Pop quiz: What is common between a lawsuit, a Ponzi scheme, and “hundreds of millions” dollars’ in losses? If you guessed cryptocurrencies, then you are on the right track. Bitcoin price fell below $20,000 this morning after news came out that the SEC had rejected Grayscale’s Bitcoin ETF application.
For crypto enthusiasts, approval would have been a vote of confidence for the ecosystem. It would have also meant more liquidity and engagement with institutional investors. As of this writing, it is changing hands at $19,116.45, down roughly 1% from its price a day earlier.
Grayscale Fights Back Against SEC Rejection
Grayscale Investments, owner of the Grayscale Bitcoin Trust (GBTC) – the world’s biggest bitcoin fund, plans to file a lawsuit against the Securities and Exchange Commission (SEC) after the agency rejected its bid to convert GBTC into a Bitcoin ETF.
The firm had filed its application for a spot trading Bitcoin ETF last year. The SEC’s decision is significant because GBTC is a behemoth in the crypto industry and one of the biggest holders of bitcoin. As of this writing, GBTC has $12.9 billion worth of assets under management (AUM) in its portfolio, down from a figure of $42 billion at its peak.
Grayscale charged the SEC with acting “arbitrarily and capriciously” in rejecting its Bitcoin ETF application and said its decision was a violation of the Administrative Procedure Act and Exchange Act.
The SEC has previously rejected many Bitcoin ETF applications based on the cryptocurrency’s spot price before yesterday. Among others, the agency cited the potential for market manipulation and fraud – two incidents that have been rife in the crypto ecosystem – as reasons for its decisions.
Craig Salm, chief legal officer at Grayscale, said the difference between Grayscale’s application and those that came before it was that the firm already had an established product. Of course, that product trades at significant premiums and discounts to bitcoin price based on its price trajectory.
In the last week, as bitcoin’s price has cratered, its shares have traded at a discount of more than 29% to the cryptocurrency’s price. Conversion to an ETF will erase the double-digit discount by bringing in more investors and liquidity. According to Salm, current traders of GBTC, which is open only to accredited investors and institutions, are being “withheld millions of dollars” in value because of the disparity in prices.
Another Bitcoin ETF decision, this one involving Bitwise Investments, is pending with the SEC.
Celsius Ponzi Scheme
The Wall Street Journal published a long feature on Celsius yesterday. Celsius, as has been made clear by recent news, is a crypto money lending firm that has paused withdrawals due to “extreme market conditions” and is reported to be exploring bankruptcy. By some accounts, investment firm Goldman Sachs is also a bidder for its assets.
The WSJ report provides an insight into the land of magic that is crypto. Rubbing a lamp materializes genies who grant wishes; rubbing the Celsius lamp materialized a platform that granted fantastic yields. In Celsius’s case, it offered a yield of as much as 18.6% on certain tokens to customers who deposited or staked their cryptocurrencies on its platform.
Where did it get these yields from?
By turning around and rehypothecating customer assets to firms that were willing to pay even higher yields. There is nothing new or innovative about rehypothecation. But such risk in financial markets is limited by regulation and backstopped by government agencies to protect customers. Celsius, apparently, lent assets to Galaxy Digital and Genesis. This part of its business was expected to bring in revenues of $290 million last year. Because this is crypto, there seems to have been accounting as to where the buck or asset stopped.
Celsius also had 19:1 ratio of assets to equity, meaning for every $19 worth of assets it held only $1 worth of equity. This ratio is similar to that of big and regulated banks. But the FDIC has their back. Celsius’s investments in volatile crypto markets had little backing.
And this is my favorite part. Tether, the world’s biggest stablecoin, had a $1.1 billion credit facility open to Celsius. It was an investor in the platform. Bafflingly, after news came out about Celsius’s troubles, Tether told reporters that there was “no link between investment in Celsius and our reserves or stability.” “The credit facility for Celsius has been liquidated without losses to Tether.” No details about the timing and method of liquidation.
FTX’s Sam Bankman-Fried, who has been busy shopping this crypto winter backed away from purchasing Celsius because of a “$2 billion hole” in its balance sheet, The Block reports.
Meanwhile, rival lender Nexo seems to have hired Citigroup to advise on potential acquisitions. But this report claims that a majority of Nexo’s funds are in Staked Ether (stETH), the same token that left a hole in Celsius’s balance sheet. But according to a snapshot from its CEO, only 12.13% of its overall assets were in stETH. Almost 50% are locked in Ethereum’s ETH, whose price has also crashed along with those of other tokens. Why did Celsius crash while Nexo holds steady? It is, like the yields in crypto lending, a mystery.
Genesis Trading Claims Losses
Genesis Trading, a leading market maker in crypto markets, said yesterday that it was facing “hundreds of millions” of dollars in losses. A portion of those losses are due to its exposure to Three Arrows capital and Babel Finance – two firms that are buffeted with losses due to tanking markets. The script is a familiar one. Genesis claimed that its losses were on account of its dealings with a “large counterparty” that failed to meet its margin call. It is liquidating assets “left, right, and center” to meet its obligations.
According to a press release earlier this year, it had originated $44.3 billion in loans in Q1 2022 and had $14.6 billion active outstanding loans at the end of the same time period. Because this is crypto, its annual reports filed with the SEC are non-public. Genesis trading is marketing agent for GBTC.