught up in this, I genuinely wonder how far up this can go. Would be wild if, ultimately, creditors ended up with claims against the Bahamian government.

could also see this making places like Panama and Cayman incredibly nervous. Want to keep more profits when trading? Get the best possible prices and trade with 50% lower fees on Nexo Pro. The new Spot and Futures trading platform uses aggregated liquidity of over 3,000 order books collected from multiple sources. Utilizing the complete Nexo Suite allows you to earn interest and borrow funds as you wait for the next trade setup. Visit pro.nexo.io. That's P-R-O-N-E-X-O-D-I-O and sign up today. This episode is brought to you by Circle, the sole issuer of USDC, and a leader in crypto that's held to a higher standard.

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Industry-leading security keeps your funds and information safe, and award-winning client engagement teams are available for support 24-7. Buy crypto instantly with fast, flexible funding options on Cracken. Download the Cracken app on Google Play or the Apple App Store, or visit crackin.com to join. Now, in terms of contagion outside of FTCS, one of the institutions that people are keeping a close watch on is Silvergate Bank. Silvergate Bank services a huge part of this industry. In fact, is one of the only banks that does. The Crypto Specialized Bank operated its own proprietary trade.

to crypto settlement rails, which are used throughout the crypto space. Due to fears of its exposure to FTX, Silvergate's stock is down 54% this month. Institutional crypto trading platform FalconX informed its clients that it would be no longer using Silvergate for clearing late this week. Falcon X said this was, quote, out of an abundance of caution, end quote, in line with their aim to be the quote, safest counterparty during these market conditions. Optimistically, then, this move doesn't necessarily indicate a problem at Silvergate, just crypto platforms seeking to minimize all counterfeit.

party risk, but that hasn't kept the chattering class from saying that something might be wrong at Silvergate as well. What's more, the rumors around Silvergate were getting worse, not better. By midday Friday, Silvergate's stock was down 20% in the last two days. One defender Friday came in the form of Blocktower's Erie David Paul. He wrote, an update on Silvergate. We've done some more analysis and are confident it's solvent with large margin for error, as confident as we can be as non-bank experts performing superficial financial analysis. It's critical and valuable infrastructure to the industry, and they've always been good faith partners to the industry. Any bank can face liquidity challenges, but Silvergate's structured balance sheet very defensively,

and so is in great shape to deal with short-term liquidity challenges. Again, this has not stopped the rumor mill from flying. Now, in terms of some of the other areas of contagion that we've been following, when it comes to Genesis and DCG, there's not really anything new as of late Friday afternoon. Alex Kruger, however, pointed out, quote, market trading as if DCG were throwing Genesis lending under the bus, as indicated by the GBTCD, discount widening today by 6%, ETHE discount by 8%. And then, of course, there was CryptoVC, Chris Berniske, who had recently started to allow some optimism to come back into his tweeting, only to tweet late on Thursday night,

I've gotten more information, unconfirmed by the primary source that makes me less aggressively optimistic than I was earlier. We should get significant clarity next week. This week and weekend is likely rumor chaos. So make of that what you will. Now, one more thing inside crypto, some updates on the regulatory landscape. lawmakers have understandably renewed their efforts to bring crypto legislation to the table during the lame duck session following the midterms. Chief among them is a push from Democrat Senator Kirsten Gillibrand to ready a stablecoin bill for a vote.

At a blockchain association event in D.C. on Wednesday, she said, quote, the bill we're working on now and we hope to introduce in the next few weeks, would be a comprehensive stablecoin bill that we would ask to get at least a hearing in the Senate banking committee and maybe get a vote by the end of the Congress. She mentioned that Republican senators Patrick Toomey and Cynthia Lummiss were assisting in this effort. So far, most of the attention on Stablecoin legislation has been focused on the bipartisan bill in the House, which looked promising in early reporting but stalled out as negotiations became tense on controversial inclusions. Getting a stablecoin bill through the Senate Banking Committee is likely to remain difficult, however. Committee Chairman Sherrod Brown this week said that, in his view, cryptocurrencies still don't offer, quote, anything useful or beneficial.

