7th April 2024 > > QE & the SEC.

tl;dr

Beware QE. The SEC wins a court case, an outcome we all approve of. The SEC loses a court case, an outcome we all approve of.

Market Snap

Market Wrap

That robust jobs report out of the US on Friday is yet more proof that there is no recession in the offing. What else could possibly explain the 2s-10s yield curve inversion?

Yes, you in the back, you are right. You must have been paying attention to the CCC after all. Interest rate cuts are on their way. When that happens, inflation will still head towards zero. Central Banks will be forced by their political masters to reintroduce the world’s most un-progressive policy decision of all time – more QE. The wealthy Modern Monetary Theorists, who hide their greed behind the flimsiest of virtue-signalling defences, will be cock-a-hoop.

Those of us who care about society, and especially about those individuals who are not as fortunate as us, will feel despair.

Curious Cryptos’ Commentary – The SEC wins a crypto case

This time, the crypto community is on Gary Gensler’s side.

Rewind to May 2022, and one of the triggers for the darkest days of the crypto winter driving BTC below $16k in December that year, was the collapse of the Terra ecosystem.

Underpinning the Terra house of cards was TerraUSD (UST), an algorithmic stablecoin supposedly pegged to the dollar. The Curious Cryptos community knows that all algo stablecoins are destined to fail at some point, but UST was spectacularly badly designed.

The core concept was that if the peg was broken, UST could be minted or burnt in exchange for LUNA, the other foundation block of the Terra ecosystem. The key issue here is that this algo process anchored both UST and LUNA to a dollar, though LUNA at its height traded at over $100. I do not need to spell out the obvious arbitrage when UST deviated from a dollar, up or down.

During benign times, this algo works tolerably well. In times of stress, it falls apart.

You don’t have to take my word for it. In a very prescient piece of work issued on 18th November 2021, a research piece written by Ryan Clements whilst working at the University of Calgary Faculty of Law, stated in its very first sentence “Algorithmic stablecoins are inherently fragile”. Indeed, the paper was titled “Built to Fail”. This was a conclusion the CCC had come to long before then, but without the academic rigorousness of Ryan’s seminal work:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3952045

Ryan doesn’t pull any punches, declaring that “algorithmic stablecoins are fundamentally flawed” and have “very little, if any, societal or financial inclusionary value.”

If you read the full document (it is only fifteen pages long and has lots of interesting stuff to say) there are some choice quotes to be had:

“An algorithmic stablecoin is a contradiction of terms.”

“… it is an incredibly tenuous payment mechanism.”

Ryan also foretells the future regarding the Terra ecosystem in frighteningly simple terms:

“… algorithmic stablecoins require a support level of demand for the entire ecosystem to operate. If demand falls below a threshold level, the entire system will fail.”

And that is exactly what happened to the fraudulent Terra ecosystem in May 2022, destroying $45 billion of investors’ capital in the process.

…

Co-founder of Terraform labs and the key driver behind this fraud was Do Kwon, currently languishing in a Montenegro jail having fled there from South Korea believing it a safe place to avoid extradition to the US. The local authorities are weighing up requests from both South Korea and the US as to which gets first dibs at putting Kwon on trial with a very lengthy jail sentence whichever way he turns. I don’t know about you, but I suspect South Korean jails are better than the other two options if that is how one is to spend much of the rest of one’s life.

I seem to recall that on the Saturday morning preceding the week of Terra’s collapse, UST had dropped to about 90c. In response Kwon told everyone on Twitter (as it was then) to relax and everything will be fine, whilst also (allegedly) rapidly removing as much of his multi-billion-dollar fortune as quickly as he could.

…

The SEC has won a civil case that found Terraform Labs and Do Kwon deliberately defrauded investors. An SEC spokesperson commented:

“Terraform Labs and Kwon, its former CEO, deceived investors about the stability of the crypto asset security and so-called algorithmic stablecoin TerraUSD.”

Terraform Labs responded with this laughable comment:

“We continue to maintain that the SEC does not have the legal authority to bring this case at all, and we are carefully weighing our options and next steps.”

Very occasionally, the SEC does fight the good fight.

Curious Cryptos’ Commentary – The SEC loses a crypto case

This time, the crypto community is not on Gary Gensler’s side.

A US court has ruled in favour of Coinbase that the secondary sales of cryptocurrencies on its platform do not violate the Securities Exchange Act.

Coinbase Chief Legal Officer Paul Grewal posted on X:

“We appreciate the Second Circuit confirming today what is clear under the federal securities law: there's no private liability for the secondary trading of digital assets on exchanges like Coinbase. Why? Because contracts matter.”

Cases like this highlight that current securities legislation in the US is not fit for the crypto world, despite Gensler’s insistence that the Howey Test dating from the 1940s and related to agricultural produce works just fine.

Usually, the SEC does not fight the good fight.