Cryptographic Asset: Recent Episodes
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Barry Silbert’s crypto empire could be unraveling before our eyes. As one of his company’s, Genesis, goes further into bankruptcy, pressure for him to sell off assets will only increase, marking potentially the beginning of the end for DCG and Silbert in crypto.
While critics lampoon his companies (DCG, Genesis, and others) for their mishandling of retail money and poor investment decision, Silbert maintains he remains “incredibly proud” of the role he and DCG played “as pioneers and builders over the past decade.”
DCG, 3ACGenesis Trading, a subsidiary of Genesis Capital, acted as a lender to other institutions. Genesis procured capital to fund loans by borrowing from institutions and exchanges like Gemini.
Genesis’ profits equaled the rate Genesis charged to borrowers less the rate it offered to depositors. Genesis Trading took the funds from firms like Gemini and loaned it to hedge funds, including Three Arrows Capital (3AC), which went bankrupt in June 2022.
Genesis backed loans with the Grayscale Bitcoin Trust (GBTC) and Grayscale’s Ethereum Trust (ETHE). GBTC was one of the first securities in the world to only invest in and get its value from the Bitcoin price.
Genesis lent Bitcoin and Ethereum to 3AC, which then sent BTC and ETH to Grayscale, and in return received GBTC and ETHE shares. 3AC then put GBTC and ETHE shares up as collateral to Genesis, which then lent more BTC and ETHE to 3AC.
Meanwhile, only Genesis could accept orders to create or redeem shares of GBTC and ETHE shares. Genesis was both 3AC’s lender and Grayscale’s authorized participant, representing potential conflict of interests for Silbert.
Genesis’ on-chain portfolio has at least eight addresses, which are worth $300 million. Funds are held 75% in ETH, with the rest in altcoins like USDC, COMP, APE, SAND, AAVE, and MANA. When 3AC collapsed last June, Genesis admitted to potentially “hundreds of millions” of losses.
https://twitter.com/nansenportfolio/status/161644623575347200Enter Gemini Gemini announced in 2021 a partnership with Genesis where participants earn “yield” on digital assets called “Earn.”
The small print to which Gemini users agreed altered their relationship with Gemini. Participants became lenders, Gemini the acting agent, and Genesis the borrower. Gemini thus far takes zero legal responsibility for the fact their users are owed $900 million.
Gemini Earn users lent money to Genesis, which lent money to 3AC. The money was collateralized by Grayscale shares created by Genesis. Grayscale then posted the shares to 3AC, which borrowed more money from Genesis.
As one Twitter user described: “So Gemini gave the money to Barry (Genesis), who then gave the money to Barry (DCG), who then gave the money to Barry (Grayscale)?”
Silbert’s Conflict New York-based hedge fund FirTree, a shareholder in the Grayscale Bitcoin Trust, filed a lawsuit in the Delaware Court of Chancery seeking information on Grayscale’s potential mismanagement of and conflicts of interest with GBTC. When Grayscale denied FirTree’s allegations in its complaint, the hedge fund wrote in a press release Grayscale “continues to obfuscate the facts and refuses to provide clear information to GBTC shareholders.”
According to FirTree, Grayscale failed to acknowledge it “has the power to open redemptions and create liquidity for its investors, yet is choosing not to do so.”
The situation is “extremely simple,” argues FirTree. “Grayscale management is keeping redemptions closed in order to maximize their revenues, and they don’t care that it’s at investors’ expense.” FirTree adds Grayscale failed to “take responsibility for issues it created, and commits to “taking all available actions” so “Grayscale is held accountable.”
In its official complaint, FirTree said approximately 850,000 retail investors were “harmed by Grayscale’s shareholder-unfriendly actions.” The complaint mentions Silbert by name 26 times across 41 pages. It also states that Grayscale is deeply interconnected with Silbert’s “cryptocurrency empire”
“Mr. Silbert remains the Chairman of the Board of Grayscale and, until recently, was its Chief Executive Officer and a member of its Audit Committee,” reads the complaint. “…In short, each new day brings troubling new disclosures about misconduct and relationships among the Trust, Grayscale, and their affiliates.” FirTree wants Grayscale books to be opened for inspection.
Barron’s reported that several “securities regulators are investigating Genesis Global Capital as part of a wide-ranging inquiry into the interconnectedness of crypto firms, Genesis’s connection to retail investors, and whether it or other industry participants might have violated securities laws.”
The penalty for willful violation of federal securities laws is imprisonment for up to 25 years or a fine, which will depend on the nature of your case.
What’s Next?DCG claims it and subsidiaries are insulated from insolvency relating to its Genesis Lending business. Yet the firm is facing serious allegations. Grayscale will likely be the first asset to be sold when DCG legally can do so, alongside other liquid assets of DCG and Genesis.
DCG halted on January 17 quarterly dividends of its own accord, saying it did so to conserve funds. In a letter to shareholders, the cryptocurrency conglomerate said it is committed to enhancing its balance sheet and will do so by reducing operational costs and cash management.
On 1/12/23, the SEC already charged Genesis and Gemini with selling unregistered securities through Gemini Earn.Earn members likely lacked insight into Genesis’ loss minimization strategies, loan and collateralization requirements, Genesis’ role as an authorized participant in Grayscale shares, loan structures between involved parties, Gemini borrower solvency, Gemini due diligence practices, exposure limits and margin oversight. Moreover, Grayscale executives admitted they “drove down the discount” by “flooding the market with supply.”
As more headline grabbing revelations come to light, it could in turn lead to a further unraveling in Silbert’s former empire, leading to the bitter end of a once-celebrated crypto OG.
On the airwaves, your local radio station is blasting sweet nothings and 4/4 beats. In the cubicles, your co-workers are humming along to the DJ as they work. It has been a long day, and it is time to kick back, relax, and let the energy flow through your asses. You’re waiting for payday, and you’re not sure how long it will take to get there. It might be a while.
You check your emails every two days, hoping to see a simple deposit in your bank account. It is a grueling wait, and if you are lucky, you will get paid at the end of the month. If you are unlucky, your sojourn in the land of cat photos on Facebook and Reddit will continue. You will have to wait until you make it to the front page.
You will not be able to buy new clothing for the kids, or pay the rent. You may even have to ask God for help. But one day, it may not be like that.
