September 21, 2022 • 54 mins
Coming to you this week from our YouTube archive is a piece on Europe’s energy squeeze and a recent report which casts doubt on much of cryptocurrency’s trading volume.
The war in Ukraine drags on, causing death, destruction and misery on a shocking scale. But the effects of Putin’s madness are being felt beyond the borders of Ukraine and Russia in many different ways. For Europe, it means a potentially long, cold and dark winter, as fossil fuel exports from Russia dwindle in the face of sanctions and a proposed price cap on Russian oil. A stand-off has ensued, with Russia turning off the gas taps and refusing to budge until sanctions are lifted, while Europe tries to stand firm and not let energy shortages weaken its resolve.
In the first part of today’s episode, we look at what led to this situation and examine why it’s more precarious than many might think. We also look at some of the ways in which European countries are starting to take steps to try and limit the damage, all while winter gets closer with each passing day.
Then, in the second part of the episode, we go through a recent report by Forbes which digs down in the trading volumes on cryptocurrency exchanges. It’s titled: ‘More Than Half Of All Bitcoin Trades Are Fake’ and is critical of much of the crypto industry. It was an interesting report to cover, containing much to disagree with, but also plenty of food for thought. Have a listen and see what you think.
We hope you enjoy the show.
Producer for iHeartMedia: Noel Brown
Editor: Semir Mutapcic
Theme music composed by: Noel Brown
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Hello everyone, and welcome to the latest episode from the
Midweek Edition of the Coin Bureau podcast. Every week, I
pick out two of my favorite videos from Coin Bureau's
Youtube Channel to present to you in podcast form. The
audio you're about to hear is from those videos I've
chosen this week. Many of you have been in touch
to ask whether it's possible to listen to our videos
(00:20):
in podcast format, and so your wish is my command.
This week I've selected our videos on Europe's looming energy
crisis and a recent report by Forbes that alleges over
half of Bitcoin's trading volume is fake. Ever since Vladimir
Putin launched an unprovoked war against Ukraine in February, Europe's
dependence on Russian fossil fuel exports has been laid bare
(00:43):
for all to see. Now, with winter approaching and no
end to the war in sight, the stakes are getting higher.
The Russians recently turned off the gas taps and stated
that they wouldn't be turned on again until sanctions were lifted.
Neither side wants to back down, but both have a
lot to lose from this situation. In the first part
(01:04):
of the episode, I look at how we found ourselves
in this mess and what steps countries across Europe are
taking to try and prepare for winter. I also examine
a few reasons as to why the looming crisis may
not turn out to be as bad as some are expecting. Then,
in the second part of today's episode, I dig down
into a recent report by Forbes, which examines cryptocurrency trading
(01:27):
volumes and how much of the supposed trading taking place
in the crypto market is likely fake. This was a
fascinating report to summarize, and there are some interesting takeouts
from it, although I must admit I disagree with the
author on quite a few points. Nevertheless, have a listen
and see what you make of it all. I hope
you enjoy listening to these two pieces and I'll be
(01:49):
back talking crypto with Mike very soon, so be sure
to stay tuned and if you want even more content
from Coin Bureau, be sure to subscribe to our Youtube
Channel and visit us on social media. Year two. It
(02:21):
was entirely predictable and some would say inevitable. Russia is
turning off the taps and Europe is scrambling, scrambling to
secure supplies and conserve energy before winter sets in. However,
some are arguing that this may already be too late.
In my video today, I'm going to tell you exactly
(02:41):
what's going on in the European energy market and what
could happen this winter. This is a video you don't
want to miss. The question of whether Russia would actually
turn off the taps was always in the air. It
was arguably one of the main reasons why Europe was
initially reluctant to impose sanctions on imports of Russian energy.
(03:04):
As I mentioned in a previous video, there were concerns
that planned maintenance on nordstream one, the main pipeline into Europe,
was meant as an intentional warning sign to European leaders,
and while Putin was on a trip to Tehran a
few months ago, he further warned European leaders that gas
deliveries could fall further due to these maintenance issues. It
(03:28):
seems that one of the biggest sticking points here was
a turbine that the Russian said was being held up
in Canada thanks to the sanctions. Now, despite the eventual
delivery of that turbine, gas supplies through nordstream one dropped
by a further fifty in the days that followed, there
was panic on the continent as prices kept on rising
(03:50):
to dangerous levels. However, that was only the first salvo.
When European countries, in conjunction with the g seven star,
arted proposing price caps on Russian oil. Putin didn't take
too kindly to the speculation. The gas flows coming through
nordstream one were once again brought to zero as there
(04:11):
were some more turbine related issues that needed to be
fixed in a quote specialized workshop. Now, whether this was
legitimate is anybody's guess, but the result was that gas
flows coming through Nordstream were brought to zero. This caused
panic in Europe. That's because, even though they were scrambling
(04:31):
to source gas from other places, this would still not
be enough to bridge the demand this winter. The complete
shutdown of Russian gas made it clear that either demand
would have to be curtailed or there would be shortages
later in the year. In the immediate short term, though,
the price of gas skyrocketed on the continent. This led
(04:53):
to some serious concerns that not only could we have
an energy crisis, but a financial crisis as well. Allow
me to explain. You see, there's a massive derivatives market
for gas and energy worth trillions of Euros. This is
used by a number of participants, but perhaps some of
the most prolific are power companies and utilities that are
(05:15):
looking to hedge their exposure to falling prices. This makes
sense when prices are falling and the power producers are
trying to protect their bottom line, but it creates a
whole lot of issues when we see prices rally like this.
That's because these power producers will now have to put
up collateral for margin calls. This becomes a serious issue
(05:37):
when it happens all at once and power producers have
not been able to realize the profits from the higher
spot prices. Collateral needs to be posted and fast. That's
because there are numerous other counterparties to that trade that
could also go belly up should they not get that
collateral posted. According to Bloomberg, this has created a, quote layman,
(06:02):
moment for the European Energy Market, a highly leveraged derivative
market that could see firms go bankrupt thanks to a
massive liquidity crunch. By some estimates, the amount of margin
calls that could be faced is near one point five
trillion euros. The spike in these margin requirements is forcing
(06:22):
these energy producers to tap numerous credit lines. For example,
last week, Finish Utility fortum got two point three five
billion euros of bridge funding. Over in Switzerland, AXXSPO got
a credit line of up to four billion francs, about
four point one billion dollars. Over in the UK, Centrica
is in talks with banks about a potential extension of
(06:45):
credit lines. Other companies are nearing bankruptcy and have had
to get state support. These include the likes of Germany's UNIPER,
for instance. It is facing a liquidity shortfall not only
because it can't get any more Russian gas through the pipeline,
but also because it has had to post close to
one billion euros in collateral. UNIPER has become one of
(07:06):
the most high profile casualties of the crisis and right
now its survival hinges on support from the state, according
to the UNIPER CEO quote. Look, the worst is yet
to come. What we see on the whole scale market
is twenty times the price that we have seen two
years ago. Twenty Times. UNIPER may not be the only casualty, though.
(07:29):
Throughout Europe there are a number of utility companies that
could be teetering. In Austria, for example, the government stepped
in with billions in support for Vienna's municipal utility supplier.
In Sweden, the government extended emergency liquidity support to its
electricity producers. It has now become quite clear that broader
(07:50):
support will be needed in order to stave off a
full blown credit crunch in Europe. As such, the European
Commission is examining a number of pasures to help with liquidity.
Those proposed include credit lines from the E C B,
expanding the acceptable collateral or even, in the worst case,
a temporary suspension of the derivatives markets. Whether these measures
(08:14):
could work is anybody's guess. So far, prices appear to
have eased after a meeting of EU energy ministers. That's
because there appears to be some disagreement around the initial
spark that lead to the gas being shut off. The
suggestion of a price cap on Russian oil. It's another
(08:35):
short sighted action that could potentially have disastrous consequences. The
principal m o behind the price cap is that by
agreeing not to pay above an agreed maximum for Russian
oil and gas, EU countries can reduce the income the
Russians are earning by selling their exports on the open market.
They're also hoping that, should they ban, together with other
(08:58):
members of the g seven, they can create a buyer's market,
essentially creating an environment where Russia will have to take
it or leave it. The buyers set the price and
the seller will just have to agree. However, there are
a number of problems with this. Firstly, it assumes that
the seller will accept Europe is taking a gamble that
(09:19):
Putin needs to sell them gas more than they need
to buy it. For his part, Putin has said that
he will quote make Europe freeze and will turn off
the tabs to any country that imposes price caps. It's
unlikely that countries like India or China will agree to
these caps, so he may just decide to direct oil
(09:40):
and gas there instead. Yes, it's unlikely to make up
for the demand and the pipeline infrastructure in the East
isn't as developed, but it's still something he can do. Then,
of course, there's the question of how these price caps
could impact the power producers and utilities. Together with proposals
to tax quote windfall profits, these measures could do further
(10:03):
harm to generation efforts. More broadly, if they can only
charge a certain amount for gas that's coming from Russia,
it could limit their incentives to get supply onto the market. Moreover,
if you're going to tax them even more for making money,
then you're going to disincentivize them from investing in and
sourcing new supply. I'll leave a link to this Bloomberg
(10:26):
interview with an energy expert, where he explains exactly why
these measures are going to lead to more shortages. Now,
something else that needs to be considered here is the
demand side. When you implement artificial price caps, the dynamics
of supply and demand don't work. Consumers don't adjust their
usage lower or conserve their energy, which only makes rationing inevitable.
(10:50):
The same can be said for some of the other
support measures that have been proposed. Measures like subsidies, for example,
don't do anything to limit energy demand. So it looks
inevitable that Europe is going to have to ration some
of that gas and energy. In fact, there are already
a number of European countries that have proposed and indeed
(11:12):
implemented laws aimed at saving energy. Fancy cold showers anyone?
How about no street lights and lower thermostats. That is
what is happening right now. Measures have been implemented at
a consumer level to limit energy use so that European
countries can fill up their reserve gas tanks for the winter.
(11:34):
In the German city of Hanover, hot water has been
banned in public buildings. It's the first city in Germany
to make hot water unavailable for hand washing and other
uses in government facilities, gyms and swimming pools. According to
the mayor of the city quote, the goal is to
reduce our energy consumption by fifteen percent. Other cities in
(11:58):
Germany are taking measures such as dimming street lights. So
back to the Dark Ages, am I right? Sorry, bad joke.
