The Breakdown - How Impactful Will FTX Estate Selling Be on Crypto Markets?

Episode Date: September 16, 2023

The FTX estate has received approval to begin crypot asset liquidation, overseen by Galaxy. The speculation this week has all been about how much pressure it would put on market prices. NLW explores that, and catches up on 3AC's banning from Singapore. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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. What's going on, guys? It is Friday, September 15th, and today we are talking about how much pressure FTX selling will put on the crypto markets. Before we get 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 us on. on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello friends, happy Friday. We have lots to catch up on today, starting with what has emerged as a key narrative. That is, of course, that FDX has been granted approval to begin selling their crypto assets. On Wednesday, the bankruptcy judge ratified the sale plan, which was filed

in late August. Galaxy Digital has been appointed as the selling agent. At last count, FTCS said it had $3.4 billion worth of liquid crypto assets to sell. Galaxy has been authorized to sell $50 million worth of crypto this week and next week, then $100 million per week after that. Creditors can agree to increase this amount to $200 million per week on a temporary basis before seeking court approval. Galaxy has also been given permission to hedge their sales using Bitcoin and Ethereum derivatives without sizing limits and at their sole discretion. Staking of assets will also be allowed if Galaxy deems it necessary. During the hearing, the judge questioned the need to sell crypto rather than distribute it directly to customers. FtX lawyers explained that there

was no meaningful segregation of customer assets and balances hell didn't line up with customer accounts. They said, quote, it's all part of one pool. There are assets that are associated with the exchange, we call the dot-com customer pool and the US pool, but they don't necessarily match customer entitlements. So when we dispose of this, we'll be turning it into cash effectively, and the cash will be available for distribution pursuant to the plan. Now, all parties appeared concerned with getting this liquidation moving quickly while also limiting the price impact on the portfolio. A lawyer representing the ad hoc creditors committee said, the sooner we can get this process rolling, the better. Now, the speculation all over Twitter has, of course, been that this would lead to

incredible downward price pressure across the crypto markets with any asset that was being sold. However, Jeff Dorman's CIO of ARCA, pushed back on notions that this liquidation will be an uncontrolled dump. Here's a summary of his Twitter thread. He pointed out, that Galaxy asset management, not their trading desk, won the bid. They must act as a fiduciary and sell gradually and opportunistically. He pointed out that Galaxy is receiving massive amounts of reverse inquiry already, some from real funds and some fishing expeditions, but over-the-counter sales will dominate the buying. In other words, we're less likely to see a lot of selling on exchanges or via twopps. As good bids come in, they will engage. Hedging, he points out, will be opportunistic,

i.e. long puts to offset a large drop in the portfolio. And he points out that people thinking that Galaxy will rush to sell $3 billion in futures right away is crazy. The goal he points out is to outperform a static portfolio, not turn the estate into a long short fund. He reminds that Galaxy cannot front-run the sales and profit internally, that that is very illegal and that their asset management business is completely walled off from their prop desk. Finally, he points out that this is not some half-baked plan. It involved months of working with the courts to win this business, and that the point of bankruptcies is to maximize the upside of the estate, not speed of distributions. In other words, this may be cap's short-term gains due to operatic sales into strength, but it is not a fire

sale into weakness. Now, getting even more granular, much of the speculation in recent weeks has specifically surrounded how sales of the hefty FTX Solana portfolio will impact that market. In their most recent accounting, FTX said they hold $1.1 billion worth of Solana, which is able to be sold. That would be around 14% of the current market cap. It was previously believed that much of the supply was staked and would be unlocked between 2025 and 2008, although latest FTCS filing threw this into question by lumping all of the Solana holdings in together. Fundstrap published a report earlier this week detailing the FTX crypto holdings and claimed that less than $150 million worth of Solana is liquid and able to be sold off. Now ultimately,

