1 00:00:00,200 --> 00:00:02,960 Speaker 1: Hello everyone, and welcome to the latest episode from the 2 00:00:03,000 --> 00:00:06,320 Speaker 1: Midweek Edition of the Coin Bureau podcast. Every week, I 3 00:00:06,360 --> 00:00:09,240 Speaker 1: pick out two of my favorite videos from Coin Bureau's 4 00:00:09,280 --> 00:00:13,119 Speaker 1: Youtube Channel to present to you in podcast form. The 5 00:00:13,160 --> 00:00:15,800 Speaker 1: audio you're about to hear is from those videos I've 6 00:00:15,880 --> 00:00:18,000 Speaker 1: chosen this week. Many of you have been in touch 7 00:00:18,040 --> 00:00:20,520 Speaker 1: to ask whether it's possible to listen to our videos 8 00:00:20,560 --> 00:00:24,000 Speaker 1: in podcast format, and so your wish is my command. 9 00:00:24,560 --> 00:00:27,840 Speaker 1: This week I've selected our videos on Europe's looming energy 10 00:00:27,880 --> 00:00:31,600 Speaker 1: crisis and a recent report by Forbes that alleges over 11 00:00:31,720 --> 00:00:35,880 Speaker 1: half of Bitcoin's trading volume is fake. Ever since Vladimir 12 00:00:35,880 --> 00:00:39,640 Speaker 1: Putin launched an unprovoked war against Ukraine in February, Europe's 13 00:00:39,680 --> 00:00:43,240 Speaker 1: dependence on Russian fossil fuel exports has been laid bare 14 00:00:43,360 --> 00:00:46,640 Speaker 1: for all to see. Now, with winter approaching and no 15 00:00:46,920 --> 00:00:50,080 Speaker 1: end to the war in sight, the stakes are getting higher. 16 00:00:50,440 --> 00:00:53,680 Speaker 1: The Russians recently turned off the gas taps and stated 17 00:00:53,760 --> 00:00:57,240 Speaker 1: that they wouldn't be turned on again until sanctions were lifted. 18 00:00:57,960 --> 00:01:00,920 Speaker 1: Neither side wants to back down, but both have a 19 00:01:00,960 --> 00:01:04,240 Speaker 1: lot to lose from this situation. In the first part 20 00:01:04,240 --> 00:01:06,360 Speaker 1: of the episode, I look at how we found ourselves 21 00:01:06,400 --> 00:01:09,479 Speaker 1: in this mess and what steps countries across Europe are 22 00:01:09,520 --> 00:01:13,480 Speaker 1: taking to try and prepare for winter. I also examine 23 00:01:13,520 --> 00:01:16,399 Speaker 1: a few reasons as to why the looming crisis may 24 00:01:16,480 --> 00:01:20,280 Speaker 1: not turn out to be as bad as some are expecting. Then, 25 00:01:20,440 --> 00:01:23,039 Speaker 1: in the second part of today's episode, I dig down 26 00:01:23,120 --> 00:01:27,199 Speaker 1: into a recent report by Forbes, which examines cryptocurrency trading 27 00:01:27,280 --> 00:01:30,559 Speaker 1: volumes and how much of the supposed trading taking place 28 00:01:30,640 --> 00:01:34,520 Speaker 1: in the crypto market is likely fake. This was a 29 00:01:34,600 --> 00:01:38,280 Speaker 1: fascinating report to summarize, and there are some interesting takeouts 30 00:01:38,280 --> 00:01:40,920 Speaker 1: from it, although I must admit I disagree with the 31 00:01:40,959 --> 00:01:44,640 Speaker 1: author on quite a few points. Nevertheless, have a listen 32 00:01:44,959 --> 00:01:47,200 Speaker 1: and see what you make of it all. I hope 33 00:01:47,200 --> 00:01:49,440 Speaker 1: you enjoy listening to these two pieces and I'll be 34 00:01:49,480 --> 00:01:52,360 Speaker 1: back talking crypto with Mike very soon, so be sure 35 00:01:52,440 --> 00:01:55,160 Speaker 1: to stay tuned and if you want even more content 36 00:01:55,200 --> 00:01:57,800 Speaker 1: from Coin Bureau, be sure to subscribe to our Youtube 37 00:01:57,880 --> 00:02:21,320 Speaker 1: Channel and visit us on social media. Year two. It 38 00:02:21,360 --> 00:02:25,640 Speaker 1: was entirely predictable and some would say inevitable. Russia is 39 00:02:25,680 --> 00:02:29,920 Speaker 1: turning off the taps and Europe is scrambling, scrambling to 40 00:02:30,000 --> 00:02:34,880 Speaker 1: secure supplies and conserve energy before winter sets in. However, 41 00:02:35,080 --> 00:02:38,600 Speaker 1: some are arguing that this may already be too late. 42 00:02:39,240 --> 00:02:41,640 Speaker 1: In my video today, I'm going to tell you exactly 43 00:02:41,840 --> 00:02:44,880 Speaker 1: what's going on in the European energy market and what 44 00:02:45,200 --> 00:02:49,040 Speaker 1: could happen this winter. This is a video you don't 45 00:02:49,200 --> 00:02:53,240 Speaker 1: want to miss. The question of whether Russia would actually 46 00:02:53,280 --> 00:02:56,040 Speaker 1: turn off the taps was always in the air. It 47 00:02:56,120 --> 00:02:58,880 Speaker 1: was arguably one of the main reasons why Europe was 48 00:02:59,000 --> 00:03:03,840 Speaker 1: initially reluctant to impose sanctions on imports of Russian energy. 49 00:03:04,120 --> 00:03:07,079 Speaker 1: As I mentioned in a previous video, there were concerns 50 00:03:07,120 --> 00:03:12,120 Speaker 1: that planned maintenance on nordstream one, the main pipeline into Europe, 51 00:03:12,520 --> 00:03:16,560 Speaker 1: was meant as an intentional warning sign to European leaders, 52 00:03:17,160 --> 00:03:20,200 Speaker 1: and while Putin was on a trip to Tehran a 53 00:03:20,200 --> 00:03:23,640 Speaker 1: few months ago, he further warned European leaders that gas 54 00:03:23,639 --> 00:03:28,840 Speaker 1: deliveries could fall further due to these maintenance issues. It 55 00:03:28,960 --> 00:03:31,680 Speaker 1: seems that one of the biggest sticking points here was 56 00:03:31,720 --> 00:03:34,480 Speaker 1: a turbine that the Russian said was being held up 57 00:03:34,520 --> 00:03:38,680 Speaker 1: in Canada thanks to the sanctions. Now, despite the eventual 58 00:03:38,680 --> 00:03:42,920 Speaker 1: delivery of that turbine, gas supplies through nordstream one dropped 59 00:03:42,920 --> 00:03:46,839 Speaker 1: by a further fifty in the days that followed, there 60 00:03:46,960 --> 00:03:50,480 Speaker 1: was panic on the continent as prices kept on rising 61 00:03:50,640 --> 00:03:55,480 Speaker 1: to dangerous levels. However, that was only the first salvo. 62 00:03:56,240 --> 00:03:59,880 Speaker 1: When European countries, in conjunction with the g seven star, 63 00:04:00,080 --> 00:04:04,320 Speaker 1: arted proposing price caps on Russian oil. Putin didn't take 64 00:04:04,400 --> 00:04:08,480 Speaker 1: too kindly to the speculation. The gas flows coming through 65 00:04:08,560 --> 00:04:11,680 Speaker 1: nordstream one were once again brought to zero as there 66 00:04:11,720 --> 00:04:14,760 Speaker 1: were some more turbine related issues that needed to be 67 00:04:14,840 --> 00:04:19,359 Speaker 1: fixed in a quote specialized workshop. Now, whether this was 68 00:04:19,480 --> 00:04:23,080 Speaker 1: legitimate is anybody's guess, but the result was that gas 69 00:04:23,080 --> 00:04:27,520 Speaker 1: flows coming through Nordstream were brought to zero. This caused 70 00:04:27,640 --> 00:04:31,719 Speaker 1: panic in Europe. That's because, even though they were scrambling 71 00:04:31,760 --> 00:04:34,720 Speaker 1: to source gas from other places, this would still not 72 00:04:34,800 --> 00:04:38,680 Speaker 1: be enough to bridge the demand this winter. The complete 73 00:04:38,720 --> 00:04:42,320 Speaker 1: shutdown of Russian gas made it clear that either demand 74 00:04:42,480 --> 00:04:45,440 Speaker 1: would have to be curtailed or there would be shortages 75 00:04:45,600 --> 00:04:48,840 Speaker 1: later in the year. In the immediate short term, though, 76 00:04:48,920 --> 00:04:52,920 Speaker 1: the price of gas skyrocketed on the continent. This led 77 00:04:53,040 --> 00:04:56,080 Speaker 1: to some serious concerns that not only could we have 78 00:04:56,120 --> 00:05:00,599 Speaker 1: an energy crisis, but a financial crisis as well. Allow 79 00:05:00,640 --> 00:05:04,880 Speaker 1: me to explain. You see, there's a massive derivatives market 80 00:05:05,080 --> 00:05:08,640 Speaker 1: for gas and energy worth trillions of Euros. This is 81 00:05:08,720 --> 00:05:11,359 Speaker 1: used by a number of participants, but perhaps some of 82 00:05:11,400 --> 00:05:15,160 Speaker 1: the most prolific are power companies and utilities that are 83 00:05:15,200 --> 00:05:19,520 Speaker 1: looking to hedge their exposure to falling prices. This makes 84 00:05:19,520 --> 00:05:22,360 Speaker 1: sense when prices are falling and the power producers are 85 00:05:22,360 --> 00:05:25,560 Speaker 1: trying to protect their bottom line, but it creates a 86 00:05:25,640 --> 00:05:29,240 Speaker 1: whole lot of issues when we see prices rally like this. 87 00:05:30,120 --> 00:05:33,200 Speaker 1: That's because these power producers will now have to put 88 00:05:33,279 --> 00:05:37,839 Speaker 1: up collateral for margin calls. This becomes a serious issue 89 00:05:37,920 --> 00:05:41,400 Speaker 1: when it happens all at once and power producers have 90 00:05:41,560 --> 00:05:44,719 Speaker 1: not been able to realize the profits from the higher 91 00:05:44,760 --> 00:05:50,720 Speaker 1: spot prices. Collateral needs to be posted and fast. That's 92 00:05:50,760 --> 00:05:54,240 Speaker 1: because there are numerous other counterparties to that trade that 93 00:05:54,320 --> 00:05:56,839 Speaker 1: could also go belly up should they not get that 94 00:05:56,920 --> 00:06:02,000 Speaker 1: collateral posted. According to Bloomberg, this has created a, quote layman, 95 00:06:02,120 --> 00:06:07,039 Speaker 1: moment for the European Energy Market, a highly leveraged derivative 96 00:06:07,120 --> 00:06:10,440 Speaker 1: market that could see firms go bankrupt thanks to a 97 00:06:10,480 --> 00:06:14,400 Speaker 1: massive liquidity crunch. By some estimates, the amount of margin 98 00:06:14,480 --> 00:06:17,320 Speaker 1: calls that could be faced is near one point five 99 00:06:17,680 --> 00:06:22,360 Speaker 1: trillion euros. The spike in these margin requirements is forcing 100 00:06:22,400 --> 00:06:26,520 Speaker 1: these energy producers to tap numerous credit lines. For example, 101 00:06:26,760 --> 00:06:30,680 Speaker 1: last week, Finish Utility fortum got two point three five 102 00:06:30,839 --> 00:06:34,960 Speaker 1: billion euros of bridge funding. Over in Switzerland, AXXSPO got 103 00:06:35,040 --> 00:06:37,839 Speaker 1: a credit line of up to four billion francs, about 104 00:06:38,000 --> 00:06:41,880 Speaker 1: four point one billion dollars. Over in the UK, Centrica 105 00:06:41,960 --> 00:06:45,159 Speaker 1: is in talks with banks about a potential extension of 106 00:06:45,240 --> 00:06:49,440 Speaker 1: credit lines. Other companies are nearing bankruptcy and have had 107 00:06:49,480 --> 00:06:53,599 Speaker 1: to get state support. These include the likes of Germany's UNIPER, 108 00:06:53,760 --> 00:06:57,160 Speaker 1: for instance. It is facing a liquidity shortfall not only 109 00:06:57,200 --> 00:06:59,919 Speaker 1: because it can't get any more Russian gas through the pipeline, 110 00:07:00,160 --> 00:07:02,440 Speaker 1: but also because it has had to post close to 111 00:07:02,480 --> 00:07:06,719 Speaker 1: one billion euros in collateral. UNIPER has become one of 112 00:07:06,760 --> 00:07:09,880 Speaker 1: the most high profile casualties of the crisis and right 113 00:07:09,920 --> 00:07:14,280 Speaker 1: now its survival hinges on support from the state, according 114 00:07:14,360 --> 00:07:18,240 Speaker 1: to the UNIPER CEO quote. Look, the worst is yet 115 00:07:18,280 --> 00:07:20,920 Speaker 1: to come. What we see on the whole scale market 116 00:07:21,040 --> 00:07:23,360 Speaker 1: is twenty times the price that we have seen two 117 00:07:23,400 --> 00:07:29,200 Speaker 1: years ago. Twenty Times. UNIPER may not be the only casualty, though. 