Crypto Contagion Spreads
BlockFi and FTX Become BFFs
As meltdowns continue in crypto and the broader economy, there is fear of contagion spreading across the entire crypto sector. While a string of lending platforms and crypto hedge funds fall into dire straits, Sam Bankman-Fried has emerged as somewhat of a backstop for the industry.
Last week his quant Alameda Research gave a line of credit to crypto broker, Voyager Digital. This week, his exchange, FTX, extended a $250 million credit facility to BlockFi, in order to provide ongoing security and economic safeguards to BlockFi customers and clients.
Unlike traditional loans, a credit facility is over an extended period of time and allows for more funds to be borrowed under the same agreement instead of having to re-file for a new loan every time money is needed. Founder and CEO of BlockFi, Zac Prince, wrote in an official press release:
"This agreement also unlocks future collaboration and innovation between BlockFi and FTX as we work to accelerate prosperity worldwide through crypto financial services. This is a significant step forward in our continued commitment to the strength and accessibility of cryptocurrency markets."
Later in the week, the Wall Street Journal announced that FTX was also in talks to acquire a stake in BlockFi.
There are some nuances to these deals that are worth noting: the credit-line gives FTX the option to buy BlockFi at “zero price”, which would basically wipe out existing shareholders. Some of those shareholders, including crypto investment firm and long-time BlockFi backer, Morgan Creek Digital, are apparently trying to scrape together competing offers — providing a counter equity finance offer would be a way for them to try to protect their investment.
According to a leaked call obtained by CoinDesk, BlockFi had a valid reason to preliminarily accept FTX’s terms: FTX made the only offer for emergency funds that would not subordinate client assets to the rescuer. As CoinDesk explained, this means that “unless BlockFi went with FTX, its depositors would have had to wait in line behind the new lender to be repaid”.
Bankman-Fried remarked of the credit-line:
"BlockFi's team has always demonstrated a strong bias towards prudent risk management and swift action. Protecting customer assets is their top priority which allows them to operate from a position of strength. FTX is excited to partner with BlockFi, a leader in the digital asset ecosystem, to offer first-class products to customers."
As for Morgan Creek Digital’s investment, managing partner Mark Yusko said in the leaked call:
“It's not over, but it is definitely looking dark.”
Perhaps BlockFi would be in better standing if a large chunk of their capital reserves hadn’t been extorted from them earlier this year.
We’ll hear more about the fate of BlockFi in the coming week.
Celsius Update
Competing crypto lending firm, Celsius, has also been affected by falling markets. In May this year they had $12 billion in assets under management, and then in June decided to freeze accounts and halt withdrawals due to extreme market conditions. They said the decision was made in order to “stabilize liquidity and operations”, and in return they have received tremendous backlash from customers.
Since this announcement, they have hired restructuring consultants from at least 2 firms in order to prepare for a potential bankruptcy (including Alvarez & Marsal, and Akin Gump Strauss Hauer & Feld).
Meanwhile solutions for Celsius are also being floated from the crypto community, such as the BnkToTheFuture Celsius Recovery Plan from Simon Dixon.
Dixon argues that traditional financial solutions will leave investors in the lurch, and that innovative financial solutions like the one they had previously offered to Bitfinex after their 2016 hack will be needed:
“In 2016, Bitfinex needed a plan to recover from their hack and the company I co-founded, BnkToTheFuture.com, supported them and executed a recovery that involved security tokens, debt and equity and gave investors a very high return for the high risk they took.”
Celsius published a blog on June 19th asking for more patience and notifying clients that they will be temporarily pausing Twitter posts and AMAs:
“As has been a priority since our company’s inception, we maintain an open dialogue with regulators and officials. We plan to continue working with regulators and officials regarding this pause and our company’s determination to find a resolution. We are pausing our Twitter Spaces and AMAs to focus on navigating these unprecedented challenges and seeking to fulfill our responsibilities to our community.”
CBDCs Are Still A Bad Idea
Congressman Jim Himes (D, CT) laid out his support for a US Central Bank Digital Currency in a 15 page white paper to congress. In it, he addresses common concerns lawmakers have often cited as causes for not proceeding forward:
“The answer is at least threefold:
1) a U.S. CBDC, by exclusively leveraging the full faith and credit of the U.S. government, could be a uniquely secure and trusted platform for innovation;
2) as the digital equivalent to a physical U.S. dollar, a CBDC is a likely vehicle for preserving or even buttressing the dollar’s position as the global reserve currency of choice, and
3) a CBDC might have trust and cost advantages that encourage the unbanked and underbanked to participate more comprehensively in the financial system”.
The proposal, which is divided into 10 sections, aims to illustrate in plain-language how an American CBDC could be implemented by the central bank and used by individuals, merchants, and intermediaries.
Source: CBDC White paper, Rep. Himes.
Congressman Himes also addressed the risks associated with CBDCs and pointed out that different situations call for different procedures:
“A U.S. CBDC should be regarded as an alternative rather than a substitute for commercial money and payment systems. Therefore, the architecture and characteristics should not ‘squeeze out’ activity more efficiently or appropriately provided by commercial entities.”
It’s worth remembering that Congressman Himes is responsible for the terrifying “special measures” provision in the America COMPETES Act, that would essentially have given the Treasury Secretary unchecked and unilateral power to ban crypto:
For those who have jumped onto the crypto train because they are tired of the surveillance of the existing monetary system and are looking for alternatives where supply isn’t at the whim of government bureaucrats, obviously a CBDC isn’t a solution.
Coinbase’s New Strategy
Coinbase, the multi-billion dollar crypto exchange, is making changes to their platform in an effort to keep the ship sailing. In conjunction with releasing their newly redesigned mobile wallet and new NFT marketplace, Coinbase is eliminating their Coinbase Pro platform. The features of this service will be gradually absorbed into Coinbase Advanced Trade. According their official blog:
“Advanced Trade is equipped with all the capabilities of Coinbase Pro, but upgraded with the most seamless Coinbase experience to make informed trades, faster and easier.
Advanced Trade offers more in-depth technical analysis, advanced real-time order books, and charting powered by TradingView to help customers research and analyze crypto markets before making investment decisions”.
Ronaldo strikes NFT deal with Binance
International soccer star, Cristiano Ronaldo, has signed an exclusive sponsorship deal with Binance to provide digital NFTs of the athlete and his greatest moments. CEO of Binance, Changpeng Zhao, expressed his praise for the fast-footed legend:
“Cristiano Ronaldo is one of the world’s best footballers, and has transcended sport to become an icon in multiple industries”
Despite the current massive volatility of the crypto sector, Ronaldo is optimistic about the deal:
“My relationship with the fans is very important to me…so the idea of bringing unprecedented experiences and access through this NFT platform is something that I wanted to be a part of.”
By Will Sandoval, NBTV Associate Producer, and Naomi Brockwell.