no matter what people say, it's going to be very, very hard to get people away from the concern that this amount of selling will impact the market. Liquidity is incredibly thin right now, and probably the best that we can hope is that some of the negative price action over the last few weeks, has been in anticipation of this and trying to front-run it. But ultimately, the only way out is through, and so we just have to deal with this as the next thing we have to deal with. Now, moving over to that other big exchange, two more Binance U.S. executives have joined the exodus from that embattled company. The head of legal Krishna Juvadi and the chief risk officer Sydney Majalia are leaving the company according to WSJ sources. Juvadi was one of the firm's

main contacts for communicating with the SEC, which is currently in active litigation. with Binance. This makes three executives reported to be jumping ship from Binance U.S. in less than a week. Remember on Tuesday, sources said that Binance U.S. CEO Brian Schroeder had left his position. Now, Schroeder has not been active on social media since February, leading some to speculate on whether reporting was simply catching up on events that had quietly transpired much earlier. According to a company spokesperson, Chief Legal Officer Norman Reed, has stepped in as interim CEO. Bloomberg ETF analyst James Safart said the obvious thing when he tweeted, well, this cannot be a good sign for whatever is going on at Binance.

On the flip side, crypto has at this point, I think, written off Binance U.S. is a going concern. The Flow Horse writes, why does anyone care about Binance U.S. employees leaving? They don't have a job to do. The exchange is a placeholder and no one uses it. Proof of talent founder, Rob Payone writes, Binance U.S. doing $9 million in 24-hour volume right now. At what point do they shutter the doors?

Gotta be soon, right? Now, staying on the Binance train for a moment more, the SEC have accused Binance U.S. of refusing to cooperate during the discovery process of their ongoing lawsuit. A court filing made on Thursday noted that only 220 documents had been produced by the exchange. Binance U.S. had signed a consent order regarding the scope of discovery in June, but the SEC are claiming that many of the documents produced in accordance with that order, quote, consist of unintelligible screenshots and documents without dates or signatures. The SEC noted that Binance had refused to produce essential witnesses for depositions, including former CEO Brian Trotter. Instead, they unilaterally limited the list of witnesses to just four employees.

The SEC said that Binance U.S. quote, has responded to requests for relevant communication with blanket objections and has refused to produce documents kept in the ordinary course of its business, claiming those documents do not exist, only for the SEC to later receive such documents from other sources. Now, the bulk of the SEC's filing related to Seifu, the wallet custody system at Binance U.S., which is provided by Binance International. The regulator called attention to contradictory statements about Binance's involvement in the management of U.S. customer funds. They argued that the usage of Sefu violates the terms of a

prior agreement that Binance U.S. customer funds would not be diverted offshore. The heavily redacted filing also included information obtained by the SEC with the cooperation of a former Binance U.S. auditor who has provided over 6,500 documents related to Binance's accounting. The SEC are treating the lack of disclosure of these documents from Binance U.S. directly as evidence of a lack of transparency. Now, continuing on the cleanup theme, three Aeros Capital co-founders Kyle Davies and Suzu have been slapped with a nine-year ban from the regulated financial services industry in Singapore. The pair have been prohibited from taking part in the management of or being a major investor in any regulated firm involved in capital markets. Now, MAS, the Monetary Authority of Singapore,

handed down the ban after concluding its investigation into the collapse of the once high-flying Singapore-based crypto fund. They found that 3AC had failed to notify the regulator of the appointment of a new fund manager, falsely claimed that this manager wasn't conducting regulated activities, and failed to have in place appropriate risk management. MAS assistant managing director of policy payments and financial crime said in a statement, senior management of fund managers are required to implement robust risk management measures to protect the interests of investors. Mass takes a serious view of Mr. Zhu and Mr. Davies' flagrant disregard of Mass's regulatory requirements and dereliction of their director's duties. Mass will take action to weed out senior managers who commit such misconduct.

