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TBW Premium #6: How French crypto players are tackling the UST crisis

TBW Premium #6: How French crypto players are tackling the UST crisis

Read all about The Big Whale's 6th Premium newsletter.

THE BIG SPLASH

¡ La Ballena Grande en Argentina! 🛬

That's it, we've arrived in Buenos Aires! The Argentinian capital is not only a beautiful city, but also one of the lungs of the crypto ecosystem. It didn't take us long to realise why: arriving in Argentina means arriving in a country where the inhabitants have been juggling with the peso, the dollar, the euro, official rates, black market rates - in short, a rather complex monetary system - for decades. For Europeans, it's all a bit confusing. We'll tell you in the next few days how we got our first pesos back at the 'right price'.

In 48 hours, we've already had time to meet several members of the Argentine crypto community, including Mariano Di Pietrantonio from MakerDAO, and the 'digital' manager for the city of Buenos Aires. As well as being approachable, Diego Fernández is a passionate man, who is notably working on a digital identity project on a public blockchain (more on that below).

But it's not just Argentina on our beautiful planet. In Europe, and France in particular, there's been quite a bit going on in recent days, particularly in the wake of the collapse of the Terra project.

Our exclusive information 🗣

👉 Coinbase will (also) be setting up shop in France

After Chinese-born giant Binance, another crypto heavyweight is set to set foot in France very soon. According to our information, US exchange Coinbase has applied to be registered as a digital asset service provider (DASP) with the Autorité des marchés financiers (AMF). The application was submitted in autumn 2021. Given the average time taken to process applications (six to eight months), registration could be imminent. This deadline is indicative, however, because the financial watchdog is demanding security guarantees on anti-money laundering procedures, and non-European players often need more time to show their credentials. Obtaining the PSAN will enable Coinbase, which is the only major crypto platform listed on the stock exchange, to be more aggressive in its marketing (it is impossible to advertise in France without it). And, above all, prepare for the future: when the European Markets in Crypto-Assets (MiCA) regulation comes into force, only companies with a licence obtained in a Member State will be able to continue operating while they obtain the Community label.

👉 Tether's good accounts

In the wake of the collapse of stablecoin UST, many other dollar-indexed crypto projects experienced turbulence last week. The largest of these, USDT (capitalisation of $74 billion), fell sharply on several platforms such as Binance. For a few hours, it fell by as much as 14% to $0.86, raising fears of a much more violent fall. But behind the scenes, Tether, the company that issues USDT, managed to take advantage of this volatility 🤔. "Tether has an extremely efficient arbitrage mechanism," confides Anthony Lesoismier, co-founder of Swissborg, Switzerland. "When the parity with the dollar starts to fall on the secondary market, the company can buy back its tokens at a lower cost on the exchange platforms in order to resell them on the primary market with a 1:1 parity against real dollars," he continues. As we explained in our stablecoin report, the company issues USDT tokens in exchange for dollars provided by institutional players. According to Anthony Lesoismier, "Tether must clearly have made extraordinary profits during this sequence".

👉 The French ecosystem wants its lobbyist in Brussels

It's no secret that part of the future of the crypto ecosystem is being played out in the European arcane. Especially not Adan, which represents French companies in the digital assets sector. The association will soon be on the hunt for a director of European affairs to bring its influence to bear in Brussels. "His/her mission will be to strengthen action at European level, including by moving geographically closer to the institutions, in order to better federate and represent the French and European crypto industry", says Faustine Fleuret, president of Adan. This recruitment will be funded by a call for donations in cryptos (bitcoins and ethers) that the association has just set up. "Given that only companies could contribute a fee to become members of Adan, we thought it would be useful to allow individuals to participate in the development of the ecosystem", she insists. Depending on the amounts raised, other actions may be financed at a later date.

THE BIG STORY

These French players caught in the UST trap 💥

👉 The news. UST stablecoin crashed last week.

👉 Why it matters. It was at the heart of many performance services offered by French platforms.

  👉 The background. This case comes at a time when the European Union is debating future crypto regulation.

A veritable cataclysm. Last week, the crypto universe experienced an almost unprecedented crash. In just a few days, the Terra project, one of the biggest blockchains on the planet, collapsed like a house of cards, costing investors more than $50 billion. To give you an idea, that's the equivalent of the capitalisation of a major European bank.

The fall of the project created by South Korean Do Kwon spared no one. From Asia to America via Europe, hundreds of thousands of investors have been affected, but not just because of the collapse of Luna, the token of the Terra blockchain.

