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The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.

Let’s see what’s going on this week:

  • SBF Had Invested in a US Bank… Why?
  • BTC and ETH Barely Notice Dovish Fed
  • Are Proof-of-Reserves Enough for Exchange Transparency?
  • Digital Currency Group: In Trouble?
  • DeFi is Moving Away from Privacy

The Rabbit Hole Never Ends: FTX Owned a Large Stake in a Small US Bank… Huh?

  • FTX Acquired a US Licensed Bank with Just 3 Employees in a Questionable Deal: Report (link)

Bahamian FTX Meets US Bank, via Alameda Research

The situation with SBF just keeps getting weirder. After three weeks of saying this, we all thought the weirdness would end. But it hasn’t.

SBF was apparently dabbling in traditional banking. And not just any banking, but a US bank — with ties to Tether.

Here are the facts so far:

  • A subsidiary of SBF’s FTX invested $11.5 million into a tiny Farmington State Bank in Washington State, having only three employees and a single branch, without any credit or online banking service.
  • According to the FDIC, the bank’s net worth at the time was $5.7 million, yet SBF had injected double that via Alameda Research this past March, at $11.5 million, through Farmington State Bank’s parent company, FBH.

Here’s the kicker. Back in 2020, a year after FTX launched, the bank was acquired by FBH. Who is the chairman of FBH? Jean Chalopin, the chairman of another bank, Deltec Bank, headquartered in the Bahamas just like FTX.

Stablecoin Shenanigans?

Things start to roll down the rabbit hole fast from here.

Deltec Bank is none other than the bank Tether partnered with in 2018 for securing its dominant redeemable stablecoin, USDT.

To contextualize the size of USDT, recall the algorithmic stablecoin UST from the Terra collapse, which had an $18.6 billion market cap before it depegged from the dollar.

Well, that’s chump change compared to Tether (USDT), at a $65 billion market cap. USDT is a classically redeemable stablecoin — one digital USDT for one USD banknote, custodied by a bank.

But if it somehow stopped being redeemable, USDT would collapse the entire crypto ecosystem across different blockchain networks.

Adjusted on-chain volume of stablecoins. In November, USDT traffic accounted for over $295.5 billion. Image credit: The Block

Now, there is no indication that USDT is not appropriately redeemable. While Tether has historically had a bit of a bad reputation in terms of its backing, progress has been made in a positive direction. Tether recently hired reputable accounting firm BDO Italia for monthly reserve attestations, for example.

So — was something in a preparatory stage here with SBF?

According to Protos research, $36.6 billion out of a total $108.5 billion worth of USDT went through SBF’s Alameda Research market maker.

Tether (USDT) distribution across market makers and traders. Image credit: Protos

Just before FTX’s stake, Farmington State Bank was rebranded online and trademarked as Moonstone Bank with a mission to propel “the evolution of next generation finance.” The tiny bank’s deposits also skyrocketed by +600% this Q3, from a steady $10 million for a decade to $84 million, from just four accounts.

The Mystery Continues

Why would an unregulated Bahamian crypto exchange invest in a small US Bank? Was FTX trying to launch its own stablecoin? Who busted the FTX scam by leaking Alameda Research’s balance sheet? How did US regulators approve an off-shore cryptocurrency exchange (even through a subsidiary) investing in a licensed, FDIC-insured US bank in the first place?

There are no satisfactory answers to these questions. It’s simply too early. Yet there are clear red flags here.

“The fact that an offshore hedge fund that was basically a crypto firm was buying a stake in a tiny bank for multiples of its stated book value should have raised massive red flags for the FDIC, state regulators and the Federal Reserve,”

-Camden Fine, former head of the Independent Community Bankers of America.

Perhaps the ongoing bankruptcy case will reveal more about this peculiar development in the ongoing — and endlessly surprising — case of SBF and FTX.

Dovish Fed Minutes Meeting Revealed: Main Takeaways

  • US Dollar Holds Steady on Reassuring FOMC Minutes, Stocks Trend Upwards (link)

Fed Moves Dovish, Dollar Weakens, but Crypto Still Struggles

The Federal Reserve, the global liquidity maker, released notes from the Fed’s minutes meeting this past Wednesday.

They confirmed the market’s prior expectation that the Fed is going to ease up on interest rate hikes. After four consecutive 75 bps bumps, the Fed is now leaning towards 50 bps for December and 25 bps into 2023.

“…slowing the pace of increase could reduce the risk of instability in the financial system.”

However, there is still uncertainty on the total ceiling of Fed hikes. Will they surpass 4% or 5% next year? Surprisingly, the dollar strength index (DXY) broke the 100-day moving average for the first time this year, after hitting a 20-year high earlier this year.

