FTX Crypto Empire Update

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By Mirva Anttila

The collapse of FTX/Alameda Research sent the digital asset industry into a state of shock, and the repercussions are still being felt. Although the failure of a central counterparty behaving badly and operating in a loosely regulated offshore environment has nothing to do with the failure of digital assets, blockchain or cryptocurrencies, the interdependence between crypto companies remains strong and fears of contagion still abound.

In recent days, Sam Bankman-Fried (SBF), the former CEO of FTX (FTT-USD), has given interviews stating that he has no intention of committing fraud and denying any misuse of customer funds. The fact remains, however, that approximately $8 billion in client funds disappeared at FTX.

The narrative being promoted seems to be that SBF was young, possibly reckless, and unsure of what was going on in his own businesses. Given the gravity of what happened and its massive impact on the crypto industry, we find these claims implausible, but we will leave it to investigators to find out and judge what exactly happened. .

Centralized exchanges that show proof of reserves and liabilities will benefit

Increased scrutiny is now exercised over centralized exchanges, particularly those operating overseas, but also over others. Demands are increasing for centralized exchanges to provide proof of reserves and liabilities. The active side would show which coins and tokens are held by the exchange, while the passive side would show investors’ deposits. Both sides are important. Regular comprehensive independent audits, possibly conducted unexpectedly, would allay fears that asset transfers could take place to cover funding shortfalls and improve investor confidence. What might still not be accounted for are off-balance sheet liabilities, which would remain difficult to track. It is possible that proof of reserves and liabilities will become the norm in the industry, to the benefit of companies wishing to be transparent about their assets and liabilities.

Many believe that decentralized finance (DEFI) is the solution, but we believe that centralized exchanges will continue to play an important role in the near future, as they have convenient entry and exit routes for digital assets and have put KYC1 and AML2 procedures in place. .

The Role of Insiders in Token Issuance and Trading Needs Further Consideration

The close connection between Solana (SOL-USD) and FTX and the rise and fall of the Solana token has led to increased scrutiny of Layer 1 solutions, and questions are being raised about the viability of some of them. A particularly important area to study is the role of insiders in the issuance of tokens, the amount of issuance in the hands of the public, and the amount of real transactions that arise from the actual use of the tokens and not from the crime of tokenization. initiated.

SBF was a big supporter of the Solana network and its native token, SOL, which has fallen -95%3 since November 2021. While some of this price turbulence is most likely related to FTX, we still see an ecosystem active around Solana.

At the moment, the Ethereum blockchain continues to have the largest community of developers supporting the network and a vibrant ecosystem supporting both DeFi and non-fungible tokens (NFTs), although volumes have been dismal these last time.

Bitcoin miners under pressure

Another group of companies that we actively monitor are bitcoin miners. Some of them have been operating at a loss for a few months now, and if the price of bitcoin were to drop further, many of them would be in deep distress. Some bitcoin miners have high debt levels, and rising interest rates and energy costs are putting pressure on margins. Bitcoin miners using renewable energy sources might be in a better position than others to deal with high energy costs.

Will Genesis also fail, and will more Bitcoin hit the market, driving prices down?

We are also closely following developments at Genesis, a leading crypto prime broker and trading and lending company and a wholly owned subsidiary of Digital Currency Group (DCG), one of the most powerful conglomerates in the cryptocurrency industry. cryptography. In November, Genesis’s lending arm suspended buyouts and new loans, and several creditors of Genesis Global Tradings hired restructuring lawyers to help prevent bankruptcy. We have learned that Genesis owes funds to several parties, one of them being Gemini, who is seeking to recover $900 million from Genesis and DCG, and another unidentified party who also owes $900 million4 . The financial hole therefore seems to amount to at least 1.8 billion dollars.

DCG also disclosed $2 billion in intercompany debt between itself and its subsidiary Genesis Global Capital. It appears that DCG currently owes Genesis $575 million, with payment due in May 2023. We believe this loan may have been made to fund investment opportunities and buy back stock from shareholders of Grayscale, another DCG company. There is a potential maturity mismatch here, as this loan appears to be a short-term loan; however, private investments usually take years to materialize. Additionally, DCG has a $1.1 billion promissory note to Genesis (maturing 2032) due to the assumption of liabilities from Genesis following the collapse of Three Arrows Capital earlier in 2022 and a facility to $350 million loan from a group of lenders led by Eldridge.5

Perhaps most importantly, Grayscales Bitcoin Trust currently has over $10 billion in assets under management, which equates to at least 600,000 bitcoins. assess. If DCG were to liquidate some bitcoin Trusts, it would have a significant impact on the price of bitcoin and the crypto market in general. It is estimated that DCG and its subsidiaries currently own around 10% of the Grayscale Bitcoin Trust.7

Our near-term outlook for the crypto industry

2022 has seen a significant drop in digital asset prices. We believe that in the near term, uncertainty is likely to persist as the industry tries to determine which companies may still be impacted by the FTX/Alameda collapse.

Perhaps the biggest casualty of the recent explosion is investor confidence, which now needs to be rebuilt by cleaning up opaque business practices and increasing the transparency of crypto companies’ assets and liabilities.

Mirva Anttila is an employee of WisdomTree UK Limited, a European subsidiary of WisdomTree Asset Management Inc.’s parent company, WisdomTree Investments, Inc.

1 KYC refers to knowing your customer.

2 AML refers to the fight against money laundering.

3 Bloomberg, 4/12/22.

4 Financial Times, 03/12/22.

5Wall Street Journal, 11/22/22.

6 Digital Currency Group, Bloomberg

7 Coindesk

Important risks related to this article

This material is prepared by WisdomTree and its affiliates and is not intended to be used as a forecast, research or investment advice, and does not constitute a recommendation, offer or solicitation to buy or sell securities or adoption of an investment strategy. The opinions expressed are valid as of the date of production and may change according to subsequent conditions. The information and opinions contained herein are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given, and no liability otherwise arising for errors and omissions (including liability to any person for negligence) is accepted by WisdomTree, any affiliate or any of its officers, employees or agents. The reliability of the information contained herein is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.

Mirva Anttila, Director, Digital Asset Research

Mirva joined WisdomTree’s research team as a director in August 2022 after working as a senior advisor at a Swedish fund advisory firm. Prior to that, Mirva led an alternative investments team at Finnish asset manager FIM and spent over 15 years as a senior partner and portfolio manager at a technology-focused New York-based family office. listed company and investment in growth stocks, as well as alternative investments. .

Additionally, Mirva has over six years of sell-side experience as head of the Telecom Equities team at Danske Securities and as a principal at CIBC Capital Markets. Mirva started her career in strategic planning at Nokia. She holds a Master of Science in Economics from Aalto University, Finland’s leading business school.

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Editor’s note: The summary bullet points for this article were chosen by the editors of Seeking Alpha.

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