My Appearance on NFT QT

I recently appeared on the NFT QT podcast to discuss my thoughts on NFTs and NFT coins. I specifically discuss my worries about scams, securities, and some things I find meaningless.

Full show notes.

NFT QT 014 – Sniffing Out NFT and Crypto-Related Fraud w/ Bennett Tomlin The Bitcoin Podcast

In this episode of the NFT QT Show, QuHarrison Terry and Ryan Cowdrey are joined by special guest Bennett Tomlin, co-host of the Crypto Critics Corner podcast. He’s a data scientist that is fascinated by tracking down fraud in crypto-related projects. We cover topics including:– Spotting scams or fraud in crypto-related projects– Comparing / contrasting securities and NFTs– Relating the failures of early utility and governance cryptocurrencies with today’s NFT projects– Bennett’s take on NFT-related coins and SEC regulationFor more information on the topics discussed in this episode, head over to NFTQT.com

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What Stablecoins Might Become

(This article was originally published at Coindesk)

Identifying the ideal path to regulatory compliance for a stablecoin has been difficult. It seems that United States regulators have taken a much more active interest in this industry, though it is still not entirely clear what they want stablecoins to be and what they will want stablecoins to be.  

Janet Yellen, the secretary of the U.S. Treasury who recently convened the “President’s Working Group on Stablecoins,” has warned specifically about their risks to the financial system and national security. “Depending on its design and other factors, a stablecoin may constitute a security, commodity, or derivative subject to the U.S. federal securities, commodity, and/or derivatives laws,” she said. This certainly leaves some ambiguity.  However, “in the next few months” we may hear what they recommend.  

Opinions on the appropriate regulatory framework for stablecoins are varied from those who believe that the current money transmitter adjacent framework is appropriate, to those who believe they are more likely going to end up as regulated as banks, to the regulation enthusiasts who believe there should be no space for stablecoins.  It’s apparent that many of the U.S. top policy makers are working on exactly that question, even though there still exists disagreement.  What is certainly clear is that this $130 billion industry has drawn the attention of powerful people.

Gary Gensler at the U.S. Securities and Exchange Commission is suggesting that “stable-value coins” may be securities.  It seems clear that he is trying to tie them to stable-value funds, a fund design that the SEC already claims jurisdiction over.  If stablecoins, or at least stablecoins backed by non-cash assets, are securities then they will no longer be useful for the things that they are now.  It seems unlikely that they would be able to continue to move and trade unimpeded across censorship-resistant global networks.  

Some cryptocurrency companies took a decidedly proactive approach and tried to find existing regulations that they felt more adequately covered what their stablecoin would do.  Avanti, a Special Purpose Depository Institution, a bank with only a state charter, created under new legislation in Wyoming, seems to believe that the Uniform Commercial Code, which (in part) dictates standards for bank notes, would allow for the issuance of a “digital bank note.” If their token is considered a bank note then it will be explicitly exempted from regulation as a security.  This also may in part explain why Paxos has a bank charter and Circle wants one.  

The Office of the Comptroller of Currency has issued guidance that makes it clear that banks are allowed to use stablecoins as part of their normal business, including payments, and that they can hold reserves for stablecoins. This suggests that the path forward for stablecoins may look an awful lot like being a bank.  

However, it may be difficult for depository institutions like Avanti to gain access to Federal Reserve master accounts.  The Narrow Bank, an earlier proposed bank which would have parked their funds at the Federal Reserve and then passed on higher interest rates to depositors, has so far not been able to get such access.  Both Kraken and Avanti have applied for Federal Reserve access and so far neither has been accepted.  Lack of access to the Federal Reserve payment rails would make running a stablecoin more difficult, or require Avanti and Kraken to rely on other service providers who do have access through federally chartered banks.

A new piece of legislation called the STABLE Act will create a framework for stablecoins and other money transmitters where they would be obligated to keep all of their reserves at the Federal Reserve. Under a framework like the STABLE Act there is a much better path towards a more narrow stablecoin issued by a bank.  

