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Bitfinex’ed tells (almost) all about Tether: The Modern Consensus interview

Anonymous critic of Tether and Bitfinex explains why bitcoin is headed to $15

anonymous

As far as we know, this could be Bitfinex’ed (via Pixabay)

  • As pressure mounts on Tether, its harshest critic—the anonymous “Bitfinex’ed”—does an interview with Modern Consensus.
  • Reveals how he—or she—first started investigating Bitfinex and Tether.
  • Claims 2016 hack of 120,000 bitcoins on Bitfinex was an inside job at the highest levels.
  • Argues almost nothing backs up billions in outstanding Tether tokens; suspects recent reports were a “forgery.”
  • Presents bleak view of cryptocurrency and blockchain’s future.
  • Justifies a $10 to $15 price target for bitcoin (yes, you read that right).

 

The vice is tightening on Tether and that could have devastating repercussions on the $200 billion cryptocurrency market.

Though over $2 billion worth of the “stablecoin” is circulating, it has an outsized influence on crypto. Half of all bitcoins traded on exchanges are done against tethers, according to data from CryptoCompare.com; by comparison, the U.S. dollar accounts for just 18.7 percent of trades.

Tethers are supposed to be backed one-to-one by U.S. dollar deposits. But do those deposits actually exist? That is a question that has repeatedly been raised by one of the leading critics of Tether and its sister company Bitfinex, an anonymous blogger going by the name “Bitfinex’ed”. He—or she (or even they)—has been relentlessly hounding the two companies for well over a year. At first, few listened but now the cryptosphere is taking the charges seriously.

Bitfinex’ed agreed to an online interview with Modern Consensus with one big condition: we couldn’t ask questions that would reveal any personal information. That means we have no way of verifying whether Bitfinex’ed has an axe to grind or would benefit from the perception of bad news about Tether or Bitfinex, so readers should incorporate that into their evaluation of this interview.

Tether’s soundness has been called into question by the marketplace, especially since Modern Consensus first broke the story that Noble Bank, the Puerto Rico-based institution where Tether once held their deposit, was in financial trouble. Although Tether is said to now bank with Deltec Bank in the Bahamas, data from CoinMarketCap show tether now trading at 98 cents—on Kraken, it’s as low as 95 cents—and the supply contracting from 2.6 billion tokens to 2.2 billion in the past two days.

In the following interview, Bitfinex’ed questions the integrity of Tether, Bitfinex—one of the world’s largest bitcoin exchanges—and the very foundation of cryptocurrency markets.

It should be noted that the opinions expressed by Bitfinex’ed are solely his or hers, not that of anyone at Modern Consensus.

We reached out to the Wachsman, the firm handling public relations for Tether and Bitfinex, to get a response to some 27 specific charges Bitfinex’ed made in the following interview. We have yet to hear back from them but, if and when we do, we will include those responses.

[This interview was edited for consistency, clarity, grammar, and style.]

 

Tether supply

Tether prices have fallen in recent days, even as supplies have started to shrink (via CoinMarketCap)

 

Modern Consensus: This has to be an interesting time to be Bitfinex’ed. How does it feel to see all this stuff unfold?

Bitfinex’ed: I’m pretty excited. I have a lot of highly intelligent people confirming what I have been saying.

 

Who’s on the list of “highly intelligent”?
B: John Griffin, Amin Shams, Nicholas Weaver, Stephen Palley, Preston Byrne, but these are just the ones off the top of my head. In reality, there are dozens more.

 

So, let’s start from the beginning. What led you to start poking around Bitfinex?

I was a Bitcoin believer, I got in very early, but I never traded because I considered trading to be absurd. I watched trading religiously on second monitors trying to understand exactly what was happening. In early 2017, right after the SEC denied the ETF, I decided to do some more research. My position in Bitcoin was “cannot afford to lose this much money.” So, with the SEC concerned about manipulation, and the logic of “I can always buy back in if I feel the SEC is wrong.” I got out completely and started digging more.

 

Was there something specific the SEC said that caught your eye?

Not really, it was instincts mostly. The SEC comments simply put me over the edge. I already felt that there was something very fishy with the trading after being glued to watching the charts every day.

 

How much Bitcoin were you holding?

Irrelevant.

 

But it was enough—even at early 2017 prices—to make you investigate, correct?

