Compliance Racket

See! This is how an innocent private enterprise becomes a security state tool. Notice that Coinbase didn’t actually do anything wrong – there was no evidence of money laundering or terrorist financing or actual criminal activity. Coinbase is being fined for letting customers open accounts “without sufficient background checks”.

The $100 million settlement requires that Coinbase invest $50 million in its compliance program. In other words, Coinbase needs to hire a lot of expensive former federal regulators to do compliance duty. This may look like a penalty, but it’s actually an induction. When a critical mass of ex-government employees occupies the corner office, only then can Coinbase become a respectable financial institution.

The “compliance program” is obviously bullshit. When a criminal wants to launder stolen crypto, they don’t go to the hassle of opening a new Coinbase account. They borrow a hacked account, or buy one off the dark web, and launder the proceeds through a victim. The unwitting money mule is as old as advance fee fraud.

Speaking of hacked accounts, here’s Michael Terpin suing AT&T because a 15-year-old kid stole his phone number in a SIM swap. The teen used the number to access Terpin’s email where Terpin’s private keys were saved, and swiped $24 million worth of shitcoins.

This is not uncommon; last year there were 28 lawsuits filed against mobile service providers for enabling SIM-swap attacks on crypto accounts. In most cases, hackers bribed retail employees to override security measures and hijack the SIM account.

I’m generally unsympathetic to people who secure their crypto with a cell phone, but I do wonder — How come AT&T never gets in trouble for facilitating money laundering?

They already have very good compliance, that’s why.

Why are Weedwacker engines such crap?

There is no tool I hate more than the gas-powered string trimmer. What idiot decided that it would be a good idea to cut weeds with twirling bits of string? If the grim reaper were around today, he would be depicted not with a scythe, but a Craftsman gas trimmer.

I recently destroyed my second weedwacker in as many years. These run about $150 new — enough money that I don’t really want to toss it — so I hauled it to a small engine repair shop and asked for a quote.

Mechanic: “Just throw it away and buy a new one.”

E: “What?”

“It’s not worth it. It will take at least two hours of labor, and we have to special order the parts. These aren’t designed to be serviced.”

“It’s barely a year old!”

“That’s about how long they last. If you want something that you can use longer, buy an Echo. We sell and service them.”

“Wait, why does Craftsman last only a year? Is it because they’re made in China??

“No. It’s because emissions regulations mess them up. Just buy an Echo.”

I had a ton more questions but I felt guilty asking questions without buying anything, and there was no way I was gonna spend $$$$ on an Echo. So I thanked the mechanic for his time and left.

Seriously? Craftsman string trimmers crap out because of EPA regulations?

Small engines have two emissions metrics to meet: (HC + NOx) and CO. Hydrocarbons (HC) and Carbon Monoxide (CO) are the result of unburned fuel in the exhaust; Nitrogen oxides (NOx) form when nitrogen and oxygen combine at high combustion temperatures.

Historically, small engines were factory-tuned to run rich, meaning they would draw a mixture of more fuel and less air than could fully combust. Excess fuel lowers the operating temperature (evaporative cooling), and helps the engine generate more power under heavy load. A rich mixture dumps HC and CO; a lean mixture runs hotter and cleaner while producing NOx.

Handheld engines don’t have catalytic converters or electronic fuel injectors, nor do they have on-board computers that can be programmed to cheat on EPA tests. Two-stroke engines like the weedwacker produce little NOx to begin with, so the cheapest way for a manufacturer to reduce emissions is to tune the carburetor to run lean.

In older weedwacker models, the carburetor has an adjustable air screw. Air density varies depending on temperature, altitude, and humidity; so a consumer might want to adjust the air:fuel mixture to match local conditions.

EPA regulations require that any engine with adjustable fuel mixture meet the emission standards across all settings. Craftsman solves this problem by blocking access to the air screw: Everyone runs lean.

Running hot and lean shortens the life of the piston and rings and bearings, but that’s fine. According to Federal regulations, light-duty handheld engines should have a useful life of 50 hours. That’s how long they’re tested during certification, and there’s no incentive to exceed this.

There isn’t even any incentive to invest in cleaner technology, because by 2024 California will entirely ban small gas-powered engines.

Then there’s the increase in ethanol fuel blends. Ethanol is green because it’s made out of corn. It also has 33% less energy per volume than regular gasoline, which is effectively like running lean. Even worse, ethanol attracts water, which separates from the fuel and corrodes the engine. All engines are susceptible to moisture, but someone who shells out for an Echo probably knows to buy ethanol-free fuel by the can.

