WEBVTT - The Crypto Players Caught in FTX’s Contagion

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<v Speaker 1>This is Bloomberg Crypto, a daily Bloomberg I heart podcast,

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<v Speaker 1>and I'm Stacy Marie Ishmael, Managing editor of Crypto for

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<v Speaker 1>Bloomberg News. It's Wednesday, no Ambithatius. We're just gonna keep

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<v Speaker 1>saying this news moves fast in crypto to help us

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<v Speaker 1>stay on top of it. Today, we're going to talk

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<v Speaker 1>about some of the pivotal but maybe even slightly less

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<v Speaker 1>well known to you players in crypto, many of whose

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<v Speaker 1>names all begin with G y G. I have no idea,

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<v Speaker 1>but it is a strong letter joining me today to

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<v Speaker 1>discuss Genesis, Galaxy and even Gemini. Is Bloomberg Report um.

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<v Speaker 1>I think the centralized players recognize the need to provide

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<v Speaker 1>more transparency, just so that they can convince people that

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<v Speaker 1>they are a legitimate business and they are not misusing

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<v Speaker 1>your fund a. Welcome back to the podcast. Have you

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<v Speaker 1>been getting a lot of sleep? Ah, that's a great question.

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<v Speaker 1>Not as much as I hope to. This past few

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<v Speaker 1>weeks has been crazy. Every since the collapse of FTX happened,

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<v Speaker 1>which nobody really saw it coming. Before we jump into

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<v Speaker 1>some of the people who have been affected or maybe

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<v Speaker 1>affected by the collapse of FTX, reminder our listeners who

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<v Speaker 1>you are and what you cover. I am Us Young,

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<v Speaker 1>and I'm a crypto market structure reporter at Boomberg in

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<v Speaker 1>New York, and I cover crypto exchanges, including by nights,

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<v Speaker 1>f t X, and coin Bass, so all of the

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<v Speaker 1>people that have a lot of stuff going on right now.

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<v Speaker 1>But in addition to covering the exchanges, you have also,

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<v Speaker 1>along with some of our colleagues, been reporting on a

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<v Speaker 1>lot of different kinds of crypto companies that have in

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<v Speaker 1>the past couple of weeks been you know, making it

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<v Speaker 1>clear that they're affected and big and small ways by

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<v Speaker 1>the fallout from FTX. One of the things that I've

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<v Speaker 1>noticed is there are a lot of companies in crypto

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<v Speaker 1>that have like really similar names to each other. And

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<v Speaker 1>there's some that we cover that all begin with G.

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<v Speaker 1>One of them is Genesis and they have really in

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<v Speaker 1>the past couple of weeks come to people's attention alongside Gemini,

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<v Speaker 1>another G, and you know a few other folks in

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<v Speaker 1>that area. Can you just share with our listeners what

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<v Speaker 1>are some of the things that have been happening in

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<v Speaker 1>the reporting that you've been doing on them the crypto space.

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<v Speaker 1>There are two companies starting with the letter G that

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<v Speaker 1>are highly critical in terms of the role that they

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<v Speaker 1>play in the market space. One is Genesis UM and

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<v Speaker 1>now there is Galaxy Digital, and both of them are

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<v Speaker 1>institutional facing only, which means that they're not really household

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<v Speaker 1>name for people outside of the cryptal industry, but they're

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<v Speaker 1>essentially providing financial services similar to what Wall Street is

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<v Speaker 1>in finance in the crypto space. And recently the collapse

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<v Speaker 1>of f t X really shed a light on the

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<v Speaker 1>business model of some of these companies, especially with Genesis,

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<v Speaker 1>because they're also caught in the contagion effect from ft X.

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<v Speaker 1>Now how and why are they caught in the contagions?

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<v Speaker 1>So you know, you mentioned they provide financial services, like

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<v Speaker 1>what are some of the wieze that companies like Genesis

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<v Speaker 1>and Galaxy are exposed to the collapse of FTX. So

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<v Speaker 1>Genesis is one of the earliert and biggest lenders in

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<v Speaker 1>the cryptal industry and what they do is that they

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<v Speaker 1>provide lending to cryptal players in the space. And as

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<v Speaker 1>we know that lenders have been hit hard in the

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<v Speaker 1>current collapse with the of prices, there's a question about

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<v Speaker 1>the level of clasterization that's widely accepted in the industry.