Now, alongside spending much of the last year ignoring request to engage with the 3AC bankruptcy process, Sue and Kyle launched a new offshore exchange based in the Seychelles. However, that crypto and bankruptcy claims marketplace was recently reprimanded by Dubai authorities for advertising within the Emirate. They were issued a $2.8 million fine, which big surprise remains unpaid. Moving on to yet another hanging chat on Wednesday, Digital Currency Group formally proposed their creditor agreement as part of the Genesis bankruptcy. The agreement seeks to refinance a $630 million intercompany loan owed by DCG, which fell due in May and remains unpaid. DCG, the plan could offer, quote, all unsecured creditors is 70 to 90% recovery with a meaningful

portion of the recovery in digital currencies. DCG claimed the repayment of loans over time using crypto would allow creditors to, quote, capture the appreciation of cryptocurrency up to $85,000 for Bitcoin and $8,500 for ETH. We'll come back to that in just a moment. DCG called the deal a, quote, remarkable outcome for any liquidating Chapter 11 case, let alone one in the volatile cryptocurrency industry. Now, the deal will, of course, require the agreement of creditors before moving forward. DCG have secured the consent of the Unsecured Creditors Group, however, the major creditor Gemini have so far been silent on the deal. Gemini claims to be owed approximately $1.1 billion in the bankruptcy on behalf of hundreds of thousands of their customers.

The Gemini claim is in a much stronger position than unsecured creditors, as Genesis posted about 31 million GPTC shares as collateral when taking loans from Gemini customers. This collateral has appreciated significantly since the bankruptcy and represents about 60% of the total balance owed to Gemini. DCG indeed claimed that Gemini customers could see an excess recovery of up to 110% under the new agreement. They wrote in their filing, at current pricing, the Gemini user collateral is worth approximately $607 million. If Gemini agrees to provide $100 million to Gemini earn users under the proposed agreement, as it previously did, or to distribute even a small portion of the Gemini user collateral to Gemini Earned users, there would be little doubt

Gemini earn users would receive a full recovery. DCG then contended that Gemini is failing to, quote, put its money where its mouth is. The filing stated that Gemini, quote, is not contributing a single penny to provide Gemini earn users a better recovery. Now, the crypto community was not as convinced as DCG made it out that this was a great deal. Lumida wealth CEO Rama Lawalia writes, the deal between DCG and Genesis reeks of self-dealing at worst and incompetence at best. The deal presumes an $85,000 for Bitcoin and $8500 for Eath. The defaulted party should make the creditors whole, not speculate yet again on a risky gamble on behalf of creditors. Creditors lent money expecting credit risk, not volatile equity-like risk. If DCG truly believes those numbers, they should ensure

that outcome for creditors through an options contract. Genesis creditors should seek the removal of the Genesis CEO, who was conflicted in a party to the alleged fraudulent balance sheet statements, petition the judge to have a new trustee, pressured Genesis to focus on the over motion and resume litigation. What a mess. Now, speaking of Genesis, Genesis will also cease all trading services according to a company spokesperson. If you were surprised to hear that Genesis's trading services were continuing, you're not alone. Although the crypto lending arm of the firm declared bankruptcy in January, many other DCG subsidiaries which shared the Genesis branding continued to operate throughout this year. Earlier this month, the Genesis company which handles

US-based over-the-counter trading announced it would be shutting down throughout September. At the time, it was believe that Genesis would continue providing offshore OTC trading from their British Virgin Island companies, but with this announcement, Genesis has signaled their exit from OTC and derivatives trading globally. A spokesperson for the firm said, this decision was made voluntarily and for business reasons. With this termination of services, Genesis no longer offers trading services through any of its business entities. Now, while this was highly expected, it still marks something of a big moment. Wayne Vaughn tweeted, the former largest OTC crypto trading desk is officially closed. Genesis announced today that they are no longer offering trading services through any of its business

entities. It seems like a juggernaut falls with every cycle. In this cycle, though, friends, I think we can agree that numerous juggernauts have fallen, but perhaps it is just to clear out the way for companies who will use that juggernaut status a little more responsibly. Anyways, friends, that is going to do it for today's episode. I appreciate you guys listening as always. Until next time, be safe and take care of each other. Peace.