Mistakes happen...all the time apparently
Hello fair readers…this week I would like to discuss the recent follies of the sordid world of decentralized finance
Hello fair readers…this week I would like to discuss the recent follies of the sordid world of decentralized finance. We will be delving, neck deep, into some of the most recent egregious missteps and ill-fated blunders by players in the digital asset space. After reading this issue you may be left with a nagging feeling that, if put in the same position as some of the aforementioned actors of this Shakespearean ensemble of tragedies, you would not have made such bad decisions. You would probably be right. Let’s get into it.
The Highlights
Move over Rumble in the Jungle; SEC deals hammer blow to token issuance
The habitual party poopers of the financial world, the Securities and Exchange Commission, has come out on top in a fight against decentralized publishing platform LBRY. This comes after the SEC claims that the token issued by the company is under its jurisdiction and thus warrants oversight.
This is a hammer blow to token issuers who are currently making the case that the SEC is grossly overstepping and trying a “regulation by enforcement” strategy. Many digital asset firms are griping that the SEC does not give issuers enough warning on how it will apply its oversight. SEC Chair Gary Gensler took the opposing view, commending the SEC for deftly being able to apply laws (not designed with such assets in mind) to regulate issuers. Specifically, the Howey Test (referring to a U.S. Supreme Court case which determined whether a transaction qualifies as an investment contract) has been instrumental in reigning in issuers for the proverbial financial sheriffs in town.
The Howey Test, a precedent that has held up over 70 years and been applied to hundreds of cases, was in fact used in this case. It was, however, the first time it has been applied to a digital token issuer that did not conduct an ICO.
Bankman-Fried doesn’t just shoot himself in the foot; blows whole leg off
Unless you live under a rock (and with these rental prices, I get it), you will have heard of the absolute disaster that is FTX and its fearless leader, Sam Bankman-Fried (SBF).
In a continuation of black swan events for the crypto world, SBF announced last week that the non-US business arm would be sold to his competitor, Binance (confirmed by Binance CEO). Now, this revelation came about a day after SBF stated that the exchange and its assets were “fine”, even though said assets and exchange found themselves in the middle of mass speculation about financial health.
The best thing about this is, the digital asset billionaire is known for his lobbying efforts and maintained a status as a last resort liquidity provider for the likes of Voyager and BlockFi. At the same time, he was slamming what he called “third-tier exchanges” post the 3AC collapse in the summer. The interconnectedness of FTX and its assets to other DeFi entities has led to speculation of how large the contagion for the ecosystem as a whole, as digital asset prices continue to slide in the wake of the turmoil.
Earlier this week, it was reported that the exchange (in a grim omen) stopped client withdrawal processing (with about $6B of net outflows in the days leading up to the halt). The online reactions have been nothing short of apocalyptic, with speculation regarding the impact the contagion would have on other exchanges and possible legal action against the billionaire and FTX.
You think it ends here? You are mistaken; Just recently (literally, as I am writing this), it was reported that the whole compliance and legal department of FTX up and left…which is generally not a good sign when a potential suitor takes a magnifying glass to your business. Further, Binance has reportedly pulled out of the deal due to “corporate due diligence, as well as the latest news regarding mishandled customer AND alleged US agency investigations.”
All-in-all, the story continues to unfold and pull down one DeFi player after another…hopefully the assets in your account won’t be next to tumble on whatever “super safe” exchange they are on.
El Salvador to consider renaming nation to “L” Salvador
Remember during the pandemic heydays of digital assets when El Salvadorian president, Nayib Bukele, was all over Twitter touting he would be essentially making a bet on Bitcoin’s (BTCs) value…with his nation’s economy? Did you ever wonder how that worked out? Well, in a miscalculation akin to Steven Gerrard’s infamous “slip” (sorry Liverpool fans), it seems that Bitcoin is not quite “FU money” as the politician so eloquently tweeted.
The timeline
How did we get here? In 2021, the nation essentially dipped into it’s treasury to purchase the digital currency, which kicked off a timeline of events that is nothing short of extraordinary:
September 2021 El Salvador becomes the first nation to declare Bitcoin a legal currency
Bukele then gave $30 of BTC to each citizen that adopted the transition
BTC ATMs are thrown around every town and city as business are told they must accept the currency
Bukele authorizes the use of $100M worth of government funds to purchase the currency (when prices seemed to be peaking to anyone with eyes)
Mind you, in the backdrop of all this, the nation was going through a serious debt crisis (seems responsible, I know).
The disaster that is…Bukele
Fast forward to today, and BTC prices have plummeted over 60% and almost no one is using the currency in the nation. The ones that followed their clairvoyant leader to the pit, are seeing savings evaporate. Amazingly, the president’s approval rating still hovers at around 90% in the impoverished nation, due to many people still blaming politicians of the past for the current economic climate. As well, they credit the current president with the reduction in gang violence (never mind the allegations that he cut a deal with gang leaders to cut down the violence, like a South American Lucky Luciano). When questioned about the results of his bet on BTC, Bukele spews out lines akin to your right wing uncle, raving about how the media is too biased and is unwilling to admit the “success” of his BTC project. He has even gone as far as to say, “El Salvador is the epicenter of Bitcoin adoption, and thus, economic freedom, financial sovereignty, censorship resistance, unconfiscatable wealth.”
Where are we now?
All in all, the outlook is pretty grim. Most believe the nation will default on its debt in the next few years, and the BTC project has stalled bailout negotiations with everyone’s favorite monetary body, the IMF (this is when you’d play dramatic villain music). The cost of the BTC project has been anywhere from $203 - $300M, attributable to the cost of running and fixing the proprietary platform facilitating the BTC economy (named Chivo…which means “cool” in Spanish, yes you read that right) and covering the trading losses from the nation’s BTC purchases.
Final Word
Well, that’s all kiddos. As you saw, our revered leaders in the digital asset world are seemingly chickens with their heads cut off…and no sense of risk at all. With that being said, it is that much more important that when you wade into these waters, you do so with some good goggles. I fear that wading in with your eyes closed may protect you from getting filth in your eyes…but it will also prevent you from seeking the shark coming at you. As always, if you liked (or hated) what you read, make sure to like and subscribe. Tell a friend, lover, or even a stranger to follow suit.