“There are not that many dollar buyers around these days after the correction higher in euro-dollar in the first half of November,”

-Niels Christensen, chief analyst at Nordea.

The stock market doesn’t like a strong dollar because it hurts earnings and investment for international companies. The crypto market doesn’t like a strong dollar since it’s largely led by Bitcoin, which currently acts as a fiat money debasement hedge more than anything else. The stock market also doesn’t like Fed hikes due to the loss of cheap capital.

Added up, both stocks and digital assets should have gone up, but the negative turmoil from the collapse of FTX is clearly still weighing heavily on the crypto market.

The stock market saw a noticeable gain from the Fed’s dovish signals. Trading View

With the FTX-SBF-Alameda contagion still unfolding, CME institutional investors are heavily shorting BTC.

Image credit: Arcane Research

Likewise, ProShares Short Bitcoin Strategy ETF (BITI) inflows rose to new highs on Monday, having gone up 154% since November 7th, when the FTX crisis engulfed the space.

In short (no pun intended), the crypto market is so deep in the SBF slime that not even dovish Fed minutes and a weaker dollar have exerted their traditionally positive effect.

Crypto Exchanges Trend Toward Proof of Reserves — a Good Start, but Is It Enough?

  • Proof of Reserve is Not Adequate to Determine an Exchange’s Health (link)

Proofing CEX Vulnerabilities

The unprecedented fraud that continues to unravel from the FTX and Alameda Research situation might have a silver lining.

Moving forward, we will see significantly increased transparency among centralized exchanges (CEXes).

By default, decentralized exchanges (DEXes) are already transparent because market makers are users themselves. Their liquidity is bound in automated smart contracts, visible to all on a public blockchain.

DEXes also don’t have CEOs to worry about. But if CEXes have centralized market makers and CEOs, how can they approach DEX-level of transparency?

With a new independent mechanism called proof-of-reserves (PoR). Third parties would run a check on CEXes to ensure they have as much user funds as they are supposed to have. This process uses a cryptographic structure called a Merkle Tree. It snapshots a CEX’s balance sheet into digestible chunks by processing all transactions.

Nansen already has a running dashboard that uses Merkle Trees to display the balance sheets of 14 CEXes. Now that all CEXes are suspect for background misuse of customer funds, more exchanges rush to be included on a daily basis. Here is what a PoR snapshot looks like for Binance.

By obtaining Merkel Root, which is the totality of all transaction hashes, third parties like Nansen can contrast the exchange’s balance sheet with publicly verifiable balances. Image credit:

But is PoR enough? What about the “not available N/A” sections for “Claimable” and “Total Debts”. How can one verify that the exchange is not leveraging customer funds for hidden debt?

For example, an organization could collude with an exchange to transfer funds for a short-term balance snapshot. This is where proof-of-liabilities (PoL) comes into play.

Nic Carter, the co-founder of blockchain data aggregator, has a proposed his own indirect solution:

“Proving liabilities is tricky, and generally requires an auditor to engage in a full assessment. For instance, exchanges can omit certain liabilities to ‘cheat’ a PoR attestation. This is why I recommend both a user-facing PoR protocol, allowing users to obtain ‘herd immunity’ by collectively verifying their individual balances, and an auditor-facing PoR protocol, to prove that the claimed liabilities are faithful to reality.”

With this continual scanning from both user and auditor side, we will likely see a new era of CEX transparency.

It’s interesting to see these developments take place organically, independent of regulators.

Enjoy 5MF? Click to forward it to three friends.

Digital Currency Group Still Has Leeway

  • DCG’s CEO Reassures Shareholders that Intercompany Lending is Not a Concern (link)

November as the Month of Crypto Cascades

November is the month of crypto cascades. Sam Bankman-Fried created the cascade environment, and Binance CEO “CZ” pushed the cascade by calling out SBF’s illigitimate FTT collateral against user funds.

Image credit: Twitter

In the aftermath, we have seen withdrawal halts from multiple lenders, with BlockFi and Genesis as the largest. These caused their own mini-cascades. Case in point, when Genesis halted withdrawals last week, Gemini exchange suffered $570 million in withdrawals throughout a single day.

That’s because people confused Gemini exchange with the Gemini Earn lending program, facilitated by Genesis. But who owns Genesis? One of the biggest crypto players around — Digital Currency Group — a venture capital (VC) firm with fingers in over 200 crypto pies.

The liability cascade from FTX and Genesis to Grayscale and DCG itself. Image credit: Winter Soldier

Having $50 billion AuM and run by Barry Silbert, DCG is so big that the firm’s front page describes it as “the epicenter of the bitcoin and blockchain industry”. Not only does DCG own Genesis but a much bigger player as well, Grayscale Bitcoin Trust (GBTC), a fund holding $10.5 billion worth of Bitcoin.