And that’s how EPA regulations turn small engines into garbage.

Fraud as a Feature, not a Flaw

The only crime more stupid than money laundering is fraud. Here we have Wells Fargo “erroneously” repossessing people’s cars and homes, making “incorrect” charges to checking and savings accounts. Wells Fargo screwed their customers for over $2 billion, but it was an accident so the shareholders pay a penalty and no one goes to jail.

The difference between an innocent mistake and criminal fraud is a matter of mindset, which is why SBF is now pretending to be an imbecile.

SBF didn’t do it on purpose! He doesn’t even know how to code!

Traditionally, fraud was a civil matter where a victim could recover damages in court, outside of federal jurisdiction. During the 19th century, the US Mail service was struggling to compete with private express companies, so Congress offered discounted rates for large-volume ads to drum up business. Direct mail marketing was a novel idea, with obvious potential for abuse, so in 1872 Congress added a provision that it would be a federal offense to mail any material in a scheme to defraud.

Money-making onion? Looks like mail fraud to me.

Fraud had to be criminalized, because Congress wanted people to feel like they could trust the junk mail circulars that were subsidizing the mail service. But prosecutors found the Mail Fraud statute useful for so much more:

When a “new” fraud develops – as constantly happens – the mail fraud statute becomes a stopgap device to deal on a temporary basis with the new phenomenon, until particularized legislation can be developed and passed to deal directly with the evil. Prior to the passage of the 1933 [Securities] Act, most criminal prosecutions for fraudulent securities transactions were brought under the Federal Mail Fraud Statute. —Chief Justice Warren Burger, 1974

There was really no need for the 1933 Securities Act, nor the creation of the Securities and Exchange Commission — the Federal Mail Fraud Statute was broad enough to prosecute securities fraud. But it was the Great Depression, and FDR promised lots of makework. Basically the function of the SEC is to go after businesses that have failed to provide ex-SEC commissioners with sinecures.

You know who didn’t get prosecuted for securities fraud? Pump-and-dumper Joseph P. Kennedy. As a major donor to Franklin D Roosevelt and the Democratic party, Kennedy was appointed chairman of the SEC.

That’s the great thing about broad, ambiguous laws. Prosecutors have full discretion to go after their political enemies while excusing their friends. Same approach with Twitter content moderation. What are Twitter’s content moderation rules? Nobody knows; that what makes them useful!

Government agencies select accounts they want to vaporize, then Twitter’s Trust and Safety team invents a violation. Show me the man and I’ll find you the crime.

The Mail Fraud statute was followed by the Wire Fraud statute and Computer Fraud Act, each more versatile than the last. Sharing a Netflix password? That’s Computer Fraud. Downloading JSTOR journal articles at MIT? Also Computer Fraud.

There’s gonna be new crypto regulation. The Digital Commodities Consumer Protection Act, or something like it. It’ll boil down to crypto-fraud, where it becomes a federal offense to use crypto in furtherance of a scheme to defraud. And it’ll be broad and ambiguous, enforced by an agency full of grifters, weaponized against dissidents. Maybe they’ll put SBF in charge.

Self-bailing Bailouts

Wait, disregard my earlier post, I wasn’t thinking straight. I saw SBF say “F— regulators” and instantly wanted to give him all my money. A day later I realized AH, that’s his schtick! Say some politically expedient words, signal that you’re in the in-group, and My god how the money rolls in!

Remember that time Bitfinex suffered a $60 million hack, issued BFX tokens as placeholders for customer deposits, and eventually paid it all back? It was hailed as a triumph of the FREE MARKETS. And remember that time Poloniex did the same thing? Even Ponzi schemes get lucky sometimes.

Bitfinex lost 120,000 BTC in the 2016 hack. That would be worth over $2 billion today.

In theory FTX could pull off the same stunt. Replace the vanished funds with tokens of a different stripe and let the trading continue. $8 billion sounds like a huge hole to fill, but FTX only misappropriated 70,000 BTC. The rest of consists of shitcoins. Do casino patrons care if their gambling chips change color?

Arguably, a one-time hack is different from profligate political spending. Speaking of which — Remember that time Citigroup, Bank of America, JP Morgan Chase, Goldman Sachs received a $700 billion bailout from the Fed, and paid it all back? Do you think they suspended political contributions during that time? Do you think they refrained from using bailout money for banker bonuses? Hahahaha.