There may still be significant legislative, regulatory, and political hurdles related to effectively creating a new type of bank. Furthermore, the STABLE Act is not just limited to what those in cryptocurrency consider stablecoins, but would likely involve a wide array of money transmitters, and may even change things for companies such as PayPal.  

But it’s not just issuers who are eyeing the banking system as a model. ​​Federal Reserve executives, like Governor Jeffrey Zhang in his article “Taming Wildcat Stablecoins,” have proposed bringing stablecoin issuers into the broader bank regulatory framework. While the Federal Deposit Insurance Corporation (FDIC), a federal agency, is reportedly studying how to extend deposit insurance to stablecoins to help protect users. Meanwhile, the Biden Administration has stated it thinks stablecoin issuer are at least “bank-like.”  

The Digital Asset Market Structure and Investor Protection Act outlines a process where every stablecoin issuer to apply to the Treasury, at which point they check with the Federal Reserve, the SEC, the CFTC, and banks and they decide whether or not to approve the stablecoin.   

If this passes (it’s currently in committee in Congress), any unapproved stablecoin – including any digital asset pegged or collateralized significantly by any fiat currency – would then be unlawful.  However, this would provide a path for approved stablecoins to avoid being considered a security.

It is difficult to say exactly how this will play out. My intuition is that a new type of banking charter will be created that will allow stablecoin issuers to access Fed master accounts and there will be an expectation that stablecoins will hold their reserves there.  It also seems reasonably likely that the Treasury gets their way and stablecoin issuers will need to register with the Treasury. I expect that securities regulations may be part of the cudgel that will be used to help ensure that the only stablecoins are the “approved” stablecoins.  

The end result of this will likely be that any stablecoin issuer that wants to continue operating would need to become a bank and is going to have significantly less flexibility with what they can do with their reserves.  Those that choose not to register or are not approved are likely to have difficulty accessing the U.S. banking system. They may have trouble servicing redemptions, and may perhaps even find themselves aggressively pursued by regulators.

The effect on the average crypto user is likely a degradation of their experience using stablecoins. However, there will be significantly greater certitude surrounding the backing and safety of the token, and regulators will no longer have to worry about them being an existential financial risk. In effect the government may take the private money that is stablecoins, and integrate it into the banking regulation framework so that it can become publicly guaranteed.

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Episode 26 — Cryptocurrency Lending is Too Good to Believe — Crypto Critics’ Corner

Cryptocurrency Lending is Too Good to Believe Crypto Critics' Corner

Today Bennett Tomlin and Cas Piancey explore the incredible interest rates offered by centralized cryptocurrency lenders, how they likely make their money, and whether or not any of them are "risk-free."

In this episode Cas and I discuss the problems with cryptocurrency lending companies including BlockFi, Celsius, and Nexo. They are marketed as risk-free while actually you take on significant counterparty risk. 

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My Second Appearance on the Blockchain Debate Podcast with Sam Kazemian

Motion: Algo and fractional stablecoins are flawed (Bennett Tomlin vs. Sam Kazemian) The Blockchain Debate Podcast

