Stablecoin News for the week ending Wednesday 23rd November.

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Here is our pick of the 3 most important stablecoin stories during the week.

Stablecoins are the Canary in the Crypto coal mine! 

This week we continue to see the shakeout from the FTX implosion and stablecoins point to it continuing for some time yet. 

Binance, Crypto.com and OKX suspended deposits in Circle’s (USDC) and Tether’s (USDT) stablecoins based on the Solana blockchain.

Victoria Davis, Crypto.com’s VP of corporate communications, later clarified in an email to Axios, “We have temporarily disabled the ability to withdraw or deposit USDT and USDC via the Solana protocol due to Solana network conditions and the risk posed by the significant role of FTX as a Solana-based stablecoin bridge and trading venue.”

Some alarm bells were raised when the yield on Circle’s Earn product showed zero on versus 0.25% the day earlier.

The change seemed to coincide with Genesis Global‘s crypto lending unit announcing that it would halt customer withdrawals and loan originations, which led to the Winklevoss twins’ exchange Gemini suspending its yield-earning Earn product.

“Circle chose to change the yield from 0.25% yield to 0% before Genesis closed their credit lines,” Busch, the spokesperson for Circle, says. “Circle Yield has historically been driven by demand to borrow in crypto capital markets.”

Crypto exchanges mum on abrupt stablecoin deposits halt

Meanwhile a JPMorgan report measured investors’ exodus from the crypto ecosystem as shrinkage of the stablecoin market.

The combined market cap of the largest stablecoins reached a peak of $186 billion in May, before the Terra/LUNA collapse, the note said. That compares with less than $30 billion at the start of 2021 and about $5 billion a year before that. Since May, the stablecoin universe has dropped by $41 billion, with just under half of the decline attributed to the demise of Terra.

This outflow of looks small relative to the $165 billion that had entered the crypto market via stablecoin creation in 2020 and 2021, “but it would be difficult here to imagine a sustained recovery in crypto prices without the shrinkage of the stablecoin universe stopping.”

jpmorgan-the-shrinking-stablecoin-market-is-another-sign-of-investors-exodus-from-crypto

In some positive news, USDA would be the first fully fiat-backed, regulatory-compliant stablecoin in the Cardano ecosystem.  The issuance will be  partnered with a regulated financial services company based in the United States as the banking partner, ensuring the stablecoin is fully compliant and adheres to regulatory guidelines

cardano-based-regulated-stablecoin-usda-will-hit-the-market-in-early-2023

So in summary as the Crypto market continues to wobble it will be the stablecoin market that indicates when prices will stabilise and potentially grow as funds and confidence begin to return.

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Alan Scott is an expert in the FX market and has been working in the domain of stablecoins for many years.  

Twitter @Alan_SmartMoney

We have a self imposed constraint of 3 news stories per week because we serve busy senior Fintech leaders who just want succinct and important information.

For context on stablecoins please read this introductory interview with Alan “How stablecoins will change our world” and read articles tagged stablecoin in our archives.

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Daily Fintech Alt Lending Week Ending 18th November 2022

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Is this finally the end of the crypto saga?

I can’t say that you read it here first, but I have been consistent within this column in refusing to believe in the crypto currency story. FTX might not actually be the archetypal financial con but a con it most certainly was whether by accident or by design. I discussed the whole thing with a colleague who understands the crypto business better than most and he compared it to Enron? As in most of these stories some innocent people were almost certainly caught up in doing things which were illegal, but they might have not known about it? To me the great lesson to be learned from a huge financial disaster is that the fact that a company is regulated does not save you from being swindled. The EU added credibility as Cyprus granted a license to FTX less than two months ago. To its credit the UK’s FCA warned the UK public against trading with an unlicensed unregulated entity but FTX had been licensed in quite a few respectable locations but that has not helped one iota. The UK only seemed to warn people because FTX was in the Bahamas. The FCA also recently granted a license to Revolut which moved a lot of their trading to Lithuania earlier this year? My colleague told me that the real problem was that an affiliated company Alameda Research was gambling with client’s money. He told me that this was not a research company but a proprietary trading desk and that the traders were “ true believers” in the asset class and were therefore always holding a long position. I told him that was the key shortfall of crypto. By definition you cannot take a short position in something that doesn’t actually exist in any tangible form. Caveat Emptor.  

