At the surface level, the implosion of a Chinese real estate conglomerate shouldn’t have much to do with cryptocurrency. But there are at least a few connections worth knowing about between this company and the overall crypto market.
Let’s get into them below.
But first, what’s the deal with Evergrande?
In a soundbyte, China is having a Lehman Brothers moment right now.
Evergrande Group is a property developer that’s publicly traded on the Chinese stock market. It’s currently the country’s second-largest property developer, and in 2018 achieved the rank of the world’s most valuable real estate company.
The company is dominating the financial news cycle lately because it’s facing a record number of legal cases filed against it by contractors that it can’t afford to pay. Time Magazine estimates that 1,500,000 customers could lose deposits on unbuilt Evergrande homes if the company collapses. Now with $300 billion in liabilities and $100 billion of debt, Evergrande is at risk of defaulting and sending an economic shockwave around the world.
So how does this all connect with crypto?
The unclear relationship between Tether and Evergrande
Tether is the major stablecoin company that’s no stranger to controversy. Initially, every USDT in existence was backed by a fiat dollar somewhere. But as we learn more about the company, we know this isn’t the practice at all.
The company’s latest disclosure on how USDT derives its value goes as follows: “All issued USDT are always 100% backed by Tether reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties.”
In other words, Tether is backed by a variety of things, not just US dollars in a bank account. We know roughly half of this backing consists of short-term loans. No one knows for certain, but much of that is believed to be Chinese short-term loans. Tether has come out with a public statement that it holds no Evergrande commercial paper, but this is less than encouraging — loads of Chinese businesses stand to get squashed here, and they definitely do have Evergrande exposure.
We’d know more about what actually backs USDT if the company would allow an external audit, but such audits never seem to happen.
In any case, there’s clear potential for the dominoes to fall from the fiat world into the crypto world, and if a stablecoin the size of Tether suddenly can’t make good on its transactions, it will tank the crypto market.
FUD isn’t limited to crypto
To be clear, that stands for “fear, uncertainty, and doubt.”
No one knows yet if the Chinese government will save the day and bail out Evergrande, so investors around the world have been taking profits and generally triggering a selloff avalanche. The global financial markets were blood red with losses as people did what they thought was necessary to protect their money this week. This included crypto traders looking to lock in their gains, so the overall crypto market was down between 10-20% as the week kicked off, representing a total loss of around $250 billion in value.
Just about any cryptocurrency you can name was showing a loss. From Bitcoin to Ethereum to Dogecoin, nothing was up. The real estate FUD even made its way to virtual real estate — Decentraland, a project based around buying and selling virtual land, posted losses on the day.
Regulatory scrutiny is on the rise
The world economy needs big businesses like Evergrande to stay operational, make debt payments on time, and provide the services that people pay them for — in this case, building homes and developing real estate. When big businesses fail for dodgy reasons, they stand to torpedo other businesses on their way down. This is exactly why regulators are charged with taking notice and taking action in these instances.
Regulators know the world’s attitudes toward finance are changing. Once considered an outlaw Wild West of sorts, the crypto industry is now on its way to reshaping how money moves around the world. SEC Chairman Gary Gensler has made it abundantly clear that he intends to regulate distributed finance to the fullest extent. Bloomberg reported over the weekend that Binance, the world’s largest crypto exchange, is being investigated by U.S. regulators for possible insider trading and market manipulation. News items like this are popping up regularly.
So the secret’s out: crypto is cool and interesting, now regulators want in on the party. And that’s a little bit like the cops knocking at the door of a loud party — some people are going to quickly bow out while they can. In crypto markets, that means selling.
With increased regulatory attention (as well as interest from large financial institutions), cryptocurrency is rapidly developing into a mature economic force. As it achieves this kind of mainstreaming, the distance between the failure of a Chinese real estate giant and the price of BTC is decreasing rapidly.
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