It's not just in Germany, though. In Spain, Parliament recently
approved a law that would limit heating and cooling in
most businesses and public spaces. Air contemperatures are not allowed
to go below twenty seven Celsius in summer and above
(12:20):
nineteen Celsius in winter. In fact, I remember seeing signs
to that effect when I was in Barcelona just a
couple of weeks ago. Those temperatures will make for a
far from comfortable living environment for many people and for
any viewers who deal in Fahrenheit. We're talking eighty point
six and sixty six point two degrees respectively, by the way.
(12:41):
And speaking of limiting temperatures, there have been suggestions in
Switzerland that would see people potentially being jailed for heating
their homes higher than nineteen Celsius in the event of ration.
Ng this is on top of the proposed finds that
the government could doll out to those Scali wags who
score at the rules. Speaking to the Blick newspaper, Marcus
(13:04):
spawned Ly, a spokesman for the Federal Department of Finance,
explained that the rate for fines on a daily basis
could start at thirty Swiss francs and added that the
maximum fine could be up to three thousand Swiss francs.
Over in France, meanwhile, things are similarly bleak. Despite generating
more nuclear power than any other European country, it turns
(13:27):
out almost half of French reactors are under maintenance barles
demure timing. As a result, rationing is also taking place
in a number of French cities. They're turning off street
lights and factories are shutting down their furnaces. In Normandy,
some schools will even start heating their classrooms by burning
wood instead of gas. There are also efforts on a
(13:50):
national level for businesses and individuals to embrace energy conservation
by increasing car pooling, lowering thermostats and shutting off illuminated
advertising signs. The restrictions are even more forceful for French businesses.
The prime minister has called for companies to reduce their
consumption by up to ten percent or face enforced rationing. Basically,
(14:14):
you make it happen or we will make it happen
for you. As if that wasn't bad enough, businesses will
also have to appoint a, quote, Ambassador of Energy Sobriety
this month and present blueprints to the government for cutting
their electricity consumption. The result is that some businesses have
decided to shut their production for a couple of months.
(14:38):
These include der Lex International, which said it would put
its furnaces on hold and its employees on furlough till November.
The same can be said for Christal dark, the maker
of crystal wine goblets. They've placed six and fifty of
their five thousand employees on partial furlough. Imagine being sent
(14:58):
home from work and there having to contend with cold
showers and a home no warmer than nineteen Celsius. That
is the reality facing many today. So that's it, then,
a cold, dark winter. Well, there are a few silver
linings to these wintry clouds. First, you have to assume
(15:19):
that it is going to be a particularly cold winter,
which is not guaranteed. Trying to forecast winter temperatures this
early in the year is incredibly difficult. Moreover, there are
so many drivers of weather that forecasts can change on
a dime. But, having said that, there are some indications
that it could be warmer than usual. This is thanks
(15:42):
to the influence of La Nina, which could be felt
later this year. I'll leave a link to this very
helpful blog post below, which gives you more of an
overview about the forecast for this winter. But the T
LD R is quote. Europe is expected to have warmer
than average imperatures over most of the northern and north
(16:03):
central parts of the continent. Then, of course, you have
to consider that Europe is trying to source other supplies
of gas. They're scrambling to secure contracts for gas pipelines
and liquid natural gas shipments. These are making up some
of the shortfall, but even then, it's not been plain sailing.
That's because Europe hasn't been too active in developing re
(16:27):
gasification plants on its shores. This means that they're limited
to how quickly they can bring these gas shipments on shore.
Building these plants can't be done overnight, but European countries
are doing what they can to approve the construction of these.
They're also making use of offshore ships which can do
the job of a regasification plant. These are called floating
(16:51):
storage regasification units, F R S us, and they could
help to bring a lot of this gas on shore.
But you so have to consider the fact that Europe
isn't the only region that's competing for these Leen g shipments.
Countries in Asia, such as South Korea and Japan, are
big consumers of llen G as well. They have also
(17:14):
secured longer term contracts, which have to be fulfilled long
before the Europeans can even consider buying up additional supply.
Whether Europe will be able to do this also really
depends on how cold things are over in Asia. If
it's unseasonably warm there, then there will be a lot
of ellengy supply that can be scooped up by the Europeans.
(17:37):
Beyond this, European countries are rushing to fill gas storage units,
and they are well ahead of schedule. They have already
reached of storage limits, a target that they were initially
aiming to reach by the first of November. Typically, gas
storage is able to absorb supply shocks and typically provides
(17:58):
at least twenty five tot of the fuel consumed in winter.
If we were to assume more gas stored and a
slightly warmer winter in Europe and Asia, then the big
European energy freeze could be narrowly averted and those hot
showers may not just be a fond memory. Okay, time
(18:19):
for a few of my closing thoughts on the matter.
It's quite clear that we're going to see some challenging
times in the coming months. Nearly every country in Europe,
short of perhaps Norway, is concerned about the prospect of
gas and energy shortages this winter. It was always clear
that Putin would use gas supplies as the ultimate trump card.
(18:41):
Of course, cutting gas to Europe and killing demand from
the continent won't come without long term implications for Russia
and Europe. Knew this. However, they still played Russian Roulette
with a madman, and that is a dangerous game. Firstly,
it's important that financial regulators find a a to provide
liquidity to those companies facing a credit crunch. The last
(19:04):
thing that the continent needs now, on top of an
energy crisis, is another layman moment for the derivatives markets.
It seems as if they're managing here, though, and solutions
such as posting alternative collateral are being considered. Governments are
also rushing to support these companies with state funded lifelines. Now,
(19:25):
while I was heavily against bailouts of over Leverage Wall
Street banks in two thousand and eight, supporting an energy
company under a crunch caused by geopolitics does make sense.
Bankruptcies of power companies would not help an already fraught
situation in Europe. When it comes to short term policies,
governments should refrain from knee jerk reactions. Price caps and
(19:48):
taxing windfall profits could potentially warp the market and exacerbate
the supply shortages. The best solution for this winter is
to reduce demand and increase supply. On the demand side,
these energy saving policies appear to be the only solution
Europe needs to cut at least ten percent of its demand,
(20:09):
and if this can be done by temporary power saving solutions,
then it should help stave off a crisis. Cold showers
are a bitter pill to swallow, but they aren't deadly now.
When it comes to the supply side, Europe is finding
additional sources. They've been in frantic negotiations with L energy
exporters and they are making plans for temporary regasification facilities.
(20:32):
Offshore storage facilities are getting full and there is a
chance that this winter the weather could be on their side. Then,
in the longer term, Europe is laying the ground work
for more energy independence. The politicians needed a wake up
call from woke environmental policies that sacrificed energy independence at
the altar of green power. Hopefully, they're going to implement
(20:56):
common sense policies that find a balance between emission reduction
and energy security. CRYPTOCURRENCY's purpose is to replace the existing
financial system. This not only includes replacing Fiat currencies with
hard money like BTC, but also replacing financial intermediaries with
(21:20):
defied protocols. This makes defied protocols direct competitors to commercial
banks and central banks. And that's why the report about
defy recently published by the United States Federal Reserve is
so significant. Today I'm going to summarize what the feds
defy report says in simple terms, give you my thoughts
(21:40):
as we go along, and tell you what it could
mean for the crypto market. The thirds defy report is titled, quote,
Decentralized Finance, defy, transformative potential and associated risks. It appears
to have been written in June but was only published
late last month. I'll get into why that might be
a little later. In any case, you can find the
(22:02):
full text in the description. So the report begins with
a brief overview, wherein the authors effectively reiterate what I
mentioned a few moments ago. Quote. Defied products and services
are conducted without a trusted central intermediary such as a bank,
and they include payments, lending and borrowing, trading and investments,
(22:23):
capital raising, crowdfunding and insurance. As a fun fact, crowdfunding
via Cryptocurrency, I. C O S, is considered to be
one of the most powerful tools in cryptocurrency, as it
allowed both crypto projects like ethereum and cryptocurrency exchanges like
finance to get off the ground. Given that retail investors
arguably have a tendency to crowd fund projects that seek
(22:45):
to disrupt the status quo, it should come as no
surprise that countries around the world seem to be moving
towards restricting retail access to cryptocurrency. More about that in
the description. Now. What's interesting is that the authors seem
to consider bitcoin to be the first defied protocol, as
it made it possible to send and receive BTC payments
(23:07):
in a trust less manner. This is consistent with the
author's definition of defy I mentioned a few moments ago,
but interesting nonetheless. The author's point to the proliferation of
Smart Contract cryptocurrencies as the precursor to the explosion of
decentralized finance, which makes sense, given that extensive programmability is
(23:28):
required for most defied protocols to work. The author's note
ethereum as being the most popular smart contract cryptocurrency for defy,
but acknowledge that avalanche and Salana are starting to become
popular as well. They also acknowledged that many defied protocols
have gone multi chain, before going on to highlight the
two hundred and twenty four billion dollars in total value
(23:51):
locked in defy protocols, a figure which was obviously recorded
earlier this year. Even though this figure is still a
fraction of the global financial system. The author's caution that
defy is growing very quickly, and I suppose it was
until May. Now, while the author's caution that defy is
(24:13):
growing quickly, they don't seem to be all that concerned,
and that's for one simple reason scalability. Smart Contract cryptocurrencies
can't currently scale to support global adoption, but the authors
believe they could with the right scaling solutions. The authors
then outline too scenarios they foresee when it comes to
(24:34):
defy adoption. Either defy evolves to become interoperable or even
integrated with the existing financial system, or it evolves to
become its own financial system, which would be the preferable
outcome for Crypto in my opinion. As far as the
authors are concerned, which of the two scenarios unfolds is
ultimately irrelevant, as they both pose financial stability concerns, especially
(24:58):
since there is a lack of regularation around defi. In
other words, we can't control it, so it's bad, regardless
of what it becomes. They go on to lament. How,
whereas centralized entities in the CRYPTO industry are easy to regulate,
decentralized entities can't be coerced with questionable laws and even
more questionable sanctions, including some defied protocols. And being hyperbolic,
(25:22):
of course, but you get the point. The second part
of the Fed paper is about blockchain basics, and the
way the authors explained blockchains and smart contracts was peculiar
to say the least. For example, quote consensus protocols regulate
the way in which updates to the data set are proposed,
reconciled and recorded, while ensuring that no other previously validated
(25:46):
data have been altered. This immediately reminded me of a
defy report by the bank for International Settlements, wherein the
author explains how defied protocols will exist on permissioned distributed
ledgers run by banks, with regulations at the protocol level.
