On the sixth episode of This Week In Doom, Doomberg and I turn our attention to the world of cryptocurrencies — or rather, stablecoins — in the wake of the recent collapse of Terra/Luna and the astonishing spectacle of a $60 billion meltdown.
Joining us are two high profile critics of the crypto space, Bennett Tomlin and George Noble. Bennett and his co-host Cas Piancey have been at the forefront of thoughtful criticism of the cryptoverse with their excellent podcast, Crypto Critics Corner, while George has taken the bit between his teeth on behalf of Wall Street and become an Establishment lightning rod determined to force regulators into action.
As always, the subject leads to raised voices and inflamed passions but… would you want it any other way?
Grant Williams:
Before we get going, here’s the bit where I remind you that nothing we discuss should be considered as investment advice. This conversation is for informational and hopefully, entertainment purposes only. So while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets. And now, on with the show.
Grant Williams:
Welcome, everybody to another edition of This Week In Doom. Joining me as always to bring the doom is the green chicken himself, Doomberg. Hi, mate. How are you?
Doomberg:
Hey, Grant. I’m doing great. Yeah, it’s a really exciting show we have in store for our listeners and one that has been in the works for a few days, so it’s really-
Grant Williams:
Yes, we do.
Doomberg:
… really great to be here.
Grant Williams:
We had a show that was in the works for a lot longer than that and then events, dear boy, events, as was famously said, transpired to change the format for this podcast. Originally, you and I were going to sit and chat with Bennett Tomlin, one half of the incredible combination that produced the Crypto Critics’ Corner along with Cas Piancey. We were going to talk to Bennett about his journey and about his work and about all the stuff going on in the crypto world and then Terra happened. This is something that Cas and Bennett have just fantastic knowledge of and done some incredible work in getting podcasts out there. We’ll put a link to that in the transcripts so people can tune into their work.
Grant Williams:
We had to get the band back together, Doomy, and get George Noble on who, in recent days, was afforded the opportunity to question the Tether CTO, Paolo Ardoino in person, which is something I never thought I’d see. So the idea is for the four of us to kick around what’s happened in Terra and Luna this past week, its implications for Tether and the broader implications. I got to say, Doomy, I’m extremely excited at the prospect.
Doomberg:
Yes, indeed. What a great opportunity to get two of the leading voices in the middle of this really historic dislocation, shall we say, in the crypto markets. George in particular had an amazing opportunity to directly question the chief technology officer of Tether in the middle of a Twitter Spaces. Twitter is truly the modern Times Square. As our listeners will hear during the podcast, George is never one who is short for words or opinions and he has a very authentic grasp of reality and the truth and shall we say, an effective nose for bullshit. He really put all of those attributes on display in this epic confrontation with the CTO. And of course, Bennett is probably the walking encyclopedia for all things stablecoin, crypto.
Doomberg:
This Luna collapse, which as you know has wiped out probably, at its peak, roughly $60 billion of market value which happens to coincidentally be the peak market cap of Enron, just so people can have a frame of reference here. It’s really amazing to see what’s going on in these markets in real time and more amazing is our unbelievable opportunity to talk to two of the leading voices in this space and then hear from them just how things are going in real time. Really, outstanding podcast and can’t wait for our listeners to hear it.
Grant Williams:
Fantastic. We should probably, at this point, issue a trigger warning for the crypto community. They are going to hear opinions that they’re not particularly happy with, but that’s okay. They are opinions. As always, there’s so much opacity in all this that it’s impossible to have any proof of anything until it actually happens. So which way this ends up, we don’t know yet, Doomy, but in kicking it around with George and Bennett, at least we get some sense of how we got here and what the weak points might be and how they might unfold. So what do you say? We get the conversation started.
Doomberg:
Can’t wait. Let’s do it.
Grant Williams:
Well, Bennett, George, welcome back to the podcast. Welcome to This Week In Doom. It’s great to see the pair of you. Funny enough, we have a lot to talk about. Bennett, how’ve you been?
Bennett Tomlin:
I’ve been great. Glad to be back.
Grant Williams:
Busy, busy times for you with all the stuff that’s been going on. You and Cas’ podcast is going great guns and the stuff you continue to put out there is just fantastic, so commendations on that. And George, your Twitter Spaces are lighting the world up lately.
George Noble:
I am the world’s most unlikely social media character, but I think I found my calling and I would just say that I’m never in a loss for content. What’s the line, Grant? You’re more literate than I am. So little time in so many disasters.
Grant Williams:
Right. Yeah. It’s exactly right. But the three of us convened a year ago, almost to the day to talk about Tether at the time. That conversation received a lot of airplay because I think it was an introduction to a lot of people as to what Tether in particular and perhaps stablecoins in general were all about. Now, we stand a year on and we’ve just seen in the last week this Terra Luna fiasco. Again, it’s brought up the subject of stablecoins and I think it’s likely changed the playing field. So Bennett, if I can, I want to come to you first because there will be people that have heard of Terra Luna, have seen the carnage, but don’t quite understand exactly what’s happened and you are just the absolute master of doing this. So perhaps you could lay out for people exactly what’s happened in this last week or so.
Bennett Tomlin:
Sure. So Terra is a stablecoin, nominally like Tether or any other stablecoin where it’s supposed to be pegged to some other asset. Normally, the US dollar and most of the Terras in circulation were pegged to the US dollar. Tether is meant to be fully collateralized by a set of assets including cash, commercial paper, index funds, bonds. It’s an asset-backed coin, supposed to have a dollar in reserves for every Tether in circulation. Terra is different. It’s a more crypto-native stablecoin. At least they claim to be a more decentralized stablecoin. So rather than being collateralized by this group of actual assets, it’s pseudo collateralized by the governance token for the system. Luna and Terra is a two-token system. Luna is the governance token that gives you the right to vote on proposals for the protocol. If you stake it, it gives you your share of the fees paid to swap or to interact with smart contracts on that chain.
Bennett Tomlin:
The Luna token then acts as a pseudo collateral for the Terra stablecoin. The way this works is through the protocol, you can normally swap $1 worth of Luna for one Terra dollar or one Terra dollar for about $1 worth of Luna. This is supposed to keep Terra stable by enabling a bit of arbitrage. So if, for example, the Terra dollar falls to 90 cents in the marketplace, you can buy it up, trade it back to the protocol, and you’re supposed to be able to get a dollar of newly minted Luna out of it. If the Terra dollar starts to exceed a dollar, you should be able to buy a dollar worth of Luna, take it to the protocol, get a new Terra dollar and then sell it for more than a dollar if the peg is broken up.
Bennett Tomlin:
The problem with algorithmic stablecoins in general and Terra and Luna in specific is that it is dependent on the continued belief that the system as a whole has value and that specifically, the governance token has enough value. So what can end up happening is if people start to lose faith in the system and they start trying to convert the stable asset, the Terra dollar, back into Luna. They can end up causing the system to death spiral because each of those exchanges is minting new Luna into the market and effectively diluting all the existing Luna holders. So when there’s insufficient demand for Luna, there’s insufficient value there for the Terra to be exchanged into, you’ll see what ended up happening, which is just ever larger and larger mints of Luna as they desperately try to extract whatever value they can to return the stable asset back to pegged.
Doomberg:
Bennett, welcome to the show and congratulations on being so prescient about this potential disaster on a podcast that you and Cas did just, I think a couple of weeks before this all unfolded. Just to dive a little bit deeper into what you just said, because many of our listeners and two of the hosts are relative amateur sleuths in this whole affair, can you talk to us about this whole staking mechanism, the relationship to the Anchor protocol? One of the numbers that we see floating around on Twitter and in the news is that they were offering 19% or 20% annual yields for such staking, which screams to us old timers as a Ponzi type structure. What could possibly be going on to generate such yield? Talk to us about the Anchor protocol, it’s relationship to Luna and its criticality towards getting this thing going.
Bennett Tomlin:
Yeah. There’s two pieces there. There’s the staking for the protocol itself, which is where you take your Luna. You bond it to a specific validator and then you get your proportional share of the rewards they earn from the operation of the Terra chain itself. The Anchor protocol is a separate protocol built on top of the Terra chain that is at its most basic, supposed to just be a lending platform to allow you to lend out or borrow assets. The one that really matters for Anchor protocol is again, the Terra dollar. About 50% of the total value locked in the Terra ecosystem was locked into Anchor and the reason for this is because Terraform Labs, the entity behind Terra, was paying many millions of dollars to the Anchor protocol so that they could offer lenders a way higher rate than borrowers were paying.
Bennett Tomlin:
You’d see this effective 19% or 20% yield guaranteed by this yield reserve that was being subsidized by Terraform Labs which was meant to incentivize the creation of more UST, the lending of this Terra dollar all in the hopes of trying to grow the system. Now, everyone here probably pretty quickly noted that having one entity continually subsidizing a 20% rate to try to accelerate growth is not sustainable and would eventually lead to problems when they try to reduce the rates, which coincidentally is exactly what happened. Six or so days before the collapse actually occurred, Anchor went to a dynamic rate, still subsidized, but started to drop down a little bit. You started to see money withdrawn from the Anchor protocol, then a few days later, you started to see the peg break and then the death spiral begin.
