Tag: bitcoin
Bitcoin

How Crypto-Backed Ponzi Schemes Endanger Our Banking System

The collapse of Silicon Valley Bank (SVB) last week raises serious issues far more significant than the obvious ones cited by the financial press and a broad range of Washington politicians.

Chief among these are bank loans against dubious assets. That’s not getting much if any attention in the news or from Washington and is likely to soon be swept under the rug, allowing needlessly risky banking practices to continue.

Before its collapse last week, SVB made loans against Bitcoin and other cryptocurrencies.

The question: why is any bank anywhere allowed to accept crypto as collateral for loans?

Why do banking regulators allow our federally insured and regulated banks make loans using magic internet money as collateral? That’s a crazy policy, no different than allowing banks to accept buckets of ice cubes in winter as collateral, even though they melt come spring and evaporate in summer.

Bitcoin and its imitators are not money. They are not currency. They’re hardly used to buy and sell, an unsurprising fact given that by design the Bitcoin system can process only seven transactions per second compared to many thousands of transactions per second for credit cards.

Indeed, except for laundering proceeds from drug trafficking as well as hiding assets from creditors, estranged spouses, and the tax police, cryptocurrencies have no use.

High-tech Ponzi Scheme

Cryptocurrencies and their cousins, Non-Fungible Tokens or NFTs—are just a high-tech Ponzi scheme. Instead of Charlie Ponzi or Bernie Madoff personally running the con, the crypto scam relies on decentralized computer blockchain and “mining” of mathematical solutions.

Bitcoin’s supposed inventor, who went by the pseudonym Satoshi Nakamoto, has never been identified. He or she has since vanished, leaving holders with a digital string worth only as much as the next fool, or crook, will pay for this imaginary asset.

Early participants in Ponzi schemes profit mightily if they cash out while the gullible souls who get sucked in later wipe out. That is what happened to SVB, America’s 16th largest bank, which was big on crypto loans.

Many Bitcoin “investors” have already been wiped out as the “market cap” of Bitcoin plummeted from nearly $1.3 trillion in 2021 to about $389 billion on Friday, down almost 70 percent.

Why do banking regulators allow our federally insured and regulated banks to make loans using magic internet money as collateral? That’s a crazy policy, no different than allowing banks to accept buckets of ice cubes in winter as collateral, even though they melt come spring and evaporate in summer

Silicon Valley Bank is just one of many federally insured financial institutions that accept crypto currency as collateral for loans. Some banks will loan you 90 percent of the seeming value of your crypto, though 50 percent loan-to-value is more common and that appears to be the standard at SVB based on its web pages.

Zero Interest Crypto Loans

All sorts of financial news outlets offer advice on borrowing against crypto. These include NerdWallet, and the increasingly naïve and unreliable Forbes. People with crypto can even borrow at zero interest. Gadzooks!

For a sober look at the big risks of crypto loans read Investopedia’s essay.

In the wake of the second largest bank failure in history, you should be deeply concerned that for more than four decades we have failed miserably at regulating banks. That history contrasts with the period from 1935 until voters abandoned the moderating and successful New Deal banking rules in favor of Reaganomics.

We took a wrong turn when the prudent New Deal banking regulations in effect from 1935 were killed by Reaganomics, which re-regulated banks to reduce regulations and increase the risk of financial institutions failing. (There is no such thing as deregulation, only new regulation, which in our time on terms typically means regulations favoring corporations, including banks, over customers, financial prudence, and public safety.)

Congress’s Role Is Critical

What we need now are Congressional hearings to examine the reasons that cryptocurrencies can be collateral for bank loans.

Even if you don’t own Bitcoin or its growing list of alternatives, this story matters to you for multiple reasons.

Your money is only insured up to $250,000. Any money above that isn’t insured. That means if you’re a trustee of a nonprofit, for example, and it’s got $1 million in the bank, you or the organization you help lead is at risk of being wiped out in a bank failure.

The federal government is covering all deposits for SVB and at Signature Bank in New York, which failed Sunday. But that doesn’t mean it always will. During an earlier banking crisis nonprofits with more than the guarantee then in effect of $100,000 lost their deposits above that sum, which got very little news coverage at the time.

If people want to buy crypto, they should be free to do so. But they should not be allowed to put our bank deposits and investments at risk by using these digital tokens as collateral for loans. After all, it’s your, and my bank deposits, along with those of businesses, nonprofits, and our governments that the banks use to make loans, so it’s not like we don’t have a deep interest in blocking crypto of any kind as collateral for loans.

Reprinted with permission from DC Report.

Why Regulate Crypto When We Can Just Watch It Crash?

Why Regulate Crypto When We Can Just Watch It Crash?

Cryptocurrencies were born out of the libertarian dream of a financial system free from government regulation. Bitcoin's promoters peddle its ability to let us make transactions without dealing with regulated banks, which, they say, we are not supposed to trust.

What crypto players since stripped of their "investments" saw were some operators getting amazingly rich sitting in their shorts and running numbers on their laptops. The less savvy may not have quite understood how this thing worked, but they could bask in the flattery of being called "brave," per the Super Bowl ads.

The crypto markets crashed amid a sobering string of scandals, crimes and the growing evidence that much of this wealth was basically made-up money. Amid so much suffering, calls have been growing in Washington to impose government oversight on the industry.

The idea is insane.