Morrison owner shields £ 6.5bn. from rising interest rates.

I found this piece quite interesting as it somehow seems to assume that just because you have an interest hedge then everything is hunky dory. Clayton, Dubillier and Rice are Wall street players but no doubt consider themselves to be world players. I don’t know anything about them but I wouldn’t mind betting that thew rationale for acquiring Morrisons in the first place had very little to do with next to zero interest rates. The purchase took place in October of 2021 when conditions were much different to today. This was a leveraged buy out which almost certainly means that the buyers borrowed most of the money in Sterling thereby creating a partial hedge against the capital sum. However, if the leverage was let’s say three times this would have left the buyer with a 25% sterling liability. Since the Russian insanity in Ukraine the American dollar has surged as a safe haven (under Biden?) Just  the same I would like to be fly on the wall when CDR’s hedging committee next meets. Hedging has costs and risks attached to it. Nothing comes cheap and whatever else comes out of this deal it doesn’t look like a good deal for the buyer nor for he banks that financed it.

UK Insolvencies hit six month high

As the UK chancellor takes aim at the British Economy a warning that things are not at all good in the credit markets. Insolvencies of UK companies have risen by nearly 40% year on year. Part of this is due to the support given to the walking dead through artificial COVID support loans, another giant folly mainly caused by the UK Government in the first place. Many of the companies which are in trouble now have been in trouble for ages and would not have survived in a normal interest rate environment anyway but it will prove to be a dire headache for the bankers that will have to pick up the pieces. As I have mentioned many times before the real problem is that there is shortage of people mot just in the UK but worldwide who have the ability to recognise value and to know how to save what is valuable. Britain is the first economy in Europe to have to address this problem but it will be everywhere as soon as the ECB recognises that it cannot go on printing virtual money for ever. That point cannot be far off. The UK has a relatively strong banking system but that does not apply to some other Eurozone economies. Today the ECB warned that the Eurozone faces threats to its financial stability. Yesterday we were told that Japan faces a downturn with economic fundamentals far worse that the UK.

Howard Tolman is a London based well known ex Banker, Entrepreneur and IT specialist

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Stablecoin News for the week ending Wednesday 16th November.

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Here is our pick of the 3 most important stablecoin stories during the week.

As FTX blows up stablecoins hang in there. 

This week while FTX burned down to the ground, thankfully stablecoins managed to stay for the most part stable.

With volumes of trades at unprecedented levels as customers rushed to the exists, 

USDT transactional activity jumped to a four-month-high.  Tether Global Chief Technology Officer Paolo Ardoino pointed out in a Thursday tweet that over 700 million USDT were redeemed for U.S. dollars in the past 24 hours. “No issues. We keep going,” he said.

Tether’s USDT Stablecoin Drops 3% Below $1 Peg

Meanwhile in CBDC land, the BIS discovers that convenience is not only good for customers but also for Central Banks.  Good to know.

“More and more central banks are transitioning from thinking about central bank digital currencies (CBDCs) in conceptual terms to considering a launch. Attention has shifted from high-level monetary policy and financial stability considerations to country-specific design and policy interactions.

Large banks have a competitive advantage that the introduction of a CBDC could amplify or reduce, depending on the design choices. A highly convenient CBDC produces sufficient competitive pressure in deposit markets to raise deposit rates for any given level of IOR and increases the responsiveness of deposit rates to IOR rate changes. Increasing payment convenience also has favourable effects on market composition by levelling the playing field. Paying interest on CBDC balances increases deposit rates but is arguably a less desirable policy since this action increases the inequality of market shares and can weaken the responsiveness of deposit rates to IOR rate changes. 

The conclusion is that payment convenience is a crucial aspect of CBDC design that may be more desirable than paying interest on CBDC balances.”

The case for convenience: how CBDC design choices impact monetary policy pass-through (bis.org)

However, just up the road from Basel in Zurich, The Swiss National Bank does not see any overall benefit from issuing a central bank digital currency (CBDC) to be used by the general public and used in day to day transactions, governing board member Andrea Maechler said on Tuesday.

“We believe the risks outweigh the benefits,” Maechler told a financial conference held in Frankfurt, saying a retail CBDC meant central banks taking on the risks carried by the private sector and increased the risk of bank runs.