Grant Williams:
Bennett, should anybody be surprised about this? Because obviously, a lot of people were, people that were in that community. Look, I’ve spoken to people caught up in this and it’s just horrendous listening to the stories. It really is, but there were plenty of people that warned that this was the ultimate end game for this protocol. Was there an element of surprise in this or was it just timing and this was inevitable at some point?
Bennett Tomlin:
In my opinion, it was almost certainly inevitable. The good faith, steel man version of what they were trying to do is make this Terra Luna protocol so large and so deeply integrated that there would be sufficient demand and liquidity for Luna and therefore, for Terra that it would be able to continue operating even without them subsidizing the demand through Anchor. I think even at that point, it is a system vulnerable to attack as many pegged assets are, as history has shown us is true for pegged assets. If you try to peg one thing to another, eventually someone will find a way to profitably attack that, and that’s the fundamental issue with these algorithmic stablecoins, is eventually, there will likely be a well enough capitalized attacker who will find a way they can profit from your demise and then they will do so.
Bennett Tomlin:
So I think it was inevitable. I think the timing was largely unforeseeable. Gallo’s capital crypto hedge fund had made a bet and profited on it pretty well by guessing when this was going to happen, but I certainly did not expect it to collapse six days after we published our episode or anything like that. So I think it was totally foreseeable. I think it was likely inevitable. The only reason I hesitate a little bit there is because it’s impossible for me to prove that they couldn’t have grown to some absurd scale. At that point, there would’ve been sufficient demand or something to keep it going, but I am deeply skeptical of that proposition or the likelihood of that ever working.
Doomberg:
So Bennett, before we pivot to George, maybe a transition question for you, which is days after the collapse of the Terra project, we saw that Tether began to depeg and it was a fascinating night watching the battle for Tether on Kraken and other exchanges as the peg was broken down to as low as 92 cents, I believe. At least it traded there. It has since almost recaptured its peg, but not quite. There’s obviously lots of noise around Tether, which is what we’re going to pivot to George about here soon, but can you walk us through how the collapse of the Terra project is ricocheting around the entire DeFi construct and what it means for panic in the market and potential depegging of one of the allegedly reserved, fully backed stablecoins and what that would mean for the crypto ecosystem?
Bennett Tomlin:
Sure. So yeah, Tether did depeg. They had a couple of scam works down like you’re talking, like in Kraken, but I don’t think it exceeded 1% of a depeg on aggregators looking at the liquidity across the market. So it was a relatively small depeg in the history of Tether. They had much more substantial ones much more regularly back in 2018. I wasn’t super concerned about it at the time, but Tether is always a bit strange because in the lead up to this Terra collapse and this shaking of a lot of the faith in stablecoins and a lot of people de-risking in crypto after this, you saw Tether growing and growing and growing in the weeks leading up to this collapse while every other stablecoin was regularly processing redemptions and seemed to be shrinking. So there was this really strange dynamic leading up to there.
Bennett Tomlin:
Then you mentioned the depeg when Tether started to go below its peg, which is when you would expect market makers and Tether clients to step in and try to arbitrage that, buying up the cheaper Tethers, taking them back to Tether and redeeming. However, that seemed to take a while. I think there’s a few possible explanations for this. One is that many of Tether’s clients were also invested in the Terra ecosystem and so during the Terra depeg, they had more pressing risks to their capital than trying to arbitrage this minor Tether depeg, and so we’re trying to manage those first. Sam Bankman-Fried and other Tether clients have suggested that redeeming Tether is not always a super clean and easy process. Sam Bankman-Fried described it as a messy process.
Bennett Tomlin:
I think that there’s a bit of a disincentive there for entities to try to redeem from Tether until they’re pretty confident there’s going to be enough of a payout in it for them, especially when the markets are so volatile and there is so much other risk, but again, there’s still the bit of a strange dynamic I can’t really explain, where Tether was growing into a down market while everyone else was shrinking, and then suddenly redeems seven billion, like 8% or so of their total circulating supply in a single day after having no net negative redemptions for months and months and months, just being a continually increasing line.
Bennett Tomlin:
It’s one of those things that’s always strange with Tether, is that their redemption pattern is so fundamentally different than every other stablecoin. You don’t see small, regular redemptions. You don’t see the oscillations as some people meant to redeem. You see Tether go up until suddenly it drops by massive amounts. It was the same dynamic in 2018. Tether kept going up until finally they ended up processing a relatively large set of redemptions at once and you saw this major drop to the market cap all at once. That, I don’t have a satisfying explanation for why Tether was growing into a down market and why just then finally at that point, we suddenly see people want to redeem from them.
Grant Williams:
Let’s pivot to you, George, because first of all, there’ll be people amazed that you’ve managed to keep quiet for this long in any podcast, but seriously, at this point in the story with all this going on, suddenly this conversation emerges on social media between you and Paolo Ardoino. Perhaps you could give us the background to that, because we want to know how that came about. Because it was an extraordinary opportunity for someone with some knowledge of this and the balls to ask the straight questions to get up close and personal with a guy who’s been a very tricky person to ask questions of. How did that all come about?
George Noble:
Thanks, Grant. We were last seen together almost a year ago, as you say, and I was very frustrated because it’s very obvious to me what’s going on here. There’s no question in my mind that Tether is a complete scam, Ponzi scheme. It’s bigger than Madoff. But what also became apparent to me was unless until the regulators do something about it, I was highly doubtful that anything was really going to happen. Timing is everything. So I put the crypto saga on the back burner. Then when the Luna thing happened last week and I leave to Bennett and yourself and Doomberg to get to the weeds on that, all of a sudden, I shut up and started paying attention again. Call it pattern recognition, muscle memory, having seen past collapses via the Japanese stock market in the late ‘80s or the NASDAQ bust, the 2008, the great financial crisis. It’s pattern recognition.
George Noble:
I’m like, “Aha,” and it didn’t take me too long to figure out time to start paying attention again. So I got back in the saddle and just going on Twitter and just see some great commentary on Twitter. As we all know, Grant, it’s just brilliant content out there to follow the right people. So on Twitter on this Friday morning, and I was looking at Twitter Spaces and there’s a conversation featuring Paolo Ardoino, hosted by the same fellow who had a conversation with Michael Saylor the day before. That was a complete waste of time. That was just a photo op and there weren’t really any questions. So I go in the room and it’s clear that it’s just a PR stunt for Tether. I start DMing the host. Asked about the backing. He’s not addressing at stations, all the usual questions.
George Noble:
I’m thinking to myself, this is a waste of time. 35 minutes in, the host says, “Okay, now let’s go to some Q&A, so let’s call up George.” I fell out of my chair like, “Are you serious?” As I told you the other day, Grant, I sort of felt like that moment the Navy SEALs must have felt like when they’re hunting down Osama bin Laden and they get into the compound and he’s there in his bedroom with no bodyguards. They got a clear shot at him. I couldn’t believe it was happening. I was like, “Are you serious?” So pulled myself together. I try to channel my inner Bennett and have a go. I was amazed they let me ask questions. Not only that, we know I tend to get a little bit animated at times. I promise might even in this discussion.
George Noble:
The answers became increasingly ridiculous and I got upset. At one point, I had to apologize and I thought they would throw me out for sure, but they let me keep going. This went off for like 10 minutes. You heard the tape and I figured, you know what? This guy’s never going to admit to the truth, so let me just ask the inconvenient questions and it’ll be clear by his answers or non-answers what’s really going on and I think I was successful on achieving that objective.
Grant Williams:
I think we’ll listen to some of that in a second, I think George, because it’s important. But Bennett, coming back to you, Paolo is the CTO of Tether and a lot of the commentary was on the defensive side saying, “Oh, this is not a question for the CTO to answer,” but of course we don’t get any shots at the real guys who should answer those questions. So just talk a little bit about the hierarchy at Tether so people are familiar with the cast of characters. Then I want to get into some of the Q&A from George’s session just so we can hear the answers and pick them apart.
Bennett Tomlin:
Yeah. The nominal CEO of Bitfinex and Tether is Jan Ludovicus van der Velde, who basically never makes public statements. He did a recorded one for, I think the Lugano Tether announcement a couple months ago and that was the first time anyone had even heard his voice in something related to Tether Bitfinex in years. He never talks about either of the companies. The chief financial officer is Giancarlo Devasini for both Bitfinex and Tether again. He used to make public statements. You can go on the old Bitcoin talk forums and find him calling Bitfinex clients morons and stuff like that, but generally, does not make very many public facing statements these days. So the primary figures who end up in public are, as you mentioned, Paolo Ardoino, the chief technical officer, and then occasionally, Stuart Hoegner, the general counsel for both firms.
Bennett Tomlin:
The other person you would expect to perhaps occasionally make public statements would be Silvano Di Stefano, the chief investment officer of Tether, but they’re not big on putting him in front of the public either and are currently stewing in New York to try to avoid the disclosure of his name. Whoops. So the only people who generally make public statements for Tether, from the executive suite at least, are Stuart Hoegner and Paolo Ardoino. So saying that’s not really a question for the CTO is pretty unsatisfying when it’s not a question you’re able to ask any of the other executives.
