In this issue
- Genesis: End times?
- FTX: The big wind-up
- Chinese NFTs: Pixel loss
From the Editor’s Desk
After almost three years of the Covid pandemic, one might think the world had had enough of contagions. One would be right. But contagions appear not to have had enough of us.
The latest ill to befall the cryptocurrency sector is a contagion that seems to be of the industry’s own making — a rapidly spreading wave of woe stemming directly from the collapse of FTX not even a fortnight ago.
It’s now well-known what kinds of sharp practices landed that exchange — at the time, the world’s third-biggest — in a plea for Chapter 11 bankruptcy protection. Now, the spotlight is on crypto investment firm Genesis as speculation mounts that it may be the next major player to go south.
The trouble in which Genesis finds itself can reasonably be said to have originated further back than the FTX bust — in the implosion of Terra-LUNA, which many in the industry now see with 20:20 hindsight as the writing on the wall for Sam Bankman-Fried’s once-celebrated exchange.
The fates of companies linked to Genesis — as the extent to which crypto firms’ impressive feats of leveraging become ever clearer and more concerning — are now also being called into question, as are Genesis’s own business practices.
Expect more revelations in the coming weeks and months as the severity of the contagion continues to be revealed. But don’t expect it to end anytime soon.
And don’t expect regulators to ride to the rescue — even though they will doubtless play a major role in ensuring that such reckless practices as those responsible for the recent collapses, and the other busts that seem likely to follow, are not repeated yet again once the current reckoning has been played out.
For now, one thing is clear: A number of industry players have decided to learn such lessons the hard way. In doing so, they have inflicted much collateral damage on the crypto community — and left many victims of what might be best described as a sick joke at a time when people have suffered more than enough, thanks to the other, bigger contagion.
Until the next time,
Founder and Editor-in-Chief
1. What’s that sucking sound?
By the numbers: Genesis — over 5,000% increase in Google search volume.
Genesis Global Trading, the crypto investment arm of venture capital firm Digital Currency Group, recently paused withdrawals of assets loaned to the firm’s brokerage unit, Genesis Global Capital.
- New York-based Genesis Global Trading said the decision followed “abnormal withdrawal requests” that exceeded current liquidity at Genesis Capital. The announcement makes Genesis the latest crypto-related business to face funding shortfalls after exchange FTX filed for bankruptcy protection on Nov. 11.
- Genesis Capital’s withdrawal freeze quickly spread to trading partners such as crypto exchange Gemini and South Korea’s GOPAX exchange. Digital Currency Group is GOPAX’s second-largest shareholder.
- Following the decision, Gemini also paused withdrawals on its interest-bearing Earn program, which leverages Genesis as a trading partner, saying: “We are working with the Genesis team to help customers redeem their funds from the Earn program as quickly as possible. We will provide more information in the coming days.”
- After pausing Earn withdrawals, Gemini went offline temporarily due to what it called an “Amazon Web Services EBS outage.”
- GOPAX halted interest payments and withdrawals from its crypto savings product GOFi, which also brokers products from Genesis Global Capital. The company said it had requested the repayment of all assets belonging to GOFi account holders prior to Genesis’s withdrawal freeze announcement.
- Concerns are mounting over potential contagion. Digital Currency Group lists seven main subsidiaries on its website, including Genesis and digital asset management giant Grayscale, which oversees more than US$28 billion of Bitcoin, Ether and other cryptocurrencies.
- Digital Currency Group had previously assumed liability for Genesis’s US$1.2 billion claim against bankrupt crypto hedge fund Three Arrows Capital in July — which fell victim to the Terra-LUNA collapse.
- The aftermath of Terra’s implosion is still arguably being felt in the crypto market, and it likely played a significant role in FTX’s collapse.
- Digital Currency Group also provided an emergency US$140 million to Genesis the day FTX declared bankruptcy.
- Despite the capital injection, Genesis is reportedly seeking a new loan of US$1 billion, according to a fundraising document cited by the Wall Street Journal.
- U.K.-based financial services firm B2C2 might also offer Genesis some additional capital. B2C2 founder Max Boonen tweeted that his company “wishes to extend an offer to purchase loans from Genesis Trading’s book to alleviate the current liquidity shortfall.”
Forkast.Insights | What does it mean?
During the global financial crisis that began 15 years ago, the interconnected nature of the finance sector meant that when one company fell, it dragged several others down with it. Crypto is experiencing its own version of that — a phenomenon dubbed “contagion,” and Genesis is now suffering because of it.
The key difference in the case of crypto is there’s no central bank or international monetary agency on hand to bail out failing firms. That has meant that companies caught up in the collapse of FTX are left scrambling to find buyers or file for bankruptcy protection.
Crypto companies’ swashbuckling days are coming to an end. Instead, a look and feel more like the traditional financial system is emerging. Binance CEO Changpeng Zhao, a key player in the FTX saga, has been touting plans to set up a crypto reserve to play a similar role to those of governments and central banks in the event of another collapse.
Other measures, such as proof of reserves, have also gained traction. Although decentralized finance has been promoted as a solution to the mess in which crypto has found itself, usage is still low. The bigger problem remains that crypto has a trust problem, and no amount of code has been able to fix that.
2. Where’s all the money?
By the numbers: FTX — over 5,000% increase in Google search volume.
The now-bankrupt FTX Trading Ltd., which earlier this month was the world’s third-largest cryptocurrency exchange, has started a strategic review of its global assets since filing for Chapter 11 bankruptcy protection alongside 101 affiliated companies.
