Wtf is happening

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Get caught up from the past week in 10 minutes or less:

• Crypto bailouts & how we got here💰

• Other stories from the week 📰

Crypto bailouts

News of crypto firms collapsing, like Celsius and Three Arrows Capital (3AC), rocked the crypto markets last week. With liquidations happening and prices falling quickly, many other lenders and investment firms with exposure to the crypto markets were at risk.

Now Sam Bankman-Fried, Founder of the crypto exchange FTX, is using his companies (FTX and Alameda Research) to issue loans to crypto companies BlockFi and Voyager Digital.

BlockFi is a crypto lending platform where you can "buy, sell, and earn crypto". The firm was famously hit with a $100M fine earlier this year for failing to comply with SEC regulations and recently laid off 20% of its workforce. They reportedly liquidated their 3AC margin loan before the collapse last week and are now receiving a $250M loan from FTX to back up client balances on the platform.

Voyager Digital is a crypto brokerage that was not so lucky when it came to exposure to 3AC. The brokerage apparently had over $650M of exposure to 3AC in the form of unsecured loans that it has requested to be paid back in full by June 27th, or it will issue a notice of default.

While it is not looking like Voyager will see that money from 3AC, Sam Bankman-Fried's quantitative crypto trading firm, Alameda, is providing a loan of $200M and 15,000 BTC to safeguard customer assets on the platform. Voyager issued this release on Wednesday on the matter. Since then, Voyager has limited withdrawals on the platform to $10k per day.

In May, Alameda had purchased roughly 11.56% of outstanding shares in Voyager so some see the move coming out of desperation to save Alameda's original investment.

But, with so many crypto lenders nearing insolvency, there needs to be an explanation other than just "bear market", right?

So wtf is happening? And how did we get here?

Well, Jon Wu breaks it down beautifully in this Twitter thread:

Basically, what he says, is that CeFi (Centralized Finance) crypto lenders are not as reliable as banks or DeFi lenders for three main reasons:

1.  They don't match their assets and liabilities - Banks only deal in fiat currency whereas CeFi lenders owe depositors USD and hold assets in multiple forms of crypto as well as USD. DeFi lenders like MakerDAO make each borrower put up collateral for their own loan, so assets are always matching liabilities and risk is isolated to each account.

2. They don't have access to the Federal Reserve and other banks - this is a no brainer but when banks lend out money to customers and need to maintain reserve requirements, they can just borrow from other banks or the Fed at a predetermined rate.

3. They don't have a diversified loan book - Banks are typically loaning out to many different customers across all industries but Voyager had 94% of their loans concentrated in just 7 entities.

Centralized crypto lenders have been far too leveraged from the start, and collapse in a bear market was inevitable in hindsight. Luckily, there are companies that are doing things responsibly and they may prove to be the ones who come out of this bear market stronger than ever.

More stuff from the week

• Solana announced its own smartphone, the Saga, along with a developer stack and dApp store called Solana Mobile Stack. The phone was previously built by a company called Essential. The phone will sell for $1,000.

• Stemming from an EU ruling we covered a couple of months ago, Coinbase has now begun asking users in the Netherlands to provide details on withdrawals from the platform including who the recipient of the transfer is, their address, and the purpose of the transfer.

• FTX.US acquired Embed Financial Technologies, a brokerage and clearing company that can plug their API into broker-dealers. Terms of the deal have not been disclosed.

• NFT NYC was this week and it provided some great content from a fake protest to a fake Snoop Dogg, to exclusive parties and concerts featuring some big names.

Glossary

We're confused too. We're here to help decrypt the crazy world of crypto.

• liquidation - when a company cannot pay its obligations and its remaining assets are used to pay creditors and shareholders (Investopedia)

• margin loan - a loan that allows you to borrow against the securities you already own through the broker, usually to buy more securities, with a given interest rate.

• reserve requirements - the amount of funds that a bank must hold in reserve to ensure that it is able to meet liabilities in case of sudden withdrawals, usually 10%. (Investopedia)

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