Stablecoins & MtGox Echoes - Unqualified Opinions #17

this time is different. kinda.


  • We’re in the midst of a “stablecoin” boom. These fiat-pegged cryptos are an increasingly important source of liquidity for crypto exchanges around the world. While an over-reliance on unaudited or “black box” stablecoins could wreak havoc on the crypto financial system if not kept in check, the alarm bells may be over-rung. Bitfinex and its reliance on Tether, a supposedly fully-reserved, but opaque $2.1bn asset, doesn’t present as dire a systemic threat as MtGox’s decline and ultimate bankruptcy did five years ago.

Messari’s Unqualified Opinions #17

Stablecoins and MtGox Echos

Veterans of 2014's crypto-winter remember vividly when a certain pseudonymous troll spilled the beans on MtGox's insolvency, and caused the market to tank overnight.

[TBI Note: My bad.]

For many of us, though, it wasn’t much of a surprise. With Gox, the writing had been on the wall for months. The exchange had a history of hacks, service outages, and other snafus, and when price quotes began to widen between Gox and other major exchanges from late 2013 to early 2014, some analysts started to sound alarm bells.

MtGox price (pink) vs Winkdex (blue), Oct 13 - Mar 14. (Source: Winklevosscapital)

It was getting more difficult for customers to withdraw funds, and service complaints intensified. There were increasing concerns about MtGox’s solvency, and Gox quotes continued to widen from the rest of the market. To add insult to injury, many believed a rogue trading bot at MtGox “Willy” had manipulated prices and inflated the 2013 bitcoin bubble (to MtGox’s benefit). That was apparently confirmed by MtGox CEO Mark Karpeles in his trial last year.

This may sound familiar to newer crypto market entrants.

Similar rumors have plagued Bitfinex over the past two years. A pseudonymous whistleblower documented a series of alleged issues at the exchange. Today, spreads between 'finex and other exchanges are widening as concerns regarding its banking relationships and solvency swril. The charts certainly looked extreme in the wee hours of Monday morning.

Look at that bitcoin spike:

Oct 15th 2018 Bitfinex BTC:USD spike (about $1000 more than other exchanges)

Years-old rumors about the insolvency of the exchange and, in particular, its preferred stablecoin are swirling more than ever. The stablecoin, Tether, broke its dollar peg and swung wildly over the weekend:

Oct 15th 2018 USDT:USD, Kraken

So what is Tether?

For the uninitiated, Tether (nee “Realcoin”) is a stablecoin created in 2014 to serve as a peg to the US dollar. A central company (Tether Limited) manages the supply, and has committed to keeping $1 in USD reserves for every 1 USDT issued on the blockchain. In theory, this should be a fully-collateralized digital dollar that moves with the speed and reliability of bitcoin. And it presented a liquidity option for exchanges that lacked strong banking on- and off-ramps. (Most of them, given the compliance costs.)

Even as over two billion dollars has accrued to Tether, there's been little transparency into the holdings because no auditor has wanted to take on the reputational risk of signing off on the controversial digital asset’s reserve accounts, especially given the issuer’s exotic international legal structure.

Sounds suspect.

This could be for legitimate reasons, though. Before you accuse me of having my head in the sand on Tether, keep in mind that this is the industry we grew up with.

We look around today and take for granted the professional teams and exchanges that have led the charge in building reliable, regulated exchanges with tight banking relationships.

Bitfinex, on the other hand, offered something different early on: crypto financial services for the cowboys of the new frontier. Before it was blessed by regulators.

Fast deposits and withdrawals. Unregulated offshore, margin trading. A gateway accessible to fast and loose Chinese and US customers alike.

And part of that meant playing cat and mouse with legacy banks via international shell corporations, and always staying a step ahead.

The Block has done a nice job covering Bitfinex/Tether’s ongoing banking shell game under corporate aliases, most recently “Prosperity Revenue Merchandising Limited.” From The Block’s reporting yesterday:

“Bitfinex says on its site that its banking information is “commercially sensitive and confidential” and is being provided “for purposes of contributing good faith funding.” Bitfinex warns that sharing banking details “could damage not just yourself and Bitfinex, but the entire digital token ecosystem” and adds that “there may be serious negative effects associated with this information becoming public.”

Shady or necessary evil? Depends on who you ask.

Acquiring and maintaining legitimate and high-profile banking relationships is and has always been the hardest thing for a crypto exchange to get right. It’s almost inevitable that a banking-light system would be a magnet for risks, both real and imagined. When you’re worried about fiat deposits and withdrawals getting shut down, you might just be tempted to tokenize fiat deposits through a separate affiliate.

Which is exactly what happened.

Tether represents a strange and dangerous hybrid; a centralized cryptocurrency exposed to regulatory shutdown risks, insider theft risks, and business-solvency concerns; and a USD-substitute that won't stay perfectly stable in an illiquid or fearful market. It represents the worst of centralized entities, and decentralized currencies, and the risks persist even if Bitfinex and Tether are currently doing everything 100% above board.

Naturally, the market has responded with a slew of alternatives. We're seeing an explosion of new stablecoin projects that range from fully centralized and collateralized like Paxos, TrueUSD, and the Gemini dollar, to fully algorithmic like Basis, Reserve, and Carbon.