Guests:Bennett Tomlin (twitter.com/bennetttomlin)Sam Kazemian (twitter.com/samkazemian)Host:Richard Yan (twitter.com/gentso09)Today’s motion is “Algo and fraction stablecoins are flawed.”A good stablecoin can sustainably hold its peg, and recover quickly from a premium or discount. This is a basic requirement for stablecoins. An obvious design is the bank coin model, where coins are backed 1-to-1 by fiat. But this creates a single point of failure and incurs compliance overhead. Hence MakerDAO, which made a smart contract driven stablecoin, and is de-coupled from the banking system. But it requires over-collateralization. So new designs popped up and tried to make the next capital-efficient stablecoin to allow under-collateralization, with innovative collateral adjustment mechanisms. We call these algorithmic and fractional stablecoins. Historically, most of these coins failed to hold their pegs. Is there a fundamental problem? Or can these challenges be overcome?The two debaters today include the founder of an algo/fractional stablecoin that has been holding its peg relatively well since launch, that is about half a year, as well as a well-known critic of various stablecoins.If you’re into crypto and like to hear two sides of the story, be sure to also check out our previous episodes. We’ve featured some of the best known thinkers in the crypto space.If you would like to debate or want to nominate someone, please DM me at @blockdebate on Twitter.Please note that nothing in our podcast should be construed as financial advice.Source of select items discussed in the debate (and supplemental material):Dragonfly research on FRAX stablecoin: https://medium.com/dragonfly-research/a-visual-explanation-of-frax-bcce72c1730fBennett Tomlin article on FEI stablecoin: https://bennettftomlin.substack.com/p/fei-protocol-analysis-last-reminderFrax stablecoin: https://frax.finance/Bennett Tomlin blog (mostly crypto): https://bennettftomlin.substack.com/Maker DAO's Black Thursday: https://medium.com/@whiterabbit_hq/black-thursday-for-makerdao-8-32-million-was-liquidated-for-0-dai-36b83cac56b6Guest bios:Bennett Tomlin regularly publishes articles about fraud in the crypto space via his blog. His dayjob is data scientist and fraud investigator in the pharmacy benefits area.Sam Kazemian is cofounder and CEO of Frax Finance, a stablecoin project that brands itself as the world's first "fractional-algorithmic" stablecoin. Sam also started Everipedia, the first decentralized online encyclopedia on the blockchain.

I returned to the Blockchain Debate podcast and in this episode I debated whether or algorithmic stablecoins are a valuable idea. I reference several different pieces of my work, so will drop the links to them below.

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A History of Tether and Bitfinex’s Audits, Attestations, Memos, and Letters: Both Promised and Actual

A History of Tether and Bitfinex’s Audits, Attestations, Memos, and Letters: Both Promised and Actual Bennett's Articles

https://bennettftomlin.com/2021/07/17/a-history-of-tether-and-bitfinexs-audits-attestations-memos-and-letters-both-promised-and-actual/ Amidst all the confusion surrounding Tether and Bitfinex it can be difficult to keep track of what they have actually provided in terms of audits, attestations, and other documents to support their contentions. Here I will summarize, but the important note that needs to be included at the top is that both Bitfinex and Tether once hired an auditor, but neither ever completed the audit. Ever since Tether was founded they have promised to provide a full financial audit. It feature prominently in their whitepaper and on their website for years. They have never provided this audit, but have provided a variety of other documents meant to convince the public that they had sufficient backing for the tethers in circulation. In March of 2015 Tether and Factom announced (archive) they had formed a partnership to provide greater transparency into Tether’s holdings. The partnership never provided any additional transparency into Tether or its operations. In August of 2016 Bitfinex promised (archive) to provide a full financial and security audit after they were hacked. They initially announced that Ledger Labs was hired to perform both. No audit from Ledger Labs was ever released. This was likely in part due to the fact that Ledger Labs was not able to provide financial audits. In May of 2017 Bitfinex announced (archive) they had engaged Friedman LLP out of New York to audit them. As of today in 2021 we have yet to get an update from Bitfinex on the status of this audit. In September of 2017 Tether announced (archive) that they had engaged Friedman LLP out of New York to audit them. This audit would never occur, we would eventually get an update from a Tether spokesperson saying the relationship dissolved, citing the “excruciatingly detailed procedures”(archive) that the auditor wanted to undertake. Also in September of 2017 Tether released from previous attestations from a small accounting firm in Taiwan called TOPSUN. These were monthly attestations attesting to Tether having sufficient backing for the end of the month from December 2016 through March 2017. Strangely these were not completed at the end of the respective months but were all completed on May 23rd 2017. (Strangely approximately two weeks after they announced that Friedman had been brought on to audit Bitfinex) Read more… https://bennettftomlin.com/2021/07/17/a-history-of-tether-and-bitfinexs-audits-attestations-memos-and-letters-both-promised-and-actual/

Amidst all the confusion surrounding Tether and Bitfinex it can be difficult to keep track of what they have actually provided in terms of audits, attestations, and other documents to support their contentions. Here I will summarize, but the important note that needs to be included at the top is that both Bitfinex and Tether once hired an auditor, but neither ever completed the audit.