Doomberg:
So George, before we start playing some of the really epic soundbites from your confrontation with Paolo, I think it’d be worthwhile for a bit of a refresher for our audience to understand just how critical Tether is to the Bitcoin-
Doomberg:
… Understand just how critical Tether is to the Bitcoin/crypto ecosystem, and just how much of the float would be impacted by the artificial creation of Tethers from thin air, if that is indeed what is occurring, and the preponderance of the evidence would seem to suggest. You’re an expert in market structure. You had a very good segment in the prior appearance to this effect. So maybe you could summarize for our listeners just how big of a deal this could be, vis-a-vis the price of Bitcoin and other cryptocurrencies, if in fact Tethers can be created out of thin air, and are not fully backed.
George Noble:
Thanks, Doomberg. Yeah. So I leave the particulars of Tether itself to Bennett, who’s forgotten more about Tether than I’ll remember. But speaking to the point of market structure, from memory, if memory serves me correct, we go back to the fall of 2020 when this leg of the bull run started, when Bitcoin was around 11,000 with about 18 million coins outstanding at the time. It gave approximately 200 billion dollar market cap to Bitcoin.
George Noble:
The non-hollowed float of Bitcoin is about 20%, give or take, depending on time of the day, of the week. There were about, I believe, two billion Tether in existence at that time. Again, my aim is accuracy, not precision. The amount of Tethers outstanding has gone from two billion to about 80 billion since the fall of 2020. So you’ve seen an increase on the order of 78 billion.
George Noble:
The market cap of Bitcoin, there are about 19 million coins outstanding right now, and even at today’s price of 30,000 give or take, that gives a market cap of 570 billion. So you have Tether going two to 80. The market cap of Bitcoin went from about 200 to 570. Keep in mind, the market cap of Bitcoin at the peak, for this correction, it’s up over a trillion three. So the casual observer, they’d say, “Well, George, what are you bothering me for? This is the two billion cap, so what, Tether’s now at 80 billion, 78 billion. Bitcoin’s 570 billion, a trillion three. It’s nothing. It’s the tail wagging the dog.”
George Noble:
No, no, no. You have to focus on the flow. And so imagine Grant, Doomberg, if the three of us were at Tether in the fall of 2020, let’s go in the way back machine. And I said, “Doomberg, I’ll tell you what, I’m going to print 75 billion Tether for you. How much do you think you can push up the Bitcoin price?” Say, “Well, the market cap of Bitcoin’s like 200 billion, but the floats only 20% or 40 billion.”
George Noble:
So you give me a market not held order to buy 75 billion into a free float of 40 billion. I think I can get the price up for you a little bit, ergo, that’s your moon shot 11,000 to 69,000 out of 30. I suggest everyone to go look at Urban Cowboy’s tweets, his thread on Twitter. He sets it out far more eloquently, and it’s not my purpose here to repeat it all, but essentially has to do with an increase in demand into what’s an inelastic supply. And that plays really well on the way up, but also live by the sword, die by the sword. It doesn’t take a whole lot to push the price down. And I think that’s what we’re looking at. I’m reminded of this, and Grant, we got to go on our way back machine, but I go back to the late eighties and the great Japanese bull market.
George Noble:
One of the things that made that market so dynamic was the lack of free flow. The enormous cross holdings exist in the Japanese market. If you were Sumitomo bank, you in turn own Sumitomo Trust and Sumitomo Motors and Sumitomo Metals. So Sumitomo whatever it is might have a cap of say a billion dollars, but the free flow was maybe only 200 million. So it didn’t take a whole lot to push the price up. And foreigners were piling into the market that would have an outsized impact on the Japanese stock market. And that’s how we got the the Nikkei to go to 39,000 on peak in the last day of 1989. It subsequently fell to 7,000. Hasn’t seen that price 39,000 cents. I think it’s like 25 or something like that. So the big fly in the ointment was the cross holes and illiquidity of the Japanese bull market, in Japanese stock market. And that’s what gave you the giant bull market.
George Noble:
And then the liquidity comes unwound, it has an outside impact resulting in the whole edifice collapsing. And to me standing back, looking at market structure, I think that’s what’s going on with this whole crypto thing. I’ll be the first one, once Tether goes bust, not if, when, let Bitcoin go to wherever it wants to, let the market clear and then we’ll reassess. But until that happens, the idea that somehow some significant portion of that 75 billion increase of Tether didn’t have an effect on the Bitcoin price? I don’t have the figures to hand. I mean, Bennett, you probably do, but the percentage of Bitcoin purchases I think they’re done with Tether. I mean, in what planet, in what world could you ever imagine that wasn’t having an impact? And then when you start to go to look at trading patterns in Bitcoin, there’ve been numerous studies. Doomberg, I know you’re well familiar with it.
George Noble:
There was at professor at Tel Aviv University. And there’s a guy in Texas showing all the manipulation and how the Tether creation occurs always when Bitcoin is crashing. I mean, it’s obvious to anyone who’s spent any time in capital markets what’s going on here. So for all the Bitcoin maxis and apologists out there, say, “Oh, Tether, fine. Let it go bust. That’s good, because Bitcoin to the moon doesn’t really matter.” Not so quick, not so quick.
Grant Williams:
Well, let’s talk about that for a second. And Bennett, I’m going to come to you here because what this resolves around necessarily is not so much Tether, but if we take at face value what’s been said about Tether, it’s what’s happened to those $80 billion, where are they? What are they invested in? Because again, there’s history there, which hopefully you can run through in terms of the way the peg was couched when it was first launched, the way that’s changed over time as to what one Tether actually is. And the questions that have been brought up over how Tether can prove to the satisfaction of those questioning them quite simply and make the fears go away. So perhaps you could walk us through those reserves, the composition and the evolution of that composition over time.
Bennett Tomlin:
Sure. So Tether was founded in 2014 by a team that included Craig Reeves, Brock Piers, Craig Sellers, Colin Reeve and William Quigley, bunch of people from the Master Coin Foundation who wanted to create a dollar batched token on the Bitcoin blockchain. This token would eventually become Tether. And the promise was that they would always have $1 in their bank account for every Tether in circulation. And that Tether would get regular audits to prove this to the people using it, to help support their contention that they had a dollar for every Tether in circulation.
Bennett Tomlin:
They very quickly did not have a dollar for every Tether in circulation. And this was revealed by their recent CFTC settlement, which showed that from the period the CFTC looked at, which was 2016 through 2018, they had adequate reserves on 26% of the days, I think. Yeah, I think it was 26% of the days they had adequate reserves.
Bennett Tomlin:
And the other promise that they would regularly be audited was also ignored. They’ve never been audited. There’s also been a bit more issues. In 2017, Bitfinex and Tether, sister companies were both banking at a group of Taiwanese banks that were using Wells Fargo as their US correspondent banking partner. Wells Fargo cut off Bitfinex and Tether, and Bitfinex and Tether decided to briefly file a frivolous lawsuit against Wells Fargo to try to regain access to banking.
Bennett Tomlin:
When this inevitably failed, they were largely without banking for much of the next two or so years. Bitfinex nominally had a bank account, and this is going to get a little specific here. So Tether there was about 300 million in circulation during this period, I think. They had about $60 million of backing at the Bank of Montreal in the account of their general council, Stuart Hoegner. And that was ostensibly the only backing these Tethers had. Tether’s accounting records suggested they also counted a receivable from Bitfinex’s account, but when the CFTC did their analysis of Bitfinex’s account, they found deposits from only two institutional partners, neither of whom ever purchased Tethers.
Bennett Tomlin:
And so if the backing was held in that account, they were doing some accounting tricks to make that work out because the money coming into that account was not intended to be used to purchase Tethers. During this period for much of 2017 and 2018, Bitfinex and Tether were using a payments processor called Crypto Capital Corp. Crypto Capital Corp was a Panamanian company that was moving money for Kraken, Bitfinex, Quadriga, briefly BitMax, and a bunch of other cryptocurrency exchanges. And allegedly also the Columbian cartels. Several of the principles of Crypto Capital Corp have since been arrested. Even Manuel Molina Lee, the president, was arrested in Greece and extradited to Poland on suspicion of money laundering for the cartels, specifically through a cryptocurrency exchange. Reggie Fowler, former part owner of the Minnesota Vikings was arrested in the United States, has since pled guilty to wire fraud, bank fraud, operating an unlicensed money transmitter, and a couple of other related charges.
Bennett Tomlin:
When he was arrested, he had thousands of dollars of counterfeit bills, equipment to make more counterfeit bills, fraudulent bond certificates totalling billions of dollars, and a master US workbook that detailed how he had been embezzling about 10% from customer deposits out of Crypto Capital Corp. In 2018, Crypto Capital Corp started to lose access to their bank accounts because of this broad multinational investigation into their alleged money laundering activities. As Crypto Capital Corp’s bank accounts got frozen, they were no longer able to service withdrawals, deposits or anything like that for Bitfinex and Tether.