118 00:07:29,600 --> 00:07:33,160 Speaker 1: Throughout Europe there are a number of utility companies that 119 00:07:33,240 --> 00:07:36,960 Speaker 1: could be teetering. In Austria, for example, the government stepped 120 00:07:37,000 --> 00:07:41,360 Speaker 1: in with billions in support for Vienna's municipal utility supplier. 121 00:07:41,920 --> 00:07:46,240 Speaker 1: In Sweden, the government extended emergency liquidity support to its 122 00:07:46,240 --> 00:07:50,880 Speaker 1: electricity producers. It has now become quite clear that broader 123 00:07:50,920 --> 00:07:53,680 Speaker 1: support will be needed in order to stave off a 124 00:07:53,800 --> 00:07:58,000 Speaker 1: full blown credit crunch in Europe. As such, the European 125 00:07:58,040 --> 00:08:02,120 Speaker 1: Commission is examining a number of pasures to help with liquidity. 126 00:08:02,320 --> 00:08:04,880 Speaker 1: Those proposed include credit lines from the E C B, 127 00:08:05,320 --> 00:08:08,760 Speaker 1: expanding the acceptable collateral or even, in the worst case, 128 00:08:09,000 --> 00:08:14,600 Speaker 1: a temporary suspension of the derivatives markets. Whether these measures 129 00:08:14,640 --> 00:08:19,400 Speaker 1: could work is anybody's guess. So far, prices appear to 130 00:08:19,440 --> 00:08:23,840 Speaker 1: have eased after a meeting of EU energy ministers. That's 131 00:08:23,880 --> 00:08:27,640 Speaker 1: because there appears to be some disagreement around the initial 132 00:08:27,720 --> 00:08:30,800 Speaker 1: spark that lead to the gas being shut off. The 133 00:08:30,880 --> 00:08:35,400 Speaker 1: suggestion of a price cap on Russian oil. It's another 134 00:08:35,640 --> 00:08:41,000 Speaker 1: short sighted action that could potentially have disastrous consequences. The 135 00:08:41,040 --> 00:08:43,840 Speaker 1: principal m o behind the price cap is that by 136 00:08:43,920 --> 00:08:47,640 Speaker 1: agreeing not to pay above an agreed maximum for Russian 137 00:08:47,640 --> 00:08:51,079 Speaker 1: oil and gas, EU countries can reduce the income the 138 00:08:51,160 --> 00:08:54,560 Speaker 1: Russians are earning by selling their exports on the open market. 139 00:08:55,160 --> 00:08:58,040 Speaker 1: They're also hoping that, should they ban, together with other 140 00:08:58,120 --> 00:09:01,560 Speaker 1: members of the g seven, they can create a buyer's market, 141 00:09:02,120 --> 00:09:05,320 Speaker 1: essentially creating an environment where Russia will have to take 142 00:09:05,360 --> 00:09:08,440 Speaker 1: it or leave it. The buyers set the price and 143 00:09:08,480 --> 00:09:12,439 Speaker 1: the seller will just have to agree. However, there are 144 00:09:12,480 --> 00:09:16,240 Speaker 1: a number of problems with this. Firstly, it assumes that 145 00:09:16,280 --> 00:09:19,880 Speaker 1: the seller will accept Europe is taking a gamble that 146 00:09:19,920 --> 00:09:23,319 Speaker 1: Putin needs to sell them gas more than they need 147 00:09:23,400 --> 00:09:26,360 Speaker 1: to buy it. For his part, Putin has said that 148 00:09:26,400 --> 00:09:29,840 Speaker 1: he will quote make Europe freeze and will turn off 149 00:09:29,920 --> 00:09:33,760 Speaker 1: the tabs to any country that imposes price caps. It's 150 00:09:33,840 --> 00:09:37,480 Speaker 1: unlikely that countries like India or China will agree to 151 00:09:37,520 --> 00:09:40,559 Speaker 1: these caps, so he may just decide to direct oil 152 00:09:40,600 --> 00:09:44,719 Speaker 1: and gas there instead. Yes, it's unlikely to make up 153 00:09:44,720 --> 00:09:47,840 Speaker 1: for the demand and the pipeline infrastructure in the East 154 00:09:48,000 --> 00:09:52,640 Speaker 1: isn't as developed, but it's still something he can do. Then, 155 00:09:52,640 --> 00:09:55,199 Speaker 1: of course, there's the question of how these price caps 156 00:09:55,200 --> 00:09:59,800 Speaker 1: could impact the power producers and utilities. Together with proposals 157 00:09:59,800 --> 00:10:03,640 Speaker 1: to tax quote windfall profits, these measures could do further 158 00:10:03,720 --> 00:10:07,760 Speaker 1: harm to generation efforts. More broadly, if they can only 159 00:10:07,840 --> 00:10:11,199 Speaker 1: charge a certain amount for gas that's coming from Russia, 160 00:10:11,440 --> 00:10:15,720 Speaker 1: it could limit their incentives to get supply onto the market. Moreover, 161 00:10:15,840 --> 00:10:18,640 Speaker 1: if you're going to tax them even more for making money, 162 00:10:18,880 --> 00:10:21,960 Speaker 1: then you're going to disincentivize them from investing in and 163 00:10:22,040 --> 00:10:26,040 Speaker 1: sourcing new supply. I'll leave a link to this Bloomberg 164 00:10:26,040 --> 00:10:29,640 Speaker 1: interview with an energy expert, where he explains exactly why 165 00:10:29,679 --> 00:10:33,760 Speaker 1: these measures are going to lead to more shortages. Now, 166 00:10:33,800 --> 00:10:36,200 Speaker 1: something else that needs to be considered here is the 167 00:10:36,280 --> 00:10:40,640 Speaker 1: demand side. When you implement artificial price caps, the dynamics 168 00:10:40,679 --> 00:10:45,559 Speaker 1: of supply and demand don't work. Consumers don't adjust their 169 00:10:45,679 --> 00:10:50,160 Speaker 1: usage lower or conserve their energy, which only makes rationing inevitable. 170 00:10:50,920 --> 00:10:52,800 Speaker 1: The same can be said for some of the other 171 00:10:52,880 --> 00:10:57,040 Speaker 1: support measures that have been proposed. Measures like subsidies, for example, 172 00:10:57,360 --> 00:11:02,000 Speaker 1: don't do anything to limit energy demand. So it looks 173 00:11:02,080 --> 00:11:05,160 Speaker 1: inevitable that Europe is going to have to ration some 174 00:11:05,320 --> 00:11:09,240 Speaker 1: of that gas and energy. In fact, there are already 175 00:11:09,280 --> 00:11:12,800 Speaker 1: a number of European countries that have proposed and indeed 176 00:11:12,880 --> 00:11:18,440 Speaker 1: implemented laws aimed at saving energy. Fancy cold showers anyone? 177 00:11:18,760 --> 00:11:22,880 Speaker 1: How about no street lights and lower thermostats. That is 178 00:11:22,920 --> 00:11:27,200 Speaker 1: what is happening right now. Measures have been implemented at 179 00:11:27,240 --> 00:11:30,760 Speaker 1: a consumer level to limit energy use so that European 180 00:11:30,800 --> 00:11:33,840 Speaker 1: countries can fill up their reserve gas tanks for the winter. 181 00:11:34,600 --> 00:11:37,720 Speaker 1: In the German city of Hanover, hot water has been 182 00:11:37,760 --> 00:11:42,160 Speaker 1: banned in public buildings. It's the first city in Germany 183 00:11:42,160 --> 00:11:45,400 Speaker 1: to make hot water unavailable for hand washing and other 184 00:11:45,559 --> 00:11:50,440 Speaker 1: uses in government facilities, gyms and swimming pools. According to 185 00:11:50,480 --> 00:11:53,280 Speaker 1: the mayor of the city quote, the goal is to 186 00:11:53,360 --> 00:11:58,240 Speaker 1: reduce our energy consumption by fifteen percent. Other cities in 187 00:11:58,280 --> 00:12:01,360 Speaker 1: Germany are taking measures such as dimming street lights. So 188 00:12:01,679 --> 00:12:05,040 Speaker 1: back to the Dark Ages, am I right? Sorry, bad joke. 189 00:12:06,160 --> 00:12:10,199 Speaker 1: It's not just in Germany, though. In Spain, Parliament recently 190 00:12:10,240 --> 00:12:13,280 Speaker 1: approved a law that would limit heating and cooling in 191 00:12:13,320 --> 00:12:17,760 Speaker 1: most businesses and public spaces. Air contemperatures are not allowed 192 00:12:17,760 --> 00:12:20,720 Speaker 1: to go below twenty seven Celsius in summer and above 193 00:12:20,920 --> 00:12:24,560 Speaker 1: nineteen Celsius in winter. In fact, I remember seeing signs 194 00:12:24,600 --> 00:12:26,920 Speaker 1: to that effect when I was in Barcelona just a 195 00:12:26,920 --> 00:12:30,120 Speaker 1: couple of weeks ago. Those temperatures will make for a 196 00:12:30,280 --> 00:12:33,920 Speaker 1: far from comfortable living environment for many people and for 197 00:12:33,960 --> 00:12:37,040 Speaker 1: any viewers who deal in Fahrenheit. We're talking eighty point 198 00:12:37,120 --> 00:12:41,240 Speaker 1: six and sixty six point two degrees respectively, by the way. 199 00:12:41,679 --> 00:12:45,600 Speaker 1: And speaking of limiting temperatures, there have been suggestions in 200 00:12:45,640 --> 00:12:49,880 Speaker 1: Switzerland that would see people potentially being jailed for heating 201 00:12:49,880 --> 00:12:53,840 Speaker 1: their homes higher than nineteen Celsius in the event of ration. 202 00:12:53,960 --> 00:12:56,920 Speaker 1: Ng this is on top of the proposed finds that 203 00:12:56,960 --> 00:12:59,679 Speaker 1: the government could doll out to those Scali wags who 204 00:12:59,720 --> 00:13:04,280 Speaker 1: score at the rules. Speaking to the Blick newspaper, Marcus 205 00:13:04,280 --> 00:13:07,840 Speaker 1: spawned Ly, a spokesman for the Federal Department of Finance, 206 00:13:07,960 --> 00:13:10,880 Speaker 1: explained that the rate for fines on a daily basis 207 00:13:10,960 --> 00:13:14,400 Speaker 1: could start at thirty Swiss francs and added that the 208 00:13:14,480 --> 00:13:18,040 Speaker 1: maximum fine could be up to three thousand Swiss francs. 