The Breakdown - Traders Shifting to Tether and BTC Are Voting Against the U.S.

Episode Date: April 9, 2023

On this week’s “Long Reads Sunday,” NLW reads: USDC Boasted Transparency but It Didn't Help When Silicon Valley Bank Got Into Trouble - J.P. Koning  Happy 48th Birthday, Satoshi Nakamoto - George Kaloudis Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   “The Breakdown” is written, produced and narrated by Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Foothill Blvd” by Sam Barsh. Join the discussion at discord.gg/VrKRrfKCz8.  

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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 produced and distributed by CoinDest. What's going on, guys? It is Sunday, April 9th, and that means it's time for Long Read Sunday. 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 of the show notes or go to bit.ly slash breakdown pod.

All right, friends, happy Sunday, happy Easter to those of you who celebrate. Today, we are talking King Bitcoin for this special Longreed Sunday. And one of the interesting things about Bitcoin this year and its resurgence in 2023 is that the banking crisis has referred people back to Bitcoin in more than, than one way. Certainly there has been a narrative around this being what Bitcoin was built for that goes all the way back to the Genesis block and the famous inscription in that block, Chancellor on the brink of a second bailout for banks. Mainstream media has picked up on the notion that this might be attracting people to Bitcoin as they see banks failing around them, and they have new questions or restored questions around how much the money in banks that is

quote-unquote theirs is actually theirs. But it's also making people remember how valuable it is to have a censorship-resistant store of value and reference and settlement asset that's outside of the control of any regulatory regime in the world. Which brings us to our first piece. This is by J.P. Koenig, who's always a thoughtful writer, writing in CoinDesk with a piece that he titled, USDC boasted transparency, but it didn't help when Silicon Valley Bank got into trouble. The weekend of March 10, 2023, was a profound test of how well stable coins hold up under pressure. Now that everything has settled, some odd lessons have been passed on. Namely, transparency doesn't seem to be a good thing. And forget about prudent management of reserves. It's just not worth it.

Opacity and sloppy reserve management win the day. Or at least, so it would appear. Leading up to Friday, March 10th, the issuer of the second largest stable coin U.S.D. Coin or U.S.D.C. Circle was probably the industry's most transparent issuer. It provided daily updates to investors through its BlackRock managed money market fund, which backstops the stable coin. On top of that, Circle had just adopted the New York Department of Financial Services guidance for stablecoin transparency, which required two attestation of reserves tests each month. In contrast, Circle's arch-competitor Tether, which publishes attestation reports on a less frequent quarterly basis, lagged far behind on transparency. To boot in its attestation reports, Circle disclosed all sorts of useful information

to users, such as each individual treasury bill's CUSIP number and where it banks. On that list was Silicon Valley Bank. It was the last bit of data, Circle's banking relationships, that seemed to have caught everyone's attention that Friday. After experiencing a run through most of the week, Silicon Valley Bank shares were halted at 9.30 a.m. local time after plunging 62% in pre-market trading. Just before noon, the Federal Deposit Insurance Corporation announced that it would be shutting the bank down. Keen-eyed social media commentators scanning circles disclosures noticed the mention of deposits held at Silicon Valley Bank. Tweets were issued. They certainly had cause for concern. When a bank fails and the FDIC takes over, depositors are only protected up to 250,000 per account. Anything above

that amount is at risk. The implication was that if Circle had funds at Silicon Valley Bank, it could suffer big losses. That meant potentially being insolvent, and that raised the possibility that USC holders might not be made whole. Social media began to demand a statement out of Circle. CoinDisc picked up on Circle Silicon Valley Bank problem after lunch. Curves' massive three-pool and important source of stable coin liquidity began to be drained as fearful traders swapped their USDC for USDT. By that evening, three-pool was empty and Binance, the world's largest crypto exchange by trading volume, suspended one-to-one conversions between B-USD and USDC, indicating a significant amount of stress in the market. By 7 p.m. Eastern time, a slight U.S.C. depegging from the U.S.

