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After the 2021 high, cryptocurrencies collapse in 2022. One by one, multiple large cryptocurrency companies went bankrupt, taking down many smaller companies in a small replay of the 2008 financial crisis. It is a collapse that has taken property, or supposed property, all over the world, and it is not over yet.
TerraUSD, a “stablecoin” token used in place of real dollars, collapsed in May after reaching an estimated value of $18 billion. That failure led to the bankruptcy of cryptocurrency hedge fund Three Arrows Capital (3AC) in June. Lending platforms Celiusi and Voyager followed in July. FTX, one of his biggest crypto exchanges, fell in November. Its founder and two of his executives have been indicted for fraud.
All of these companies have relied on modern forms of check kites to pretend they can fix themselves when they don’t. Instead of writing checks between different accounts to temporarily inflate with non-existent funds, they made loans to each other and counted each loan as an asset. However, BlockFi also collapsed. In his bankruptcy documents detailing how Celsius went bankrupt, CEO Alex Mashinski does not explicitly explain who the loans are to or from.
After the 2021 high, cryptocurrencies collapse in 2022. One by one, multiple large cryptocurrency companies went bankrupt, taking down many smaller companies in a small replay of the 2008 financial crisis. It is a collapse that has taken property, or supposed property, all over the world, and it is not over yet.
TerraUSD, a “stablecoin” token used in place of real dollars, collapsed in May after reaching an estimated value of $18 billion. That failure led to the bankruptcy of cryptocurrency hedge fund Three Arrows Capital (3AC) in June. Lending platforms Celiusi and Voyager followed in July. FTX, one of his biggest crypto exchanges, fell in November. Its founder and two of his executives have been indicted for fraud.
All of these companies have relied on modern forms of check kites to pretend they can fix themselves when they don’t. Instead of writing checks between different accounts to temporarily inflate with non-existent funds, they made loans to each other and counted each loan as an asset. However, BlockFi also collapsed. In his bankruptcy documents detailing how Celsius went bankrupt, CEO Alex Mashinski does not explicitly explain who the loans are to or from.
The cryptocurrency lobby seeks to confuse users and regulators with claims that “technology” makes everything different. This is incorrect. Crypto tokens are all existing hoaxes used for money laundering, over-leveraged trading, asset inflation through non-fungible tokens (NFTs), or pump-and-dump using decentralized financial tokens as penny stocks. It is a new form of financial product. .
Now, another big domino, Barry Silbert’s Digital Currency Group (DCG), may be about to collapse. Crypto conglomerates have been able to survive for so long with relatively clean legal records that Silbert has become somewhat of a business genius in the crypto world. Genesis has filed for bankruptcy. The collapse of his once acclaimed DCG could be the final nail in the coffin of cryptocurrency credibility. DCG is one of the largest investors in the space, so it could also lead to a systemic collapse of cryptocurrencies.
A former Wall Street banker, Silbert began piling up his cryptocurrency pile in 2012, when bitcoin was trading at $11 per share. He founded his DCG three years after he started investing in other cryptocurrency companies. DCG’s portfolio currently includes 200 companies.
DCG is the parent company of three major players in the cryptocurrency industry. Asset management company Grayscale Investments operates a multi-billion dollar Bitcoin fund. CoinDesk, his one of the most popular cryptocurrency news sites. (I wrote for them as a freelancer from 2016-2017. DCG acquired CoinDesk in 2016 and has a history of direct pressure on outlet employees to promote its earnings and portfolio. CoinDesk, given to promote anything that might sound plausible like good news for cryptocurrencies, has seen some journalistic work, including a report that took down FTX and its sister company hedge fund Alameda Research. We have won.
Genesis Global Capital, the lending arm of Genesis launched in 2018, suffered a major hole in its books after 3AC imploded in late June. DCG tried to fill the void by moving 3AC’s claims onto its own books and issuing his $1.1 billion promissory note to Genesis. That is, DCG and Genesis counted the internal IOU as money in order to claim that Genesis is still solvent.
The DCG hoped to give the IOU enough time to stem the bank run and raise funds. Then FTX collapsed in his November and Genesis lost his $175 million it had on the Doom Exchange. This appears to have completely eliminated liquidity for Genesis’ customers. After an unsuccessful attempt to raise $1 billion in emergency funding, Genesis was forced to freeze its withdrawals.
Authorities are currently investigating DCG and its subsidiaries. The US Securities and Exchange Commission (SEC) and the US Attorney’s Office for the Eastern District of New York are reportedly scrutinizing the flow of funds between DCG and Genesis.
When Genesis froze withdrawals, Gemini Earn, a crypto interest rate account offered by Gemini, a cryptocurrency exchange run by Tyler and Cameron Winklevoss, most famous for their role in Facebook’s early history, was also blocked. rice field. The twins partnered with Genesis to offer retail customers up to 8% interest. When Genesis stopped withdrawing, this caused 340,000 Gemini Earn customers to lose his $900 million.