After SBF was exposed, Genesis was left with $175 million stuck in FTX. Simultaneously, users fled and drained Genesis’ liquidity. But more importantly, as the price of BTC price was suppressed, GBTC’s discount to NAV was at an all-time-low of -45% last Friday.

You see, GBTC issues shares representing Bitcoin holdings, traded on over-the-counter markets. Bitcoin holdings are represented as Net Asset Value (NAV). When GBTC is trading at a discount, it means that the Net Asset Value (NAV) is higher than the shares sold by Grayscale.

DCG’s GBTC is at a -71.36% trailing 12-month loss. Image credit: Grayscale

To account for this hemorrhage, DCG tapped into Genesis lending — its piggy bank of sorts — to prop up GBTC to the tune of $772 million.

In the meantime, Genesis Global Capital hired investment bank Moelis for bankruptcy exploration due to its liquidity shortfall of $1.6 billion.

In terms of Grayscale, was the GBTC propping sufficient?

If not, imagine the devastating fallout of selling GBTC’s 633,360 bitcoins. Such a selling pressure would be historic, plunging the entire blockchain space into new depths. However, that dire scenario appears to be unlikely.

Although BTC price going up would certainly switch things faster for the better, GBTC’s $575 million debt to Genesis is not due until May 2023. Moreover, GBTC runs on 2% fees, which account for ~$200 million per year if BTC remains at $16k. In Tuesday’s letter to investors, DCG CEO, Barry Silbert, further noted that the firm has $800 million in revenue.

DCG’s total liabilities run up to $2 billion, but the $1.1 billion promissory note is not due until June 2032. For now, based on this information, it looks as if DCG has plenty of available runway.

Decentralized Finance Doesn’t Necessarily Mean ‘Private’ Finance

  • Uniswap Updates Privacy Policy: Will Track User Data for Optimization (link)
  • Ethereum Software Firm ConsenSys Reveals It Collects User Data (link)

Will User Privacy Be the Next Focal Point for DeFi?

On August 8th, DeFi had its turning point.

The US Treasury’s Office of Foreign Assets Control (OFAC) sanctioned an open source protocol called Tornado Cash. The original purpose of Tornado Cash was to ensure financial privacy.

For example, Ethereum co-founder Vitalik Buterin used it to donate to Ukraine because he didn’t want to be embroiled in politics.

Image credit: Twitter

OFAC approached Tornado Cash in a singular way, focusing on its potential for money laundering and other negative uses, despite the service being purpose-agnostic.

So how can OFAC block a decentralized application (dApp) on a public blockchain that is supposed to be immutable? The problem is, while the smart contract running TC on Ethereum is intact, the road from a cumbersome smart contract code to a user-friendly interface is vulnerable.

Specifically, when the MetaMask wallet connects to dApps, it does so with third-party infrastructure like Infura, which was among the first to block Tornado Cash access.

Because both Consensys (MetaMask’s developer) and Infura are registered and centralized companies, they must comply with governmental policies. Otherwise, they risk long prison sentences.

This is why we are seeing a blurring of lines between privacy and decentralization:

  • Uniswap, a decentralized exchange, updated its privacy policy informing users they screen their wallet addresses with the help of a third party company — TRM Labs — which is funded by Goldman Sachs, Visa, PayPal, and others.
  • Consensys-developed MetaMask, a non-custodial wallet, collects all pertinent user data through Infura, including IP addresses and associated Ethereum wallet addresses.

However, competition is already standing by. It will take some time to catch up to MetaMask’s 21 million monthly active users, but with a push towards data collection among DeFi’s leading components, the competition is already heating up in the privacy-centric crypto space.

Image credit: Twitter

Tweets of the Week


Seeing a lot of bad takes about SBF “only violating ToS and not breaking a law”

“Wire fraud” is a crime that simply summed up is any electronic fraud/scheme designed for profit, in a way that is knowingly deceitful, fraudulent, or illegal.


Also under “18 U.S.C. § 1341” notes that any devised scheme with fraudulent pretenses or representations designed to take money or profit from it, is by definition a criminal offense. Mail fraud or wire fraud.

He stole.

He didn’t break a pinky promise.



During the chaos of the last few weeks, the #Ethereum market cap briefly fell below the aggregate stablecoin cap, once again.

The Top 4 stablecoins USDT, USDC, BUSD and DAI make up over $138B in total, with the $ETH market cap just 2.8% higher at $142B


The price of Crude Oil is now down 1% over the last year. Energy stocks? Up 68%.🤔


The current #Bitcoin market profitability is basically the worst it has ever been.

Adjusted MVRV, which measures market wide profit excl lost coins, is at 0.63.

This means the average $BTC investor is holding an unrealized loss of -37%.

Only than 75-days have been worse off.


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