Financial technologists and theoreticians today believe that digital currencies like Bitcoin are a great means of transferring money. In many ways, they are better than certain types of money. Bitcoin is a form of money that uses the blockchain, a distributed ledger, as a means to transmit value and data across borders. This means that you can make payments to whomever, whenever, and from wherever you want. You do not have to wait until payday to receive your money.
In fact, one of the most popular Bitcoin projects in the early days was an online creation community for cat memes. Many early bitcoiners believed that Bitcoin could change the lives of many people around the world, and it did. It was a testament to the fact that the world was ready for a sudden new technology undermines the ADP and allows workers to receive their wages in real-time. This is why remittances have become so popular in the world of Bitcoin, and why so many people are excited about it. But what about the world at work?
Let us do a thought experiment. Imagine if you could get paid every hour of the day, thanks to a new payroll technology company. Imagine that your paycheck comes in the form of a digital token that is pegged to the national market system. Your boss is an asshole, and you want to pay your bills in a currency of your choice, but you can only get paid in the currency that your boss uses to pay his bills, which is the currency of the National Market System.
Imagine that you are able to get paid by numerous means of asset, such as a certain bitcoin, airline miles, or any other sort of asset. You can choose from many different value options, and a mainstream financial institution would not be averse to accepting any of them. You could even use a plugin that allows you to automatically convert your transactions into the system of your choosing. The reason why this is possible is because of the incentives, as well as the technology features of blockchain technology. As blockchain technology evolves, it will be possible for you to get a loan from your employer sans interest, and get paid within 24 hours, instead of waiting two weeks for your paycheck to be deposited into your bank accounts, and then another two weeks before you can actually spend the money.
A new blockchain model would allow you to work on a project for a pre-determined amount of time and then receive hourly funds. There is no doubt that blockchain companies will continue to develop new technologies in regards to the payroll space. Bitwage, for example, is a blockchain company that aims to provide the fairest payment terms for qualified workers in the world, and it is just one example of the new technologies that are emerging.
Ethereum and Bitcoin are not competitors. They have important differences.
Ethereum represents a different set of innovations than Bitcoin. Ethereum set out to create a “Virtual Computer” where distributed participants put businesses on a blockchain through programmable contracts, called smart contracts. Bitcoin was designed as a transfer system.
For the most part, people view Bitcoin and Ethereum as potentially symbiotic technologies.
Nathaniel Popper’s piece in New York Times, entitled “Ethereum, a Virtual Currency, Enables Transactions That Rival Bitcoin’s,” does not sound as divisive as the title. In the article, Popper backs off that notion. He highlights instead of the novel nature of Ethereum, while also cautioning how untested the technology is.
But Ethereum has also won fans with its promise to do much more than Bitcoin. In addition to the virtual currency, the software provides a way to create online markets and programmable transactions known as smart contracts.
Many Bitcoin advocates say Ethereum will face more security problems than Bitcoin because of the greater complexity of the software. Thus far, Ethereum has faced much less testing, and many fewer attacks, than Bitcoin. The novel design of Ethereum may also invite intense scrutiny by authorities given that potentially fraudulent contracts, like the Ponzi schemes, can be written directly into the Ethereum system.
Nasdaq also released an article entitled, “Bitcoin’s Rival: Ethereum’s Rapid Rise.” In it, Martin Tillier doesn’t so much make that argument, as much as use the headline for clickbait.
While Bitcoin does transactions and value transfer well, Ethereum economic arrangements are determined by a distributed program.
Overstock and others invested into a blockchain-forward financial technology firm in the Caribbean seeking to create the Bardian digital dollar.
“A major impediment to economic advancement around the world is the fact that the vast majority of humans are unbanked,” Overstock Chief Executive Patrick Byrne said at the time. “Yet mobile penetration in some countries exceeds 100 percent. Bitt has a vision for the Caribbean of frictionless mobile cash, beginning with central banks transparently issuing digital fiat which is then exchanged on a blockchain.”
Bitt, Inc.’s Barbadian digital currency is designed to function on a blockchain while also backed by the Central Bank of Barbados. The Barbados Digital Dollar should make it more efficient to send and receive Barbados dollars.
At the time, Bitt co-founder and CFO Oliver Gale said:
The Barbadian Digital Dollar is easy to send to anyone, with a few gestures on your mobile device. Commerce can be done with less friction, payment(s) can be made instantly, auditors can cryptographically verify the signatures with unparalleled security.
CEO Gabriel Abed added: “One of our digital Barbados dollars is equivalent to one dollar issued by the Central Bank of Barbados. What we do is allow people to do more with their money.”
Bitt provides services such as exchange, mobile wallet and remittances. The company is also credited with founding the first crypto exchange in the island nation.
A well-publicized report surfaced in December 2015, in which two Barbadian economists suggested the Central Bank of Barbados hold a small portion of Bitcoin in its foreign reserves. The economists stated:
Within recent years, the proportion of digital transactions done using digital currencies has grown significantly. As a result, it is possible that digital currency could become a key currency for settling transactions.
Crypto’s Shakespearian drama has yet to cease, the latest resulting in an open feud between Gemini crypto exchange founder Cameron Winklevoss and Digital Currency Group (DCG) Chief Executive Barry Silbert. The turbulence could wash out recent crypto price gains.
The PlayersThe New York-based crypto exchange Gemini is run by the Winklevoss twins. DCG, one of the industry’s largest and earliest investors in crypto projects and coins, plays a key market role in the crypto industry. The group was founded in 2015 by Silbert, a former Houlihan Lokey banker, and is the parent company of Genesis and Grayscale Investments, as well as CoinDesk and other companies. Genesis, one of the largest lenders in the crypto market, allowed customers to lend out their digital assets in return for yields.
As one of crypto’s largest venture portfolios, DCG has backed well-known crypto exchanges, including Coinbase, Kraken, Blockchain.com, and the now-defunct FTX, in which it invested $250,000 in July 2021. DCG also funded U.S. bank Silvergate, digital wallet company Circle, and others. DCG was valued at $10bn in 2021 and backed by blue-chip investors including SoftBank, Ribbit Capital and Alphabet’s venture arm Capital.
Gemini EarnGemini Earn, Gemini’s lending platform, allowed users to lend out their crypto holdings in exchange for interest payments. Gemini used Genesis as the lender. Genesis functions like a bank, taking short term liquid deposits, and making long term illiquid loans to hedge funds which sometimes go bankrupt, like Three Arrows Capital (3AC).
