Compiled by the Oliver Wyman Forum
The fallout from the collapse of FTX continued to spread in the digital assets industry as the cryptocurrency exchange's former head was given an October trial date, several major firms announced big cutbacks, and regulators in the United States and Europe called for new rules and closer oversight to contain risks. These are among the significant recent developments in digital assets.
Crypto in crisis
Bankman-Fried Gets an October Trial Date
The founder and former chief executive of FTX, Sam Bankman-Fried, on Jan. 3 pleaded not guilty to fraud charges stemming from the collapse of the cryptocurrency exchange. US District Judge Lewis Kaplan said a trial would begin on Oct. 2, and granted prosecutors’ request to bar Bankman-Fried from accessing or transferring assets of FTX or its related trading firm, Alameda Research.
Two of Bankman-Fried’s associates – Alameda ex-CEO Caroline Ellison and FTX’s former chief technology officer, Gary Wang – pleaded guilty to fraud charges in December 2022 and are cooperating with prosecutors.
Genesis Slashes Staff and Mulls Bankruptcy
Crypto lender Genesis Global Trading laid off 30% of its staff and is considering filing for bankruptcy protection, the Wall Street Journal reported on Jan. 5.
Genesis, a unit of Digital Currency Group (DCG), suffered significant losses on loans it made to hedge fund Three Arrows Capital, which filed for bankruptcy on July 1, 2022, and to Alameda Research, the trading affiliate of FTX. Genesis halted loan originations and redemptions after FTX filed for bankruptcy on Nov. 11, 2022.
The redemption halt, in turn, brought increasing pressure from crypto exchange Gemini, which used Genesis as a partner in its lending product and has $900 million of client funds frozen at the firm. In an open letter on Jan. 2, Gemini co-founder and president Cameron Winklevoss accused DCG Chief Executive Barry Silbert of “engaging in bad faith stall tactics” rather than discussing ways to return the funds.
Silvergate Reels from FTX Collapse
Silvergate Capital, a major bank servicing the digital asset industry, lost nearly half its market value after disclosing on Jan. 5 that digital asset customers withdrew 68% of their deposits, or $8.1 billion, in the fourth quarter of 2022. FTX and other companies controlled by the failed exchange’s founder, Sam Bankman-Fried, accounted for about $1 billion of the bank’s deposits, the Wall Street Journal reported.
To help cover the withdrawals, Silvergate sold $5.2 billion in debt securities it had held and took a loss of $718 million on those sales and related derivatives. The bank said it was reducing its staff by 40% to prepare for “a sustained period of transformation” in the industry. The company’s stock fell by 44% in the two days following the announcement to close at $12.22 on Jan. 6.
SEC Objects to Binance Bid for Voyager Digital Assets
The US Securities and Exchange Commission on Jan. 4 filed an objection to Binance.US’s proposed $1 billion acquisition of assets from failed crypto lender Voyager Digital, saying the exchange had failed to provide details about its ability to close the deal.
In a motion filed with the judge overseeing Voyager’s bankruptcy, the SEC said Binance.US should disclose more about its finances and about its relationship with its parent company, citing concerns that assets could be moved offshore and frustrate efforts by Voyager customers to recover funds.
Voyager, which filed for bankruptcy in July 2022 following the collapse of the TerraUSD stablecoin, had previously agreed to sell assets to FTX, but that deal fell apart when FTX collapsed in November.
Policy and regulation
US Regulators Highlight Risks of Cryptoassets
Three leading US banking regulators called out “significant risks” in cryptoassets in a joint statement on Jan. 3, 2023, and said they would “continue to take a careful and cautious approach” to banks’ existing or proposed activities and exposures to the sector.
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency said market events in 2022 underscored the risk of fraud and scams in crypto, legal uncertainties about custody practices and ownership rights, inaccurate or misleading representations by cryptoasset companies, market volatility, the susceptibility of stablecoins to run risk, contagion risk within the crypto sector, and other vulnerabilities. Issuing or holding cryptoassets that are issued, stored, or transferred on public or decentralized networks “is highly likely to be inconsistent with safe and sound banking practices,” they added.
ECB’s Panetta Likens Crypto Investing to Gambling
Regulators should acknowledge the speculative nature of unbacked digital assets and treat them like gambling activities, with consumer protection akin to what the European Commission has proposed for online gambling, according to Fabio Panetta, a member of the European Central Bank’s Executive Board.
Unbacked cryptocurrencies are rarely used for payments and lack any intrinsic value, he claimed in a Jan. 5 blog. Panetta said European Union should implement the provisional Markets in Crypto-Assets (MiCA) regulation as soon as possible and take further action to ensure that all segments of the industry, including decentralized finance activities, are regulated.
Business moves
Bear Market Prompts Layoffs at Huobi
Singapore-based cryptocurrency exchange Huobi plans to lay off about 20% of its staff to cut costs in response to the bear market for digital assets, Reuters reported on Jan. 6.
Justin Sun, the crypto entrepreneur who owns a majority of the exchange, moved $100 million worth of stablecoins to Huobi after an increase in withdrawals, Decrypt reported. In a series of tweets, Sun said crypto “can be volatile and uncertain at times” but the exchange plans to “stay focused on the long-term.”
Crypto Exchange Volume Drops to Two-year Low
Trading volume on crypto exchanges has fallen to a two-year low following a big drop in December 2022, The Block reported on Dec. 31, 2022.
The seven-day moving average of crypto exchange volumes was just over $350 million at the end of last year, down 48% from the preceeding month and the lowest level since December 2020, when Bitcoin first broke above $20,000. The price of Bitcoin fell by nearly two thirds in 2022 to finish the year at just over $16,500.
Legal beat
Ex-head of Failed Celsius Network Sued for Fraud
Alex Mashinsky, a co-founder and former chief executive of Celsius Network, was sued by New York State on Jan. 5 for allegedly using false and misleading representations to lure investors to the failed cryptocurrency lender.
The lawsuit, brought by New York Attorney General Letitia James, said Mashinsky served as the public face of Celsius and promised to deliver investors yields as high as 17% with minimal risk by making collateralized loans to first-tier institutions and crypto exchanges as well as overcollateralized loans to retail borrowers. As the lender grew, pulling in $20 billion by early 2022, it moved into riskier investments including uncollateralized loans and failed to disclose losses to investors. The firm halted customer withdrawals in June 2022 and filed for bankruptcy the following month with liabilities exceeding assets by more than $1 billion.
Separately, the federal judge overseeing Celsius’ bankruptcy ruled on Jan. 4 that $4.2 billion held in the firm’s Earn accounts at the time of its filing were the property of Celsius, not investors, under the terms of those accounts. That means account holders rank as unsecured creditors and “may recover only a small percentage of their claims,” the judge said. The ruling may set a precedent for investors in other crypto-asset firms that have filed for bankruptcy recently.
Man Charged with Market Manipulation for Mango Markets Attack
The US Department of Justice announced on Dec. 27, 2022, that it had arrested Avraham Eisenberg and charged him with market manipulation for an attack that drained roughly $110 million from the Mango Markets crypto exchange in October 2022.
The complaint alleged that Eisenberg artificially inflated the price of perpetual futures on the exchange’s MNGO token by 1,300% and then used his position as collateral for approximately $110 million in loans, effectively draining all of the cryptocurrency deposited at the exchange. It also pointed to tweet Eisenberg sent on a Twitter account under his own name shortly after the exploit, which said he had “operated a highly profitable trading strategy” on Mango.