Some Thoughts

I tend to shy away from write ups like this.

But my team encouraged me to go ahead and share some of my thoughts on what is currently unfolding in the industry.

Reason I tend to avoid things like this is because I’m an analyst. It’s a trait I’ve had my entire life. And one thing I’ve learned is to let the data guide me to a possible set of answers. This is why a thought piece is out of my wheelhouse.

Not to mention, if I start to form a public opinion on a matter, I believe it might cause myself to protect that opinion and form a bias with the data.

But today’s topic, I won’t be forming a directional opinion on the market or a project without data. Instead, I’m writing a piece that has been baking in frustration for years.

Ask anybody that works closely with me and they will admit I have gone on rants about how the metrics that exist right now are not helping the industry fight back. To push back against bad actors. To force VC to take a second look at their allocation schedules for a project preparing to launch.

We lack the necessary tools.

Teams like Nansen, Dune, Tie.io, Messari… These guys are doing work that can truly turn the table. I don’t know about you, but when Ryan Selkis from Messari starts ranting I say to myself, here he goes again… But at the end of the day, he is the one that is building the tools to help us all avoid sending money to an incinerator.

For that, all those teams and many more I haven’t mentioned, should be given a big thank you. Because if investors, traders, journalists, and many others have better tools, metrics, and research, then we can hold the industry to a higher standard.

Which is why when I talk about some of the work we are doing at The Lab, I talk about being that standard. And to do that, we need to walk the walk.

It is no secret to anybody who chats with us that we’ve spent all of 2022 building. For me it is an outlet for the frustration that brews within.

The countless stories my team hears about people having money tied up in Luna, Celsius, and now FTX is enough for a lifetime. My business partner Benjamin should literally win some type of crypto reward for how much time he has spent helping people see beyond the rubble. He is a saint in that regard. But neither of us take any pride in it. We hate it. Hearing somebody getting rugged and losing faith in crypto… it’s like losing a comrade.

Yes, I am one of those people who genuinely believe cryptocurrencies can act as a foundation that a better society can be built upon.

Which is why the events of this week make me mad. Once again actors using solutions not crypto native and similar to legacy finance solutions are setting things back.

I’m not afraid to admit I’m mad. But what is almost as maddening is that the solution we are building here at Jarvis Labs can help people reduce their impact on disasters like this. But that discussion is best reserved for another time. A time when we are able to stand more firmly on our feet and start to move forward.

For now, let’s try to push some frustration to the side and address the question of what will happen next?

Liquidity is Gone

I hear rumors just like most, and many in the industry do give me their thoughts. But the reality is nobody really knows what the outcome will be.

Crypto Twitter is literally your best source for information. You just need to know who to follow and trust… And also who is disguising insider information by prefacing a comment with “wouldn’t be surprised”.

As far as what this means for crypto… This is bad. Many many books got hit hard. All market makers will likely mention the damage incurred in the coming days. A few we can keep an eye on are Amber (might have already folded), Jump, GSR, Wintermute, and others. The recoil will take weeks if not months before the industry is able to operate as normal. And the market will now need to adjust to this liquidity destruction.

Realize if Alameda is no longer operating, and other market makers fold, the industry loses liquidity. That’s not a great recipe moving forward.

Not to mention… The hole for FTX is between $8 and $10bn as of now. And who knows the size of Alameda’s crater. We can quickly realize just how sever this is since Celsius came in at $5bn while Three Arrows Capital owes $3bn to creditors.

This fleet of Titanic ships sized hole is why many are starting to think this might take some time to play out. And while I can understand their point, we can better understand the more direct impact here.

We hit on the market makers before. But now many trade desks, high net work individuals, and various traders lost their trading capital. That’s billions of money simply locked up… Unable to act on an opportunity.

The capital available to buy any future selloff is severely impaired. And the reality of the situation is that this is the direct and immediate consequence to the market.

And while we should all tread with upmost caution, let’s also realize that there were a lot of tokens that did not make a new low for 2022 here. One of which is ETH.

This was literally one of the most bearish things that could have unfolded… We should all be asking ourselves how is it not worse in terms of price? This is something to keep in the back of your mind over the next few weeks in the event the market starts to gain a footing.

Now, as far as what else might materialize outside of price action moving forward…

The Blame Game

I think what we are seeing is the start of what will soon progress into a series of pass the blame.

