July 10, 2022 | Issue 23
CONTAGION IN THE CRYPTO ECOSYSTEM
I lived three blocks from the ocean in the Pacific Beach section of San Diego. Most days, I would take a long bike ride and finish at the beach to watch the sun disappear over the horizon. At night time, I'd sleep with my window open and listen to the waves crashing against the shoreline.
I marveled at the power and beauty of the ocean, but I didn't appreciate it as an interdependent ecosystem until I had a summer job at Sea World as a tour guide. During my training (in the 80s the word "onboarding" hadn't been invented yet), I was handed a three-inch binder filled with photos and facts of all the
animals and plants at Sea World. I was instructed to prepare ten talks about the park's attractions.
I learned about whales, dolphins, penguins, sea lions, walruses, sharks, fish, and the tide pools. I also discovered that the oceans function as an interconnected system. They are fragile and resilient. Ten years after living in San Diego, I moved to South Florida. As an environmental lawyer, I had an opportunity to learn about another ecosystem – wetlands.
In the mid-1990s, Broward County developers were building new homes on massive tracts of farmlands that were once thriving wetlands.
As a condition to obtaining a building permit, many developers had to agree to restore a portion of the property back to its original wetland condition.
Not surprisingly, many of the wetland projects languished and failed after the developers finished their work and homeowners associations had to maintain the wetland mitigation projects. A small patch of wetlands surrounded by roads and homes didn't have much a chance to survive.
One solution to the failing mitigation restoration projects was to aggregate tiny wetland projects into larger projects.
I partnered with another law firm, an environmental engineering firm, and a world-renowned wetland biologist to create the first federally-permitted entrepreneurial wetlands mitigation bank in the US. We borrowed the concept of carbon credits and created Florida Wetlandsbank. We sold wetland credits to developers and used the money to build a 345-acre thriving wetland. The project was successful and we replicated it elsewhere.
Fast forward to today and I'm living next to another wondrous ecosystem – the protected forest of the Watchung Preserve in New Jersey.
Walking the trails daily (without my iPhone) is calming and inspiring. Watching how the forest and animals adapt to the seasons is fascinating.
However, I didn't understand the forest in my backyard until I started reading about trees.
Trees in a forest are part of a community that work together.
Look up at the canopy and you'll see that most trees stop growing its branches when it touches another tree's branches at the same height. This ensures better air flow and light for all the trees.
Nature teaches us that healthy ecosystems evolve by developing a system of inter connectedness. Weak connections fail and strong ones take their place. The healthy trees, plants, and animals survive and thrive.
I see this happening in the crypto ecosystem.
In May, stablecoin USD Terra was not able to maintain its correlation to the US dollar because it was built on a faulty foundation. Unlike Tether and USD coin which are backed by assets such as cash and short-term US government securities, Terra was an "algorithmic stablecoin." As withdrawals increased, it sought to prop up its stablecoin by creating new coins, Luna coins.
The best lay explanation I read was from CZ, CEO of crypto exchange Binance. He said, "The design flaw: minting coins (printing money) does not create value, it just dilutes the existing coin holders."
When the dust settled, $50 billion disappeared.
USD Terra wasn't a lone tree in the crypto forest. It had roots connected to other crypto trees.
Celsius, a crypto lending platform, was having problems recovering money from its customers and froze customer withdrawals in June. Celsius had managed $11.4 billion in assets and had 1.7 million customers.
As Celsius was collapsing, it lost billions of assets from hedge fund Three Arrows Capital (3AC). 3AC filed for bankruptcy as did Voyager. BlockFi obtained a lifeline loan from FTX.
As Substack writers Nik Bhatia and Joe Corsorti published in their newsletter, The Bitcoin Layer, "This all made for a spectacular ‘Lehman moment’ for crypto — only in this instance, there are no bailouts. The free market immune system did its work by eliminating the fragile market participants. Only strong, healthy balance sheets will survive."
Bitcoin is fundamentally different than the crypto companies who have died or are on life support. Those who hold bitcoin are not holding someone else's liability.
I believe the crypto ecosystem is being challenged and that it will survive.
Reach out to me and let me know your thoughts.
Have a productive week and stay crypto curious!
Rich Hopen
richard.hopen@compass.com | 908.917.7926
PS. You can find all CNR newsletters here.
PSS. This newsletter is supported by home buyers and sellers in NJ who retain me as their real estate agent. If you know of anyone looking to buy or sell a home, please reach out to me.
CRYPTO NEWS
▸ Wall Street Journal to SEC Chair – Back Off
Last week, I reported that the Security & Exchange Commission denied a request by Grayscale to convert one of Grayscale's crypto products into a "spot ETF." (A spot ETF is an exchange traded fund that trades on the current price.)
On January 6, the Wall Street Journal published an editorial and chastised Chair Gensler – "[He] has his regulatory eye on cryptocurrency markets, and he's taking investors hostage in the process."
One of the biggest "friction points" for potential crypto investors is buying crypto. Purchasing crypto through a crypto exchange platform such as Coinbase or Gemini is laborious.
