Crypto banks are afraid

Welcome to The Daily Moon. It’s a brand new week. And the US SEC doesn’t want to fight crypto lawsuits anymore. SEC will now work with crypto companies and register them as securities.

Moving on, today we talk about how crypto banks failed in their promises, and Ethereum users are suddenly active.

The crypto markets stayed flat, with Bitcoin falling from the $24,000 level and Ethereum just above $1,700. Nasdaq rose on strong earnings from Apple and Amazon. Back home, Sensex and Nifty were up due to FII buying.

Photo by Kanchanara on Unsplash

How Crypto Banks Faced A Lehman Moment

“Banks are not your friends,” Alex Mashinsky often told people. Mashinsky, the founder and CEO of Celsius, believed that banks’ hidden charges angered customers. Four years since its launch, it’s the 1.7 million Celsius customers are raging.

But this is not a problem unique to Celsius alone. Since May, a host of crypto lenders have crashed into oblivion. Voyager is bankrupt. It's also under the US Fed’s radar for misleading investors about their funds being insured.

Similarly, Genesis had extended significant loans to the now-bankrupt Three Arrows Capital. BlockFi has $600 million in loans without any collateral. These crypto lenders owe billions to customers, and no one knows when they’ll pay back.

When did crypto become banking?The world witnessed a slowdown in 2018. Interest rates rose and stock markets crashed. Investors were looking for alternatives to grow their money. Enter crypto lenders.

By then, retail investors had used crypto but stored it in a private wallet. The pitch was to park the crypto with lenders instead and earn up to 18% annual performance yield (APY) or returns. Since these rates were significantly higher than bank interest rates, investors began to switch. Assets under management zoomed from $601 million at the start of 2020 to $253 billion until the crash.

Go onWhile the big returns promised by crypto lenders were not sustainable, the crypto crash came as a massive shock.

1. Liquidity wiped out: The Terra-Luna crash led to a $60 billion loss for the industry. Crypto lenders such as Celsius were amongst the worst affected. The lender had an exposure of $535 million in Terra founder Do Kwon’s Anchor protocol.

2. High yields were unmaintained: Even as the lenders’ balance sheet was wiped out, crypto tokens were still earning yields. Within a few weeks of the May crash, Celsius and Voyager realised the returns could not be paid out. Withdrawals were frozen soon after.

3. Fund-raising got tougher: Crypto lenders could not find investors to keep operations afloat because these shadow banks operated in a grey regulatory zone.

A few firms got lucky, because there was buying interest from within the industry. For instance, crypto lender Nexo may buy competitor Vauld.

But the larger issue with this architecture lay in the lack of uniformity in managing returns. Users also were unaware of the risks involved, especially the ownership of the crypto deposited with these entities.

Are there survivors?BlockFi found a buyer in Sam Bankman-Fried’s FTX. There is temporary relief since FTX will offer $400 million to revive BlockFi.

A few crypto lenders, such as Celsius and Voyager, have filed for bankruptcy. Some unrequited acquisitions have also been attempted, with FTX eager to buy Voyager. FTX isn’t interested, but Bankman-Fried will not give up. Just for context, Bankman-Fried’s Alameda Research owes $377 million to Voyager.

Once the M&As happen, there will be survivors. But investor trust and billions in hard-earned money are already lost.

The ETH Spike Mystery

There has been a flurry of activity on the Ethereum network. It touched an all-time high of 1.1 million active addresses on July 28 amidst the US Fed’s 0.75% rate hike.

FYI Active addresses are those which have made at least one transaction in 24 hours. One address is not equal to one user because users can create multiple wallets on Ethereum.

What’s happening?Experts said that the rise in active wallets does not mean higher adoption. It could indicate that there are multiple token transfers per unit of gas.

The Ethereum Merge that is scheduled for September has also increased transaction activity on the platform to ensure wallets stay active. The move to proof-of-stake will enable faster transactions and reduce fees.

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Who are we? There is a lot happening in our world. Everything has layers, and each layer has to be carefully peeled so you, the reader, know how the world of money is changing every day. That’s our promise. Help you unpeel the onions, which are the public markets in the US, India, and crypto, so that you know just a little more.