Notes: 7/6: Voyager Bankruptcy, Celsius Payback, and FTX’s Push For Retail Investors

Brokerage firm Voyager Digital has filed for bankruptcy, becoming the second crypto company – after hedge fund Three Arrows Capital (3AC) – to go under. In its filings, the firm stated that it had 100,000 creditors and between $1 billion to $10 billion in assets and liabilities. Its exposure to 3AC was worth $661 million, according to the filing.  Voyager had received critical cash infusion of $200 million and 15,000 Bitcoin from Sam Bankman-Fried’s Alameda Research. The latter is also the biggest creditor to Voyager.

The crypto brokerage firm’s descent into bankruptcy has been a quick one. It first restricted withdrawals from its platform to $10,000 per day. Then it suspended all trading activity before filing for bankruptcy. The company has also been accused of misleading advertising because it marketed itself as an FDIC-insured outfit. [It was not; its banking partner was].

Investors in the company, which trades in OTC markets, haven’t taken too kindly to the recent sequence of company events. Its stock price has crashed from $2.44 a month ago to $0.26 as of this writing.

Meanwhile, lending firm Celsius is trying to stave off bankruptcy by paying off creditors. According to reports, it has paid off $183 million of its estimated $278 million debt to Maker protocol since July 1. The lending firm was one of the first shoes to drop in crypto’s current crisis, when it paused withdrawals on its platform due to “extreme market conditions.” The company was reported to be exploring restructuring options earlier.

There is not much news on how it managed to get hold of funds to repay its debt. There was the supposed ‘short squeeze’ that inflated the price of its token CEL but, in the absence of much information or confirmations, we can only surmise about the source of its cash infusion.

Incidentally, by some accounts, Celsius held the largest debt position on the Maker protocol. But the protocol seems to have been survived just fine even with the Celsius drama.

FTX’s Push to Offer Crypto Derivatives to Retail Investors

One of the more interesting discussions related to cryptocurrencies is happening in Washington. There, FTX’s billionaire CEO, and a modern-day JP Morgan-in-the-making, is trying to convince regulators to allow him to offer crypto derivatives to directly to retail investors. What this means is that they would not need to go through brokers to buy derivative products like futures and options. Purchasing derivatives could become as simple as logging into an online account and placing an order. Crypto derivatives are the main source of profits for the Bahamas-based firm.

Currently retail investors can only access derivatives markets through intermediary brokers, such as the CME Group Inc. Such firms have measures in place to allay credit risk and failsafe mechanisms to ensure that the effects of a crash in trading markets are ameliorated. Examples of such measures are margin calls, KYC, AML etc.

Bankman-Fried is arguing for a new kind of risk model for crypto markets that trade 24X7. According to him, constant monitoring of markets will help prevent untoward events. Automation of margin calls and auto-liquidation, a feature that automatically liquidates customer collaterals, will further ensure market stability.

But existing players in the derivatives markets are not impressed with FTX’s assurances. At a May Congressional hearing to discuss the issue, Terrence Duffy, chief executive officer at the CME Group Inc., said FTX’s proposal eliminates due diligence and credit risk mitigation. “This has the potential to build losses upon losses and further destabilize markets,” he said.

He also played into fears that the exchange’s auto-liquidation feature could be used capriciously. “Non-defaulting customer positions, and I quote here, could be terminated…for any reason [and] under any market condition,” he told the panel.  

For his part, Bankman-Fried said customer collateral would be held at a clearinghouse regulated at the Commodities and Futures Trading Commission (CFTC).    

While Bankman-Fried is making the case to offer retail access, he will the going difficult without institutional players to provide liquidity and depth to their markets. The rapid deleveraging that occurred during the recent crypto contagion – some of it was a result of auto-liquidation of collateral held on DeFi platforms – is proof that automation can cause damage in a very short time. Brokers can extend loans or use their discretion while making margin loans to customers, thereby pausing or slowing down market contagion.

Some of the automated future is already upon us. Many of the features being proposed by FTX are in use in trading apps. For example, anyone who has used trading app Robinhood knows that their margin call features are automated. The firm’s customer agreement allows it to liquidate securities and collateral held in the event, if a margin call is not honored. It caters to a different market, however, one that is regulated and has mechanisms [and regulations] to prevent steep losses to investors. Whether unregulated crypto markets can stand up to the test is another matter.

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