The Financial Times reported that Digital Currency Group (DCG) was the largest single creditor to Three Arrows Capital, and therefore suffered the largest loss. Reports posit Genesis lent $2.36 billion to 3AC. Concerns over Genesis’ solvency might have begun there, albeit behind the scenes. Genesis also made loans to its parent company DCG, and financed the purchase of digital assets.
The now-defunct 3AC borrowed billions of dollars from Genesis to fund its own trading, before filing for bankruptcy in July after making risky and overleveraged bets. According to its July 2022 bankruptcy filings, 3AC faces $3.5 billion in creditors’ claims. The fund lost more than $3 billion over 2021 and 2022, making its collapse one of the largest hedge-fund losses in history.
Wall Street Journal reported that the exposure of the Genesis Lend program to 3AC was approximately $2.4 billion. And whereas a bank holds approximately 10% of its holding in so-called Tier 1 capital, the typical non-bank lender will have a capitalization rate of just 5%.
Some analysts believe that with a loss of such magnitude, Genesis would have been insolvent, their liabilities exceeding their assets, therefore triggering issues around any representations of solvency in loan agreements. Those loans were funded by clients of Gemini Earn and other retail programs.
Gemini’s vetting process clearly failed, even though the firm was relying on representations and warranties, which is legal jargon for when a claim is asserted as true. For instance, Genesis maintained its solvency until this week. Gemini and Genesis have both been charged by the Securities Exchange Commission with issuing an unregistered security.
An Open Feud On Twitter
In an open letter to DCG’s board, which he also posted to Twitter, Cameron railed against Silbert’s leadership due to the liquidity issues at Genesis, which ceased in November loan originations and redemptions, citing the FTX meltdown. Gemini was forced to pause withdrawals on its interest-bearing product—$900 million of customer money was frozen and unpayable to customers.
“He has proven himself unfit to run DCG and unwilling and unable to find a resolution with creditors that is both fair and reasonable,” Winklevoss wrote. “As a result, Gemini, acting on behalf of 340,000 Earn users, requests that the Board remove Barry Silbert as CEO, effective immediately, and install a new CEO, who will right the wrongs that occurred under Barry’s watch.”
Earn Update: An Open Letter to the Board of @DCGco pic.twitter.com/eakuFjDZR2
— Cameron Winklevoss (@cameron) January 10, 2023
Cameron did not stop there. “For the past six weeks, we have done everything we can to engage with you in a good faith and collaborative manner in order to reach a consensual resolution for you to pay back the $900 million that you owe, while helping you preserve your business,” Winklevoss wrote.
“We appreciate that there are startup costs to any restructuring, and at times things don’t go as fast as we would all like. However, it is now becoming clear that you have been engaging in bad faith stall tactics.” Cameron says Silbert is cowering behind “lawyers, investment bankers, and process.” The long-time Bitcoiner calls Silbert’s behavior “not only completely unacceptable, it is unconscionable.”
Cameron believes Silbert has two legitimate options. “Restructure the Genesis loan book (inside or outside of bankruptcy court) or fill the $1.2 billion hole. He did neither.” Cameron lamented that lenders to Genesis, among which Earn users are included, have been “seriously harmed and deserve a resolution for the recovery of their assets.”
He added: “Beginning in early July 2022, Barry, DCG, and Genesis embarked on a carefully crafted campaign of lies to make Gemini, Earn users, and other lenders believe that DCG had injected $1.2 billion of actual support into Genesis.”
DCG tried to hide Genesis’ loss for months, Winklevoss contends, accusing the parties involved of accounting fraud. “It’s not lost on us that you’ve been working desperately to try and firewall DCG from the problems that you created at Genesis,” Winklevoss wrote. “You should dispense with this fiction because we all know what you know — that DCG and Genesis are beyond commingled.” At one point, he gave DCG a January 8 deadline to settle the issue. The deadline came and went without resolution.
“The idea in your head that you can quietly hide in your ivory tower, and that this will all just magically go away, or that this is someone else’s problem is pure fantasy. To be clear, this mess is entirely of your own making. Digital Currency Group, of which you are the founder and CEO, owes Genesis and its wholly owned subsidiaries approximately $1.675 billion, which is money Genesis in turn owes to Earn users and other creditors. You took the money of school teachers to fuel greedy share buybacks, illiquid venture investments and kamikaze grayscale net asset value trades that ballooned the fee generating AUM of your trust all at the expense of creditors and all for your own personal gain. It is now time for you to take responsibility for this and do the right thing.”
Cameron links Silbert personally to the same activities that caused the demise of Celsius and BlockFi: taking in a retail deposit money to go finance hedge funds, and trades such as buying GBTC on leverage. Cameron has stopped short of calling Barry out for a violation of contract law.
Silbert in a tweeted response refuted many of Cameron’s claims. “DCG did not borrow $1.675 billion from Genesis” and “never missed an interest payment to Genesis and is currently on all loans outstanding.” Silbert also revealed DCG sent a proposal for resolving the dispute to Genesis and Winklevoss on Dec. 29. He said he received no reply.
In a November letter to shareholders, Silbert noted that loans from Genesis to DCG were made “in the ordinary course of business,” disclosing that DCG has a liability of $575 million to Genesis. In the letter, he also highlighted a $1.1 billion promissory note, due June 2032. According to Silbert, the loan was needed as DCG assumed liabilities from Genesis’ losses in the aftermath of the 3AC meltdown. Genesis has also commented on the situation.
Silbert wrote to investors that the crypto industry had in 2022 “been all but destroyed by a wave of unprecedented fraud and criminal behaviour” and that DCG was “making meaningful changes to position the firm for long-term success.”
Genesis also commented on the situation. “While we obviously do not agree with everything that Gemini has said, and we are disappointed that Gemini is waging a public media campaign despite ongoing productive private dialogue between the parties, we remain focused on finding a solution for our borrowing and lending intermediation business and reaching the best outcome for all affected Genesis lending and Gemini Earn clients,” a Genesis spokesperson told Insider.
The spokesperson added: “We continue working with our advisors, in collaboration with DCG and advisors appointed by various client groups, to evaluate options to preserve client assets and move the business forward.”