dollar occurred on trading markets, and after 10 p.m., Circle finally issued a statement. It revealed that 3.3 billion of U.S.D.C. reserves was in limbo at Silicon Valley Bank. The market was stunned. U.S.D.C.'s price began a sickening plunge to below 90 cents. The irony of this is that neither of Circle's competitors, Tether or Paxos, disclose where they bank. And so commentators on social media didn't have enough dirt on Tether and Paxos to start asking questions. While USD collapsed on exchanges, the prices of the Tether and Paxos stable coins held solid. Had Circle been as opaque as its competitors, no one would have known that Silicon Valley Bank was its banker, and the weekend run on USDC probably would have never occurred. The lesson would seem to be, don't be transparent, or if you need to be transparent, don't be transparent about your shortcomings.

How might Circle have managed its reserves differently? Paxos, which issues the Paxos dollar stable coin and until recently BUSD. offers some cues. According to the Paxos attestation reports on USDP, Paxos keeps hundreds of millions worth of deposits with banks, but all of those deposits are insured. It bypasses the $250,000 limit in two ways. First, some of Paxos deposits are invested through placement networks. The way this works is that Paxos Bank farms money out to other partners in $250,000 blocks. Each of these blocks is completely covered by FDIC insurance. Although there are 4,333 FDIC insured banks in the U.S., providing a theoretical coverage ceiling of $1.08 billion, in practice, Paxos only uses deposit networks

for part of its deposit balance. For the remaining unprotected part, Paxos has contracted with an insurance company to be covered by private deposit insurance. Of the 270 million in cash reserves used to back USDP going into the crisis, $72 million was privately insured. And that, folks, is how to prudently manage large cash balances. It's a pain. You can't just casually stash your billions at a bank. You've got to go out of your way to properly secure it. Which leads us to the second irony. If it didn't pay for it, for Circle to be transparent, it also didn't pay for Paxos to be prudent. On Sunday evening, March 12th, the FDIC announced that the $250,000 limit on insurance would be waived. All deposits held

at Silicon Valley Bank would be extended a blanket guarantee. Circles 3.3 billion was safe, and in moments, the price of USDC rocketed back up to its $1.00 peg. The crypto sector had just benefited from its first federal bailout, and not a small one at that. According to FDIC, the 10 largest deposit accounts at Silicon Valley Bank held a combined $13.3 billion, implying that Circle was the largest beneficiary of the bailout. The moral of this part of the story is that the government's official cap of 250,000 was never very serious. Un Officially, FDIC protects everything. Paxos' careful deployment of private insurance and deposit networks seems to have been a waste of time and resources, and its competitors don't think just deposit strategy the right one. In the aftermath, Circle now advertises

USDC as a stable coin with GSI cash. That means no longer keeping a big chunk of its reserves at mid-sized banks like Silicon Valley, but lodging most of it at Bank of New York Mellon, a global systemically important bank, one almost certain to benefit from a bailout should it fail. That also means Circle probably won't bother going through the process of negotiating private deposit insurance. As for Tether, which issues the least transparent of the big stable coins going into March 10th, it wasn't terribly prudent either. Its public attestation reports give no indication that it routes its $5 billion or so in cash through deposit networks, nor does it resort to non-FDIC insurance. It fully absorbs the risks of its bankers going bust. Yet the amount of USDCT in circulation has exploded by around $9 billion or 11%

since that weekend. On a long enough timeline, another significant stablecoin test, like the one that faced USDC, is inevitable. The reasons for the next one will be difficult to predict, and likely different from the last one. While opacity and a nonchalant approach to reserve management may not have been punished this time around, indeed they seem to have been rewarded, if issuers internalize these lessons, then the next stablecoin crisis will only come sooner and at a much larger scale. All right, so a couple things to dig into here. First of all, I think it's important to anchor ourselves around the real challenges here. These are not questions of Circle or Paxos per se. These are questions of the U.S. banking system. And those are the questions that have been raised since the banking crisis last month.

