The Breakdown - Does Crypto Have a Banking Problem?

Episode Date: January 24, 2023

On today’s episode, NLW breaks down the latest news from the weekend, including: Signature Bank limiting services, and what it means for the industry as a whole U.S. government seizing $700 million of assets associated with Sam Bankman-Fried  Genesis first-day bankruptcy hearing information    (Genesis and CoinDesk are both subsidiaries of Digital Currency Group.) Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW - Join the most important conversation in crypto and Web3 at Consensus 2023, happening April 26–28 in Austin, Texas. Come and immerse yourself in all that Web3, crypto, blockchain and the metaverse have to offer. Use code BREAKDOWN to get 15% off your pass. Visit consensus.coindesk.com. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Swoon” by Falls. Image credit: Craig Hastings/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is produced and distributed by CoinDesk. What's going on, guys? It is Monday, January 23rd, and today we are asking whether crypto has a banking problem. Before we dive into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join the Breakers' Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, welcome back to another week of the breakdown.

And there was a pretty good cluster of news there at the very end of last week heading into the weekend to say nothing of over the weekend. So today we're going to go over what we missed and see where it leaves us heading into this final week of January. Let's start on Saturday morning, where we had some fairly sensational reporting before things calmed down a bit. On Saturday, a headline from the publication, Asia-Mort. markets sent a shockwave through crypto Twitter. The headline was Swift Payments Network access cut to crypto exchanges, which, if it were what the headline suggested, would be a pretty big deal. So what it was actually about was changes to policies affecting finance. These changes

would prevent customers from processing transactions to and from the exchange in amounts less than $100,000 via the Swift Payments Network beginning in February. Swift is the international US dollar-based transaction messaging system, which facilitates a majority of cross-border wires. Now, short on details and high-odd-fud potential, the article caused the crypto-critical corners of Twitter to light up with speculation that this was the end of the crypto industry. David Gerard writes, Swift Network will no longer process transfers of actual money from bank accounts to cryptocurrency exchanges with the value of less than $100,000, effective 1st of February 2023. The move will thwart crypto access to tens of millions of people worldwide, thankfully.

Finance Alot writes crypto exchanges use the Swift Network to facilitate deposit and withdrawal requests in fiat currency. It's scary how many replies don't know about Swift and how big of a deal this announcement is. Basically, crypto exchanges are cut off from the banking system on February 1st. Now, additional reporting later in the day from Bloomberg significantly cleared up the situation. It appears that Signature Bank, one of the main U.S. banking partners for crypto firms, has decided to cut off support for Swift payments below $100,000. The policy is not coming from Swift itself, but rather, reflects a decision made by Signature, and it's purported to cover all of its crypto clients,

which includes BitStamp, Fireblocks, and Huobit. That said, no confirmation of the policy change has been mentioned by these other firms. Binance said that none of its other banking partners are impacted and that it hasn't been blocked from using Swift. They also added that they were, quote, actively working to find an alternative solution. Signature Bank announced in December that it was seeking to reduce its exposure to crypto firms and flag that this would mean shedding up to $10 billion in deposits. So the logical conclusion is that this news forms part of Signature's plans to sever its ties with the crypto industry. Now, while this news doesn't represent the worst case scenario that it seemed to initially banning crypto firms from transacting over Swift,

it does seem that Binance will be limited in their ability to use Swift from February on unless they can find another banking partner. Now, at this time, only two U.S. banks, Signature and Silvergate, provide the vast majority of banking services to the industry. In other words, there's very little redundancy available to crypto firms. Here's how another crypto-sceptic Patrick McKenzie put the situation. So Binance just announced they will no longer process swift payments of less than 100k, citing a new change in policy by signature bank, which they purport applies to all of its crypto clients. That suggests that a regulator recently asked a pointed question and did not like the answer it got back, or in the alternative that someone likely anticipated the question and reaction to the

answer. If I were speculating out of the clear blue sky, I would assume that 100K is the threshold, where a bank might choose to identify in its AML policy that any wires above will undergo secondary screening, sometimes called enhanced due diligence at the bank. And below that, the bank might have made a risk-based calculation that routine retail use of a crypto exchange could rely on the exchanges or sending banks AML-KYC policies. And perhaps someone looked at that written part of the AML-KYC policy and said, nah, we're not comfortable with that second clause anymore. We think the bank needs eyes on every transfer. And since we have no pre-existing process for that which is retail appropriate, dot, dot, dot. Now, from the crypto side, a lot of the focus was on the sensationalism of the

initial reporting. Alex Thorne, the head of firm-wide research at Galaxy Digital, said this is Fudd. The reporting was not that Swift was doing anything. It's that signature limited Swift's size for crypto to over 100K. That's not to say that there aren't or won't be crypto banking issues, but the current claim and current reality are quite different. Liam Quinlan Stamp, founder at Coinspresso, has an even more generous interpretation. It's one bank's signature, not the whole of Swift, rubbish journalism. On another note, there seems to be a synchronized effort across Tradfai to fud crypto at the moment. Diamond, the Bitslato Nothing Burger, now this.

