Patricia: Crypto and Dark Magic IV
Dark magic and debt tokens aside; the only way users get any money back, and soon, is if Patricia raises actual cash to return to the users. That much should be clear by now. So what options are open?
Part 4: Preventing a Bank Run with Trust and Debt Tokens
Patricia subsequently released a new update and an attendant Whitepaper making a very colossal U-turn from its initial description of the Patricia Token. Patricia switched its communication to an admittance of the problem at hand and a lot of use of the word “trust”. There are 20 instances of “trust” in the Whitepaper, and a total of 21 instances of either “transparent” or “transparency”. Indeed, a lot of trust is required for what the Whitepaper posits. So let us examine the new strategy Patricia is hinting at.
The nature of the Patricia Tokens has fundamentally changed. Apparently, Patricia Token is an admittance of the debt Patricia owes to its customers for losing their money and assets. In their words, Patricia Token is “an internal token used to represent debt, and it would be managed by Patricia”. This is a huge change from its earlier suggestion that the token is some sort of ownership token, that allows you to “own a piece of Patricia”. It seems Patricia is issuing these tokens just as an IOU.
Also, as regards its value, Patricia now claims that the Patricia Token has its value pegged to the USDT and not the dollar. USDT is another separate token, Tether Token, whose value hovers close to $1. Although Tether has been found to have lied that it is “fully-backed” by real dollars, and while it is still in doubt how many real dollars exist for the Tether Tokens, the Tether Tokens themselves still sell for around $1.
The description of the peg changes throughout the document, and it quickly becomes confusing what this peg means, exactly. In one breath, the Whitepaper says that the token is ‘pegged’ to the USDT: “Patricia Token (Patricia Token) is systematically aligned with the USDT's value. This 1:1 peg with the USDT… guarantees stability in Patricia Token's valuation”. Yet in another breath, it clarifies that it is more of a promise to repay: “It symbolizes a promise by Patricia Technologies to pay holders 1 USDT for each Patricia Token in the future”. Here is another part of the Whitepaper: “...we would be backing up every Patricia Token with USDT”. If I were to guess, it would seem that there is no USDT as well, at least not yet.
The most interesting change is that virtually all the points in the update are phrased as a statement of intention and not of things already done. So it really changes nothing, ultimately. There is simply no money. Notice the phrasing of some parts of the Whitepaper:
“Upon issuance, Patricia Tokens will be allocated to users as a debt instrument in exchange for the assets lost during the breach”
“Customers who have filled out the Asset recovery form would be prioritized for withdrawals once the app relaunches”
“Our vision is to formally launch the Patricia Token after we address our debt dynamics”
“We will automate Patricia Token release in line with exchange profitability”
“The contract's algorithmic conditions release tokens based on the exchange's demonstrated profitability…”
“This contract will lock the tokens and gradually release them based on the exchange's profitability”
The phrasing is ambiguous, and I can barely bring myself to a sufficient understanding of how all of this is supposed to work. I think it is better for me to not try to understand it, really.
They wrap up the Whitepaper by listing three exchanges that have had to do something similar by issuing tokens for lost customers’ funds. I am really not sure what the point is, but I guess it could appeal to some people that “others have lost peoples’ money before”. By Patricia’s own admission, only one has repaid all debts. One is still trying to recover the debts, and one is still repaying the debt. So it seems they are suggesting that the chances are bleak, but not so bleak, but bleak all the same?
Dark magic and debt tokens aside; the only way users get any money back, and soon, is if Patricia raises actual cash to return to the users. That much should be clear by now. So what options are open to raising money? I do not want to go into too much details for fear of dragging this out too long. So here are two options:
Equity. Patricia finds an investor willing to buy Patricia and the debt it owes to the customer. Under this scenario, the investor would offer to pay close to nothing to acquire all the shares in Patricia. The investor is basically a saviour buying your debt and, if anything at all, Patricia should be the one paying the investor, really. The investor would also most likely be another crypto company that feels it can gain something by acquiring the user base of Patricia.
Debt. Patricia finds a way to get a loan to repay the customer's debts. The idea here is that if Patricia starts repaying customers, some customers might decide not to leave and trust them. If they can keep even 5% of their users, they could still continue business and build again.
Whichever approach it takes, there is something very important that would happen before it can proceed; an audit. Investors or lenders must first check Patricia’s book to ascertain, amongst other things:
The actual extent of the losses from the hack.
If Patricia is guilty of shady dealings that led to losses.
What do we mean by “guilty of shady dealings”?
Well, for one, there is a particular fraudulent practice that failed crypto startups have been found to do. Failed crypto startups have been found to misuse users’ money, subsequently losing it. Yikes! FTX did it, diverting users' funds and ultimately losing them. Binance hinted that it did not proceed with acquiring FTX due to what it discovered in corporate due diligence. Celsius did it too. So if an audit finds such shady dealings, it is unlikely that Patricia would be able to raise funds.
Sadly, we will never find out if such efforts are ongoing to raise money to repay customers or what the audit would discover if there is an ongoing audit by an investor/lender. These matters are usually kept very private. It would be interesting if someone should leak these matters the same way they leaked that the Patricia hack actually happened in 2022 and cost it $2,000,000 in lost assets. I wonder what we would find out if more comes to light.
Truth? If you are a financial service with no regulations, the odds are high that you would misuse user funds. Imagine not having to submit accounting reports monthly, not having compulsory risk management requirements, and not having cash reserve ratios. Imagine just being able to take money from the general public with no restrictions and no accountability beyond whatever you impose on yourself. Imagine having no regulation. You would need to have a god-like mastery over your basic human instincts to not misuse the money in your care.
We will wrap this series up by having a look at financial regulations and how they play out to protect financial consumers in situations like this.
If you feel like it, you can also buy me a coffee.
Thank you for reading.