Some investors have also lost out big in lending operations, i.e. loans, with UST, Terra's stablecoin, which were offering annual returns of more than 10% on average. This was the case for thousands of French investors, who had placed their money with French companies, such as the start-up Just Mining, run by Owen Simonin, aka Hasheur on YouTube (560,000 subscribers).

Just Mining is obviously not the only company involved. Other French and foreign start-ups were exposed to the UST, which was still worth $18 billion at the beginning of May before it lost parity with the dollar (it is currently worth 90% less). According to several sources, US giant Celsius, which has yet to make a statement, may also have been caught up in the storm.

To fully understand what happened, we need to remember that the algorithmic stablecoin UST was one of the stars of the moment on the markets. Until a few weeks ago, you could deposit it in the Anchor protocol for an annual return of 19.5% 🤑. An unbeatable rate in decentralised finance (and pretty much everywhere, in fact...).

For months, crypto companies offered their customers stablecoin return products with tempting rates thanks to a simple system: they converted some of the so-called "safe" stablecoins (USDC in particular) entrusted by their customers into USTs, which boosted overall performance. A mechanism that obviously broke down when the UST lost parity with the dollar and began to collapse from 7 May.

For almost all the players we interviewed, the risks of the UST were well identified, not least because of the outsized performance it provided. It was "too good to be sustainable", some are now rewinding.

Just Mining announced on Wednesday 11 May the extent of the damage, announcing an "exceptional" compensation plan: each customer will be covered for up to $1250. "This means that 73% of them will not take any loss", assures Owen Simonin, the boss of the Metz-based company. There was no legal obligation for Just Mining to compensate its customers.

1.4 million euros to limit the damage

According to our information, the "rescue" plan has cost the start-up, which is a heavyweight in the French ecosystem (65,000 customers in total for all its products), just over 1.4 million euros. This sum represents around "a third of the company's war chest", admits Owen Simonin. He also acknowledges that the company will need to strengthen its cash position to remain in a position to invest.

For a time, the possibility of seeking help from Just Mining was considered, but the possibility of seeking help from a player with deep pockets was finally ruled out. "Others have been affected by the situation to a greater or lesser extent, at least all those who handle large volumes on DeFi," says the entrepreneur. "We haven't yet had a chance to debrief all these essentially international structures. They were all in a hurry and very unavailable", he says.

Is everything now settled? While Just Mining appears to have contained the fire, it is not out of the question that other companies may also be forced to announce losses. According to several sources, the analyses of the flows on the blockchain are sometimes at odds with the official communication. "A lot of companies offering yield (returns on cryptos, ed. note) will surely try to raise funds to contain their losses, if tomorrow all users decided to withdraw their money, we could see some terrible things happen," worries Anthony Lesoismier, co-founder of Swissborg.

Same tone of voice from a source close to the Autorité des marchés financiers (AMF): "If there had been, as in the traditional world, an obligation to return funds, several crypto players could have gone bankrupt".

Nearly 1,000 customers could not be covered

While Just Mining's "smallest" customers were ultimately spared, this was not the case for the "largest", whose losses exceeded $1,250. Just over 1,000 of the company's 4,000 lending customers have been affected by the fall in the UST and the company's exposure. "Around fifty customers are unhappy, but the majority of those who suffered losses were aware of how the product worked and the associated risks," insists Thibaut Boutrou, Just Mining's Operations Director. "Those who have criticised us did not fully understand the mechanism", says the start-up's number two. "We will continue to be even more demanding when it comes to transparency and educating our customers. This is important if we want the ecosystem to grow."

Just Mining has never hidden its exposure to UST in its product description sheet. When a customer sent "safe" stablecoins to the company, they were likely to be converted into UST and therefore subject to the associated risks. "It may seem easy to say a posteriori that UST should not have been touched, but the Terra ecosystem was valued at $50 billion, and it was inconceivable not to use UST as part of a DeFi diversification strategy", continues Thibaut Boutrou. Before it stalled, Just Mining's UST ratio was 37%. It then rose to 39.58% as a result of the fall in its share price.

Coinhouse is playing it safe

At the end of our survey, only Just Mining reported significant losses linked to UST. Coinhouse, France's leading broker, informed its customers on 14 May that this stablecoin "had never been available", either on its exchange platform or in its "Crypto Booklets" (products offering returns of between 4 and 5% on the reputedly safe stablecoins USDT, USDC and EURL). "Our team has always insisted that algorithmic stablecoins, such as UST, require a very cautious approach," says its boss Nicolas Louvet.

