By Amy Castor and David Gerard
“I’ve believed crypto to be in a credit bubble, for years. I think we’re shortly to find that embedded leverage in the sector was far, far higher than anyone, even its most ardent critics, expected. If this is true… it will not be pretty.” — Patrick McKenzie
The FTX legal team entering the court
FTX bankruptcy: first-day hearing
The Bahamas is holding at least a portion of $500 million of cryptos transferred out of FTX between November 11–12, and appears to be trying to keep the money in FTX Digital Markets — a Bahamas company — out of the Delaware bankruptcy. But the Delaware judge, John Dorsey, was quite unimpressed with the New York bankruptcy lawyers’ arguments, and this hearing was in Delaware. [Elliptic; FT Alphaville, archive]
FTX’s current management — John Jay Ray’s financial hazmat team — wants to keep FTX’s top 50 creditors anonymous, over the Trustee’s objections. “For most of our customers, we don’t have physical addresses.” Judge Dorsey will keep the list anonymous for now. The list will stay redacted at least until a December 16 evidentiary hearing, and may stay redacted even then.
The UK and China have the largest shares of FTX clients (we’re not sure if that’s by number or dollar amounts). The Cayman Islands and Virgin Islands have more FTX customers — but these are both tax havens, so who knows where the actual owners of those accounts are located.
This differs from info researched by CoinGecko, who says that most clients came from South Korea, Singapore, and Japan. [Twitter]
FTX lawyers from Sullivan & Cromwell gave a presentation explaining how FTX got into this whole mess. [Slides, PDF]
One slide showed a list of companies backed by FTX. These included Sequoia — the company that also invested $150 million in FTX — along with a bunch of AI research firms and the developer of the video game Storybook Brawl. That’s the game whose rankings on Steam plummeted after FTX bought the company and said they would put NFTs into it.
James Bromley from Sullivan & Cromwell says FTX wants to sell some subsidiaries that they believe “are self-sufficient and robust and have generated interest from others in the marketplace.”
FTX has suffered huge attrition since the bankruptcy filing. About 260 employees have left the company out of 850. [Twitter]
Sam Bankman-Fried has consulted with his father, a Stanford Law School professor, but also with his father’s colleague David Mills, who “teaches classes in Criminal Law and White-Collar Crime.”
Any ordinary bankrupt crypto firm would be doing so much better already — tweet the stuff that crypto suckers have come back after so many times before, and keep your head down. But SBF just will not shut up. For all his IQ points and great brain, SBF is acting dumber than the typical crypto scammer.
The SEC was told to back off from FTX
The SEC tried to look into FTX earlier this year, but eight members of the US Congress — “the blockchain eight” — wrote to SEC Chair Gary Gensler in March telling him to back off. [Letter, PDF]
Five of the eight members received campaign donations from FTX employees, ranging from $2,900 to $11,600. Rep. Ted Budd (R-NC), one of the signatories, received $500,000 in support from a Super PAC created by FTX Digital Markets co-CEO Ryan Salame. [Federal Election Commission; The American Prospect]
We know that SBF gave $39 million in political donations during the 2022 midterm elections. Salame gave $23 million during the same election cycle. SBF is widely touted as a Democratic donor, but he has also given lots of money to Republicans. [CNBC]
In other news, prosecutors from the Southern District of New York have filed to involve themselves in the Bahamas bankruptcy proceeding.
Genesis sets Digital Currency Group teetering
Genesis Trading is where Wall Street money enters crypto. The New York firm offers exchange services, lending, and custody for institutional investors.
Genesis is owned by Barry Silbert’s Digital Currency Group (DCG) — a huge crypto conglomerate that owns a slew of other companies, including media outlet CoinDesk and Grayscale, the firm behind the Grayscale Bitcoin Trust (GBTC).
One component of Genesis Trading is Genesis Global Capital, which offers institutional investors low-interest loans to amplify their trades.
Borrowers use the funds to short cryptocurrencies, hedge investments, or invest in yield-generating platforms. They loved the cheap credit, especially during bitcoin’s bull run. In Q4 2021, Genesis Global Capital had $50 billion in loans. [Bloomberg]
Many of these loans were reportedly unsecured — if their customer made risky bets and went belly-up, Genesis Global Capital had nothing to collect on. They would just be completely screwed. [Quartz]
Even when the loans were secured by collateral, they were still risky — because Genesis Global Capital would rehypothecate those loans.
