Weekend Reading #204

This is the two-hundred-and-fourth weekly edition of our newsletter, Weekend Reading, sent out on Saturday 11th February 2023.

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What we’re thinking

For all the drama in the markets this week is about way more than numbers on a screen. A country very close to our hearts has been struck by not one but two natural disasters in the space of a few hours. The effects of the earthquakes in Southern Turkey this past week are just heart-breaking.  

From our side, we are doing everything we can to help. We beseech anyone who wants to help to contribute to any one of the below charities which are helping people who are suffering in the region. 

Akut: https://www.akut.org.tr/en/donation 

Mozaik: https://www.justgiving.com/campaign/kahramanmarasearthquake 

If you want to donate crypto go to https://crypto.ahbap.org/en 

From a markets perspective it also couldn’t have come at a worse time than when the local market was already collapsing after a speculative frenzy. Just like in 1999, albeit with a delay, the local market has been shut for a week (until Weds 15th Feb). Politically the botched response is a disaster for President Erdogan, already struggling to gain momentum in the polls. Sadly, whichever way this unfolds from here it's hard to see how it ends up positive in any way. There is pain ahead. 

Back across the pond, the regulators in the US seem to be taking a shot at some territorial grabs, with the SEC moving with enforcement actions against crypto exchange Kraken, which subsequently made a settlement of $30m and an agreement to wind down their staking offering, which the SEC purports is a securities offering “similar to lending” (and not like steak in any way, according to SEC Chair Gensler). Kraken is one of those exchanges that has ostensibly tried to frame itself as being on the right side of regulations, and to be fair to them, the staking that they’re offering is on-chain staking as opposed to the Gemini Earn style “staking” which was more like financing some trading desk with collateral for a fixed fee. Extrapolating the Kraken enforcement action led to Coinbase expectedly being next in line, although no news has yet emerged. Almost concurrent with the SEC’s announcement on Kraken, the NYDFS announced an investigation into Stablecoin issuer Paxos, which triggered rumours that USDC issuer Circle could be next in the firing line. 

The reactions on Crypto Twitter have been defiant – to start, many in the community look at this as regulatory encroachment, trying to take crypto down. Perhaps that may be the case, although objectively speaking, one could see the rationale behind this enforcement: it’s one thing for an individual to seek out opportunities to earn “yield” by staking (“yield” itself being a concept that is purely financial); it’s another for an institution to offer and facilitate access to these products, even if done so in good faith.  

Ultimately, it remains largely true that for crypto to realise its full potential, it requires mass adoption. And mass adoption, especially in a manner safe for mass consumption, is typically not possible without some form of regulation. Perhaps they may be too strict (like China), or they could be too lax; they may be too prescriptive and restrictive, or they may be too ambiguous and open to interpretation, leading to litigation risk for those involved. But the only way to find that balance is to push the boundaries (from both sides) and find that balance between flexibility and safety. 

And we’d tend to be optimists: because behind all the bluster and posturing for public consumption, the reality is that the actual regulatory guidance being issued from the likes of the National Futures Association is moving towards offering clarity on what needs to be regulated and what doesn’t. That’s the key – it's not about being disallowed from doing something. On the contrary, it’s about making sure that if someone did want to make certain trades or engage in certain financial instruments, the correct knowledge, understanding of risks, safeguards and contingencies are in place for when things go wrong. 

After all, that's what regulators are for.

What we’re reading.

