Grayscale’s Bitcoin bounty. Circle’s SPAC listing controversy. NFTs for thieves.

From the Editor’s Desk

Dear Reader,

Once in a while it doesn’t hurt to get back to Econ 101 and the basic law of supply and demand.

Bitcoin holders may want to recall that tenet of economic orthodoxy as the world’s biggest BTC fund prepares to release an avalanche of Bitcoin shares to its investors after a six-month lockup. The headlines are practically writing themselves as people (who should know better) panic over the prospect of a flood of BTC.

In this week’s Current Forkast, we read the small print: supplies of shares are one thing, but supplies of coins are another.

Speaking of supply, there’s an embarrassment of riches at stablecoin issuer Circle as it looks to list in New York. A thumping US$26 billion of Circle’s USD Coins are in circulation, and amid fresh questions over the assets backing them, a law firm has the listing in its crosshairs and a chairman has a target on his back. There may well be much more where that came from, so stay tuned.

Something else that’s in abundance this week is a digital product whose entire USP is scarcity: non-fungible tokens. It turns out that NFTs, like so many things, have spawned a knock-off industry.

When the supply of digital art rises, economics tells us, the price of it will fall. As the unauthorized copycat photo affair casts a shadow over the NFT industry, it seems that scarcity may be harder to commodify than some may have thought.

Until the next time,

Angie Lau,
Founder and Editor-in-Chief
Forkast.News

Forkast.Insights | What does it mean?

The unlocking of such a large volume of Bitcoin-backed shares has led many to expect a huge drop in BTC’s price. But if that occurs, it will likely be a result of market panic due to a lack of understanding of how Grayscale’s trust operates.

The Grayscale Bitcoin Trust is the largest traded crypto fund in the world. It is an investment vehicle that allows both accredited individuals and institutional investors to gain exposure to the movements of Bitcoin without having direct exposure to it. They instead purchase GBTC shares, sidestepping the hands-on process of buying, storing and keeping Bitcoin safe. 

After an investor buys GBTC shares, their investment is locked up for a six-month period. Once it is unlocked, the investor has the option of either liquidating their shares immediately at the current market price or continuing to hold them to sell later.

An important aspect of Grayscale’s unlocking that many commentators appear to be overlooking is that it is not a cache of Bitcoin itself that is being unlocked — it is GBTC shares purchased by investors six months ago. It’s also important to note that the trust has no redemption mechanism, so share liquidations won’t necessarily force Grayscale to sell the Bitcoin holdings that back the shares. 

The unlocking of the GBTC shares and even their subsequent liquidation should not directly affect the price of Bitcoin itself, but a lack of understanding about how Grayscale’s trust works could create short-term bearish anxiety in crypto markets and a self-fulfilling prophecy of a Bitcoin dip. 

Bitcoin holders might take comfort from the words of former U.S. President Franklin D. Roosevelt: “The only thing we have to fear is fear itself.”

Forkast.Insights | What does it mean?

Circle’s USD Coin has always maintained a transparency advantage over Tether, the world’s biggest stablecoin, whose eponymous operator was eventually shown not to have backed up the currency fully with U.S. dollars. However, Circle’s listing via a backdoor deal comes at a time when transparency around its own coin is in decline.

USD Coin has historically gained points for good governance thanks to its practice of issuing periodic attestation reports disclosing the value of Circle’s investments — a practice Tether has also adopted since reaching a settlement with the New York Attorney General. In an attestation report, an independent auditor verifies information about the investments a coin issuer holds to back its stablecoin.

Before March last year, Circle held all of its customer funds in federally insured U.S. banks. But that had changed by the end of March, following the declaration of Covid as a pandemic and ensuing turmoil on financial markets. According to an attestation report dated March 31, 2020, Circle had begun to invest its customers’ funds in various types of financial assets it referred to as “approved investments.”

Although the March 31 report asserted that the U.S. dollars that Circle held in custody still more than backed its USDC at a 1:1 ratio, the company provided no further information about the nature of its “approved investments,” or even the proportion of customers’ funds it had committed to them.

What’s raising eyebrows is the fact that when Circle changed how it invested its customers’ funds, it had minted only around US$400 million of USDC. Now, however, more than US$26 billion worth of USDC is in circulation. 

Circle may very well be investing its customers’ funds in the most prudent possible way, but investors might be forgiven for suggesting that a little more transparency may be in order.

Circle’s decision to list may be comforting to those investors, subjecting the company to more robust reporting requirements and oversight by the U.S. Securities and Exchange Commission. But the timing of the deal’s announcement was unfortunate, coming on the same day that Senator Elizabeth Warren warned of the “highly opaque and volatile” nature of the cryptocurrencies.

And the legal investigation of the merger — to say nothing of the possibility of a lawsuit — raises questions of its own. As does the name on one corner-office door at Concord. 

Concord’s chairman is Bob Diamond, a former CEO of Barclays during the global financial crisis. Diamond resigned from the bank in 2012 during the Libor scandal, in which Barclays staff were implicated in the manipulation of global money market rates.

Diamond has been blamed for fostering a profit-at-all-costs culture at Barclays that led to the scandal. Longtime Financial Times economics commentator Martin Wolf said of him: “After the financial crisis, the British establishment became very divided over what’s the model for the big banks that we want to see. Bob represented investment banking big time. He represented the success of it — but also the sense that investment banking is dicey and not a completely sound business. He represented a way of doing business that we’ve become very uncomfortable with.”

Diamond is in line to join Circle’s board following the planned merger, becoming a key figure in decisions about the USDC stablecoin at a time when its issuer’s investment strategy is at its most opaque. 

Forkast.Insights | What does it mean?

The market for NFTs appears to be going from strength to strength, but the pirating of Caixin’s copyrighted photo is certain to prompt lively discussions of intellectual property rights.

Art theft in the digital world is not a new problem, and although NFTs have been lauded for supposedly giving digital artists a bigger market and greater control over their creations, the technology may have also handed unscrupulous individuals an easier means to profit from other people’s art.

As reports of NFTs selling for astronomical prices continue to make headlines, an alarming parallel trend has emerged, with a proliferation of renegade NFT creators selling art and media they didn’t create.

All over Twitter, creative types are reporting seeing their original art for sale as an NFT on NFT platforms. Some so-called fans have even been brazen about what they assert is their right to mint such pieces. Artists are entitled to legal protections when their work is stolen, but copyright enforcement in the borderless and often anonymous digital world is difficult.

In the U.S., one mechanism for creators who believe their work is being misappropriated is to file a Digital Millennium Copyright Act takedown notice against any site selling an NFT copy of those works. The DCMA was established to address the dissemination of copyrighted material online, but it is only valid in the U.S.

Intellectual property rules in China are, at least to outsiders, less clear cut. At present, legal issues specific to NFTs from a regulatory standpoint and the protection of intellectual property have not been tested in Chinese courts. However, according to the Copyright Protection Center of China, “anyone who exploits a work created by others shall conclude a contract with, or otherwise obtain permission from, the copyright owner.”

In the case of Caixin’s photo, it appears that anyone who has minted an NFT from the original may be in straight-out violation of China’s copyright rules, despite the pretty filter. But how to catch a digital thief — and is the chase and litigation worthwhile when the damages amount to just 0.1 ETH?