Industry Insights: February 2023

We are a month into 2023 and the crypto community continues to grapple with the fallout of a chaotic 2022, but growth continues and prices steadily increase. 

The dark saga of FTX continues to loom over the industry, dominating headlines and earning the attention of regulators. Former FTX CEO Sam Bankman-Fried, with his criminal trial now set to begin in October 2023, has remained vocal, launching his own Substack newsletter to publish his thoughts on FTX’s collapse. Bankman-Fried has maintained that FTX US remains fully solvent despite mounting evidence to the contrary, including the company’s bankruptcy claim and a newly disclosed batch of ‘unauthorized third party transfers’ that moved $90M from the platform.

Crypto lending platform Genesis has also been ensnarled in the fallout from FTX, with recent court filings revealing that the company was FTX’s top creditor and is currently owed over $226M. Genesis itself filed for Chapter 11 bankruptcy protection on January 19, after halting withdrawals in November. Genesis has over $5B in liabilities and will explore a sale of the company in order to repay its creditors. 

Genesis’ parent company DCG has been under intense scrutiny since the collapse of FTX, with many concerned that the company is facing a liquidity crunch. In addition to Genesis, DCG’s flagship product, Grayscale Trust, has faced sustainability concerns and is currently trading at around a 40% discount to Bitcoin spot prices. Liquidation of the trust, which holds over 3% of the total Bitcoin market cap, would likely trigger a dramatic drop in crypto prices. Reports that DCG is considering a sale of CoinDesk, the dependably profitable news outlet, have further amplified liquidity concerns.

The SEC also took aim at Genesis, charging the company and their crypto exchange partner, Gemini, with the unregistered offer and sale of securities. The SEC took issue with the pair’s Gemini Earn lending program, which paused all withdrawals in November, noting Genesis’ liquidity problems in its complaint. Gemini CEO Tyler Winkelvoss called the SEC complaint “counterproductive” and noted his company had been discussing its Earn program with the SEC for the past 17 months but was never notified of any issues.

US regulators and enforcement agencies made another big splash by calling a heavily publicized press conference to announce charges against Bitzlato, a Hong Kong-based crypto exchange, and its Founder and CEO Anatoly Legkodymov for money laundering concerns and Russian illicit finance. Many in the media and on Twitter felt the announcement was too little too late, paling in comparison to last year’s collapses of Voyager, Celsius, and FTX. Some called it a distraction, pointing out the agencies’ lack of foresight or prevention in the FTX collapse.

Despite the uncertainty facing the industry, the price of Bitcoin and Ethereum has been steadily increasing and several altcoins including SOL, MATIC, and XRP have skyrocketed in value in recent weeks. 

Meanwhile the pace of innovation remains steady as ever, with Polygon successfully executing a hard fork that will eliminate spikes in gas fees and Circle announcing plans for a new permissionless protocol that can be embedded in dApps to enable cross-chain USDC transfers. Masa Finance, a Web3 identity provider, launched its mainnet on January 17, taking an important first step in bringing Soulbound Tokens – an idea first published by Ethereum co-founder Vitalik Buterin – to the Ethereum network. While regulators and creditors squabble, the developers are hard at work expanding the capabilities of Web3 and increasing its efficiency. 

Policy and Regulatory Implications

Many of these companies, including FTX and DCG, once reigned as perceived foundational players within the crypto ecosystem. As they continue to tumble, many in and outside of the industry are looking to the US government to step in. What that will precisely look like remains to be seen. Clearly, post-FTX, we will continue to see regulators and enforcement agencies flex their muscles, making sure everyone knows they are aware of the crimes being committed and that they are willing to take action. 

Ongoing investigations in Binance, DCG, and others give us enough to believe there is more to come. Wachsman’s Policy team will keep our clients apprised of how this shakes out in actual regulations or policy changes. But one thing is for sure: regulators are watching.