You're in Charge Now
As I look back at the year that was, I take a certain amount of pride in the stories I have written. It is always my hope that I can both learn and entertain myself with the information I'm researching. As a result, I hope that you, the reader, are experiencing the journey with me. Thankfully, many of you write me directly, telling me what you enjoy or get excited about from my blogs. I enjoy getting that feedback, as it reminds me how much we all have in common.
In my first blog of 2022, I wrote about Cryptocurrency and its DeFi (decentralized finance) status. In January, I wrote about the power of DeFi, and that you don't have the protections of the FDIC (Federal Deposit Insurance Corporation) because it is a DeFi coin system. "DeFi" stands for decentralized finance. In other words, it stands for self-custody finance. Unlike traditional finance, where a company, bank, or fund is responsible for your money, in Defi, no one but you has access to it.
As a result, I pointed out that this process eliminates the need for a middleman/person: no more banks and their fees. A credit card issuer will no longer be the intermediary between you and a merchant when you make purchases.
You use the digital currency, have ownership of it, and can utilize it directly.
Just take this Much
I was excited to share this news with you because now we can eliminate some of the ways we get into financial trouble. For example, interest rates are created the minute you borrow from a bank or delay payment on credit card debt.
Merchants pay a two or three percent fee every time someone buys something. Furthermore, banks charge fees for transferring money or checking accounts with a low balance. All of this goes away with digital/cryptocurrency. I knew this information was not going to make the financial institutions happy. It would take away billions in profit.
70% of the Market
According to the Consumer Protection Financial Bureau (CFPB), credit cards are the largest consumer lending product by the number of users, with almost a trillion dollars outstanding. Over 175 million consumers have at least one credit card – one of the largest sources of consumer debt. From 2018 to 2020, the CFPB estimates that Americans paid roughly $120 billion per year in credit card interest and fees. That works out to about $1,000 per year for every American household.
Interestingly, while the credit card market is enormous, it is among the more consolidated markets for consumer financial products. Just eight big financial players control 70% of the total balances of the market—and the credit card business is often a significant contributor to their bottom line. Compared to other forms of widely accessed credit, credit cards have interest rates that are relatively expensive for consumers. From 2015 to 2019, the average assessed interest rate on credit cards increased by more than 20% (from 13.7% to 16.9%).
Imagine telling the banks who own this 70% big money playground you plan to change how people access and control capital (money) and eliminate the fees. In a simple way, that is what cryptocurrency set out to do. What I share with you next is history repeating itself.
Money for Nothing
The name Sam Bankman-Fried (SBF) and FTX have recently been in the news. Consequently, they are now interesting footnotes in U.S. banking and financial history. However, it would be best if you did your investigation. This story is not as cut and dried as it seems.
In less than five years, Bankman-Fried built a personal fortune that, at its peak, was believed to be worth more than $26 billion, placing him among the world's wealthiest individuals.
Sam attended the Massachusetts Institute of Technology to study mathematics and physics. He became interested in the idea of effective altruism. Effective altruism is a philosophy that emphasizes using logic and data to find solutions that benefit as many people as possible. He established the quantitative trading company Alameda Research, which specializes in digital currencies, in 2017.
He made a fortune over the following year by arbitraging Bitcoin BTCUSD between exchanges in the U.S. and Japan, where prices were frequently higher. Bankman-Fried established the cryptocurrency exchange FTX in 2019. The timing was fortunate since interest in cryptocurrency skyrocketed the following year as the COVID-19 outbreak spread worldwide.
Trust your Bankman
Bankman-Fried was toasted by some of the largest financial organizations, luring investment from the most notable names on Wall Street. The names included Softbank Group, Sequoia Capital, and Blackrock. Even the legendary billionaire hedge fund managers Israel Englander and Paul Tudor Jones gave him financial support. Soon, FTX was one of the major companies in the sector.
Bankman-Fried stood apart from other cryptocurrency tycoons because he claimed to engage with regulators. He wanted to develop a more robust framework for the budding business and treat it like a regular finance network. To do so, Bankman-Fried testified before Congress to explain how the cryptocurrency sector operated to skeptic U.S. politicians.
