11/21/2022: FTX Contagion
Parent Company of Genesis Trading is Raising $1B
FTX saga continues. I didn’t want to turn this blog into a crypto meltdown diary so I limit myself to only writing about crypto up to two times a week. Since my last crypto entry on 11/15, a lot has happened. First, let me start with sharing the following screenshot from SBF who DM’ed with a reporter from Vox who wrote a super interesting article based on these DMs with SBF. I was shaking my head the whole time when reading it but I am stunned by his unapologetic tone when talking about his virtue signaling practice: “This dumb game we woke westerners play where we say all the right shibboleths so everyone likes us.” WOW. Previously, I thought SBF just had his priorities wrong with regard to effective altruism. I was too charitable. The whole EA thing is just a front for him. He didn’t even have good intentions to start with!! Aren’t we glad that CZ burst his bubble? Imagine how much more damage he would have done if the whole FTX fiasco didn’t happen and he gained more power. Karma is a bitch after all.
In his DMs with the reporter, he also literally said “f**k regulators”. Let’s see how things will go down for him. AFAIK, he is still not arrested. But Elizabeth Holmes got 11 years in prison by losing $700M of investors money. SBF lost $1.8B of investor money and misappropriated $8B of user deposits. I suppose he should get 9.8/0.7*11 = 154 years in prison?
The other crazy thing happened is that one of the FTX *hackers* is actually the Bahamian government. The Bahamian government asked FTX to send all the digital assets to their wallets to *secure* user funds. It was very confusing as it appears there are multiple hackers and one *hacker* is the Bahamian government while the other hacker is converting ETH to renBTC and will probably unwrap the renBTC to BTC and make things harder to track. The Bahamian government is currently fighting with the US government on who has the authority over FTX bankruptcy.
On Thursday(11/7) , FTX made a new bankruptcy filing. In the filing, the CEO, who was the previously liquidator of Enron and has seen all kinds of corporate shenanigans, said:
Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.
WOW! Didn’t FTX raise $1.8B of venture capital? Did the investors not look into their books or how their operation is run on a day to day basis? Supposedly they should have built out the whole corporate security and compliance systems given their size. In the filing, it was revealed that:
Employees of the FTX Group submitted payment requests through an online ‘chat’ platform where a disparate group of supervisors approved disbursements by responding with personalized emojis.
What??!! Even my little startup has a lot of this stuff built out with Trinet, Airbase, Carta and some outside CPA, bookkeeping and legal support. I suppose a lot of FTX customers thought investors had done all the due diligence as FTX had a bunch of A-list investors like Sequoia and Tiger. And that’s part of the reason why FTX customers trusted them. But it turned out SBF somehow manipulated the investors to not look into these important details and billions of dollars were lost this way.
Finally, Genesis Trading halted customer withdrawals on Wednesday (11/16), citing FTX exposure. Gemini’s earn program is impacted as Genesis is the backend provider. This is a big deal as Genesis is THE prime broker of crypto and is powering a lot of the crypto lending activities in the whole ecosystem. Genesis Trading’s parent company DCG is trying to raise $1B to stay alive. It’s hard to know all the details that led to this difficult situation. But basically, Genesis takes in customer deposits and lends the deposit to counter parties like 3AC and Alameda. The counter parties pay Genesis interest. Genesis takes a small cut of the received interest payments and sends the rest to the deposit customers. It works well when everyone is liquid and solvent. But many of the counter parties they lend to are now broke and it sounds like they also have some deposits that were lost on FTX.
Anyway, Genesis doesn’t have enough money to cover withdrawal requests. We don’t know if it’s simply a liquidity issue or it’s a solvency issue. But if DCG goes bankrupt, it will be disastrous as DCG also owns Grayscale. Grayscale currently holds 650K BTC. If they are forced to liquidate all the BTC at once and return USD to customers, it could impact the BTC price a lot. BTC is currently trading at $15,861, down 4% WoW and 65% YTD. Crypto folks are super nervous right now. If DCG goes bankrupt and a lot of cryptos get dumped into the open market, the crypto prices will tank, which would cause even more liquidations. It will be an apocalyptic situation and I don’t believe there’s a central bank like entity out there to save crypto.
Sam is unfortunately kinda of right about how pitching to US VCs is kind of a game.
The bigger/more stretched the pitch the better. The more Grey a founder is willing to get without crossing(getting caught crossing) a red line the better.
Obviously many fonders build great companies through disruptive innovation without crossing any lines, but there is something of a sickness in the large US VC community that really needs a closer look.