Repeated rehypothecation is one of the ways that Celsius got into trouble. Traditional finance has strict rules on rehypothecation for good reason! It’s one of the tricks that caused the 2008 financial crisis!
One of Genesis’s biggest customers was Three Arrows Capital (3AC), who they’d lent $2.4 billion. After 3AC blew up in May, DCG assumed $1.2 billion of the liabilities to keep the hit off Genesis’ books. Genesis had been the single largest creditor of 3AC. [Coindesk; Twitter]
Genesis also had money on FTX. As FTX was falling apart, Genesis tweeted on November 8 that they had no exposure, and it was fine. Two days later, Genesis admitted they had “~$175M in locked funds in our FTX trading account,” and they were not fine. [Twitter; Twitter]
Genesis scrambled to find more capital. Genesis and DCG needed $1 billion in emergency credit by 10 a.m. EST on November 14, but didn’t get it. Even Binance turned them down. [WSJ, paywalled; Twitter]
So two days later, Genesis suspended withdrawals, and it’s currently teetering on the edge of bankruptcy. They’ve hired a restructuring lawyer. [NYT]
Gemini Trust was exposed to Genesis
If you were a CeFi company promising to pay large interest rates on crypto deposits, you were probably a Genesis customer.
One of Genesis’s biggest customers is Gemini Trust, run by the Winklevoss twins, that operated its own “yield” program, Gemini Earn, for retail investors. [Bloomberg]
Gemini was supposed to be the safe exchange — but it was exposed to risks via Genesis. There’s now $700 million that Gemini Earn customers can’t withdraw — because it’s stuck on Genesis. If it’s still there. [Bloomberg]
DCG eyes up the piggy bank
DCG is not bailing out its subsidiary Genesis this time around, because:
- they think they can get away with not doing so;
- they probably don’t have the money (or cryptos).
“Importantly, this decision has no impact on the business operations of DCG and our other wholly owned subsidiaries,” said Amanda Cowie from DCG. So that’s nice. [Coindesk]
A leaked letter to investors reveals that DCG’s balance sheet is a morass of internal loans between DCG companies — including a $575 million loan to DCG from Genesis. Most of the actual revenue comes from Grayscale. [Dirty Bubble]
Grayscale is the largest single holder of bitcoin, via the Grayscale Bitcoin Trust, which holds nearly 633,600 BTC. Grayscale is refusing to show proof of reserves, as is the fashion these days — but it’s probably in there, right? [CNBC]
GBTC has dropped in price by more than 74% over 2022. It’s now trading at a 42% discount to the value of the bitcoins that went into it. [Bloomberg]
GBTC is Grayscale’s cash cow. Grayscale earns a 2% management fee, no matter how GBTC is doing — that’s $200 million a year.
Amy has written previously how Grayscale is the Hotel California of bitcoin — coins go in, and there’s no mechanism to redeem them.
If Grayscale did redeem them — say, by unwinding the trust — that would put hundreds of thousands of unsaleable BTC onto the market.
If DCG fails, then an administrator will see that big fat bitcoin piggy bank in the corner, and unwind the trust.
This was always going to be the end for GBTC — given that it failed to become an ETF before the 2021 bitcoin bubble popped.
Silvergate is the actual-money banker to almost the entirety of US crypto. In fact, Silvergate’s customer base is almost entirely crypto companies.
Crypto companies love Silvergate because the bank’s Silvergate Exchange Network (SEN) lets them transfer dollars any time of day. Silvergate loves its crypto customers because it doesn’t pay them any interest. Silvergate also lent dollars to Michael Saylor of MicroStrategy, taking bitcoins as collateral. [Business Wire]
If Silvergate ever has to pull the plug, almost all of US crypto is screwed.