Just in case anyone’s forgotten about SBF and the FTX debacle, this article in the FT entitled “Sam, are you there?!” - The bizarre and brutal final hours of FTX, is a gripping read. In fact, it could easily pass off as a script summary for a film, which is most definitely in the works now. Without spoiling it for anyone, let’s just say that reading through this and imagining what was happening at the time creates scenes that could easily belong in both Margin Call and The Big Short. And yes, there’s even one point where the classic Margin Call boardroom scene would fit in perfectly after some character and casting updates. EL 

On the genomics side, Jennifer Doudna, along with her colleague, Joy Wang, co-released a piece in Science (journal) summarising the first decade of CRISPR and showing just how much has been achieved in that time since she (and a bunch of others) discovered the marvels of what it can do. The article also looks ahead with hope to the next decade and gives a few of the possible developments to come. I think she is being a bit conservative given learning curve and the talent (and capital) at work on all these problems. Already just over the past 7 years we have seen the additional discovery of base editing and then prime editing. While nothing commercially has been achieved in the space as of yet, it would be a major surprise if over the next decade at least a couple of blockbuster companies don’t rise. The problem for investors in this space is to find the correct ones, given how early stage it all is. 

Further on the science side, a breakthrough for psychedelic medicine in Australia as both psilocybin-based and MDMA-based treatments was approved by The Therapeutic Goods Administration for depression and PTSD from 1 July 2023. There are still lots of hoops to jump through as psychiatrists haven't yet been told what kind of approvals they need in order to prescribe it. On top of this, the treatment will be expensive and medical insurance is not yet available. But all this will come with time and it’s a massive step. Incredible really given the history of the space and how much reticence there once was to even consider such compounds in the medical realm. 

According to Josh Wolfe of Lux Capital, we are living in a golden age of fraud. We’ve already seen some big profile ones like FTX (and maybe Adani) but one off the radar of most Western investors will be Lojas Americanas, which recently filed for bankruptcy in Brazil. Americanas was the most feted blue-chip retail group with founders and investors who were considered the best of the best. Its downfall as result of “accounting inconsistencies” of around $4bnwhich goes back for years is a huge shock to the Brazilian investment community. We don’t trade Brazil as much as we once did but this is a big deal. It is already having repercussions way beyond just the bankruptcy. Itau’s CEO, Milton Maluhy Filho, commented a few days back and labelled it a fraud, not tiptoeing around the list of famous investors who just like with FTX, will have egg on their face at the very least. DC 

What we are listening to.

With all the hype around generative AI and ChatGPT in particular, I listened to an episode of The Tech Strategy Podcast to get a bit more background. It’s a pretty good intro to the ecosystem and one guy’s view on how it all unfolds in terms of winners and losers. I don’t know the host, Jeff Towson, at all and I have no idea if he will be correct but it gave a good weigh up of the pros and cons and is probably a decent place to start. Of particular interest was his view that big budget and large-scale content producers like Netflix and Disney will suffer at the hands of new emerging AI-tech giants. 

I also listened to a good Desert Island Discs episode featuring Sir Malcolm Walker, the founder of Iceland, the frozen supermarket chain, in the UK. He tells his story from the start and it's not an ordinary one – personally or in business. I know Iceland as South African private equity firm, Brait, bought them out many years ago, blew it, and sold it back to Sir Malcolm a few years later. His son now runs Iceland. Like anyone, his story is filled with sadness as his wife of 50 years suffered for many years from dementia and early-onset Alzheimer's before passing away in 2021. But life had new plans for him as he remarried just a year later at the age of 75. This was an authentic interview and his song choices were good too. DC 

 What we’re watching.

With everyone talking about the new Netflix series, Madoff: The Monster of Wall Street, I realised I hadn’t watched the earlier series from 2017. Starring Robert De Niro as Madoff and Michelle Pfeiffer as his wife, the show offers a gripping and intense look at one of the largest financial frauds in history. From the early days of Madoff's investment firm to the eventual discovery of his massive Ponzi scheme, "The Wizard of Lies" provides a detailed and engaging look at the events that led to Madoff's downfall. Through a series of flashbacks and interviews with those closest to Madoff, the film explores the various factors that contributed to his success, including his charisma, his reputation, and the trust he built with his clients. For anyone interested in the world of finance, financial fraud or even human psychology, "The Wizard of Lies" is a must-watch. Whether you're familiar with the story of Bernie Madoff or not, this short series provides a thought-provoking and engaging look at one of the most notorious financial frauds in history. HS 

Eugene Lim