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<v Speaker 1>And even though Genesis is an institutional company, because they

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<v Speaker 1>provide such a central role in providing lending to the space,

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<v Speaker 1>some of the retail facing products, such as Gemini Earned

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<v Speaker 1>product is in essence supported by Genesis. And this means

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<v Speaker 1>that for retail users who use the Gemini Cryptal exchange

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<v Speaker 1>when they opt into this yield product, which means they

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<v Speaker 1>can deposit their cryptal and get say a percent yield

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<v Speaker 1>from the product, the back end of it is supported

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<v Speaker 1>by Genesis because what Gemini does is essentially pairing retail

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<v Speaker 1>users who are wanting to get yield from their deposits

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<v Speaker 1>with lenders like Genesis who's paying out the yield. Got it.

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<v Speaker 1>So here we have another g Gemini. So we've got Gemini,

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<v Speaker 1>Genesis Galaxy. Now Genesis, as you mentioned, is this pivotal

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<v Speaker 1>lender in the crypto space, and one of the challenges

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<v Speaker 1>that they've had is this is not their first crisis.

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<v Speaker 1>They lent money to Three Arrows Capital now collapsed, another

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<v Speaker 1>bankrupt touch fund. They lent two point four billion dollars

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<v Speaker 1>to Three Arrows Capital. You mentioned collateralization earlier, but Three

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<v Speaker 1>Arrows had put up about half as much of that

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<v Speaker 1>in collateral, so they had an overall exposure of one

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<v Speaker 1>point two billion. What happened to that exposure and how

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<v Speaker 1>does that kind of relate to genesis parent company DCG.

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<v Speaker 1>So Genesis was the biggest creditor to Three Arrows with

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<v Speaker 1>Three Arrows blew up, so this is really a one

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<v Speaker 1>to punch for Genesis. They were just recovering from Three

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<v Speaker 1>Arrows loss. After that they had this new generation of leadership.

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<v Speaker 1>Their CEO, Michael Mara departed and they had new top

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<v Speaker 1>seats with executives and they laid off people as well,

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<v Speaker 1>so they were really try in to restructure their business

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<v Speaker 1>and recover from the head and then just a few

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<v Speaker 1>months into it, now we have the FTX collapse and

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<v Speaker 1>this time it seems that they're being hit pretty hard

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<v Speaker 1>given that it just came on the heel of the

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<v Speaker 1>earlier damage. And the parent company d c G. Digital

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<v Speaker 1>Currency Group is the cryptal conglomerate founded by Barry Silbert,

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<v Speaker 1>and they are the one who again stepped in to

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<v Speaker 1>help our with Genesis, this time with their ft X exposure.

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<v Speaker 1>They injected capital over a hundred million into Genesis. When

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<v Speaker 1>Genesis realized that it has some of its money stuck

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<v Speaker 1>on the ft x platform, but it seems like this

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<v Speaker 1>is not enough to fully sustain the business. And as

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<v Speaker 1>we have reported, Genesis has been in talks for emergency

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<v Speaker 1>fundraising to raise over one billion dollar during the past

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<v Speaker 1>few days, and they have told investors that if they

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<v Speaker 1>can't get that money, they're at risk of entering bankruptcy.

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<v Speaker 1>What are some of the expectations that people have for

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<v Speaker 1>crypto right now? It's like, clearly there's no evidence of

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<v Speaker 1>bitcoin is going back to sixty anytime soon. But at

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<v Speaker 1>the same time, you don't really see a lot of

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<v Speaker 1>people saying, well, everything is going to zero. We seem

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<v Speaker 1>to be in an in between place, like what is

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<v Speaker 1>the vibe you're getting from your reporting? I think the

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<v Speaker 1>series of blobs and failures at major companies into crypto space,

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<v Speaker 1>it's going to lead to major market structure changes in crypto.