Bennett Tomlin:
So what ended up happening is Tether and Bitfinex had given just over $1 billion of commingled client and corporate funds, commingled between Bitfinex and Tether to this unlicensed money transmitter who was money laundering, allegedly, for the cartels. And then that money launderer never gave it back. Complicating things here, Bitfinex and Tether claimed to have never signed a contract or any agreement with Crypto Capital Corp. And so when these funds became inaccessible, in order for Bitfinex to continue to be able to service withdrawals, because the bulk of the money sent to Crypto Capital Corp was nominally Bitfinex customer funds. They started taking money out of Tether’s bank account, because at this point, Tether had established banking. First at Noble Banking, Puerto Rico, and then later at Deltec.
Bennett Tomlin:
So Bitfinex started taking money from Tether’s bank account to be able to continue to service their withdrawals and hide their insolvency. In order to keep Tether from appearing unbacked, they again claimed that Tether was owed a receivable from Bitfinex nominally at the accounts at Crypto Capital Corp, which had become inaccessible. During this period, because Bitfinex was having issues with withdrawals, there was a lot of online pressure on both Bitfinex and Tether to prove their solvency and to fix their withdrawals, because traders were getting frustrated with their funds ending up stranded on Bitfinex. And people were worried that Tether was lying about their backing, because they were lying about their backing.
Bennett Tomlin:
But November 1st, 2018, Tether finally announces that they have established a solid banking partner in Deltec Banking Trust in The Bahamas, where all the best banking partners are. And so once they had established with Deltec Banking Trust in The Bahamas on November 1st, Deltec Banking Trust issued a letter saying that the portfolio cash value of Tether’s assets exceeded the number of Tethers in circulation.
Bennett Tomlin:
On November 2nd, 2018, Bitfinex withdrew $650 million from Tether’s account. Again, immediately making Tether unbacked. This continued for several months with Bitfinex basically using Tether’s funds and Tether’s accounts to service withdrawals and to hide their insolvency. Including at one point in October of 2018, Bitfinex published a blog post with a link to their Bitcoin wallet saying, “Look at how many Bitcoins we have. We can’t possibly be insolvent and withdrawals are working fine. And anyone who says otherwise is lying.”
Bennett Tomlin:
Meanwhile, when Carlo Devasini, the CFO of both Bitfinex and Tether was desperately messaging Oz Yosef, one of the principals of Crypto Capital Corp, asking him to give them any funds or Tethers he could so that they could continue to handle withdrawals. Oz did not do this because their funds had been seized. Finally, in February of 2019, after Tether has been backed by cash equivalents and other assets since 2016, without disclosure, they update their terms of service on their website to now say that Tether can be backed by cash, cash equivalents, receivables, loans to related parties, or basically anything else we want.
Bennett Tomlin:
In March of 2019, Bitfinex and Tether enter into a revolving credit agreement for a little under a billion dollars where Tether would extend this line of credit to Bitfinex and Bitfinex would be able to tap it as needed. They rolled the previous hundreds of millions of dollars of transfers into this line of credit agreement at this point.
Bennett Tomlin:
A couple weeks after this, Latitia James office in New York issuefiles for an exparte order against Bitfinex and Tether to stop the series of deeply conflicted transactions. And that leads to the New York attorney general investigation into Tether, which finally forced Tether to once a quarter for two years provide an independent accountant’s report of their assets and reserves, which gets us finally after all this to what do Tether’s reserves look like now? And that’s not entirely clear. We know there’s a lot of commercial paper. We know the relative proportion of commercial paper has been reduced over the last six or so months and the proportion of US treasuries have gone up. A decent portion of the backing is in secured loans to other cryptocurrency companies, especially lending platforms like Celsius and Nexo. A portion of the reserves are digital assets like Bitcoin and the secured loans are normally collateralized by digital assets like Bitcoin.
Bennett Tomlin:
The strange thing about the Tether reserves is that they have all of these commercial paper, they claim to have, I should say, they claim to have all of these treasuries, all these commercial paper, all these bonds and all these assets. And yet even as the bond market has struggled over recent months, every single day, if you check the Tether transparency page, which they promised to update every single day, the assets over liabilities stays almost exactly the same. Tether’s reserves are miraculously managed by what must be a hyper competent team who is able to make sure they are making only the best bets that never seem to decrease in value. And so we’ve now ended up at this point where Tether is backed by a nebulous collection of assets, including commercial paper, bonds, treasuries, secured loans, and probably some equity from Celsius and a couple of other companies that Tether has done venture capital investing in. And that’s what backs Tether.
Doomberg:
So George, listening to Bennett’s encyclopedic memory of the history here, just last week, and I think around the time you confronted Apollo, he was quoted in the news as saying that Tether’s reserves have shifted to predominantly treasuries. And if that’s true, that’s a huge amount of holdings. And then when asked who is involved in the custodial aspects of these reserves, he said, “That’s our secret sauce,” some kind of corporate trade secret. I mean, really listening to Bennett and then now trying to force myself to finish asking this question, you can’t make it up. What is your impression as a street savvy old school Wall Street guy, when you hear this kind of nonsense?
George Noble:
Thank you, Doomberg. For those that go to the link, I threw up the YouTube, the recording of the interaction, which by the way, I’ve never seen such a tweet. I’m just another guy, I think seen by 700,000 people, something crazy, but I put below that, and Grant, might be useful as well. I put the link to the Enron April to April, I think it was 2002 conference call. Where Jeffrey Skilling was confronted by Mr. Grubman. It was exactly the same question. It was how come you don’t produce a balance sheet? If you’re a new investor and you have no sense of financial history and reading balance sheets aren’t your thing. Okay. But anyone who knows how to read an income statement or a balance sheet and has any sense of financial history, it’s like, you’d say, for a guy from New Jersey, “Get outta here. Are you kidding me?”
George Noble:
So, no. The logical fallacies, and Grant, I have it sitting around here somewhere, but I couldn’t find it in time for this podcast. I have a list. It’s an encyclopedic list. Most comprehensive list I’ve seen of 150 different logical fallacies. And you listen to Paolo Ardoino go between straw man arguments and deflections and distractions, and just go down the list. I mean, if he said anything that was truthful, it was a coincidence. His whole holding forth was all designed to obfuscate the truth, lying by perhaps omission instead of commission. And the reason I got so angry, we’re talking to someone who should know better. And I’m like, you’re insulting me with your answers.
George Noble:
And I certainly understand someone who’s never heard this fellow before, oh, he sounds so nice and he chooses his words carefully and even though he’s Italian he speaks in beautiful English. He speaks better English than the crazy [inaudible 00:41:55]. Okay. But the outrage, and actually, I don’t want to get on my high horse here, but I think there’s a bit of transference going on when I went nuts on him because we live in the post truth society where what matters increases not the truth but what people say is the truth. And the regulators are asleep at the switch. And we have so many charlatans on Wall Street, bad actors who are not being taken to task. It would seem that Elon Musk, I hope this changes, is not subject to any laws. Cathie Wood makes up stuff. On my portfolio it’s gone up 40%, 50%, 60%. I mean, on what planet as an investment advisor could you ever say that and not be fearful of being thrown in jail? Chamath.
George Noble:
I mean, go down the list, Cramer. I probably shouldn’t be saying some of this, but I’m going to say it anyway. And so here it is. I got the guy. It’s like in those James Bond movies, Dr. No, Dr. Evil, guy on this South Pacific island, and now I got him in my sights. Now’s my chance. So Gary Gensler, please call your office. Where are you? How much money has to be lost? Luna wasn’t big enough for you? So it’s the moral outrage. That’s what got me so triggered.
Grant Williams:
George, we’ll come onto the regulators because I think that’s probably where this conversation is going to end up, because ultimately that’s where the buck is ultimately going to stop. But before we get there, let’s talk a little more about this because you said something there that I find interesting, particularly in the wake of the Terra Luna collapse. And that’s when you pointed out that anybody knows how to read a balance sheet, income statement, understands this stuff. And I wonder having seen what happened with Terra and having seen the outpouring on Twitter of people that don’t know how to read a balance sheet, don’t know how to read an income statement, all they know how to read is this fluffy prose about how this thing is going to save the world. And they’ve watched the number go up, they’ve watched the 20% returns roll in.
Grant Williams:
They don’t know what they’re doing. And when you look at some of the people who said, “I put everything I own into Terra,” and it was 20,000 or 50,000 or 133,000 was one of them I saw. And now it’s all gone. These are people that don’t know how to read that. It’s interesting, on the one hand you’ve got people like yourself, old Wall Street hands that have seen this stuff happen before. It’s a horse of another color, but it’s the same thing as Enron, as you say, in terms of the opacity surrounding it. But most of the people playing in these sandboxes are not people who understand how to tear this apart and build it up from the ground up and recognize it for what it is.
Grant Williams:
They are people who have been sold the promise of a better life, of getting rich, of becoming wealthy, of all these great things that we know are guaranteed to lure them in. So how do you kind of tease those two apart and get understanding for whether it matters or not to anyone that can read a balance sheet and income statement, this is something quite obvious.
George Noble:
It’s part of this fake it til you make it economy that we’re in. I also think about Robinhood and the democratization of finance and the gamification of the stock market. I know we’re going a little bit off path, don’t worry. I’m going to come back on point. And the whole 10,000 hours concept, whether it’s the Beatles or it’s Michael Jordan or whatever, and the stock market’s not a game. They made it a game. It’s because of the unprecedented irresponsible monetary policy that we’ve had. It made it a game.