Yes, I actually wanted to buy back in originally. I just decided to do some due diligence before getting back in, now that I had realized profits. So before you invest in something, you do research.

 

What attracted you to Bitcoin to begin with?

I lean libertarian/free market. I was attracted to the programmable aspect of Bitcoin as well.

 

What happened on the screens that made you question the Bitcoin market?

The way the prices would move was always suspect to me, I’d watch the prices move just enough to liquidate a bunch of traders, and then the prices move right back to where they were before the big move. It did not feel organic, especially when there was no news. There was always a joke in BitcoinMarkets, “Bitcoin always moves to cause the most pain.” It always seemed to move against where most margin traders would make their bets, which didn’t seem organic.

 

Was this specific to Bitfinex or were you seeing this elsewhere as well?

It took place on Bitfinex mostly. Bitfinex was the main exchange I watched.

 

Was this before or after “the hack”? [Some 120,000 bitcoins—worth $72 million at the time—were said to have been stolen in August 2016.]

These kinds of manipulations always happened when I watched, before and after the “hack” in 2016. I’d always see the same kind of patterns with Bitcoin. The first hint of a red flag I got was late March [2017], when suddenly Bitcoin would bleed upwards, which was unusual.

 

How would it “bleed upwards”?

At the time I was unaware of why the price on Bitfinex was bleeding up, essentially there was no red candles for an extended period of time. Very unusual at the time.

 

The price just skyrocketed out of nowhere?

Research showed nothing, BitcoinMarkets was quiet about it. Whalepool said nothing about it. It was bleeding up and there was no news. I listened to the [Bitfinex chief strategy officer] Phil Potter [April 4, 2017] interview when they claimed to pay off all of the tokens, and for a moment I thought Bitfinex insiders knew about this ‘good news’ and started loading the truck with Bitcoin. However, a day later on April 5th, I discovered that Bitfinex filed a lawsuit against Wells Fargo.

 

Let’s back up because that’s a key point. Walk through what happened with Bitfinex and “the hack”.

Bitfinex claimed to have lost roughly 120,000 bitcoins, they promised a security audit and a report on what happened. An audit and a report they never provided. I say a “hack” because I think it’s highly possible the “hack” was fabricated. Based on what I know about the exchange, the characters behind the exchange, I think it’s a very big probability the “hack” was intended to cover up an insolvency. The way they applied a haircut on everyone and every cryptocurrency (except for Coinbase) was very suspicious. They then tried to coerce everyone into buying equity into Bitfinex, and then even tried to make so-called “recovery right tokens,” in case somehow they got the stolen Bitcoins back.

Bitfinex

Bitfinex is currently the world’s largest bitcoin exchange (via Shutterstock)

What do you mean “except for Coinbase”?

Coinbase allegedly had an account on Bitfinex. The account on Coinbase did not have a haircut applied to the account, meaning everyone else got a bigger haircut. They of course never told people about that.

 

Coinbase didn’t? Or Bitfinex? And how did you find out about it?

Neither admitted to it. But the New York Times reporter Nathaniel Popper talked about it. Such an admission in August 2016 would have been a giant scandal. There were traders who had very big short positions on Bitcoin and had no exposure to Bitcoin, and they got massive haircuts despite not owning any Bitcoin on Bitfinex. This is actual theft.

 

So they sold “recovery right tokens”?

Yes, the “RRT” tokens were used to try and coerce people holding “BFX tokens” to convert to equity, to use the words of the Chief Financial Officer of Bitfinex, Giancarlo Devasini. “The quickest way to get your money back, is to convert your tokens to equity, and then sell your shares to another shareholder.” There’s another word for that. It’s called a Ponzi scheme.

 

How would it work, according to their plan?

Essentially, Bitfinex wasn’t paying anyone back. They were hoping new shareholders would come in and buy up the equity from hack victims. Bitfinex lost over ten years worth of REVENUE.

 

You argue the bitcoins that were said to have been hacked were to deal with a cash crunch. How would that have worked?

So, if you had $1,000,000 on Bitfinex when they were hacked, and had 0 Bitcoins, and then they lost Bitcoins, they took $360,000 away from you, despite the fact that they did not get their dollars ‘hacked’ like Bitcoin. But this applied to every currency they listed on Bitfinex. Not just Bitcoin and USD.

 

They socialized the loss, in other words.