Perhaps we should have been, but the reality was that basically no one was operating in a world where we assumed that it was possible there would be these sort of large-scale runs on bank assets. No one was doing the due diligence to check the duration risk of the banks they banked with. were assumed to be safe. Indeed, that assumption that banks were assumed to be safe was so important to the U.S. government to protect that they changed the rules on the fly to make sure that that assumption as much as the money in the accounts was protected. I don't think anyone believes that going forward that's going to be the same every time. And that's why you're seeing movements, such as circles movement, into these G-sibs that are, in fact, too big to fail. This is part of the reason that people are so

nervous about regional and smaller banks coming off that crisis. A second piece that's worth discussing is why money has flowed out of circle and into tether. And I don't believe it's because of any decision Circle made vis-à-vis banking. I don't think it's a rational assessment about whether Bank of New York Mellon is a good place or not. And by way of counterfactual, I don't think there's really enough thought being given here, or frankly anywhere in the crypto space, about how it might have played out had Circle actually lost this money. Yes, it would have been impaired, but would it have been existential? I'm not sure. They divided their assets across a huge number of banks for a reason. But anyway, going back to Circle versus U.S.

and USDAC versus USDT, the reason I believe that money is flowing out of circle and into tether is not about banking practices, it's about regulatory risk. The banking crisis coincides with something that whether you believe it's Operation Chokepoint 2.0 or not is certainly a concerted effort from a significant number of meaningfully powerful U.S. institutions, or at least the individuals within them who have power, to push crypto out of the U.S. Circle has done its level best to comply with very unclear and challenging regulatory regimes in the U.S.

across a number of different regulators. What they're being punished for is not their banking decisions. It's for trying to do right by the U.S. system, a U.S. system that is currently actively debating things like whether they should ban crypto altogether. People's move into USDT is not a vote against Circle. It's a vote against the United States. But that brings us back to Bitcoin.

Before the rise of stablecoins, Bitcoin was the reference asset for the entire crypto space. When you trade it in 2016, you trade it against Bitcoin. When you trade it in 2017, you trade it against Bitcoin. That's obviously changed. Stablecoins have a ton of benefits in that sphere. But I do believe that part of why Bitcoin is looking so strong right now, why there's a different energy around it, why narratives are shifting around it, is that it's a reminder that Bitcoin's unique decentralization is fundamentally uncompromised compared to, even

projects that are trying to do right by regulatory regimes. While Tether may be the on-paper beneficiary of Circles' challenges operating within the U.S., I think that Bitcoin has had a renaissance in its value relative to stable coins in general. Now, next up, let's move to a piece that focuses right in on Bitcoin and its pseudo-anonymous founder. The piece is by Coin Desk's George Kulutis and is called Happy 48th birthday, Satoshi Nakamoto. George writes, Today we celebrate the creator of Bitcoin on Satoshi Nakamoto's birthday. Happy birthday, Satoshi. We don't know who Satoshi is and we likely never will, but the pseudonymous founder does apparently have a birthday. Satoshi entered a birthday when they registered the pseudonym with the

P2P Foundation. Satoshi's birthday is, according to the registration, April 5, 1975. For proof, Satoshi's age showed up as 38 on the P2P Foundation on April 4th, 2014, and is 40 on April 5, 2015, implying in April 5, 1975 birthday. Of course, the Bitcoin faithful have drawn up all sorts of theories about why Satoshi chose this date specifically, besides it being their actual real birthday. One has to do with the anniversary of Executive Order 6102, when President Franklin D. Roosevelt banned the private ownership of gold on April 5, 1933. Americans handed over gold to the government, and with the Gold Reserve Act the following year, the gold content of the U.S. dollar was increased from $20 to $35 an ounce. Really, that was just a devaluation of the

