Fear and Loathing in Crypto? Or Business as Usual?

Well this week has certainly already been a bang up one for crypto news. Seems like a convergence of many forces being amplified by a lot of salacious clickbait headlines. But make no mistake, the $1 trillion value wipeout is real. (remember, you only lose money when you sell)

First of all, several days ago, a major stablecoin project Terra went haywire. The algorithmic $UST (Terra) broke its peg maintaining a price at or around $1 USD. The market saw the coin plummet to lows far below the $1 mark.

Stablecoins are an essential way for the crypto market to maintain its liquidity because it allows a holder of otherwise volatile crypto assets to move to a less volatile, price stable position in a dollar denominated asset without having to incur the fees and friction of moving back to actual fiat cash.

In fact, stablecoins provide an essential way for the market to maintain the liquidity as it trades in other assets.

Traditional, asset-backed stablecoins are ostensibly backed by an actual form of fiat currency in a depository account somewhere in the real world - hopefully within a licensed, monitored, audited depository institution. At least that's what the claim has been - notwithstanding some of the controversies involving other currency-backed projects like Tether (which has suffered from claims of fractional reserve with more Tether than dollars backing it).

Algorithmic stablecoins like Terra seek to maintain the stable dollar peg by creating some other form of tradable asset - in Terra's instance, the $LUNA token. As the $LUNA trades independently based on the normal token economic supply and demand network effect economics, the $UST Terra money stablecoin is minted or burned on the supply side relative to the $LUNA price and Bitcoin reserves backing the token. This is to maintain the relative peg to that magical $1 price point.

As the peg was clearly broken, the market price declined significantly to pennies on the dollar.

The question is WHY?

The experiment has been solid from the outset, with very competent people involved. (I know some of them, and they're genuinely smart, earnest folks)

How could this happen.

Then the allegations began to surface that something strange was afoot behind the scenes.

A screen shot of a message clip from someone named "Anna" started making its way around the internet claiming that BlackRock and Citadel were behind the crash as a form of organized attack on the crypto asset.

This clip was even published by notable crypto folks via Twitter and other places. It gained enough steam to elicit a public response from BlackRock denying the allegations in a Forbes article on Wednesday.

https://www.forbes.com/sites/michaeldelcastillo/2022/05/11/blackrock-and-citadel-deny-trading-cratering-stablecoin/

Whether the allegations are true or not will ultimately remain to be seen (or not). One thing is for certain - Terra isn't a security, nor is it actual currency. This is important because of that word deemed dirty to some... regulation.

Undoubtedly, this will be a major event used by the government to accelerate a regulatory framework for crypto assets. Because if the allegations are actually true - it would ultimately be one of the largest heists in crypto history - and not illegal because it's not a security.

Arguably it could fall under CFTC regulation for commodity market manipulation, but certainly BlackRock would have the resources to fight it as an already quasi-government entity with the complex intertwining of the financial markets by Larry Fink & company.

But in its wake, a lot of people have been left scrambling to cover long positions while even more people are experiencing the black swan event trigger of the overall market drop.

Meanwhile, back at the Coinbase ranch, the company quietly amended its 10-Q quarterly filing to include a disclosure of risk suggested by the SEC in a very recent Staff Accounting Bulletin (SAB 121) signed March 31st and effective April 11.

SABs are not rules, they're simply an elucidation of staff interpretations and practices in administering the disclosure requirements under federal securities laws.

Buried in the text of the bulletin was a single sentence that stated:

Coinbase was simply following the SEC's recommended guidance about disclosure of potential risk as a public company - trying to actually maintain compliance with the understood prevailing thought processes at the agency.

Of course, some folks spotted the disclosure and touched off enough of an inquiry for Brian Armstrong, Coinbase CEO, to tweet an explanation:

Seems reasonable enough, right?

I mean, after all, outright bankruptcy and receivership of a public company is exceedingly rare.

Further, Coinbase isn't a bank, they have an institutional custodian where customer assets are stored. Crypto isn't cash deposit, therefore not necessarily subject to fractional reserve hypothecation risk as a lender. Bailment and custody laws for personal property apply, therefore there's not really any risk to the ownership of the asset, which has been conveyed, not transferred (from an ownership standpoint). A judge would be highly unlikely to attach those crypto assets to creditor claims for recovery - at least not without upending a lot of other pre-crypto era laws about chartered trust, UCC, etc...

But the news sphere ran with it:

Damage done.

The company's shares plummeted right along with the crypto market taking a nosedive. The irony, of course, being that as an exchange, they get paid on the ticket regardless of market conditions. With the market falling off the ledge, volume was insane as people liquidate their positions - a cash printing press day for them.

So, here we are a day later with the smoke rising from the rubble of the collapse like some post war scene.

Where does it all go from here?

I believe this is yet another shakeout that will inoculate the market from the bullshit that still floats past more often than it should.

NFTs were already experiencing the bubble pop, as well they should. We don't need another iteration of fairy land magic crypto money and Beanie Babies.

Like tokens and blockchain that came before NFTs, yes, there are countless ways to apply the technology in meaningful, useful ways far beyond making expensive JPG files that continue to prove Thorsten Veblen and his "Theory of Conspicuous Consumption" as true and valid.

A fool and his money are soon parted.

Meanwhile, the overall systemic risks to traditional markets exposed to the persistent "Wild West" of crypto will be the siren's call for regulatory flame throwing that the industry still needs.

I'm just sitting here with regulatory compliance solutions for the marketplace that applies the technology to traditional uses in a sensible, rational fashion with real-world use cases emerging along the slower, regulatory-compliant lines.

It's not glamorous or fast. It's arduous, slow, and painful to have committed to the path of most resistance - but also the one that I believe will emerge as the winner in the race.

Stay frosty my friends.

Until then, learn more about XDEX, our governance, risk, and compliance market infrastructure oracle network solutions for decentralized capital markets at 10XTS.

(ps. not legal or investing advise, hire licensed people who know what they're talking about in those capacities if you're in need)