Institutional money is probably accumulating. Alicair Milney says not sure why Signature Bank not wanting to deal with people's $92.50 transfers to Binance and setting 100K minimum is big news. Now, I agree that the initial reporting and triumphal tweets were way overblown. However, I don't agree with the idea that this is somehow just some small little footnote. Banking and fiat on ramps and off ramps remain a real risk for crypto right now. And there has definitely been an uptick and concern. Remember, on January 3rd, the Office of the Comptroller of the currency,

the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation issued a joint statement highlighting risks to banks associated with crypto assets and crypto participants. Here's how they summarize their highlights. Quote, the interagency statement highlights key risks associated with crypto assets that could affect banks, reminds banks to engage in robust supervisory discussions with their supervisory office regarding proposed and existing crypto asset-related activities, reminds banks that before launching

crypto-asset-related activities, banks should ensure that an activity can be performed in a safe and sound manner, is legally permissible, complies with applicable laws and regulations, and can be conducted in a manner that is fair to consumers." End quote. Now, the key line maybe of the whole report was this. The agencies believe that issuing or holding as principal crypto assets that are issued stored or transferred on an open public and or decentralized network, where similar system is highly likely to be inconsistent with safe and sound banking practices. Further, the agencies have significant safety and soundness concerns with business models that are concentrated in crypto asset-related activities, or have

concentrated exposure to the crypto-asset sector. In other words, this report might be suggesting that banks like Silvergate and Signature might not be conforming to their agency's view of sound banking practices. And I think that the lesson here is that when it comes to banking, we don't need some full ban for it to get problematic. We just need banks in the U.S. not being willing to take on the risk. But with that, let's move over to another update this time from Friday. Court documents filed on Friday by the Justice Department have disclosed the seizure of almost $700 million in assets related to fraud charges leveled against FTC's former CEO, Sam Bankman-Fried. Now, the bulk of these assets are the 7.6% stake in Robin Hood

purchased in May, with those shares currently being worth around $526 million. Another portion of the seized assets were cash held in bank accounts. Over 6 million was seized from Silvergate Bank in early January from accounts held in the name of a Bahamas-based FTX subsidiary, and a further 50 million was seized from Moonstone Bank, the tiny Washington State chartered bank, which received a suspiciously large venture capital round in March, led by Alameda Research. Finally, three Binance accounts were seized, however, the DOJ did not disclose the value of those accounts. Now, the Robin Hood shares have been the subject of disputed claims over ownership from BlockFi, the FTX bankruptcy team, and SBF personally.

They were reportedly purchased using personal loans granted to Sam and fellow FTX co-founder Gary Wong. The seizure from the DOJ opens questions over whether any of these assets will be able to be accessed by the FTX bankruptcy team in order to make creditors whole, or whether they will be retained by the government as part of civil forfeiture or RICO proceeds of crime claims. Now, a lot of the commentary was some version of this from CryptoCrib, quote, The U.S. government has seized nearly $700 million in assets and cash belonging to SBF. Didn't he say he add only $100K to his name? Another point was that this reinforced the co-mingling. Patrick DeCorty writes, assets connected to SBF. We can't even say if these were personal SBF assets or corporate assets

belonging to FTX. Why? Because everything was commingled. And like kept track of on post-it pads. Borrowed a billion to buy X type accounting. So yeah, the whole process over there continues to be extremely messy. Join CoinDesk's Consensus 20203, the most important conversation in Crypto and Web 3. Happening April 26 through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto, Web3, and the Metaverse. Immers yourself in all that blockchain technology has to offer creators, builders, founders, brand leaders, entrepreneurs, and more. Use code breakdown to get 15% off your paths. Visit consensus.com or check the link in the show notes.

Now moving over to Genesis. We left on Friday with the news that Genesis Global Capital had filed for bankruptcy. The troubled crypto lender will now enter restructuring in order to find a way to repay creditors after the calamitous events of last year came to a head. In the first day, motion filed with the bankruptcy court on Friday, Genesis claimed that the firm had $5.1 billion in outstanding liabilities. They noted that although the collapse of FTCS had affected them, their liquidity crisis was more to do with the run-on deposits that ensured afterwards. At that time, customers demanded repayment of $827 million in loans, forcing the lending unit of Genesis to halt withdrawals. Referring to the digital currency group, which is the parent company of both Genesis

as well as CoinDesk, the filing said that DCG was unable to backstop Genesis during the run. Quote, at the same time, Genesis's corporate parent, digital currency group, or DCG, and its various subsidiaries were also impacted by the market turmoil and did not have the liquidity to pay back the company on certain loans, adding pressure to the debtor's balance sheets. First-day filings also showed that Gemini was by far the largest creditor of Genesis with more than $700 million owed. After a weeks-long public relations war, Gemini co-founder Cameron Winklevoss threatened to sue DCG and CEO Barry Silbert if Genesis fails to put forward a, quote, fair offer to creditors. In a nod to the acrimony among creditors, these Friday filings characterize the bankruptcy proceedings as a way to, quote, incentivize all stakeholders

