Some crypto exchanges are already “secretly insolvent”
After throwing lifelines at troubled digital currency platforms BlockFi and Voyager Digital, Sam Bankman-Fried, the 30-year-old billionaire founder of FTX, warns that some crypto exchanges will soon fail.
TThe question for everyone in the crypto world is whether we have reached the market bottom. Nearly $ 2 trillion in crypto market value has evaporated since November. Two digital assets Luna, a $ 40 billion cryptocurrency associated with TerraUSD, a stable $ 16 billion currency designed to maintain parity with the US dollar, has collapsed. Earlier this month, bitcoin traded below $ 20,000, the lowest level since December 2020.
But the fallout is far from complete. Earlier this month, Singapore-based Three Arrows Capital (3AC), a high-lending crypto-trading company with $ 200 million exposure to Luna, revealed it was virtually insolvent. Three Arrows had borrowed large sums from a number of crypto companies, including New Jersey’s Voyager Digital and New York-based BlockFi. To survive the Three Arrows standard, the two digital asset exchanges turned to billionaire Sam Bankman-Fried, founder of FTX and the richest person in crypto, worth about $ 20.5 billion. Between FTX and his quantitative trading firm Alameda, he gave the companies $ 750 million in lines of credit. There is no guarantee that Bankman-Fried will recoup its investment. “You know, we’re willing to make a bad deal here, if that’s what it takes to stabilize things and protect customers,” he says.
“We are willing to make a slightly bad deal here, if that is what it takes to stabilize things.”
Bankman-Fred’s cash infusions are far from altruistic. He has emerged as a smart vulture capitalist in the besieged crypto market, knowing that his own fortune depends on its healthy rise and growth. Bankman-Fried has also bought into the crypto brokerage house Robinhood, where FTX has already collected a stake of 7.6%, and it is rumored to be considering an acquisition.
Bankman-Fried denies all active merger talks with Robinhood, but tells Forbes that more errors in crypto exchanges are coming. “There are some third-tier exchanges that are already secretly insolvent,” says Bankman-Fried.
GUERIN BLASK FOR FORBES
Fried’s FTX, along with Coinbase, Kraken and Binance, are giants among digital asset exchanges. They have millions of customer accounts and functionally they work in the same way as online stockbrokers. But outside of these whales, there are more than 600 crypto exchanges around the world operating in a largely unregulated border. Never heard of AAX, Billance and Hotbit? You are not alone, but like Coinbase, they trade in bitcoin, ether and dogecoin and offer generous margin loans – as much as 20 times the initial capital – to their customers. Many crypto exchanges have been vulnerable to scammers and hacks, without any meaningful regulatory oversight.
The Japanese exchange Coincheck was hacked for 530 million dollars in crypto in 2018, the Singapore exchange KuCoin lost 275 million dollars in 2020, and in December 2021, the Cayman Island-based Bitmart was broken for 200 million dollars. Back in 2016, Bitifinex was hacked to almost 120,000 bitcoin worth $ 2.5 billion now.
But despite the generous rescue packages, not even Bankman-Fried is able, or willing, to throw good money at bad for eternity. “There are companies that are basically too far away, and it’s not practical to stop them for reasons like a significant balance sheet gap, regulatory issues, or that there is not much of a business left to save,” Bankman-Fried said. , which refused to name any specific crypto exchanges.
As Forbes reported in its analysis of the world’s top 60 crypto exchanges, the digital asset exchange business generally lacks standards for certifying a new entity before or after they start seeking client funds. The SEC does not regulate the stock exchanges, and the Commodities Futures and Trading Commission only oversees a handful of cryptocurrency derivatives markets. In the USA, there is no member organization like FINRA to self-regulate crypto exchanges.
Bankman-Fried is concerned about continued failure because during the euphoria of rising cryptocurrencies, stock exchanges continued to increase rates to attract customers with generous returns on deposits. BlockFi or Voyager promised return payments to customers, upwards of 12% per year that had to be paid for either by demanding at least as much more interest from borrowers or more likely, by using the money to work in decentralized DeFi financing applications. It worked well when the crypto went nothing but up. It looks catastrophic now.
“There are companies that are basically too far away, and it’s not practical to stop them.”
Like JP Morgan during the stock market panic and crash of 1907, Bankman-Fried exploits the crypto-chaos to expand his empire. He recently completed the acquisition of Liquid, a troubled Japanese stock exchange. BlockFi and Voyager Digital are in his grasp, and despite his denials, Robinhood may be next. According to sources familiar with his loans to Voyager, Alameda is likely to lose at least $ 70 million of the credit it has already given. In 2021, listed Voyagers Digital had a market value of more than $ 3 billion. Today it shares trading for pennies and the market value of $ 62 million points to an imminent bankruptcy.
Despite the carnage, Bankman-Fried says Forbes that FTX remains profitable and has been so for the last 10 quarters. FTX’s biggest rival Coinbase lost $ 432 million in the first quarter of 2022, and the stock is down almost 90% from its all-time high.
Bankman-Fried also has an eye on crypto miners, many of whom took advantage of their balance at a breakneck pace to quickly scale and take advantage of this 21st-century digital gold rush. The shares of publicly traded crypto miners, including Marathon Digital Holdings and Riot Blockchain, are down more than 60% so far this year.
One cryptocurrency Bankman-Fried is not worried about is Tether, the world’s largest dollar-denominated stable coin with a market value of over $ 70 billion. Many industry watchdogs have considered it a ticking bomb with questionable security whose failure will almost certainly be an existential threat to the entire cryptocurrency market. Tested during the Luna collapse, Tether briefly lost the $ 1 bond and fell to a price of 95 cents. However, it successfully processed withdrawals worth $ 10 billion and has since recovered.
Says Bankman-Fried, “I think the really bearish views on Tether are wrong … I do not think there is any evidence to support them.”
MORE FROM FORBES
