US Treasury Turns Its Gaze to Stablecoin Issuers

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PLUS: SushiSwap's $3M NFT exploit, Ripple's XRP money market and more |

The biggest crypto news and ideas of the day

Sept. 17, 2021

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Today's must-reads

Top Shelf

RISKS TO STABILITY? The U.S. Treasury Department is preparing a report on stablecoins and their potential risks to the financial system for a presidential working group. A team of top financial regulators, including Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell and Securities and Exchange Commission (SEC) Chairman Gary Gensler, last met in July to discuss stablecoins and the issuance process.

PUBLIC TENDERIZES: El Salvador’s public management watchdog will investigate the government’s use of the country’s public treasury for bitcoin purchases. Regional human rights and transparency organization Cristosal filed the complaint. Meanwhile, credit rating agency S&P Global said El Salvador’s decision to adopt bitcoin as legal tender had “immediate, negative implications.”

MART THEFT: An NFT auction on the MISO token launchpad built on SushiSwap appears to have been exploited. The attacker made off with roughly $3 million in ETH, SushiSwap CTO Joseph Delong tweeted Thursday. Sushi representatives allege that Github user “AristoK3″ replaced JayPegsAutoMart’s wallet address with their own on Sushi’s frontend – it was the only project attacked. The funds have reportedly been returned. Something of a breakout success, Jay Pegs is a farcical NFT project that draws inspiration from used car dealerships.

RESEARCH & DEVELOPMENT: Shanghai will use Conflux’s blockchain infrastructure for a test of the digital yuan in offshore markets in the city’s Lin-gang Pilot Free Trade Zone, home to Tesla’s Gigafactory, Siemens and General Electric. The experiment will be conducted by the new Shanghai ShuTu Blockchain Research Institute established by Conflux and the state-owned Shanghai Maritime University, according to the statement.

RIPPLE BUILDS: Ripple, the global payments company currently sparring with the SEC, is looking to build a crypto market-making platform. The firm is looking to recruit as many as 10 people in total to be split between three hubs: London, New York and Singapore.

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Sound Bites

"We never want to be expressing frustration with regulators on Twitter."

–FTX CEO Sam Bankman-Fried, on CoinDesk's “First Mover".

What others are writing...

Off-Chain Signals

“[T]he NFT art form is beautiful, some individual manifestations of this art form will be ugly, crass, and devoid of creativity,” Arthur Hayes (Medium) Fidelity Digital Assets finds 90% of surveyed investors find digital assets appealing. The full report (MK Manoylov/The Block) “Crypto trader James Harper, who sought to stop the U.S. government from accessing details of his crypto holdings, was derailed for a second time” (Protos) Forefront raises $2.1M to Build the “Port of Entry” to Web3 Social Clubs & Digital Cities (Mirror) More than 60 cryptocurrency exchanges in South Korea must notify customers of a partial or full suspension of trading by Friday midnight, a week before a new regulation comes into effect (Reuters) Biden will step up efforts to prevent ransomware attackers from using digital currencies (Ian Talley and Dustin Volz/WSJ) Fred Ehrsam on the value of NFTs (Nick Bilton/Vanity Fair)

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Putting the news in perspective

The Takeaway

The Risk in Evergrande’s Stablecoin Sandwich

The stablecoin issuer Tether this week declared that it doesn’t hold short-term debt issued by troubled Chinese real estate developer Evergrande. Since Tether doesn’t disclose specifics about the commercial paper that substantially backs its “stablecoin,” this is a bit like serving a houseguest a sandwich and loudly assuring them that the meat is NOT from a diseased horse.

It seems increasingly likely that Evergrande is fated instead for the glue factory. But it could still take Tether with it, depending on what’s actually in that stablecoin sandwich.

Though its main product since its founding in the 1990s has been housing, Evergrande has grown into a huge conglomerate with products ranging from bottled water to electric cars to a soccer team. It expanded by borrowing aggressively, including during periods when China’s economic outlook was seen in much rosier terms globally than it is now.

Evergrande has failed to execute on the promises backing its roughly $300 billion in debt, particularly in housing. Among other signs of serious mismanagement, customers have made large deposits on Evergrande apartments that were never built. Hundreds of customers have protested in front of the company’s offices alleging mistreatment or fraud.

But this is not just about one company: Even if Tether doesn’t specifically hold any of Evergrande’s short-term debt, it could have huge exposure in the form of other Chinese obligations. The developer’s debt is spread across an army of banks and other financial institutions, leading some analysts to worry that its collapse would have systemic impacts comparable to the fall of Lehman Brothers, which kicked off the Great Recession 13 years ago. Debate swirls about whether that impact would spread beyond China, but there’s broad agreement that impact within the country would be near catastrophic.

Evergrande is just the latest major Chinese firm to have serious problems due to apparent fraud or mismanagement. A wave of smaller stock frauds from 2010-2016 were chronicled in the documentary "The China Hustle," and Luckin Coffee put an exclamation point on the trend in 2019.

These frauds even show some sign of being tacitly approved by the Chinese government, to the extent that they have targeted investors abroad. It’s been going on for a long time – one analyst who warned about Evergrande’s practices as early as 2012 was temporarily banned from Hong Kong markets by regulators for his “reckless” claims.

China’s loose (at best) financial regulatory environment is one reason anxiety around Tether has largely centered on whether it holds Chinese commercial paper in general – not just whether it holds Evergrande’s.

Over the past year, yet another headwind has entered the China mix. After a couple of decades of relative freedom for entrepreneurs (including, as mentioned, the apparent freedom to commit securities fraud), Chinese leadership under Xi Jinping has begun to directly intervene in markets. That has included harshly curtailing apparently successful fintech firms like Ant Group and, most recently, instituting restrictions on video games, which can't be good for Tencent and other firms.

That type of heavy-handed control is at the core of China’s conundrum as an authoritarian state trying to reap the rewards of capitalism. Markets can’t function without transparent information flows, full stop. The systematic suppression that characterizes Chinese markets adds an opaque but potentially huge risk for the holders of any Chinese asset – even if that risk is wrapped up in a supposed stablecoin.

–David Z. Morris

Sponsored Content

BTCS: Nasdaq Listing Brings BTCS to Mainstream Markets

The crypto markets are becoming increasingly mainstream as new institutional investors and traditional financial services companies enter the markets daily. Just last week financial services giant Citigroup announced that due to the intensity of client requests, it was setting up a crypto derivatives team. Citi’s move reinforces the revelation the previous week that 90% of Fidelity’s institutional clients had shown an interest in bitcoin. The move of mainstream financial firms into crypto is in full swing.

But the trend is also working the other way, as more crypto firms are going mainstream. Some are adding traditional financial services products, such as FX or options trading, to their product suites. Others are applying to be regulated by the traditional market regulators. A third way this trend is playing out is by crypto firms seeking the ultimate market recognition: a listing on the U.S. public equity markets.

One such firm is BTCS Inc., which began trading on Nasdaq under the ticker symbol BTCS on Tuesday.

The Chaser...