Mad Crypto: Max Boonen, CEO of B2C2, weighs in on Tether news

This post first appeared in Frank Chaparro’s weekly column “Mad Crypto,” which is sent to Genesis subscribers’ inbox every Monday morning. 

Last week Mad Crypto explored how crypto traders in Asia don't give a hoot about recent developments out of Tether, the stable coin associated with Bitfinex, the cryptocurrency exchange that has come under fire by state and federal regulators. Tethers provide a way for high-speed traders to move in and out of their digital asset positions without having to go through the hassle of dealing with actual U.S. dollars, euros, or yen. 

Since last Monday, we've learned: 

• Bitfinex revealed that Tether is only 74% backed by cash, saying it is 'simultaneously addressing' requests from multiple agencies, including the New York Attorney's Office, DOJ, and the Commodities Futures Trading Commission
• Bitfinex plans to raised $1 billion in an initial exchange offering to cover the $850 million it had locked up by its payments processor Crypto Capital
• Speaking of Crypto Capital, the U.S. Attorney's Office for the Southern District of New York charged two individuals connected to the firm with multiple felonies — including bank fraud

Still, traders are unfazed — or so it seems. As two trading executives put it to my colleague Celia Wan, many still don't see an alternative to the crypto.

It's striking considering, Paxos, Gemini Dollar, and USDC all provide regulated alternatives. 

At Paxos, a source says the firm is seeing an increase in activity from existing customers using its PAX stable coin and that the number of new account sign-ups is "accelerating." In addition the firm is working on speeding up the redemption process for its stable coin. 

Tether isn't known for being the fastest as it stands anyway. 

Furthermore, Tether has seen at least a tiny fraction of its volume action eaten into. 

"The other stable coins are not serious contenders at this stage,” said B2C2 CEO Max Boonen. B2C2 is a UK-based trading firm, which also has operations in Japan and United States. 

As part of this week's column, I've decide to share our entire conversation with Boonen outside of the soundbites in Celia's piece. Enjoy. 

The Block: What do you think in general of the recent headlines out of Tether?

Boonen: Good that the New York authorities are forcing much-needed transparency onto the market when private actors (i.e. audit firms) shamefully failed to do so. More and more, the tacit partnership between the legislator and professional services firms (auditors, lawyers, insurers, etc.) is failing our modern societies. Be it banks that refuse to bank you, auditors that refuse to audit you or insurers that refuse to insure you for no other reason than the perceived risks to their reputation or their milquetoast approach to doing business with the new economy - it's a shame that our community cannot step up by setting up alternative arrangements due to the barriers to entry that those big firms have erected over the years in order to stifle competition. Let's hope that Tether's predicament can trigger a rethink.

Regarding Tether itself, I always believed it was Tether was "backed" and not an exit scam, but I do not condone the actions of the two sister companies (although I do believe their stakeholders acted in good faith and/or out of desperation in the face of a hostile banking industry). Now, some say that fractional reserve banking is fine and Tether is still as good as a year ago. I strongly disagree. I am a proponent of fractional reserves - if you have access to any significant amount of short-term funding and you're not engaged in maturity transformation, you are doing it wrong. There's a right way and a wrong way, though. Tether is not dissimilar to the U.S. concept of a money market fund. You put money in a fund, it's like a bank account except it's invested in short-term securities. The assets have a yield, the sponsor takes a cut, and you get something that looks like a bank's saving account and is redeemable at par at any time. It's OK to invest client funds in U.S. Treasuries, because those high quality assets are readily turned into cash (through outright sales or repo), but you can't invest in 30-year mortgages, come on. Similarly, the Bitfinex equity that Tether received as collateral for its loan might be a total home run on a 5- to 10-year horizon, but it is inappropriate as an investment for in a short-term, non-interested-bearing money fund. It's not a question of value, it's a question of liquidity. In 2008, the real-world and very serious Reserve Primary fund was in a similar bind. I hope Tether doesn't meet the same end! It's a lot of wrong way risk, too: the difficulties faced by Bitfinex will surely impair the liquidity of Tether. Now, it's a free market, it was plausibly legal (or at least "not illegal") and Bitfinex has proven its critics wrong before, so let's see!

Are you still confident in trading tethers or switching to other stablecoins?

A move from $1 to $0.95 is only 5%. It doesn't matter to us that assets are volatile, for instance we had a great day during the DAO hack when ETH fell off a 50% cliff. More concerning would be, e.g., the repercussions of an actual enforcement action on the fungibility or transferability of Tether tokens, or jump-to-default risk. We are not there yet. The other stable coins are not serious contenders at this stage, although this presents an obvious opportunity. Given the past misguided attempts by some stable coin sponsors at spurring adoption by throwing money at market participants without regard to unwanted consequences (something B2C2 has avoided), I am not very confident that a substitute will emerge in the near future.

Thoughts on the tether dispute over the entire cryptocurrency trading market and prices of other coins?

Whilst it's obviously not great for crypto in the very short term, in the medium term we will see a bifurcation of the narrative between the macro picture (public authorities forcing clarity in the market when private audit firms have failed to do so - positive) and the micro story (whether Tether and Bitfinex will make a success of their current predicament). I was not surprised that Tether failed to break $0.97 on the downside but I admit I am puzzled that it is back to $1 Wednesday. Regarding bitcoin itself, if it was headed higher, then it will soon resume its trend upwards. Or vice versa!