More about that crazy report in the description. Now the
(26:08):
authors go on to explain how blockchains work, and I
won't bore you with the details there. However, I will
commend them for acknowledging that the Bitcoin blockchain became the
first blockchain when the first bitcoin block was mined in
two thousand and nine. Bravo. I'll quickly note that blockchain
is a term that's often used interchangeably by institutions to
(26:32):
describe both cryptocurrencies and the permission distributed ledger systems that
are operated by centralized entities. In this case, it seems
the authors are using the term correctly, which I again
commend them for. They then turned to the topic of
smart contracts, and I won't bore you with the details
here either. However, I will again commend them for underscoring
(26:54):
the importance of Compos ability and acknowledging that oracles are
required to make most de fi protocols work. This makes
me worry that they could go after popular oracles like chain, link,
et Cetera, to apply regulations to defy, but let's not
go there yet. Now the third part of the Fed
(27:15):
paper talks about, quote, defy products and services, and I
must admit I take issue with the title there, because
a product or service implies that an intermediary of some
kind is involved, which is simply not the case with
defi protocols. The author start by repeating that Ethereum is
currently the most popular smart contract cryptocurrency for defy, but
(27:36):
this time add the finance smart chain and car Darno
as two additional smart contract cryptocurrencies that are increasing in popularity.
Respect what's interesting is the author's note that quote, many
depths provide discrete services rather than complex bundles of products.
This is interesting because central banks seem to be obsessed
(27:57):
with the idea of a one stop shop for their
upcome in Central Bank digital currencies, or cbdcs as it
so happens. The authors also note that, quote, new protocols
are beginning to offer a combination of several products in
an attempt to become a one stop shop for financial services.
This makes me wonder whether they'll start going after these
(28:19):
kinds of defied protocols more aggressively. What's even scarier is
that the author's single out make a Dow when discussing
governance in defy. This is scary because make a dow
makes it possible to mint a decentralized sable coin called die,
using cryptocurrency as collateral. Once upon a time, most of
(28:39):
the Diet was largely collateralized by ether, but today it's
mostly collateralized by circles. USDC, a centralized stable coin circles.
Response to the recent sanctions against Tornado cash have consequently
led to concerns that make a Dow could be next
on the regulatory chopping block. More about what happened to
(29:00):
tornado cash using the link in the description. Now what's
reassuring is that the authors actually seemed to be somewhat
supportive of defy, as they provide some recommendations for how
it could be improved, including the introduction of more real
world assets, the creation of more robust stable coins and
(29:21):
the introduction of cbdcs. That last one threw me off,
because the authors literally suggest that, quote. The creation of
a central bank digital currency, CBDC, that becomes available on public,
permissionless blockchains such as Ethereum, may also serve to reduce volatility.
I'm not sure how I feel about that, if I'm
(29:42):
being honest. Now the authors end this section with another
insightful comment, and that's the quote. The direct implication of
a fast growth in defi, predominantly driven by wholesale and
possibly institutional investors, would be the relevance of financial stability considerations.
Put differently, they're concerned that too much institutional interest in
(30:04):
defy could pose a threat to financial stability, revealing that
this is a very real risk that central banks are
concerned about. Take a second to consider that. This suggests
defied option is much more significant than we think. anyways.
The authors then go on to describe some subcategories of
(30:24):
defy in detail. These are borrowing and lending protocols, decentralized
exchanges or dexes, derivative dexes, payment protocols and asset management protocols.
When it comes to borrowing and lending protocols, they point
out that about a fifth of all the total value
locked in defy is coming from this specific niche note
(30:46):
that these statistics are from earlier this year, but it
looks like this market share still stands today. What's odd
is that the author's note quote fees are often denominated
in the platform's governance token, which she is certainly news
to me. As far as I know, all transaction fees
on almost all borrowing and lending protocols are paid in
the native cryptocurrency coin of whatever blockchain they're on. After
(31:11):
describing what appears to be are as innovative safety module,
the author's note that quote lenders may earn an interest
rate that exceeds rates offered by banks on sovereign currency
denominated deposits, which is a big no note because it
creates competition for the big banks. What's impressive is that
the authors go as far as explaining are as flash
(31:34):
loan functionality, though they again fail to mention the defied
protocol by name. This is forgivable, however, as they emphasize
that there are quote, legitimate uses of flash loans, such
as swapping out cryptocollateral on the debt. This is significant
because flash loans have been the subject of regulatory scrutiny
due to their use in extreme arbitrage trades that have
(31:56):
resulted in billions of dollars of damage to defy protocols
with suboptimal oracles. More about that using the link in
the description. I also couldn't help but notice that the
authors included make a dow in their list of borrowing
and lending protocols. Some would say that maker Dow is
technically a collateralized debt protocol, but let's not split any
(32:18):
more hairs when it comes to dex is. The authors
point out that related protocols make up the lion's share
of the total value locked in defy and briefly explain
how dex is work. You know, liquidity providers ratio of
two assets in a trading pool determining their price, liquidity
providers earning trading fees, et cetera. What strange is that
(32:39):
the authors refer to liquidity providers as quote investors and
trading fees as quote interest, like yield. This is strange
because it's the type of language that anti crypto regulators
like the SEC routinely use when justifying their crackdowns on
crypto projects. Probably nothing. On a more positive note, the
(33:02):
authors correctly state that quote, unlike centralized exchanges, dexes never
take custody of user funds, which is important because some
centralized exchanges have been hacked, which resulted in a loss
of customer's cryptocurrency. Preach. What's unfortunate is that the authors
don't spend too much time talking about other dex related innovations,
(33:23):
such as stable coin dexes, like curve finance and its
vote S, growd liquidity mining, but I suppose there's a
time and a place for that degree of detail. The
section on derivative dexes is even shorter, and I suspect
this is because the authors don't want to give the
relevant crypto projects too much advertising. After all, derivative dexes
(33:44):
make it possible to quote get price exposure to other
digital assets, currencies, commodities, stocks and indices. As far as
the powers that be are concerned, all these investments should
only be accessible via a regulated intermediary. Hence why regulators
came down hard on all cryptocurrency exchanges offering tokenized stocks
(34:04):
last spring and summer. Luckily for the incumbents, derivative dexes
seem to be the least popular defy niche, accounting for
the smallest slice of the Pie, according to the authors,
again outdated estimates, which still seem to hold true. The
authors also touch on the use of leverage in derivative
dexes and touch on decentralized prediction markets, which have been
(34:28):
subject to lots of regulatory scrutiny in recent months. When
it comes to payment related defied protocols, the authors define
these as being designed to quote overcome one or more
obstacles posed by decentralized technology, including issues with efficiency, interoperability
and privacy, to provide a user experience that mimics payments
(34:51):
in traditional finance accurate. They then go on to explain
how tornado cash and flex a network work, which slightly
suspicious given that Tornado cash got sanctioned and flexa networks,
amp token, was recently delisted from a series of crypto
exchanges after the sec called amp a security in an
(35:13):
insider trading case against a coin base employee. More about
that in the description. The authors also touch on Bitcoin's
lightning network, which is extremely underrated. More about that in
the description too. Now, when it comes to asset management
related defy protocols, the authors quickly explained that these defy
(35:35):
protocols automatically redirect any crypto deposited into them to wherever
they will earn the highest yield. Among other things. What
caught my eye is that liquid staking protocol, Lido Finance,
was at the top of the list, potentially for shadowing
regulatory scrutiny for L D O. Let's hope I'm just
seeing things, because if this happens, it could be very
(35:58):
bad news for a theory him once it transitions to
proof of stake in the next week or so. And yes,
you can learn more about that using the link in
the description. It's always there, isn't it? Now the fourth
part of the Fed's report concerns the risks associated with defy,
and it should come as no surprise that this is
the longest section of the report by a wide margin.
(36:22):
The author's commenced by acknowledging that defied presents, quote, interesting
opportunities for lowering costs, expanding access and increasing transparency, and
reiterate that defy is still small relative to the financial
system it seeks to replace. Logically, the authors admit that
a disruption to defy at this point in time would
(36:43):
therefore probably have next to no impact on financial stability,
but again reiterate that its rapid growth could pose future
challenges to financial stability if left unchecked. What's funny is
that they say, quote, the current developments in defy have
the potential to trigger a defi version of a financial crisis,
(37:04):
possibly with spillovers to the traditional financial system. This is
funny because that's basically what happened when terror imploded in May,
and defy is doing just fine. Thank you very much.
The authors then point to high leverage as an area
of concerns, since high leverage has historically been a primary
factor in financial crisis. They also say the same for Illiquidity,
(37:28):
a k a the inability to sell a large amount
of an asset at the same price without crashing said price.
What's Hilarious is that the author's caution that defy could
cause financial stability issues while simultaneously claiming that, quote, the
overwhelming majority of the losses in the traditional financial system
associated with op risk are merely a cost of doing business.
(37:50):
Double Standards Much you know. I think U S Senator
Pat to me said it best. Quote failure should be
an option for reference. This was PAT's response to terror's
catastrophic collapse. Just goes to show you how investor protection
is often an excuse for financial control. End of rant. Now,
(38:11):
to the author's credit, they admit that, quote, defy can
reduce some operational risks inherent in traditional finance, particularly those
associated with reliance on centralization of financial intermediation activities. However,
they caution that defy protocols present new risks. The authors
then go on to list all the benefits of defy,
(38:34):
and the first is that blockchains make transaction settlements near instant.
