Pether (2)
My words didn’t seem to surprise David much.
“Questions about Pether’s dollar reserves have been raised plenty of times already. They’ve also kept refusing demands for an audit.”
“Why is that?”
“Strictly speaking, cryptocurrencies aren’t subject to an audit under international accounting standards. Leonard Chang just waves it away by saying it’s hard to find an accounting firm willing and able enough to do the job.”
If Pether had been treated as a financial product, it would have been regulated on the same level as a bank. But Pether was a stablecoin.
Which meant there was no real way to force them into an audit, even if they refused one.
“The Commodity Futures Trading Commission and the SEC even held a joint hearing on Pether. They wanted to investigate whether the reserves were sufficient and whether there had been any price manipulation. But no due diligence was ever carried out, and nothing was uncovered. In the end, all they did was slap a $35 million fine on them for disclosing misleading information.”
I nodded.
“Even if they had done the due diligence, nothing would have come of it.”
Back then, the amount of Pether in circulation was ten billion coins—hardly anything compared to now.
The hearing had been announced months in advance, so if they had wanted to, they could have easily padded the reserves to match it.
In the end, that hearing had practically handed Pether a clean bill of health, and after that, issuance exploded.
“Despite all the questions around it, Pether still holds at one dollar because Leonard Chang’s credibility is that strong.”
Leonard Chang had built trust with customers by seeing the Coinmax hack compensation through to the very end. That was why people were willing to believe in the Pether he issued, too.
“Honestly, even if there really were less cash in reserve than they claimed, redemption still wouldn’t be a major problem.”
A bank’s reserve ratio was usually only around 7 percent.
Even so, banks operated without issue. The reason that worked was simple: not everyone went to withdraw their money at the same time.
Pether was no different.
As long as the crypto market kept growing and Pether retained its place as a reserve currency, there wouldn’t be much immediate demand to cash it out for dollars.
Unless everyone tried to redeem Pether all at once, there was no way a bank run could break out.
“Could they have issued Pether without reserves just to provide liquidity?”
“It’s possible.”
“What if the amount was bigger than we think?”
“How much bigger are we talking?”
“Let’s say half?”
David frowned slightly.
“That’s absurd.”
“When you think about it, the fact that Leonard Chang issues Pether is absurd in itself.”
When the Fed prints money, stocks go up. In the same way, the more Pether gets issued, the higher crypto prices climb.
And if a brokerage firm were responsible for that kind of liquidity injection? It would happily flood the market with money and drive stock prices higher.
In the real world, that would be ridiculous.
And yet in the crypto market, that kind of ridiculousness was happening right out in the open.
Leonard Chang ran an exchange and issued a stablecoin at the same time.
“When Pether issuance increases, market liquidity grows and crypto prices rise. When crypto rises, Coinmax makes more money, and with that money, it can issue even more Pether. Isn’t that enough incentive to issue far more Pether than they actually have reserves for?”
David looked stunned.
“Are you saying Leonard Chang is John Law?”
John Law was the man behind the infamous Mississippi Bubble.
In the early eighteenth century, he appeared in France, which was drowning in deficits, won the royal family’s trust, founded a bank called Banque Générale, and began issuing currency.
The royal court then pushed people to use that money by accepting taxes only in the currency issued by Banque Générale.
From there, Law went a step further, took control of the Mississippi Company, and sold its stock.
By exchanging French government debt for Mississippi Company shares, he solved France’s deficit problem in one stroke.
He kept expanding the money supply after that, and as a result, Mississippi Company stock climbed day after day.
The problem was that the Mississippi Company was, in reality, a failing business that earned nothing at all. When you thought about it, it was almost laughable.
He was printing money, using that money to buy stock and drive the price up, then repeating the process by printing even more money and stock.
But there is no asset in this world that rises forever.
The moment people began to sense something was wrong and started selling, the scam came to an end.
The Mississippi Company’s stock collapsed. The currency collapsed with it. Once both stock and money turned into scraps of paper, prices skyrocketed in a wave of hyperinflation.
Countless people lost their entire fortunes, and in the end, it helped set the stage for the French Revolution.
The Mississippi Bubble set France’s financial development back by decades.
Because of the aftershocks, French banks still prefer to use “Credit” or “Society” instead of the word “Bank.”
If Leonard Chang had issued Pether without reserves, it would have been no different from what John Law had done.
And a few years later, that suspicion would prove true.
The reason everything blew up was deeply tied to Snow Crash.
Digitalization was an inevitable tide, and the best fit for it was a stablecoin with a fixed value.
Snow Crash went on to build a massive metaverse world, and for currency inside it, it created the stablecoin Penny.
Penny became the reserve currency of the digital world Snow Crash built, and its operation, speed, and functionality were superior to any other cryptocurrency that had come before it.
Money only keeps its value when there are plenty of places for it to be used.
Penny could be used not only inside Snow Crash’s metaverse, but across every cloud linked to it as well.
As a result, altcoins and stablecoins naturally collapsed, and exchanges began shutting down one by one.
That was when the problem hit.
As the entire crypto market bubble deflated, demand to exchange Pether for dollars flooded in all at once.