George Noble:
So what matters is not what the truth is, not what value is, but how much liquidity is in the system. And asset prices to a degree unprecedented have become a barometer of how much liquidity in the system, not what intrinsically it’s worth. An intrinsic worth is not the price that’s paid. People forget that. To say, what’s an asset worth? Well, is it producing income? Is it backed by hard assets you could sell? Is it liquidation value? It’s not the price. When you hear ponytailed personalities on a CNBC, I’m told that you should criticize generally and praise specifically, but whatever. And they say price is truth, seriously? And so what’s happened is it’s-
George Noble:
Seriously? So what’s happened is, it’s become a case of monkey see, monkey do. It’s what Charlie Munger always says, “you show me incentives. I’ll show you the outcome”. One bad actor gets away with this. And then it’s copied by another one. You know, Elon Musk pulls his stunt, gives birth to yet a child , Trevor Milton, here we go, Nikola right? So it’s coming back to crypto, it is the regulatory capture or willful neglect, or just they’re too busy or they’re Understaffed, call it whatever you want. I’m not going to focus on the why I’m going to focus on the what. The what is the regulators are asleep at the wheel and I’m sorry, they have blood on their hands. Luna, this is on you, Gary Gensler Tether when it goes down, not if, when, it’s on you Gary Gensler. And so we have this crazy situation where asset prices are untethered to reality.
George Noble:
Imagine, we’re on the moon, we’re just floating around and numbers can be whatever they are. And it’s number go up. It’s stock to flow model. It’s digital gold, bro. You understand what I’m saying, bro? Okay. And then you try to speak logic to these people and they look at you like you got three heads. And so I think what’s happening now is we’re beginning to normalize, the airs coming out of the tires and all the most hyper liquidity driven assets. Be it fanciable technology stocks that are on 50 time sales or SPACs or crypto, they’re all coming back to earth.
George Noble:
And as Andrew Smithers once said, and ,Grant, I think you know Andrew, famously once said, “the role of a bear market is to return capital to its rightful owner”. That’s what we’re seeing. And so my view is, and I’ll stop. That investors are going to get an education. The only question is how expensive will that education be? They can study their financial history and realize it’s nothing new under the sun, Charles Kindleberger, please call your office. Or they can get the more expensive education and get their heads handed to them which unfortunately seems to be the way too many of these people are proceeding. Sorry to go a hundred tangent.
Grant Williams:
So George, let’s get into that conversation, those questions you were allowed to ask your prey once you had him cornered. Because it’s a fascinating thing to listen to. There would be people who have heard this, and there were people that haven’t and for the people who haven’t, it’s a great chance to hear this in its entirety, but for others, it’d be a great chance for Bennett, you and George to pull this apart and explain the dancing that’s going on here. Because I think, unless you, unless you understand it properly, as you say, George, a lot of people come across and go, oh, that he was very calm and he was very nice and he was very polite and he just sounds like he was being bullied by that Boston guy. So let’s…
George Noble:
A random guy on Twitter. That’s who I am.
Grant Williams:
Oh, random guy, Twitter. That’s right. Yeah, you’re right. The random guy on Twitter.
George Noble:
Bennett, really for the purpose of historical context, I will weigh in. But I think you can do it better justice than I can. So I’ll take the lead from you. But I’d like you to tell, Grant, stop the tape where you want. But Ben, I think your perspective is really more valuable than mine right here.
Grant Williams:
Okay. So I’m going to play this and let me see if this works.
George Noble to Paolo Ardoino:
“Hello George. Thanks very much. Terrific interview, great run. I had a question for Paolo. So Tether has been the subject of a lot of speculation. Many people are very uncomfortable with your disclosures. You could easily silence your critics by giving a full and complete accounting of what assets you own and a full and complete audit. This idea that at stations, what everybody else does and no other industry or at stations allowed. If I were you, I would just come clean and say, here it is. You could silence the critics. Why do you not offer up a full and complete accounting of all your assets? So, the critics would shut up. This would make your life a lot simpler. I can think of one reason and one reason only why you don’t. And that is because you don’t want people to see what you own. Please answer my question.”
Grant Williams:
Okay. So that’s straightforward, right? And that is the $64,000 question. It’s right there right? Just tell us what you own come clean. And we all know where we stand. So let’s, let’s listen to Paolo’s answer before we turn this over to Bennett one second.
Paolo Ardoino replying to George Noble:
“So we don’t have problems in disclosing what we have in general. First of all, there are different type of disclosures. And we in since 2021, we started to provide the attestations that you might say that there are not enough. And then we provided the breakdown reserves. And then we provided the ratings of the breakdown of these reserves. So if you have a rating that is an asset that is rated A1 and is rated by Standard & Poor’s. Why that the underlying asset does really matter. So, even if we provide that additional information, people will ask for even more information and it-”
George Noble to Paolo Ardoino:
“No, excuse me, excuse me. That is total garbage.”
Grant Williams:
Okay. We’ll come back to George’s interject in a minute. Bennett, does it matter what the underlying assets are?
Bennett Tomlin:
To the crypto market? It seems not to matter. So there’s a few different things here that I want to draw some historical context to. One, like every money market fund on earth will tell you exactly what securities they own, that’s just what they do. That’s how they work. And so him saying they can’t disclose it or whatever is, always feels inauthentic. My intuition is that he was leading up to their common excuse that it’s impossible for them to get an audit because no stablecoin can get an audit, but for him to claim that he’s got to explain some of Tether s activities in 2017. Because in 2017, both Bitfinex entire and Tether announced that they had hired Friedman LLP to conduct a full audit of both firms. And so presumably at the time, assuming Tether and Bitfinex were being honest about the nature of this engagement, Friedman must have assessed that they would be able to complete an audit.
Bennett Tomlin:
A few months later in September 2017, Tether announced that their relationship with Friedman had dissolved and no audit would be conducted because of the excruciatingly detailed procedures that Friedman was insisting on. Bitfinex never updated us on the status of their ongoing audit with Friedman. But I think five years on, we can safely assume it is unlikely to appear. And this gets into now, the other reason why their attestations are very much less than convincing to me. And so in September of 2017, they did get Friedman to issue them. And attestation suggesting they had enough money in their accounts to back every Tether in circulation. But again, this is kind of a half truth. On September 14th, 2017 Tether had no bank account. On September 15th, 2017 in the morning, Tether opens a bank account at NobleBank & Trust, founded by Brock Pierce, Tether s co-founder.
Bennett Tomlin:
They transfered millions and millions of dollars from Bitfinex’s account that day. At 8:00 PM that evening Friedman comes in, checks the account and sees the money is there. And this is a repeated pattern. Then in 2018, they get a letter from Freeh Sporkin & Sullivan. Eugene Sullivan of that firm was of course, one of the executive advisors to NobleBank, where they were banking at the time. Sullivan and Freeh had both previously worked with Brock Pierce Tether ‘s co-founder at Sunlot, Brock Pierce’s first attempt to try to purchase and revive Mt. Gox followed later by Gox rising his Phoenix project. But yeah, and so they brought in this group of lawyers who they were already working with and had previously worked with to provide this letter saying they had the assets. And then we’ve already talked in this episode about the November 1st, 2018 letter, where on that day they had the portfolio cash value.
Bennett Tomlin:
And on the day after that Bitfinex withdrew $ 650 million. And so these point in time verifications for Tether, especially of the ilk they’re getting now from these firms, are not particularly convincing to me because Tether has this history of moving and manipulating assets to make attestations appear adequate when they were clearly inadequate. When someone looking at this and seeing that they had just transferred that money in that day would have additional questions about Tether’s backing on the previous days before that, or them moving the assets out of the account the day after they get the letter, right? And then the other wrinkle is, well, like Paulo mentioned in 2021, we started doing this. In 2021, we had to start doing this because the New York attorney general made it a condition of our settlement with them. And then for a long time, they were getting their attestations from this firm in the Cayman islands called Moore Cayman.
Bennett Tomlin:
Their last one instead came from MHA Cayman. And the little fun wrinkle in the announcement of this transition was that both Moore Cayman and MHA Cayman, had been run by the same auditor in the Cayman islands, out of the same office using just like slightly different branding on the websites. And so they’ve now switched to a new auditor, but it’s actually the same auditor. Moore, just no longer wanted to be associated with it. And MHA was still okay with it. And so him trying to suggest that they have done everything they can to be transparent when money market funds, which are an ostensibly similar structure will tell you exactly every single security they own. And when they have this history of deliberately acting to manipulate, their attestations seems deceitful.
George Noble:
That’s brilliant, Ben. I just want to add one thing, one of the big unanswered questions in this is like, why did they let you question Paolo? You continue to best question Palo, I don’t know the answer to that. The best explanation I’ve heard is that perhaps they thought I was from NobleBank, because my last name is George
Doomberg:
Yeah, it’s possible.
Bennett Tomlin:
It’s possible Noble markets and NobleBank were sold off for scraps back in 2018. So, I don’t know that was their an assumption, because it hasn’t existed as a going concern in almost half a decade.