209 00:13:18,920 --> 00:13:23,640 Speaker 1: Over in France, meanwhile, things are similarly bleak. Despite generating 210 00:13:23,800 --> 00:13:27,640 Speaker 1: more nuclear power than any other European country, it turns 211 00:13:27,640 --> 00:13:32,040 Speaker 1: out almost half of French reactors are under maintenance barles 212 00:13:32,080 --> 00:13:36,720 Speaker 1: demure timing. As a result, rationing is also taking place 213 00:13:36,800 --> 00:13:39,720 Speaker 1: in a number of French cities. They're turning off street 214 00:13:39,800 --> 00:13:43,520 Speaker 1: lights and factories are shutting down their furnaces. In Normandy, 215 00:13:43,679 --> 00:13:47,199 Speaker 1: some schools will even start heating their classrooms by burning 216 00:13:47,240 --> 00:13:50,840 Speaker 1: wood instead of gas. There are also efforts on a 217 00:13:50,960 --> 00:13:55,480 Speaker 1: national level for businesses and individuals to embrace energy conservation 218 00:13:55,720 --> 00:14:00,679 Speaker 1: by increasing car pooling, lowering thermostats and shutting off illuminated 219 00:14:00,720 --> 00:14:05,800 Speaker 1: advertising signs. The restrictions are even more forceful for French businesses. 220 00:14:06,200 --> 00:14:08,960 Speaker 1: The prime minister has called for companies to reduce their 221 00:14:09,000 --> 00:14:14,559 Speaker 1: consumption by up to ten percent or face enforced rationing. Basically, 222 00:14:14,880 --> 00:14:17,800 Speaker 1: you make it happen or we will make it happen 223 00:14:17,880 --> 00:14:21,680 Speaker 1: for you. As if that wasn't bad enough, businesses will 224 00:14:21,760 --> 00:14:26,040 Speaker 1: also have to appoint a, quote, Ambassador of Energy Sobriety 225 00:14:26,280 --> 00:14:29,800 Speaker 1: this month and present blueprints to the government for cutting 226 00:14:29,840 --> 00:14:34,160 Speaker 1: their electricity consumption. The result is that some businesses have 227 00:14:34,320 --> 00:14:37,520 Speaker 1: decided to shut their production for a couple of months. 228 00:14:38,280 --> 00:14:41,400 Speaker 1: These include der Lex International, which said it would put 229 00:14:41,440 --> 00:14:45,880 Speaker 1: its furnaces on hold and its employees on furlough till November. 230 00:14:46,480 --> 00:14:49,440 Speaker 1: The same can be said for Christal dark, the maker 231 00:14:49,560 --> 00:14:53,720 Speaker 1: of crystal wine goblets. They've placed six and fifty of 232 00:14:53,760 --> 00:14:58,720 Speaker 1: their five thousand employees on partial furlough. Imagine being sent 233 00:14:58,800 --> 00:15:01,680 Speaker 1: home from work and there having to contend with cold 234 00:15:01,720 --> 00:15:06,440 Speaker 1: showers and a home no warmer than nineteen Celsius. That 235 00:15:06,760 --> 00:15:11,560 Speaker 1: is the reality facing many today. So that's it, then, 236 00:15:11,640 --> 00:15:15,960 Speaker 1: a cold, dark winter. Well, there are a few silver 237 00:15:16,040 --> 00:15:19,480 Speaker 1: linings to these wintry clouds. First, you have to assume 238 00:15:19,560 --> 00:15:22,160 Speaker 1: that it is going to be a particularly cold winter, 239 00:15:22,400 --> 00:15:26,440 Speaker 1: which is not guaranteed. Trying to forecast winter temperatures this 240 00:15:26,520 --> 00:15:30,320 Speaker 1: early in the year is incredibly difficult. Moreover, there are 241 00:15:30,400 --> 00:15:34,000 Speaker 1: so many drivers of weather that forecasts can change on 242 00:15:34,040 --> 00:15:39,000 Speaker 1: a dime. But, having said that, there are some indications 243 00:15:39,200 --> 00:15:42,800 Speaker 1: that it could be warmer than usual. This is thanks 244 00:15:42,880 --> 00:15:46,040 Speaker 1: to the influence of La Nina, which could be felt 245 00:15:46,120 --> 00:15:48,960 Speaker 1: later this year. I'll leave a link to this very 246 00:15:49,080 --> 00:15:51,680 Speaker 1: helpful blog post below, which gives you more of an 247 00:15:51,760 --> 00:15:55,240 Speaker 1: overview about the forecast for this winter. But the T 248 00:15:55,440 --> 00:15:59,160 Speaker 1: LD R is quote. Europe is expected to have warmer 249 00:15:59,200 --> 00:16:02,920 Speaker 1: than average imperatures over most of the northern and north 250 00:16:03,000 --> 00:16:06,280 Speaker 1: central parts of the continent. Then, of course, you have 251 00:16:06,400 --> 00:16:09,360 Speaker 1: to consider that Europe is trying to source other supplies 252 00:16:09,400 --> 00:16:13,600 Speaker 1: of gas. They're scrambling to secure contracts for gas pipelines 253 00:16:13,720 --> 00:16:18,280 Speaker 1: and liquid natural gas shipments. These are making up some 254 00:16:18,440 --> 00:16:22,240 Speaker 1: of the shortfall, but even then, it's not been plain sailing. 255 00:16:23,000 --> 00:16:26,960 Speaker 1: That's because Europe hasn't been too active in developing re 256 00:16:27,120 --> 00:16:31,600 Speaker 1: gasification plants on its shores. This means that they're limited 257 00:16:31,760 --> 00:16:34,880 Speaker 1: to how quickly they can bring these gas shipments on shore. 258 00:16:35,560 --> 00:16:39,440 Speaker 1: Building these plants can't be done overnight, but European countries 259 00:16:39,520 --> 00:16:42,840 Speaker 1: are doing what they can to approve the construction of these. 260 00:16:43,440 --> 00:16:46,720 Speaker 1: They're also making use of offshore ships which can do 261 00:16:46,800 --> 00:16:51,400 Speaker 1: the job of a regasification plant. These are called floating 262 00:16:51,520 --> 00:16:55,600 Speaker 1: storage regasification units, F R S us, and they could 263 00:16:55,640 --> 00:16:58,160 Speaker 1: help to bring a lot of this gas on shore. 264 00:16:59,000 --> 00:17:02,000 Speaker 1: But you so have to consider the fact that Europe 265 00:17:02,080 --> 00:17:06,440 Speaker 1: isn't the only region that's competing for these Leen g shipments. 266 00:17:07,240 --> 00:17:10,360 Speaker 1: Countries in Asia, such as South Korea and Japan, are 267 00:17:10,440 --> 00:17:14,480 Speaker 1: big consumers of llen G as well. They have also 268 00:17:14,640 --> 00:17:18,480 Speaker 1: secured longer term contracts, which have to be fulfilled long 269 00:17:18,560 --> 00:17:22,439 Speaker 1: before the Europeans can even consider buying up additional supply. 270 00:17:23,320 --> 00:17:26,639 Speaker 1: Whether Europe will be able to do this also really 271 00:17:26,680 --> 00:17:30,080 Speaker 1: depends on how cold things are over in Asia. If 272 00:17:30,080 --> 00:17:33,400 Speaker 1: it's unseasonably warm there, then there will be a lot 273 00:17:33,480 --> 00:17:37,480 Speaker 1: of ellengy supply that can be scooped up by the Europeans. 274 00:17:37,480 --> 00:17:42,000 Speaker 1: Beyond this, European countries are rushing to fill gas storage units, 275 00:17:42,080 --> 00:17:45,840 Speaker 1: and they are well ahead of schedule. They have already 276 00:17:45,880 --> 00:17:50,080 Speaker 1: reached of storage limits, a target that they were initially 277 00:17:50,119 --> 00:17:54,200 Speaker 1: aiming to reach by the first of November. Typically, gas 278 00:17:54,240 --> 00:17:58,040 Speaker 1: storage is able to absorb supply shocks and typically provides 279 00:17:58,080 --> 00:18:02,160 Speaker 1: at least twenty five tot of the fuel consumed in winter. 280 00:18:02,960 --> 00:18:06,040 Speaker 1: If we were to assume more gas stored and a 281 00:18:06,160 --> 00:18:09,320 Speaker 1: slightly warmer winter in Europe and Asia, then the big 282 00:18:09,400 --> 00:18:14,040 Speaker 1: European energy freeze could be narrowly averted and those hot 283 00:18:14,080 --> 00:18:19,080 Speaker 1: showers may not just be a fond memory. Okay, time 284 00:18:19,119 --> 00:18:21,399 Speaker 1: for a few of my closing thoughts on the matter. 285 00:18:22,240 --> 00:18:25,040 Speaker 1: It's quite clear that we're going to see some challenging 286 00:18:25,119 --> 00:18:28,800 Speaker 1: times in the coming months. Nearly every country in Europe, 287 00:18:28,840 --> 00:18:32,520 Speaker 1: short of perhaps Norway, is concerned about the prospect of 288 00:18:32,600 --> 00:18:36,480 Speaker 1: gas and energy shortages this winter. It was always clear 289 00:18:36,560 --> 00:18:40,440 Speaker 1: that Putin would use gas supplies as the ultimate trump card. 290 00:18:41,000 --> 00:18:44,000 Speaker 1: Of course, cutting gas to Europe and killing demand from 291 00:18:44,000 --> 00:18:48,280 Speaker 1: the continent won't come without long term implications for Russia 292 00:18:48,560 --> 00:18:52,800 Speaker 1: and Europe. Knew this. However, they still played Russian Roulette 293 00:18:52,880 --> 00:18:56,760 Speaker 1: with a madman, and that is a dangerous game. Firstly, 294 00:18:56,920 --> 00:19:00,840 Speaker 1: it's important that financial regulators find a a to provide 295 00:19:00,920 --> 00:19:04,800 Speaker 1: liquidity to those companies facing a credit crunch. The last 296 00:19:04,880 --> 00:19:07,280 Speaker 1: thing that the continent needs now, on top of an 297 00:19:07,320 --> 00:19:11,520 Speaker 1: energy crisis, is another layman moment for the derivatives markets. 298 00:19:12,200 --> 00:19:15,159 Speaker 1: It seems as if they're managing here, though, and solutions 299 00:19:15,160 --> 00:19:20,000 Speaker 1: such as posting alternative collateral are being considered. Governments are 300 00:19:20,040 --> 00:19:25,040 Speaker 1: also rushing to support these companies with state funded lifelines. Now, 301 00:19:25,040 --> 00:19:28,520 Speaker 1: while I was heavily against bailouts of over Leverage Wall 302 00:19:28,560 --> 00:19:31,879 Speaker 1: Street banks in two thousand and eight, supporting an energy 303 00:19:31,920 --> 00:19:35,639 Speaker 1: company under a crunch caused by geopolitics does make sense. 304 00:19:36,200 --> 00:19:40,199 Speaker 1: Bankruptcies of power companies would not help an already fraught 305 00:19:40,359 --> 00:19:44,600 Speaker 1: situation in Europe. When it comes to short term policies, 306 00:19:44,720 --> 00:19:48,840 Speaker 1: governments should refrain from knee jerk reactions. Price caps and 307 00:19:48,880 --> 00:19:53,160 Speaker 1: taxing windfall profits could potentially warp the market and exacerbate 308 00:19:53,280 --> 00:19:57,000 Speaker 1: the supply shortages. The best solution for this winter is 309 00:19:57,040 --> 00:20:01,440 Speaker 1: to reduce demand and increase supply. On the demand side, 310 00:20:01,560 --> 00:20:05,160 Speaker 1: these energy saving policies appear to be the only solution 311 00:20:05,600 --> 00:20:08,880 Speaker 1: Europe needs to cut at least ten percent of its demand, 312 00:20:09,080 --> 00:20:12,200 Speaker 1: and if this can be done by temporary power saving solutions, 313 00:20:12,359 --> 00:20:16,080 Speaker 1: then it should help stave off a crisis. Cold showers 314 00:20:16,160 --> 00:20:20,200 Speaker 1: are a bitter pill to swallow, but they aren't deadly now. 315 00:20:20,240 --> 00:20:23,680 Speaker 1: When it comes to the supply side, Europe is finding 316 00:20:23,720 --> 00:20:27,680 Speaker 1: additional sources. They've been in frantic negotiations with L energy 317 00:20:27,760 --> 00:20:32,240 Speaker 1: exporters and they are making plans for temporary regasification facilities. 