Genesis has lent money to accredited and institutional investors. But since February 2021, Genesis has been using Gemini Earn as a pass-through, offering ordinary family-owned investors an interest rate otherwise unavailable. Genesis then loaned out his Earn crypto to large investors such as 3AC, using the previously pledged collateral as collateral for new loans, giving the crypto companies 2008-style infinite leverage and allowing them to loan reset. These cryptocurrency companies often used their own created tokens as collateral.
Gemini Earn was clearly an investment deal under the Howey test. This is the US precedent that determines whether something counts as a security, such as stocks, bonds, mutual funds, and is therefore subject to SEC regulation.But Gemini didn’t register itself with the SEC. public spats Over a funding shortfall between Cameron Winklevoss and Silbert, the SEC charged both Genesis and Gemini with selling unregistered securities.
Along with the $1.1 billion note, DCG owes Genesis $525 million in hard currency and bitcoin due in May 2023.
“The promissory note is like a noose tightly wrapped around the DCG’s neck. When Genesis goes over a cliff, it drags the DCG along as well.” Ram Alwalia saidco-founder of cryptocurrency investment advisor Lumida, said before filing for bankruptcy.
DCG is now frantically going through its portfolio to see what it can sell. However, almost all companies that DCG has invested in have illiquid, unsellable crypto assets. Its most valuable asset is grayscale.
Grayscale manages the Grayscale Bitcoin Trust (GBTC). The trust holds $12.3 billion in Bitcoin, and Grayscale has a whopping 2% annual maintenance fee, more than $240 million annually.
For years, GBTC traded at a premium to the underlying asset as part of arbitrage trading during Bitcoin’s rising price. However, the premium evaporated in early 2021. GBTC is currently trading at a 40% discount against Bitcoin, up from his 48% discount in December. Trusts have no redemption mechanism, leaving owners trapped in their underwater assets.
Grayscale spent in 2020 Running National TV Advertisements Market GBTC to retail investors as if it were real Bitcoin. Many people bought his GBTC for retirement and bet on its future. Over the past two years, however, GBTC has lost 60% of its value and is currently trading at just over $11 a share from its February 2021 high of $57.
Grayscale told investors it planned from the beginning to convert GBTC into a regular exchange-traded fund (ETF). ETFs trade close to the price of their underlying assets, if they can convince the SEC. In April 2022, Grayscale purchased all advertising space in Washington, D.C.’s Union Station and New York’s Penn Station, prompting Amtrak commuters to write to the SEC in support of Grayscale’s ETF application. . The campaign was unsuccessful and the SEC, which had applied for almost all Bitcoin ETFs to date, rejected the application due to legitimate concerns over fraud and manipulation. Grayscale is now suing regulators.
Grayscale has other options. After years of GBTC stock flooding the market, Grayscale stopped issuing new shares in his March 2021. The rules governing Grayscale’s grantor trusts open the door for Grayscale to pursue a reimbursement program if desired.
However, since GBTC trades at a steep discount, nearly all holders may jump at the chance to redeem their shares. This could significantly reduce the size of the trust and reduce Grayscale’s profits. And too many bitcoins flooding the market could cause the price of bitcoin to crash, further reducing the value of trust and wreaking havoc on the rest of the crypto world.
Gene Grant, founder and CEO of Levelfield Financial, a financial services company in Houston, said: foreign policy.
If Grayscale is forced to liquidate GBTC, Silbert’s empire will lose its last reliable source of income. If the fund does not liquidate, DCG will continue to charge high management fees, while his enraged GBTC holders will be left with huge losses.
GBTC is a registered security regulated by the SEC. But the SEC could and should have done more to warn the public about the risks. Did. In August 2017, Citron Research announced Predict accurately GBTC Collapse: “As Bitcoin soars, GBTC will likely become irrelevant and alternatives will likely flood the market.” what happened when it was
Genesis pitched its lending program to accredited investors, and that was fine. But that wasn’t the case when we started lending to retail investors through Gemini. Gemini Earn was clearly a security and should have been closed immediately, but the SEC filed charges against the two companies after he waited two years for retail investors to actually suffer losses.
Crypto promoters often portray crypto as having no clear regulation. The team building the decentralized product “doesn’t want to break the rules and doesn’t know what the rules are right now,” said Brian Armstrong, CEO of Coinbase, the largest U.S. cryptocurrency exchange. (CEO) of FTX. In fact, the regulation of cryptocurrencies is clear in the United States. Securities laws have been in place for decades, and the Howey test is simple and broad. What regulators lack is resources, but that is changing. In May 2022, the SEC doubled the size of its Crypto Assets and Cyber Unit division to his 50 staff. But this is still not enough.
Regulators need better funding and legal tools that can be applied more effectively in cases of such clear and overt violations. Create an environment where regulators in the U.S. and other countries need to clearly understand why cryptocurrency companies offering high interest rates actually have compelling reasons to do so, or the serious consequences of fraud is needed.
Will crypto bounce? Only if regulators don’t act quickly to quell it before it creates another giant crypto bubble that sees money flow from new retail investors to old bitcoin holders.
Meanwhile, the collapse of cryptocurrencies is far from over. Several more cryptocurrency companies will go bankrupt in 2023. His DCG of Silbert is another. Crypto promised freedom from the financial intermediaries that caused the 2008 crisis and built their own mini-2008. Collapse continues.
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