The Breakdown - Would a Genesis/DCG Deal With Creditors End the Crypto Contagion?

Starting point is 00:00:00 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, February 6th, and today we are discussing, well, the fallout from last year. Before we get into that, a quick note, there are two ways to listen to the breakdown. You can hear us on the CoinDesk podcast network, which comes out every afternoon and features other great CoinDesk shows, or you can listen on the breakdown only feed which comes out a few hours later in the evening. Wherever you're listening, if you were enjoying the show, I would so appreciate it if you would take the time to leave a rating or review.

Starting point is 00:00:46 It makes a huge difference. All right, guys, so like I said, today is a fallout day. This year was always going to be a tough one following up the institutional failures and frauds of last year, and we are definitely seeing that across a number of different stories. And where we'll start is with the White House. Last week, the White House published a note entitled Roadmap to Mitigate Cryptocurrency's Risks, It was co-signed by the National Economic Council Director, the White House Office of Science and Technology Policy Director, the Council of Economics Advisors Chair, and the National Security Advisor.

Starting point is 00:01:16 The note walked through the tumultuous events of last year and reflected on what has been done since the Biden administration's landmark crypto executive order in March of last year. It also laid out the work that still needs to be done to improve regulatory safeguards for the industry. The note pointed out that agencies ranging from the SEC and the CFTC through the FDIC have increased enforcement efforts surrounding industry issues. It also noted the recent joint guidance issued by banking regulators that focused on the need to separate crypto assets from the broader banking system.

Starting point is 00:01:44 Now, regarding things that still need to be done, the administration says that they will be issuing a statement on priorities for digital assets research and development shortly, which will focus on the need to provide consumer protection by default. The main thrust of the note, however, was that Congress needs to step up its efforts. The note suggested that Congress should expand regulators' power to prevent misuse of customer assets, strengthen transparency and disclosure requirements for crypto companies, and increase funding to build out law enforcement capacity. The note also gets into what Congress should not do, including providing a green light to traditional financial institutions like pension funds

Starting point is 00:02:16 to move into the space. Much like this year's guidance from banking regulators, the subtext was clear. The administration is primarily concerned with the potential of increased risks the traditional financial and banking system should crypto become more intertwined and able to affect those firms. An anonymous White House official told CoinDesk in an interview last week, quote, I think that given the events of last fall, we were very mindful of the need to implement a lot of the safeguards that were called for in the FSOC reports, things like segregating customer assets, getting additional visibility into vertically integrated firms, cracking down conflicts of interest, addressing spot market jurisdiction, and that's a long list. But I think they're all part

Starting point is 00:02:51 and parcel of how we make sure we'll be protecting consumers and supporting financial stability. Now, regarding what Congress is actually doing, we have two upcoming committee hearings to kick off this year of lawmaking. The first will be held next Tuesday in the Senate Banking Committee and is entitled Crypto Crash, why financial system safeguards are needed for digital assets. The first crypto hearing in the House is looking likely to be held on March 9th. One notable thing about this to me is that the White House is really not about overreach here. It's pretty much an acknowledgement that it's Congress that needs to do something here, which I agree

Starting point is 00:03:21 with. Still, it definitely got some debate going in the community. Perry Ann Boring, the founder of the Digital Chamber of Commerce tweeted, the White House's crypto roadmap would hinder U.S. financial institutions' ability to compete in the digital economy. This is bad for U.S. competitiveness. Policymakers should encourage the U.S. to lead in the development of critical and emerging technologies. Cryptotrater Traylam responded and said, that's not at all what it says. It's about cracking down on fraud and other scammy shit that goes on. The need of more safeguards that help ordinary users who aren't tech savvy is of the utmost

Starting point is 00:03:50 importance. Don't spread misinformation that's part of the problem in the first place. Perian responded to that, we have sufficient laws to protect against fraud. There's a big difference between banning industries from accessing a technology and creating a regulatory framework to operate within. Anyways, expect a lot more of this debate to happen in the weeks and months to come. Certainly the agencies aren't waiting around for new rules. According to CFTC Chairman Rosten Benham, his agency is, quote, working towards another strong year of precedent-setting cases. In remarks for an American Bar Association event on Friday, he said, quote, the CFTC has brought important precedent set in cases against those who illegally offered derivatives

Starting point is 00:04:26 or leveraged, margin, or financed digital asset products to U.S. customers or operate within the United States. He said that he promised to use, quote, the full breadth of the commission's authority in going after illegal transactions in digital assets. He also renewed his call for the CFTC to be granted formal oversight of spot crypto markets for tokens that are not securities. Now, while there were obviously multiple problematic parts of the crypto industry last year, you have to think that FTCS is at the very top of politicians' minds, and that's even more so after this past weekend. On Sunday, the FTX bankruptcy team announced that it had begun sending confidential messages to political figures and political action committees that had received funding from SBF and other FTX executives.