318 00:20:32,240 --> 00:20:36,159 Speaker 1: Offshore storage facilities are getting full and there is a 319 00:20:36,240 --> 00:20:40,600 Speaker 1: chance that this winter the weather could be on their side. Then, 320 00:20:40,800 --> 00:20:43,320 Speaker 1: in the longer term, Europe is laying the ground work 321 00:20:43,440 --> 00:20:47,760 Speaker 1: for more energy independence. The politicians needed a wake up 322 00:20:47,800 --> 00:20:52,160 Speaker 1: call from woke environmental policies that sacrificed energy independence at 323 00:20:52,200 --> 00:20:56,040 Speaker 1: the altar of green power. Hopefully, they're going to implement 324 00:20:56,080 --> 00:20:59,959 Speaker 1: common sense policies that find a balance between emission reduction 325 00:21:00,040 --> 00:21:10,720 Speaker 1: and energy security. CRYPTOCURRENCY's purpose is to replace the existing 326 00:21:10,800 --> 00:21:15,159 Speaker 1: financial system. This not only includes replacing Fiat currencies with 327 00:21:15,240 --> 00:21:20,000 Speaker 1: hard money like BTC, but also replacing financial intermediaries with 328 00:21:20,200 --> 00:21:25,760 Speaker 1: defied protocols. This makes defied protocols direct competitors to commercial 329 00:21:25,800 --> 00:21:29,280 Speaker 1: banks and central banks. And that's why the report about 330 00:21:29,359 --> 00:21:33,239 Speaker 1: defy recently published by the United States Federal Reserve is 331 00:21:33,359 --> 00:21:37,159 Speaker 1: so significant. Today I'm going to summarize what the feds 332 00:21:37,200 --> 00:21:40,240 Speaker 1: defy report says in simple terms, give you my thoughts 333 00:21:40,320 --> 00:21:42,920 Speaker 1: as we go along, and tell you what it could 334 00:21:42,960 --> 00:21:47,639 Speaker 1: mean for the crypto market. The thirds defy report is titled, quote, 335 00:21:47,840 --> 00:21:53,880 Speaker 1: Decentralized Finance, defy, transformative potential and associated risks. It appears 336 00:21:53,920 --> 00:21:56,600 Speaker 1: to have been written in June but was only published 337 00:21:56,720 --> 00:21:59,679 Speaker 1: late last month. I'll get into why that might be 338 00:22:00,000 --> 00:22:02,280 Speaker 1: a little later. In any case, you can find the 339 00:22:02,320 --> 00:22:06,439 Speaker 1: full text in the description. So the report begins with 340 00:22:06,600 --> 00:22:10,000 Speaker 1: a brief overview, wherein the authors effectively reiterate what I 341 00:22:10,080 --> 00:22:14,400 Speaker 1: mentioned a few moments ago. Quote. Defied products and services 342 00:22:14,400 --> 00:22:18,800 Speaker 1: are conducted without a trusted central intermediary such as a bank, 343 00:22:18,880 --> 00:22:22,760 Speaker 1: and they include payments, lending and borrowing, trading and investments, 344 00:22:23,000 --> 00:22:28,320 Speaker 1: capital raising, crowdfunding and insurance. As a fun fact, crowdfunding 345 00:22:28,400 --> 00:22:31,160 Speaker 1: via Cryptocurrency, I. C O S, is considered to be 346 00:22:31,240 --> 00:22:34,359 Speaker 1: one of the most powerful tools in cryptocurrency, as it 347 00:22:34,400 --> 00:22:38,520 Speaker 1: allowed both crypto projects like ethereum and cryptocurrency exchanges like 348 00:22:38,600 --> 00:22:42,639 Speaker 1: finance to get off the ground. Given that retail investors 349 00:22:42,720 --> 00:22:45,800 Speaker 1: arguably have a tendency to crowd fund projects that seek 350 00:22:45,880 --> 00:22:48,840 Speaker 1: to disrupt the status quo, it should come as no 351 00:22:49,000 --> 00:22:51,960 Speaker 1: surprise that countries around the world seem to be moving 352 00:22:51,960 --> 00:22:56,320 Speaker 1: towards restricting retail access to cryptocurrency. More about that in 353 00:22:56,359 --> 00:23:00,720 Speaker 1: the description. Now. What's interesting is that the authors seem 354 00:23:00,760 --> 00:23:04,640 Speaker 1: to consider bitcoin to be the first defied protocol, as 355 00:23:04,680 --> 00:23:07,720 Speaker 1: it made it possible to send and receive BTC payments 356 00:23:07,800 --> 00:23:11,760 Speaker 1: in a trust less manner. This is consistent with the 357 00:23:11,800 --> 00:23:14,880 Speaker 1: author's definition of defy I mentioned a few moments ago, 358 00:23:15,280 --> 00:23:19,719 Speaker 1: but interesting nonetheless. The author's point to the proliferation of 359 00:23:19,880 --> 00:23:24,080 Speaker 1: Smart Contract cryptocurrencies as the precursor to the explosion of 360 00:23:24,160 --> 00:23:28,480 Speaker 1: decentralized finance, which makes sense, given that extensive programmability is 361 00:23:28,520 --> 00:23:33,040 Speaker 1: required for most defied protocols to work. The author's note 362 00:23:33,080 --> 00:23:36,879 Speaker 1: ethereum as being the most popular smart contract cryptocurrency for defy, 363 00:23:36,920 --> 00:23:40,520 Speaker 1: but acknowledge that avalanche and Salana are starting to become 364 00:23:40,520 --> 00:23:44,840 Speaker 1: popular as well. They also acknowledged that many defied protocols 365 00:23:44,880 --> 00:23:48,040 Speaker 1: have gone multi chain, before going on to highlight the 366 00:23:48,160 --> 00:23:51,359 Speaker 1: two hundred and twenty four billion dollars in total value 367 00:23:51,359 --> 00:23:55,399 Speaker 1: locked in defy protocols, a figure which was obviously recorded 368 00:23:55,440 --> 00:23:59,440 Speaker 1: earlier this year. Even though this figure is still a 369 00:23:59,520 --> 00:24:03,399 Speaker 1: fraction of the global financial system. The author's caution that 370 00:24:03,520 --> 00:24:07,520 Speaker 1: defy is growing very quickly, and I suppose it was 371 00:24:07,960 --> 00:24:13,080 Speaker 1: until May. Now, while the author's caution that defy is 372 00:24:13,200 --> 00:24:16,359 Speaker 1: growing quickly, they don't seem to be all that concerned, 373 00:24:16,400 --> 00:24:21,800 Speaker 1: and that's for one simple reason scalability. Smart Contract cryptocurrencies 374 00:24:22,000 --> 00:24:26,360 Speaker 1: can't currently scale to support global adoption, but the authors 375 00:24:26,359 --> 00:24:30,880 Speaker 1: believe they could with the right scaling solutions. The authors 376 00:24:30,920 --> 00:24:34,439 Speaker 1: then outline too scenarios they foresee when it comes to 377 00:24:34,520 --> 00:24:39,639 Speaker 1: defy adoption. Either defy evolves to become interoperable or even 378 00:24:39,680 --> 00:24:43,920 Speaker 1: integrated with the existing financial system, or it evolves to 379 00:24:44,000 --> 00:24:47,040 Speaker 1: become its own financial system, which would be the preferable 380 00:24:47,080 --> 00:24:50,119 Speaker 1: outcome for Crypto in my opinion. As far as the 381 00:24:50,160 --> 00:24:53,359 Speaker 1: authors are concerned, which of the two scenarios unfolds is 382 00:24:53,480 --> 00:24:58,359 Speaker 1: ultimately irrelevant, as they both pose financial stability concerns, especially 383 00:24:58,520 --> 00:25:01,800 Speaker 1: since there is a lack of regularation around defi. In 384 00:25:01,800 --> 00:25:05,320 Speaker 1: other words, we can't control it, so it's bad, regardless 385 00:25:05,359 --> 00:25:09,280 Speaker 1: of what it becomes. They go on to lament. How, 386 00:25:09,400 --> 00:25:13,120 Speaker 1: whereas centralized entities in the CRYPTO industry are easy to regulate, 387 00:25:13,359 --> 00:25:17,720 Speaker 1: decentralized entities can't be coerced with questionable laws and even 388 00:25:17,760 --> 00:25:22,840 Speaker 1: more questionable sanctions, including some defied protocols. And being hyperbolic, 389 00:25:22,880 --> 00:25:26,640 Speaker 1: of course, but you get the point. The second part 390 00:25:26,760 --> 00:25:29,800 Speaker 1: of the Fed paper is about blockchain basics, and the 391 00:25:29,840 --> 00:25:34,040 Speaker 1: way the authors explained blockchains and smart contracts was peculiar 392 00:25:34,080 --> 00:25:38,960 Speaker 1: to say the least. For example, quote consensus protocols regulate 393 00:25:39,000 --> 00:25:42,199 Speaker 1: the way in which updates to the data set are proposed, 394 00:25:42,320 --> 00:25:46,800 Speaker 1: reconciled and recorded, while ensuring that no other previously validated 395 00:25:46,920 --> 00:25:51,040 Speaker 1: data have been altered. This immediately reminded me of a 396 00:25:51,119 --> 00:25:54,760 Speaker 1: defy report by the bank for International Settlements, wherein the 397 00:25:54,800 --> 00:25:59,320 Speaker 1: author explains how defied protocols will exist on permissioned distributed 398 00:25:59,359 --> 00:26:03,560 Speaker 1: ledgers run by banks, with regulations at the protocol level. 399 00:26:04,240 --> 00:26:08,720 Speaker 1: More about that crazy report in the description. Now the 400 00:26:08,760 --> 00:26:12,080 Speaker 1: authors go on to explain how blockchains work, and I 401 00:26:12,119 --> 00:26:15,080 Speaker 1: won't bore you with the details there. However, I will 402 00:26:15,160 --> 00:26:18,720 Speaker 1: commend them for acknowledging that the Bitcoin blockchain became the 403 00:26:18,840 --> 00:26:22,199 Speaker 1: first blockchain when the first bitcoin block was mined in 404 00:26:22,320 --> 00:26:27,720 Speaker 1: two thousand and nine. Bravo. I'll quickly note that blockchain 405 00:26:27,880 --> 00:26:32,040 Speaker 1: is a term that's often used interchangeably by institutions to 406 00:26:32,119 --> 00:26:36,879 Speaker 1: describe both cryptocurrencies and the permission distributed ledger systems that 407 00:26:36,960 --> 00:26:40,919 Speaker 1: are operated by centralized entities. In this case, it seems 408 00:26:40,960 --> 00:26:43,879 Speaker 1: the authors are using the term correctly, which I again 409 00:26:44,040 --> 00:26:47,479 Speaker 1: commend them for. They then turned to the topic of 410 00:26:47,600 --> 00:26:50,040 Speaker 1: smart contracts, and I won't bore you with the details 411 00:26:50,080 --> 00:26:54,280 Speaker 1: here either. However, I will again commend them for underscoring 412 00:26:54,280 --> 00:26:58,320 Speaker 1: the importance of Compos ability and acknowledging that oracles are 413 00:26:58,359 --> 00:27:02,879 Speaker 1: required to make most de fi protocols work. This makes 414 00:27:02,880 --> 00:27:06,440 Speaker 1: me worry that they could go after popular oracles like chain, link, 415 00:27:06,480 --> 00:27:10,439 Speaker 1: et Cetera, to apply regulations to defy, but let's not 416 00:27:10,480 --> 00:27:15,200 Speaker 1: go there yet. Now the third part of the Fed 417 00:27:15,240 --> 00:27:19,040 Speaker 1: paper talks about, quote, defy products and services, and I 418 00:27:19,119 --> 00:27:21,920 Speaker 1: must admit I take issue with the title there, because 419 00:27:21,920 --> 00:27:25,000 Speaker 1: a product or service implies that an intermediary of some 420 00:27:25,080 --> 00:27:28,120 Speaker 1: kind is involved, which is simply not the case with 421 00:27:28,280 --> 00:27:32,480 Speaker 1: defi protocols. The author start by repeating that Ethereum is 422 00:27:32,520 --> 00:27:36,080 Speaker 1: currently the most popular smart contract cryptocurrency for defy, but 423 00:27:36,240 --> 00:27:39,240 Speaker 1: this time add the finance smart chain and car Darno 424 00:27:39,400 --> 00:27:43,960 Speaker 1: as two additional smart contract cryptocurrencies that are increasing in popularity. 