- FTX’s newly appointed chief executive, John J. Ray III, said the review aimed to maximize recoverable value for stakeholders.
- Ray added that the review had so far indicated that many of FTX’s licensed global subsidiaries had solvent balance sheets and responsible management structures.
- Perella Weinberg Partners has been appointed as the lead investment bank for the process as the company starts preparing business units for sale or restructuring.
- FTX Debtors, a group composed of FTX and its 101 affiliates, has filed for interim relief from the U.S. Bankruptcy Court, which would allow the operation of a new global cash management system as well as payments to critical vendors and vendors at foreign subsidiaries. At a hearing held on Tuesday this week, lawyers agreed to consolidate the proceedings in Delaware and confirmed earlier reports that prosecutors in the Southern District of New York’s Cyber Crimes unit have launched an investigation.
- FTX Trading and its affiliates owe their 50 largest creditors about US$3.1 billion, according to a calculation by Forkast based on estimates listed in a bankruptcy filing FTX submitted on Saturday.
- The documents also showed that the three biggest creditors are owed more than US$600 million, with the largest owed US$226.3 million in unsecured claims, followed by US$203.3 million owed to the second-biggest and US$174.3 million to the third.
- “The Debtors’ investigation continues regarding amounts listed, including payments that may have been made but are not yet reflected on the Debtors’ books and records,” FTX said in the filing.
- In a bankruptcy filing from Nov. 14, FTX said it had more than 100,000 creditors and that the number could potentially exceed 1 million.
- Meanwhile, an unidentified party that hacked FTX became the 35th-largest Ethereum holder last week, with their address holding a total of 228,523.83 Ether as of November 15. The hacker reportedly stole an estimated US$477 million in digital assets from the bankrupt exchange and has since started to sell their Ether.
- On Monday, the hacker swapped 15,000 ETH worth US$16.7 million to renBTC, which was then bridged to native BTC. Crypto intelligence firm Arkham said, “the attacker is limited by the liquidity of renBTC,” making it impossible to bridge more assets at once. According to Arkham, the transaction resulted in US$312,000 of slippage, or 1.8% of the total transaction value.
- Arkham also pointed out that the attacker keeps “operating between 08:00 and 10:00 UTC … generating a new account for each operation.”
- Nick Percoco, the chief security officer at crypto exchange Kraken, alleged that the exchange knew the hacker’s identity, but Kraken hasn’t provided further information.
Forkast.Insights | What does it mean?
The more we learn about how FTX was run, the shabbier the whole crypto industry looks. In court filings, it has emerged the world’s third-largest exchange had little or no record of how it did business, splurged wantonly on property and political campaigns, and had only a hazy understanding of who was even working for it.
Against such a backdrop, it’s not difficult to see how someone managed to extract hundreds of millions of dollars of assets from FTX without raising much alarm. It’s also unclear why Sam Bankman-Fried built a back door into FTX that would allow transfers of cash without detection.
That money, now sloshing through Web3, is wreaking havoc. When the unidentified hacker began converting those stolen assets from Ethereum to Bitcoin, a slump in the price of ETH followed. That’s piling further pressure on already distressed companies that are trying to convince investors that large parts of the industry are worth saving.
The conclusions being drawn are worryingly similar to those that emerged amid the Terra-LUNA collapse earlier this year: Crypto companies tend to be poorly run, they’re often looted when things start to go wrong, and investors and traders are left picking up the tab.
Although security companies are tracking the money, that’ll be cold comfort to those who no longer hold it.
3. Digital downturn
Nearly 20 small and medium-sized NFT platforms in China are now scaling back due to industry risks and stagnating growth, according to a recent report by technology news outlet Lanjinger.
- The development comes as Chinese giants, including Tencent Music, have begun shutting down their digital collectibles operations, according to a report by Jiemian News.
- “Digital collectibles” is a phrase used in China to avoid any association with non-fungible tokens (NFTs), following criticisms of speculation in NFT trading by state media outlets.
- In the spring, the Chinese Communist Party mouthpiece Economic Daily called for stricter regulation of “digital collectibles” as NFT speculation continued in the country.
- Only a week later, three self-regulatory bodies overseeing China’s internet finance, banking and securities industries urged their members to “resolutely curb” the “financialization and securitization” of NFTs.
- China’s moves against NFT trading have spawned a side industry in which auctions of “digital collectibles” are being conducted through groups on Twitter-like social media site WeChat and other platforms.
- The Chinese government has yet to take a clear stance on NFT trading regulation.
Forkast.Insights | What does it mean?
The hype around NFT issuance and trading in China has slowed down in recent months, as more platforms close down, in part due to regulatory uncertainty.
Although Chinese regulators have yet to spell out hard and fast rules for NFTs, state media have bashed “speculative behavior” in the sector. But that hasn’t stopped Chinese consumers from buying and trading digital collectibles, and many platforms continue to offer trading services.
Pengfei Wang, chief executive of ShucangCN, an NFT platform that launched in China in January and quickly became one of the largest players, told Forkast earlier this month that it planned to establish a presence in Hong Kong early next year, as the city has just announced a more friendly policy direction for the Web3 industry.
Hong Kong could even become a “safe haven” for Chinese NFT platforms if mainland regulators continue tightening their vise over the sector. If that happens, Hong Kong will have to brace itself for an influx of Chinese NFT industry players. The city’s regulators will also need to figure out how to oversee Chinese companies in a sector that has come under much mainland heat, under its “one country, two systems” approach to governance.