By contrast, transactions in the traditional financial system can take
days to clear or more, especially if you're dealing with
more elaborate investment vehicles. Another benefit is that all transactions
on cryptocurrency blockchains are publicly viewable. This makes it easy
for investors and regulators to assess the current state of
(38:57):
the market, namely the status of market participants and any
potential risks they're experiencing. Now, if you think that this
isn't possible because cryptocurrency is anonymous, think again. In the
words of the authors quote, pseudonymity does not necessarily guarantee
true anonymity. In practice, blockchain analysts have found that it
(39:19):
is often possible to associate an address with a specific
person or institution by observing transaction counterparties and amounts associated
with addresses. If you're wondering how blockchain analytics companies track
CRYPTO transactions, you can find out using the link in
the description. I digress. Now a third benefit of defied
(39:39):
the authors identify is auditability. CRYPTOCURRENCY blockchains allow us to
check the accuracy of financial statements from individuals and institutions
and make it possible to assess the security of the
smart contracts that make up defied protocols. The authors also
touch on something that's often overlooked, and that's that Mo
(40:00):
individuals and institutions aren't fans of this transparency, as it
exposes sensitive information about their finances. As far as I
can tell, this is why there has been institutional interest
in Crypto Privacy, despite the regulatory concerns. Now, the fourth
benefit is somewhat unfortunate as it has to do with
(40:20):
cryptocurrencies censorship resistance, which has come into question on ethereum
after supposedly decentralized crypto platforms, protocols and even crypto wallets
blocked access to tornado cash and any associated wallets. The
authors seem to reference this reality by noting that DAB
creators can decide which transactions to accept or reject, and
(40:42):
even go as far as suggesting that, quote, a government
could limit a firm's ability to use Divi to avoid
sanctions by ordering the firm suppliers to only accept payments
coming from approved blockchain addresses. Yikes. After pointing out that
bitcoin and ethereum have yet to experience any censorship at
the blockchain level, the authors go on to state that, quote,
(41:05):
immutability is not necessarily a benefit in all cases, as
blockchain transactions that involve fraud or theft might not be
reversed as quickly or easily as they would be in
traditional finance, which is fair but also terrifying and also
not crypto. This ties into the long list of risks
(41:25):
the authors see with defy, and the first is the
consensus protocols of the smart contract cryptocurrency blockchains themselves. The
author's note that these are corruptible if more than fifty
of the Hash power or stake is controlled by a
single entity or set of coordinated entities. Now, if you
watched our recent video about Kracken's crypto consensus report, you
(41:48):
might recall that the corruption for many proof of state
cryptocurrencies is actually much lower, at around thirty, meaning any
proof of state smart contract cryptos carry even more risks
than their proof of work counterparts. The second risk is
similarly simple, and that's errors in smart contract code. As
we've seen, incorrectly written code is eventually exploited and this
(42:12):
often results in a massive loss of funds. The silver
lining is that the traceability of most scripto transactions means
many of these funds can be found and returned. The
authors also take time to caution that audits are not
evidence that a smart contract is secure, and this is
something that yearn finance founder and Phantom developer Andre Cronier
(42:35):
said many times. I wonder what he's up to these
days anyhow. The authors continue by noting that the conditions
of a smart contract must be predetermined and are permanent.
This means that it's not possible to write, say, a
smart contract whose terms and conditions can be easily changed
like a real world agreement. The third risk is that
(42:59):
you could lose your crypto forever if you send it
to the wrong wallet address or lose access to your
crypto wallet, which is just part and parcel of being
a responsible, self custodial adult, really. The fourth risk involves
transaction ordering. This includes everything from transaction fee competition to
minor extractable value, or MTV, which is where miners reorder
(43:21):
transactions to benefit themselves rather than process transactions in order
of transaction fees, as they're incentivized to do. The fifth
risk is one I alluded to earlier, and that's oracles.
Any issues with the oracles providing pricing data to defy
protocols means there could be serious threats, such as flash
loan attacks between dexes from defied D gens and unwanted
(43:45):
liquidations in borrowing and lending protocols. The sixth risk is
especially relevant these days, and that's liquidity. The T L
D R there is that many defied protocols need large
amounts of liquidity, a k a Crypto, to function properly.
An absence of liquidity can cause serious issues, such as
price slavage on decentralized exchanges. I'll quickly note that a
(44:07):
lot of the liquidity in defy comes in the form
of centralized stable coins. As per ethereum Creator vitirely BITTERIAN's
own admission. This gives centralized stable coin issuers significant say
in future forks and changes, as they could decide not
to support the blockchains they don't like now. The seventh
(44:28):
risk is straightforward, and that's regulation. I think the author's
summed it up quite well with quote. Regulation may facilitate
the growth of financial activities by providing increased confidence to
potential users of the services, but it can also have
unintended adverse consequences for existing defy and its future development.
(44:49):
In the next subsection, the authors examine defy risks that
aren't directly related to defy protocols, and they start with
a bold claim. Quote, the goal of achieving a truly
trustless financial system is unlikely to ever be fully realized.
The authors say this because it will eventually become impossible
for the average person to be a minor or validator
(45:13):
for a cryptocurrency, and I would argue that this ultimately
depends on how the cryptocurrency is designed. An easy fix
would be to have a trust less base layer with
trusted layers on top. The authors then turned to the
topic of cryptocurrency governance and seemed to send a warning
to unnamed crypto projects. Quote. Even when the final control
(45:37):
over changes to a block chain's protocol resides with a
decentralized group of stakeholders, the group that founded the blockchain
often still exercises substantial influence over its evolution. This is
significant because the idea that an identifiable third party is
driving the expectation of profit from investing in the cryptocurrency
(45:58):
is how the SEC decides to go after crypto projects,
at least in theory. I reckon. We can all think
of a few CRYPTO projects which meet that above description.
The authors continue by correctly identifying the trade off between
centralization and decentralization, namely that centralization makes it easy for
(46:19):
a crypto project to change and adapt, but also goes
against the core values of cryptocurrency and eats away at
the very things that make cryptocurrencies valuable. Here the authors
reveal that the biggest governance related risk has to do
with blockchain forks, wherein two corners of the same community
with opposing views decide to go their own way. This
(46:43):
can negatively impact the safety of both crypto projects as
well as the liquidity on their blockchains. The authors go
on to discuss the governance of decentralized applications and warned
that the centralization of token holders for some dece centralized
autonomous organizations means that they're quite centralized in practice. Note
(47:06):
that one per cent of token holders have voting power
in most dows. What's wild is the authors warned that
quote this risk suggests that, should financial regulators gain authority
over finance conducted on blockchains, they should have similar authority
over on chain protocols controlled by centralized groups. Now, call
(47:29):
me crazy, but I think that the authors are saying
that regulators could potentially become active participants in decentralized autonomous organizations.
That said, I'm sure this is meant to mean that
regulators will treat more centralized dows with the same scrutiny
as centralized crypto companies. After discussing the risk of governance
(47:51):
attacks on decentralized applications, the authors return to the topic
of censorship resistance and make a pretty ridiculous claim. Quote
governments may have legitimate reasons for censorship. Let me remind
you that the Fed is based in the United States.
The authors continue by saying that there's a case for
(48:12):
censorship at the blockchain level because cryptocurrencies are being used
by criminals and countries the United States doesn't like. Ironically,
the author's note immediately after that quote, some blockchain finance operations,
seify and defy are likely to be based in jurisdictions
with varied interests in supporting US regulatory goals. Figures. Another
(48:36):
non defy specific risk the authors identify is the composability
of smart contracts, which can be a blessing when the
markets are rallying but a curse when the markets are crashing.
That's simply because composability makes it possible for volatility to
become more widespread. In Defy, the authors go as far
as suggesting that defied developers quote, invest less than the
(48:58):
optimal amount in Securey, which is not the case as
far as I can tell. In the free crypto market. Secure,
user friendly, useful and profitable projects eventually succeed full stop.
The final area of risk the author's examine relates to
the interaction of cryptocurrency and the traditional financial system. They
(49:20):
begin by saying that it's more than likely that crypto
will exist alongside the traditional financial system for some time,
regardless of whether it succeeds in replacing it. This presents
a series of risks, and the first is, of course,
stable coins like tethers, U S Dt, which hold hundreds
of billions of dollars of real world assets as collateral
to back the stable coin tokens in circulation, mostly US
(49:44):
government debt. A run on US D T, or any
other stable coin for that matter, could therefore create serious
issues for both crypto and the traditional financial system, which
is why the European Union is working to implement a
cap on stable coins as part of its upcoming regulations.
More about those in the description. The second risk is
(50:06):
the exposure that entities in the traditional financial system have
to cryptocurrency, and here the authors say something disturbing. Quote.
As banks and other intermediaries get deeper into providing crypto
services and loans to crypto users, these banks may not
fully appreciate the risks they are incurring. Now I'm sure
(50:28):
I'm just hearing things, but it really sounds like the
authors are saying that crypto users and investors themselves present
a risk to the traditional financial system due to the
fact that they interact with traditional financial services as part
of their activities. This would actually be consistent with the
endgame of the Financial Action Task Force, or fat F,
(50:51):
which is to make it impossible to access cryptocurrency without
an intermediary by labeling disintermediated activities as high risk. More
about that in the description. What's funny is the authors
also note that intermediaries in the traditional financial system could
end up being sued by disgruntled Crypto users in the
(51:11):
event that they can't pin down a centralized individual or
institution behind the CRYPTO project or protocol which caused them pain. Well,
I've yet to see that happen. So this brings us
to the conclusion of the report, where the authors mostly
(51:32):
reiterate what they mentioned earlier, namely that defy is growing
rapidly and therefore requires regulation, a s a p. what's
worth noting is that the author specified that there are, quote,
unique concerns arising from the development of defy, especially the
governance of the code used in depths. This again suggests
that crypto projects with centralized governance mechanisms could soon come
(51:55):
under fire, and with that I must say that I'm impressed.
It sounds like the folks over at the Federal Reserve
know their way around the crypto industry. Now, this is
definitely a double edged sword, because, as awesome as this
awareness is, it also means that the Fed knows where
to direct regulators and lawmakers. On that note, I don't
(52:19):
think it's a coincidence that the Fed waited until August
to release this report. The SEC seems to have a
habit of engaging in many enforcement actions when its fiscal
year ends in September. As such, the purpose of the
Fed report could be to guide them in their crypto crackdown. Alternatively,
(52:39):
the Fed could simply have been providing the information that
was requested by US President Joe Biden in his executive
order about cryptocurrency earlier this year. If you watched our
recent video about important September updates on coin bureau clips,
you'll know that the deadline to submit regulatory recommendations about
cryptocurrency was the fifth of September. As such, the Fed
(53:02):
report could have been a last minute submission of sorts.
In any case, the Fed report is almost certainly bullish
for cryptocurrency. I mean, did you ever think that you'd
see Bitcoin, ethereum, Cardano and Salana in a report from
the Central Bank of the United States? Heck, they even
mentioned are a curve finance and Lido Finance. If that
(53:24):
is not a sign that crypto is slowly taking over,
I don't know what is. As per a recent coin
desk article, Crypto is officially in the quote. Then they
fight you, phase a phase that's followed by an epic victory,
as per the old adage. Make no mistake, however, the
incumbents will not go quietly. I expect to see some
(53:45):
seriously insane announcements from US regulators in the coming weeks
and months, and they're almost guaranteed to do unprecedented damage
to the crypto market. Still, it's not going to stop
the trend of crypto adoption and when the next bullmarket
inevitably comes around, we could hit the critical mass required
to create a parallel system that can't be crushed by
(54:07):
regulations or institutional market manipulation. Mark my words, that day
will come. Thank you so much for listening to the
Coin Bureau podcast. If you'd like to learn more about cryptocurrency,
you can visit our Youtube Channel at Youtube Dot Com
forward slash coin bureau. You can also go to coin
bureau dot Com for loads more information about all things crypto.