425 00:27:44,359 --> 00:27:48,720 Speaker 1: Respect what's interesting is the author's note that quote, many 426 00:27:48,840 --> 00:27:53,320 Speaker 1: depths provide discrete services rather than complex bundles of products. 427 00:27:53,880 --> 00:27:56,960 Speaker 1: This is interesting because central banks seem to be obsessed 428 00:27:57,000 --> 00:27:59,560 Speaker 1: with the idea of a one stop shop for their 429 00:27:59,640 --> 00:28:03,800 Speaker 1: upcome in Central Bank digital currencies, or cbdcs as it 430 00:28:03,920 --> 00:28:08,120 Speaker 1: so happens. The authors also note that, quote, new protocols 431 00:28:08,160 --> 00:28:11,320 Speaker 1: are beginning to offer a combination of several products in 432 00:28:11,359 --> 00:28:15,600 Speaker 1: an attempt to become a one stop shop for financial services. 433 00:28:16,400 --> 00:28:19,480 Speaker 1: This makes me wonder whether they'll start going after these 434 00:28:19,560 --> 00:28:24,080 Speaker 1: kinds of defied protocols more aggressively. What's even scarier is 435 00:28:24,119 --> 00:28:27,320 Speaker 1: that the author's single out make a Dow when discussing 436 00:28:27,359 --> 00:28:30,480 Speaker 1: governance in defy. This is scary because make a dow 437 00:28:30,760 --> 00:28:34,480 Speaker 1: makes it possible to mint a decentralized sable coin called die, 438 00:28:34,640 --> 00:28:39,640 Speaker 1: using cryptocurrency as collateral. Once upon a time, most of 439 00:28:39,760 --> 00:28:43,480 Speaker 1: the Diet was largely collateralized by ether, but today it's 440 00:28:43,520 --> 00:28:50,040 Speaker 1: mostly collateralized by circles. USDC, a centralized stable coin circles. 441 00:28:50,080 --> 00:28:53,960 Speaker 1: Response to the recent sanctions against Tornado cash have consequently 442 00:28:54,040 --> 00:28:57,320 Speaker 1: led to concerns that make a Dow could be next 443 00:28:57,480 --> 00:29:00,800 Speaker 1: on the regulatory chopping block. More about what happened to 444 00:29:00,800 --> 00:29:05,160 Speaker 1: tornado cash using the link in the description. Now what's 445 00:29:05,200 --> 00:29:08,680 Speaker 1: reassuring is that the authors actually seemed to be somewhat 446 00:29:08,720 --> 00:29:12,680 Speaker 1: supportive of defy, as they provide some recommendations for how 447 00:29:12,720 --> 00:29:16,760 Speaker 1: it could be improved, including the introduction of more real 448 00:29:16,840 --> 00:29:21,200 Speaker 1: world assets, the creation of more robust stable coins and 449 00:29:21,440 --> 00:29:26,160 Speaker 1: the introduction of cbdcs. That last one threw me off, 450 00:29:26,200 --> 00:29:30,400 Speaker 1: because the authors literally suggest that, quote. The creation of 451 00:29:30,440 --> 00:29:34,520 Speaker 1: a central bank digital currency, CBDC, that becomes available on public, 452 00:29:34,520 --> 00:29:40,560 Speaker 1: permissionless blockchains such as Ethereum, may also serve to reduce volatility. 453 00:29:40,680 --> 00:29:42,560 Speaker 1: I'm not sure how I feel about that, if I'm 454 00:29:42,600 --> 00:29:46,200 Speaker 1: being honest. Now the authors end this section with another 455 00:29:46,360 --> 00:29:50,760 Speaker 1: insightful comment, and that's the quote. The direct implication of 456 00:29:50,800 --> 00:29:54,240 Speaker 1: a fast growth in defi, predominantly driven by wholesale and 457 00:29:54,320 --> 00:29:59,920 Speaker 1: possibly institutional investors, would be the relevance of financial stability considerations. 458 00:30:00,240 --> 00:30:04,320 Speaker 1: Put differently, they're concerned that too much institutional interest in 459 00:30:04,400 --> 00:30:08,400 Speaker 1: defy could pose a threat to financial stability, revealing that 460 00:30:08,440 --> 00:30:11,600 Speaker 1: this is a very real risk that central banks are 461 00:30:11,640 --> 00:30:15,320 Speaker 1: concerned about. Take a second to consider that. This suggests 462 00:30:15,600 --> 00:30:21,000 Speaker 1: defied option is much more significant than we think. anyways. 463 00:30:21,120 --> 00:30:24,600 Speaker 1: The authors then go on to describe some subcategories of 464 00:30:24,720 --> 00:30:30,160 Speaker 1: defy in detail. These are borrowing and lending protocols, decentralized 465 00:30:30,200 --> 00:30:35,920 Speaker 1: exchanges or dexes, derivative dexes, payment protocols and asset management protocols. 466 00:30:36,680 --> 00:30:39,560 Speaker 1: When it comes to borrowing and lending protocols, they point 467 00:30:39,560 --> 00:30:42,360 Speaker 1: out that about a fifth of all the total value 468 00:30:42,360 --> 00:30:46,760 Speaker 1: locked in defy is coming from this specific niche note 469 00:30:46,960 --> 00:30:49,760 Speaker 1: that these statistics are from earlier this year, but it 470 00:30:49,760 --> 00:30:54,280 Speaker 1: looks like this market share still stands today. What's odd 471 00:30:54,480 --> 00:30:57,880 Speaker 1: is that the author's note quote fees are often denominated 472 00:30:57,920 --> 00:31:01,000 Speaker 1: in the platform's governance token, which she is certainly news 473 00:31:01,080 --> 00:31:04,000 Speaker 1: to me. As far as I know, all transaction fees 474 00:31:04,000 --> 00:31:06,920 Speaker 1: on almost all borrowing and lending protocols are paid in 475 00:31:06,920 --> 00:31:11,640 Speaker 1: the native cryptocurrency coin of whatever blockchain they're on. After 476 00:31:11,720 --> 00:31:15,720 Speaker 1: describing what appears to be are as innovative safety module, 477 00:31:15,840 --> 00:31:19,280 Speaker 1: the author's note that quote lenders may earn an interest 478 00:31:19,360 --> 00:31:23,240 Speaker 1: rate that exceeds rates offered by banks on sovereign currency 479 00:31:23,280 --> 00:31:26,680 Speaker 1: denominated deposits, which is a big no note because it 480 00:31:26,720 --> 00:31:30,560 Speaker 1: creates competition for the big banks. What's impressive is that 481 00:31:30,600 --> 00:31:34,040 Speaker 1: the authors go as far as explaining are as flash 482 00:31:34,040 --> 00:31:37,760 Speaker 1: loan functionality, though they again fail to mention the defied 483 00:31:37,760 --> 00:31:42,400 Speaker 1: protocol by name. This is forgivable, however, as they emphasize 484 00:31:42,400 --> 00:31:45,880 Speaker 1: that there are quote, legitimate uses of flash loans, such 485 00:31:45,920 --> 00:31:49,719 Speaker 1: as swapping out cryptocollateral on the debt. This is significant 486 00:31:49,720 --> 00:31:53,240 Speaker 1: because flash loans have been the subject of regulatory scrutiny 487 00:31:53,400 --> 00:31:56,240 Speaker 1: due to their use in extreme arbitrage trades that have 488 00:31:56,320 --> 00:31:59,640 Speaker 1: resulted in billions of dollars of damage to defy protocols 489 00:31:59,760 --> 00:32:03,760 Speaker 1: with suboptimal oracles. More about that using the link in 490 00:32:03,800 --> 00:32:07,360 Speaker 1: the description. I also couldn't help but notice that the 491 00:32:07,400 --> 00:32:10,720 Speaker 1: authors included make a dow in their list of borrowing 492 00:32:10,760 --> 00:32:14,200 Speaker 1: and lending protocols. Some would say that maker Dow is 493 00:32:14,240 --> 00:32:18,440 Speaker 1: technically a collateralized debt protocol, but let's not split any 494 00:32:18,440 --> 00:32:21,800 Speaker 1: more hairs when it comes to dex is. The authors 495 00:32:21,800 --> 00:32:25,240 Speaker 1: point out that related protocols make up the lion's share 496 00:32:25,320 --> 00:32:28,920 Speaker 1: of the total value locked in defy and briefly explain 497 00:32:29,120 --> 00:32:32,640 Speaker 1: how dex is work. You know, liquidity providers ratio of 498 00:32:32,640 --> 00:32:35,560 Speaker 1: two assets in a trading pool determining their price, liquidity 499 00:32:35,560 --> 00:32:39,720 Speaker 1: providers earning trading fees, et cetera. What strange is that 500 00:32:39,800 --> 00:32:44,280 Speaker 1: the authors refer to liquidity providers as quote investors and 501 00:32:44,400 --> 00:32:49,720 Speaker 1: trading fees as quote interest, like yield. This is strange 502 00:32:49,760 --> 00:32:53,120 Speaker 1: because it's the type of language that anti crypto regulators 503 00:32:53,160 --> 00:32:57,520 Speaker 1: like the SEC routinely use when justifying their crackdowns on 504 00:32:57,600 --> 00:33:02,080 Speaker 1: crypto projects. Probably nothing. On a more positive note, the 505 00:33:02,160 --> 00:33:07,520 Speaker 1: authors correctly state that quote, unlike centralized exchanges, dexes never 506 00:33:07,600 --> 00:33:10,800 Speaker 1: take custody of user funds, which is important because some 507 00:33:10,840 --> 00:33:14,600 Speaker 1: centralized exchanges have been hacked, which resulted in a loss 508 00:33:14,680 --> 00:33:19,640 Speaker 1: of customer's cryptocurrency. Preach. What's unfortunate is that the authors 509 00:33:19,680 --> 00:33:23,560 Speaker 1: don't spend too much time talking about other dex related innovations, 510 00:33:23,600 --> 00:33:26,640 Speaker 1: such as stable coin dexes, like curve finance and its 511 00:33:26,760 --> 00:33:30,000 Speaker 1: vote S, growd liquidity mining, but I suppose there's a 512 00:33:30,040 --> 00:33:32,880 Speaker 1: time and a place for that degree of detail. The 513 00:33:32,960 --> 00:33:36,800 Speaker 1: section on derivative dexes is even shorter, and I suspect 514 00:33:36,880 --> 00:33:39,120 Speaker 1: this is because the authors don't want to give the 515 00:33:39,160 --> 00:33:43,800 Speaker 1: relevant crypto projects too much advertising. After all, derivative dexes 516 00:33:44,000 --> 00:33:46,880 Speaker 1: make it possible to quote get price exposure to other 517 00:33:46,960 --> 00:33:52,160 Speaker 1: digital assets, currencies, commodities, stocks and indices. As far as 518 00:33:52,160 --> 00:33:55,200 Speaker 1: the powers that be are concerned, all these investments should 519 00:33:55,240 --> 00:33:59,520 Speaker 1: only be accessible via a regulated intermediary. Hence why regulators 520 00:33:59,680 --> 00:34:04,280 Speaker 1: came down hard on all cryptocurrency exchanges offering tokenized stocks 521 00:34:04,640 --> 00:34:09,640 Speaker 1: last