A pure socialized loss would have applied the losses just to Bitcoin. So, they lose 36% of everyone’s Bitcoin, they give everyone a 36% haircut on their Bitcoins, and if they want, give everyone a token to promise to repay the lost Bitcoins. However, if they did that, it would not solve a U.S. dollar insolvency. If the exchange is short on cash, seizing 36% of everyone’s U.S. dollars would help resolve that, but you need an excuse to do that. Hence, a hack. Or as I call it, a “hack”. The exchange should have gone bankrupt in August 2016 basically, just like MtGox. The losses were too big, and the only way out is to turn it into a Ponzi scheme, again, just like what Mt. Gox did.

 

They clipped only their dollar positions or did they also hit their crypto positions?

Everyone got a haircut except for Coinbase. Everything you held on Bitfinex was applied a haircut. So 36% of your USD, BTC, ETH, whatever, despite them only losing BTC. What they did with the cryptocurrencies they seized from customers remains to be seen. I highly suspect they used those funds for trading and market manipulation.

 

And there was no way to track where your 36 percent went?

Nope, they promised the community a full audit. Both security audit, a report, and a financial audit. They never provided that, and that was for 2016.

 

They kept the doors open in 2016. Then what happened?

Unsurprisingly, now armed with a battlechest the price of Bitcoin continued to rally after the hack, going into December, and the new year. Then there was the big ETF hype.

 

And then the SEC turned it down. Then what?

Immediately Bitcoin prices crashed in response. Interestingly, the prices recovered within a few days despite the fact that the news was very bearish. There was no clear reason why. There was one more crash, and then that’s when prices started bleeding up for no publicly known reason.

 

That’s when you heard Phil Potter’s interview?

The interview where they made a big happy announcement about paying off the “hack” and how they “unGoxxed” themselves. The reality is they artificially increased the valuation of their company from 200 million to 250 million, and sold 50 million equity to people holding BFX tokens. The remainder seems to have been paid off with Tethers, as Tether issuance was on the rise. During this interview there was zero mention of any banking issues. Nobody asked any questions regarding it. However, some traders obviously knew hence the bleeding up trading. The next day, we have the Wells Fargo lawsuit. I grabbed a copy of it and read it, and then immediately figured out why the price was bleeding up. It had nothing to with bullish news, or the “hack” payoff.

 

The valuation came from venture capital investors?

No, the valuation was a number they themselves just invented. And more importantly, a number they invented just as they lost banking and were trying to sue Wells Fargo. I highly doubt they told potential buyers about their banking issues or lawsuit they were about to file.

 

Where did they throw out that number?

It was in the interview. April 4th, 2017. The lawsuit was filed April 5th.

 

So whom did they “pay off” with tethers?

Not everyone could convert to equity (Americans), so they credited these accounts with Tethers/USD on the exchange. However, nobody could withdraw USD at this time. The only way out… Bitcoin. There’s no way to tell if that money they issued ever existed, because nobody could withdraw it. They could only use it to bid up the price of Bitcoin. So it’s quite possible it never existed.

 

Did the issuance of tethers lead to Wells Fargo dropping Bitfinex or was it something else?

Bitfinex is not KYC/AML [Know Your Customer/Anti-Money Laundering] compliant (and this fact is actually mentioned as a big plus by shareholders). They do not want to become KYC/AML compliant. They only want to have what I call, pretend KYC/AML.

 

What do you mean, “pretend KYC/AML”?

When I say pretend-KYC/AML, essentially there are ways around complying with KYC/AML on the exchange. For example, let’s say you’re a drug dealer. You buy bitcoins with cash. Send the Bitcoins to Bitfinex. Sell for US Dollars on Bitfinex. No KYC required. You need the USD? Buy Bitcoin with the USD on Bitfinex. Withdraw, cash out at an ATM. You have a USD bank account with no-KYC/AML. That’s illegal.

Phil Potter

Phil Potter (via LinkedIn)

Now let’s look at the link with Tether. It wasn’t public for a long time.

Actually, it was. Bitfinex just suddenly tried to start covering it up. In 2016, Phil Potter admitted that Bitfinex was a majority owner in Tether. Despite having audio of Phil Potter admitting to this, people still believed the Bitfinex employees on Reddit lying about the connection. Bitfinex employees routinely said the two companies were separate, then that shifted to “minority ownership”, to “overlap in shareholders”, until the Paradise Papers where Tether was literally fully in control by the same people who controlled Bitfinex. Only at that point did the community accept that Tether was owned and controlled by Bitfinex. Despite the fact I told them prior to that with concrete evidence.

