Notes: 6/28: CoinFLEX Drama, Bitcoin As Commodity, Grayscale’s ETF Bid, and Crypto’s Robber Barons

Bring out the popcorn.

The dramas [and pyramid schemes] in crypto seem to go on forever.

Just as the controversies about Three Arrows Capital and Celsius Lending were on the wane, we are being treated to another soap opera of sorts at CoinFLEX.

The derivatives exchange stopped customer withdrawals due to “extreme market conditions” last week and was back in the news yesterday. It is planning to issue a new coin – Recovery Value USD (rvUSD) – with 20% accrued interest rate to raise funds and resume withdrawals. Because this is crypto, there are no official documents testifying to the risks of the offering. Instead the company has issued a rudimentary whitepaper. In case you are interested, the offering runs from today till June 30th and is only to non-US accredited investors. The minimum subscription amount is $100,000.   

“[With this offering] we pass on the risk to investors who understand this risk and are eager for this risk,” CoinFLEX CEO Mark Lamb told Bloomberg. According to him, the offering turns the “problem into an opportunity” and “more people” get to participate in devising a solution.

As a reminder, the problem he is referring to is a high net worth (HNI) individual who cannot make margin payments worth millions of dollars on their holdings after crypto’s market crash. The offering’s whitepaper states that the HNI is a “high integrity person of significant means with investments in several unicorn private companies.”

On its Twitter account, CoinFLEX identified this person as Roger Ver – a prolific investor in crypto startups – and stated that he owes them $47 million worth of USDC as margin. “We have a written contract with him obligating him to personally guarantee any negative equity on his CoinFLEX account and top up margin regularly. He has been in default of this agreement and we have served a notice of default,” the company stated.  

But Ver denies owing money to the exchange. “Not only do I not have a debt to this counter-party, but this counter- party owes me a substantial sum of money, and I am currently seeking the return of my funds,” he wrote.

It would be pointless to raise the number of red flags in this offering. But one thing’s for certain: the crypto corn is ready to pop.

Gensler Gives All-Clear to Bitcoin’s Commodity Status; Refuses Comment on Ethereum

SEC Chief Gary Gensler reaffirmed Bitcoin’s status as a commodity in a conversation with CNBC’s Jim Cramer. But he refused comment on other tokens, including Ethereum. The distinction is important because former SEC commission William Hinman had previously described Ethereum as “sufficiently decentralized” enough to not qualify as a security. Ethereum’s native token Ether was launched in an initial coin offering (ICO) in 2015.

The Gillibrand-Lummis bill tabled recently in Congress seeks to put the Commodities and Futures Trading Commission (CFTC) in charge of regulating cryptocurrencies. Gensler has been angling for joint regulation of the asset class. It is possible that his utterances today were aimed at asserting his agency’s say in the matter. They also have a bearing on operations of crypto exchanges in the country. Many exchanges, such as Coinbase, have listed tokens that do not have much utility beyond being profit-making mechanisms for select traders.

A prominent example is Ripple’s XRP, which is engaged in a high profile lawsuit with the SEC. Other examples are Dogecoin and Shiba Inu, coins that owe their existence (and price bumps) to Tesla CEO Elon Musk’s tweets. Both are listed on North America’s biggest trading exchange Coinbase. If the SEC decides to come after these two coins, Coinbase (and other US-based exchanges where they are listed) could be on the hook for selling unregistered securities to customers.

Gensler’s comments came as Grayscale stepped on the gas on its bid to convert the Grayscale Bitcoin Trust (GBTC) into America’s first publicly traded bitcoin ETF based on the cryptocurrency’s spot prices. It announced a partnership with market-making firms Virtu Financial and Jane Street to bring them on as Authorized Participants (AP) that can create and redeem shares of the ETF.

Virtu was reported to be in talks with Citadel Securities earlier to create a crypto marketplace. Douglas Cifu, CEO of Virtu, said the firm saw an opportunity in crypto in market-making. GBTC trades at significant premiums and discounts to bitcoin’s spot price. This allows institutions and accredited investors to make quick trades – entering and exiting at opportune times based on Bitcoin’s volatility.

Conversion to an ETF would increase GBTC’s liquidity by bringing in more investors and slash the disparity between its share price and bitcoin’s spot price.

Will the SEC play along? The chances are slim.

Even as the crypto ecosystem has become bigger in the pandemic, bitcoin remains as volatile as ever. The unraveling spool of interdependencies within crypto during the current downturn also points to the inherent instability of its markets and their material risks to retail investors – a point repeatedly emphasized by SEC chief Gensler in almost all of his appearances. Bloomberg has also pointed out Grayscale’s hefty fees, two percent, that it intends to charge customers, if its bid is successful.

The SEC will decide on the matter in July.

Crypto’s Consolidation and Robber Barons

Crypto’s narrative, so far, has hewed closely to the early days of the United States, when many currencies competed for legitimacy and the monetary system was rife with scandals and scams. It also had robber barons like Andrew Carnegie and JP Morgan. They took advantage of a relatively lawless system to become extremely wealthy and consolidated their holdings during downturns.

Something similar is happening in crypto currently.

FTX co-founder Sam Bankman-Fried is being touted as crypto’s robber baron. Apart from running his multibillion-dollar exchange, Bankman-Fried is busy rescuing crypto firms flailing in the current downturn. They should help expand the product portfolio for FTX, which was valued at $32 billion in February.

He is also shopping. There are reports that he is exploring paths to acquire millennial trading platform Robinhood. He already has a stake in the company. FTX stands to bring millions of customers into its fold, if it is serious and successful with the offer.

What might an FTX-owned Robinhood look like? Not very different from its current avatar, I presume. It is difficult to predict since the app already offers many crypto products. A “decentralized” Robinhood might be another idea but no one knows what a decentralized system looks like.

FTX is not the only one out with a check book. North America’s biggest crypto exchange by trading volume, Coinbase, is also on the prowl for acquisitions even as it lays off a chunk of its staff. The company has already introduced new products, such as its derivatives marketplace, for customers.     

Another candidate for the robber baron title might be Changpeng Zhao, CEO and founder of Binance – the world’s biggest crypto exchange by trading volume. He is the subject of a lengthy profile over at Bloomberg. Although it has been described as the world’s biggest unlicensed casino, Binance is attempting to become “the adults in the room, basically,” according to Zhao.

This means that the company, after claiming to be without an office for many years, is putting down roots in Dubai. “We have 120 million users who trust us with their life savings,” he told Bloomberg. “We protect our users. We communicate with governments and regulators. You know, we’re the stable guys.”

In an inherently unstable ecosystem with daily price swings that run into double digits, that is a tall claim. Binance has had run-ins with regulators before. It claims to have a strict vetting process before listing tokens but its exchange is littered with shitcoins that possess no intrinsic worth and are blatant attempts to make money off gullible investors.

As it moves towards regulatory acceptance, the company will have to work hard to prove its credentials. Binance, already one of the cheapest places to trade cryptocurrencies, recently announced zero trading fees at its US subsidiary.

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