spring and summer. Luckily for the incumbents, derivative dexes 522 00:34:09,760 --> 00:34:13,080 Speaker 1: seem to be the least popular defy niche, accounting for 523 00:34:13,120 --> 00:34:16,440 Speaker 1: the smallest slice of the Pie, according to the authors, 524 00:34:16,480 --> 00:34:21,120 Speaker 1: again outdated estimates, which still seem to hold true. The 525 00:34:21,160 --> 00:34:24,520 Speaker 1: authors also touch on the use of leverage in derivative 526 00:34:24,560 --> 00:34:28,000 Speaker 1: dexes and touch on decentralized prediction markets, which have been 527 00:34:28,040 --> 00:34:33,279 Speaker 1: subject to lots of regulatory scrutiny in recent months. When 528 00:34:33,280 --> 00:34:37,200 Speaker 1: it comes to payment related defied protocols, the authors define 529 00:34:37,320 --> 00:34:40,879 Speaker 1: these as being designed to quote overcome one or more 530 00:34:41,000 --> 00:34:46,760 Speaker 1: obstacles posed by decentralized technology, including issues with efficiency, interoperability 531 00:34:46,920 --> 00:34:51,040 Speaker 1: and privacy, to provide a user experience that mimics payments 532 00:34:51,080 --> 00:34:56,160 Speaker 1: in traditional finance accurate. They then go on to explain 533 00:34:56,239 --> 00:35:00,680 Speaker 1: how tornado cash and flex a network work, which slightly 534 00:35:00,719 --> 00:35:05,360 Speaker 1: suspicious given that Tornado cash got sanctioned and flexa networks, 535 00:35:05,360 --> 00:35:08,920 Speaker 1: amp token, was recently delisted from a series of crypto 536 00:35:09,000 --> 00:35:13,120 Speaker 1: exchanges after the sec called amp a security in an 537 00:35:13,120 --> 00:35:17,160 Speaker 1: insider trading case against a coin base employee. More about 538 00:35:17,239 --> 00:35:22,600 Speaker 1: that in the description. The authors also touch on Bitcoin's 539 00:35:22,760 --> 00:35:26,799 Speaker 1: lightning network, which is extremely underrated. More about that in 540 00:35:26,840 --> 00:35:31,840 Speaker 1: the description too. Now, when it comes to asset management 541 00:35:31,840 --> 00:35:35,840 Speaker 1: related defy protocols, the authors quickly explained that these defy 542 00:35:35,960 --> 00:35:41,160 Speaker 1: protocols automatically redirect any crypto deposited into them to wherever 543 00:35:41,320 --> 00:35:44,759 Speaker 1: they will earn the highest yield. Among other things. What 544 00:35:44,920 --> 00:35:48,560 Speaker 1: caught my eye is that liquid staking protocol, Lido Finance, 545 00:35:48,760 --> 00:35:51,880 Speaker 1: was at the top of the list, potentially for shadowing 546 00:35:52,040 --> 00:35:55,719 Speaker 1: regulatory scrutiny for L D O. Let's hope I'm just 547 00:35:55,760 --> 00:35:58,799 Speaker 1: seeing things, because if this happens, it could be very 548 00:35:58,920 --> 00:36:01,319 Speaker 1: bad news for a theory him once it transitions to 549 00:36:01,360 --> 00:36:04,120 Speaker 1: proof of stake in the next week or so. And yes, 550 00:36:04,360 --> 00:36:07,200 Speaker 1: you can learn more about that using the link in 551 00:36:07,239 --> 00:36:11,680 Speaker 1: the description. It's always there, isn't it? Now the fourth 552 00:36:11,760 --> 00:36:15,520 Speaker 1: part of the Fed's report concerns the risks associated with defy, 553 00:36:15,640 --> 00:36:18,239 Speaker 1: and it should come as no surprise that this is 554 00:36:18,280 --> 00:36:21,760 Speaker 1: the longest section of the report by a wide margin. 555 00:36:22,680 --> 00:36:27,000 Speaker 1: The author's commenced by acknowledging that defied presents, quote, interesting 556 00:36:27,040 --> 00:36:33,120 Speaker 1: opportunities for lowering costs, expanding access and increasing transparency, and 557 00:36:33,239 --> 00:36:37,320 Speaker 1: reiterate that defy is still small relative to the financial 558 00:36:37,360 --> 00:36:41,000 Speaker 1: system it seeks to replace. Logically, the authors admit that 559 00:36:41,120 --> 00:36:43,719 Speaker 1: a disruption to defy at this point in time would 560 00:36:43,719 --> 00:36:47,640 Speaker 1: therefore probably have next to no impact on financial stability, 561 00:36:47,840 --> 00:36:51,400 Speaker 1: but again reiterate that its rapid growth could pose future 562 00:36:51,440 --> 00:36:56,279 Speaker 1: challenges to financial stability if left unchecked. What's funny is 563 00:36:56,400 --> 00:37:00,080 Speaker 1: that they say, quote, the current developments in defy have 564 00:37:00,160 --> 00:37:04,000 Speaker 1: the potential to trigger a defi version of a financial crisis, 565 00:37:04,040 --> 00:37:08,279 Speaker 1: possibly with spillovers to the traditional financial system. This is 566 00:37:08,320 --> 00:37:12,680 Speaker 1: funny because that's basically what happened when terror imploded in May, 567 00:37:13,000 --> 00:37:16,080 Speaker 1: and defy is doing just fine. Thank you very much. 568 00:37:17,040 --> 00:37:20,600 Speaker 1: The authors then point to high leverage as an area 569 00:37:20,640 --> 00:37:23,960 Speaker 1: of concerns, since high leverage has historically been a primary 570 00:37:24,000 --> 00:37:28,440 Speaker 1: factor in financial crisis. They also say the same for Illiquidity, 571 00:37:28,560 --> 00:37:31,360 Speaker 1: a k a the inability to sell a large amount 572 00:37:31,360 --> 00:37:34,600 Speaker 1: of an asset at the same price without crashing said price. 573 00:37:35,280 --> 00:37:38,239 Speaker 1: What's Hilarious is that the author's caution that defy could 574 00:37:38,280 --> 00:37:42,359 Speaker 1: cause financial stability issues while simultaneously claiming that, quote, the 575 00:37:42,440 --> 00:37:46,160 Speaker 1: overwhelming majority of the losses in the traditional financial system 576 00:37:46,320 --> 00:37:49,920 Speaker 1: associated with op risk are merely a cost of doing business. 577 00:37:50,239 --> 00:37:54,280 Speaker 1: Double Standards Much you know. I think U S Senator 578 00:37:54,400 --> 00:37:58,680 Speaker 1: Pat to me said it best. Quote failure should be 579 00:37:58,800 --> 00:38:02,680 Speaker 1: an option for reference. This was PAT's response to terror's 580 00:38:02,719 --> 00:38:06,680 Speaker 1: catastrophic collapse. Just goes to show you how investor protection 581 00:38:06,960 --> 00:38:11,800 Speaker 1: is often an excuse for financial control. End of rant. Now, 582 00:38:11,920 --> 00:38:15,480 Speaker 1: to the author's credit, they admit that, quote, defy can 583 00:38:15,600 --> 00:38:20,080 Speaker 1: reduce some operational risks inherent in traditional finance, particularly those 584 00:38:20,120 --> 00:38:26,120 Speaker 1: associated with reliance on centralization of financial intermediation activities. However, 585 00:38:26,239 --> 00:38:31,720 Speaker 1: they caution that defy protocols present new risks. The authors 586 00:38:31,800 --> 00:38:34,320 Speaker 1: then go on to list all the benefits of defy, 587 00:38:34,440 --> 00:38:38,440 Speaker 1: and the first is that blockchains make transaction settlements near instant. 588 00:38:39,080 --> 00:38:42,759 Speaker 1: By contrast, transactions in the traditional financial system can take 589 00:38:42,880 --> 00:38:45,799 Speaker 1: days to clear or more, especially if you're dealing with 590 00:38:45,880 --> 00:38:50,359 Speaker 1: more elaborate investment vehicles. Another benefit is that all transactions 591 00:38:50,360 --> 00:38:54,320 Speaker 1: on cryptocurrency blockchains are publicly viewable. This makes it easy 592 00:38:54,400 --> 00:38:57,840 Speaker 1: for investors and regulators to assess the current state of 593 00:38:57,920 --> 00:39:01,560 Speaker 1: the market, namely the status of market participants and any 594 00:39:01,640 --> 00:39:06,080 Speaker 1: potential risks they're experiencing. Now, if you think that this 595 00:39:06,239 --> 00:39:10,560 Speaker 1: isn't possible because cryptocurrency is anonymous, think again. In the 596 00:39:10,600 --> 00:39:15,239 Speaker 1: words of the authors quote, pseudonymity does not necessarily guarantee 597 00:39:15,320 --> 00:39:19,600 Speaker 1: true anonymity. In practice, blockchain analysts have found that it 598 00:39:19,680 --> 00:39:22,760 Speaker 1: is often possible to associate an address with a specific 599 00:39:22,800 --> 00:39:28,160 Speaker 1: person or institution by observing transaction counterparties and amounts associated 600 00:39:28,200 --> 00:39:32,359 Speaker 1: with addresses. If you're wondering how blockchain analytics companies track 601 00:39:32,480 --> 00:39:35,319 Speaker 1: CRYPTO transactions, you can find out using the link in 602 00:39:35,360 --> 00:39:39,840 Speaker 1: the description. I digress. Now a third benefit of defied 603 00:39:39,880 --> 00:39:45,000 Speaker 1: the authors identify is auditability. CRYPTOCURRENCY blockchains allow us to 604 00:39:45,080 --> 00:39:49,840 Speaker 1: check the accuracy of financial statements from individuals and institutions 605 00:39:49,880 --> 00:39:52,359 Speaker 1: and make it possible to assess the security of the 606 00:39:52,400 --> 00:39:56,640 Speaker 1: smart contracts that make up defied protocols. The authors also 607 00:39:56,719 --> 00:39:59,840 Speaker 1: touch on something that's often overlooked, and that's that Mo 608 00:40:00,239 --> 00:40:05,200 Speaker 1: individuals and institutions aren't fans of this transparency, as it 609 00:40:05,280 --> 00:40:09,560 Speaker 1: exposes sensitive information about their finances. As far as I 610 00:40:09,560 --> 00:40:13,000 Speaker 1: can tell, this is why there has been institutional interest 611 00:40:13,080 --> 00:40:17,800 Speaker 1: in Crypto Privacy, despite the regulatory concerns. Now, the fourth 612 00:40:17,800 --> 00:40:20,880 Speaker 1: benefit is somewhat unfortunate as it has to do with 613 00:40:20,960 --> 00:40:25,440 Speaker 1: cryptocurrencies censorship resistance, which has come into question on ethereum 614 00:40:25,640 --> 00:40:30,320 Speaker 1: after supposedly decentralized crypto platforms, protocols and even crypto wallets 615 00:40:30,640 --> 00:40:35,560 Speaker 1: blocked access to tornado cash and any associated wallets. The 616 00:40:35,600 --> 00:40:38,839 Speaker 1: authors seem to reference this reality by noting that DAB 617 00:40:38,960 --> 00:40:42,759 Speaker 1: creators can decide which transactions to accept or reject, and 618 00:40:42,800 --> 00:40:45,520 Speaker 1: even go as far as suggesting that, quote, a government 619 00:40:45,560 --> 00:40:48,280 Speaker 1: could limit a firm's ability to use Divi to avoid 620 00:40:48,320 --> 00:40:52,400 Speaker 1: sanctions by ordering the firm suppliers to only accept payments 621 00:40:52,400 --> 00:40:58,040 Speaker 1: coming from approved blockchain addresses. Yikes. After pointing out that 622 