Wirecard Bank was a hero of the banking community in Germany. They grew very rapidly by servicing payments for niche operators around the world. They were part of the elite German DAX30, among the largest companies in the country. The full story of their demise is yet to be told but it boils down to the fact that they claimed to have $2 billion in a bank account somewhere and ultimately didn’t. Their auditors Ernst and Young allegedly failed to validate this, or more likely, were deceived.
First conclusion: audits don’t work. Principally because if a company wants to lie to an auditor they can do so and frequently over the years, they have. Far, far easier than mandating audits would be to not mandate them at all. The best companies would still get an audit, the worst companies would not. Investors would then make their own judgement about unaudited companies. Remember WorldCom, Enron, Tyco, Lehman Brothers? Massive companies, pulling huge accounting frauds, all with blue chip auditors. What about all the smaller companies we don’t hear about?
Investors will now blame Ernst and Young. Maybe they were indeed deficient in their work but hard to imagine willfully so. The onus on the auditor is too high, the expectations are too high and frankly it is an awful job. It is met with either grudging acceptance or a massive law suit and an early pension with nothing in between.
Secondly, it is extremely difficult to actually validate the ownership or existence of assets. Wirecard’s $2 billion was in an account in the Philippines (or rather wasn’t), no doubt there was a piece of paper somewhere that said we have $2 billion dollars. Everyone knows that the most junior person on the audit looks after cash. That person, with no experience at all, then does their best. If they receive a statement like looking piece of paper with the correct number and signature on it, they accept it. What is the alternative? Fly to Manila with an abacus and even then, in a room full of money, who says it belongs to Wirecard?
The only way to check asset ownership properly is with cryptography. If you own bitcoin or another crypto asset you can prove it. You can sign those assets with the private key that as owner only you could have. Indeed, you can even move the assets around the blockchain proving you control them if that is what an auditor wanted. Pieces of paper signed by foreign banks mean nothing. Certified documents mean nothing, they prove nothing. They simply satisfy some bureaucrat who wants to tick a box and hide behind a lawyer but that is still the way the world operates today. That is why blockchains are often referred to as ‘triple entry bookkeeping’. The third leg being the easy external proof of what has happened.
Wirecard’s tagline is “Beyond Payments”. A prophetic statement indeed, they are some way beyond payments now, insolvent and with their CEO arrested and roaming his mansion on €6 million bail.
For everyone else, we are beyond mandatory audits. They are a waste of time and money. Auditors would be surprised how many clients retain them when they are no longer mandatory. It’s useful to have a second set of eyes working together to do the right thing. The change would also self-select the fraudulent, who have something to hide.
NGFS: The Network for Greening the Financial System. Who knew that such a thing existed? Not only does it exist, it comprises 66 central banks, including all the ones that matter, with the exception of the Federal Reserve.
Also emerging from the unknown is the verb “Greening”. Previously undiscovered, it does not appear in the Oxford English Dictionary which has this to say on the matter:
Clearly they made that up too when they invented the organisation for international banking junkets.Anyway, the NGFS made a declaration this week that unless carbon emissions are cut to zero then there will be a 25% GDP loss by 2100. That may be true, but what has it got to do with central banks? Why are the people that cannot predict the next quarter’s inflation and have been consistently wrong on almost every economic metric since forever, now forecasting temperature changes 80 years out?
At great expense, we managed to track down the new 80 year climate mode.
I can only think the reason banks are involved is a Green New Deal. So many countries are now in a debt predicament from which they cannot escape. The idea that national debts will be paid down is not even discussed. Governments are doing well if they aren’t going up that much. There has to be a debt jubilee at some point and it is very likely it will be dressed up as a climate rescue.
Interestingly, the most vulnerable economies are the most active, even though there are 66 members, the footnotes to the report give the game away.
(Clément Bourgey and Amandine Afota). Banque de France (Pierre-François Weber) and the
European Central Bank(Torsti Silvonen) coordinated the work which has led to this document.
Basically, the entire thing written by the Eurozone. Not too many contributions from well-captialised countries like Singapore.NGFS: Not Good For Solvency.
Grayscale posted incredible numbers again last week. They purchased nearly three times the mined amount of bitcoin. They now have around 400,000 BTC under management.
This prompts the question, if they are buying so much more bitcoin than is being produced why is the price not soaring? I think the answer lies in the halving too. Bitcoin miners have seen their revenue drop 50% since the block reward fell. Since early May only the most profitable miners are holding onto bitcoin, the loss makers are selling off their holdings until they eventually capitulate. Immediately after the the halving we saw the bitcoin hash rate fall for a month before it recovered sharply, I would think there are some miners out there in real distress and they will keep feeding Grayscale for a while. In the past, the halvings have taken about six months to work their way through the system.
If you are looking for proof that bitcoin mining is a difficult game, look to Canaan Creative. They are a Chinese based manufacturer of mining machines. They went public on the NASDAQ in late 2019 raising $90million at $9 per share.
Bitcoin mining depends on two things, the speed of the mining machines and their energy efficiency. You have to be top on both to succeed. Unfortunately, the latest mining machines from Canaan are under performing and are allegedly loss making at the current bitcoin price, as a result their shares have dropped to $2. Customers aren’t happy, investors aren’t happy and now a class action lawsuit has been filed about the IPO document.
Not to be out done though, another Chinese miner, Ebang listed on June 26th, again on the NASDAQ. Ebang’s filings suggest that their revenues are moving backwards over time. That seems to be the trigger to list for many mining companies because they need capital to renew their advantage, the life cycle appears to be.
1. Design the best mining machine in the world. Fast and efficient2. Mine profitably and keep the IP and the strategy a secret
3. As the advantage declines – design new chips that keep up with competition
4. This is incredibly hard to repeat, so the capital pool gets smaller. Now attempt to list
5. Explain in the listing document why revenues are falling. Promise a brighter future
6. Go bust.
That appraisal may seem harsh but bitcoin mining is unbelievably brutal. Not three years ago, Bitmain bestrode the world as one of the most profitable companies in China. Now they are on their knees due to a couple of bad decisions and some below par mining equipment.
In the end, mining will reside only with energy producers. The likes of Exxon, Shell and Saudi Aramco. The two moving vectors of Moore’s Law and Energy prices are simply too much. Unless you can source unlimited low cost energy, or you can source unlimited advantage in chip design (which nobody can) then it’s a losing game.
In the end bitcoin is energy, energy is used to mine it. That is what it represents and I imagine mining will be dominated by energy producers in the end.
These early phases of mining are best avoided, it is risk layered on risk. The best exposure is obtained simply by buying bitcoin and that itself is risky enough.
Assay: the test of a metal to determine its ingredients or quality.
Almost nobody assays their gold because it is incredibly difficult to do. When buying gold the best approach is to use a supplier with a long and good reputation. Even better, go directly to a miner. For large amounts of gold, assay is very time consuming so it’s not really practical for investment in the millions.
The Asian Nikkei reports this week that creditors of Wuhan Kingold Jewelry Inc (a NASDAQ listed company) held 83 tons of gold as collateral for a $2.8 billion loan. Unfortunately much of that gold has turned out to be gilded copper. I imagine the feeling is rather like ordering wagyu and receiving chicken wings.
By comparison, digital currency is very easy to assay. It costs almost nothing and takes less than 1 second. More and more, this feature will become relevant with time, particularly in a digital world.
As Warren Buffett never said “only when the tide goes out do you discover who has been painting their copper yellow”.