In the anti-crypto wing of the Democratic Party, Senators Warren and Durbin are pushing for answers about the collapse of FTX. On Wednesday, they wrote to former CEO Sam Bankman-Fried and current CEO, John J. Ray, asking for more information about what precipitated the exchanges collapse. They said that the collapse, quote, justified our longstanding concerns that the crypto industry is built to favor scammers and designed to reward insiders and to defraud mom and pop investors. Now, an important aside, Sam's father, Joseph Bankman, Stanford Law Professor, helped Warren draft her 2016 tax simplification bill and was formerly a donor to her campaign. With the collapse of FTX happening rapidly and

in a shroud of confusion and secrecy, the senators asserted that one thing is clear. The public is owed a complete and transparent accounting of the business practices and financial activities leading up to and following FTX's collapse and the loss of billions of dollars of customer funds. On this, at least, I agree with them. By November 28th, both Bankman Freed and Ray are required to provide the senators with information and documents about FTX and its subsidiary's balance sheets, the cause of the exchange's liquidity crisis, its rationale for buying bankrupt crypto exchange, Voyager Digital, and whether reports that Sam and other executives built a backdoor into FTCS's accounting system to allow them to alter financial records and move money around without

alerting other people are accurate. The CEOs are also required to provide historical data about transfers between FTX and Alameda Capital. Now, on top of this effort, there is also talk of a hearing in December from the House Financial Services Committee, and I think you will all understand when I say bring it on. All right, so what about a couple updates about what's been happening in the state of play in not crypto. Since the lower than expected inflation print, markets have been doing pretty well, which of course raises the question if the Fed's going to do that thing they do where they walk everything back, trotting out an endless line of Fed officials to explain why the market has gotten ahead of itself. On Thursday, it was St. Louis

Fed Chair James Bullards turned to pour cold water on the market rally. He said that the Fed's interest rate policy would need to rise between 5 and 5.2% from the current level at 4% to be sufficiently restrictive to curb inflation. He also flagged the possibility. that more might need to be done, saying that's a minimum level. Echoing comments from other Fed speakers this week, he dismissed the relevance of a single good inflation print. We have to see a lot more progress before we can be convinced that inflation is actually declining. We've been burned already two years in a row, so we've got a long ways to go from here. One of the emerging side narratives out of the Fed in the last month

has been a renewed factional dispute between Hawks, presumably led by Chairman Powell, and Doves presumably led by Vice Chair Lael Brainerd. The main point of difference seems to be on whether to hike fast and get there sooner, or to slow down hikes and allow the economy to catch up with policy adjustments to see if the Fed has already done enough. Speaking to this, Bullard said he would defer to Chairman Powell on how much to hike at each meeting, but noted, quote, If you do more now, you have less to do in the first quarter of 2023. If you do less now, then you have more to do in the first quarter. Generally speaking, it probably does not make a lot of difference in terms of the macroeconomics. Markets and Mayhem wrote,

Bullard mentioned the possibility of a 7% Fed funds rate, folks. Before we dismiss him as completely insane? If inflation doesn't show signs of significant relief, the Fed is likely to continue hiking until it does. Now Elizabeth Warren, for her part, is almost as angry at the Fed as she is at crypto. She issued a terse response to the barrage of hawkish Fed speakers saying, quote, of course the Fed has a role to play in getting inflation under control, but there's a big difference between landing a plane and crashing it. Her concern is that the Fed has gone too far with interest rate hikes and risks a deep recession or maybe worse. How risks pushing our economy off a cliff, she wrote. And who will be most likely to lose their jobs? Not stockbrokers and investment bankers. Nope.

The people out of work will be low-wage workers and those already struggling most with rising prices. The Fed needs to slow down on these extreme rate hikes and remember its dual mandate of price stability and maximum employment. The jobs and livelihoods of millions of Americans hang in the balance. It's a good reminder that for all the things going on in crypto, there is a larger game at play here, a larger structural, secular game of tight versus looser monetary policy. We may be in a dislocated, disconnected moment due to the craziness of everything we've experienced over the last few weeks. But even when it resolves, we're still going to have to contend with these larger macro forces. Hopefully when we're back from the holiday, we'll get to spend a little bit more time

on them and a little bit less time on what's going on closer to home. For now, I want to say thanks again to my sponsor, nexo.io, circle and crackin. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.