(54:30):
You can follow me on twitter at at Coin Bureau
or one word, and I'm also active on Tiktok and
instagram too.
Hello everyone, and welcome to the latest episode from the
Midweek Edition of the Coin Bureau podcast. Every week, I
pick out two of my favorite videos from Coin Bureau's
Youtube Channel to present to you in podcast form. The
audio you're about to hear is from those videos I've
chosen this week. Many of you have been in touch
to ask whether it's possible to listen to our videos
(00:20):
in podcast format, and so your wish is my command.
This week I've selected our videos on Europe's looming energy
crisis and a recent report by Forbes that alleges over
half of Bitcoin's trading volume is fake. Ever since Vladimir
Putin launched an unprovoked war against Ukraine in February, Europe's
dependence on Russian fossil fuel exports has been laid bare
(00:43):
for all to see. Now, with winter approaching and no
end to the war in sight, the stakes are getting higher.
The Russians recently turned off the gas taps and stated
that they wouldn't be turned on again until sanctions were lifted.
Neither side wants to back down, but both have a
lot to lose from this situation. In the first part
(01:04):
of the episode, I look at how we found ourselves
in this mess and what steps countries across Europe are
taking to try and prepare for winter. I also examine
a few reasons as to why the looming crisis may
not turn out to be as bad as some are expecting. Then,
in the second part of today's episode, I dig down
into a recent report by Forbes, which examines cryptocurrency trading
(01:27):
volumes and how much of the supposed trading taking place
in the crypto market is likely fake. This was a
fascinating report to summarize, and there are some interesting takeouts
from it, although I must admit I disagree with the
author on quite a few points. Nevertheless, have a listen
and see what you make of it all. I hope
you enjoy listening to these two pieces and I'll be
(01:49):
back talking crypto with Mike very soon, so be sure
to stay tuned and if you want even more content
from Coin Bureau, be sure to subscribe to our Youtube
Channel and visit us on social media. Year two. It
(02:21):
was entirely predictable and some would say inevitable. Russia is
turning off the taps and Europe is scrambling, scrambling to
secure supplies and conserve energy before winter sets in. However,
some are arguing that this may already be too late.
In my video today, I'm going to tell you exactly
(02:41):
what's going on in the European energy market and what
could happen this winter. This is a video you don't
want to miss. The question of whether Russia would actually
turn off the taps was always in the air. It
was arguably one of the main reasons why Europe was
initially reluctant to impose sanctions on imports of Russian energy.
(03:04):
As I mentioned in a previous video, there were concerns
that planned maintenance on nordstream one, the main pipeline into Europe,
was meant as an intentional warning sign to European leaders,
and while Putin was on a trip to Tehran a
few months ago, he further warned European leaders that gas
deliveries could fall further due to these maintenance issues. It
(03:28):
seems that one of the biggest sticking points here was
a turbine that the Russian said was being held up
in Canada thanks to the sanctions. Now, despite the eventual
delivery of that turbine, gas supplies through nordstream one dropped
by a further fifty in the days that followed, there
was panic on the continent as prices kept on rising
(03:50):
to dangerous levels. However, that was only the first salvo.
When European countries, in conjunction with the g seven star,
arted proposing price caps on Russian oil. Putin didn't take
too kindly to the speculation. The gas flows coming through
nordstream one were once again brought to zero as there
(04:11):
were some more turbine related issues that needed to be
fixed in a quote specialized workshop. Now, whether this was
legitimate is anybody's guess, but the result was that gas
flows coming through Nordstream were brought to zero. This caused
panic in Europe. That's because, even though they were scrambling
(04:31):
to source gas from other places, this would still not
be enough to bridge the demand this winter. The complete
shutdown of Russian gas made it clear that either demand
would have to be curtailed or there would be shortages
later in the year. In the immediate short term, though,
the price of gas skyrocketed on the continent. This led
(04:53):
to some serious concerns that not only could we have
an energy crisis, but a financial crisis as well. Allow
me to explain. You see, there's a massive derivatives market
for gas and energy worth trillions of Euros. This is
used by a number of participants, but perhaps some of
the most prolific are power companies and utilities that are
(05:15):
looking to hedge their exposure to falling prices. This makes
sense when prices are falling and the power producers are
trying to protect their bottom line, but it creates a
whole lot of issues when we see prices rally like this.
That's because these power producers will now have to put
up collateral for margin calls. This becomes a serious issue
(05:37):
when it happens all at once and power producers have
not been able to realize the profits from the higher
spot prices. Collateral needs to be posted and fast. That's
because there are numerous other counterparties to that trade that
could also go belly up should they not get that
collateral posted. According to Bloomberg, this has created a, quote layman,
(06:02):
moment for the European Energy Market, a highly leveraged derivative
market that could see firms go bankrupt thanks to a
massive liquidity crunch. By some estimates, the amount of margin
calls that could be faced is near one point five
trillion euros. The spike in these margin requirements is forcing
(06:22):
these energy producers to tap numerous credit lines. For example,
last week, Finish Utility fortum got two point three five
billion euros of bridge funding. Over in Switzerland, AXXSPO got
a credit line of up to four billion francs, about
four point one billion dollars. Over in the UK, Centrica
is in talks with banks about a potential extension of
(06:45):
credit lines. Other companies are nearing bankruptcy and have had
to get state support. These include the likes of Germany's UNIPER,
for instance. It is facing a liquidity shortfall not only
because it can't get any more Russian gas through the pipeline,
but also because it has had to post close to
one billion euros in collateral. UNIPER has become one of
(07:06):
the most high profile casualties of the crisis and right
now its survival hinges on support from the state, according
to the UNIPER CEO quote. Look, the worst is yet
to come. What we see on the whole scale market
is twenty times the price that we have seen two
years ago. Twenty Times. UNIPER may not be the only casualty, though.
(07:29):
Throughout Europe there are a number of utility companies that
could be teetering. In Austria, for example, the government stepped
in with billions in support for Vienna's municipal utility supplier.
In Sweden, the government extended emergency liquidity support to its
electricity producers. It has now become quite clear that broader
(07:50):
support will be needed in order to stave off a
full blown credit crunch in Europe. As such, the European
Commission is examining a number of pasures to help with liquidity.
Those proposed include credit lines from the E C B,
expanding the acceptable collateral or even, in the worst case,
a temporary suspension of the derivatives markets. Whether these measures
(08:14):
could work is anybody's guess. So far, prices appear to
have eased after a meeting of EU energy ministers. That's
because there appears to be some disagreement around the initial
spark that lead to the gas being shut off. The
suggestion of a price cap on Russian oil. It's another
(08:35):
short sighted action that could potentially have disastrous consequences. The
principal m o behind the price cap is that by
agreeing not to pay above an agreed maximum for Russian
oil and gas, EU countries can reduce the income the
Russians are earning by selling their exports on the open market.
They're also hoping that, should they ban, together with other
(08:58):
members of the g seven, they can create a buyer's market,
essentially creating an environment where Russia will have to take
it or leave it. The buyers set the price and
the seller will just have to agree. However, there are
a number of problems with this. Firstly, it assumes that
the seller will accept Europe is taking a gamble that
(09:19):
Putin needs to sell them gas more than they need
to buy it. For his part, Putin has said that
he will quote make Europe freeze and will turn off
the tabs to any country that imposes price caps. It's
unlikely that countries like India or China will agree to
these caps, so he may just decide to direct oil
(09:40):
and gas there instead. Yes, it's unlikely to make up
for the demand and the pipeline infrastructure in the East
isn't as developed, but it's still something he can do. Then,
of course, there's the question of how these price caps
could impact the power producers and utilities. Together with proposals
to tax quote windfall profits, these measures could do further
(10:03):
harm to generation efforts. More broadly, if they can only
charge a certain amount for gas that's coming from Russia,
it could limit their incentives to get supply onto the market. Moreover,
if you're going to tax them even more for making money,
then you're going to disincentivize them from investing in and
sourcing new supply. I'll leave a link to this Bloomberg
(10:26):
interview with an energy expert, where he explains exactly why
these measures are going to lead to more shortages. Now,
something else that needs to be considered here is the
demand side. When you implement artificial price caps, the dynamics
of supply and demand don't work. Consumers don't adjust their
usage lower or conserve their energy, which only makes rationing inevitable.
(10:50):
The same can be said for some of the other
support measures that have been proposed. Measures like subsidies, for example,
don't do anything to limit energy demand. So it looks
inevitable that Europe is going to have to ration some
of that gas and energy. In fact, there are already
a number of European countries that have proposed and indeed
(11:12):
implemented laws aimed at saving energy. Fancy cold showers anyone?
How about no street lights and lower thermostats. That is
what is happening right now. Measures have been implemented at
a consumer level to limit energy use so that European
countries can fill up their reserve gas tanks for the winter.
(11:34):
In the German city of Hanover, hot water has been
banned in public buildings. It's the first city in Germany
to make hot water unavailable for hand washing and other
uses in government facilities, gyms and swimming pools. According to
the mayor of the city quote, the goal is to
reduce our energy consumption by fifteen percent. Other cities in
(11:58):
Germany are taking measures such as dimming street lights. So
back to the Dark Ages, am I right? Sorry, bad joke.
It's not just in Germany, though. In Spain, Parliament recently
approved a law that would limit heating and cooling in
most businesses and public spaces. Air contemperatures are not allowed
to go below twenty seven Celsius in summer and above
(12:20):
nineteen Celsius in winter. In fact, I remember seeing signs
to that effect when I was in Barcelona just a
couple of weeks ago. Those temperatures will make for a
far from comfortable living environment for many people and for
any viewers who deal in Fahrenheit. We're talking eighty point
six and sixty six point two degrees respectively, by the way.
(12:41):
And speaking of limiting temperatures, there have been suggestions in
Switzerland that would see people potentially being jailed for heating
their homes higher than nineteen Celsius in the event of ration.
