The launch of the first Bitcoin-focused exchange-traded fund last week proves that crypto bulls have to meet John Law. The Scottish gambler, economist and financier is probably why so few top French banks have Banque in their name. Instead there is Crédit Agricole, Société Générale and Crédit Mutuel. Laws Banque Générale, later renamed Banque Royale, issued banknotes out of nowhere, then exploded royally in 1720, devastating the French economy. The reputation of French banks has never fully recovered.
Law’s connections gave him the exclusive rights to trade between France and his Louisiana territory. Mississippi Co. was financed by the sale of new shares in Banque Générale, which could be paid for in Banque Générale banknotes. From January to December 1719 the shares rose from 500 livres to 10,000 livres. Soldiers had to be sent to keep order in the frenzied financial district.
Law’s mistake was to randomly issue banknotes with no real value of money to keep the stock price higher. The French government eventually made the big mistake of making these banknotes legal tender, thereby doubling the French money supply. Inflation raged, reaching a monthly rate of 23% in January 1720. By September 1721, stocks had dropped back to 500 and the French economy imploded.
Fast forward 300 years. Crypto had a big October in which Bitcoin rose from nearly $ 44,000 to a high of $ 66,000 in anticipation of the ProShares Bitcoin Strategy ETF, which actually doesn’t buy bitcoins but buys bitcoin futures. In the meantime, stablecoin issuer Tether Ltd. a $ 41 million penalty after the Commodity Futures Trading Commission found the company falsely claimed it had sufficient dollar reserves to secure its tokens.
The New York attorney general’s office conducted a similar investigation into Tether’s allegation of one-to-one US dollar support. It ended unsatisfactorily, if you ask me, with a $ 18.5 million payment in February and an agreement to report reserves for Tether. Why not keep digging? Tether has neither admitted nor denied the attorney general’s findings.
I wanted to know more, so I filed a Freedom of Information petition with the New York attorney general to request reserve statements, ledgers, and banking records from Tether. This was denied citing disclosure that would “constitute an unjustified invasion of privacy” and “disrupt law enforcement investigations or legal proceedings”. Thanks for nothing.
Tether released vague pie charts of its $ 42 billion in “reserves” in May. Only 5% was in cash or treasuries, and about half of Tether’s backing was unnamed commercial paper. Is it a JPMorgan Chase AAA rated paper or a Dogecoin backed promissory note? You do not say. When Coindesk filed a FOIL request for documents detailing Tether’s reserves, Tether attempted to block them, arguing, “The competitive advantages Tether gains from its investment strategy would be undermined if competitors had full insight into the Investments from Tether. “
The attorney general’s office released details of a fascinating game of cat and mouse in its settlement agreement after discovering that “Bitfinex and Tether have deceived customers and the market by overusing their reserves.” Through September 15, 2017, an account with the Bank of Montreal held most of Tether’s cash, approximately $ 61.5 million to cover the 442 million Tether in circulation at the time. Not 1 to 1. The sister company Bitfinex held 382 million US dollars in a “Comeled” [sic] Account ”, which Tether referred to as“ Claim ”. Tether was taking money on another company’s balance sheet as its own reserves.
It’s going to be fun here. Tether hired Friedman LLP on September 15, 2017 to provide “advisory services” to “analyze our bank balances”. That morning, Tether opened an account with Puerto Rico-based Noble Bank, and later that day, Bitfinex transferred more than $ 382 million to Tether’s account. Friedman checked Tether’s fortune that evening.
According to the settlement agreement, Bitfinex and Tether dropped Noble Bank in October 2018 and opened an account with Deltec Bank & Trust Ltd. in the Bahamas. On November 1, 2018, Tether posted a letter on Deltec’s letterhead stating that the present portfolio value of its account was over $ 1.8 billion as of October 31. On November 2, according to the Attorney General’s office, Tether began transferring a total of $ 475 million to Bitfinex accounts with Deltec, clearly a game in which the assets were passed on.
Can we trust Tether, which has increased from 21 billion to 69 billion Tether in circulation this year? Doesn’t that sound a bit like John Law’s Banque Royale, which issues banknotes? And what does Tether buy? It is unclear. Recent Cayman Islands independent accountant disclosure – no auditing – for Tether Reserves shows lots of commercial paper and certificates of deposit and secured loans. Only about a third of its reserves are cash and treasuries.
How about a real audit? Recently, the Biden government announced that it was considering regulating stablecoin issuers as banks. Prescribing transparency for crypto would go a long way. But it could get ugly for crypto investors. In June, the stablecoin IRON, which was supposedly “softly pegged” to the dollar, fell from $ 1 to below 70 cents after TITAN, its collateral token, suffered frenzied sales of $ 2 billion in losses in just a few hours had dropped from about $ 64 to almost zero.
Are stablecoins like Law issued for better or worse and increase the volatility of Bitcoin and other cryptocurrencies? How much leverage is there in the crypto world? The Bahamas-based crypto exchange FTX allowed 100x leverage for margin trading, though the company reduced it to a still insane 20x in July. According to Bloomberg, part of Tether’s reserves includes a $ 1 billion loan to Celsius, a crypto loan startup. If cryptocurrencies are to become the backbone of a modern financial system, we should put them to the test before a banque royale-like bubble bursts in the real world.
Write to kessler@wsj.com.
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