He’s Cooked…

Guest Post by Karl Denninger

Sam is done.

Two of his chief lieutenants, including his former lover, have turned on him, pled guilty to criminal offenses that will almost-certainly lead to a decade or more in prison, and are cooperating against him.

Among the offenses they pled guilty to are installing specific bypasses of the risk-control and auto-liquidation rules on certain accounts which were utterly essential to propagate the robbery of client funds.  Absent that most, if not all of the loss would not have occurred, with Alameda being forced into liquidation before the damage was severe enough to implicate customer money.

That’s an intentional act and the other two admitted to being involved in doing it so its perfectly legitimate to state it as fact rather than speculation.

How far down the rabbit hole this all goes is an open question, but the real underlying issue is that the sort of nonsense with so-called “stable coins” and similar games have repeatedly been exposed and the entire house of cryptocurrency “value” rests on said claims that this is not the case.  It is the case, however, and only an idiot after seeing it happen several times sequentially has any reason to believe its not present in every single one of these instances.

At the core of the issue is that somewhere everyone has to get paid for what they do.  If you think you found an example where this is not the case you are being scammed; you just haven’t figured out how or why yet.  If there’s enough indirection you can hide this for a good long time, but eventually the market will turn against you.  This is the essence of why “cryptocurrencies” are all valueless; each transaction has a cost, someone has to pay said cost, the more complex and secure the system is the higher said cost is and all of those costs exceed that of other currency systems thus without some means of cheating so your transaction “appears” to be inexpensive to process compared against the alternatives nobody would use it unless what they were doing is fundamentally illegal and thus to use any of the “legitimated” currency systems exposes said person to immediate arrest and prosecution.

What’s possibly worse, however, is that all crypto systems by definition result in an indelible and immutable forensic transaction trail that fully meets all requirements to be admissible in court and therefore the claim that somehow they are “safe” to use for illegal acts is also both false and thus an active fraud.

One of the oldest ways to lose all your money in Vegas is to repeatedly double your bet every time you lose.  This “looks” safe because statistically if the odds are close to even (e.g. in blackjack) you’d think there’s no way to get cleaned out.  Eventually you will win and the one win recovers all your accumulates losses.  You’re wrong because even if you can find a casino without a table limit it is entirely possible, although unlikely, for the dealer to pull a series of a few dozen 20s and 21s in a row, and if that happens you will run out of money before you beat said dealer on the next hand.

While such a string of bad luck is improbable in any short period over enough time it is not only probable it is certain to occur.  Thus if you employ this strategy for long enough you will eventually go bankrupt and you didn’t cheat at anything — you just got nailed by a statistical probability that is unlikely but possible, and you stuck around long enough to have it happen to you.

There is always someone who thinks the rules of probability don’t apply to them and that they can skirt what’s supposed to be there without bad things happening because just one more throw of the dice and they’ll come up the right way.  Financial institutions of all sorts are supposed to have and enforce margin to prevent that sort of thing from wiping out their customers.  Every business has the right to do stupid things and kill itself but if you tell a customer they’re protected against someone else doing a stupid thing and you lie, as the guilty pleas state occurred here, you committed a crime when you did the lying.

The bigger problem within our government and regulators is that we continually refuse to force compliance audits of those firms that wish to operate in the United States or accept funds from US concerns, whether people or corporations.  Major auditing companies have refused to do said audits on these firms and their asset books and risk controls for years and that alone should be enough to bar them from operating in or with US funds on a blanket basis.

It hasn’t been because both sides of the aisle love the cranking of asset values that result from said frauds so long as they don’t blow up in anyone’s face.  The falsehood in such activity is that it always eventually does blow up which is why the surveillance and absolute bar on that sort of activity is critical.

We live in a world of crooks folks, and always have.  Any time you allow an exemption from the rules that are supposed to be enforced and do not jail people immediately when they are caught breaking the rules you will get more law-breaking.  Those political and business entities that profit from this, and that list is long and distinguished, should be held entirely and personally accountable for said malfeasance — not just the actual malefactors — as only with their intentional, willful blindness does any of this happen in the first place.

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