 

Let’s walk through how you see tether was used. You said it first began with paying off U.S.-based account holders who lost in the “hack” instead of giving them equity, correct?

The victims that for whatever reason didn’t convert, basically, they converted BFX tokens into tethers. I actually have audio of Phil Potter admitting to that being the plan all along as well. Phil Potter said he wanted to use the Omni Protocol to convert BFX Tokens into Tether tokens that, legally, would be paying off a debt liability with a non-redeemable not-money Tether token.

 

And that would put them in the clear?

In the minds of the community it did, but it was simply a Ponzi tactic. When they paid off the people that could not convert to equity, they knew these people could not withdraw the U.S. dollars. So they knew the only move they could do, to get the money, is to buy Bitcoin. Which created an artificial rally in Bitcoin prices, and eventually Bitfinex had a $200 premium as a result of this. You had people panicking about the lawsuit and the withdrawal situation, and people that just got credited a bunch of money they lost from the exchange (at least on paper)… and the only way out: Buy bitcoin. Other exchanges were following the price rises on Bitfinex, the price rising on Bitfinex was not due to bullish news, it was simply the exchange not processing withdrawals combined with money being credited to accounts and nothing being able to be withdrawn.

 

And that was even before the explosive rise in tether issuances?

Correct.

 

So what led to the massive rise in Tether issuances?

Around April 18th, Bitfinex and Tether finally came clean and told everyone they could not process deposits or withdrawals. Tether announced they would not be issuing more tethers until the situation was resolved. Despite that, a bunch of new tethers were issued. I smelled a rat. Tether issuance started skyrocketing along with the price of Bitcoin, and Bitfinex/Tether never announced new banking partners or a resumption of deposits/withdrawals.

 

According to Tether, how were new tethers issued if they couldn’t take dollar deposits?

They wouldn’t say. They kept claiming “institutions” but nothing clear. The Tether website was non-functional as well. People were trying to sign up for Tether and would never get verified. The Tether website, when logged in, would tell you they cannot take deposits or withdrawals.

 

How much of the tethers outstanding do you believe are based on non-existent deposits?

A significant majority of it was issued with no deposits. Think about it for a moment. The people behind Bitfinex/Tether are very clever. You can’t pull off a stunt like that without some imagination. They likely issued them without backing, used them to manipulate the markets, and then when they’d profit from the market manipulation, return the profits to their banks. Institutions buying tethers to buy bitcoin defies all logic. Right when Bitfinex loses all banking, and has no legitimate functioning banking, why is someone going to send billions of dollars to buy Tether tokens, when the Tether website doesn’t work, there’s no redemptions, shareholders admit Tether is illegal? When you can just buy bitcoin with USD from more legitimate exchanges?

Former FBI Director Louis Freeh at an event for Rudy Giuliani. (Kevin B. Sanders)

 

So how about “the Freeh report” [A report on Tether’s financial situation conducted by Freeh, Sporkin & Sullivan, LLP. Louis Freeh is a former FBI director]? The one that showed dollars in the bank. How did they do that?

I highly suspect the Noble Bank statement is a forgery. John Betts, the former CEO of Noble Bank, was sued in 2015 with an employee alleging that he was asking him to cook the books. That was in 2015 way before I ever started looking into this. Now, it’s an allegation, but when you combine that with what is going on today, it’s definitely some smoke.

 

Let’s talk about Betts and Tether. There is a connection related to Mt. Gox. How did it work out?

Right, the founders of Tether originally tried to take over Mt. Gox. Freeh, John Betts, and Brock Pierce wanted to restart Mt. Gox.

 

Louis Freeh, too?

Yes, Freeh was involved in Sunlot Holdings, The attempt to restart Mt. Gox.

 

Do you think the issuances of tether were related to anything other than a way to buy and sell bitcoins for the company’s owners?

I do not think any legitimate institution was buying billions of dollars of tethers. So it’s likely they were issuing these to themselves for market manipulation. They had a big advantage that Mt. Gox didn’t have: Mt. Gox could only print USD on their own exchange; Bitfinex, through Tether, could print money for every tether exchange.

Tether supply

Tether supply over the past two years (via CoinMarketCap)

The issuances slowed down around early January. What happened?

