What Happened Today: May 23, 2023
Binance goes FTX; China's looming debts; Inflation in Argentina
The Big Story
Billions of dollars of crypto customer funds were commingled on an almost daily basis with corporate accounts at Binance, the world’s largest cryptocurrency exchange, according to three sources cited in a Reuters report on Tuesday—the same banking practice that precipitated the recent collapse of crypto exchange FTX. While Binance says “there was no commingling at any time,” only client money used to buy Binance’s house crypto tokens, “former U.S. regulators told Reuters that Binance’s explanation was undermined by the exchange’s own previous representations to customers that the transfers were deposits.” As recently as 2021, Binance’s website described customer transfers for the token as “deposits” in their own accounts that could be withdrawn as dollars.
While no evidence was found that clients’ money had been lost by Binance, the commingling of funds runs afoul of U.S. financial regulations. Similar accounting practices triggered significant losses for collapsed crypto exchange FTX, where Sam Bankman-Fried, according to charges by the Securities and Exchange Commission, used commingled funds on risky venture-capital investments, expensive luxury-home purchases, and donations to high-profile political candidates.
Citing records and interviews with former employees, Reuters says that Binance relied on American lender Silvergate Bank as its primary bank between 2019 and 2021. Currently winding down operations after a run on the bank by depositors, Silvergate had largely focused on modest real estate lending before it turned to crypto companies as its primary focus. Binance made use of at least three Silvergate accounts, one of which was used to mix user and company money under the auspices of a Cayman Islands firm belonging to Binance CEO Changpeng Zhao.
Read More: https://www.reuters.com/investigates/special-report/crypto-binance-money/
In The Back Pages: Tablet Goes to Saudi Arabia
→ There’s a time bomb ticking loudly across U.S. cities as local officials struggle to accommodate the growing number of elderly homeless people in their jurisdictions.
In Arizona, the largest provider of homeless shelters, Central Arizona Shelter Services, says the shelter with 40 beds for those 55 and older that it’s rushing to open will hardly make a dent in the surging population of older homeless. Last year, it served 1,717 older Americans, a 43% increase from the year prior.
Older Americans who can’t afford the higher cost of living are straining homeless facilities in Alaska’s Anchorage, Oregon’s Portland, San Francisco, and other places because their medical needs can be more complex, often requiring longer stays.
The cohort of homeless who are 65 and older will soon double if not triple compared to the cohort of five years ago, says Dennis Culhane, a professor and social science researcher at the University of Pennsylvania. “It’s in crisis proportions. It’s in your face,” Culhane told The Washington Post. “Average citizens can see people in wheelchairs, people in walkers, people with incontinence and colostomy bags making their living out of a tent.”
Read More: https://www.washingtonpost.com/business/2023/05/22/seniors-homeless-baby-boomers/
→ The highest-ranking human-rights official in the Mexican government, Alejandro Encinas, was spied on using notorious spyware Pegasus while he investigated human-rights violations perpetrated by the military. That’s from a New York Times report, which argues the attack on the top official is “a clear sign of how freewheeling the surveillance in Mexico has become, when no one, not even the president’s allies, appears to be off limits.” With long-standing tension between Encinas and military brass, and Pegasus only licensed to government agencies, it’s perhaps not a surprise that the military has hacked his digital devices several times, sources tell the Times; the most recent hack occurred while Encinas looked into the 2019 disappearance of 43 Mexican students, one of the more notorious human-rights violations in recent memory.
→ A new United Nations report of a five-day military operation by Mali’s armed forces and a squadron of Russian mercenaries from notorious outfit Wagner found that at least 500 people were slaughtered, mostly in extrajudicial killings, in March 2022. Documenting the massacre, during which detained women and girls also endured rape and sexual violence, the report says that while the forces squared off with a small band of 30 combatants who were ostensibly the focus of the operation, “their presence can in no way justify the extrajudicial executions, rapes and looting committed by the armed forces against the inhabitants and stallholders trapped by their siege.”
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→ Quote of the Day:
I’d rather put a gun in my mouth.