George Noble:
That explanation is more believable than any other explanation.
Doomberg:
So George I’m sitting here like baffled at the fact that Martha Stewart went to jail for fibbing about $50,000 or $60,000 worth of MNPI. And you sit here and you listen, you were talking about $80 billion. How does this happen? You were pretty rough, I think fairly so on Gary Gensler, his predecessor, Jay Clayton was no better. Like how can this happen? When you were in the markets, back in the old days, people used to fear the SEC, what’s happened to the regulators?
George Noble:
Again, it gets to incentives. Whether the regulators, whether it’s regulatory capture, for instance, Hester Pierce, who’s a Bitcoin maxi. She’s one of the lead dogs. Ben, you’ll tell me which alphabet. I don’t know if it’s SCC or CFTC, whatever, okay. These people are like, there’s complete regulatory capture. I don’t want to get into politics, please, because both sides do it. But it’s not lost on us that I believe FTX Sam Bankman-Fried was the second largest contributor to the Biden campaign in the last election. I believe his mother who was a Stanford Law professor, a very smart woman. She was a high ranking person of the Biden campaign. So again, please, don’t, I’m not making about politics, both sides do it. But the regulatory capture that goes on both sides is just extraordinary.
George Noble:
And you can embed it. You can probably cite this. You’ve forgotten more about this at all, but so and so regulator from what agency he leaves and then goes and becomes the head of Binance or wherever the hell it is, it’s just, there’s no honor. It’s just people getting away with stuff. The laws aren’t being enforced. And so the longer this goes on the more losses and the bigger pay, it doesn’t have to be this way. It really doesn’t have to be this way, but the regulators just aren’t doing their job. And again you’re asking, the why I can think of a lot of reasons why, but they need to do their job.
Grant Williams:
Well, let’s come back to the regulator at the end of this, because as I said before, I think that’s where we need to end because that ultimately those are the hands that this situation is going to ultimately be placed in. And, they’re going to have to make some kind of decision, but let’s get back to your… I was going to call it a conversation with Paolo, but I think let’s call it interrogation show George let’s call it what it is.
George Noble:
The Nuremberg Trials of Paolo Ardoino.
Grant Williams:
Yeah, right? And let’s play the next part. Act 2, in which G. Noble loses his cool. Hold on.
George Noble to Paolo Ardoino:
“No, excuse me. Excuse me. That is total garbage. You are trying to hide the truth. You are hiding the truth. Anyone who can read financial statements knows that you’re lying. Come clean, come clean.”
Moderator to George Noble:
“We need to keep, George, we need to keep…”
George Noble to Moderator:
“Sorry, I’ll be civil. I’ll be civil.”
Moderator to George Noble:
“But you’re not being civil.”
George Noble to Paolo Ardoino:
“No, I will be civil. I apologize. You are not answering the truth. You are dancing around the truth, sir.”
Moderator to George Noble:
“Okay. Let Paolo finish the question. Otherwise I’m going to have to mute you.”
George Noble to Moderator:
“Okay. I apologize, but I wanted to answer the question he hasn’t so far.”
Paolo Ardoino:
“Well, again, I take no disrespect for this. So there are many people given the size of Tether, I understand there are skeptics. We are proving that we have all the balances and all the reserves to fulfill all the redemptions. So I think that we are waiting for a framework, by the way, just by the way, we are providing all this information also to the AG and we are doing this since last year and we need to do it also for the entire this year. So yes, definitely people want to have more information. We are not lying about our reserves. We have all the reserves that we should, we are supposed to have. And we, over time we had demonstrated over time.”
Paolo Ardoino:
“If you think about where we were in 2019, we had much less information public that’s true, right? Many people criticize us because of that. Also people that supported us, they were always complaining. We didn’t give enough information. And yet now after two years, we improved a lot. So I’m not saying that we are not going to give additional information on what we are giving, but we are working on it and we will provide it. So I think that you can always ask me more and more and more. We are doing our own steps. We are able to get the community comfortable. Otherwise we would not be an $80 billion, $79 now million dollar asset. And again, it’s all about the process. And we are working with regulators, including the AG on our disclosures.”
Bennett Tomlin:
Months ago, like, eight or nine months ago, Stuart Hoegner and Paolo Ardoino go D. Bosa’s show on CNBC. And Stuart says in a few weeks, we’ll have a financial audit. And that’s the last update we got on. That was Stuart Hoegner, their general counsel saying months ago that in a few weeks they’ll have an audit. And now Paolo now here is, what do you mean an audit? We’re already doing attestations. Look at how transparent the New York attorney general is forcing us to be. It’s not like the audit is a historical promise that they gave up on. This is a thing they regularly repromise. And then never do. It’s always six weeks away. It’s Elon Musks three months maybe six months, definitely. Where it’s just over the horizon, far enough away that most people will forget. But near enough that it still seems like exciting and can like placate the current criticisms.
George Noble:
It’s my dog ate the homework. Excuse, like I had it done. So, let me ask you, when you put a question to someone, an inconvenient question, and instead of answering the question, they say, I’m not lying. I’m not lying. How does this sit with you, Grant?
Grant Williams:
Look, I think anyone that interrogate pay it, interrogates people for a living would have a field day with this conversation. Anyone that works in other people’s heads would also, I’m sure there’d be all kinds of tells and giveaways in this conversation, but Bennett, let me posit something as devil’s advocate, let’s suggest that Paolo is the technical guy and he’s the guy they sent out to do this. They’ve told him what to say. They’ve told him, don’t worry Paolo, you can trust us. This is the truth. Is there a chance that he is just a stooge who’s been shoved out in front of house and said, here’s what you say.
Bennett Tomlin:
Sure. I think that it is very possible that’s kind of what they do, right? We know from the CFTC settlement that even their internal records were often not accurate and did not reflect where the money currently was or anything like that. And we know from Zeke Fox’s reporting for Bloomberg business week, that Juan Carlo Davis Cini was the one who was interested in finding ways for the Tether reserves to earn more yield and make Tether more profitable. And so I think it is quite plausible that Paolo has exposed to him. Some kind of view into their database or whatever that is telling him what their records currently reflect. And I also think it’s plausible that those records are either deliberately or perhaps unintentionally inaccurate and that what they’re actually doing, Paolo is not completely aware of. I think that is a plausible explanation.
Grant Williams:
As George Costanza once said, I think, “It’s not a lie if you believe it”.
Bennett Tomlin:
Yeah and I think it’s quite plausible that all the people they let make public statements have a partially occluded view of what the business is doing for the safety of the business, since that’s why you get him referencing their secret sauce, right? Because that’s perhaps what he’s being told is that, this is a thing that can’t be disclosed for whatever reason.
Doomberg:
So Ben, I wonder if we couldn’t tie the two stories together a little bit, one of the accusations floating around about the collapse of Luna is that in a period where the UST peg was collapsing, several insiders were allowed to get out of the trade at par via some questionable Bitcoin trades. If Tether is in fact only partially backed and the house begins to sort of cave in on them, how do you sort of see the end game? And sort of a two part question, what is your analysis of the Luna collapse and whether some lucky insiders may have gotten out at par and then what do you think the Luna experience informs to us if Tethers, in fact only partially backed, which I believe is probably the case.
Bennett Tomlin:
Yeah. So the Luna collapse in specific, there is a lot of oddities and not a lot of details yet. So the Luna foundation guard, the group that was holding their ostensible reserves, the Bitcoin they purchased has written a thread detailing their actions during this period, when the Terra peg broke down below 75 cents, they discussed moving the remaining several billion of their Bitcoin to this market maker and then onto exchanges and stuff. Or they talk about deploying this Bitcoin to try to preserve the peg. The implied peg that they purchased the Terra at using those funds is well above 75 cents. It’s not at par. If you look at the cost of Bitcoin during the period, when they’re making these transfers, the peg of Terra and the number they transferred, it looked like they were buying. If I remember my math right at like 90 cents per Terra, which is still substantially above where the peg was when they deployed these funds.
Bennett Tomlin:
It is possible that when they started buying that’s when we saw the peg start to recover and that most of these were just used in open market operations, or it is possible that these funds were less appropriately used and that they were purchasing a larger sum of Terra at a above market, but below par price, I think that it is important for Luna Foundation Guard and Terraform labs to share what information they do have, what the agreements looked like and what was actually performed there because $3 billion of Bitcoin were in the reserves. And now they’re supposedly all spent. And that is a lot of money.
Bennett Tomlin:
And if the action, the price action that day with the peg was with them providing $3 billion of buy pressure. The idea of them purchasing Bitcoin was always a little bit dumb, but it suggested it’s even dumber than they pretended because it was barely able to temporarily buoy the price before the collapse continued. And so I think it’s important they share that. Now the other question about what does this mean for Tether is a little bit trickier because Tether doesn’t have to redeem Tethers. In the Tether terms of service, they explicitly say they can deny redemptions for any reason or no reason. And so you won’t necessarily see the same dynamics. And I think, so anyone who goes to Tether and tries to demand of redemption Tether doesn’t feel like giving it to you. They’ll just say no, if they don’t want to give you cash, they can instead just give you whatever securities Bitcoin or whatever stuff are in their vaults. George, were you saying something?