Starting point is 00:05:03 The notes asked them to return the money to the bankruptcy estate by the end of February. The latest estimates by the bankruptcy team are that over $93 million was distributed by FTX executives to political causes. In January, Coyndesk reported that more than one in three sitting politicians had taken campaign contributions from FTX execs. Many politicians have already made charitable donations with the money, but the FTCS bankruptcy team warned that making a donation, quote, does not prevent the FTX debtors from seeking recovery. It's pretty clear then that the clawback process is underway and in a big way. Last Monday, FTX sued Voyager Digital seeking to clawback $445.8 million in loan repayments. After Voyager filed for bankruptcy in July, they demanded

Starting point is 00:05:42 repayment of all outstanding loans held by FTCS and Alameda research. Repayments were made from September through October last year. FTCS's lawsuit alleges that these repayments were made too close to the filing date of the FTX bankruptcy, so it could be viewed as preference payments. Although Voyager's loans were collateralized, the lawsuit claims that the collateral documentation was lacking, and that by accepting FTT and SRM tokens as collateral, Voyager was functionally acting as a, quote, feeder fund for Alameda. The Voyager bankruptcy team have unsurprisingly rejected these claims and will defend the lawsuit, stating that Alameda's inequitable and fraudulent conduct, their words, cost the Voyager estate over $100 million during the bankruptcy process. Remember,

Starting point is 00:06:18 FTCS had placed the successful bid to purchase Voyager's assets in September, but failed to complete it before declaring bankruptcy themselves. Another major target of clawbacks laid out in a presentation made to FTX creditors in January is a startup hedge fund named Madulo Capital. The fund was established in March last year and received $400 million in seed funding from SBF himself. Madulo Capital was supposedly operated from the same Bahamas compound where Sam lived and was founded by two of his former colleagues at Jane Street. According to reporting from the New York Times in January, it's unclear how much of the 400 million is still held by the fund. However, both founders have retained criminal defense attorney Eitaine Goldman, the former director of enforcement for the CFTC.

Starting point is 00:06:56 Meanwhile, there continues to be tension around the appointment of an independent examiner. On the one side are the U.S. trustee, which is a division of the Department of Justice, which represents the interest of the U.S. government in bankruptcy matters, as well as about 18 states. This group wants an independent examiner. On the other side are the new FTX management and the creditor committee. The main issue is that of cost. Basically, FTX is saying that this is going to cost a ton and be a lot of duplicative work for a report that no one is actually going to do anything with, while the U.S. trustee, on the other hand, is saying that the goals of FTCS. management, which is to recover as much money as possible, aren't necessarily aligned with the goals of a neutral party investigating

Starting point is 00:07:32 wrongdoing. Anyways, this has come up in a number of different ways. For example, on Thursday, the U.S. trustee filed an objection to proposals to subpoena Sam, his immediate family, and senior staff in the FTX bankruptcy case. The grounds for the objection is that issuing the subpoenas would duplicate work that could be done by an independent examiner. And they're filing the U.S. trustee said, quote, if the court directs the appointment of an examiner, then his or her charge could be to investigate the same web of entities and transactions. The bankruptcy court has an obligation to prevent unnecessary expenditures in the administration of an estate. Now today, we got a hearing about whether or not to appoint this independent examiner. A number of people were live tweeting the hearing, so I'm pulling

Starting point is 00:08:11 from that. FtX's current management basically argued that the U.S. trustee has been repeatedly overstepping its bounds, then an independent examiner looking at FtX's code would be a cybersecurity risk, which was a point they really went into detail on, making it seem like giving an independent examiner access to FtX hot wallets could create a ton of risk for both hacks and accidents. And finally, John J. Ray III also argued that in the case of Enron and residential capital, which he also oversaw the restructuring of, the reports cost $90 million and $100 million, respectively, and just weren't that useful. At the end of the hearing, the judge didn't end up making a ruling. Lawyer James Murphy writes, the judge will not rule today. The judge spoke with the parties in

