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By the way, CoinDesk just turned 10. Read about it and what we've learned from a decade of crypto history in Consensus Magazine this week. |
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Binance, the world's largest crypto exchange, temporarily paused bitcoin (BTC) withdrawals twice on Sunday as the blockchain became overwhelmed with pending transactions and sky-high fees due to the unexpected use of a new Bitcoin-based token standard called BRC-20. Some 500,000 bitcoin transactions sat unconfirmed while the average transaction fee on the network rose to two-year highs (now costing approximately $20, up from well under $1 last week). About 14,000 BRC tokens have been created in recent days, which are used to facilitate trade of Bitcoin-based NFTs called ordinals, another relatively-new type of asset that’s seeing increasing use. To alleviate trading pressure Binance said it has adjusted its BTC fee structure and will integrate the Lightning Network scaling solution. This comes as the mania over the PEPE meme coin on Ethereum, based on the familiar Pepe the Frog internet character (and separate from the BRC-20-based PEPE token), began to ebb this weekend. The token’s price dropped more than 50% after early adopters began to sell off their holdings. PEPE’s market capitalization hit a high water mark of $1.8 billion, appreciating some 5,000,000% in three weeks of existence, in an example of market exuberance and irrationality associated with crypto market bull runs. |
Blockchain company Ripple's legal battle with the U.S. Securities and Exchange Commission (SEC) is set to cost the firm around $200 million, CEO Brad Garlinghouse said at the Dubai Fintech Summit this weekend. The SEC sued the company and several executives in 2020 over the unregistered sale of XRP tokens worth around $1.3 billion, in what could be a precedent-setting case for the crypto industry that some on-lookers predict will soon settle out-of-court. Meanwhile, financial watchdogs in South Korea are investigating Rep. Kim Nam-kuk, a lawmaker with the Democratic Party of Korea who co-sponsored a pro-crypto bill, over a potential conflict-of-interest after he allegedly made some $4.5 million from crypto trades between January and February 2022. Finally, Liechtenstein Prime Minister Daniel Risch said the country is mulling accepting bitcoin for government services like tax payments. While no timeline was given, Risch told local press any crypto received by the state will likely be immediately exchanged for Swiss francs. |
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Worldcoin, the controversial global ID and universal basic income (UBI) project co-founded by ChatGPT creator Sam Altman, has released its first consumer product: a crypto wallet called World App. The Polygon-based wallet is “minimalist,” its designer told CoinDesk, in that it only supports basic crypto trading and storage functions. However, World App could have more utility one day for those with a verified World ID, the digital identity marker Worldcoin envisions for all 8 billion humans that’s created by scanning users’ retinas. Meanwhile, Estonia, once a crypto hub, has lost 80% of its crypto businesses since a restrictive crypto law went into effect in 2022. The country’s Financial Intelligence Unit said 200 firms withdrew their licenses after it began enforcing the country’s new capital reserve and employment requirements. |
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"After a big bubble when anything and everything can just raise money, crypto VCs are being much smarter about where the money is going."
– Delta Blockchain fund founder and general partner Kavita Gupta, on CoinDesk TV's "First Mover" |
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| The Takeaway: Genius Fraud |
(Shutterstock) The recent buyout of First Republic, the second-largest bank failure in the U.S. ever, has raised serious questions about solvency and liquidity across the global banking system. Banks are supposed to be stodgy operations: Customers deposit money into a bank account for safekeeping and withdraw it whenever they want to use it. And by and large that system works. But banks need to make money, and most banks in the United States are basically free or low-fee accounts. So how do banks make money? By lending out customer deposits to risky businesses to make yield, of course. In reality, banks run like this: Short-term, safe customer deposits come in the door, the bank uses those short-term customer deposits to invest in long-term, risky assets in exchange for future financial returns and then the banks pray like hell that all the customers don’t want their deposits at the same time since short-term deposits are tied up in long-term assets. This is fractional reserve banking (where only a fraction of customer deposits need to be held in the bank’s reserve) and it’s a widely-known fraud. And while this fraud is indeed a fraud, it has in a way been beneficial to society even though we would be more well-served to have a way to opt out of the fraud. A blog post by Steve Randy Waldman’s Interfluidity on the topic of the complexity of finance puts it best: “Financial systems help us overcome a collective action problem. In a world of investment projects whose costs and risks are perfectly transparent, most individuals would be frightened…A banking system is a superposition of fraud and genius that interposes itself between investors and entrepreneurs.” What does this mean? Basically if banks weren’t able to invest short-term, low-risk customer deposits into long-term, high-risk assets then the availability of investment capital for most of the crazy, world-changing ideas entrepreneurs come up with would have never been funded. Banks help us spread the risk of financial capital allocation. In absence of banks participating in this genius we could instead have a financial system where the only financial capital that invests in long-term risky investments is the capital that commits to investing in long-term risky investments (see: narrow banking). Therein lies the fraud. The fraud is that almost no one who deposits money into bank accounts knows that they are opting into this particular solution for the “collective action problem” of financial capital allocation. Here’s the thing though, this genius has been kind of good for society. We’ve been tricked into making productive investments. Unproductive investments too, sure. But you’d be hard pressed to argue that we would have made more productive investments without the genius of fractional reserve banking. But when fractional reserve banking is backed by the U.S. government when no alternatives available or even legally allowed, like with Custodia Bank or The Narrow Bank, that is a problem. People should have the option to deposit with these narrow banks that don’t participate in fractional reserve banking practices because, as we’ve seen recently, when fractional reserve banking goes wrong the fallout is catastrophic. The good thing is that banks do appear to be moving towards a more narrow model. Sure, it might get more expensive for companies to get capital since there will be less capital available if the fractional reserve banking system becomes less popular, but that’s fine. The people who invest in high-risk, potentially high-reward investments and assets should be the people who outright declare: “I want to invest in high-risk, potentially high-reward investments and assets.” Otherwise, it’s fraud. So, the modern financial system is built on “fraud and genius.” Does the latter excuse the former? Probably not. – George Kaloudis @gckaloudis george@coindesk.com |
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CoinDesk is coming back to Austin for Consensus 2024. Get your super early bird tickets for the lowest possible rates and join us May 29-June 1, 2024. Get your tickets now. |
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Kudos for making it this far! On occasion, we'll give our loyal Node readers the opportunity to claim DESK, our social token, which is a mechanism for returning the value of engagement directly to the users who create it. |
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