George Noble:
So a very important point on that. It’s even worse than that. It’s not just, they can decline redemptions. For some of this, shall we say skeptics such as myself who are out there? Good luck trying to short Tether. I know people have tried to short Tether and I have not heard of a secure, safe way of shorting it because, who’s your counterparty. If you can go to Binance or one of these places, and you can maybe arrange some transaction, I haven’t tried to do it actually, but I know people have, and they’ll say you, okay, so you want short some tether, supposed to collateral or oppose you say you want to short a million dollars worth tether, you got to post it with them. And it’s put in an account with everybody else’s money.
George Noble:
… and it’s put in an account with everybody else’s money? Hello? In order to short Tether, you have to be able to borrow it. Good luck borrowing it from a sound counterparty. It’s set up as a one way market. So it’s not just that if you were a legitimate person, owned Tether. And I don’t know what person who’s not clinically brain dead would own Tether, but let’s say they did. I mean, I understand why drug dealers out in Asia might do it. Fine. But I can’t imagine anyone would say Tether is an asset class. Like, okay, so let’s say just hypothetically capital markets are melting down, it’s a bare market, and cash is as a conscientious asset allocation decision. Okay. You’re going to hold Tether? Really? So you can’t short Tether. It’s a complete manipulation.
Grant Williams:
Let’s bring this back to, as I say, ultimately, where I think this has to end, and that’s with the regulators, because there’s been talk about regulating crypto, there’s been talk about regulating stablecoins for some time now. And to me it seems, and I’m happy to be proven wrong by any of you, that at this point, when you’ve torched the kind of money we saw torched last week in Terra, and you’ve seen the kind of people that it’s affected and the people who’ve lost their life savings, as I say, I just don’t see any way that the regulators can’t act and act very, very quickly, because they have to address this while it still hurts to make sure that people tag the two together and understand we are doing B because of A. Is this wishful thinking on my part, George?
George Noble:
Had you asked me that question about Elon Musk three or four years ago, with all the restrictions put on him with the tweeting, everything else he’s done, he just ignored everything. He’s gotten away with it. So I hate to break the news to you, Grant, but I look at that… and again I hope I’m proven wrong… but with that as the most recent example, why should I believe that the regulators are going to uphold their responsibility and do the right thing here? I have no faith. I have zero faith. And so what I’m hoping is going to happen, and I want to say more likely, but another plausible scenario is the market will take care of it. To me, Tether is… and this is the problem where it comes… I’d say it’s George Soros and the Bank of England all over again, except that George Soros could borrow sterling and put it back to the Bank of England and the market collectively crashed it. Because when you maintain an artificial price, the market attacks it.
George Noble:
The problem is, and maybe Doomberg or Grant or Bennett, you know a way or you found some person who knows a good way you can actually short Tether. Because if you could short Tether what you would do, or that’s what you would do. Another possibility might be closing off the on ramps and exit ramps, so that just as when you have a cancer tumor in your body and you can’t actually operate on the tumor or attack the tumor because it’ll cause systemic problems, sometimes what the doctors will do is they’ll cut off the blood flow to the tumor and you starve it that way. And there’s this idea, and, Bennett, I really want you to speak to this, because Tether, it’s like where are they? They keep relocating from one domicile to the next, kind of like in the internet somewhere up in the sky. It’s like, where are they? They’re beyond the scope of the regulators. But what you can do is take Sam Bankman-Fried and FTX and Binance and all those guys and suspend their goddamn licenses in the various countries. And Bennett, you’ll correct me on this, but I believe, if I’m not mistaken-
Bennett Tomlin:
I think you’re overestimating how many licenses they have.
George Noble:
Okay, fine. But we can make it difficult for them. Because, listen, the Chinese are no fans of this and the Europeans are no fans of this. Maybe the El Salvadorian fans and drug gangs in Central America are. But the United States is no fans of this. Okay? So you could make it so you could really put a stranglehold on these folks. The regulators just throw their hands. “Well, it’s beyond. We don’t have jurisdiction.” Yada, yada, yada. You sure as hell have jurisdiction on the intermediaries around the deal. And so, Bennett, can you correct me on this? But if I got this right, we know Tether’s got 80 billion assets. They have 15 employees. So first thing, the idea that Paolo Ardoino somehow doesn’t know what’s going on, I mean, they know full well what their assets are. They’re on a sheet of paper.
George Noble:
Here’s the best part. Is this right that Tether accounted for the long side of 70% of all Bitcoin trades and 60% of all decentralized Tethers went to two customers, Sam Bankman-Fried FTX, I believe, with Binance. Could you speak possibly a little bit about the incestuous relationship between Sam Bankman-Fried FTX and Binance and how they’re an integral part… Well, the other guy in Chicago. You’ll know the name of it. Okay?
Bennett Tomlin:
Yeah, DRW. Cumberland Global.
George Noble:
So all these feeders that are making this happen, these enablers, can you explain the incestuous relationship between these various parties?
Bennett Tomlin:
Sure. Tether has a relatively small number of clients. And this kind of gets back to the previous question about what happens in a Tether collapse, is that there’s only a couple dozen people who are allowed to issue and redeem Tethers with, at least for the period we were able to analyze, about two-thirds of them going to Alameda Research, Sam Bankman-Fried’s quant/hedge fund, and Cumberland Global, the Chicago subsidiary of DRW. And so because Tether can refuse redemptions at any time or can offer them in kind for whatever length they have in the vault, there’s the dynamic you’d see if it was collapsing, if they refused redemptions to one of these entities and these entities no longer wanted to cooperate in the game would be them probably trying to liquidate or sell their position in the markets.
Bennett Tomlin:
And so this is why Tether recently published a blog post talking about their peg, how they had actually maintained their peg because they had been redeeming assets all the time at Tether and these other exchanges just didn’t have enough liquidity. Again, this was another one of those Tether statements where it feels like they’re ignoring their own history, right? Because from March of 2017 until November of 2018 Tether did no redemptions and any redemption of Tethers was handled through Bitfinex because Tether had no banking for which to do those with. And during this period, whenever Bitfinex would have trouble with their bank accounts and couldn’t handle withdrawals or redemptions, you know what would happen to the, well, Bitcoin premium, because there weren’t as many liquid markets for the Tethered peg at that point, you’d start to see it go up, you’d start to see the peg break. Because when the arbitrage shorts when the market makers are not able to make that arbitrage trade, they’re going to want to presumably reduce the amount of Tether they hold. And so they’re going to do that by selling it into the market and by no longer being willing to take the other side of that and purchase up Tethers.
Bennett Tomlin:
And so they say the peg doesn’t matter, but the peg kind of does matter, because it represents times when, for whatever reason, these few large firms who are the primary customers of Tether are not incentivized to try to arbitrage that gap. And so when that’s happening, it either suggests there’s some reason those firms specifically can’t do it or there’s something going on at Tether that is preventing them from redeeming those quick enough to make the arbitrage worth it. And so you see this very tight relationship with about two-thirds of Tethers issued to these two entities and the rest issued to a few more. They’re the only ones who can go back to Tether and try to redeem. And so Tether has tried to kind of isolate itself from certain pressures, and form this kind of cartel around it, where the cooperation of these individuals is important, both for the continued success of Tether, but both for the continued success of these entities who are cooperating with Tether.
Doomberg:
So, Bennett, lot of talk about regulators and stablecoins. And of course, Tether is not the only stablecoin. One stablecoin that is sort of second in market cap that seems to be trying to do its best to get right by the regulators is Circle, which is a USDC. Circle is in the process of trying to go public via a reverse merger with a special purpose acquisition vehicle, a SPAC called Concord Acquisition Corp. They have been comparatively far more open about their reserves, and my belief, our belief on the Doomberg team, is that by trying to go public and exposing themselves to essentially SEC oversight in the equity markets, they must have a lot more there-there behind the backing than say Tether. What is your view of USDC vis-a-vis Tether? And do you think that they will successfully find their way to the market? Just in the last few minutes that we have, you guys.
Bennett Tomlin:
Yeah, I don’t have a super strong opinion on whether or not their SPAC merger ends up going through, whether or not they’re able to get their listing. I think it is much more likely that Circle is a legitimate business operation with what they claim to have. There were still a couple of times, like in their past where they were still claiming all cash backing on some of their materials when they had started moving into treasuries, commercial paper, and other stuff like that. So there’s still been a bit of deceit in the history of USDC, but compared to Tether it is comparatively minor.
Bennett Tomlin:
Returning just to the point of regulators for a second and stablecoins, there have been a couple different bills introduced at this point and it seems that the most likely future for that type of asset-backed stablecoin in the United States is going to see them brought into kind of the banking framework. The different proposals have varied a little bit here, whether it’s fed oversight or OCC oversight or a combination of both, but in all of the more recent proposals we’ve seen put forward, it’s been these stablecoins being merged into kind of the banking system. And so related to that, Paxos went out and got a bank charter. Circle has been trying to get a bank charter. They seem to be trying to take the steps so that they’ll be able to accommodate the coming regulations.
