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Genesis jitters keep investors on edge as contagion risks grow

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    • Genesis, FTX and China flag on phone

    In this issue

    1. Genesis: End times?
    2. FTX: The big wind-up
    3. Chinese NFTs: Pixel loss

    From the Editor’s Desk

    Dear Reader,

    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,

    Angie Lau,
    Founder and Editor-in-Chief
    Forkast

    1. What’s that sucking sound?

    Crypto lender Genesis is at the center of fears about contagion in the industry following the collapse of FTX. Image: Canva

    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.

    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. 

    And that has led to a dramatic change in crypto investors’ appetite for risk. Capital has flowed out of crypto quickly, and sentiment has been consistently poor for months. 

    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?

    Creditors of bankrupt crypto exchange FTX are already counting the cost as a clearer picture of the firm’s finances emerges. Image: Getty Images

    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.

    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

    ‘Digital collectibles,’ known to the world outside China as NFTs, appear to be losing some of their appeal on the mainland, where state media has repeatedly criticized the sector. Image: Envato Elements

    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.

    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. 

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