dollar because it now took more dollars to buy the exact same amount of gold. Was Satoshi Winking at us regarding the failure of a government-controlled money? Sure. Satoshi's birth year is apparently 1975, which is perhaps a salute to President Gerald Ford, who repealed Executive Order 6102 in 1974. It was effective on December 31st, 1974, which is basically 1975, but who's counting? Satoshi winks, yet again. On this particular birthday, I want to shine a light on something else about Satoshi, their real identity or identities. Was it Hal Finney, Nick Sabo, Adam Back, Len Sassiman, John Nash? Was it all of them together? Was it none of them in some other gallivanting group of cyberpunks. No one knows, and it doesn't matter, at all.

Bitcoin is an open-source protocol that has outgrown a founder or founders. The fact that Satoshi stepped away from Bitcoin when it was hardly a toddler in 2011, only to have it grow into a $500 billion global monetary system elicits two thoughts. One, Satoshi is a gracious founder who knew what Bitcoin would be, but only if the protocol was leaderless. And two, Bitcoin's ascension to notoriety is basically a small miracle. Who knows what Satoshi was thinking when they stepped away, but Bitcoin probably wouldn't have come as far. Would Bitcoin have become as important if we knew who Satoshi was and we looked to them for guidance. Would Satoshi have supported taproot, segregated witness?

What about ordinal non-fungible tokens? Maybe? Maybe not. The point is that it doesn't matter. Bitcoin belongs to everyone now. There is no leader. That might make some things messy, but at least it's our mess. If it was revealed to us in a collective fever dream who Satoshi was, that person or persons would not be handed complete ownership over the project.

If it were, there would be plenty of dissenters. Bitcoin is rules without rulers. So happy birthday to you, Satoshi, wherever you may be. We love you, but we don't miss you. I thought this was a great little piece. This is something that I've referred to as the long shadow of Satoshi's ghost. It is so without compare in the history of basically all entrepreneurship, but certainly modern entrepreneurship, for someone to leave the project that they founded in the way that

Satoshi did. I think this is why so many speculate that perhaps Satoshi is no longer with us, whoever they were. But in any case, the singular fact of that disappearance from the system, makes Bitcoin unimpeachably different than every other crypto asset. And one doesn't have to have conspiracy theories about Vitalik pulling the strings behind Ethereum to still understand that his simple existence on Earth creates challenges and centralization questions that don't face Bitcoin.

Whenever we have one of these moments where the world around us makes people look back to Bitcoin in some way, it's these fundamentals, these things that make it so different, so unique that once again capture a new set of people who find their way into this wild space. Now, one more quick one just because I thought it was unbelievable this week. Andy Bow of Waxy.org tweeted earlier this week, a blog post that he had written called the Bitcoin white paper is hidden in every modern copy of MacOS. He writes, while trying to fix my printer today, I discover that a PDF copy of Satoshi Nakamoto's Bitcoin white paper, apparently shipped with every copy of Mac OS since Mojave in 2018.

I've asked over a dozen Mac using friends to confirm, and it was there for every one of them. So then Andy gives you the set of terminal commands to plug in to find this document, and I did it, and sure enough, the Bitcoin PDF popped right open in preview. Now, as Andy notes, what's unbelievable is that there's so little conversation about how this is or why this is. In fact, there's really no good explanation, at least so. far. To me, it's just a great little example of the sort of mystery and mythology that surrounds this project that just keeps it so captivating and interesting. Alex Gladstein really captured it for me when he wrote, There's something beautiful about a hundred million white papers buried on computers

across the world. He quoted Hal Finney when Hal said, the computer can be used as a tool to liberate and protect people rather than to control them. Great thoughts for this Easter Sunday. I hope you are having a wonderful one. I appreciate you listening. Until tomorrow, be safe and take care of each other. Peace.