That’s television writer and creator of The Wire David Simon explaining to NPR radio jockey Ari Shapiro what he’d rather do than use AI to help him write a script. Their discussion of supplanting writers with AI comes amid the ongoing writers strike in Hollywood, with the Writers Guild of America demanding protections against AI while also seeking better terms on contracts that have reduced some writers to gig economy workers in the streaming era. Simon argues, “If that’s where this industry is going, it’s going to infantilize itself. We’re all going to be watching stuff we’ve watched before, only worse.”
Read More: https://www.npr.org/2023/05/19/1177194215/tv-writer-david-simon-weighs-in-on-the-writers-guild-of-america-strike
→ The third-place finisher in Turkey’s recent presidential elections has thrown his support behind current President Erdoğan ahead of his run-off vote with opposition leader Kemal Kılıçdaroğlu on Sunday. Though the third-place finisher, Sinan Oğan only picked up about 5% of the vote; still, his endorsement is likely to further boost Erdoğan, who’s now expected to win the re-election and extend his 20-year tenure by another five years.
→ Street cleaners are going two months without payments, locals have no heat during freezing winter nights, and taxis are being pummeled in fines in Hegang, the remote northeast China town that continues to struggle with basic operations since it refinanced its debt. The town’s experience could be a harbinger of what’s to come for cities across China, where aging populations and slow economic activity, coupled with COVID-19 pandemic expenses, have led to ballooning debt obligations. Goldman Sachs recently estimated that the thousands of shell companies holding debts for local governments have pushed China’s total government debt to $23 trillion. And while no municipality will likely default since Beijing ultimately will hold the liability, the strain is already evident in places such as Shangqiu, which recently shut down its bus service for 7.7 million residents. “Many cities will become like Hegang in a few years’ time,” economist Houze Song told Bloomberg. “The reality is that over two thirds of the localities won’t be able to repay their debt on time.”
→ The initial buzz of being one of the most profitable cannabis markets in the nation has worn off in Colorado. With sales spiraling against a robust black market and competition across state lines intensifying , Colorado’s cannabis industry laid off more than 10,000 workers in the past year, says a new report from Vangst, a cannabis staffing platform. Matt Darin, the CEO of Curaleaf, a major industry player, shut down all of the chain’s stores across Colorado because authorities aren’t cracking down on the black market supply. “The current price compression caused by a lack of meaningful enforcement of the illicit market prevents us from generating an acceptable return on our investments,” he told The Denver Post.
→ Number of the Day: 2,000 pesos
That’s the new, and highest-denomination, banknote just rolled out by the government of Argentina—double the previous 1,000 peso note—while the country struggles to keep cash in ATMs as residents carry around huge stacks of cash to cover basic expenses amid soaring inflation. Hitting 109% in April, Argentina’s inflation is expected to go as high as 150% over the next year, which means the newest bill exchanges for $4 USD. Featuring an image of Ramón Carrillo, the nation’s health minister in the 1940s, the new bill has also caused an uproar among the Jewish community. Carrillo is accused of Nazi ties, having hired a former SS officer, Dr. Carl Vaernet, who ran medical experiments on gay prisoners in concentration camps. “We emphatically reject the choice of such a character, that will sully Argentina with his image on its highest-denomination banknote,” the Latin American chapter of the Simon Wiesenthal Center said in a statement.
TODAY IN TABLET:
Birth of a Nation by Armin Rosen
Reporting from the front lines of Mohammed bin Salman’s stupefyingly ambitious mass experiment in modernization, reform, and control
A Man With No Name Revisits the Kingdom by Jeremy Stern
A portrait of life in the heart of America’s military empire, where the work of perpetuating the ‘liberal world order’ can be seen up close
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Tablet Goes to Saudi Arabia
‘Everyone here has their Jews now’
By The Editors
For nearly a half-century, American Jews understood the Middle East as a product of the Cold War, in which two external powers—the U.S. and the Soviets—tried to flip individual states in the region to one side or the other. After 1967, Israel proved its worth to Washington by demonstrating that it could defeat Soviet proxies in the Arab world, and also help bring countries like Egypt into the U.S. camp by ceding land as part of peace deals. In the wake of that success, Israel became a linchpin of American foreign policy, playing two roles: that of the U.S.-dependent military power, and of the U.S.-dependent peace partner.
That world ended with the dissolution of the Soviet empire, though we understand it that way only in hindsight. The period between 1990 and 2010 was merely an interregnum, in which U.S. hegemony ensured a semblance of continuity in the lives of its allies, while former Soviet clients seemed to lose their great power patron.
