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As the crypto insolvency crisis continues to claim new victims, FTX billionaire Sam Bankman-Fried has said he is willing to spend up to $2bn to stop the bleeding and save the industry.
At the end of last week, FTX confirmed that it has signed a $680m rescue package with crypto-lending platform BlockFi, which could lead to a full takeover.
The deal includes a $400m revolving credit facility subordinate to all client funds, and an option for FTX to buy out BlockFi for up to $240m based on performance triggers.
One day after the deal was announced, BlockFi said it will raise its interest rates for all tiers of customers who lend out their crypto-assets using the platform.
Among crypto industry observers, the FTX rescue package raised eyebrows for numerous reasons, not least because BlockFi had been valued at $4bn as recently as last summer, according to data from Crunchbase.
In other words, if FTX were to acquire BlockFi at the maximum price of $240m, it would be locking in an impressive discount of 94 percent on last summer’s valuation.
Why now?
In a company statement, BlockFi co-founders Zac Prince and Flori Marquez said they had come to an agreement with FTX after being negatively affected by “crypto market volatility”.
They mentioned Celsius, for example, and blamed the rival lending platform for causing an “uptick” in client withdrawals from BlockFi, following Celsius’ decision to freeze all withdrawals on June 12.
Although BlockFi said it has no direct exposure to Celsius, it did admit exposure to Three Arrows Capital (3AC), the crypto hedge fund once worth billions that filed for Chapter 15 bankruptcy in the US on July 1.
BlockFi said it lost $80m on loans to 3AC, but insisted that client funds were not affected. It added that the $80m represents a “fraction” of losses publicly reported by other lenders to 3AC.
“As a matter of principle, we fundamentally believe in protecting client funds,” said Prince and Marquez.
“Not only because it’s absolutely the right thing to do, but this also benefits the ongoing health and adoption of crypto financial services worldwide.
“Therefore, it was important to add capital to our balance sheet to bolster liquidity and protect client funds.
“Ultimately, we found a great partner in FTX US, who shares our commitment to clients. This represents the best path forward for all BlockFi stakeholders and the crypto ecosystem as a whole.”
The final deal represents a significant expansion of the term sheet BlockFi signed with FTX late last month for a $250m revolving line of credit.
Since signing the latest deal, FTX founder and CEO Bankman-Fried has been optimistic about the health of the crypto markets, telling Reuters that he believes the worst of the industry’s liquidity crunch is over.
He stressed, however, that should things get worse, FTX has a “few billion” on hand that could be used to rescue other struggling crypto firms if necessary.
FTX bailout fails to keep Voyager afloat
One company where this strategy has demonstrably failed is Voyager Digital, a Canadian crypto lending platform that filed for bankruptcy this week.
As previously discussed on VIXIO, Voyager was directly exposed to Celsius through an asset sharing partnership that it had in place since 2019.
Signs of trouble at Voyager emerged almost immediately after Celsius put withdrawals on hold on June 12.
On June 14, Voyager announced that it currently has no customer assets held by Celsius, citing Celsius’ risk management practices as a cause for concern.
Then on June 17, Voyager announced that it has signed an agreement with Alameda Research for a $200m and 15,000 bitcoin revolving credit line (the bitcoin being worth about $270m at the time).
Alameda Research is the crypto trading firm founded by Bankman-Fried in 2017. He served as its CEO until late last year, when he passed the position to co-CEOs Sam Trabucco and Caroline Ellison.
Despite reporting a balance sheet of $200m on June 17, less than a month later, Voyager filed for Chapter 11 bankruptcy relief in the Southern District of New York on July 6.
In a list of debtors submitted to the court, Voyager’s largest outstanding debts were revealed to be owed by 3AC and Alameda Research respectively.
3AC owes $654m to Voyager and Alameda owes $376m, at rates of between 3 and 10 percent and 1 and 11.5 percent respectively.
The revelation begged the question whether Alameda’s most recent credit line to Voyager was signed so that it would not have to pay back its own debt to Voyager in the near future.
In a separate statement dated July 1, Voyager revealed that about 58 percent of its loan book consists of loans to 3AC, and its loan book accounts for nearly 50 percent of its total assets.
Voyager had traded publicly on the Toronto Stock Exchange (TSX) since 2019, but on July 6 its shares were suspended and an expedited delisting review was announced.
3AC contagion spreads
While the TSX was busy disabling Voyager’s shares, another major crypto business, Genesis Trading, came forward with another account of losses due to 3AC’s collapse.
In a tweet thread posted on July 6, Genesis CEO Michael Moro revealed that 3AC was the “large counterparty” that failed to meet a margin call in June, as many observers had suspected at the time.
Moro said he could reveal the identity of the borrower due to 3AC having commenced its bankruptcy proceedings. He also said that 3AC had a weighted average margin of 80 percent, but did not reveal the full extent of losses attributed to 3AC.
Genesis is a large cryptocurrency brokerage for institutional investors, and Moro added that it has enlisted the support of parent company Digital Currency Group, which has assumed undisclosed liabilities on Genesis’ behalf with respect to 3AC.
Digital Currency Group is the owner of crypto news website CoinDesk, and owns Grayscale, which operates the Grayscale Bitcoin Trust (GBTC).
It is also noteworthy that in Voyager’s bankruptcy filings, Genesis Global Capital, of which Moro is also the CEO, was listed as one of the company’s largest debtors, with an outstanding loan of just over $17.5m.
Celsius escapes defi liquidation
Meanwhile, over at Celsius, blockchain analysts believe that the lending platform may have just closed its largest outstanding loan position.
On July 7, a wallet address believed to be associated with Celsius paid back the last remaining interest on a leveraged loan backed by $450m worth of wrapped bitcoin (an ethereum-based bitcoin token).
The wrapped bitcoin was then reclaimed and withdrawn from the MakerDao decentralised finance (defi) platform.
DeFiyst, an analyst who has been tracking Celsius transactions since June, believes that the company is currently consolidating its remaining liquidity in a single wallet, potentially in preparation for its own bankruptcy filing.
Such speculation is likely to be correct, given that on July 6 Celsius appointed four new directors to its board who are all bankruptcy attorneys, namely John Dubel, David Barse, Alan Jeffrey and Laurence Tosi.
But as commercial law and bankruptcy professor Adam Levitin has said, there is no need for Celsius to rush to file for bankruptcy, as long as it has enough cash to keep operating, even in a limited capacity.
“Celsius can play for time because its board doesn't face liability — at least in Delaware — for any further decline in asset values,” Levitin said.
