Notes 7/5: Vauld Acquisition Talks, Regulatory Action, and Celsius Disclosures

Another domino fell in the crypto ecosystem over the weekend.

Singapore-based lending firm Vauld stopped operations in response to “financial challenges” due to a flurry of customer withdrawals due to a crash in crypto markets. More than $197.7 million has been withdrawn from the platform since June 12.

Interestingly, Three Arrows Capital, the hedge fund that seems to have spread its tentacles far and wide in the crypto ecosystem, was a seed investor in Vauld in 2020. It exited its position in Dec 2021. Vauld claimed to have more than $1 billion in assets under management (AUM) in May and was targeting $5 billion this fiscal.    

The company, which is backed by the likes of Coinbase and Paypal co-founder Peter Thiel’s fund, is in acquisition talks with lending firm Nexo, according to reports. It has signed a term sheet with the company to explore an all-equity acquisition of the country.

In an earlier interview, CEO Darshan Bathija had said the company’s long-term goal was to “power banking” using protocols. The firm offered interest rates as high as 10.51% for some tokens, such as Skale. On major coins like Bitcoin, Ethereum, and Ripple’s XRP, it offered interest rates of 4.6%.

Bathija told an interviewer that it was able to offer high interest rates because of a bottleneck in capital supply in crypto markets. “The demand to borrow capital [in the form of crypto tokens] is high in cryptocurrency markets,” he said. Ostensibly, the crash in crypto markets and a deepening contagion in its ecosystem has sapped that demand.

Are Regulators Responsible for the Crisis in Crypto Markets?

The liquidity crisis in crypto has been exacerbated by the crash in its markets. Some blame unsavory elements and Ponzi schemes for the crash. Caitlin Long, founder and CEO of Custodia Bank, thinks regulators are also to blame for causing the crash. A “regulatory void” was built into the crypto ecosystem through SEC inaction and non-approval of funds that could arbitrage away the premium building up on Bitcoin price in shares of the Grayscale Bitcoin Trust (GBTC), she postulated in a Newsweek piece.

The premium in GBTC’s price made it a money pot for many players – arbitrageurs, traders, and lending firms who promised high returns – and multiplied the risk of contagion. In turn, it also propelled a “roller coaster” ride that ended with a crash. Now that crypto markets have crashed, and GBTC shares are trading at a discount, the same firms are tumbling, en masse, towards bankruptcies and insolvent operations.       

Parts of the thesis are true: regulatory action (or inaction) can make or break an industry. But it might be a stretch to blame the non-approval of bitcoin ETFs for crypto’s 2008 moment. A shutout from mainstream financial markets left crypto without access to banking and lending infrastructure and converted it into a cash-starved ecosystem where institutional borrowers, at least based on anecdotal evidence, seemed to be willing to pay a premium to access crypto tokens.

The first futures-based Bitcoin ETF was approved in October 2021. But GBTC shares had begun trading at a discount to their net asset value (NAV) as far back as January 2021. The current crash had deepened the discount. In its many rejections over the years, the SEC has repeatedly emphasized the presence of fraud and manipulation in crypto markets as the most important reason for its decision. [Though given past precedent with the approval of gold ETFs, the agency might eventually relent and admit the problem of instituting surveillance agreements amongst players.]  

Still, Long’s column highlights the importance of GBTC to the crypto ecosystem. Back in 2021, when Bitcoin was in the initial legs of a record pandemic run, JP Morgan strategists said the trust was key to Bitcoin price.

Is the tail wagging the dog now that GBTC shares are trading at significant discounts? The coming days will provide an answer.

Crypto Shenanigans

While Vauld has become the latest lending firm to pause operations, other crypto controversies are still bubbling in the background.

Take Celsius, for example. Apparently, the firm did not make a slew of disclosures to lenders. It sent out an email to customers listing the failed disclosures. That list included, among others, identity of the creditor making the disclosure, the terms “amount financed” and “finance charge”, a disclosure that the loan includes a demand feature, and/or a statement that the annual percentage rate does not reflect the effect of a required deposit etc.

Trustworthy Tether also continues to make news. It accounts for the majority of supply at one of the more popular liquidity pools in crypto. “That’s an indication that investors remain cautious about holding Tether,” Edul Patel, chief executive officer at Mudrex told Bloomberg.

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