But a new era—the current era—was about to begin.
As president, Barack Obama not only withdrew U.S. forces from Iraq but overturned the old Cold War alliance structure by sidelining traditional status quo allies like Saudi Arabia and Israel and moving closer to the regime in Iran. The decision to demote U.S. alliances in the Gulf in particular was supported by the illusion that fossil fuels would soon be phased out of world energy markets, to be replaced by renewable energy technologies primarily manufactured in China.
Obama largely succeeded in creating a new geopolitical reality in the Middle East, which is largely the one we see today. In it, there are only three major powers: Israel, with the region’s only technological and military capacity to combat all security threats; Iran, too militarily weak to remake the region in its image, but strong enough to break formerly sovereign countries through mass violence; and Saudi Arabia, with the natural resource capacity to swing global energy markets and the cash to pay for social stability at home.
Each of the more populous Arab states that was seen during the Cold War as potentially more stable and influential than Saudi Arabia—Egypt, Iraq, Syria, Libya, Lebanon—is now a shattered wreck. Only the Saudis have emerged from the bloody 20th century with a young population and young political leadership unscathed by the experience of either communism or fascism; Pan Arabism or Islamist fanaticism; civil or sectarian war. It also retains the Sunni world’s greatest claim to religious legitimacy, with the House of Saud seen as the most responsible available stewards of the holy sites in Mecca and Medina.
The future of the Middle East will therefore largely be determined by the technological and military capabilities of Israel on the one hand, and the economic resources of Saudi Arabia on the other—and the extent to which they can cooperate together against their common existential enemy in Iran. Although Israel’s military power and Saudi Arabia’s economic power dwarf all regional competitors, they can do very little independently—Saudi Arabia because it cannot defend itself, and Israel because it lacks the legitimacy to operate in an explicit leadership role within the Arab Muslim world. The future of the Middle East, in other words, will be determined by how much Israel and Saudi Arabia are able to work together to pursue their own interests. Failure to cooperate will leave the region vulnerable to even more chaos and violence than it’s experienced to date.
The future of the Middle East will also continue to be shaped by external great powers, but it remains unclear which one will predominate. The United States is now in its third consecutive administration that has publicly vowed to reduce U.S. interests and engagement in the Middle East. China is a very eager suitor, not least because its economy will clearly continue to depend on fossil fuels for the next 50 or 100 years. India and Russia are wild cards. Regardless, to the extent that Saudis and Israelis will succeed in cooperating with each other, their entente will likely require some external guarantor. It is not a foregone conclusion that Washington is the right choice, as the dominant cultural and political ideology in the contemporary United States has cast both Zionism and the House of Saud as enemies.
So the world’s only Jewish state wants—needs—an alliance with Mohammed bin Salman’s Saudi Arabia. The question is: Who are these people? Are the far-reaching reforms initiated by MBS—which include an end to the religious police and compulsory hijab, the repudiation of the fundamentalist Wahhabi ideology the state once exported around the world, and the legalization of women driving—merely scaffolding for a larger repressive project that’s destined for catastrophic failure? Or are they real changes that will actually make Saudi Arabia a freer and more normal country?
As with every big, unanswerable question about any foreign society, the only way to begin to find the answer is to go there, which is what Tablet did—the first time a delegation from a Jewish, Zionist publication was given permission to report freely (and entirely on its own dime) from the kingdom.
As we learned while the magazine decamped for a week to Riyadh and Jeddah, we weren’t exactly alone. Hardly a week goes by these days without leading Jewish communal figures, pro-Israel professionals, and hawkish think-tankers visiting Saudi Arabia’s two biggest cities. “Everyone here has their Jews now,” explained a well-connected Saudi whose Jews we probably were.
Perhaps an inflated perception of Jewish power has led Saudi elites to accessorize with members of the tribe. Perhaps entrepreneurially minded Jews believe they have their own vital part to play in some future Saudi sequel to the Abraham Accords. Perhaps the dreams and egos of Jews and Saudis are especially compatible at this specific moment in history, and no deeper affinity is at work. All of this is more speculative, and inevitably less important, than the fact that a wealthy, populous, and internally stable Arab country that rules over the birthplace of Islam and whose government used to be a global exporter of anti-Jewish poison has discovered a certain philo-Semitism.