Nonetheless, the chair of the Securities and Exchange Commission, Gary Gensler, wants to work with Congress to increase his agency's oversight of what he has accurately calls the "Wild West" of crypto. And Sen. Elizabeth Warren (D-MA) is predictably working on a big digital currency bill that, Politico reports, would cover "consumer protections, anti-money laundering rules and climate safeguards for crypto mining."

The climate part refers to the coal-fired power plants providing the obscene amount of electricity to mine bitcoin. And the money laundering (and assorted scams) is made possible by another of crypto's libertarian virtues, anonymity.

Most of the problems Warren cites are being fixed right now through the collapse in crypto values. Many financial experts say the crypto era is now over (although the associated blockchain technology may have good future uses).

When the government gets involved with overseeing investments and the entire category goes south, calls for government bailouts follow. Do the taxpayers really want to be on the hook for invented money? Besides, the biggest crypto selling point is that it isn't regulated by the government.

But aha, some crypto businesses are now saying, OK, as long as we help write the regs. If that happens, again, heaven help the taxpayers.

One such volunteer was Sam Bankman-Fried, whose $32 billion fortune has vanished along, apparently, with the holdings of depositors at his former crypto empire, FTX. Bankman-Fried cleverly broke with others in his industry by actively calling for regulations. That prompted would-be investors to think: A guy who wants his crypto business regulated is probably on the up-and-up, as opposed to other figures in this admittedly dark business.

Some have likened the crypto craze to the Beanie Baby bubble of the 1990s. Beanie Babies were nothing more than cloth dolls stuffed with beans. They originally sold for $5, but their creator, as Vox reports, "used the illusion of scarcity" to make many think they could be incredibly valuable. People lined up outside Hallmark stores to score a new Beanie Baby release. Especially desirable models traded for thousands of dollars. Naturally, a black market for counterfeit Beanie Babies quickly surfaced.

But step aside Beanie Babies, and make room for CryptoKitties. This is a blockchain-based game that works as follows: You turn over one of the cryptocurrencies in return for pictures of cute little cats. They are marketed as unique kitten pictures, and some have sold for over $100,000. But CryptoKitties are nothing more than digital artwork, which means they have no value other than what you think it is.

Agustin Carstens, a former director at the International Monetary Fund, has called crypto "a combination of a bubble, a Ponzi scheme, and an environmental disaster."

Cryptocurrencies were created to avoid government. Government should avoid cryptocurrencies. Let we who trust banks stroll past the smoking crypto ruins. Not our problem — or shouldn't be.

Reprinted with permission from Creators.

Texas Governor Begs Bitcoin Miners: ‘Help Me Get Through The Winter’

Texas Governor Begs Bitcoin Miners: ‘Help Me Get Through The Winter’

Texas Gov. Greg Abbott is reportedly pleading with crypto miners to help the state get through the bitter winter in the event the electric power grid fails.

According to Bloomberg, details about Abbott's discussion with a group of crypto miners are now being publicized as the state braces for inclement winter weather. During the meeting, which was held at the governor's mansion in Austin, Texas, one concern was expressed: "Electricity-hungry Bitcoin miners could shore up the state’s power grid, a top priority after a deep freeze last winter triggered blackouts that left hundreds dead."

Four individuals who reportedly attended the meeting said that Abbott made his request clear. "Help me get through the winter," the Republican governor reportedly said.

Per Bloomberg, surviving the winter may be a critical key if Abbott wants to win re-election as the electric grid and the governor's failed leadership last winter are two relatively weak spots for his campaign. A poll conducted by the University of Texas/Texas Tribune back in October also showed that "60 percent of Texans disapprove of how state leaders have handled the reliability of the grid."

Doug Lewin, an Austin, Texas-based energy consultant weighed in on the concerns about Bitcoin miners as he noted that there needs to be some form of process in place to ensure mining has ceased in the event the electrical grid becomes stressed.

“There has to be a really thoughtful approach to bringing gigawatts worth of Bitcoin onto the system,” said Lewin. “We’ve got to make sure that if we’re getting close to scarcity, people aren’t mining Bitcoins anymore.”

The Texas electric grid is one of the reasons why the Lone Star state is attractive to crypto mining companies. The Bloomberg report also explained why Abbott is embracing the industry.

"Texas’s cheap electricity and near-zero regulation, helped spur big companies like Riot Blockchain Inc., Singapore-based Bitdeer Group and the U.K.’s Argo Blockchain Plc to build some of the world’s largest Bitcoin mines in the state," the report reads.

Reprinted with permission from Alternet


#EndorseThis: Late Night Explores The Mystery Behind Bitcoin

#EndorseThis: Late Night Explores The Mystery Behind Bitcoin

The first signs that the Bitcoin bubble will implode have appeared on the financial horizon, with sudden deep drops and spikes in value that do not augur well. Catastrophic losses, when they occur, should be no surprise — because the crypto-currency is essentially a scam that attracts right-wing rubes into handing over real dollars for something with zero intrinsic value.

Of course, the far right financial geniuses who have made fast profits by touting Bitcoin never tell the suckers that they’re buying nothing but a number cooked up by an algorithm — or that there is an infinite supply of that numerical commodity.

But Late Night with Seth Meyers offers this “commercial” that depicts what happened to a housewife who entrusted her kids’ college fund to the latest digital investment. Very funny, except that if it hasn’t already happened to some sad boob, it will soon.