Repercussions
On January 5, WSJ reported that Genesis laid off 30% of its staff and was mulling bankruptcy. Genesis was working with investment bank Moelis & Co. to determine its options for the future, including a potential chapter 11 filing. Yahoo reported Jan. 18 that the bankruptcy filing was already in the works.
Genesis reportedly owes creditors more than $3bn. Silbert is reportedly considering selling off assets in its large venture portfolio to raise money, and raising cash. CoinDesk has already enlisted Lazard’s to help find investors or a buyer. Fundraising efforts thus far have failed. Among DCG’s assets are 200 crypto-related projects, including exchanges, banks, and custodians spread across approximately 35 countries. It is estimated to be worth $500 million, according to people familiar with the matter.
Beyond the $900 million owed to Gemini, Genesis owes €280mn to Dutch exchange Bitvavo, as well as money to customers of crypto savings company Donut. An unrelated group of Genesis creditors have employed lawyers from Proskauer Rose, according to Bloomberg’s anonymous sources.
American holding company Eldrige also lent money to Genesis, and DCG faces an immediate repayment of a loan to the investment house, owned by U.S. financier Todd Boehly, new owner of the Chelsea Football Club.
Eldridge led a DCG debt raise in November of last year, entailing a $600 million loan from Eldridge and a group of other investors, including California asset manager Capital Group, private equity firm Francisco Partners and investment manager Davidson Kempner Capital Management.
In the event of Genesis failing, a $350 million still outstanding loan immediately falls due. The senior secured loan would have to be repaid first due to preference rights, according to sources familiar with the matter. Genesis said it had “no plans to file bankruptcy imminently.”
DCG says its relationship with Eldridge “is entirely separate from Genesis’ restructuring strategy and has no bearing on any outcome at Genesis.” Eldridge has declined to comment, though reports suggest the firm believes Genesis’s suspension of withdrawals means it cannot repay debts and is thus in default. Not wanting to lose its investment, Eldridge is working with DCG to help it raise capital and pay Genesis’s investors, clients and customers. Creditors have formed a committee to help regain funds.
DCG has been losing key staff throughout its crisis. Glenn Hutchins, the billionaire co-founder of private equity group Silver Lake, stepped down from DCG’s board last year, the Financial Times reported, and Former US Treasury secretary Larry Summers has also stopped advising the group.
What’s Next
Despite DCG’s high valuation, it seems investors have been uneasy over DCG’s debt for a while. According to securities filings, Capital Group marked down $1.26 million in holdings of DCG debt by 17 percent. It’s perhaps been a longer road to bankruptcy than the public has been made aware.
In recent weeks, both Genesis and DCG have retained separate investment banks, and separate counsel, to attempt to adhere to the standard of arm’s length negotiations. This will be difficult, however, because
Silbert is the largest shareholder of both these institutions. His consent will be required for any proposed restructuring.
With Genesis moving towards bankruptcy, and CoinDesk looking for suitors, Silbert is likely trying to hold on to his prized jewel, Grayscale Trust, where there’s around $10 billion worth of Bitcoin. It’s not been a smooth ride for Grayscale. Over the course of several years, there was so much demand to buy bitcoin, GBTC’s premium relative to the underlying net asset value of Bitcoin was 30 to 50%, until the Coinbase IPO, when the premium went flat, and then traded at a discount of 45%.
If Grayscale trust holdings were liquidated, and Bitcoin delivered, GBTC owners would enjoy nearly a 100% gain, because the net asset value of the trust is nearly twice as much as the value of GBTC. It’s likely Silbert might face pressure to sell off Grayscale, perhaps to Valkyrie, which has already made a proposal for Grayscale. Sharks are circling.
Genesis’ most liquid assets on its balance sheet are GBTC and crypto assets. It is perhaps only a matter of time before the bankruptcy trustee says it’s time to liquidate these holdings. That’s the bear case for GBTC. There is, to be sure, a bull case, as well. DCG will likely be forced to sell Grayscale to generate cash flow to pay off creditors.
Instead of accepting the creditor committee terms, and paying out from free cash flow to creditors (thereby diluting shareholders), it seems DCG will file Chapter 11 bankruptcy, which could lead to another unwinding of the crypto industry not unlike the 3AC, Celsius, and FTX meltdowns. While creditor committee terms would have been the best way for DCT to strengthen the ecosystem, preserve jobs, avoid the potential collapse of DCG and unwinding of Grayscale, chapter 11 is likely the best way of protecting Silbert.
Meanwhile, retail customers have been caught in the middle of the situation, with some customers of Gemini whose funds are trapped at Genesis having invested hundreds of thousands of dollars each, and the US Department of Justice and The U.S. The Securities and Exchange Commission have reportedly launched an investigation of DCG.
While the crypto markets could certainly shrug off what’s coming (a considerable amount of crypto holdings have been sold off already), the bankruptcy of Genesis could kick off a series of events which bring Bitcoin down to the $9,000 support level.
Dan Schulman, CEO and Chairman of PayPal, said that the “time is now” for cryptocurrency in December 2020.
Schulman predicted that digital currencies would quickly enter the mainstream, even becoming a major day-to-day payments technology. He says that the coronavirus pandemic has “pushed those trends ahead by anywhere from three to five years [and] by five to six months.” It was actually lockdowns.
PayPal, as you probably know now, has recently started to let users buy and sell Bitcoin. Schulman points out that 360 million digital wallets are in existence. Mizuho Securities has been polling PayPal users, finding 65% will be using Bitcoin as currency with 28 million merchants on PayPal. Alongside bitcoins newest big players such as Square, MicroStrategy, and others, the New York Digital Investment Group (NYDIG) raised $150 million to launch two new crypto investment funds aimed at investors looking to get into long-term bitcoin. In addition, Visa plans to support issuance of stablecoin credit cards in USDC.
Mass adoption is, of course, the end-goal for every crypto-blockchain project. We are seeing it already, with adoption of cryptocurrency debit cards. But cryptocurrency still leaves much to be desired in terms of usability.
For example, today, we are sending crypto funds using our public keys. That is, somebody else has to enter your private key, which is a long string of letters and numbers. That might be a lot of information to handle for beginners. Simplifying this process, but also making sure that this is a secure experience, would be the key path for faster adoption of cryptocurrency. Surprisingly few people own cryptocurrencies, relative to mainstream financial instruments, even though many know of Bitcoin.