The CFTC subpoena spooked them, and then when the market was crashing in January, they had to put the tether printer in ludicrous speed. Did you know that the biggest U.S. dollar move in Bitcoin’s history was the same day they got a subpoena from the CFTC? Neat, huh?

 

Then they lost their auditor, Friedman LP. Who bailed out, Bitfinex or Freidman?

Bitfinex knew an audit was impossible. Even before they started it. It was for p.r. I believe Bitfinex simply fired the auditor.

 

When did Tether start dealing with Noble?

I don’t know the exact timing when the relationship with Noble started. But Phil Potter did express in interviews wanting to capture a bank…. I originally thought that they would simply buy some small bank and then use it.

 

When did the BitMEX research show a spike in deposits in Puerto Rico?

That was in Feb. The truth is BitMEX knew where they were banking but they wanted to make it look like research, so they did a little bit of parallel reconstruction.

 

You think [tether exchanges] were in on everything?

Any exchange which lists tether is corrupt, an accessory to the Tether scam. By now everyone knows Tether is fraudulent. The minute Tether fired the auditor, if tether exchanges were legitimate, they would have disabled all tether trading pairs and only allow traders to withdraw. At that point, all of the tethers would return to Bitfinex for redemption. And you’d see something like what we saw today [Monday], with Bitfinex prices spiking $1,000 over normal USD exchanges. The tether exchanges know this. The genius about the Tether scam is, the exchanges, including the more legitimate USD exchanges, know it’s a scam, but if they speak out against it… their business dies too…

Any exchange that lists tether is an accessory to the Tether scam. A legitimate exchange would disable Tether trading and force withdrawals.

 

What led to the halting of tether issuances at the end of January? Did ING provide banking, as was reported?

ING was a shell account. It was quickly terminated. Every time people figure out what bank they use, once it gets out, the bank closes the account. The problem is in order for people to send you money… people need the bank account information. So you can’t hide this.

 

What happened to Noble, then? If the relationship was close, why did Tether and Bitfinex bail? And why did John Betts leave?

A former employee of Bitfinex admitted on Twitter, Betts left as soon as he got his “golden parachute”. Noble outlived its usefulness and the heat is really on them for Tether.

 

By “heat,” do you mean from U.S. regulators?

Everyone in the community knew they were using Noble. Everyone knew the custodian was BNY Mellon as well. It was reported that BNY Mellon was no longer the custodian.

 

So they pulled the plug? Do you think BNY Mellon knew about Tether when they were dealing with Noble?

It’s a possibility, and in most cases we see the major banks have no idea what they are dealing with, in the case of Bitfinex/Tether. They likely lie to the banks about the nature of their business, which explains why their accounts get closed so quickly.

 

What about recent events? One argument I’ve repeatedly heard from HODLers is, “So what if there are no actual dollars backing Tether? There are no assets backing the U.S. dollar, either and we all seem fine with that.”

Pure lunacy. People want to put their head in the sand about Tether because they’re afraid of the truth. Tether is a bigger version of Mt. Gox. Mt. Gox only printed up a few hundred million [dollars]. Have you noticed the absolute desperation to get an ETF? They need a mad rush of ‘new’ money before Tether collapses.

Tether/Bitfinex

Tether (USDT) is now more the countercurrency in half of all bitcoin trades; Bitfinex is often the largest Bitcoin exchange (via CryptoCompare).

Another argument we’ve heard is that exchanges represent a fraction of all real trades going on with Bitcoin so Tether shouldn’t be a problem. How do you respond?

If you’re talking about the so-called “OTC” [over-the-counter] market, it’s nonsense. I just did an OTC trade with myself for a billion dollars, therefore that’s volume. OTC prices use the spot prices for the trades anyway.

 

Spot determined by…?

Spot prices are determined by exchanges, predominantly tether exchanges…

A former Bitfinex employee showed an OTC orderbook for tethers few days back, and said that order’s been there forever. The price went below some of the so-called “bids” on the OTC orderbook he provided.

 

Where did the Bitfinex employee post it?

‪@IamNomad. He’s a former employee. I suspect he’s a shareholder as well, despite his denial. Bitfinex employees are not known for being honest or transparent. One time, someone asked Phil Potter who was in charge of Bitfinex. Phil Potter had a stroke, and couldn’t answer the question. And yes, I have that recording. The truth is the CEO of Bitfinex isn’t really the guy in charge.