Ng this is on top of the proposed finds that
the government could doll out to those Scali wags who
score at the rules. Speaking to the Blick newspaper, Marcus
(13:04):
spawned Ly, a spokesman for the Federal Department of Finance,
explained that the rate for fines on a daily basis
could start at thirty Swiss francs and added that the
maximum fine could be up to three thousand Swiss francs.
Over in France, meanwhile, things are similarly bleak. Despite generating
more nuclear power than any other European country, it turns
(13:27):
out almost half of French reactors are under maintenance barles
demure timing. As a result, rationing is also taking place
in a number of French cities. They're turning off street
lights and factories are shutting down their furnaces. In Normandy,
some schools will even start heating their classrooms by burning
wood instead of gas. There are also efforts on a
(13:50):
national level for businesses and individuals to embrace energy conservation
by increasing car pooling, lowering thermostats and shutting off illuminated
advertising signs. The restrictions are even more forceful for French businesses.
The prime minister has called for companies to reduce their
consumption by up to ten percent or face enforced rationing. Basically,
(14:14):
you make it happen or we will make it happen
for you. As if that wasn't bad enough, businesses will
also have to appoint a, quote, Ambassador of Energy Sobriety
this month and present blueprints to the government for cutting
their electricity consumption. The result is that some businesses have
decided to shut their production for a couple of months.
(14:38):
These include der Lex International, which said it would put
its furnaces on hold and its employees on furlough till November.
The same can be said for Christal dark, the maker
of crystal wine goblets. They've placed six and fifty of
their five thousand employees on partial furlough. Imagine being sent
(14:58):
home from work and there having to contend with cold
showers and a home no warmer than nineteen Celsius. That
is the reality facing many today. So that's it, then,
a cold, dark winter. Well, there are a few silver
linings to these wintry clouds. First, you have to assume
(15:19):
that it is going to be a particularly cold winter,
which is not guaranteed. Trying to forecast winter temperatures this
early in the year is incredibly difficult. Moreover, there are
so many drivers of weather that forecasts can change on
a dime. But, having said that, there are some indications
that it could be warmer than usual. This is thanks
(15:42):
to the influence of La Nina, which could be felt
later this year. I'll leave a link to this very
helpful blog post below, which gives you more of an
overview about the forecast for this winter. But the T
LD R is quote. Europe is expected to have warmer
than average imperatures over most of the northern and north
(16:03):
central parts of the continent. Then, of course, you have
to consider that Europe is trying to source other supplies
of gas. They're scrambling to secure contracts for gas pipelines
and liquid natural gas shipments. These are making up some
of the shortfall, but even then, it's not been plain sailing.
That's because Europe hasn't been too active in developing re
(16:27):
gasification plants on its shores. This means that they're limited
to how quickly they can bring these gas shipments on shore.
Building these plants can't be done overnight, but European countries
are doing what they can to approve the construction of these.
They're also making use of offshore ships which can do
the job of a regasification plant. These are called floating
(16:51):
storage regasification units, F R S us, and they could
help to bring a lot of this gas on shore.
But you so have to consider the fact that Europe
isn't the only region that's competing for these Leen g shipments.
Countries in Asia, such as South Korea and Japan, are
big consumers of llen G as well. They have also
(17:14):
secured longer term contracts, which have to be fulfilled long
before the Europeans can even consider buying up additional supply.
Whether Europe will be able to do this also really
depends on how cold things are over in Asia. If
it's unseasonably warm there, then there will be a lot
of ellengy supply that can be scooped up by the Europeans.
(17:37):
Beyond this, European countries are rushing to fill gas storage units,
and they are well ahead of schedule. They have already
reached of storage limits, a target that they were initially
aiming to reach by the first of November. Typically, gas
storage is able to absorb supply shocks and typically provides
(17:58):
at least twenty five tot of the fuel consumed in winter.
If we were to assume more gas stored and a
slightly warmer winter in Europe and Asia, then the big
European energy freeze could be narrowly averted and those hot
showers may not just be a fond memory. Okay, time
(18:19):
for a few of my closing thoughts on the matter.
It's quite clear that we're going to see some challenging
times in the coming months. Nearly every country in Europe,
short of perhaps Norway, is concerned about the prospect of
gas and energy shortages this winter. It was always clear
that Putin would use gas supplies as the ultimate trump card.
(18:41):
Of course, cutting gas to Europe and killing demand from
the continent won't come without long term implications for Russia
and Europe. Knew this. However, they still played Russian Roulette
with a madman, and that is a dangerous game. Firstly,
it's important that financial regulators find a a to provide
liquidity to those companies facing a credit crunch. The last
(19:04):
thing that the continent needs now, on top of an
energy crisis, is another layman moment for the derivatives markets.
It seems as if they're managing here, though, and solutions
such as posting alternative collateral are being considered. Governments are
also rushing to support these companies with state funded lifelines. Now,
(19:25):
while I was heavily against bailouts of over Leverage Wall
Street banks in two thousand and eight, supporting an energy
company under a crunch caused by geopolitics does make sense.
Bankruptcies of power companies would not help an already fraught
situation in Europe. When it comes to short term policies,
governments should refrain from knee jerk reactions. Price caps and
(19:48):
taxing windfall profits could potentially warp the market and exacerbate
the supply shortages. The best solution for this winter is
to reduce demand and increase supply. On the demand side,
these energy saving policies appear to be the only solution
Europe needs to cut at least ten percent of its demand,
(20:09):
and if this can be done by temporary power saving solutions,
then it should help stave off a crisis. Cold showers
are a bitter pill to swallow, but they aren't deadly now.
When it comes to the supply side, Europe is finding
additional sources. They've been in frantic negotiations with L energy
exporters and they are making plans for temporary regasification facilities.
(20:32):
Offshore storage facilities are getting full and there is a
chance that this winter the weather could be on their side. Then,
in the longer term, Europe is laying the ground work
for more energy independence. The politicians needed a wake up
call from woke environmental policies that sacrificed energy independence at
the altar of green power. Hopefully, they're going to implement
(20:56):
common sense policies that find a balance between emission reduction
and energy security. CRYPTOCURRENCY's purpose is to replace the existing
financial system. This not only includes replacing Fiat currencies with
hard money like BTC, but also replacing financial intermediaries with
(21:20):
defied protocols. This makes defied protocols direct competitors to commercial
banks and central banks. And that's why the report about
defy recently published by the United States Federal Reserve is
so significant. Today I'm going to summarize what the feds
defy report says in simple terms, give you my thoughts
(21:40):
as we go along, and tell you what it could
mean for the crypto market. The thirds defy report is titled, quote,
Decentralized Finance, defy, transformative potential and associated risks. It appears
to have been written in June but was only published
late last month. I'll get into why that might be
a little later. In any case, you can find the
(22:02):
full text in the description. So the report begins with
a brief overview, wherein the authors effectively reiterate what I
mentioned a few moments ago. Quote. Defied products and services
are conducted without a trusted central intermediary such as a bank,
and they include payments, lending and borrowing, trading and investments,
(22:23):
capital raising, crowdfunding and insurance. As a fun fact, crowdfunding
via Cryptocurrency, I. C O S, is considered to be
one of the most powerful tools in cryptocurrency, as it
allowed both crypto projects like ethereum and cryptocurrency exchanges like
finance to get off the ground. Given that retail investors
arguably have a tendency to crowd fund projects that seek
(22:45):
to disrupt the status quo, it should come as no
surprise that countries around the world seem to be moving
towards restricting retail access to cryptocurrency. More about that in
the description. Now. What's interesting is that the authors seem
to consider bitcoin to be the first defied protocol, as
it made it possible to send and receive BTC payments
(23:07):
in a trust less manner. This is consistent with the
author's definition of defy I mentioned a few moments ago,
but interesting nonetheless. The author's point to the proliferation of
Smart Contract cryptocurrencies as the precursor to the explosion of
decentralized finance, which makes sense, given that extensive programmability is
(23:28):
required for most defied protocols to work. The author's note
ethereum as being the most popular smart contract cryptocurrency for defy,
but acknowledge that avalanche and Salana are starting to become
popular as well. They also acknowledged that many defied protocols
have gone multi chain, before going on to highlight the
two hundred and twenty four billion dollars in total value
(23:51):
locked in defy protocols, a figure which was obviously recorded
earlier this year. Even though this figure is still a
fraction of the global financial system. The author's caution that
defy is growing very quickly, and I suppose it was
until May. Now, while the author's caution that defy is
(24:13):
growing quickly, they don't seem to be all that concerned,
and that's for one simple reason scalability. Smart Contract cryptocurrencies
can't currently scale to support global adoption, but the authors
believe they could with the right scaling solutions. The authors
then outline too scenarios they foresee when it comes to
(24:34):
defy adoption. Either defy evolves to become interoperable or even
integrated with the existing financial system, or it evolves to
become its own financial system, which would be the preferable
outcome for Crypto in my opinion. As far as the
authors are concerned, which of the two scenarios unfolds is
ultimately irrelevant, as they both pose financial stability concerns, especially
(24:58):
since there is a lack of regularation around defi. In
other words, we can't control it, so it's bad, regardless
of what it becomes. They go on to lament. How,
whereas centralized entities in the CRYPTO industry are easy to regulate,
decentralized entities can't be coerced with questionable laws and even
more questionable sanctions, including some defied protocols. And being hyperbolic,
(25:22):
of course, but you get the point. The second part
of the Fed paper is about blockchain basics, and the
way the authors explained blockchains and smart contracts was peculiar
to say the least. For example, quote consensus protocols regulate
the way in which updates to the data set are proposed,
reconciled and recorded, while ensuring that no other previously validated
(25:46):
data have been altered. This immediately reminded me of a
defy report by the bank for International Settlements, wherein the
author explains how defied protocols will exist on permissioned distributed
ledgers run by banks, with regulations at the protocol level.