Starting point is 00:08:48 chambers to see whether they could reach an agreement on the motion. They asked for more time to explore that. The only agreement I can imagine would be an appointment of an examiner with a very narrow mandate. So for now, we are still in wait and C mode on this. Join CoinDesk's Consensus 2023. The most important conversation in crypto and Web 3, happening April 26th through 28th in Austin, Texas. Consensus is the industry's only event

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Starting point is 00:09:35 Last couple catch-up details on FTX. According to court filings made on Thursday in the criminal case against SBF, Sam is negotiating with U.S. prosecutors to, quote, resolve the outstanding issues related to his bail conditions. Lawyers for Sam stated in a letter to the court that negotiations are progressing, and they would like to continue these discussions rather than return the matter for a court hearing. Last week, prosecutors alleged that Sam had been in contact with Ryan Miller, the current general counsel to FTX U.S., which they labeled an attempt to influence witness testimony. On February 1st, the court modified Sam's bail to preempts prohibit him from contacting former or current employees of Alameda Research or FTX, as well as from using encrypted messaging apps like Signal. Lawyers acting on Sam's behalf had requested that the ban on him

Starting point is 00:10:19 accessing crypto assets owned by FTX or Alameda Research be lifted, given the lack of evidence that he was involved with any movement of assets after the FTC's bankruptcy. A hearing regarding bail conditions is scheduled for Thursday. Also, last week, the court decided that the names of two people who signed Sam's bail could be revealed. The order was stayed until Tuesday, that's tomorrow, to allow for any appeals, but if no appeal is lodged, we could find out who assisted in bailing Sam out by later this week. Finally, on the FTX drama side, Emergent Fidelity Technologies, which was a firm co-founded by Sam and Gary Wong, filed for bankruptcy late on Friday. Emergent was the firm which held the 7.6% stake in Robin Hood that was purchased in May of last year. Those 56 million

Starting point is 00:10:58 Robin Hood shares have become the subject of an ongoing dispute, with the FTX bankruptcy team, BlockFi, and SBF himself, all lodging competing claims over ownership of the assets. Ultimately, federal officials seized the shares in January, but have not disclosed if they will be seeking some form of forfeiture. The stock was worth around $600 million at the market close on Friday, and Emergence's only other asset was $20.7 million held in cash. Emergence bankruptcy filing is not yet available, so it's unclear what debts the company is claiming to underpin its bankruptcy at this stage. All right, now moving on from FTX, we move to another exchange. This morning, Binance announced that as of Wednesday, they will be

Starting point is 00:11:33 temporarily suspending U.S. dollar bank transfers. They said, quote, we are working to this administrative issue as soon as possible, and we'll let you know when we can resume USD deposits and withdrawals as soon as possible. They later confirmed this to CoinDesk, saying we are temporarily suspending U.S.D. bank transfers but also noted that just 0.01% of monthly active users use U.S. bank transfers. Now, the issue here, of course, is U.S. banks, who were already hesitant to work with crypto companies, and now are even more gun-shy after FTCS. Last Thursday, Bloomberg reported that the U.S. Department of Justice's fraud unit was looking into Silvergate's dealings with FTX and Alameda.

Starting point is 00:12:07 Despite the fact that Silvergate hasn't been accused of any wrongdoing yet, their stock tanked 30% on the news. Other banks just do not want a piece of that, which of course makes it difficult not just for exchanges, but any crypto company. But let's flip it around and end on one more promising bit of news regarding cleanup from last year. According to CoinDesk, DCG and Genesis have reached an in-principle agreement on a restructuring plan with their main creditors. From CoinDesk, quote, the agreement entails winding down the Genesis loan book as well as the sale of the bankrupt Genesis entities. The term sheet also involves refinancing the outstanding loans where DCG borrowed $500 million in cash and about $100 million worth of Bitcoin from Genesis. Included is, quote, an equitization of the infamous 10-year promissory note that DCG gave Genesis in return for failed hedge fund 3AC claims.

Starting point is 00:12:53 Now, as of recording, there haven't been any confirmations of this yet, but still people are pretty optimistic. Hal Press writes, in my opinion, this pretty much marks the end of contagion. DCG isn't going bust and after the move we've had, neither is anyone else any time soon. On the one hand, I have to feel like famous last words, but still, it is currently seeming a lot better than it might have been. Anyways, guys, I hope your week is off to a rollicking start. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Would a Genesis/DCG Deal With Creditors End the Crypto Contagion?

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