November 27, 2022 | Issue 43
"CRYPTO IS DEAD, RIGHT?," ASKED STEPHEN AT OUR THANKSGIVING DINNER TABLE.
I should have anticipated my brother-in-law's question by having a concise answer on hand. Instead, I leaped into a long rambling response that caused his eyes to glaze over. Darn, another missed opportunity to impart knowledge.
Stephen is a news junkie, but mostly political news. However, when a business news story about crypto dominates all media it's impossible not to read the headlines and see the face of a young man with a head of curls.
Sam Bankman-Fried is crypto's face of shame. Pharma has Elizabeth Holmes of Theranos. Energy traders had Ken Lay of Enron. Commercial real estate owners had Adam Neumann of WeWork. Financial advisors had Bernie Madoff. (Hmm, how long before HULU has a series about FTX?) As more of Bankman-Fried's disastrous practices are uncovered, crypto industry leaders are on the defensive. Investors are asking tough questions, like "How can you prove to me that you are not using customer funds for risky loans?"
Expect to see adequate reserves held on the blockchain where anyone can verify the balance. There will be thorough financial audits by reputable accounting firms and, Congress will step in with legislation. FTX's failure is horrible for their customers, investors, and those interested in crypto who have been watching from the sidelines. It set the industry back because its failure and inevitable contagion to other weak companies will support crypto naysayers. The industry however, will adjust, improve, and move ahead.
At my Thanksgiving dinner, I could have said all this to Stephen, but that wouldn't have left time to debate politics. If you want to see past issues of my crypto newsletter, go Crypto News for Realtors. Also, check out my YouTube videos and Podcast Crypto News for Realtors wherever you get your podcasts. Have a productive week and stay crypto-curious! Rich Hopen email@example.com | 908.917.7926
PS. This newsletter is supported by home buyers and sellers in NJ who retain me as their real estate agent. If you know of anyone looking to buy or sell a home, please reach out to me.
PPS - Here's our Thanksgiving menu if you want some ideas for 2023.
▸ Uh Oh, Is Crypto Lender Genesis Going to Fail?
As in any ecosystem, the crypto ecosystem is built on connections. When FTX collapsed, we knew that its failure would impact many other companies. Over the past week, a lot of attention has been on Barry Silbert and Digital Currency group, the owner of Genesis Global Capital (GCD).
Genesis was a trading partner with FTX and had $175M in assets with FTX. The money was frozen when FTX filed for bankruptcy.
Shortly after FTX's bankruptcy, Genesis halted withdrawals and on Tuesday, November 22, Silbert said, "Genesis leadership and their board decided to hire financial and legal advisors and the firm is exploring all possible options amidst the fallout from the implosion of FTX.” Essentially, Genesis is seeking expert counsel to avoid bankruptcy.
A failure of Genesis could be worse than the FTX failure.
The Financial Times said, "Genesis is the biggest trading desk for professional investors in cryptocurrency markets." The Genesis website shared these 2021 stats: $116.5B in Spot Volume Trading (financial instruments are traded immediately), $130.6B in Loan Origination (loans provided), and $53.8B in Derivatives Trading (financial contracts, usually leveraged, that either mitigate or assume risks).
Genesis was the biggest creditor to Three Arrows Capital when it went into bankruptcy. Genesis' parent company GCD covered the $1.1B loss.
Genesis sits at the center of crypto markets. Large crypto traders ("whales") and family offices rely on Genesis to pay the yield on their crypto funds. Also, retail crypto exchanges like Gemini use Genesis for their "Earn" product.
DCG has over $2B in debts.
Other crypto companies owned by DCG include Grayscale, the world's largest digital currency asset manager and Foundry, the largest bitcoin mining pool.
▸ Binance Shares Reserve Info
Binance, the largest crypto exchange, released its proof-of-reserves systems to show the world it is financially sound. For those holding bitcoin at Binance, the company showed it has a surplus of 6,742 bitcoin, or $111M. Overall, Binance has a 101% reserve ratio.
▸ Perils of a Crypto-Friendly Bank
Silvergate Capital Corp. remade itself from a small commercial lender to a bank serving the crypto market. It had FTX deposits, but no loans to FTX, according to company statements. However, given its close ties with the crypto industry, it is being viewed as vulnerable. The Wall Street Journal reported that "short bets against Silvergate have doubled this year. It is the second-most heavily shorted regional bank, based on percent of shares outstanding, according to data from S3 Partners."
Silvergate has an exchange network that connects the bank accounts of investors to exchanges. This is known as an on-ramp to cryptocurrency exchanges.
CRYPTO CLASS – A Run On The Crypto Bank
Whenever there is bad news about a crypto company, customers become nervous, panic ensues followed by requests from customers to withdrawal their funds. If the company cannot assure its customers that they are solvent, frenzied withdrawals overload the system resulting in a crisis for the bank and its customers. We saw this two weeks ago. On November 6, 2022, the largest crypto exchange, Binance, announced on Twitter that is was selling hundreds of millions of FTX's token FTT. The announcement precipitated a "run on the bank" and $4B was withdrawn that day. The next day, $6B. And then on November 8, FTX could not meet customer withdrawal requests. Three days later on November 11, the CEO resigned and the company filed for bankruptcy. To most of us, bank runs are associated with the Great Depression and the classic movie "It's a Wonderful Life." In the 1930s, people heard stories about banks not being able to return funds to customers and panic spread across the country. In 1933, the government responded to the banking crisis by creating the Federal Deposit Insurance Corporation (FDIC) which insured customer deposits. Today, the amount is $250,000. Banks become FDIC insured by meeting rigorous standards.Bank customers know that their funds are safe because the FDIC protects them. If a bank is overwhelmed by withdrawal requests, the bank can borrow funds from other institutions. Also, most bank customers probably do not realize that banks do not have cash reserves on hand for all customer deposits. This is by design. It allows banks to use the capital for lending. This system is know as fractional reserve banking. There is no FDIC for crypto lenders or exchanges, especially those outside the US. However, this does not mean that bad actors can't be prosecuted for fraud and existing laws. The SEC has been aggressive in filing enforcement actions against crypto companies it believes violated securities laws. Crypto bank runs will continue. Responsible companies will support smart legislation and publish their reserve amounts in an attempt to stave off customer worries about inadequate available funds.
INFLUENCERS - People to Follow
Barry Silbert – @BarrySilbert
Silbert is the Founder/CEO of Digital Crypto Group (DCG), parent of Grayscale, Genesis Trading, CoinDesk and other companies. DCG has invested in over 200 crypto startups. Prior to DCG, Silbert sold his company, SecondMarket, to Nasdaq. Forbes estimates his network at $2B.
RESOURCES – Books, websites, podcasts, interview, articles
THE SCOOP. A podcast by The Block by Frank Chaparro with a lot of fascinating guests.
CRYPTO WORD – Rehypothecation
Rehypothecation is the practice where banks, and even the brokers themselves, use assets that have been posted as collateral by their clients for their own purposes. Clients that permit rehypothecation of their collateral can be compensated through a lower cost of borrowing or a rebate on fees. (Source: Coinmarketcap)
OH, ONE MORE THING – In the 1946 movie "It's A Wonderful Life," bank president George Bailey (played by James Stewart) tries to persuade customers not to withdraw their money during a bank run. Today, crypto CEOs try to reassure nervous customers on Twitter.