Continue reading “A History of Tether and Bitfinex’s Audits, Attestations, Memos, and Letters: Both Promised and Actual”

Sunday Reads – Things I Found Interesting 2021-05-30

Ethereum

Vitalik breaks down the limits to scaling.

Hard Forks

Eric Wall shares a flowchart from the Segwit2X Bitcoin scaling debate that can serve as a useful model for understanding contentious hard forks.

Steve Bannon’s Italian Gladiator School for Western Culture

Ben Munster breaks down the absurdity of the above phrase.

ICYMI

In this article I try to summarize what I see as the difference between the trader perspective and skeptic perspective on Tether and Bitfinex, plus it’s like a greatest hits of their fuck-ups.

In this podcast episode Cas and I discuss Crypto Capital Corp, the shadow bank to the cartels and to Bitfinex and Tether.

In this article I try to work through my thoughts on why Coinbase listed Tether.

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Episode 6 – Crypto Capital Corp: the quiet billion dollar cryptocurrency scam — Crypto Critics’ Corner

In this episode Cas and I take a look at the payments processor for Bitfinex, Tether, Kraken, Quadriga, and Bitmex. They’re implicated in money laundering for the cartels, wire fraud, bank fraud, embezzlement, and more.

Episode 6 – Crypto Capital Corp: the quiet billion dollar cryptocurrency scam — Crypto Critics’ Corner

Crypto Capital Corp: the quiet billion dollar cryptocurrency scam Crypto Critics' Corner

Cas and BT discuss Crypto Capital Corp, a defunct, fake, Panamanian money services transmitter that helped service almost every important cryptocurrency exchange, owned and operated by Reginald Fowler, Ivan Manuel Molina Lee, and Oz and Ravid Yosef. 

In this episode Cas and I take a look at the payments processor for Bitfinex, Tether, Kraken, Quadriga, and Bitmex. They’re implicated in money laundering for the cartels, wire fraud, bank fraud, embezzlement, and more.

I covered it here:

Cas discusses tracking Ravid Josef using her Google reviews here

He also discusses Crypto Capital Corp and the web around it more broadly here.

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Sunday Reads – Things I Found Interesting 2021-05-23

Stu claims many things, all on his personal Medium

Stu felt he had to respond to posts like mine here:

SafeMoon the US Based, Ponzi-like, FBI Related Token

SafeMoon is a popular cryptocurrency (especially on places that prey on unsophisticated investors like TikTok) and based on reporting by Protos Media it seems to be a shit-show. Founders are US based, apply for government contracts, and may even be paying people to shill it.

USOCC Signals Caution

As the former agency head departs for Binance US, the new head signals caution and review of crypto guidance. From Nikhilesh De at CoinDesk.

Food

Helen Rosner wrote a brilliant piece at the New Yorker about the nature of exclusivity for restaurants.

Books I Read

Perennial Seller by Ryan Holiday – This was an excellent book that summarized creating and marketing ‘long-tail’ projects. Art and creations that you want to continue generating forever. I also highly enjoyed Trust Me, I’m Lying by Ryan as well.

Tabletop Roleplaying Games

Mustangsart showed off some prosthetics they were working on for a Witcher RPG, but they are a brilliant inspiration item for any other game masters.

TBM Games has a really cool homebrew for a time-traveling rogue.

Programming

Miguel Grinberg has a new Flask library I am really excited about thanks to its potential to keep me from having to write Javascript.

ICYMI

I appeared on the COINTELPRO podcast:

Note: This posts contain affiliate links, if you purchase after following them I will make a small amount.

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