We believe the reason is due to lack of convenience. To provide the convenience, we are going to have to design centralized tools for managing the cryptocurrency. In order to make the adoption of the decentralized technologies, they must be convenient. If somebody built the decentralized Internet, it must be convenient.
At this point, I would say that a major reason that most people are not interested in crypto, or did not go in, is that it is pretty difficult to get involved in it without doing quite a bit of research. However, as bad as the lockdowns were, it is done cryptocurrency many favors. People have had more time to study it, and, thanks to the stimulus checks being sent, people are investing in it, too. When users are looking for new investment opportunities, Bitcoin and other cryptos are going to stay on top. As I said, while this sounds terrible, the lockdowns has actually prompted widespread adoption of crypto.
As the chaotic, volatile, financially violent year of 2022 draws to a close, we examine the state of the game in Bitcoin. Bitcoin markets have been quiet in recent weeks, perhaps owing to the holidays.
Bitcoin (BTC) hit a record high of more than $68,000 in November of 2021. It started 2022 at a little less than $30,000. The cryptocurrency sector in general had grown to an overall market capitalization of over $2 trillion before a wintry 2022. Investor interest in cryptocurrencies is evident, with bitcoin (BTC) and ether (ETH) both reaching record highs.
Meanwhile, decentralized finance (DeFi) protocols have been relatively quiet this year on the cusp of collapsing markets. The market for non-fungible tokens (NFTs) grew exponentially as venture capital firms invested in a number of cryptocurrencies before the onset of crypto winter. As the cryptocurrency industry has evolved, Bitcoin’s market share has declined, while other digital currencies such as Ethereum have played larger roles.
As far as institutional investors’ adoption of cryptocurrencies is concerned, Bitcoin remains the more viable choice because of the Bitcoin’s market capitalization and comparatively lower volatility. Bitcoin has a far longer track record than other cryptocurrencies, although still relatively young when compared with the 200+ year history of U.S. equities. Launched in 2009, Bitcoin has been around for a very long time (in cryptocurrency terms) and is the most recognized digital currency.
Bitcoin Price on December 20Bitcoin has been considered as one of the best crypto investments in the long run for years, thanks to the status that Bitcoin has in the marketplace of being the first-mover.
The vast majority of brokerages and crypto exchanges will now let users invest in Bitcoin. Many also offer derivatives markets. Additionally, with more platforms making space for bitcoin trading, the market is expected to grow among individual traders and investors.
Increased interest by institutional investors, as hedge funds and other financial services providers begin offering options to trade bitcoin, may also boost demand. Cryptocurrency prices are experiencing significant stress from early 2022, as investors are shifting away from riskier assets such as tech stocks.
As crypto is still widely seen as a high-risk, speculative investment, this shift has sent bitcoin’s price plummeting as low as around $17,000 as of mid-December. This represents a loss of almost half the value that bitcoin reached at its November 2021 peak of $69,000, although it has seen a slight rally as of late March 2022, at around $47,345. Due to continue, our 2022 bitcoin price prediction for 2022 saw bitcoin returning to a $32,000 level before the end of the year in 2023.
Michael Saylor, a bitcoin maximalist and the former CEO of the business analytics company MicroStrategy, believes Ethereum could be facing a major crash in the near future on par with the TERRA stablecoin collapse which essentially disappeared overnight. Saylor has been a vociferous Bitcoin maximalist, favoring Bitcoin and only Bitcoin.
MicroStrategy, under his leadership, bet $4bn on bitcoin, and now holds 130k BTC. The company is also working on Lightning Network platform solutions.
https://twitter.com/saylor/status/1603101638000001026?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1603101638000001026%7Ctwgr%5Eb04ce4d3232638413b25916a533fd86642a59779%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fthecryptobasic.com%2F2022%2F12%2F15%2Fmichael-saylor-supports-argument-that-ethereum-risks-terra-luna-like-collapse%2F
Saylor has asserted Ethereum and cryptocurrencies other than Bitcin are all securities. He argues that Ethereum’s Proof of Stake staking constitutes an investment contract and urged the US Securities and Exchange Commission to “pretty much shut down all of it.” He champions Bitcoin as the only “ethical” crypto asset.
Saylor has tweeted in favor of Bitcoin. “Bitcoin is engineered to be stable, robust, and increasingly secure & efficient over time based on Proof of Work and ASIC technology advances.”
He contrasts Bitcoin’s proof of work with PoS. “Proof of Stake protocols are inherently unstable, inefficient, opaque, and risky due to their fragile design.”
He’s also taken aim at Ripple, the cross-border payments solution, and the native token of XRP’s Ledger (XRPL):
“Ripple is an unregistered security… There’s a company. The company owns a bunch of it. They sell it to the general public, but they never took the company public. There’s no disclosures, right? So the SEC’s position is ‘you’re selling an unregistered security’. It’s a crypto token, right? Just like Ethereum is an unregistered security. It’s controlled by a few people in the Ethereum Foundation and Consensys… Just like FTT. Just like Solana. They’re all unregistered securities…”
Saylor contends most cryptocurrencies are unregistered securities. “I think the best thing for the world would be if the SEC pretty much shut down all of it. It’s all unethical, right? I mean the Bitcoin position would be Bitcoin is an ethical commodity. All of these other altcoins are unregistered securities. They’re all just equity tokens issued by a company in order to get around going public and they’re committing securities fraud, Ethereum included, of course. Especially Ethereum.”
He notes that Ethereum has 20 billion dollars of $ETH token locked up in the staking contract. There is no guarantee anyone will return those staked ETH. “Now, isn’t that the definition of an investment contract? If a bank took 20 billion dollars of your assets, froze the the window, and said, ‘you can’t have your money back ever, it may be in the year 2024, we’re not sure, we’re just going to keep it, we may actually give you interest on it, we may take it all, we may slash it.”
He adds: “That’s the definition of a security, right? It’s an investment of money in a common enterprise, relying upon the efforts of others and expectation of profit. The whole point is if you want to crypto asset to be a commodity, you can’t rely upon four, engineers, a company, a CEO. If a person can make a decision, It’s not a commodity.“
Former basketball star Shaquille O’Neal, who appeared in a commercial for FTX earlier this year, is trying to distance himself from FTX and the crypto industry as a whole.