FalconX, a crypto trading desk for big traders, sent an email to its clients on 18 November stating it would not send or receive money via Silvergate: “Out of an abundance of caution for our customers, we will not be using Silvergate SEN and wires, effective immediately and until further notice.” Silvergate stock fell on the news.[Twitter; WSJ, paywalled]
What are FalconX so worried about? Silvergate was one of FTX’s banking partners, meaning Silvergate was involved in the Enron of crypto. Sam Bankman-Fried took customer money from FTX and used it to cover Alameda’s losses. Now $8 billion is missing. At least some of that money was wired through Silvergate. [Doc 44, PDF]
Silvergate issued a statement on November 11, saying their exposure to FTX was limited to deposits. Silvergate CEO Alan Lane says the bank had about $1 billion in deposits for FTX but no loans to FTX: [statement, archive]
As of September 30, 2022, Silvergate’s total deposits from all digital asset customers totaled $11.9 billion, of which FTX represented less than 10%. Silvergate has no outstanding loans to nor investments in FTX, and FTX is not a custodian for Silvergate’s bitcoin-collateralized SEN Leverage loans. To be clear, our relationship with FTX is limited to deposits.
The deposits are not the problem!
The bad thing Silvergate did seems to be that money FTX customers deposited for FTX went straight to Alameda — which was fine with everyone, until bankruptcy filings showed that these two entities are utterly separate. Silvergate should never have done this.
This is one of the stupendous range of things that is a Bank Secrecy Act violation, especially if you’re literally an OCC-chartered, FDIC-insured bank with an account at the Fed. This is the kind of thing that Silvergate could lose its license over.
According to EventLongShort, the folks in Silvergate’s risk department may have ignored KYC/AML because “the deposit growth was so massive and attractive.”[Twitter]
SBF says the reason the money went to Alameda instead of FTX is that they just … forgot! “It looks like people wired $8b to Alameda and oh god we basically forgot about the stub account that corresponded to that and so it was never delivered to FTX,” was what SBF told Kelsey Piper at Vox. [Vox]
Bitfinex’ed says that Silvergate has been sending money via the wrong account name since 2019. “I know of instances where people withdrew money from Bitfinex and the money came from Silvergate … and the sender was their own name, not Bitfinex. They did not have a bank account at Silvergate.” [Twitter]
Silvergate appointed a new risk officer, Kate Frahe, on November 15. The press release doesn’t say what happened to the previous one. [Compliance Week]
Voyager had done a deal for FTX US to buy the company’s assets and take on its customer base, paying back 72 cents on the dollar to creditors. The gap was the hole left by 3AC going bust, plus the cost of bankruptcy. Everyone had more or less accepted this — a 28% haircut wasn’t ideal, but it was better than losing 100%.
Then FTX imploded. FTX US was caught up in the implosion, and is part of the bankruptcy estate.
So, Voyager has to reopen the bidding! [Press release]
There is no reliable news of any new prospective buyer for Voyager. Binance CEO Changpeng Zhao has talked about buying the company, but there’s nothing solid as yet. [CoinDesk]
Voyager’s Unsecured Creditors’ Committee (UCC) held a Town Hall on November 4. Of course, most of their plans are now obsolete. The UCC’s next Town Hall will be on November 24 at 2:00 p.m. ET. [Twitter space; notice, PDF; Twitter]
Three Arrows Capital
Zhu Su, the cofounder of 3AC, says he wants to live a quiet life in the woods. “The sudden pain of business failure and loss of purpose, as a golden child of the industry + biz cycle more broadly, was as difficult as the ensuing ostracization and demonization.” Poor fellow. [Twitter]
How’s the other cofounder Kyle Davies doing? Guy Linked To Huge Crypto Meltdown Says It’s Just a Coincidence That He’s Hanging Out in a Country With No Extradition to United States. “It’s just a good place to be.” [Futurism]
In Singapore, 350 international investors are bringing a class action suit for $56.9 million against Terraform Labs. They claim that UST was fraudulently represented as a stable $1 store of value, so Terraform needs to compensate them for their losses. The suit also names Kwon, former head of research Nicholas Platias, and the Luna Foundation Guard (LFG). The case is being brought by Singapore firm Drew & Napier. [Decrypt; WSJ, paywalled; Law.com, paywalled]
Binance is fine, and nothing is wrong! Probably!
Binance is currently putting together a huge crypto bailout fund. A lender of last resort for crypto. CZ is talking about buying out both Voyager and Genesis. [Bloomberg]
Bitfinex’ed says that the bailout fund is for Binance itself, because it’s as hollow a shell as literally every other crypto company we’ve ever got the chance to look inside. But what does that guy know. [Twitter; Twitter: Twitter]