to move expeditiously towards a consensual resolution that avoids the costs and uncertainties of litigation. Now, Genesis will continue to operate most of its non-lending businesses, including derivatives, trading and custody, all of which are held in separate legal entities. There was also some confusion around the initial creditor list, which listed a multiple of crypto firms as uncollateralized creditors. On Friday, as I think I mentioned, Crypto Trading firm Cumberland clarified that although it was listed as being owed $18 million by Genesis, their inclusion in the creditors list was, quote, misleading and incorrect information. They explained that in November, Cumberland held $18 million in loaned crypto, which was fully collateralized by cash held

by Genesis. But on November 16th, the date when Genesis halted withdrawals, Cumberland notified Genesis that they were surrendering their cash and liquidating the loan crypto in accordance with the terms of their agreement. This liquidation process left an outstanding balance of around $46,000 owed to Cumberland rather than the $18 million shown in the creditors list. While the whatever millions of dollars owed to Cumberland is a drop in the bucket relative to the 5.1 in outstanding liabilities listed by Genesis, it does demonstrate that significant portions of this outstanding debt could have collateral attached, which would reduce Genesis's overall liabilities. Initial filings also gave us some additional clarity on what happened

between Gemini and Genesis in the lead-up to the halting of withdrawals. The filing states that on August 15th, the two parties entered a security agreement where Genesis pledged around $465 million worth of grayscale Bitcoin trust shares as collateral to Gemini. On November 10th, an additional tranche of 300 million worth of GBTC shares were pledged by Genesis, but never delivered to Gemini. On November 16th, the date when Genesis halted withdrawals, Gemini foreclosed on the collateral it had been holding, liquidating the GBTC shares for around $284 million, in a private sale. There is an outstanding dispute around whether this liquidation was conducted in a, quote, commercially reasonable manner and in accordance with notice requirements. There will also

be regulatory questions over whether GPTC was appropriate collateral to offer. SEC Rule 144 restricts a securities issuer and their associates from being able to sell more than 1% of its holdings. The sale of GBT's shares by Gemini exceeds that threshold, but the question remains as to whether the seizure of collateral gets around Rule 144 restrictions. Now, in either case, people aren't really happy about this GBT sale, although it does help explain why the discount widened around that time. Now, with all eyes on Genesis, it was noted that the firm's trading arm continued to move funds around last week, prior to Friday's bankruptcy filing by Genesis Global Capital, the lending division. A wallet control by the Genesis OTC desk sent

around $125 million worth of crypto to Coinbase, Binance, Bit Stamp, and Cracket on Thursday, according to blockchain data compiled by EtherScan. Since the filing, the address continues to transact, receiving almost $50 million worth of stable coins on Friday. During the announcement of the bankruptcy, Pair and company DCG said the trading and custody business at Genesis will, quote, continue to operate business as usual. To some, these transactions are a sign that problems might not have spilled over into other divisions at Genesis.

The wallet in question typically moves funds on weekdays, and according to Nansen data, transactions on Thursday and Friday were basically at normal levels. Still, Charles Story, the head of growth at Crypto Index Platform Future, said, quote, The reputation of Genesis is in the bin. Maybe they keep some legacy clients, maybe. As for introducing new clients, no chance while bankruptcy is in play.

Finally, on this side of the story, according to an internal message that was reviewed by the information, Gemini has cut another 10% of its staff in its third round of layoff since June. Wrote Cameron Winklevoss in the message, It was our hope to avoid further reductions after this summer. However, persistent negative macroeconomic conditions, and unprecedented fraud perpetuated by bad actors in our industry, have left us with no other choice but to revise our outlook and further reduce. reduce headcount. Still, to end on a slightly positive note, Bitcoin is up to over $23,000.

Bitcoin surged first through the 21,000 level on Friday afternoon, and settled to spend most of the weekend around 22,700. We've seen a run-up then of 37% of Bitcoin prices so far this year, making it the best-performing asset in the world. Last week alone saw an 8% gain despite the Genesis bankruptcy filing. Some commentators are suggesting that the clarity provided by Genesis entering Chapter 11 has allowed markets to more accurately price in further downside risk, essentially that we could be nearing the end now of a year filled with crypto-contagion. And to the extent that you like patterns, the end of January has typically been a cyclical strong point for Bitcoin. Chinese New Year celebrations for the beginning of the year of the

Rabbit took place on Sunday, and Matrixport Research noted that Bitcoin has seen positive returns over the first 10 days of the lunar year in each of the past eight years, averaging a 9% return during that period. I think we're going to be exploring a lot more of this question of to what extent this Bitcoin bowl that we've been on is the result of shifting narratives versus more market structure reasons versus shifts in the macro. But that's where we'll close today. As always, I appreciate you guys listening. And until tomorrow, be safe and take care of each other. Peace.