[Editor’s note: The person going under the handle “@IamNomad”  on Twitter refutes the claim that he is a previous or current Bitfinex employee and cites his previous criticisms of the exchange on Reddit as proof.]

 

Who is in charge of Bitfinex?

Giancarlo Devasini.

 

What’s his story?

His background is plastic surgeon turned software counterfeiter turned Bitcoin exchange CFO.

 

Software counterfeiter?

That’s right, the Chief Financial Officer of Bitfinex was busted in the ‘90’s for selling counterfeit software. Not something you’d really want in someone handling billions of dollars of other people’s money. He had to pay a settlement to Microsoft. I believe it was around $60,000.

 

So what caused the sudden pressure now on Tether?

Noble bank blew up, and I suspect some stuff is going haywire behind the scenes. Something not yet public. I don’t know what for sure yet, but I’m sure in a few weeks we’ll see. They keep doing shit to me every time something blows up, it’s a shame I don’t trade. I could trade off of their attacks.

 

How so?

They send me little surprises in my email at every critical juncture. It always seems to precede some very bad shit happening. Yesterday was no different.

 

What kind of surprises?

Something that’s probably illegal to do. But it’s a hint they’re mad.

 

Legal threats? Viruses? Tickets to “Hamilton”?

I’d rather not say.

 

But it’s definitely from Bitfinex/Tether?

Or a shareholder. Clearly it’s someone with internal information.

 

What’s your take on regulated stablecoins like the ones from Paxos and Gemini? And are their launches related to Tether’s troubles?

The regulated stablecoins are doomed. They only exist because people think there’s demand for stablecoins. There isn’t, the only demand for stablecoins is for unregulated exchanges. Regulators aren’t going to tolerate non-KYC/AML exchanges using regulated stablecoins. In order to use a regulated stablecoin you will have to have the same compliance as a regulate USD exchange. At that point, you may as well just get real banking. The banks that bank the regulated stablecoins also will face significant liability due to activity on non-KYC/AML exchanges. So it’s likely they’ll end up closing the accounts once it gets to a certain size.

 

Nouriel Roubini has been retweeting you a lot. Nonetheless, is there anything he has said about crypto that you feel he’s missing?

Honestly, I feel he understands it pretty well, but he uses strong language. I do not believe that this space survives Tether collapsing. Even if they solve some of the bigger technical problems such as scaling, nobody will trust the prices again.

 

I was going to ask your opinion now of Bitcoin. You said you were an early believer.

Yes, I was a very big believer. But as I have done more research, it seems we’re just recreating the same problems of the existing banking system, but even worse. When you have people defending Tether with “But don’t normal banks do that too?” you know we failed. The vast majority of Bitcoin activity is trading, and not commerce.

 

“We”? Do you feel personally invested in Bitcoin as a concept?

By we, I mean the Bitcoin/cryptocurrency community. Bitcoiners have failed to keep fraudulent exchanges in check multiple times, in spite of overwhelming evidence.

Bitcoin being eaten by a cactus because 2018

Bitcoin being eaten by a cactus because 2018 (photo by Ken Kurson for Modern Consensus).

What about other systems like Ethereum?

Doomed. Scaling—The scaling solutions they come up with reinvent centralization. You may as well use Amazon Web Services and call it a day. And Ethereum is centralized around the developers.

 

Do any cryptos survive?

That depends on what you mean by survive. If by survive, you mean the code exists and someone mines the coins for the lulz, yes. Bitcoin will survive as a project, so will Ethereum. Someone will be mining them just for fun, or for lulz. The value will be nominal. It won’t be zero, but for most people, it may as well be zero. If something goes to $19,000 and then down to $10-15, it may as well have gone to zero for most people.

 

That’s where you see Bitcoin prices headed? Mid-teens?

Everything after mid-2013 is essentially a combination of Mt. Gox fraud and Bitfinex fraud. That assumes people still ascribe some value to the idea we could have a confidence crisis. It also depends if the exchanges get sued into oblivion. Because once we see $1,000 or less, we’re going to start seeing exchanges getting sued. Think about it this way: Imagine you’re a car dealer, and you read a report that the cars you’re selling have a 100% chance that the airbag will go off and kill the driver. What do you think happens if you keep selling the cars knowing that? Now imagine Coinbase, facilitating the sales of bitcoin, knowing that the Bitcoin market is manipulated by Tether and Bitfinex. Because by now, it’s no longer a secret that Bitfinex/Tether manipulate the market.