O’Neal has not revealed how much money he received for appearing in a FTX commercial this past June. O’Neal told CNBC his friendship with fellow NBA great Stephen Curry was part of the reason why he agreed to star in an FTX spot, as reported by CNBC.
“A lot of people think I’m involved, but I was just a paid spokesperson for a commercial,” O’Neal says.
In an interview on CNBCs Make It This Week, O’Neal took questions on his connection to now-bankrupt crypto trading platform FTX. O’Neal is embroiled in a class-action lawsuit filed last month against the now-defunct crypto exchange FTX. The suit stems from his role in an ad that promoted the exchange. O’Neal told CNBC he was merely a celebrity figure in a promotional spot, nothing more.
O’Neal went further to say he doesn’t believe in cryptocurrency.
Shaq as DJ Diesel. Photo by: All-Pro ReelsThe SEC alleges FTX founder Sam Bankman-Fried misdirected client funds in order to benefit himself and his cryptocurrency hedge fund, Alameda Research. O’Neill is one of a number of well-known names named in the class-action lawsuit filed Nov. 15 against FTX, its high-profile backers, and its founder.
The cryptocurrency world was rocked on November 11, when FTX filed for bankruptcy, and ever since, FTXs new CEO, John Ray, has divulged how poorly run the behemoth was.
Texas is now separately investigating a number of celebrities who were supporters of FTX, as a possible violation of the state’s securities laws, according to Bloomberg. Other athletes and celebrities who have been featured in FTX ads include Steph Curry, Tom Brady, and comedian Larry David, all of whom are also named in the suit.
Cover photo: Army.Mil
On Monday, Bermuda-based Jewel Bank announced Jewel Bank will create a stablecoin with full backing known as Jewel USD (JUSD). The bank will serve digital asset firms worldwide, providing basic banking, payments, and settlements, according to the press release issued June 7.
Jewel Bank received Bermudas Banking and Financial Services Authority (BMA) approval for a combined full banking license and Digital Asset Business Activity (DABA) license in June, and in the process, according to the bank, became the first new bank in Bermuda in 20 years, and the first to do so with a focus on digital assets.
In future, Jewel Bank plans to leverage the Polygon ecosystem to provide commercial and retail stablecoin-based payment solutions, including transactions between institutions and businesses, as well as payments among individuals. Chance Barnett, Founder & Chairman of Jewel, explained the stablecoin project and the Polygon Network Partnership will provide for the long-term development, safety, speed, and security of the bank’s first stablecoin.
According to Jewel, stablecoin operations and their reserves will undergo banking audits and regulatory supervision, updated on monthly and quarterly bases. Polygon is currently brokering trades in more than 20+ stablecoins using the L2 Scaling Solution on the Ethereum blockchain.
It’s been an eventful week for cryptocurrency. The Binance cryptocurrency exchange has seen net withdrawals in excess of $2bn worth of Ethereum-based tokens as of 12th Dec. The Dutch Central Bank, furthermore, has issued a warning against crypto exchange KuCoin for operating without registration in the Netherlands. The Dutch central bank said KuCoins Dutch subsidiary, EK Global Limited (MGL), does not have a legal registration in the Dutch National Bank.
Photo: Ola Bear
Three U.S. senators have asked the CEO of Silvergate to disclose details of the Silvergate Bank’s connection with bankrupt FTX. Warren and two other senators sent a letter last week to Lane raising questions about the security precautions that the La Jolla-based Silvergate Capital has in place.
Also, a class-action lawsuit claims crypto bank Silvergate is liable for their role in the FTX meltdown, as well as breaching their fiduciary duties. The lawsuit claims Silvergate Bank aided and abetted the fraudulent activities of FTX, and FTXs breaches of fiduciary duty, by improperly wiring, loaning, and pooling users’ funds.
Filing on behalf of himself and other investors, Plaintiff Joewy Gonzalez claims Silvergate Bank was involved in the FTX schemes by engaging in improper transfers, commingling funds, and lending user funds.
The lawsuit seeks to hold Silvergate bank liable for their alleged role in placing FTX users deposits in Alameda Research’s bank accounts, causing panic within the cryptocurrency markets, and ultimately leading both firms into bankruptcy. To put further pressure on Silvergate Bank, a group of Senators, including US Senator Elizabeth Warren (D-Mass), a longtime critic of cryptocurrency, sent Silvergate Chief Executive Officer Alan Lane a letter demanding that the bank reveal the bank’s dealings with FTX and Bankman-Fried.
At least two lawsuits have already been filed by shareholders in La Jolla-based Silvergate Capital, claiming that the bank made misleading statements to its investors.
Lane argues Silvergate did significant due diligence and continuous monitoring on FTX and Alameda Research accounts at the bank, processing wire transfers according to sender instructions and industry practices. Had FTX directed customers to send funds to Alameda Research accounts via Silvergate, the bank typically would not have had visibility into the relationships between the parties involved in a trade, or why a trade was made.
Photo: Silvergate Bank
Mazars, a global accounting firm, will cease working with the crypto industry. The exit of the French firm from the cryptocurrency markets comes as customers and investors demand greater transparency of the cryptocurrency exchanges they use following FTX’s bankruptcy.
Investors are turning their attention to the largest cryptocurrency exchange, Binance, after the latter delivered a report last week by French accounting firm Mazars that fell short of showing the financial state of the exchange.
Mazars Group has suspended its work not only for Binance, but for all crypto clients globally. The accounting firm recently assessed Binance’s Proof-of-Reserve positions, and found Binance’s Bitcoin holdings were over-collateralized. Binance’s proof-of-reserves did not reveal all of the exchange’s liabilities.
KuCoin, which had a Proof of Reserves report from French accounting firm Mazars released Dec. 8, is open to working with any reputable auditor, according to a spokeswoman.
Mazars Group has been on the front lines of the cryptocurrency exchange industry’s scramble to perform what is known as “proof-of-reserves,” such as Binance and other major exchanges since crypto exchange FTX went down in November.
Binance Coin (BNB), the native token of cryptocurrency exchange Binance, responded to the news by falling more than 5.2% Friday, and is now trading around $243, according to CoinGecko. After Mazars Group announced that it will be cutting ties with Binance, as well as with other clients, the value of BNB, or Binance Coin dropped sharply.