There also needed to be a balance struck between safeguarding privacy and the potential misuse of retail CBDCs in criminal activity, Maechler said.

Swiss National Bank against issuing retail central bank digital currency | Reuters

So in summary, the Crypto Infrastructure, of which stablecoins are a central pillar, was given one hell of a stress test this last week, while Central Bankers continue to stare at their navels about the usefulness of customer convenience.

_________________________________________________________________________________________________________________________________

Alan Scott is an expert in the FX market and has been working in the domain of stablecoins for many years.  

Twitter @Alan_SmartMoney

We have a self imposed constraint of 3 news stories per week because we serve busy senior Fintech leaders who just want succinct and important information.

For context on stablecoins please read this introductory interview with Alan “How stablecoins will change our world” and read articles tagged stablecoin in our archives.

https://dailyfintech.com/2022/11/16/stablecoin-news-for-the-week-ending-wednesday-16th-november/?utm_source=rss&utm_medium=rss&utm_campaign=stablecoin-news-for-the-week-ending-wednesday-16th-november

Is crypto a regulated asset or a disruptive technology?

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The FTX blow up has highlighted this strategic question.

This is one WITHOUT a magic quadrant. Crypto is either a regulated asset or a disruptive technology – but it cannot be both.

If you believe that crypto is a regulated asset, the easy trade is to buy Coinbase stock (COIN). Coinbase is fully regulated in the biggest market. However,  that is a possibly unwise investment as there is something not right about a centralised regulated exchange as an on & off ramp for decentralised permissionless networks.

Regulators need to hold somebody accountable and that means a centralised permissioned network. Regulators can hold Coinbase accountable, but not Bitcoin.

Decentralised permissionless networks, such as Bitcoin and Ethereum are by nature disruptive – you CANNOT regulate them even if you can regulate their on and off ramps.

Every bull market has a narrative, which bear markets then debunk. The next bull market answers that bear market debunking. Look at Bitcoin/BTC market cycles since 2009:

  • The 2013 bull market narrative (when very few people were paying attention) was “maybe this will actually be real” and the BTC price went to over $1,000. The bear market debunking was “well show me a real use case.”
  • The 2017 bull market narrative was about ICOs changing early stage fund raising (the real use case) and the BTC price went to over $19,000. The bear market narrative was that most ICOs were a failure for investors, . 
  • The 2021 bull market narrative was about institutional money. Anarchic crypto was now wearing a suit. It was all about regulation, no more of those crazy ICOs. Crypto was just one more asset in the everything bubble.   

The FTX blow narrative is all about regulation – without explaining what regulator will police a business such as FTX  with over 100 entities all over the globe. Legacy exchanges have blown up, but then regulation prevented future blow ups by having a simple rule that prevents a regulated exchange from using customer assets. So this is easy if crypto exchanges submit to a single jurisdiction.

The next bull market narrative will have to show a use case that is more than one more asset for institutions. I think this will be a “first the Rest then the West” story but I do not know when the next crypto bull market will start.

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FTX & naked swimmers in a bear market

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Warren Buffet, who has a way with words, said only when the tide goes out can you see who has been swimming naked. During 2022 the tide has been out in a tough bear market and FTX has been swimming naked. So I decided to dig in and try to get some perspective amid all the clickbait noise.

First, in case you need a news 101,  Bankman-Fried’s FTX is a big cryptocurrency exchange on the brink of collapse amid liquidity concerns and allegations of misused funds. Bankman-Fried told investors that Alameda owes FTX about $10 billion, which FTX loaned to Alameda using customer deposits. Before making the loan, FTX had just $16 billion in assets, meaning it lent out more than half of its assets.

Headlines blare comparisons with all the big past blowups, so I started by looking at total amounts involved. I was surprised to learn that Madoff was bigger than Lehman. The big difference is that Lehman was a systemic risk, meaning all counterparties were at risk.

In all cases,  the reputational loss is massive. People like Sam Bankman-Fried fooled supposedly smart investors such as Sequoia Capital. And market prices fall, in some cases close to zero such as the  FTT token (which is akin to equity in FTX).

Re the skullduggery between Binance and FTX, this is a tale of two sharks and one wins. I was going to put Binance in the Cui Bono (who wins) category but decided on a new category which is Wait and See.