 

Fidelity just announced it was getting into the crypto game. Wouldn’t you think they factor in Tether in their decision?

No, they’re likely being advised by so-called “blockchain advisors”, and Coinbase recently shut down their “institutional wing” due to lack of demand. Every institution that wants to get into Bitcoin can already do it right now.

 

So was it a publicity stunt or a bad move in the making?

It’s a good way to get some positive p.r. for them. Think of it like changing their stock ticker to “Fidelity Blockchain” or IBM Blockchain is a good example. If there is any demand, it will collapse once Tether does.

 

What’s your take on blockchain technology? Can it be separated from cryptocurrency prices?

The only use for blockchain is the way it’s used in Bitcoin. For every other application, use a fucking database. An ICO could just as easily use a database on their website. It’s centralized around the issuer anyway. There’s no point in making it a so-called “blockchain” with mining. Even Tether is pointless to have on the blockchain. It’s centralized around Tether’s USD anyway… just use a website API with public/private keys just like Bitcoin for authentication.

 

So the use of smart contracts in, say, real estate…?

Useless in my opinion. Those would also have securities regulation likely, if you’re talking about tokenizing real estate. We call those REITs.

 

What about in keeping track of ownership and other rights?

Again that can be done with a database, and the big problem with blockchain is if someone loses the private key, now they can’t transfer it? It’s a headache for no reason. What if someone doesn’t give up the private key to transfer an asset they’re legally required to transfer? If a smart contract has a way for someone to overrule the private key owner… like what we see with Gemini USD…. just use a database. Because it’s centralized anyway. Property is centralized around the state, like it or not.

 

Has this changed your libertarian/free market views? Are you more pro-regulation now? If not, how would you see the free market solving problems with exchanges—or is it doing so?

I like the idea of the free market. A free market works because you have people competing for business, but that seemed to have broken down for Bitcoin exchanges. You would expect the more legitimate exchanges to be bashing Tether and Bitfinex for their lack of transparency in order to attract traders and customers off their exchanges. I suspect, the reason why we don’t see this… is very simple. The true genius of the Tether scam is they essentially setup a situation of mutually assured destruction, and this was pure genius on Phil Potter’s part. By making Tether such a giant scam, if the more legitimate exchanges speak out against it, they go down with Tether once trust is lost in Tether, because then everyone calls Bitcoin a scam. The more legitimate exchanges have invested millions so they quietly ignore Tether in the hopes that enough new money comes in, so that when Tether does blow up, it’s just a blip. Phil Potter is very intelligent.

 

But that’s not how you see it going down.

No, ultimately that ‘new money’ isn’t going to come in. Every single Bitcoin exchange owner and investor is terrified of Tether.

 

Would government regulation have been a solution? Or is this a lesson of sort?

Well, the truth is we don’t need new regulations. The existing regulations are sufficient. They just need to be enforced. Exchanges need to be regulated just like banks.

SEC

The SEC (via Shutterstock).

That doesn’t sound libertarian!

Sadly, when it comes to that, my views have shifted. Banks are no fucking angels. But what we have created in cryptocurrency makes the banks look like angels. There’s a big issue with HFT firms, in my opinion.

 

That should be regulated as well?

It’s something I’m still thinking about. I do not think financial markets should be casinos. People should be able to gamble, just not with other people’s lives.

 

But wouldn’t a collapse of trust in crypto ward of speculators so that investments can be made in technology instead?

There needs to be enough of a collapse where people don’t give a shit about the price. Because one issue is anytime someone wants to make an improvement to the code, everyone is scared as shit about what it could do to the price. Nobody wants to kill the goose that lays golden eggs. And no matter how good of an improvement you make there’s going to be people freaking out about it because their future is on the line.

 

Are there any public crypto figures you think aren’t smart or honest about what’s going on with crypto?

I don’t want name any names. There’s a lot of corruption though. It all needs to get wiped out.

 

Anyone getting it right? You listed a few names earlier. Any others?

There were some that were doing things right, until they made a very boneheaded decision, but I’m not going to name names.

Lawrence Lewitinn, CFA is editor in chief of Modern Consensus. Disclosure: Lewitinn owns no cryptocurrencies in his portfolio.

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