In this issue
- Celsius: Cold comfort
- Credit Suisse: Mountains of trouble
- BSN: Going global
From the Editor’s Desk
“Take the money and run” may be the most basic M.O. for someone engaged in a robbery, but it’s hardly a good look for someone engaged in running a company.
Particularly not if that money comes from members of the public who entrusted it to you to grow. And particularly in an industry such as cryptocurrency, which — despite the best efforts of the overwhelming majority of those working hard to develop it — suffers a disproportionately large image setback every time there’s even the faintest whiff of bad behavior.
Whether Celsius Network founder Alex Mashinsky’s alleged withdrawal of US$10 million in May from the now-bust crypto lender might have been sufficiently egregious to warrant legal sanction is a matter for the courts. But coming as they have, while investors in other bankrupt crypto companies are still licking their wounds following the Terra LUNA debacle, and as crypto valuations continue to struggle, the allegations are unwelcome, to say the least.
No less a figure than Galaxy Investment Partners Chief Executive Mike Novogratz — himself the target of some people’s ire due to his backing of Terra — called out undesirable conduct in the industry at last week’s TOKEN2049 conference in Singapore, describing Celsius’s operating practices as “aggressively irresponsible.”
And this week, a contrast between the perceived risks associated with crypto and those linked to traditional banking has materialized, as Credit Suisse and Deutsche Bank begin to look as wobbly as they did amid the global financial crisis that arguably spawned the crypto phenomenon 14 years ago.
But do we see those storied institutions — despite the somewhat dubious reputation of Swiss banking through the ages and Deutsche’s direct role in the crisis — subjected to the same level of suspicion or sanction as upstart crypto businesses?
Not so much. And for that, we have people in our industry who tarnish its delicate and very much still-developing reputation for trustworthiness to thank.
Until the next time,
Founder and Editor-in-Chief
1. Mercury rising
By the numbers: Alex Mashinsky — over 5,000% increase in Google search volume.
Bankrupt crypto lending platform Celsius Network is once again making headlines, as its founder and former Chief Executive Alex Mashinsky is accused of withdrawing US$10 million from the platform only weeks before it froze customer accounts in June.
- Mashinsky resigned as Celsius’s CEO on Sept. 27. According to a report by the Financial Times, he allegedly withdrew US$10 million of cryptocurrency from the platform in May. The company is expected to submit details of Mashinsky’s transactions to a court later this week.
- Mashinsky “withdrew a percentage of cryptocurrency in his account, much of which was used to pay state and federal taxes,” a spokesperson for Mashinsky said.
- The spokesperson added that Mashinsky and his family still held US$44 million in frozen crypto assets with Celsius following the withdrawals, which he had voluntarily disclosed to the Official Committee of Unsecured Creditors during bankruptcy proceedings.
- The company halted user withdrawals, swaps and transfers in June, citing “extreme market conditions,” after assuring customers just days earlier that it was financially stable. Celsius filed for Chapter 11 bankruptcy on July 13.
- Last month, Mashinsky presented plans to restructure the company as a crypto custody business that would charge customers fees for certain transactions. Celsius also sought court approval to sell or exchange its stablecoin holdings for U.S. dollars to generate liquidity and help fund its operations. A hearing was scheduled for Oct. 6 to discuss the proposed stablecoin sale, according to a court filing.
- The U.S. Department of Justice (DOJ) is trying to block Celsius’s request to sell its stablecoin holdings and reopen withdrawals for select customers, citing a lack of financial transparency on the part of the crypto lender.
- In a filing last week to the Bankruptcy Court for the Southern District of New York, William Harrington — a U.S. Trustee for the DOJ — argued that filing such a motion should not be considered until the completion of an independent examiner’s report on the company’s operations. “The motions are premature and should be denied until after the examiner report is filed. First, the withdrawal motion seeks to impulsively distribute funds to one group of creditors in advance of a fulsome understanding of the debtors’ cryptocurrency holdings.”
