Bitcoin Default Swaps: Blythe Masters Joins Bitcoin Startup

About a year ago we wrote that the "farce is complete" when we learned that the former head of JPM's commodities group - Blythe Master - the person caught red-handed in trying to pull off Enron 2.0, and responsible for manipulating electricity prices in California, was about to join the CFTC: yes, the person who created perhaps the most important derivative product of the pre-crash period, the massively levered Credit Default Swaps, was about to become an advisor to the very agency tasked with regulating all derivatives. Just 24 hours later, following a furious public backlash against what is perhaps the most corrupt regulators in the US, the CFTC, Masters withdrew her candidacy from the CFTC.

The reason for the populist fury was not so much that Blythe was caught, and then let go, in trying to pull off another Ken Lay (she got away, he didn't), but due to prevailing anger at the one person who many personify with all that is manipulated in the gold market. Recall that long before the world's biggest banks were busted for rigging precious metals, that Blythe Masters made one of her rare appearances on CNBC telling the channel that "JPM's commodities business is not about betting on commodity prices but about assisting clients"... "it's about assisting clients in executing, managing, their risks and ensuring access to capital so they can make the kind of large long-term investments that are needed in the long run to expand the supply of commodities"

"There's been a tremendous amount of speculation particularly in the blogosphere on this topic. I think the challenge is it represents a misunderstanding as the nature of our business. As i mentioned earlier, our business is a client-driven business where we execute on behalf of clients to achieve their financial and risk management objectives. The challenge is that commentators don't see that.


So to give you a specific example, we store significant amount of commodities, for example, silver, on behalf of customers we operate vaults in New York City, Singapore and in London. And often when customers have that metal stored in our facilities, they hedge it on a forward basis through JPMorgan who in turn hedges itself in the commodity markets. If you see only the hedges and our activity in the futures market, but you aren't aware of the underlying client position that we're hedging, that would suggest inaccurately that we're running a large directional position. In fact that's not the case at all.


"We have offsetting positions. We have no stake in whether prices rise or decline. Rather we're running a flat or relatively flat matched book.


"What is commonly out there is that JPMorgan is manipulating the metals market. It's not part of our business model. it would be wrong and we don't do it."

A year later the London Whale scandal broke out revealing that JPM did in fact have stakes in whether prices rise or decline, and that three years later JPM itself would be - finally - investigated for gold rigging, indicating that it was indeed "part of its business model", and that it may be wrong which is precisely why JPM does it.

Not surprisingly, following the humiliating CFTC episode, Blythe disappeared completely from the public radar. Now, with a one year delay, she has finally reappeared.

That's not the surprising part. What is shocking is the capacity in which she has reappeared. According to the FT, the former JPM commodities head
has re-emerged as chief executive of the Bitcoin startup, Digital Asset Holdings.

The start up is merely the latest legacy bank-funded or staffed operation to attempt to profit from the disintermediated digital currency, and "aims to be a venue for buyers and sellers of financial assets to meet and transact, switching currencies into bitcoin in order to cut the cost and time of settlement and make use of the decentralised “block chain” as a secure record of transactions."

What is Masters' vision vis-a-vis the digital currency and why has she suddenly become one of its biggest advocates?

“There is a school of libertarian ‘visionaries’ who want to imagine a world without big banks, big governments,” said Ms Masters, who left JPMorgan last April. “That’s nice, but completely irrelevant to this business model. We don’t imagine a world in which big banks and big governments don’t exist.”


“They say they want the world to change, but the world will change by adopting new technology to do a better job,” she said. Reducing the frictional costs of financial transactions is “one of the great challenges of our time”.

And charge a 3% commission every time the frictional costs are "reduced", she forgot to add.

Blythe said "she had held discussions with the Federal Reserve, the Bank of England and New York’s Department of Financial Services about the venture, though it would not need regulators’ blessing because it was not an exchange, a custodian or a money transmitter." 

In fact it is not exactly clear just what DAH is, which perhaps is just how Blythe and her co-workers want to keep it: "it will admit creditworthy members — such as big banks and asset managers — to trade between themselves using DAH’s technology."

So... a marketplace using Bitcoin? Didn't the Dread Pirate Roberts already try that with Silk Road, minus the "admission of creditworthy members", of course - more like drug dealers and assassins.

How did Masters end up at DAH? That also is unclear: "Ms Masters would not say how much she had invested, nor when the venture would launch. DAH was founded last year by Sunil Hirani, founder and chief executive of trueEX, an exchange for interest rate swaps, and Don Wilson, founder and CEO of DRW Trading, a proprietary-trading firm. The venture has employees in New York, Chicago and Tel Aviv, a cryptocurrency hub."

Perhaps the logo of the company should be "because you know your digital money is safe in Israel"

Joking aside, it sounds like what Masters and her startup are trying to do is implement a form of centralized financial bazaar for all things Bitcoin related: a SWIFT for the digital currency if you will.

“We feel that some of the basic plumbing is missing in the system,” said Mr Wilson of DRW. “Bridging the gap between bitcoin and other cryptocurrencies and traditional currencies is a problem. One settles immediately. One settles over a day or more than a day. Participants in this ecosystem will be able to control who they’re transacting with because it’s within a closed system where we can control who’s in the pool.”

Well good luck with all that, because the whole point of Bitcoin is to keep it as decentralized as possible, and any venture that attempts to streamlne its "efficiencies" is doomed to fail as alternative - and free - services emerge instantly.

Which is why perhaps instead of conducting her outlined business plan, one which is doomed to failure, Blythe should just focus on doing what she does best: coming up with ways to boost the leverage of the underlying product by a factor of 20, and provide a more liquidity, massively levered tool which allows traders to take on positional bets while pretending to "hedge" and without having the required capital outlays. As in Credit Default Swaps.

Perhaps the time of the Bitcoin Default Swap has truly arrived.

Sarcasm aside, what today's latest news reveals is the explanation why back in December 2013, when Masters was still with JPM, the bank mysteriously tried to spawn its own electronic currency alternative.

If you can't beat 'em, join 'em, copy 'em, and then beat 'em. While everyone's attention has been glued to Bitcoin (and its various smaller and less viable for now alternative digital currencies), JPMorgan has submitted a patent which appears to set the scene for a competing centralized network to Bitcoin. As LetsTalkBitcoin noted first, the "Method and system for processing internet payments using the electronic funds transfer network," states that Chase's technology is a "new paradigm." Moreover that it permits the creation of "virtual cash" (also referred to as "web cash") with a "real-time digital exchange of value."

the patent application itself (source USPTO):

It's odd how then JPM and now Blythe herself, are so eager to be part of a currency which has been pitched as the easiest way to transact as far from JPM and its diaspora as possible.

Back then the JPM patent application was rejected. This time around, Blythe may have more luck with her latest attempt at controlling at least a small piece of the Bitcoin pie in the sky...