00:40:58,120 --> 00:41:01,719 Speaker 1: bitcoin and ethereum have yet to experience any censorship at 623 00:41:01,719 --> 00:41:04,800 Speaker 1: the blockchain level, the authors go on to state that, quote, 624 00:41:05,080 --> 00:41:09,120 Speaker 1: immutability is not necessarily a benefit in all cases, as 625 00:41:09,160 --> 00:41:12,879 Speaker 1: blockchain transactions that involve fraud or theft might not be 626 00:41:12,920 --> 00:41:15,799 Speaker 1: reversed as quickly or easily as they would be in 627 00:41:15,840 --> 00:41:20,160 Speaker 1: traditional finance, which is fair but also terrifying and also 628 00:41:20,640 --> 00:41:25,440 Speaker 1: not crypto. This ties into the long list of risks 629 00:41:25,560 --> 00:41:28,319 Speaker 1: the authors see with defy, and the first is the 630 00:41:28,360 --> 00:41:33,719 Speaker 1: consensus protocols of the smart contract cryptocurrency blockchains themselves. The 631 00:41:33,760 --> 00:41:37,040 Speaker 1: author's note that these are corruptible if more than fifty 632 00:41:37,520 --> 00:41:40,319 Speaker 1: of the Hash power or stake is controlled by a 633 00:41:40,360 --> 00:41:44,279 Speaker 1: single entity or set of coordinated entities. Now, if you 634 00:41:44,360 --> 00:41:48,279 Speaker 1: watched our recent video about Kracken's crypto consensus report, you 635 00:41:48,360 --> 00:41:50,839 Speaker 1: might recall that the corruption for many proof of state 636 00:41:50,880 --> 00:41:56,600 Speaker 1: cryptocurrencies is actually much lower, at around thirty, meaning any 637 00:41:56,600 --> 00:41:59,960 Speaker 1: proof of state smart contract cryptos carry even more risks 638 00:42:00,200 --> 00:42:03,840 Speaker 1: than their proof of work counterparts. The second risk is 639 00:42:04,040 --> 00:42:08,279 Speaker 1: similarly simple, and that's errors in smart contract code. As 640 00:42:08,320 --> 00:42:12,399 Speaker 1: we've seen, incorrectly written code is eventually exploited and this 641 00:42:12,520 --> 00:42:16,720 Speaker 1: often results in a massive loss of funds. The silver 642 00:42:16,840 --> 00:42:20,479 Speaker 1: lining is that the traceability of most scripto transactions means 643 00:42:20,600 --> 00:42:24,640 Speaker 1: many of these funds can be found and returned. The 644 00:42:24,680 --> 00:42:28,200 Speaker 1: authors also take time to caution that audits are not 645 00:42:28,400 --> 00:42:31,360 Speaker 1: evidence that a smart contract is secure, and this is 646 00:42:31,400 --> 00:42:35,440 Speaker 1: something that yearn finance founder and Phantom developer Andre Cronier 647 00:42:35,800 --> 00:42:38,520 Speaker 1: said many times. I wonder what he's up to these 648 00:42:38,600 --> 00:42:43,719 Speaker 1: days anyhow. The authors continue by noting that the conditions 649 00:42:43,800 --> 00:42:47,759 Speaker 1: of a smart contract must be predetermined and are permanent. 650 00:42:48,560 --> 00:42:51,400 Speaker 1: This means that it's not possible to write, say, a 651 00:42:51,440 --> 00:42:54,640 Speaker 1: smart contract whose terms and conditions can be easily changed 652 00:42:55,000 --> 00:42:58,960 Speaker 1: like a real world agreement. The third risk is that 653 00:42:59,000 --> 00:43:01,719 Speaker 1: you could lose your crypto forever if you send it 654 00:43:01,760 --> 00:43:04,560 Speaker 1: to the wrong wallet address or lose access to your 655 00:43:04,600 --> 00:43:07,800 Speaker 1: crypto wallet, which is just part and parcel of being 656 00:43:07,840 --> 00:43:13,120 Speaker 1: a responsible, self custodial adult, really. The fourth risk involves 657 00:43:13,200 --> 00:43:17,759 Speaker 1: transaction ordering. This includes everything from transaction fee competition to 658 00:43:17,920 --> 00:43:21,680 Speaker 1: minor extractable value, or MTV, which is where miners reorder 659 00:43:21,680 --> 00:43:26,000 Speaker 1: transactions to benefit themselves rather than process transactions in order 660 00:43:26,040 --> 00:43:30,160 Speaker 1: of transaction fees, as they're incentivized to do. The fifth 661 00:43:30,239 --> 00:43:33,440 Speaker 1: risk is one I alluded to earlier, and that's oracles. 662 00:43:34,160 --> 00:43:37,640 Speaker 1: Any issues with the oracles providing pricing data to defy 663 00:43:37,719 --> 00:43:41,400 Speaker 1: protocols means there could be serious threats, such as flash 664 00:43:41,440 --> 00:43:45,400 Speaker 1: loan attacks between dexes from defied D gens and unwanted 665 00:43:45,440 --> 00:43:49,440 Speaker 1: liquidations in borrowing and lending protocols. The sixth risk is 666 00:43:49,560 --> 00:43:52,880 Speaker 1: especially relevant these days, and that's liquidity. The T L 667 00:43:52,920 --> 00:43:55,880 Speaker 1: D R there is that many defied protocols need large 668 00:43:55,880 --> 00:43:59,600 Speaker 1: amounts of liquidity, a k a Crypto, to function properly. 669 00:44:00,080 --> 00:44:03,520 Speaker 1: An absence of liquidity can cause serious issues, such as 670 00:44:03,560 --> 00:44:07,600 Speaker 1: price slavage on decentralized exchanges. I'll quickly note that a 671 00:44:07,680 --> 00:44:10,760 Speaker 1: lot of the liquidity in defy comes in the form 672 00:44:10,840 --> 00:44:15,640 Speaker 1: of centralized stable coins. As per ethereum Creator vitirely BITTERIAN's 673 00:44:15,680 --> 00:44:20,240 Speaker 1: own admission. This gives centralized stable coin issuers significant say 674 00:44:20,320 --> 00:44:23,440 Speaker 1: in future forks and changes, as they could decide not 675 00:44:23,520 --> 00:44:27,920 Speaker 1: to support the blockchains they don't like now. The seventh 676 00:44:28,000 --> 00:44:31,760 Speaker 1: risk is straightforward, and that's regulation. I think the author's 677 00:44:31,840 --> 00:44:36,080 Speaker 1: summed it up quite well with quote. Regulation may facilitate 678 00:44:36,120 --> 00:44:39,920 Speaker 1: the growth of financial activities by providing increased confidence to 679 00:44:40,080 --> 00:44:43,279 Speaker 1: potential users of the services, but it can also have 680 00:44:43,480 --> 00:44:48,880 Speaker 1: unintended adverse consequences for existing defy and its future development. 681 00:44:49,960 --> 00:44:53,759 Speaker 1: In the next subsection, the authors examine defy risks that 682 00:44:53,840 --> 00:44:57,520 Speaker 1: aren't directly related to defy protocols, and they start with 683 00:44:57,600 --> 00:45:01,160 Speaker 1: a bold claim. Quote, the goal of achieving a truly 684 00:45:01,200 --> 00:45:05,880 Speaker 1: trustless financial system is unlikely to ever be fully realized. 685 00:45:06,600 --> 00:45:09,879 Speaker 1: The authors say this because it will eventually become impossible 686 00:45:09,960 --> 00:45:13,000 Speaker 1: for the average person to be a minor or validator 687 00:45:13,080 --> 00:45:16,480 Speaker 1: for a cryptocurrency, and I would argue that this ultimately 688 00:45:16,520 --> 00:45:21,120 Speaker 1: depends on how the cryptocurrency is designed. An easy fix 689 00:45:21,239 --> 00:45:23,879 Speaker 1: would be to have a trust less base layer with 690 00:45:24,040 --> 00:45:28,360 Speaker 1: trusted layers on top. The authors then turned to the 691 00:45:28,400 --> 00:45:31,800 Speaker 1: topic of cryptocurrency governance and seemed to send a warning 692 00:45:31,960 --> 00:45:37,200 Speaker 1: to unnamed crypto projects. Quote. Even when the final control 693 00:45:37,280 --> 00:45:40,279 Speaker 1: over changes to a block chain's protocol resides with a 694 00:45:40,280 --> 00:45:44,200 Speaker 1: decentralized group of stakeholders, the group that founded the blockchain 695 00:45:44,400 --> 00:45:50,400 Speaker 1: often still exercises substantial influence over its evolution. This is 696 00:45:50,440 --> 00:45:54,279 Speaker 1: significant because the idea that an identifiable third party is 697 00:45:54,360 --> 00:45:57,880 Speaker 1: driving the expectation of profit from investing in the cryptocurrency 698 00:45:58,360 --> 00:46:02,000 Speaker 1: is how the SEC decides to go after crypto projects, 699 00:46:02,040 --> 00:46:05,359 Speaker 1: at least in theory. I reckon. We can all think 700 00:46:05,440 --> 00:46:08,840 Speaker 1: of a few CRYPTO projects which meet that above description. 701 00:46:10,160 --> 00:46:14,360 Speaker 1: The authors continue by correctly identifying the trade off between 702 00:46:14,480 --> 00:46:19,560 Speaker 1: centralization and decentralization, namely that centralization makes it easy for 703 00:46:19,560 --> 00:46:22,800 Speaker 1: a crypto project to change and adapt, but also goes 704 00:46:22,840 --> 00:46:26,520 Speaker 1: against the core values of cryptocurrency and eats away at 705 00:46:26,520 --> 00:46:31,760 Speaker 1: the very things that make cryptocurrencies valuable. Here the authors 706 00:46:31,800 --> 00:46:35,200 Speaker 1: reveal that the biggest governance related risk has to do 707 00:46:35,360 --> 00:46:39,080 Speaker 1: with blockchain forks, wherein two corners of the same community 708 00:46:39,160 --> 00:46:43,399 Speaker 1: with opposing views decide to go their own way. This 709 00:46:43,640 --> 00:46:47,719 Speaker 1: can negatively impact the safety of both crypto projects as 710 00:46:47,760 --> 00:46:52,319 Speaker 1: well as the liquidity on their blockchains. The authors go 711 00:46:52,400 --> 00:46:57,040 Speaker 1: on to discuss the governance of decentralized applications and warned 712 00:46:57,080 --> 00:47:00,440 Speaker 1: that the centralization of token holders for some dece centralized 713 00:47:00,480 --> 00:47:06,320 Speaker 1: autonomous organizations means that they're quite centralized in practice. Note 714 00:47:06,400 --> 00:47:10,840 Speaker 1: that one per cent of token holders have voting power 715 00:47:11,160 --> 00:47:14,960 Speaker 1: in most dows. What's wild is the authors warned that 716 00:47:15,080 --> 00:47:19,920 Speaker 1: quote this risk suggests that, should financial regulators gain authority 717 00:47:20,040 --> 00:47:24,279 Speaker 1: over finance conducted on blockchains, they should have similar authority 718 00:47:24,560 --> 00:47:29,719 Speaker 1: over on chain protocols controlled by centralized groups. Now, call 719 00:47:29,800 --> 00:47:32,640 Speaker 1: me crazy, but I think that the authors are saying 720 00:47:32,920 --> 00:47:39,520 Speaker 1: that regulators could potentially become active participants in decentralized autonomous organizations. 