0.0 Intro
For so long, I’ve had questions about:
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How are tokenized securities (in their current iteration) even a thing? How are they considered legitimate? Who wants them to be legitimate?
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How are the swaps which we know to be nuclear (such as Archegos) not nearly as nuclear as we know they should be?
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How is the price of $GME being subsidized, or offset?
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Why are some financial players so desperate to hide swap info?
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Why has the financial community been treating Sam Bankman-Fried with such kid gloves?
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Why haven’t regulators imposed tighter controls and regulations on crypto yet?
And most importantly: how has MOASS not happened?
Make no mistake, Apes, this is one of the larger discoveries.
1.0 Swap Structure
Let me expand on how the tokenized securities (let’s call them TKSX) might be used in the swaps to affect $GME – it will only be a theoretical framework:
*(A refresher on swaps, feel free to skip. A swap is between Andy and Bonnie. Andy holds various stocks in basket A, Bonnie holds different stocks in basket B. Andy and Bonnie draw up a contract where Bonnie gets the profits from Andy’s basket, and Andy gets the profits from Bonnie’s basket – they swap profits – drawing a line where the profit starts for each basket. It’s a swap contract, for the profit above a certain amount. They both put their assets under the control of a 3rd party (Ronnie), and promise to add more if their side falls below a certain dollar amount.
They do this for any number of reasons: they have assets they can’t do anything else with, or they are using those assets to generate passive income through rehypothecation/locates, or they are a client’s assets, or they don’t want to take the liability of those assets – i.e. they want to set up short positions – or they want to pluralize their stake across key players, etc.)*
To illustrate a TKSX swap in the context of $GME:
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A SIFIPBIB (or a GSIB Global Systemically Important Bank or somesuch, if that’s what you prefer, I’ll use these terms interchangeably), has a giant bag of dicks they are eating naked $GME shorts. Oh no! This makes them infinitely liable. What do?
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The SIFIPBIB adds those naked $GME shorts to a basket, then in that same basket, throws in some TKSX’d $GME for upside, to counterbalance the unpalatable shorts. They choose TKSX $GME shares because they are printable a cheaper surrogate for real shares.
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So now if $GME goes up, the tokens go up to offset the shorts. If $GME goes down, short exposure diminishes. The basket is net null-ish.
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This basket is shit. They take literally anything else for the other side of this swap.
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But because they are a SIFIPBIB, some other institution is dumb enough compelled to take this swap.
This swap makes that naked $GME short position disappear for a time, since it is contractually off the books for the duration of the swap, as long as there aren’t material changes in that basket balance.
2.0 Answers and Incentives
Again, the above is a theoretical illustration. The actual swaps will be more technical, but the existence of these swaps paints a fuller picture in answer to the above questions (I’ll go down in order of my numbered list):
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It incentivizes the legitimacy of tokenized securities. Even if tokenized securities in their current form are utter bullshit, there is now a raison d’etre for their place in the financial landscape: to keep this swap alive as well as the parties on the other side of this swap. All involved parties and their allies are incentivized to bolster the legitimacy of tokenized securities (they’re all eating a shit sandwich and trying to grin).
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It buries deep $GME exposure. We know that the swaps which held direct $GME short exposure tanked Debit Credit Suisse – a GSIB! And we also know that CS wasn’t the only SIFIPBIB exposed to naked $GME shorts, and yet no other GSIB has gone under. So where is the nuke hiding? In these swaps, under the inflated value of the TKSX – at least partially.
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It undermines the true value of $GME. A $GME share pegged to the price of, say, an Apple share or Berkshire-Hathaway class A share renders $GME valuable. But if it’s pegged to the price of a TKSX $GME share which can be printed indefinitely, makes it nearly value-less. The firms short $GME were able to supplant fictitious TKSX in place of real collateral with value, depressing $GME’s true price (edit: it's only worth as much as someone is willing to pay, and if TKSX is the same but way cheaper, $GME will drop in price toward the TKSX share).
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It incentivizes privacy in swap data. In the “it’s only illegal if you get caught” business, there’s a real risk of the swap coming unraveled if the details are made public. Not only is there an aggressive financial community that could attack the TKSX position, but there is an aggressive public community that might call for regulation or even an investigation.
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It incentivizes delicacy with FTX. Sam Bankman-Fried has been treated incredibly kindly compared to, say, Bernie Madoff. Both embezzled funds at a systemically significant level. But Sam is sitting on crucial information that could undermine the stability of the market (and is still hiding some money?). And there’s also a chance that the FTX fallout could tank the nascent community of TKSXs, which some firms need to stay alive. The FTX situation needs to be carefully unwound, to prevent a catastrophe.