First Cui Amisit (who loses):

  • FTX shareholders such as Sam Bankman-Fried and Sequoia Capital
  • FTX Depositors aka traders who held crypto at FTX. $10 billion is not big compared to other big past blowups, but this is lots of people losing their life savings – ugh. But Wait and See, some money was recovered from Madoff and Mt. Gox.
  • Altcoin Investors. Even crypto blue chips like Bitcoin/BTC and Etherum/ETH took a hit but some crypto have been hammered and may not recover. 

Next Cui Bono (who wins):

  • Legacy Finance. An old fashioned bank or regulated exchange looks good compared to FTX. Oh and Legacy Finance assets may be moving from bear to bull market.
  • Coinbase. A fully regulated cryptocurrency exchange looks good compared to FTX.
  • Non custodial wallets, where an exchange cannot take your assets, looks like the right technology if you think the future will be self regulated

In the Wait and See category:

  • Binance. Will they win as last man standing? Or will traders shun their risk as being too much like FTX?
  • Crypto blue chips like Bitcoin/BTC and Etherum/ETH Bitcoin. Is this end of bear market capitulation or sign of a bubble popping?

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Alt lending week ending 11th. November 2022

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Is Musk’s Twitter deal such a good idea?

Interesting story from The Daily Telegraph questioning the wisdom of the controversial takeover by Elon Musk of Twitter. This saga began in April this year there have been many twists and turns along the way.  However, the biggest must be the seismic changes in the capital markets and the move away from the anything goes deal in the markets to a more sceptical and risk averse stance. This is not surprisingly a leveraged deal and much of the $ 44 billion needed to complete the purchase has been provided by a group of banks led by Morgan Stanley, Bank of America, and Barclays. As a trained analyst and an ex-arranger of syndicated loans for one of the said banks I can confidently say that in my day getting such a deal approved would be impossible. The difference is that these days “investment banks” don’t intend to keep the risk on their books. When I was underwriting, I had to look at how the asset would look on the books not just of my bank but a whole load of other lenders, mainly banks. The boys these days are like celebrity chefs cooking up a meal that looks great on the menu but can give you sever stomach cramp if anything goes wrong. Well in this case it has. Interest rates are rising aggressively and Twitter, which has never made much money since it went public is already highly leveraged. The interest burden is pushing it into the red as we speak. The lead management group have already conceded they might have to hold the Twitter paper longer than they expected. It could be long time indeed.

Is Bank of England making a mistake?

A paper written by Credit Suisse analysts argue that the Old Lady’s pronouncement on the expected peak of Sterling interest rates are underestimating the impact of the consistently tight labour market in the UK on inflation. Well they may be right but firstly who wants to listen to what Credit Suisse has to say about anything at the moment. Having said that the Bank of England’s forecasting over recent years has been less that impressive to say the least. Economists can say what they like because they always have a good story when they get everything wrong. I remember from my time in Greece having a quarterly bet with my old colleague, Oxford economics guru, George Magnus about the level of the Greek drachma three months hence. I won every time but George could always tell me why I won.

Tales of a Grocer

When writing about lending I am usually focussing on the lender and not the borrower but I was reading an article today about highly leveraged Grocery chain Morrisons which was putting emphasis on how it felt about its current situation. Morrisons has been hit quite hard recently by increased competition from the German discounters and its results have suffered accordingly. Morrisons was the subject of a bidding war some 13 months ago between two wall street houses sniffing a bargain. The winner was Clayton, Dubillier and Rice (CDR)the current owners.  However market conditions are now completely different and in todays world it looks like they have significantly overpaid. As in all such transactions, part of this deal was financed by the company being acquired and the new owners have loaded £ 2billion of acquisition loans onto Morrisons balance sheets. This debt is apparently held by some 19 banks and the paper will nob be significantly downgraded.  So what is Morrison’s view on this. Remarkably sanguine. Apparently these credits have a seven year maturity and the underlying documentation is extremely flexible. This means that there are no financial covenants in danger of breach. It is therefore the banks problem and not theirs. So lenders, the small print is pretty important when buying their party debt. The choices are binary take whatever price is available in the market or sit it out for seven years and hope for the best.

Howard Tolman is a well known London based Banker, entrepreneur and technology specialist.

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