Perspective on Risk - July 5, 2022 (Crypto Update)
I thought I was done; Voyager Lied About FDIC Insurance; Crypto Market Structure; Regulators, Etc. React
I thought I was done
I thought I was done with crypto having written these two posts, but since the crypto world went to hell-in-a-handbasket I sort of feel compelled to write this follow-up. I really don’t want to, but there’s lot's more here.
Perspective on Risk - June 28, 2022 (Crypto 1/2)
Perspective on Risk - June 29, 2022 - (Crypto 2/2)
When I last wrote, it was after the Terra/Luna implosion, the troubles at Celsius, and the failure of 3AC. Sam Bankman-Fried was in the process of acquiring/bailing out several crypto exchanges.
Bitcoin has now fallen below the previous all-time high it set on December 17, 2017 — officially marking the end of the crypto bubble. … Of course, everyone is asking, why did bitcoin plunge so quickly Saturday night? What pushed it below $20,000 so suddenly? Somebody is selling. Who needs to sell? … Miners have to sell to pay their power bills. They mine 900 newly minted bitcoin per day. The bitcoin network consumes a country’s worth of energy.
The miners have been borrowing money from their buddies, DCG and Galaxy, to cover business costs rather than selling since July 2021. But they can’t borrow any more dollars, so they’re dumping their coins.1
Celsius and 3AC failed. Smaller outfits Finblox and Babel soon followed.2 At least one blogger is asserting that Celsius founder Alex Mashinsky netted at least $40 million by selling CEL tokens over the course of his tenure as Celsius Network CEO.3
On June 17, 2022, Babel told its partners that the company was insolvent and that it would suspend product redemption and withdrawal features on its website. Babel Finance may become the third crypto finance management company on the verge of collapse after Celsius and 3AC.4
Hedge funds have shorted the Tether stablecoin.5
BlockFi entered crisis mode last week when the news of a large loan made to Three Arrows Capital (3AC) went public, leading to a rapid withdrawal of customer funds from the platform. ... Morgan Creek Digital says BlockFi's loan to 3AC was $1 billion, and the collateral on 3AC's loan was two-thirds bitcoin and one-third GBTC.6
Genesis Trading is facing potential losses into the “hundreds of millions,” according to three people familiar with the matter. … The losses at Genesis relate, in part, to exposure to over-leveraged hedge fund Three Arrows Capital and Hong Kong-based crypto lender Babel Finance, and are on the order of “a few hundred million dollars,” one of the people said. … Genesis is owned by Digital Currency Group (DCG), and is also the owner of CoinDesk7
A Solana SOL whale deposited “$170 million” (face value) of illiquid SOL into Solend as collateral on a loan of $108 million in the USDC and USDT (tether) stablecoins, and disappeared. It wasn’t a loan — it was an exit. … The whale exited at least twelve days before Solend realized there was a problem — when SOL dropped in price and the interest on the loan came due. Now the depositors can’t get their USDC out of Solend. And Solend can’t sell off the SOL without crashing the price.8
CoinFLEX, an exchange incorporated in the Republic of Seychelles, halted customer withdrawals of funds last week and issued a token named Recovery Value USD (rvUSD) that offers a 20% annual return in hopes of raising funds to stabilize the business. … “We are still speaking to [Ver]9, and we have filed a default notice,” Lamb said. … Lamb and Ver first met some 10 ten years ago and have had what Lamb describes as a “personal recourse, non-liquidation relationship.” … The takeaway, from CoinFLEX’s perspective: the exchange is unable to get its lent money back and Ver is personally liable for any loans or assets he can’t repay soon.10
Singapore-based crypto lender Vauld has suspended all withdrawals, trading and deposits on its platform as it looks at restructuring options.
Vauld has seen withdrawals of around $198 million since June 12, the day when the downturn in crypto markets began to come to a head with crypto lender Celsius pausing withdrawals on its platform the following day.11
Voyager Lied About FDIC Insurance
Voyager Digital Halts Deposits, Withdrawals On Platform Following 3AC Loan Default. … Voyager had lent the crypto hedge fund 15,250 BTC, as well as $350 million USDC. Collectively, the crypto has a value of roughly $655 million, based on a bitcoin price of $20,000.12 Voyager had misleadingly stated:
USD held with Voyager is now FDIC Insured. … Through our strategic relationships with our banking partners, all customers’ USD held with Voyager is now FDIC insured. That means that in the rare event your USD funds are compromised due to the company or our banking partner’s failure, you are guaranteed a full reimbursement (up to $250,000). 13
Frances Coppula has a nice breakdown:
Voyager's press release revealed a massive hole in its balance sheet. Some 58% of its loan book consists of loans to 3AC. … And its loan book is nearly 50% of total assets. … So approximately 28% of Voyager's assets are in default.14
She also has a nice breakdown of Voyager’s crypto losses, Sam Bankman-Fried’s due diligence on investing, the concentrated nature of its book, and why UDC holders will end up getting little to nothing. Here is a link to her The sinking of Voyager. If you read only one link, look at this one.