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It incentivizes keeping regulations “gray” . The FTX fallout came at a delicate moment. Yes, cryptos do pose an existential threat to the almighty dollar, and yes, the US does have an interest in keeping what control it can over cryptos via approved on/off ramps for fiat, but the TKSX swaps might be keeping several firms alive right now. Rigid controls over TKSX exchanges might take it all down, so these firms need regulations need to be flexible, or non-existent.
2.1 Delaying MOASS
And most importantly, how has MOASS not happened?
If proven out, TKSX swaps are one of the key vehicles for artificially suppressing the price of $GME. How?
Firms that are short $GME have been exploiting the difference in cost between a real share of $GME and a fictionalized share from the tokenized exchanges, to avoid their buy-in obligations.
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The exchanges selling tokenized shares have only a limited supply of real shares backing their “digital shares.”
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That number could be 99 for every 100, or it could be 9 for every 100. The FTX blowup revealed that there isn’t necessarily money in the accounts, or shares behind the TKSX tickers.
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A firm short $GME has an obligation to buy it. That obligation is expensive to fulfill, and firms can delay the obligation through regulatory loopholes, but the exposure remains on their books and requires them to hold quality collateral against it (also expensive).
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By pairing that short with a TKSX $GME share, the firm short $GME dramatically lowers their costs. Instead of paying full market price for a real share or expensive collateral against, the cost equation for a naked $GME short becomes: Cost of $GME obligation = (Short renewal cost + Insider “buy” price of TKSX share)
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(The firms that buy TKSX for cover are likely striking deals directly from the issuing exchanges for prices far below the given TKSX ticker.)
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And these firms also happen to have the access and technical ability to affect the TKSX ticker prices, helping sustain the illusion that these tickers are somehow real and have legitimate value.
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The equation means they are paying pennies on the dollar for their $GME obligations.
This scheme would run afoul of any swap regulations requiring quality collateral. However, the fact that TKSX are reported to already be in swaps is de facto proof that they are "quality" enough to be used as collateral.
#3.0 Post Script
I have several follow on questions, thoughts, and directions to this community at large.
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Swap data in the first 2 weeks of any TKSX ticker issuance should be interesting. The FTX ticker for TKSX $GME was issued <2 weeks of the sneeze. There are likely breadcrumbs in the public swap data which could relate to interesting TKSX usage.
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Broad TKSX usage. It would be unlikely that a firm would put their entire $GME naked short position into a single swap. More likely is they diffused it across a high volume of swaps, adding small slices of their exposure (with a corresponding amount of TKSX) to each basket, maybe as a by-line. The goal would be to distribute their risk, and broaden the exposure to other firms, incentivizing other market players to go along with the scheme.
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Market-wide TKSX usage. If proven, then the price difference between a TKSX ticker and a real ticker is likely being (ab)used across many more tickers. Some firms might not partake if they see legal or regulatory risk, but if it makes money, there’s no reason to believe the TKSX swap usage stops at $GME.
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Ongoing legitimization of TKSX. To continue using this exploit, the participating firms need broader public and regulatory acceptance. The FTX debacle seriously jeopardized the future of TKSX. I anticipate a shift to other firms in the space, as other TKSX tickers could be used to replace the failed FTX tickers in the swap. We could also start to see media influence, such as “Can Joe (TKSX exchange founder) Succeed Where SBF Failed? Meet the new king of digital securities.”
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Derivitives. TKSX derivatives, such as call/put options, might also be used instead of shares themselves to further defray costs.
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TKSX vulnerability. If true, then TKSX are a key point that Apes should be raising hell about to our regulators. We do move the ball. This is an area we can cause them real pain.
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Swap schemes If swaps can be nested (meaning, a “basket of swaps” can be swapped), I’d anticipate a lot of nesting for such a volatile position.
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This is by no means exhaustive or technical. Again, this scheme will be bound by technical frameworks at large as well as specific to each contract. My explanation is likely incorrect in some way, and I welcome feedback.
TL;DR:
Firms short $GME are using “tokenized shares” (TKSX, my abbreviation) of $GME to lower their exposure, lower their costs, and delay MOASS. I speculate they are using TKSX as cheap knock-offs in place of real shares to cover upside without having to pay full price. These firms are hiding TKSX in swaps where collateral is less scrutinized, or their exposure can be intentionally shifted to more stable parties.
https://old.reddit.com/r/Superstonk/comments/16iuru4/the_discovery_that_tokenized_securities_were_used/
One more quarter of profits is all capitalism has provisioned for
It will soon come crashing down as the libs throw us directly into fascism by ignoring the left