Just Mining was until March 2022 one of the Paris-based broker's sources for generating the return on its "Livrets Crypto", but UST was not part of the contract. "We have a great deal of confidence in Just Mining, which, like Coinhouse, is a member of Adan (the French association of crypto companies, editor's note) and registered with the AMF," Nicolas Louvet is keen to reassure. "We've known them since they were founded and look forward to working with them on new allocations," he continues.

Feel Mining and Swissborg say they limited the damage

Another French company, Feel Mining, claims to have been affected only marginally and asserts that assets brought in by customers were never exchanged for UST. "Some of the company's equity may have been converted into this stablecoin, but we got out before everything collapsed," says co-founder Nicolas Marchesse. According to him, Feel Mining suffered "only €7,000" in damages, "quickly compensated via arbitrage".

As for Swissborg, which has been registered with the AMF since the beginning of April, the fragility of UST had long been identified. "We were among the last to offer it, because it was a request from our community, but we never mixed it with other yield products," explains co-founder Anthony Lesoismier. In other words, you could be exposed to UST's juicy returns, but only those who brought in UST could benefit. "We were criticised for our rates, but the choice not to add UST to the mix of our traditional yield products paid off," he says. According to the company, 7741 customers holding 23 million USTs were affected on 9 May.

The AMF is asking companies to explain themselves

For a market player who prefers to remain anonymous, "this affair is likely to leave a bitter taste in the mouths of the AMF". The market watchdog has sent PSAN-labelled firms a request for information about their level of involvement in the UST affair.

In the letter, which we have been able to consult, the AMF asks PSANs whether their prudential position (their level of solvency) has been affected, whether they held UST on their own account, whether they used it as a transaction pivot, and information about client exposure.

Contacted, the AMF declined to comment.

But already some are questioning the effectiveness of PSANs, which more than 30 crypto players have already obtained. "You really have to wonder what the point of this registration is," challenges a leading French player who preferred to remain anonymous. "It was pretty obvious that the Terra ecosystem had weaknesses and most of the companies benefiting from the AMF stamp gave access to the UST, in particular Binance", he bellows. The Chinese-born giant has had PSAN since 4 May.

In addition to the financial consequences for companies and their customers, this affair could have repercussions for negotiations around the European Markets in Crypto-Assets (MiCA) regulation, defining the future legal framework for cryptos, which will include a section on stablecoins. While it was envisaged that decentralised stablecoins (including UST) would be excluded from the future text, the latter could finally be subject to much stricter treatment...

THE BIG QUESTION

Why is the crypto community so important in Argentina?

Heavily involved in Argentina's tech community, Diego Fernandez, who has notably worked in several start-ups, became the digital manager for the city of Buenos Aires in August 2021, where he advocates the mass adoption of cryptos.

What does Argentina's crypto ecosystem weigh?

Today, Argentina is one of the most important hubs in crypto. All over the world, industry insiders know what's going on in Buenos Aires and the country. One of our great sources of pride is that a significant part of Ethereum (the second largest blockchain on the planet, editor's note) was coded here. But it's not just Ethereum, there are lots of other projects in Argentina like Proof of Humanity, Decentraland, Coinbox... There are also members of the MakerDao team who manage the Dai (one of the main stablecoins on the planet).

 How do you explain why the ecosystem is so important?

 There are two reasons for this: the first is that there is a large Tech community in Argentina. Thanks to education, we are the South American country with the most developers (several hundred thousand) in relation to the number of inhabitants (45 million Argentines). This is a real asset. And the second reason, which is actually the most important, is that we've been in crisis for decades and our currency, the peso, is worth nothing. Nobody trusts our currency. Today, inflation is over 60% a year, there are capital controls, we have two exchange rates with an official rate and a black market rate where the peso is much cheaper. All the kids in this country grow up learning that you shouldn't have pesos, so inevitably that leaves a boulevard for cryptocurrencies. Argentines need to get by, so they use what they can to get by, a bit like the Turks, Nigerians or Russians...

What are you doing at town hall level to keep this ecosystem alive?

I can't do anything about the Peso, but about the rest, I can do a lot because I'm lucky enough to have a budget and a team. When it comes to digital technology, I can rely on 800 people at the Town Hall. Obviously, not all of them work on blockchain. But I do have around ten people working on several projects, and in particular on the digital identity for the residents of Buenos Aires. The aim of this future identity, which will be recorded on a public blockchain, which we have not yet chosen, is to enable each inhabitant to regain control of their personal data and to reveal only what is necessary during an identity check or as part of a file. We hope to be able to launch the project by the end of the year.

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