Crypto Market Structure
I found this interesting analysis by Protos: Tether Papers: This is exactly who acquired 70% of all USDT ever issued.
Earlier this year, Protos shed light on that mystery by reporting that just two companies, Alameda Research and Cumberland Global, were responsible for seeping roughly two-thirds of all Tether into the crypto ecosystem.
We’ve spent months cataloguing and investigating every single USDT ever sent to and from Tether, across the eight blockchains and layers on which it currently exists: Omni (Bitcoin), Liquid (Bitcoin), Ethereum, Tron, Simple Ledger Protocol (Bitcoin Cash), EOS, Solana, and Algorand.
As Protos reported in August, market makers Alameda Research (spearheaded by crypto billionaire Sam Bankman-Fried) and Cumberland Global (a subsidiary of trading giant DRW) are still the biggest fish in Tether markets.
Together, Alameda and Cumberland received at least $60.3 billion in USDT across the time period analyzed, equal to around 55% of all outbound volume — ever.
Huobi Research published Who will be Next to Face a Liquidity Crisis? that goes into some depth on Decentralized Lending Protocols.
Currently, AAVE, Compound and MakerDAO are the largest decentralized lending protocols in the crypto space. Together they hold billions of crypto assets for borrowing. As of October 2021, the three platforms held over US$60 billion of crypto assets. While these large crypto lenders played an important role in facilitating capital utilization, they also facilitated speculation on the other side by allowing big position leveraging on the back of abundant liquidity. They also offered attractive interest rates to encourage funds and institutions like 3AC to borrow for trading and investing.
Leverage on these decentralized protocols can be increased by cycled lending. … As US$1 billion worth of ETH can be collateralized to take a US$800 million loan in any available stablecoin (maximum borrowing capacity of ETH on AAVE is 80%), which can then be used to purchase the equivalent value in ETH on exchanges. Aggressive traders tend to redeposit the purchased ETH and take out another loan to purchase more ETH. Cycled lending can increase leverage multiple times. It is commonly used for aggressive and big LONG positions.
Maple Finance and True Finance are two lending protocols which offer uncollateralized institutional crypto loans. Currently, Maple Finance has total outstanding loans of approximately US$640 million in its Ethereum Pools, and US$113.9 million in its Solana Pools.
There are five pools available for institutions to borrow on Ethereum and two pools on Solana. Lending Pools are established and managed by credit experts and asset managers, known as Pool Delegates.
The largest borrowers are Wintermute Trading, Alameda Research and Amber Group. Amber Group took a total of 10 uncollateralized loans totaling US$161.3 million on Maple and TrueFi
Regulators, Etc. React
Are Blockchains Decentralized? (Trail of Bits)
A report commissioned by the Pentagon concluded that blockchain is not decentralized, is vulnerable to attacks & is running outdated software. The report says that a subset of participants can “exert excessive & centralized control over the entire blockchain system.
SEC order re Blockfi (SEC)
From March 4, 2019 to the present, BlockFi, a New Jersey-based financial services company and wholly owned subsidiary of BlockFi, Inc., has offered and sold BlockFi Interest Accounts (“BIAs”) to investors, through which investors lend crypto assets to BlockFi in exchange for BlockFi’s promise to provide a variable monthly interest payment.
BlockFi … made a materially false and misleading statement on its website from March 4, 2019 to August 31, 2021, concerning its collateral practices and, therefore, the risks associated with its lending activity.
BlockFi made a material misrepresentation to BIA investors concerning the level of risk in its loan portfolio.
BlockFi’s statement materially overstated the degree to which it secured protection from defaults by institutional borrowers through collateral. Through operational oversight, BlockFi’s personnel failed to take steps to update the website statement to accurately reflect the fact that most institutional loans were not over-collateralized.
I’ll leave this for the interested to read, but, contrary to the crypto shills take, my read is that this basically makes crypto uneconomic for banks to hold, and even if they do choose to hold it they are highly limited in the amount. They’re not letting this stuff in the current form anywhere near the banking system.
New York regulator sets stablecoin rules (FinExtra)
Under new regulatory guidance, issued by superintendent Adrienne Harris, crypto firms must ensure that stablecoins are fully backed by a reserve of assets. Issuers must adopt "clear, conspicuous redemption policies", approved in advance by DFS in writing, that confer on any lawful holder of the stablecoin a right to redeem it in a timely fashion at par for the US dollar. Meanwhile, the assets in the reserve have to be segregated from the proprietary assets of the issuer and must be held in custody with state or federally chartered depository institutions or asset custodians. The reserves must also be subject to an examination by independent auditors at least once a month.
U.S. SEC Has Rejected Grayscale Spot Bitcoin ETF Application (SEC)
SEC again rejects attempt to list Grayscale Bitcoin Trust ETF.
HODL for Thee, But Not for Me (Dirty Bubble Media)
The tale of a whale who took Solend’s money (Amy Castor)
Crypto collapse latest: the contagion spreads (Attack of the 50 Foot Blockchain)
Ver’s nickname in the industry is “Bitcoin Jesus”
The sinking of Voyager (Coppola Comment)