Former President Donald Trump’s collection of non-fungible tokens (NFT) digital trading cards sold out early Friday, a day after it was originally released.
Trump unveiled on Thursday a limited-edition set of trading cards for the NFT, featuring comic-book-like images of himself depicted as superheroes, Hollywood actors, and others, after teasing an announcement of great importance on his Truth social account.
The entire set of 45,000 Donald Trump-themed NFTs were sold out within about 12 hours, according to data from OpenSea, and almost 14,000 people purchased one or more of the non-fungible tokens (NFTs).
OpenSea Data, which tracks NFT sales and markets, indicates that there were initially 45,000 cards featuring the former president Trump that were made available for purchase at a cost of $99 each. At a cost of $99 apiece, Trump cards were printed on the Polygon blockchain, and sold out within a day. The cards marked the first time Donald Trump has ventured into the realm of NFTs, though Melania Trump released NFTs way back in February, reportedly buying them for $185k each.
In addition to NFTs, Trump announced a raffle for a number of prizes, including dinner with him in Miami, golf outings, a one-on-one meeting, and memorabilia signed by the former President.
Melania Trump launched an NFT sales platform last year on the Solana blockchain, featuring the first picture from her eyes, and her husband’s single in office. The collection highlights iconic moments of her husband’s presidency, including one themed Christmastime in the White House. Melania Trump’s First National Currency Auction In January, Melania Trump began selling a collection of National Currency notes, a type of cryptocurrency that is on the Solana Blockchain, featuring artwork from her first official visit to the country in 2018.
Amid the U.S. Senate hearings on the FTX crash this week, Sens. Elizabeth Warren (D-Mass) and Roger Marshall (R-Kan) introduced the Combating Digital Assets from Money Laundering Act, targeting the crypto sector with a series of proposed regulations dubbed by critics as tyrannical and unconstitutional. The bill effectively kills the golden goose.
The new legislation has been put forth to target money laundering, seeking to make the digital asset ecosystem compliant with existing money laundering systems. The Digital Assets Anti-Money Laundering Act would also prohibit financial institutions from using a Tornado Cash-style mixer or other technology to enhance anonymity, as well as use cryptos that passed through such protocols.
The restrictions on privacy services and tools—defined in the Digital Asset Anti-Money Laundering Act as services designed to hide or confuse the origin, destination, and counter-parties of a digital assets transactions—would directly contradict the provisions of the FCRA, since credit reporting agencies would be allowed to keep an unlimited record of each users financial information and transactions with no ability to delete.
The Act would have significant implications for the privacy of Bitcoin and cryptocurrency users, and is designed to reduce the risks posed by cryptocurrency and other digital assets to U.S. national security by closing loopholes in the current anti-money laundering framework.
The bill seeks to close financial system loopholes that present a national security risk by allowing digital assets to be used to launder money, Warren’s office told CNN.
Senators Warren and Marshall's proposed bill subjecting software devs & nodes to AML is "a repudiation of liberal values and a move towards the types of surveillance and control prized by authoritarians like Vladimir Putin, Xi Jinping, and Kim Jong-un"https://t.co/s7pRKsWV2W
— Peter Van Valkenburgh | (@valkenburgh) December 14, 2022
The bill would direct the Financial Crimes Enforcement Network (FinCEN) to consider cryptocurrency wallet service providers, miners, validators, and other users of the network to be money services businesses, according to a statement from Warren. They then would require KYC of participants alongside requirements for anti-money laundering (AML) programs.
The seven-page bill would broaden the definition of money services business (MSB), ban financial institutions from using technologies like digital asset mixers, and regulate digital asset kiosks, aka automated teller machines, or ATMs.
The bill would also prevent financial institutions from using privacy tools like cryptocurrency mixers, and mandate that cryptocurrency companies must comply with the same money laundering rules that banks must, in addition to regulating cryptocurrency kiosks (ATMs).
“The crypto industry should follow common-sense rules like banks, brokers, and Western Union, and this legislation would ensure the same standards apply across similar financial transactions,” said Warren in a statement reported by Decrypt. “The bipartisan bill will help close crypto money laundering loopholes and strengthen enforcement to better safeguard U.S. national security.”
The bipartisan bill would help to eliminate cryptocurrency money-laundering loopholes and enhance enforcement, while also enhancing protections for US national security. The proposed legislation is proposed to remove requirements that cryptocurrency businesses and projects register as virtual asset service providers, as a response to FTXs failure.
Former president Donald Trump announced Thursday that he is starting to sell digital trading cards, billing them as an excellent stocking stuffer for Christmas.
Trump’s first NFT set came after he teased a Special Announcement, which trended on viral. Each NFT costs $99, reports the Mirror UK.
“Collect all of your favorite digital Trump trading cards, much like baseball cards, but hopefully far more fascinating,” Trump wrote on Truth Social, his social media website.
The digital trading cards featured a cartoonish Superman image of Trump pumping his fists as he sits on top of a blue-and-red elephant, with him holding a torches before the Statue of Liberty.
The limited-edition cards feature artwork related to the life and career of the former President. These 36 cards feature Trump in various fantasy-style costumes—an astronaut, a fighter pilot, a red carpet celebrity, and more.
Memorabilia cards and autographs, highlighting even Trump’s reality TV show, as well as Trump-signed NFTs round out the rarities in the set.
Trump has been in the public eye for decades, and has spawned numerous books, a board game, a TV show, the celebrity version of said TV show, and several trading cards along the way. Former First Lady Melania Trump already released her NFT set, auctioning off a batch of cards commemorating moments during her husband’s presidency, from Mount Rushmore to Air Force One Melania Trump released her latest batch of NFTs.
Trump NFT sweepstakes offers prizes such as 1-on-1 Zoom calls or an hour on the golf course with Donald Trump. Digital World shares were higher on Wednesday, following Trump’s announcement. And, If followers bought a picture of Trump dressed as a cowboy, they could win a night out on the town of Miami and an exclusive dinner hosted by Trump.
In a video teasing the announcement of his new digital trading cards, Trump says America needs a superhero, and is shown in a cartoon strip pulling off his shirt to reveal a super hero suit, complete with six-pack abs and lasers shooting out his eyes.
In Gallup’s annual Most Admired Woman survey, Melania was ranked in the top 10 in each of the years her husband was President.
