Huge cryptocurrency exposure with SPACs for LPs and GPs — Probably billions of dollars
Few will listen, but my advice to venture capitalists, private equity, and individuals (Elon?) is to leave this alone. Treat it like molten plutonium about to hit oxygen.
Adam Lewis’ article on the legally questionable status of thinking SPAC offerings are any different from IPOs applies in spades to anything crypto. His article lays out the exposure for any SPAC that doesn’t live up to its forward looking statements. It turns out that the SEC doesn’t define an IPO that specifically.
So I think there is unique reach-through exposure to executives, corporation officers, GPs & LPs with SPACs, for crypto, because cryptocurrency is pure “madness of the crowds”. Cryptocurrency is solidly based on nonsense. Since it is impossible for cryptocurrency to fulfill its promises, and its premises are false, I think the courts will rule that SPACs (and possibly any IPO related to crypto) is a type of fraud. As a criminal enterprise because of the inherent fraud, this will open up everyone for the courts to reach through just about anywhere to recoup lost money.
At its foundation, cryptocurrency is based on the principal of scarcity driven valuation of what is, if accepted, a token of exchange. I have only once spoken to any software engineer, exchange operator, buyer, or holder, or blockchain evangelist who understands this. The one exception is Tim Swanson, who sought me out to get permission to use excerpts from my working paper, The False Premises and Promises of Bitcoin.
No cryptocurrency can be banked — period — full stop — unless it is an on-demand cryptocurrency of a fiat currency issuer. The reason is that banks do not store money and then loan out what they have inside the bank. That idea is fiction, despite the fact it is still taught in lower division econ courses at way too many universities. Instead, banks create a loan, and when that loan is deposited, it becomes new money that balances the new debt. This is how the monetary system works, and you can find it in publications of the Bank of England’s research department [1].
All money in the modern world is debt. There is an accounting identity between positive money (positive balances in bank accounts), and negative money (debt, which is an asset to the issuer that bets it will be paid back). This is not understood by cryptocurrency people, at least to date I have never yet met one who does understand it. Instead, the designers of private cryptocurrency actually believed that the way the monetary system works was a bad thing, and responsible for the world’s ills. Nothing could be more wrong. You can see in the chart at the top what the effect of sticking with the gold standard would be, and even the gold standard was virtual gold, not actual gold.
Any cryptocurrency like bitcoin, if it is given to a bank or other entity (like an exchange that holds wallets) acts like delivery of physical gold or coin to a bank. With gold or coin, unless the central bank accepts that physical material for deposit, it cannot be used for reserves [2]. If you deposit cryptocoin #1 into a vault, and the vault loans it out, that cryptocoin #1 is gone from the vault. If that cryptocoin doesn’t get paid back, then it is gone. The only type of loan it can be used for is analogous to what it is for you to loan money to someone. Loansharks also lend money outside the banking system and they have to get very high rates of return in order to pay for their risk.
Because “virtual cryptocurrency” is anathema within the cryptocurrency paradigm, it is impossible to create a cryptocurrency bank loan. In the modern world, essentially all money is “virtual money”.
This is why it is necessary for crypto exchanges to implement something that acts like the agio* did in the ancient world of banking/vault operators. The agio was a fee charged for holding gold for someone. Just so, private crypto exchanges, because exchanges can never create “virtual money” loans issued in cryptocurrency, must make their money a different way.
Within a national monetary system, the only thing that cryptocurrency can be used for is a replacement for products of the mint, and only by a nation-state that controls its own currency. Physical cash is provided by national mints for the purpose of providing hard to duplicate tokens exchangeable by citizens outside of the banking system. A radically redesigned cryptocurrency could do the same thing.
For private settlement of financial transactions like we do with cash, nation-states that mint a crypto-like-currency, could make this possible. However, it will have to be done using approved, controlled entities. The big reason for this is that distributed systems which do not control who can connect to them must be slow because they cannot control their queues. Queuing theory rules here. This is in addition to the fundamental requirement that a national mint’s cryptocurrency must be minted on demand, which is the opposite of cryptocurrency’s design.
Put all this together, and it says that cryptocurrency simply is not what it claims to be. That’s not so big a problem when it is sold by and to the hoi-polloi to the rubes. But when sophisticated parties come in to profiteer, in Elon’s case admitting on national television that it’s a “hustle” on Saturday Night Live, it’s a quite different matter.
* I was doing some work analyzing the Medici records and Geoffrey Gardiner taught me about the agio fee. He said it predated modern usage in the 17th century to mean the money exchange fee. It has stuck with me.
1. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
2. Personal communication with Geoffrey Gardiner based on his experience as COO of Barclay’s bank.