- The DOJ’s decision adds to objections filed last week by the Texas State Securities Board, the Texas Department of Banking and the Vermont Department of Financial Regulation. The three entities oppose Celsius’s proposed stablecoin sale, saying that the company could use the funds to resume operating in alleged violation of state laws.
- The strength of the opposition to Celsius’s plans stems largely from the fact that the crypto lender is seeking to liquidate stablecoins held by debtors without providing information on their ownership, segregation or the impact of their sale — prompting the move’s characterization as “premature” by the DOJ.
- According to Harrington, Shoba Pillay of the law firm Jenner & Block has been appointed as an independent examiner in the case. Pillay will have around two months to prepare and file her report on the company in an attempt to bring more transparency to its assets and liabilities.
Forkast.Insights | What does it mean?
The collapse of Celsius has left tens of thousands of investors unable to access funds locked in frozen accounts, and severely dented the reputation of centralized finance as one of crypto’s growth engines.
But the silver lining for long-term observers of Web3 is that crypto collapses — and the insalubrious stories that typically follow them — are being resolved much faster by law enforcement than before.
When Japanese exchange Mt. Gox collapsed in 2014, it took eight years for investigators to track down most of the crypto that had been lost so it could be returned to investors. By contrast, the collapse of Celsius was hauled before U.S. courts within weeks.
Whatever the possible motives for Mashinsky’s alleged withdrawal of US$10 million just ahead of the company’s collapse earlier this year might have been, the matter will now be settled in court. This is a good sign.
Almost a century ago, a British judge uttered the words: “Not only must justice be done; it must also be seen to be done.” This sentiment has become synonymous with the notion that law enforcement agencies must demonstrate to society they can and do hold bad actors to account.
Although the growing role of regulation, law and enforcement in the crypto space may dismay some of the community’s most libertarian members, for everyone else, it is making crypto a safer place to put your money.
2. Banking crisis brewing?
By the numbers: Credit Suisse — over 5,000% increase in Google search volume.
Cracks are appearing in the European banking sector as Credit Suisse and Deutsche Bank suffer distressed valuations. The two lenders’ credit default insurance levels are approaching levels not seen since the 2008 financial crisis. Bitcoin appears to have reacted by initially slipping to as low as US$19,065 early in the week before rising above US$20,000 for the first time in two weeks. Ether also saw gains — increasing by 0.5% over 24 hours to trade at US$1,354, as of midweek Asia time.
- Shares of Credit Suisse plunged nearly 10% in Europe’s morning trading session on Tuesday, as bank executives were reportedly reassuring major investors of the Swiss lender’s financial health amid growing concerns over its liquidity and capital position.
- Responding to the share price drop, Credit Suisse Chief Executive Ulrich Körner sent a company-wide memo seen by Reuters on Friday aiming to reassure staff about the bank’s position, in which he said: “I trust that you are not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank.”
- The Swiss bank’s credit default swaps, which offer protection against the company defaulting, have risen by more than 50 basis points over the past two weeks, spiking sharply to 250 basis points on Friday, indicating investor concern over its financial health.
- Adding to the concerns, the bank has reportedly approached investors about potentially raising more capital, a move subsequently denied by an unnamed Credit Suisse executive speaking to the Financial Times.
- The bank’s board is due to present a restructuring plan to address investor concerns and revamp the business on Oct. 27, alongside its third-quarter results. The restructuring would leave a US$4.1 billion gap in Credit Suisse’s balance sheet, according to analysts at Deutsche Bank.
- Investors are also concerned over a potential collapse of Deutsche Bank, as the lender’s credit default insurance is approaching 2008 levels. Deutsche is currently trading at 0.3 times tangible book value, a level that investors consider highly distressed.
Forkast.Insights | What does it mean?
When two of Europe’s largest and most prestigious banks are in distress, investing in volatile assets such as crypto becomes an even harder sell.