The price of cryptocurrencies fell precipitously in 2022, leading to the failure of multiple enterprises. Bankman-Fried emerged as a hero, buying up several failing partners and establishing himself as a sort of Robin Hood for the sector.
The Domino Falls fast
Due to a "significant liquidity shortage," Bankman-Fried revealed on November 8 that FTX and Binance had struck a tentative deal where Binance would purchase FTX. Markets fell due to the unrest, which caused significant falls in some of the most well-known cryptocurrencies and even spilled over into traditional banking. The result was an old fashion bank run (run to the bank and pull out your money). Like the bank runs of the early 1900s, you see it starting here with FTX.
The confusion grew the next day once it was learned that numerous American government agencies were looking at FTX and Bankman-Fried. A day later, on November 9, Binance announced that it terminated the agreement since its investigation had shown that "the issues are beyond our control or ability to help." As a result, companies started pulling their money as no proof or validated data was needed beyond the statement from Binance.
On November 11, 2022, FTX filed for Chapter 11 bankruptcy protections as it assessed the value of its remaining assets, a company announcement said. Bankman-Fried resigned as CEO, and John J. Ray III took the CEO helm. Who is J.J. Ray the 3rd? He's the man that steered disgraced energy company Enron through bankruptcy proceedings in the 2000s. You can't make this stuff up.
But you doesn't have to call me J.J.
Ray is a corporate friend and has a background working with large companies like Deloitte, law firm Mayer Brown, and Waste Management. He learned how to get back large sums of money for investors (big firms, not people) when he led Enron out of bankruptcy. After Enron emerged from its Chapter 11 bankruptcy in 2004, Ray was appointed to chair the effort to recover assets for creditors through litigation against numerous banks. He served in that role through 2009. Under Ray's leadership, the company returned $828.9 million to its creditors, which Ray said was nearly 52 cents on the dollar.
Six days later, in a filing with the United States Bankruptcy Court for the District of Delaware, Ray stated that in over 40 years of his experience in dealing with insolvencies, he had never encountered "such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here." In addition, he stated that FTX was managed by "a very small group of inexperienced, unsophisticated, and potentially compromised individuals." How about Enron and Grandma Millie's story, almost 22 years to the day? Click here for the story.
Here is a quote from Rep. Maxine Waters, D-Calif. "The fall of FTX has posed tremendous harm to over one million users, many of whom were everyday people who invested their hard-earned savings into the FTX cryptocurrency exchange, only to watch it all disappear within a matter of seconds."
Read the Fine Print
Water's is no stranger to seeing money disappear. For example, she came under investigation for ethics violations. A House panel accused her of at least one ethics violation related to her efforts to help OneUnited Bank receive federal aid. Waters' husband is a stockholder and former director of OneUnited Bank, and the bank's executives were major contributors to her campaigns. The bank received $12 million in Troubled Asset Relief Program (TARP) money in 2008 due to bad investments (sound familiar) with Freddie Mac and Fannie Mae.
If you pay attention to the narrative, you'll see how the people in power speak to the risky crypto investment from the common people, but let's see who gets their money back from the hard work of J.J. Ray the III. My money (U.S.-based currency) is on Softbank Group, Sequoia Capital, and Blackrock.
Meanwhile, what should we expect to happen next? Go back to my blogs on the Federal Reserve and learn about the fateful 1913 holiday congressional session where our leaders voted to institute The Federal Reserve as the Central Bank for the U.S. My prediction is "people" and Congress will want a safer and more reliable cryptocurrency than we have today, so individuals like Sam Bankman-Fried can't hurt us. Furthermore, the issuer of this new secure cryptocurrency will carry the Federal Reserve name and be protected (FDIC) and fully insured through banks (part of the system) that offer to hold or invest in this digital currency.
Rinse and Repeat
I have written several blogs this year that goes into the historical detail I describe above. I'm not a psychic or futurist; I merely pay attention to fear-based habits and how far we as a species are willing to go to allow ourselves the feeling of safety. Is doing this over again wrong or bad? No, I just think it is incomplete. What should you do? With new insight and understanding, you get to make informed decisions. Just recognizing what is going on at this point is enough.
Have a wonderful New Year celebration with your loved ones, and I'll see you in 2023!