More about that crazy report in the description. Now the
(26:08):
authors go on to explain how blockchains work, and I
won't bore you with the details there. However, I will
commend them for acknowledging that the Bitcoin blockchain became the
first blockchain when the first bitcoin block was mined in
two thousand and nine. Bravo. I'll quickly note that blockchain
is a term that's often used interchangeably by institutions to
(26:32):
describe both cryptocurrencies and the permission distributed ledger systems that
are operated by centralized entities. In this case, it seems
the authors are using the term correctly, which I again
commend them for. They then turned to the topic of
smart contracts, and I won't bore you with the details
here either. However, I will again commend them for underscoring
(26:54):
the importance of Compos ability and acknowledging that oracles are
required to make most de fi protocols work. This makes
me worry that they could go after popular oracles like chain, link,
et Cetera, to apply regulations to defy, but let's not
go there yet. Now the third part of the Fed
(27:15):
paper talks about, quote, defy products and services, and I
must admit I take issue with the title there, because
a product or service implies that an intermediary of some
kind is involved, which is simply not the case with
defi protocols. The author start by repeating that Ethereum is
currently the most popular smart contract cryptocurrency for defy, but
(27:36):
this time add the finance smart chain and car Darno
as two additional smart contract cryptocurrencies that are increasing in popularity.
Respect what's interesting is the author's note that quote, many
depths provide discrete services rather than complex bundles of products.
This is interesting because central banks seem to be obsessed
(27:57):
with the idea of a one stop shop for their
upcome in Central Bank digital currencies, or cbdcs as it
so happens. The authors also note that, quote, new protocols
are beginning to offer a combination of several products in
an attempt to become a one stop shop for financial services.
This makes me wonder whether they'll start going after these
(28:19):
kinds of defied protocols more aggressively. What's even scarier is
that the author's single out make a Dow when discussing
governance in defy. This is scary because make a dow
makes it possible to mint a decentralized sable coin called die,
using cryptocurrency as collateral. Once upon a time, most of
(28:39):
the Diet was largely collateralized by ether, but today it's
mostly collateralized by circles. USDC, a centralized stable coin circles.
Response to the recent sanctions against Tornado cash have consequently
led to concerns that make a Dow could be next
on the regulatory chopping block. More about what happened to
(29:00):
tornado cash using the link in the description. Now what's
reassuring is that the authors actually seemed to be somewhat
supportive of defy, as they provide some recommendations for how
it could be improved, including the introduction of more real
world assets, the creation of more robust stable coins and
(29:21):
the introduction of cbdcs. That last one threw me off,
because the authors literally suggest that, quote. The creation of
a central bank digital currency, CBDC, that becomes available on public,
permissionless blockchains such as Ethereum, may also serve to reduce volatility.
I'm not sure how I feel about that, if I'm
(29:42):
being honest. Now the authors end this section with another
insightful comment, and that's the quote. The direct implication of
a fast growth in defi, predominantly driven by wholesale and
possibly institutional investors, would be the relevance of financial stability considerations.
Put differently, they're concerned that too much institutional interest in
(30:04):
defy could pose a threat to financial stability, revealing that
this is a very real risk that central banks are
concerned about. Take a second to consider that. This suggests
defied option is much more significant than we think. anyways.
The authors then go on to describe some subcategories of
(30:24):
defy in detail. These are borrowing and lending protocols, decentralized
exchanges or dexes, derivative dexes, payment protocols and asset management protocols.
When it comes to borrowing and lending protocols, they point
out that about a fifth of all the total value
locked in defy is coming from this specific niche note
(30:46):
that these statistics are from earlier this year, but it
looks like this market share still stands today. What's odd
is that the author's note quote fees are often denominated
in the platform's governance token, which she is certainly news
to me. As far as I know, all transaction fees
on almost all borrowing and lending protocols are paid in
the native cryptocurrency coin of whatever blockchain they're on. After
(31:11):
describing what appears to be are as innovative safety module,
the author's note that quote lenders may earn an interest
rate that exceeds rates offered by banks on sovereign currency
denominated deposits, which is a big no note because it
creates competition for the big banks. What's impressive is that
the authors go as far as explaining are as flash
(31:34):
loan functionality, though they again fail to mention the defied
protocol by name. This is forgivable, however, as they emphasize
that there are quote, legitimate uses of flash loans, such
as swapping out cryptocollateral on the debt. This is significant
because flash loans have been the subject of regulatory scrutiny
due to their use in extreme arbitrage trades that have
(31:56):
resulted in billions of dollars of damage to defy protocols
with suboptimal oracles. More about that using the link in
the description. I also couldn't help but notice that the
authors included make a dow in their list of borrowing
and lending protocols. Some would say that maker Dow is
technically a collateralized debt protocol, but let's not split any
(32:18):
more hairs when it comes to dex is. The authors
point out that related protocols make up the lion's share
of the total value locked in defy and briefly explain
how dex is work. You know, liquidity providers ratio of
two assets in a trading pool determining their price, liquidity
providers earning trading fees, et cetera. What strange is that
(32:39):
the authors refer to liquidity providers as quote investors and
trading fees as quote interest, like yield. This is strange
because it's the type of language that anti crypto regulators
like the SEC routinely use when justifying their crackdowns on
crypto projects. Probably nothing. On a more positive note, the
(33:02):
authors correctly state that quote, unlike centralized exchanges, dexes never
take custody of user funds, which is important because some
centralized exchanges have been hacked, which resulted in a loss
of customer's cryptocurrency. Preach. What's unfortunate is that the authors
don't spend too much time talking about other dex related innovations,
(33:23):
such as stable coin dexes, like curve finance and its
vote S, growd liquidity mining, but I suppose there's a
time and a place for that degree of detail. The
section on derivative dexes is even shorter, and I suspect
this is because the authors don't want to give the
relevant crypto projects too much advertising. After all, derivative dexes
(33:44):
make it possible to quote get price exposure to other
digital assets, currencies, commodities, stocks and indices. As far as
the powers that be are concerned, all these investments should
only be accessible via a regulated intermediary. Hence why regulators
came down hard on all cryptocurrency exchanges offering tokenized stocks
(34:04):
last spring and summer. Luckily for the incumbents, derivative dexes
seem to be the least popular defy niche, accounting for
the smallest slice of the Pie, according to the authors,
again outdated estimates, which still seem to hold true. The
authors also touch on the use of leverage in derivative
dexes and touch on decentralized prediction markets, which have been
(34:28):
subject to lots of regulatory scrutiny in recent months. When
it comes to payment related defied protocols, the authors define
these as being designed to quote overcome one or more
obstacles posed by decentralized technology, including issues with efficiency, interoperability
and privacy, to provide a user experience that mimics payments
(34:51):
in traditional finance accurate. They then go on to explain
how tornado cash and flex a network work, which slightly
suspicious given that Tornado cash got sanctioned and flexa networks,
amp token, was recently delisted from a series of crypto
exchanges after the sec called amp a security in an
(35:13):
insider trading case against a coin base employee. More about
that in the description. The authors also touch on Bitcoin's
lightning network, which is extremely underrated. More about that in
the description too. Now, when it comes to asset management
related defy protocols, the authors quickly explained that these defy
(35:35):
protocols automatically redirect any crypto deposited into them to wherever
they will earn the highest yield. Among other things. What
caught my eye is that liquid staking protocol, Lido Finance,
was at the top of the list, potentially for shadowing
regulatory scrutiny for L D O. Let's hope I'm just
seeing things, because if this happens, it could be very
(35:58):
bad news for a theory him once it transitions to
proof of stake in the next week or so. And yes,
you can learn more about that using the link in
the description. It's always there, isn't it? Now the fourth
part of the Fed's report concerns the risks associated with defy,
and it should come as no surprise that this is
the longest section of the report by a wide margin.
(36:22):
The author's commenced by acknowledging that defied presents, quote, interesting
opportunities for lowering costs, expanding access and increasing transparency, and
reiterate that defy is still small relative to the financial
system it seeks to replace. Logically, the authors admit that
a disruption to defy at this point in time would
(36:43):
therefore probably have next to no impact on financial stability,
but again reiterate that its rapid growth could pose future
challenges to financial stability if left unchecked. What's funny is
that they say, quote, the current developments in defy have
the potential to trigger a defi version of a financial crisis,
(37:04):
possibly with spillovers to the traditional financial system. This is
funny because that's basically what happened when terror imploded in May,
and defy is doing just fine. Thank you very much.
The authors then point to high leverage as an area
of concerns, since high leverage has historically been a primary
factor in financial crisis. They also say the same for Illiquidity,
(37:28):
a k a the inability to sell a large amount
of an asset at the same price without crashing said price.
What's Hilarious is that the author's caution that defy could
cause financial stability issues while simultaneously claiming that, quote, the
overwhelming majority of the losses in the traditional financial system
associated with op risk are merely a cost of doing business.
(37:50):
Double Standards Much you know. I think U S Senator
Pat to me said it best. Quote failure should be
an option for reference. This was PAT's response to terror's
catastrophic collapse. Just goes to show you how investor protection
is often an excuse for financial control. End of rant. Now,
(38:11):
to the author's credit, they admit that, quote, defy can
reduce some operational risks inherent in traditional finance, particularly those
associated with reliance on centralization of financial intermediation activities. However,
they caution that defy protocols present new risks. The authors
then go on to list all the benefits of defy,
(38:34):
and the first is that blockchains make transaction settlements near instant.
By contrast, transactions in the traditional financial system can take
days to clear or more, especially if you're dealing with
more elaborate investment vehicles. Another benefit is that all transactions
on cryptocurrency blockchains are publicly viewable. This makes it easy
for investors and regulators to assess the current state of
(38:57):
the market, namely the status of market participants and any
potential risks they're experiencing. Now, if you think that this
isn't possible because cryptocurrency is anonymous, think again. In the
words of the authors quote, pseudonymity does not necessarily guarantee
true anonymity. In practice, blockchain analysts have found that it
(39:19):
is often possible to associate an address with a specific
person or institution by observing transaction counterparties and amounts associated
with addresses. If you're wondering how blockchain analytics companies track
CRYPTO transactions, you can find out using the link in
the description. I digress. Now a third benefit of defied
(39:39):
the authors identify is auditability. CRYPTOCURRENCY blockchains allow us to
check the accuracy of financial statements from individuals and institutions
and make it possible to assess the security of the
smart contracts that make up defied protocols. The authors also
touch on something that's often overlooked, and that's that Mo
(40:00):
individuals and institutions aren't fans of this transparency, as it
exposes sensitive information about their finances. As far as I
can tell, this is why there has been institutional interest
in Crypto Privacy, despite the regulatory concerns. Now, the fourth
benefit is somewhat unfortunate as it has to do with
(40:20):
cryptocurrencies censorship resistance, which has come into question on ethereum
after supposedly decentralized crypto platforms, protocols and even crypto wallets
blocked access to tornado cash and any associated wallets. The
authors seem to reference this reality by noting that DAB
creators can decide which transactions to accept or reject, and
(40:42):
even go as far as suggesting that, quote, a government
could limit a firm's ability to use Divi to avoid
sanctions by ordering the firm suppliers to only accept payments
coming from approved blockchain addresses. Yikes. After pointing out that
bitcoin and ethereum have yet to experience any censorship at
the blockchain level, the authors go on to state that, quote,
(41:05):
immutability is not necessarily a benefit in all cases, as
blockchain transactions that involve fraud or theft might not be
reversed as quickly or easily as they would be in
traditional finance, which is fair but also terrifying and also
not crypto. This ties into the long list of risks
(41:25):
the authors see with defy, and the first is the
consensus protocols of the smart contract cryptocurrency blockchains themselves. The
author's note that these are corruptible if more than fifty
of the Hash power or stake is controlled by a
single entity or set of coordinated entities. Now, if you
watched our recent video about Kracken's crypto consensus report, you
(41:48):
might recall that the corruption for many proof of state
cryptocurrencies is actually much lower, at around thirty, meaning any
proof of state smart contract cryptos carry even more risks
than their proof of work counterparts. The second risk is
similarly simple, and that's errors in smart contract code. As
we've seen, incorrectly written code is eventually exploited and this
(42:12):
often results in a massive loss of funds. The silver
lining is that the traceability of most scripto transactions means
many of these funds can be found and returned. The
authors also take time to caution that audits are not
evidence that a smart contract is secure, and this is
something that yearn finance founder and Phantom developer Andre Cronier
(42:35):
said many times. I wonder what he's up to these
days anyhow. The authors continue by noting that the conditions
of a smart contract must be predetermined and are permanent.
