CZ wants to see your crypto cards

Binance’s Changpeng “CZ” Zhao tweeted on Monday about an “industry recovery fund”, which is an interesting offer given it’s just over a week since he triggered the run that sank its main competitor.

It seems strange to think that the head of the biggest crypto exchange — now a near-monopoly after FTX was erased by a few tweets — wouldn’t have a team already looking for strong or salvageable projects to pick up for cheap during crypto ice age.

We have seen the recovery fund compared to the Master Liquidity Enhancement Conduit, better known as the Super SIV. It was a Great Financial Crisis private sector attempt to avoid asset fire sales and doom loops though the short-term refinancing of structured investment vehicles.

One big difference: we’ve learned from multiple news outlets that this is not just the new Lehman Brothers, with Alameda acting as the SIV to FTX’s bank. It’s also a new MF Global, due to missing customer funds.

In other words, we get all of the drama and the contagion in just one story, applied to a market that’s significantly smaller than mortgages or FX/rates.

But to really unpack why this Binance rescue fund is different, it helps to think about who was heavily involved in 2007’s Super SIV rescue plan and why. Citigroup was one of three banks that spearheaded the effort; as Alphaville reported at the time, it also was one in need of real help.

As it restructures in Delaware bankruptcy court, FTX isn’t really in a good spot to start any rescue funds. And whichever other names might be attached, the current market shares would make it unavoidably a Central Bank of Binance initiative. From a recent Morgan Stanley note:

Remember the few years when the Federal Reserve published a bunch of research about the “stigma” of using its discount window? The general idea was that by going to the discount window for help, a bank would in effect be telling competitors (and eventually the public) about liquidity trouble, and making itself a target.

Imagine a Fed discount window that’s run by Jamie Dimon. Now imagine that in this world Dimon had just sparked a run that caused Citi to collapse. Who’s interested?

Are there any SBFcoins out there that could be takers? Solana? Well, its SOL tokens didn’t enter a death spiral as some had feared, so maybe! Serum? Ha ha yeah probably not.

And really, any rescue would require a belief that CZ doesn’t plan to salt the crypto earth now that FTX has burned to the ground.

In tangentially related news . . . whither Tether? The unregulated money-market fund stablecoin has been holding its peg to the dollar fairly well after falling as low as 98c last week.

Morgan Stanley’s note recalls an August 2021 report from Protos that said 34 per cent of all Tether minted between 2014 and late 2021 had gone to Alameda Research, with 21 per cent going to Cumberland Global. (Cumberland is owned by Chicago trading firm DRW.)

Protos stated that it compiled data from the blockchain to monitor transactions from known Tether Treasuries or Tether printers from 2014 to end of October 2021. According to the article, they found that of the $108.5bn of Tether created (not considering the $31.7bn redeemed afterwards): — 89% or $97bn was sent to market markers, — 8.5% to trading funds and other companies ($9.2bn), and — 2.3% to individuals.

According to the Protos article, Alameda ($36.7bn) and Cumberland ($23.7bn) received at least $60.3 billion in USDT across the time period analysed, the equivalent of 55% of all the Tether outbound transaction volume; 71% of that flow to the two firms was reportedly acquired in one year — October 2020 to October 2021.

From the bank, using the data from Protos:

The FTX balance sheet we published over the weekend showed the firm has $500mn in locked USDT assets, and nearly $800mn in USDT liabilities. We will leave it to Morgan Stanley to explain why this is important:

Tether’s creation has helped crypto prices by providing liquidity to the broader ecosystem. The contraction of Tether’s supply in the past month is a sign that crypto risk-taking appetite is weakening. Knowing who received the most USDT can give an indication of who may participate in the redemptions if there are more in the future. Also, the largest recipients of USDT have been market makers. The stability of stablecoins relies on market makers willing to buy the stablecoin at a discount if it falls below $1, knowing they can sell back to the issuer at $1. Alameda Research and Cumberland Global are both large participants in the crypto derivatives/futures markets — with USDT providing part of the leverage. A reduction in the availability of USDT will have a larger short-term impact on leveraged markets vs spot markets.

Hey, maybe CZ is interested in stablecoin arbitrage operations! (That is, if he doesn’t already have one himself.)

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