“MAJOR ANNOUNCEMENT! My official Donald Trump Digital Trading Card collection is here! These limited edition cards feature amazing ART of my Life & Career! Collect all of your favorite Trump Digital Trading Cards, very much like a baseball card, but hopefully much more exciting. Go to collecttrumpcards.com/ & GET YOUR CARDS NOW! Only $99 each! Would make a great Christmas gift. Don’t Wait. They will be gone, I believe, very quickly,” Trump wrote on Truth Social.
A Japanese lawmaker asked for more clarity on cryptocurrency regulation after an industry watchdog failed to alert consumers about the potential for problems around FTX’s native coin, FTT, when it approved the token for a listing earlier this year.
“It will become more and more important to ensure transparency for consumers when there are any matters that require attention on tokens,” Akihisa Shiozaki, a lawmaker with the ruling Liberal Democratic Party who helped design the nation’s crypto policy, said. He said that the FTX collapse shouldn’t undermine Japan’s relaxing of coin-listing rules.
A regulatory body, Japan Virtual Currency Exchange Association (JVCEA), was formed in early March with the goal of developing and coordinating policies alongside the Financial Services Agency.
In May, the Japanese Financial Supervisory Authority outlined the regulations governing registered exchanges, including stricter restrictions for the exchanges of anonymously traded altcoins.
The industry’s regulatory body required the Japanese affiliate of FTX to audit the financial statements of the company’s subsidiary, Alameda Research, as a condition of approval, according to the document.
The JVCEA reported back to the Financial Services Agency, which granted FTTs listing of the country’s domestic tokens, subject to certain conditions, according to a financial regulator in that country.
The FSA has decided to enforce stricter supervision on new applications by exchanges hoping to obtain an official operating license.
Record-keeping, poor centralization controls, and a mix of customers’ assets from the massive holdings of FTTs between FTX and its Alameda Research trading firm were some of the reasons behind the collapse at FTX.
FTX’s failed because of “problems in its governance as an exchange,” said Shiozaki. “We need to think of that separately from the issue of how token vetting should be.”
Photo: Aleksandar Pasaric
In the future, who knows? Perhaps there will be a universal barcode a merchant can put on their shop window or website and receive payment from any cryptocurrency at any time. If not, merchants will have decisions to make. Do they wish to accept Bitcoin? Or do they wish to accept not only Bitcoin but also some of the various cryptocurrencies on the market, such as Dogecoin. Do they wish to accept stablecoins and/or Central Bank Digital Currencies (CBDC)? Ultimately, consumers will have some say on which mediums of exchange ultimately get adopted in the future, but one thing seems for sure: touchless payments are the way of the future and crypto assets can make that payments reality happen.
Stablecoins
There exist today barriers to direct acceptance of crypto in commerce. The merchant, who just wishes to get paid quickly and easily, wants liquid assets in traditional dollars. They want to get dollars to their bank accounts so they can pay their merchants, etc. They don’t want new steps, let alone extra steps. Moreover, when we spend cross-border, we expect the dollars to be easily convertible into local currencies. To achieve this requires a whole new crypto infrastructure of custody, liquidity providers, etc. It’s an entirely new backend process that must be developed.
Consumers and merchants will choose which mediums of exchange they prefer. Stablecoins have captured a significant share of the crypto market. Bitcoin, stablecoins, and NFTs seem to be the leading use cases at the time of writing. Numerous stablecoins are growing rapidly today, including USDC and USDT, etc.
Stablecoins have been deployed across varied blockchain networks. You could use USDC atop Ethereum, Solana, Stellar, etc.. If consumers and merchants choose numerous stablecoins in commerce, the fragmentation of the market could lead to practical technical challenges with multiple stablecoins used in commerce.
Use cases for stablecoins are growing, in particular in B2B high value transactions. At the time of writing, the average value of a stablecoin transaction is more than $10,000. They’re also being used to stream payroll in real time. Stablecoins behave as a payment rail, in part because crypto capital markets offer more efficient, 24/7 trade settlement, as well as B2B use cases.
Regulators prefer standardization. Both the public sector and Fortune 500 are working to build out a standardized crypto infrastructure. The implementation thereof will be determined by how consumers and merchants use stablecoins, while also weighing first and foremost the potential benefits and, second, the potential risks.
People and businesses need 24/7 liquidity, instant conversion between assets, etc. When one holds Bitcoin, they might want to spend bitcoins. But, many merchants don’t accept Bitcoin. The bitcoiner must therefore plan ahead. They sell their bitcoins and receive the funds through an ACH. It can take as long as 3-5 days. They then purchase goods with their debit card.
Moreover, it would be quite confusing and challenging for a local dry cleaner, coffee shop or any merchant to receive payments via QR code in Bitcoin. To enable such a system in the digital currency world, a consumer would need a wallet which supported every single stablecoin or every single blockchain. The challenge is to enable seamless transfer of value across currencies in a network.
At the end of the day, merchants care about selling their product or service, and, ultimately, you want to support the payment method a consumer might want to use. It was once having to accept a handful of card networks. Today, it’s having to accept numerous cryptocurrencies. It will take a concerted effort by both the private and public sector to streamline crypto payments globally.
CBDCs: What are the opportunities?
Central banks globally have been exploring Central Bank Digital Currencies (CBDC), which are best understood in the context of the innovation happening in the open source crypto ecosystem. Much of what’s been learned in crypto technologies could be applied to CBDCs. At the very least, the work of open-source developers must inform how central banks think about designing CBDCs. There will also be high-level conversations about CBDC policy implications.
In any country, you can have a card or credential issued from a bank out of San Francisco, which you can use to pay for coffee. The coffee merchant doesn’t have to think twice about it. They receive local fiat currency from their bank. The details have been attracted away on the backend. This system works today, and people are not exactly clamoring for an alternative. Furthermore, many people still prefer cash.
It’s likely that, at some point in the near future, multiple CBDCs will be on the market, and they will run on a number of different networks. If we lived in a world with numerous fiat backed digital currencies—both stablecoins and CBDCs—there is potential for incredible fragmentation. CBDCs and stablecoins are top-of-mind topics for most policymakers and regulators across the world, working closely with regulators. It will be crucial to have consumer protection, regulatory clarity, and standards. It will also be crucial to having consumer choice.
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