Cautious investors will need to move "custody" of their crypto from the exchange to their own wallet. This keeps their crypto away from hackers and ensures that a failing exchange won't freeze their crypto in the event of a liquidity problem.
If there was a spot bitcoin ETF, retail and institutional investors would be more inclined to purchase crypto.
Gensler cites the potential of market manipulation as the reason for rejecting their application. According to the WSJ, Gensler's argument is flawed, "[T]he $390 billion bitcoin market is the deepest and most mature of all crypto-currencies. It would be hard for an investor to game."
Grayscale filed suit against the SEC. Congressional members of both parties sent letters to Gensler expressing their disapproval.
The WSJ editorial concluded that Congress should call Gensler to testify to explain that "he's undermining crypto innovation and investor protections – and remind him who controls the agency's purse-strings."
â–¸ Crypto Card Companies Planning Their Move Into Crypto
Credit card companies believe that payment by crypto could become the dominant form of payment and they do not want to be left behind.
Mastercard, Visa, and PayPal are working closely with third parties
who convert crypto to local currency. Another approach for the credit card companies to enable crypto payments is to have consumers make a payment tied to a stablecoin. Crypto firm Nexo worked with Mastercard to offer a credit card backed by a customer's cryptocurrencies. Consumers use their crypto as collateral. The card is operational in Europe and should launch in the US this fall.
â–¸ Crypto Firm Voyager Digital Filed for Bankruptcy & Is Being Investigated by FDIC
Voyager Digital, a lender and brokerage, was unable to withstand falling crypto prices and froze customers' withdrawals.
The firm had lent $650 million to failed hedge fund Three Arrows Capital which was not repaid. Three Arrows was ordered to liquidate this week.
Voyager filed for bankruptcy protection this week.
While seeking bankruptcy protection, Voyager learned that it is being investigated by the FDIC.
Voyager marketed to prospective customers that funds were insured through its banking partner, Metropolitan Commercial Bank.
However, the FDIC insures banks and not other entities who have relationships with a bank.
â–¸ US Treasury Releases "Fact Sheet" for International Engagement on Digital Assets
The Treasury published a fact sheet in response to President Biden's executive order on crypto. The report details Treasury's close cooperation with international groups, such as the G7, G20, the Organization for Economic Cooperation and Development (OECD), and the IMF.
Here are several key statements pulled directly from the report:
â– The United States continues work on the G20 roadmap for addressing challenges and frictions with cross-border payments.
â– The United States must continue to work with international partners on standards for the development of digital payment architectures and CBDCs to reduce payment inefficiencies and ensure that any new payment systems are consistent with U.S. values and legal requirements. (CBDC is central bank digital currency)
â– The United States will explore opportunities for joint experimentation on digital assets technologies, market innovations and CBDCs, with this core set of allies and partners to increase our shared learning about ways to develop systems that meet our shared policy objectives.
CRYPTO CLASS – CRYPTO ASSETS
If you visit the popular crypto publication CoinDesk, you'll see The CoinDesk 20. This is a ranking of the top 20 cryptocurrencies and digital assets. It accounts for 99% of the market at the largest eight exchanges.
Investors can purchase these "coins" on many of the larger exchanges.
CoinDesk groups the asset categories into cryptocurrencies, software platforms, stablecoins, and application tokens.
Cryptocurrencies include Bitcoin (BTC), XRP, Stellar (XLM), Dogecoin (DOGE), and Shiba Inu (SHIB),
Software platforms include Ethereum (ETH), Solana (SOL), Cordano (ADA), Polkadot (DOT), Avalanche (AVAX), and Cosmos (ATOM).
Stablecoins include Tether (USDT) and USD Coin,
Application tokens include Chainlink (LINK), Polygon (MATIC), Decentraland (MANA), and Loopring (LRC).
CoinMarketCap states that the global crypto market cap is $950.47B and includes 20,169 cryptocurrencies.
The top 10 cryptocurrencies and their market cap are as follows:
1. Bitcoin – $408.7B (43% of the market)
2. Ethereum – $147.3B (15.5% of the market)
3. Tether – $65.9B
4. USD Coin – $55.5B
5. Binance – $39.8B
6. Binance USD – $17.5B
7. XRP – $16.6B
8. Cardano – $16.1B
9. Solano – $13.0B
10. Dogecoin – $9.2B
INFLUENCERS - People to follow
Andreas Antonopoulos – @aantonop
Antonpoulos (49) is a computer scientist and tech entrepreneur. He wrote Mastering Bitcoin (2014), Mastering Ethereum: Building Smart Contracts and dApps (2018) and the Internet of Money, Volumes 1-3 (2016, 2017, 2018). He is a host on the podcast Speaking of Bitcoin.
RESOURCES – Books, websites, podcasts, interviews, articles
The podcast Speaking of Bitcoin often has lively discussions on a hot topic. It appears that the podcasts have slowed during the summer months, but there are some great shows in the library.
CRYPTO WORD – Altcoin An alternative coin is any cryptocurrency other than bitcoin.
OH, ONE MORE THING –
Thanks for reading! See you next week.
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