Pether, which was now worth $150 billion, had swelled to $600 billion by then. At first, Pether Limited handled redemptions without much trouble, but little by little, the process began to slow.
As a result, the peg broke, and it kept slipping below one dollar, spreading anxiety across the market.
Investors scrambled to redeem their Pether for dollars, but Pether Limited suspended redemptions on the grounds of a liquidity crunch.
Sensing that something was off, the U.S. Treasury and the SEC moved in to inspect and regulate Pether.
What did they find?
To everyone’s shock, Pether Limited’s assets came to less than half of the amount it had issued.
Part of that was because they had lost a huge chunk of money on bad investments, but the biggest reason was that they had issued Pether with no reserves from the very beginning.
It was the largest case of cooked books in history, surpassing even Enron.
Once that fact became public, Pether plunged 70 percent in a single day, then 99.99 percent two days later.
Investors who hadn’t managed to get out in time were left staring in emptiness at Pether, reduced to little more than worthless data.
Pether’s collapse finished off an already crumbling crypto market.
If someone had pulled a stunt like that in the stock market, they would have been looking at 300 years in prison without even breaking a sweat. But the crypto market had no clear regulations, so there was no obvious charge to apply.
“1 Pether can be exchanged for 1 dollar, and 1 dollar can be exchanged for 1 Pether.”
“However, there is no guarantee that 1 Pether is actually worth 1 dollar.”
Even the terms of service said that much.
Leonard Chang was taken to court over the affair, but the first ruling gave him only a six-year sentence. And even that ended with him posting a $10 million bond, getting out, and immediately filing an appeal.
So what about now?
If my guess was right, at least 30 percent of the $150 billion in circulation—maybe even more than half—was missing from the reserves.
“Is there no way to attack Pether?”
“How would you do that? This isn’t a stock.”
If it were a stock, all I’d need to do was write a report and short it. But this was a stablecoin. And Newcurrency Enterprise was a private company tucked away in a tax haven.
That meant I needed a completely different approach.
It hadn’t happened in my first run, which meant I’d have to figure out the method from here on out.
I got to my feet.
“I need to meet someone.”
“Who?”
“Someone I can work with.”
“Welcome, Chairman Han.”
“Long time no see. Have you been well?”
“Haha! Of course.”
I shook hands with a middle-aged man sporting a stylish mustache.
His name was Herbert Lentz.
He was the head of the activist hedge fund Empty Pool Research.
While most private equity firms invested in healthy businesses, Empty Pool Research made money mainly by exposing corporate rot and shorting the companies it targeted.
Until Continue Capital showed up, it had been the most famous name in short selling.
We had first crossed paths during the LD Studio affair.
“What brings you here today?”
“I had something I wanted to ask you about.”
“And what would that be?”
“Pether.”
His expression shifted a little.
I kept going.
“I heard they just announced a $1 million reward for anyone who provides information on Pether Limited’s dollar reserves.”
It was a blatant attempt to induce a whistleblower.
Pether Limited had blasted the move as “a foolish and pathetic attempt to drag down market confidence.”
“So you have doubts about Pether’s stability?”
Lentz nodded.
“I do. According to Pether Limited’s own statement, 96 percent of its assets are invested somewhere or other—corporate loans, bonds, and Vantcoin. Cash makes up only 4 percent.”
“They claim those are all assets that can be liquidated immediately.”
“Only 13 percent of those investment assets are U.S. Treasury bonds. The rest are mostly corporate paper and bonds, which account for 65 percent.”
“If those were promissory notes and bonds issued by Enple or Guble, wouldn’t they be practically as good as cash?”
At that, he snorted with amusement.
“Those companies don’t even issue corporate paper or bonds to begin with. And even if they did, the interest rates wouldn’t be all that different from U.S. Treasury bonds. We believe these notes and bonds are tied to emerging-market companies, especially Chinese property developers.”
Whether it was commercial paper or bonds, if something happened to the issuing company, they’d be worth nothing more than scraps.
Lentz’s guess was right.
When China’s property bubble burst, Pether Limited would end up losing an enormous chunk of its assets.
“So you’re planning to attack Pether?”
He didn’t deny it.
“That’s right.”
Pether was worth a staggering $150 billion.
There was no way Empty Pool Research could take it on alone.
From the start, the reward announcement was less about expecting a whistleblower and more about spreading negative sentiment to draw in outside capital.
Unfortunately, no whistleblower came forward, and the attack would end up never even being attempted because they couldn’t raise enough capital.
“It could fail.”
“But the downside is small.”
The expected profit from short selling was capped, but the loss was theoretically unlimited.
If you shorted Pether at one dollar and it rose to ten, you’d owe nine times your initial investment.
But Pether was a stablecoin.
Since its price was fixed at one dollar, there wasn’t much room for it to rise beyond that.
“Even if it fails, the only thing you lose is financing costs.”
“But if it succeeds, the returns would be enormous.”
Lentz smiled.
“Exactly.”
I said to him, “Could you share the materials with me?”
He looked at me, puzzled.
“May I ask why?”
Those documents must have cost them a great deal of manpower, time, and money to put together. Asking them to hand it over for free was shameless, no matter how you looked at it.
I met his gaze and said, “Because I think I can work on this with you.”