Right now, all fingers are pointing at SBF, FTX, and Alameda. Nothing surprising there. From what we can tell based upon the little amount of information known, this seems logical.

But when I think about what might unfold next… I find myself coming to this FTX.us and Binance.us dynamic. Why do they need a second entity to operate in the U.S. Yes, I ask this rhetorically in order to set myself up for my next point…

These entities give a hint as to where the blame will move to next.

My guess is the CFTC and SEC is either failing purposely or acting with gross negligence.

The first suggestion is the entities are doing it on purpose. Reason being is certain actors that have a revolving door with the agencies are trying to catch up to a technological race that gives them incredible power.

I’m referring here to the JP Morgan, Goldman, Citi, BNY Mellon, UBS, DB banking elites of the world. The banks that are beginning to realize they can compete with central banks… As there never was a moment where they could tokenize sovereign debt to mint a currency that then rides the rails of Wall Street via FX swap markets that are comparable to the DeFi primitive Uniswap.

It is the upmost control imaginable with seignorage rights. It’s what JP Morgan showed off the other day on Polygon and should not be estimated. Reason being is what other office has a staff of blockchain developers of their size?

The truth is they are one of the largest entities in crypto, but most don’t know it. And the fact regulators might be failing on purpose pairs up well with these points.

Do not underestimate the bank that bailed out the U.S. government.

OK, as far as gross negligence, we can see this all over the place with the SEC. A great example is one unrelated to crypto that involves Republicans on the ESG investing mandates in legacy markets. They are calling it “woke garbage” to quote a quote from Capitol Account. In the piece there is a discussion on how the SEC had a “glitch” and basically ignored a 15-month comment period.

At this point the SEC is now experiencing heat. To pull another quote from that linked essay, Montana’s Attorney General Knudsen said, “I don’t think it’s that veiled. When we look at some of the stuff that the SEC’s been doing lately, and some of the expedited comment periods, they’re begging for a [legal] challenge. That’s definitely one of the routes that we will be taking if they keep moving forward.”

It is no secret Gensler is stirring up a lot of dislike among the Republican party for issues relating to markets. And with the House and potentially the Senate getting closer to a Republic advantage, this dislike might get more vocal.

And when it comes to crypto, Gensler is stirring the pot up as well by overstepping his bounds. What was once a regime that requested disclosures from entities, is now acting through enforcement. This is beyond their typical behavior and is likely to get reeled in soon if Republicans truly have a say moving forward.

But most importantly…

Both the CFTC and SEC were the reason for the creation of FTX.us and Binance.us. The zero guidance given for how FTX and Binance could operate within the borders of the U.S. had secondary order effects.

These effects were hedge fund managers, desks, and firms creating entities offshore. This gave them the ability to use FTX among other services with volume and liquidity to trade with size.

And from this lack of guideline for how exchanges can operate in a manner authorities deem fit, the regulators now lack full ability to take action on what just unfolded.

The result will be what equates to tens of billions of dollars of frustrated capital pointing the finger at financial regulators… the blame will move to Gensler’s desk among others. If not for his lack of leadership, these entities would have provided appropriate disclosures, undergone necessary audits, and complied with standard regulations for exchanges.

Instead, all activity was pushed in such a manner that when things - that are not related to blockchain protocols - went astray, they would wrongly point the finger at the industry.

The truth is that these regulators have three fingers pointing back at themselves.

And it’s this type of negligence that lends itself to what I view as purposeful negligence. This was not a mistake.

Regardless, expect regulation to come down in Q1 of next year. If that happens, it’ll be plenty of time to move through U.S. Congress to get signed into law before the end of the year.

I know I’m ending on a sour note here. Regulators acting with purposeful negligence… Market Makers impairing liquidity… FTX freezing capital on the sidelines… It sucks.

But that’s the reality of the situation.

If there were to be one bright spot… Several tokens are not making lower lows for 2022 today. If this holds for some time, it might indicate bad news is not as effective in this bearish market.

As for a more pat on the back message… The industry is not dying. Legacy markets are adopting all of the technology. Take note of who is walking the walk right now. And take note that it’s happening on public blockchains.

Also take note of who is building. Support these people. We need to be better.

Let’s stay positive. We at Jarvis Labs will continue building, we were prepared for the long winter and built the runway for it. The crypto community will come back far stronger than before.

The key…

Set the standard higher.

The two most powerful warriors are patience and time.

-Tolstoy

Your Pulse on Crypto,

Ben Lilly