Here’s the highly esteemed Interfluidity with my favorite description of the 2008 bailout and subsequent repayment:

Suppose my kid’s meth habit got the best of him. He needs to come up with $100K quick or his dealer’s gonna whack him. But he’s a good kid, really! Coulda happened to anyone. So I “lend” him the money, even though he has no visible means of support and the sketchiest loan sharks in town wouldn’t give him the time of day. Now I believe in bootstraps and hard work, individualism and self-reliance. So I tell my son. “Son, you are going to pay me back every penny of that loan. You are going to work it off. I have arranged with one of my golf buddies, a guy who owes me a favor or three, a job that pays $200K a year. You’d better show up every day at 9 a.m. and sit behind that desk, and get me back my money!” And he does! After a year, he’s made me whole. What a good kid.

After assuming the banking system’s downside risk, the US government engineered a wide variety of favorable circumstances that helped banks “earn” their way back to quasi-health.

Free markets involve a good deal of engineering. Did Bitfinex “engineer” (through wash trades and Willybots) the bull market that enabled debt repayment? Or did Bitfinex provide such a valuable service to the industry that a bull market naturally ensued. Either way, bitcoin HODLers end up being the biggest beneficiaries. It’s a tremendous act of altruism that Maximalists keep railing against the shitcoins.

WTF I love SBF now

The government is a stationary bandit. It robs via taxation, but protects us from other would-be bandits so that it can maximize stealable assets. We don’t have much say in the matter; most of us don’t chose what citizenship we’re born with. 25 years ago, The Sovereign Individual predicted that people would learn to see themselves as customers rather than taxable citizens, and pay protection money to those who deliver the best service.

It’s not as obvious as paying tribute to a Mafioso. We’ve learned to be more subtle. Protection money takes the form of political donations, like FTX’s hundreds of millions in campaign contributions and lobbying (here’s a good rundown). As SBF sagely points out, regulators can’t protect consumers. Regulators have no idea what’s good for consumers; they rely on corporate-sponsored “research”, adopt corporate recommendations, and pass regulations written by lobbyists. Really!

Then you need the media to help propagandize the masses. SBF’s family foundation bankrolled crypto blogs like CoinDesk and TheBlock, and also donated millions to normie newsrooms like ProPublica and Vox. And, I suspect, the NYTimes. Here’s SBF, still listed as a headline speaker at next week’s NYTimes DealBook Summit:

The summit is hosted by Andrew Ross Sorkin, a NYT columnist and WEF Young Global Leader famous for his flattering portrayal of Wall Street bank execs in the aftermath of the 2008 financial crisis. I’m sure Sorkin will be happy to write an elaborate defense of FTX’s business operations: The empty balance sheet was in fact a typo. What happened was deeply troubling, but evidence indicates that SBF did not commit fraud. Indeed, it’s about how you define ‘invest’ and ‘funds’.

Zuckerberg will be at the Dealbook Summit. Facebook/Meta is in on the grift too. Here’s David Marcus, former head of the Facebook/Meta crypto project, whining that he was called to testify in front of the Senate and the House immediately after his whitepaper dropped. Waaah. Does he think SBF has never testified in Congress before? SBF was there just last year; in fact here’s a clip of Congresswoman Maxine Waters blowing him a kiss. Being called for a hearing is a privilege for wealthy execs, not a punishment. David Marcus was called in because the Libra Association literally said “The Libra Association intends to work with policymakers as regulations adapt to address innovation” and “Founding Members are committed to working with authorities to shape a regulatory environment.” Congresscritters want to be told what regulations to prescribe so that they can help build a moat. Libra ultimately failed not because of regulatory burden, but because the idea was stupid. David Marcus has since left Meta and is now working on a Bitcoin-focused project.

Remember 2008? Bank execs called up ex-Goldman CEO and Treasury Secretary Hank Paulson, requested a bailout, and got one. That could be SBF! It might be too late for FTX now that they’ve filed for bankruptcy, but anything could happen. Maxine Waters has just been announced as chair of the committee that will investigate the collapse of FTX.

Bitcoin people have complained about SBF’s lobbying efforts, but SBF was just a sovereign individual playing the game as designed. If you don’t want to pay the protection money, build something that can’t be regulated. Fortunately, Bitcoin interprets regulation as damage and routes around it.