One New York-state blessed stablecoin, Paxos, has raised $50mm in mere weeks since launch. Chinese exchanges Huobi and OKEx began trading four new stablecoins this past week. The Bitfinex/Tether rumors have catalyzed a shift to an ecosystem of more auditable and reliable stablecoins. And that likely won’t revert back any time soon.

In 2014, MtGox was a sloppy, insolvent entity the ecosystem relied upon too heavily. Its failure didn’t kill the industry.

In 2018, we have better diversification of risk among crypto exchanges, but USDT is a mysterious, opaque stablecoin that exchanges rely upon too heavily. Its existence will probably not kill the industry, either.

Instead, the market will reward the strongest and most transparent entities and assets win. And that’s a good thing.

- Dan

P.S. If I had to bet (at even money), I'd say Bitfinex and Tether are solvent, and 'finex is experiencing banking issues that are not surprising for a global crypto exchange with a complex product offering and history of laissez faire compliance rules. Regardless of where you place your chips, the rumors bring up the larger concern: in the supposedly “decentralized” global cryptoasset ecosystem, we care too much about the solvency of a single centralized entity. That’s an ecosystem failure.

P.P.S. Smash those share and subscribe buttons, and spread the love. Tweet at me or Messari for feedback, comments, or (more?) questions.

News & Analyses

Messari Compression Algorithm

Content and thoughts from around the web as summarized by the Messari team.

☠️ [Analysis] The not-so-killer whales of Bitcoin – Chainalysis

Killer analysis from the Chainalysis team, which breaks down the four main types of bitcoin whales:

  • Traders: nine wallets control 332,000 coins and actively trade with exchanges.

  • Miners/early adopters: 15 investors hold 332,000 coins but their activity is low. Many made significant divestments in 2016 and 2017 during price hikes.

  • Lost: five wallets hold 212,000 coins but have no activity as users lost the keys.

  • Criminals: three wallets control 125,000 coins and are connected with Silk Road or money laundering.

Interestingly enough, during the major price declines of December 2017 and most of 2018, trading whales were actually net purchasers of bitcoin. This indicates whales have been had stabilizing, not destabilizing, impact on the markets. (Messari | Source)

🎮 [Analysis] If games drive crypto mass adoption, they will be grassroots – Tony Sheng

Though there is a meme that games will drive mass crypto adoption, it is unlikely that major gaming companies would swap their assets out for ERC20s and ERC721s. This is simple: inflating supply allows companies to maximize revenue, disincentivizing them to introduce real scarcity or secondary markets. If games bring crypto to the masses, they’ll have business models that either have true scarcity or economic games at the core such as:

  • A collectibles game like CryptoKitties

  • An economic/ game theory game like FOMO3D/ Pixelmaster

  • A gambling game like EOSBet

The environment for cryptogames is the same as other crypto use cases. Incumbents aren’t likely to embrace it. Mass adoption could happen from grassroots communities if game makers make fun, painless, easily distributed games. (Messari | Source)

Quick Bits (Don't read that, I read it for you)

Choke Points (Exchange News)

  • 💱 Kraken listing Tezos (XTZ) and trading began on Tuesday. Tezos has three key features: liquid proof-of stake consensus, smart contract verification, and on-chain governance. (Messari | Source)

  • ⏸️ The largest crypto exchange Binance suspended withdrawals of the Tether stablecoin Monday morning during what it called a period of “heightened activity”, but withdrawals have since resumed. Binance had disavowed rumors it was moving to delist USDT, with founder and CEO Changpeng Zhao calling it "a single photoshopped fake announcement" in a tweet Monday. (Messari | Source)

  • 💱 Crypto exchange OKEx lists four new stablecoins: TrueUSD, USDCoin, the Gemini Dollar, and Paxos Standard Token. (Messari | Source)

  • 🇺🇬 Binance launched an exchange in Uganda. Deposits for Ugandan Shillings (UGX), BTC and ETH will open starting Oct. 17 at 10 a.m. EAT. (Messari | Source)

Startup Signals (ICOs, Cryptos, and Startups)

  • 🇮🇪 Coinbase opens office in Dublin as Brexit uncertainty pushes firms to create contingency plans. London will remain the European headquarters. (Messari | Source)

  • 👾 Ethereum testnet bug found and fixed. The issue was related to the new Ethereum Improvement Proposal that would alter gas metering. (Messari | Source)

The Powers That Be (Legal/Reg/Policy)

  • 🚶 The founder of the Digital Currency Research Lab at the People's Bank of China, Yao Qian, took on the role of general manager at the China Securities Depository and Clearing Corporation this month, after leaving PBoC in September. Yao notably led an initiative for PBoC's development of a digital yuan. (Messari | Source)

    Did I miss something? Send me the link, your twitter handle and your best imitation compression algorithm write up. If I like it, I’ll include your bit next issue (with attribution).

Community Updates

Podcast Recap

🎧 ICYMI, KWu’s latest and greatest Messari podcast #9 is an interview with Tony Sheng on his writing process. The week before, KWu was on the ground at Crypto Springs taking names and doing interviews in #8.

Listen to 1 (or all 9) on Apple Podcasts here, Spotify here, and Google play here. Happy learning!

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