Thread by @smdiehl

Let's talk about surrogate money scams and how they are used to cover up the liquidity crisis at heart of the global crypto fraud. (1/) 🧵

Contrary to myth, it's actually entirely legal for private companies to issue private money, but with some caveats.

Whenever you buy a Starbucks gift card or top up the mobile app you're effectively trading your dollars or pounds for Starbucks-bucks. (2/)

Starbucks has around $1.6 billion in stored value card liabilities outstanding. This is a great line of business for them because these dollars are locked into being spent at their coffee shops and the company gets a giant pile of actual money they can spend anywhere. (3/)

It's actually even better, Starbucks doesn’t pay any interest on the balances held in the Starbucks app or gift cards. And when you buy these products, you are providing the company with effectively an interest-free loan. (4/)

However they take that money and deposit and invest the actual money and make a return on that float which just has to exceed their liabilities. It's a good racket and the only legal requirement is that they provide the cash-equivalence of coffee when you use your gift card. (5/)

However there's a key point that makes this legal, you can't walk into a Starbucks and redeem your gift card for cash. Gift cards are not a cash-equivalent assets since money can only flow in one direction. (6/)

It turns out that if you did let people do that, most of the people buying your gift cards would be in organized crime and would use your service to take dirty money tied to crime and turn it into clean funds, through your company, and that's not legal or good for business. (7/)

There's a *huge* international market for laundering money because there are massive piles of money sitting around the world that even the shadiest of the shady banks won't touch because it's too risky. (8/)

cnbc.com/2020/09/21/lea…

Now if you're a greedy crypto bro with loose morals, you don't see this as a problem but as an opportunity.

And so they decided to build surrogate dollars for entities that are so insanely dodgy no bank will touch them. And then they cut themselves in on that fraud. (9/)

These so-called stablecoin projects are effectively the crypto equivalent Starbucks gift cards, except their accountants are constantly cooking their books and they're not redeemable for anything. (10/)

When you run an untouchable business that can't legally operate anywhere in US and Europe, turns out most banks don't want you as their customer.

Because having their name on the front page of Wall Street Journal for ties to organised crime isn't so great for business. (11/)

If you're shut out of international banking AND you run a offshore money-transmitter service you have a huge liquidity problem.

You're constantly struggling to find dollars and set up new shell companies and new accounts before the old ones get frozen or investigated. (12/)

Cryptocurrency exchanges are constantly playing a game of cat and mouse with the FBI, FinCEN, and the long arm of the Justice Department. Because the only real purpose of using crypto is doing things that are otherwise illegal. (13/)

ag.ny.gov/press-release/…

When customers wire money to exchanges in the Cayman Islands, the operators immediately run off with the cash. In order to keep the illusion of liquidity they issue these IOU stablecoin dollars and pretend they're redeemable because there's no actual real dollars anywhere. (14/)

If we take any one of these allegedly multibillion-cap cryptcon schemes, what we actually have is a bunch of of people who *think* they have a claim on some of those billions of dollars when the amount of real dollars is far far less.

Likely in the tens of millions. (15/)

To paper over this liquidity crunch, people keep issuing billions of unbacked stablecoins which do nothing but obscure and transfer the risk from one asset to another.

When exchanges trade Dollar stablecoins it's because there's no real money anywhere for withdrawals. (16/)

If even a tiny fraction of people decided to redeem their magic beans it would quicky turn into Lord of the Flies with customers fighting over 1-2% dollar reserves of the alleged value of the token.

And there's no deposit insurance or reserve requirements on any of this. (17/)

The entire crypto space is a house of cards just waiting to collapse on this inevitable liquidity crisis.

Naive investors buying into the crypto scam need to understand a simple fact:

1) Paper wealth is not real wealth.
2) Notional value does not factor in risk.

(18/)

There is insane counterparty risk associated with the notional value of these unregulated crypto assets, and if you're trusting a shell company in the Cayman Islands to make due on its debts then you're a fool.

/fin