Shares of the Swiss banking giant plummeted 12% to an all-time low on Monday before recovering almost all their losses. At the open on Tuesday in Zurich, the lender’s stock gained 5%.
Turbulence in traditional markets is prompting institutional investors to withdraw from more exotic assets such as crypto. Only US$1.36 billion of venture capital was invested in blockchain in August, a 12-month low and the fourth consecutive month-on-month decline in capital inflows into the sector.
Although some news outlets suggest that activity is up in crypto, the buzz seems to be around short positions, showing increasingly negative sentiment toward the crypto industry. Not even Ethereum’s Merge seems to have been enough to perk up investor appetite, with the world’s second-largest cryptocurrency suffering sizable outflows.
As crypto is tied ever closer to the fortunes of traditional finance, the Web3 winter seems no closer to a thaw.
3. Chinese characteristics
China’s state-backed Blockchain-based Service Network (BSN) wants to go international, but some experts say its links to Beijing could make it a hard sell overseas due to concerns related to data security and privacy.
- Early last month, BSN launched its Spartan Network, which it bills as an international platform for public blockchains available only outside of China.
- But to go global, BSN will need to convince potential overseas users that it is independent of Chinese state control, that data will be safe, and its transactions won’t be censored, Zennon Kapron, founder of fintech consultancy Kapronasia, told Forkast.
- The BSN Spartan Network supports three public chains — Ethereum, Cosmos and PolygonEdge — in “non-crypto versions” that are hard forks of their original public chain frameworks, BSN said in a white paper released last month.
- BSN says a non-crypto network of this type — which aligns with China’s increasingly hardline stance of allowing blockchain technology but banning crypto — could appeal to businesses that want to test their blockchain capabilities but are put off by the volatility of crypto prices.
- However, that doesn’t mean developers can’t issue tokens or cryptocurrencies using layer-2 applications on Spartan, Yifan He, BSN developer Red Date Technology’s chief executive, told Forkast in an upcoming episode of Word on the Block.
Forkast.Insights | What does it mean?
In its two-and-a-half years of existence, BSN has already found its reputation compromised, regarded by some experts as a blockchain version of China’s Belt and Road international infrastructure initiative, which has been characterized as a debt trap for unwary developing countries that sign up for it.
Yaya Fanusie, an adjunct senior fellow at Washington-based think tank the Center for a New American Security and a former Central Intelligence Agency analyst, told Forkast that BSN would find its image problematic and that its association with the Chinese state will present a major challenge for its international push.
The launch of BSN Spartan is an unambiguous statement of China’s intent to build infrastructure for Web3, and it has so far encountered little resistance from the U.S. because, according to Fanusie, China’s blockchain aims are not the highest priority issue for American policymakers.
However, some in U.S. policy circles cite the concerns the U.S. government had over Chinese telecommunications supplier Huawei Technologies and 5G infrastructure development and echoes of similar concerns in BSN and Chinese blockchain.
Despite BSN’s state ties, Tim Bailey, Red Date’s vice president of global sales, told Forkast that Chinese authorities had no involvement in BSN’s international network and that BSN Spartan would be governed by the Singapore-based BSN Foundation, with Red Date being the only Chinese company among the foundation’s members.
At the end of the day, Red Date says it’s a private business that just needs to make money. It appears now to have found a niche market that it thinks may embrace a crypto-less blockchain ecosystem. BSN Spartan’s non-crypto foundation may indeed appeal to some businesses.
A blockchain ecosystem “with Chinese characteristics” — a description that the Chinese Communist Party is fond of applying to its blockchain development model — is being offered for wider adoption, with executives having held a roadshow in Europe, the Middle East and Asia last month. It remains to be seen how receptive potential users are toward the network and if its attempts at branding itself as an independent entity can help it overcome the handicap of its links to the Chinese government.
Correction: Oct. 6, 2022
An earlier version of this newsletter incorrectly suggested Celsius Network was an example of decentralized finance. Celsius was centralized finance.