The US government should not fund empty crypto schemes

On December 20, 2024By Littum

The price of bitcoin went over $100,000 for a few hours on December 5 and peaked at $103,400. The financial press can’t resist constructing a hand-waving story about market forces, so bitcoin passing $100,000 has been attributed to a market reaction to President-elect Donald Trump’s lineup of a number of pro-cryptocurrency cabinet, advisoryand regulatory vote after the crypto industry spent more money funding Republican candidates in this last election cycle than anyone had previously put into an election in history.

But crypto trading is thin and almost completely unregulated—perfect conditions for commodity market manipulation. The public image of cryptocurrency is still shaped by the 2023 trial of Sam Bankman-Fried of the failed FTX crypto exchange, culminating in his conviction – and not to mention the hangover from the NFT fiasco. Crypto is seen as the domain of cheap scammers. Ordinary people are not flocking to crypto.

Coinciding with the bitcoin price news was the collapse of the Hawk Tuah crypto token. Haliey Welch who told a oral sex joke that went viral on YouTube, parlayed her instant fame into a career as an influencer and podcaster. This culminated in the meme-coin cryptocurrency $HAWK marketed solely on entertainment value, which crashed on launch in what looked a lot like a pump and dump– Tokens were dumped on regular buyers shortly after launch, crashing the price.

Welch denied that insiders dumped her token and blamed automated snipers who bought the token the moment it was released and then dumped immediately. The Hawk Tuah token fiasco only strengthened crypto’s image as a place where fools lose their money by being foolish.

The price of bitcoin has corrected since the top of the last bubble in November 2021 – but retail volume in actual dollars has not. Coinbase’s retail trade volumes is $127 billion so far in 2024 — much better than 2023’s $75 billion, but nothing like the 2021 bubble’s $545 billion.

Bitcoin remains a strange useless asset that does nothing. All you can do with it is buy, sell or hold. The only use for cryptocurrency beyond pure zero-sum speculation is bitcoin’s original use case: circumventing regulations, most often for illegal purchases, money laundering, or evading sanctions. You may be entitled to circumvent some rules in some cases – but most are there for good reason.

The largest actual US dollar crypto exchange is Coinbase. But the price discovery is taking place in the venue with the largest trading volume: the offshore exchange Binance. This exchange admitted to a number of money laundering offenses in 2023, was fined over $4 billion and was placed under strict compliance monitoring by the US Department of Justice and FinCEN.

But the Binance trading floor itself remains an unregulated free-for-all as long as US entities are not caught trading there. Any market manipulation that would be illegal in the US happens at Binance and similar unregulated offshore liquid cryptocasinos – wash trading, flash crashes, delayed settlements, spoofing and exchanges act against own customers.

Bitcoin trading volume is significant against two questionable US dollar stablecoins: tether and FDUSD. These are minted in round billions at a time. It is frankly not plausible that someone would put billions of US dollars into pegs or FDUSD to buy bitcoins on an offshore exchange with superior intentions. They could have just used the money to buy bitcoins directly on a US dollar crypto exchange or, safest of all, to buy bitcoin ETF shares from any securities broker. The purpose of buying billions of tapes is to manipulate the price of bitcoin.

Every stablecoin is supposedly backed by a US dollar sitting in a bank account – except when it isn’t. Tether Inc. has long created reins out of thin air as loanwhere the stated backing asset is the loan itself. So do the banks, but the banks are regulated. Eighteen billion tethers have been created ever since Trump’s election on November 5, bringing the total issuance to 135 billion. How far could you pump the price of bitcoin with 18 billion instant pseudo-dollars?

The other use case for tethers is crime. Zeke Faux Number Go up describes the value of clothes rings as a dollar substitute for those too crooked to get dollars – it is the currency of choice for “pig slaughter” romance scams run by human traffickers. UK National Crime Authority and the US Department of the Treasury recently cracked an international money laundering ring that used reins to serve drug traffickers, ransom groups, Russian espionage operations and sanctioned entities; The NCA called tether, not bitcoin, the “cryptocurrency du jour.” News of the bust came out just before bitcoin hit $100,000. Tether-powered bitcoin pumps seem to coincide with bad news that mentions tethers.

Tether Inc. is sensitive to the criminal use of its coin and often freezes tainted reins at the request of the Office of Foreign Assets Control and FinCEN — but only after the fact. This requires Tether Inc.’s operations to be much more organized than they have been in the past – such as in the years when the reserve was tracked, not in proper accounts, but in a shared spreadsheet which was often out of date. Despite its compliance efforts, Tether Inc. subject to an ongoing federal criminal investigation of the Manhattan office of the Southern District of New York to investigate possible failures in the fight against money laundering and sanctions.

Tether Inc. has been working to repair his reputation in the corridors of power. The company does not operate in the US, but it keeps much of the cash portion of its reserve in US Treasuries. These are managed by Cantor Fitzgerald, whose CEO, Howard Lutnickwanted to be Trump’s new Treasury Secretary and will be brought in for trade. Cantor Fitzgerald recently bought a stake in Tether Inc.

After the success of the crypto industry in directing unheard of amounts of campaign funding to the cause of the election of Trump, we should anticipate further such attempts to reach. The Trump family’s own crypto venture, World Liberty Financial, was doomed until crypto entrepreneur Justin Sun, owner of offshore crypto exchange HTX, swooped in and bought 30 million dollars of his WLFI coin – taking World Liberty over the threshold so that Trump would get a $15 million payout from the project.

Sol is given to flashy stunts, which purchase Maurizio Cattelan’s duct tape banana artwork Comedian (with cryptocurrency) and then eat the banana on stage. These give the media something different to talk about than the Suns legal and regulatory issuesmost recently the US Securities and Exchange Commission’s ongoing case against Sun for securities violations. Sun is looking forward to one more”friendly” The US crypto market under the new administration, with the pro-crypto Paul Atkins as Trump’s planned SEC chairman.

One of the biggest channels for payback to his crypto allies could be Trump’s proposal at the Bitcoin 2024 conference in June for a U.S. strategic bitcoin reserveapparently on the basis that the nation needs a stock of this speculative commodity, which is widely used for crime. Trump initially proposed that the government should hold on to bitcoins that had been seized as proceeds of crime, rather than sell them.

The current proposal to strengthen crypto is Senator Cynthia Lummis’ Bitcoin Act of 2024where the Treasury Department and the Federal Reserve would buy 200,000 bitcoins every year for five years. The US government would become the bitcoin holder of last resort, and the beneficiaries would be the crypto industry – and not ordinary Americans.

The incoming US administration wants to remove “experts” from the bureaucracy. If the incoming executive branch wants crypto to function freely, it will do its best to force crypto through and remove all possible obstacles. Crypto’s long-standing problems with fraud and poor retail investors, and the regulator’s fears about the risk of contagion from crypto to the wider economy, are likely to be ruled out to ensure market opportunities for administration insiders.

But at the end of the day, gravity still works and a balloon can only be inflated so much. The Bitcoin bubble is an artifact of market manipulation and has no more economic substance than the Hawk Tuah coin. The US government may be ripe for looting, but other nations need to take steps to protect themselves from the impact of carpet pull on a global level.