It turns out that in 2023, Saudi Arabia is a place where you can be at the same party as Will Smith and where no amount of money will buy you a beer, at least not in public. It is a country of young Snapchat and anime addicts where the taxis have digital kiblahs in the dashboard, pointing toward Mecca, and the airplanes and coffee shops often have prayer rooms in the back. There is a traditional public dress code—white robes for the men, black abayas for the women—that is still widely observed, but isn’t mandatory.
Under MBS, Saudi Arabia has experienced what one Riyadh-based artist described to us as a “harsh enlightenment,” a managed revolution in the social and economic spheres that leaves the state’s powers and privileges intact. It is possible to hear criticism of the government in Riyadh, but this only happens behind closed doors, in the untouchable domain of a private home.
Saudi Arabia is a tribal desert society moving toward a more open future, which means it is also hurtling toward developments that no one, including MBS, can predict at the moment. Could one of them be peace with Israel? Diplomatic recognition from the most stable large country in the Middle East would be an era-defining boon to both the Jewish state and U.S. strategic planners. Saudi Arabia is the only populous Arab country that hasn’t been destroyed by an ethnic or religious bloodletting, self-immolating ideological project, or foreign intervention sometime in living memory. It has a young and educated population and a quarter-trillion barrels of oil. Peace between Saudi Arabia and Israel, arguably the two most powerful and highest-functioning countries in the Middle East, would backstop a chaotic region.
Alas, a Saudi-Israeli breakthrough looks unlikely in the near term. The Saudi leadership believes it has little to gain from making peace with Israel absent a major concession on the Palestinian front. On the other hand, Saudi officials hint that they are willing to recognize Israel even before a Palestinian state is established if the right commitments and formulations can be agreed to. There is frequent talk that if Riyadh is going to be a global center of finance, technology, air travel, and a dozen other sectors in which the city may or may not achieve worldwide significance, no one can be kept out—including enemies like Iran and problematic partners like Israel.
Saudi Arabia’s leaders believe they are riding a hot streak of national success and are in no mood to bend to anyone else’s agenda. They see Washington as hectoring and ungrateful, Ankara as unserious, Tehran as annoying, and Jerusalem as an issue for another day. Still, the era of national assertion kicked off under MBS has frequently brought about the unthinkable, including a total reversal in the former relationship between Saudi Arabia and the world’s Jews. History is happening quickly here, and more surprises are in store.
In Spring 2023, Tablet staff decamped to Riyadh and Jeddah to cover the past, present, and future of the birthplace of Islam, the leader of the Sunni Middle East, and perhaps, one day, Israel’s partner in peace.
Read More: https://www.tabletmag.com/collections/saudi-arabia
The Saudi and MBS stuff is fascinating, if sometimes horrifying. Israel needs to maneuver the discussion in the direction of Jordanian involvement in any viable future for the Palestinian Arabs. Obviously, nothing serious is going to happen until Iran is removed from the picture. It's the main driver of the larger regional conflict. So maybe start with that.
The Binance thing needs clarification. Customer and company accounts, credits, and debits remain distinct. However, on the blockchain itself (be it BTC or ETH, say), there's nothing in each entry to tell the difference between what's "customer" and what's "company," except for their respective secret crypto keys -- which mean nothing except to those who know those keys. I can't imagine Binance would have mixed up customer and company crypto keys. That would fatally mess up the accounting.
The bank connection is of no significance, in spite of all the hysteria around it. The regional banks involved in crypto have been failing because of a combination of higher interest rates (crashing bond prices) on the asset side and deposit flight on the liability side. The "post-modern" aspect of it is that the run on those banks' *stocks* is what precipitated their collapse, by then triggering a deposit run. This is not the old-fashioned case, where the deposit run comes first and initiates the failure.
The crypto aspect, with respect to the bank failures, is entirely a red herring. Note crypto assets have been mostly rising for six months or more. The selling pressure that came from the collapse of Terra/Luna, FTX, et al., ended late last year. That pressure -- to raise cash in the face of falling crypto prices -- is what caused this round of crypto collapse. The unwind of the fly-by-night non-public exchanges is well over by now.
The series on Saudi Arabia was fascinating. Hopefully Israel and Saudi Arabia will do what they have to to contain Iran