This means that it's not possible to write, say, a
smart contract whose terms and conditions can be easily changed
like a real world agreement. The third risk is that
(42:59):
you could lose your crypto forever if you send it
to the wrong wallet address or lose access to your
crypto wallet, which is just part and parcel of being
a responsible, self custodial adult, really. The fourth risk involves
transaction ordering. This includes everything from transaction fee competition to
minor extractable value, or MTV, which is where miners reorder
(43:21):
transactions to benefit themselves rather than process transactions in order
of transaction fees, as they're incentivized to do. The fifth
risk is one I alluded to earlier, and that's oracles.
Any issues with the oracles providing pricing data to defy
protocols means there could be serious threats, such as flash
loan attacks between dexes from defied D gens and unwanted
(43:45):
liquidations in borrowing and lending protocols. The sixth risk is
especially relevant these days, and that's liquidity. The T L
D R there is that many defied protocols need large
amounts of liquidity, a k a Crypto, to function properly.
An absence of liquidity can cause serious issues, such as
price slavage on decentralized exchanges. I'll quickly note that a
(44:07):
lot of the liquidity in defy comes in the form
of centralized stable coins. As per ethereum Creator vitirely BITTERIAN's
own admission. This gives centralized stable coin issuers significant say
in future forks and changes, as they could decide not
to support the blockchains they don't like now. The seventh
(44:28):
risk is straightforward, and that's regulation. I think the author's
summed it up quite well with quote. Regulation may facilitate
the growth of financial activities by providing increased confidence to
potential users of the services, but it can also have
unintended adverse consequences for existing defy and its future development.
(44:49):
In the next subsection, the authors examine defy risks that
aren't directly related to defy protocols, and they start with
a bold claim. Quote, the goal of achieving a truly
trustless financial system is unlikely to ever be fully realized.
The authors say this because it will eventually become impossible
for the average person to be a minor or validator
(45:13):
for a cryptocurrency, and I would argue that this ultimately
depends on how the cryptocurrency is designed. An easy fix
would be to have a trust less base layer with
trusted layers on top. The authors then turned to the
topic of cryptocurrency governance and seemed to send a warning
to unnamed crypto projects. Quote. Even when the final control
(45:37):
over changes to a block chain's protocol resides with a
decentralized group of stakeholders, the group that founded the blockchain
often still exercises substantial influence over its evolution. This is
significant because the idea that an identifiable third party is
driving the expectation of profit from investing in the cryptocurrency
(45:58):
is how the SEC decides to go after crypto projects,
at least in theory. I reckon. We can all think
of a few CRYPTO projects which meet that above description.
The authors continue by correctly identifying the trade off between
centralization and decentralization, namely that centralization makes it easy for
(46:19):
a crypto project to change and adapt, but also goes
against the core values of cryptocurrency and eats away at
the very things that make cryptocurrencies valuable. Here the authors
reveal that the biggest governance related risk has to do
with blockchain forks, wherein two corners of the same community
with opposing views decide to go their own way. This
(46:43):
can negatively impact the safety of both crypto projects as
well as the liquidity on their blockchains. The authors go
on to discuss the governance of decentralized applications and warned
that the centralization of token holders for some dece centralized
autonomous organizations means that they're quite centralized in practice. Note
(47:06):
that one per cent of token holders have voting power
in most dows. What's wild is the authors warned that
quote this risk suggests that, should financial regulators gain authority
over finance conducted on blockchains, they should have similar authority
over on chain protocols controlled by centralized groups. Now, call
(47:29):
me crazy, but I think that the authors are saying
that regulators could potentially become active participants in decentralized autonomous organizations.
That said, I'm sure this is meant to mean that
regulators will treat more centralized dows with the same scrutiny
as centralized crypto companies. After discussing the risk of governance
(47:51):
attacks on decentralized applications, the authors return to the topic
of censorship resistance and make a pretty ridiculous claim. Quote
governments may have legitimate reasons for censorship. Let me remind
you that the Fed is based in the United States.
The authors continue by saying that there's a case for
(48:12):
censorship at the blockchain level because cryptocurrencies are being used
by criminals and countries the United States doesn't like. Ironically,
the author's note immediately after that quote, some blockchain finance operations,
seify and defy are likely to be based in jurisdictions
with varied interests in supporting US regulatory goals. Figures. Another
(48:36):
non defy specific risk the authors identify is the composability
of smart contracts, which can be a blessing when the
markets are rallying but a curse when the markets are crashing.
That's simply because composability makes it possible for volatility to
become more widespread. In Defy, the authors go as far
as suggesting that defied developers quote, invest less than the
(48:58):
optimal amount in Securey, which is not the case as
far as I can tell. In the free crypto market. Secure,
user friendly, useful and profitable projects eventually succeed full stop.
The final area of risk the author's examine relates to
the interaction of cryptocurrency and the traditional financial system. They
(49:20):
begin by saying that it's more than likely that crypto
will exist alongside the traditional financial system for some time,
regardless of whether it succeeds in replacing it. This presents
a series of risks, and the first is, of course,
stable coins like tethers, U S Dt, which hold hundreds
of billions of dollars of real world assets as collateral
to back the stable coin tokens in circulation, mostly US
(49:44):
government debt. A run on US D T, or any
other stable coin for that matter, could therefore create serious
issues for both crypto and the traditional financial system, which
is why the European Union is working to implement a
cap on stable coins as part of its upcoming regulations.
More about those in the description. The second risk is
(50:06):
the exposure that entities in the traditional financial system have
to cryptocurrency, and here the authors say something disturbing. Quote.
As banks and other intermediaries get deeper into providing crypto
services and loans to crypto users, these banks may not
fully appreciate the risks they are incurring. Now I'm sure
(50:28):
I'm just hearing things, but it really sounds like the
authors are saying that crypto users and investors themselves present
a risk to the traditional financial system due to the
fact that they interact with traditional financial services as part
of their activities. This would actually be consistent with the
endgame of the Financial Action Task Force, or fat F,
(50:51):
which is to make it impossible to access cryptocurrency without
an intermediary by labeling disintermediated activities as high risk. More
about that in the description. What's funny is the authors
also note that intermediaries in the traditional financial system could
end up being sued by disgruntled Crypto users in the
(51:11):
event that they can't pin down a centralized individual or
institution behind the CRYPTO project or protocol which caused them pain. Well,
I've yet to see that happen. So this brings us
to the conclusion of the report, where the authors mostly
(51:32):
reiterate what they mentioned earlier, namely that defy is growing
rapidly and therefore requires regulation, a s a p. what's
worth noting is that the author specified that there are, quote,
unique concerns arising from the development of defy, especially the
governance of the code used in depths. This again suggests
that crypto projects with centralized governance mechanisms could soon come
(51:55):
under fire, and with that I must say that I'm impressed.
It sounds like the folks over at the Federal Reserve
know their way around the crypto industry. Now, this is
definitely a double edged sword, because, as awesome as this
awareness is, it also means that the Fed knows where
to direct regulators and lawmakers. On that note, I don't
(52:19):
think it's a coincidence that the Fed waited until August
to release this report. The SEC seems to have a
habit of engaging in many enforcement actions when its fiscal
year ends in September. As such, the purpose of the
Fed report could be to guide them in their crypto crackdown. Alternatively,
(52:39):
the Fed could simply have been providing the information that
was requested by US President Joe Biden in his executive
order about cryptocurrency earlier this year. If you watched our
recent video about important September updates on coin bureau clips,
you'll know that the deadline to submit regulatory recommendations about
cryptocurrency was the fifth of September. As such, the Fed
(53:02):
report could have been a last minute submission of sorts.
In any case, the Fed report is almost certainly bullish
for cryptocurrency. I mean, did you ever think that you'd
see Bitcoin, ethereum, Cardano and Salana in a report from
the Central Bank of the United States? Heck, they even
mentioned are a curve finance and Lido Finance. If that
(53:24):
is not a sign that crypto is slowly taking over,
I don't know what is. As per a recent coin
desk article, Crypto is officially in the quote. Then they
fight you, phase a phase that's followed by an epic victory,
as per the old adage. Make no mistake, however, the
incumbents will not go quietly. I expect to see some
(53:45):
seriously insane announcements from US regulators in the coming weeks
and months, and they're almost guaranteed to do unprecedented damage
to the crypto market. Still, it's not going to stop
the trend of crypto adoption and when the next bullmarket
inevitably comes around, we could hit the critical mass required
to create a parallel system that can't be crushed by
(54:07):
regulations or institutional market manipulation. Mark my words, that day
will come. Thank you so much for listening to the
Coin Bureau podcast. If you'd like to learn more about cryptocurrency,
you can visit our Youtube Channel at Youtube Dot Com
forward slash coin bureau. You can also go to coin
bureau dot Com for loads more information about all things crypto.
(54:30):
You can follow me on twitter at at Coin Bureau
or one word, and I'm also active on Tiktok and
instagram too.
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!