Bennett Tomlin:
And sorry, just before we move on, I want to return briefly to the question of regulators and what they’re going to do with Terra and stuff, because it’s a little bit challenging. And I think George is probably right, the most likely course forward is they’re going to start putting pressure on the exchanges, especially the US-domiciled ones, to be more deliberative in what they list, to put more pressure on what kind of deposits they take and how they’re handling their trading and things like that. And that will be how they kind of try to regulate crypto to a degree. I also expect that Terra specifically is going to end up targeted. Do Kwon and Terraform Labs had already been subpoenaed by the SCC even before this collapse happened. And so I think that they’re going to go after them, because it’s at least a symbolic victory for them, right? You’re able to take out the one individual who did this. But that kind of whack-a-mole enforcement is not going to be effective when your marginal cost to start a new scheme approaches zero. Right?
Bennett Tomlin:
And so I think we’ll continue to see them trying to target the governance tokens, like LUNA, occasionally try to call them a security, go after people for selling them as unregistered securities, but it is going to be challenging for them to have any kind of comprehensive framework, because many of these entities and individuals are outside of the bounds of the United States and are going to be challenging and expensive to pursue. And so I don’t think there’s adequate political will now or at any time soon for that kind of activity, for really serious enforcement action going against a large number of participants. So I expect we’ll continue to see a few targeted ones. We’ll see them start to crank down on the on and off ramps on the exchanges. And then, eventually, if there is the major collapse, which I think is possible. At that point when everything is pretty desolated, I think, is the opportunity where there could potentially be the political will for more comprehensive reform.
George Noble:
I would just-
Grant Williams:
George.
George Noble:
Let me just add to that, Bennett. I mean, you and I, I think look at things the same way. The other possibility I might introduce, if I were them not only would I shut down the on and off ramps, but I would also target somebody like Sam Bankman-Fried or FTX, someone who’s in the United States, and nail him to the wall, just like with Al Capone when they brought him in. I think they initially got him on tax evasion or something like that. I’m sure there’s plenty of stuff that they could have a shot at to make him heel, so to speak, and make an example out of him. Because when the feds get their talons into you, they can make it really painful, long and drawn out. And if I were them, I know they’re afraid to bring action, until they’ve got the eyes on [inaudible 01:21:46], I get all that, but given the urgency of what’s going on, I would do something like that.
George Noble:
And my God, it’s getting into public consciousness on steroids. Like I’m watching the NBA playoff games and then there’s a commercial, Steph Curry doing some crypto ad and then there’s FTX Arena in Miami and then there’s the crypto whatever it is, the Staples Center, used to be in Los… It’s everywhere. They got to make it stop. And so even if they say, “Well, it’s up in the stratosphere somewhere, we can’t get at it,” there are other ways. If they really wanted to, they could stop this. But I question whether they want to. I don’t know. Prove me wrong.
Grant Williams:
Well, this is, I think, the problem, George, is that they can actively discourage people from using it by issuing warnings. Right? They can talk tough and say, “We are going to do X, Y and Z.” They don’t have to do it now, but they have to make it look like they’re serious about doing it at some point in the not too distant in future. And that’s the bit that I don’t get, is that they’re not coming out and talking tough about this.
George Noble:
You know, another theory, Grant, that I’ve heard… not saying I believe, but everyone can reach their own conclusions… the idea that the government knows. They know full well what’s going on. They know full well what’s going on and an actual fact it’s a great experiment for them. It’s serving their interests. I think it’s beyond my technology pay grade, but I’m told by people I respect that there’s nothing anonymous out there. The US government at the highest levels of their intelligence agencies, they’re able to survey this whole thing, they can watch the money flows, they can see what the bad guys are doing. This is actually serving their purpose. Forget about the fact innocent people getting blown up along the way. So they’re actually they could make this stop any time they want it to. This would be a logical explanation for the very important and simple question that you ask now, right? So maybe they know full well what’s going on, but they don’t want to stop it for the reasons I just laid out.
George Noble:
And another point about this as well, some of them see this as also an experiment, a dry run for eventually the advent, full blown, of digital currencies. I mean, the Chinese are an experiment, the CBDCs in China. I don’t doubt that someday we will have digital currencies. I know there are a lot of issues around privacy concerns and so on and so forth. But for the state apparatchiks that want to control everything, like take China where you dispense digital money, you can track where it goes, who spends it. So, Grant, when you go watch the porno video in your hotel room, they could see that you paid for it with crypto. So they got all the information they want over you, right? They wanted to spend stimulus checks, it’s going to expire by a certain date if you don’t spend it. So it’s a tremendous tool if the state wanted to use it as such.
George Noble:
Now we have privacy issues here in United States, so it’s one of the reasons why I think digital currency is going to be later rather than sooner here. But the idea of digital currency abstractly makes a lot of sense. And so it’s quite plausible that they’re letting this go as an experiment, just to see how it plays out. I don’t know. I don’t know. But I can believe any of what I just explained to you.
Grant Williams:
Well, look, guys, it’s such a fascinating subject and there’s so much we don’t know about A what’s going on right now and B how this will end. But I got to say, I really appreciate both of you taking the time to do this again, because, Bennett, you bring an extraordinary repository of knowledge to this and anyone that’s listened to this and your previous work will be amazed still at how you hold all these timelines in your head and the facts and figures. It’s just an incredible resource, and George, the work you are doing to try and bring attention to this stuff… while vilified by the crypto community, no doubt, and I’m sure you get the, “Okay, boomer” stuff thrown at you all the time… but having seen the devastation that this Terra situation has caused to ordinary people, kudos to you for being the guy that’s happy to stand there and make yourself a lightning rod and hold people’s feet to the flames, because it needs to happen.
George Noble:
Thanks, Grant.
Grant Williams:
Well, gentlemen, it’s been a pleasure. I would say, I can’t wait to do this again, but each of these conversations, while energizing, are kind of depressing in their own way. But there’s nobody I’d rather talk this stuff through than the two of you, because, as I say, of the attributes you bring to it. So thanks again for giving up your time to do this on short notice.
George Noble:
Thank you, Grant. Thank you, Doomberg. Thank you, Bennett.
Bennett Tomlin:
Thanks, guys. Yeah.
George Noble:
Be good.
Grant Williams:
All right. Take care. Bye-bye. Well, Doomie, I’ve got to say, mate, how fascinating I find this whole thing. The final verdict isn’t in yet, but the more of these we get, the more grateful I am to have been skeptical. Let’s put it that way. My natural skepticism is well-known, but with stuff like this that I just can’t understand and I’m happy to acknowledge that may be my failing if I don’t understand it. But the more I see, the more I feel I do understand it and the more I feel a lot of it seems to be what I thought it was and kept getting told it wasn’t. So we’re grateful to George and to Bennett for giving us that time and giving us their opinions. But, boy, this story is fascinating, isn’t it?
Doomberg:
It’s so fun to be a peripheral actor in all of this history. And I would say that the ultimate proof of nefarious behavior is just how easy it could be to put it all to bed and the hoops that we see people jumping through to try to explain away the obviously simple answer, just show us what you own.
Grant Williams:
Right.
Doomberg:
The penalty of not doing that is so much higher than the ability to do it if it were easy to do.
Grant Williams:
Yeah.
Doomberg:
And so the fact that they haven’t is kind of proof that it doesn’t exist. And we’ve been around long enough to know how these things end. It’s just the only variable left to determine in the path function is how many relatively innocent investors get burned. Unfortunately, as we discussed in the podcast, the complete and total absence of regulatory intervention is going to cause the number of people who get burned to be far higher than it should be and the amount of money that they lose to be catastrophic. And so it’s a real shame. You and I won’t get burned, because we don’t participate in such things, but to many investors this sounds like the future and unfortunately it feels like they’re being tricked into something that isn’t real.
Grant Williams:
Yeah. No, I couldn’t agree more. Well said. Well, listen, all that remains is to thank you out there for listening to us and to encourage you to follow Bennett’s work. You’ll find him on Twitter @bennetttomlin. That’s two Ts on the end of Bennett, Tomlin, T-O-M-L-I-N, all one word. And of course, George Noble @gnoble79. You can also follow Bennett and Cas Piancey’s fantastic Crypto Critics’ Corner podcast, which, again, these guys do some phenomenal work in calling out some of the things they see. And look, if there are any pro-crypto guys who have made it this far through the podcast, feel free to contact us and help us understand why the simple solution of explaining what your balance sheet holds isn’t being done by Tether, because, as Doomberg just said, that would clear everything up in a hurry. Thanks again for listening. We’ll be back with another podcast at some point soon. In the meantime, you can follow me on Twitter. You’ll find me @ttmygh.
Doomberg:
And you can find Doomberg @doombergt. And Grant, it’s always a pleasure. And I know we have some exciting guests lined up for the future. So this has been really a thrill to do and love every one of these.
Grant Williams:
Well, we’ll do it again soon, Doomberg. And maybe we’ll get Bennett on and actually talk about his work next time instead of talking about the latest scandal unfolding in his world.
Doomberg:
Indeed.
Grant Williams:
Take care, my friend.
Grant Williams:
Nothing we discussed should be considered as investment advice. This conversation is for informational and hopefully entertainment purposes only. So while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets.