721 00:47:40,160 --> 00:47:42,560 Speaker 1: That said, I'm sure this is meant to mean that 722 00:47:42,640 --> 00:47:46,640 Speaker 1: regulators will treat more centralized dows with the same scrutiny 723 00:47:46,680 --> 00:47:51,640 Speaker 1: as centralized crypto companies. After discussing the risk of governance 724 00:47:51,680 --> 00:47:55,560 Speaker 1: attacks on decentralized applications, the authors return to the topic 725 00:47:55,640 --> 00:48:00,279 Speaker 1: of censorship resistance and make a pretty ridiculous claim. Quote 726 00:48:00,960 --> 00:48:06,120 Speaker 1: governments may have legitimate reasons for censorship. Let me remind 727 00:48:06,120 --> 00:48:09,600 Speaker 1: you that the Fed is based in the United States. 728 00:48:10,239 --> 00:48:12,759 Speaker 1: The authors continue by saying that there's a case for 729 00:48:12,960 --> 00:48:16,439 Speaker 1: censorship at the blockchain level because cryptocurrencies are being used 730 00:48:16,440 --> 00:48:20,960 Speaker 1: by criminals and countries the United States doesn't like. Ironically, 731 00:48:21,239 --> 00:48:26,080 Speaker 1: the author's note immediately after that quote, some blockchain finance operations, 732 00:48:26,320 --> 00:48:29,920 Speaker 1: seify and defy are likely to be based in jurisdictions 733 00:48:29,960 --> 00:48:36,280 Speaker 1: with varied interests in supporting US regulatory goals. Figures. Another 734 00:48:36,520 --> 00:48:40,240 Speaker 1: non defy specific risk the authors identify is the composability 735 00:48:40,320 --> 00:48:42,759 Speaker 1: of smart contracts, which can be a blessing when the 736 00:48:42,760 --> 00:48:45,960 Speaker 1: markets are rallying but a curse when the markets are crashing. 737 00:48:46,600 --> 00:48:51,040 Speaker 1: That's simply because composability makes it possible for volatility to 738 00:48:51,120 --> 00:48:54,719 Speaker 1: become more widespread. In Defy, the authors go as far 739 00:48:54,760 --> 00:48:58,560 Speaker 1: as suggesting that defied developers quote, invest less than the 740 00:48:58,600 --> 00:49:01,680 Speaker 1: optimal amount in Securey, which is not the case as 741 00:49:01,680 --> 00:49:05,440 Speaker 1: far as I can tell. In the free crypto market. Secure, 742 00:49:05,680 --> 00:49:11,160 Speaker 1: user friendly, useful and profitable projects eventually succeed full stop. 743 00:49:12,600 --> 00:49:15,560 Speaker 1: The final area of risk the author's examine relates to 744 00:49:15,600 --> 00:49:20,279 Speaker 1: the interaction of cryptocurrency and the traditional financial system. They 745 00:49:20,320 --> 00:49:23,400 Speaker 1: begin by saying that it's more than likely that crypto 746 00:49:23,440 --> 00:49:27,320 Speaker 1: will exist alongside the traditional financial system for some time, 747 00:49:27,640 --> 00:49:31,200 Speaker 1: regardless of whether it succeeds in replacing it. This presents 748 00:49:31,239 --> 00:49:33,760 Speaker 1: a series of risks, and the first is, of course, 749 00:49:33,800 --> 00:49:37,040 Speaker 1: stable coins like tethers, U S Dt, which hold hundreds 750 00:49:37,120 --> 00:49:40,040 Speaker 1: of billions of dollars of real world assets as collateral 751 00:49:40,280 --> 00:49:44,320 Speaker 1: to back the stable coin tokens in circulation, mostly US 752 00:49:44,440 --> 00:49:48,080 Speaker 1: government debt. A run on US D T, or any 753 00:49:48,120 --> 00:49:51,440 Speaker 1: other stable coin for that matter, could therefore create serious 754 00:49:51,440 --> 00:49:55,439 Speaker 1: issues for both crypto and the traditional financial system, which 755 00:49:55,520 --> 00:49:58,319 Speaker 1: is why the European Union is working to implement a 756 00:49:58,400 --> 00:50:02,040 Speaker 1: cap on stable coins as part of its upcoming regulations. 757 00:50:02,280 --> 00:50:06,799 Speaker 1: More about those in the description. The second risk is 758 00:50:06,840 --> 00:50:10,160 Speaker 1: the exposure that entities in the traditional financial system have 759 00:50:10,440 --> 00:50:14,800 Speaker 1: to cryptocurrency, and here the authors say something disturbing. Quote. 760 00:50:15,400 --> 00:50:19,480 Speaker 1: As banks and other intermediaries get deeper into providing crypto 761 00:50:19,560 --> 00:50:23,200 Speaker 1: services and loans to crypto users, these banks may not 762 00:50:23,480 --> 00:50:28,640 Speaker 1: fully appreciate the risks they are incurring. Now I'm sure 763 00:50:28,760 --> 00:50:31,880 Speaker 1: I'm just hearing things, but it really sounds like the 764 00:50:31,960 --> 00:50:36,520 Speaker 1: authors are saying that crypto users and investors themselves present 765 00:50:36,640 --> 00:50:39,960 Speaker 1: a risk to the traditional financial system due to the 766 00:50:39,960 --> 00:50:44,120 Speaker 1: fact that they interact with traditional financial services as part 767 00:50:44,160 --> 00:50:48,040 Speaker 1: of their activities. This would actually be consistent with the 768 00:50:48,160 --> 00:50:51,440 Speaker 1: endgame of the Financial Action Task Force, or fat F, 769 00:50:51,680 --> 00:50:55,280 Speaker 1: which is to make it impossible to access cryptocurrency without 770 00:50:55,320 --> 00:51:00,759 Speaker 1: an intermediary by labeling disintermediated activities as high risk. More 771 00:51:00,800 --> 00:51:04,400 Speaker 1: about that in the description. What's funny is the authors 772 00:51:04,480 --> 00:51:08,200 Speaker 1: also note that intermediaries in the traditional financial system could 773 00:51:08,320 --> 00:51:11,680 Speaker 1: end up being sued by disgruntled Crypto users in the 774 00:51:11,760 --> 00:51:15,040 Speaker 1: event that they can't pin down a centralized individual or 775 00:51:15,080 --> 00:51:20,160 Speaker 1: institution behind the CRYPTO project or protocol which caused them pain. Well, 776 00:51:20,640 --> 00:51:29,400 Speaker 1: I've yet to see that happen. So this brings us 777 00:51:29,400 --> 00:51:31,920 Speaker 1: to the conclusion of the report, where the authors mostly 778 00:51:32,040 --> 00:51:35,160 Speaker 1: reiterate what they mentioned earlier, namely that defy is growing 779 00:51:35,239 --> 00:51:38,960 Speaker 1: rapidly and therefore requires regulation, a s a p. what's 780 00:51:39,000 --> 00:51:42,160 Speaker 1: worth noting is that the author specified that there are, quote, 781 00:51:42,520 --> 00:51:47,120 Speaker 1: unique concerns arising from the development of defy, especially the 782 00:51:47,160 --> 00:51:51,640 Speaker 1: governance of the code used in depths. This again suggests 783 00:51:51,680 --> 00:51:55,719 Speaker 1: that crypto projects with centralized governance mechanisms could soon come 784 00:51:55,800 --> 00:52:00,000 Speaker 1: under fire, and with that I must say that I'm impressed. 785 00:52:00,520 --> 00:52:03,440 Speaker 1: It sounds like the folks over at the Federal Reserve 786 00:52:03,840 --> 00:52:07,640 Speaker 1: know their way around the crypto industry. Now, this is 787 00:52:07,760 --> 00:52:10,719 Speaker 1: definitely a double edged sword, because, as awesome as this 788 00:52:10,800 --> 00:52:14,440 Speaker 1: awareness is, it also means that the Fed knows where 789 00:52:14,560 --> 00:52:19,240 Speaker 1: to direct regulators and lawmakers. On that note, I don't 790 00:52:19,280 --> 00:52:22,560 Speaker 1: think it's a coincidence that the Fed waited until August 791 00:52:22,760 --> 00:52:26,600 Speaker 1: to release this report. The SEC seems to have a 792 00:52:26,600 --> 00:52:30,440 Speaker 1: habit of engaging in many enforcement actions when its fiscal 793 00:52:30,560 --> 00:52:34,799 Speaker 1: year ends in September. As such, the purpose of the 794 00:52:34,800 --> 00:52:39,760 Speaker 1: Fed report could be to guide them in their crypto crackdown. Alternatively, 795 00:52:39,960 --> 00:52:42,960 Speaker 1: the Fed could simply have been providing the information that 796 00:52:43,080 --> 00:52:46,800 Speaker 1: was requested by US President Joe Biden in his executive 797 00:52:46,880 --> 00:52:50,239 Speaker 1: order about cryptocurrency earlier this year. If you watched our 798 00:52:50,280 --> 00:52:54,080 Speaker 1: recent video about important September updates on coin bureau clips, 799 00:52:54,120 --> 00:52:57,640 Speaker 1: you'll know that the deadline to submit regulatory recommendations about 800 00:52:57,640 --> 00:53:02,200 Speaker 1: cryptocurrency was the fifth of September. As such, the Fed 801 00:53:02,239 --> 00:53:05,360 Speaker 1: report could have been a last minute submission of sorts. 802 00:53:06,080 --> 00:53:09,160 Speaker 1: In any case, the Fed report is almost certainly bullish 803 00:53:09,239 --> 00:53:12,479 Speaker 1: for cryptocurrency. I mean, did you ever think that you'd 804 00:53:12,480 --> 00:53:16,680 Speaker 1: see Bitcoin, ethereum, Cardano and Salana in a report from 805 00:53:16,680 --> 00:53:20,200 Speaker 1: the Central Bank of the United States? Heck, they even 806 00:53:20,280 --> 00:53:24,680 Speaker 1: mentioned are a curve finance and Lido Finance. If that 807 00:53:24,840 --> 00:53:27,640 Speaker 1: is not a sign that crypto is slowly taking over, 808 00:53:28,040 --> 00:53:30,960 Speaker 1: I don't know what is. As per a recent coin 809 00:53:31,000 --> 00:53:34,759 Speaker 1: desk article, Crypto is officially in the quote. Then they 810 00:53:34,800 --> 00:53:38,680 Speaker 1: fight you, phase a phase that's followed by an epic victory, 811 00:53:38,760 --> 00:53:42,160 Speaker 1: as per the old adage. Make no mistake, however, the 812 00:53:42,239 --> 00:53:45,719 Speaker 1: incumbents will not go quietly. I expect to see some 813 00:53:45,880 --> 00:53:50,000 Speaker 1: seriously insane announcements from US regulators in the coming weeks 814 00:53:50,000 --> 00:53:53,600 Speaker 1: and months, and they're almost guaranteed to do unprecedented damage 815 00:53:53,640 --> 00:53:56,880 Speaker 1: to the crypto market. Still, it's not going to stop 816 00:53:56,920 --> 00:53:59,920 Speaker 1: the trend of crypto adoption and when the next bullmarket 817 00:54:00,040 --> 00:54:03,840 Speaker 1: inevitably comes around, we could hit the critical mass required 818 00:54:04,040 --> 00:54:07,399 Speaker 1: to create a parallel system that can't be crushed by 819 00:54:07,440 --> 00:54:13,080 Speaker 1: regulations or institutional market manipulation. Mark my words, that day 820 00:54:13,200 --> 00:54:16,839 Speaker 1: will come. Thank you so much for listening to the 821 00:54:16,920 --> 00:54:20,560 Speaker 1: Coin Bureau podcast. If you'd like to learn more about cryptocurrency, 822 00:54:20,840 --> 00:54:23,720 Speaker 1: you can visit our Youtube Channel at Youtube Dot Com 823 00:54:23,760 --> 00:54:26,640 Speaker 1: forward slash coin bureau. You can also go to coin 824 00:54:26,680 --> 00:54:30,000 Speaker 1: bureau dot Com for loads more information about all things crypto. 825 00:54:30,120 --> 00:54:32,520 Speaker 1: You can follow me on twitter at at Coin Bureau 826 00:54:32,680 --> 00:54:35,799 Speaker 1: or one word, and I'm also active on Tiktok and 827 00:54:35,960 --> 00:54:36,799 Speaker 1: instagram too.