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<v Speaker 1>And then one big one is really the lending business

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<v Speaker 1>in crypto. We are going to see fewer lenders who

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<v Speaker 1>accept underclasterized or even uncollasterized loans. Some of them just

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<v Speaker 1>had to shut down because they're suffering from these losses.

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<v Speaker 1>And on the other hand, DeFi is becoming a bright

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<v Speaker 1>spot because with DEFA you have the transparency and in

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<v Speaker 1>theory you can track data on chain, and that's one

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<v Speaker 1>part that people in the industry are expecting to grow

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<v Speaker 1>and to become more dominant going forward in the crypto space.

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<v Speaker 1>But then at the same time, we also have regulatory

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<v Speaker 1>uncertainty when it comes to either centralized players such as

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<v Speaker 1>lenders or exchanges, or decentralized players, which we call defy.

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<v Speaker 1>So I think there's just market forces that are reshaping

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<v Speaker 1>the market structure, especially when it comes to the type

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<v Speaker 1>of lenders that are surviving the industry. But then there

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<v Speaker 1>are also regulatory forces that will come into play as well.

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<v Speaker 1>In other words, difficult to tell because you know, you're

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<v Speaker 1>describing a series of forces that are both working against

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<v Speaker 1>and for each other. For instance, we're really really hearing

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<v Speaker 1>from a lot of folks that we're talking to this

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<v Speaker 1>idea of it's not that crypto failed, it's that centralized

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<v Speaker 1>crypto players failed, right Like that's that's a very strong

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<v Speaker 1>drumbeat that's coming from one particular element of the market.

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<v Speaker 1>And then over in the side of defy, you know,

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<v Speaker 1>we've had some pretty interesting types of blow ups and

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<v Speaker 1>defy at the same time, right you, whether it's billions

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<v Speaker 1>of dollars worth of hacks, whether it's questions around the

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<v Speaker 1>legality of certain types of dows, whether it's even though

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<v Speaker 1>you do have this transparency, it's still appears to be

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<v Speaker 1>very possible for the dynamics of these things to not

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<v Speaker 1>exactly be what you're expecting, so you still you lose

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<v Speaker 1>your money. There's a risk profile question of as interest

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<v Speaker 1>rates continue to rise, do you need to be taking

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<v Speaker 1>fairly substantial risks to get that eight percent yield? Can

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<v Speaker 1>you just like put money in a bank account instead.

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<v Speaker 1>So definitely an interesting time. But just to go back

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<v Speaker 1>to this idea of no need for centralized lenders, what

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<v Speaker 1>the lenders themselves will say and what other folks who

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<v Speaker 1>work in the more centralized part of the market will say,

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<v Speaker 1>is they bring kind of clarity and ease of use

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<v Speaker 1>and a better user experience. Then you can necessarily get

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<v Speaker 1>from DeFi right, if you are trying to have somebody

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<v Speaker 1>who will pick up the phone when you have a question,

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<v Speaker 1>having a centralized lender seems to be the way forward.

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<v Speaker 1>Are you seeing any evidence that instead of it being

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<v Speaker 1>these extremes of completely anonymous, decentralized protocol where your help

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<v Speaker 1>desk is like a discord channel and major centralized player

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<v Speaker 1>with like expensive offices in Manhattan. Is there something emerging

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<v Speaker 1>in the middle at all. I think there's this effort

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<v Speaker 1>among centralized platforms such as bine eye that has been

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<v Speaker 1>pushing to disclose more of the proof of user funds.

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<v Speaker 1>For example, there are some of them are disclosing the

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<v Speaker 1>blockchain addresses of their customer funds. So I think the

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<v Speaker 1>centralized players recognize the need to provide more transparency just

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<v Speaker 1>so that they can come the people that they are

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<v Speaker 1>a legitimate business and they are not misusing your fund,

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<v Speaker 1>which people in the industry can no longer take it

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<v Speaker 1>for granted. I think one helpful way that I've told

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<v Speaker 1>to think of these centralized players, such as centralized lenders,

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<v Speaker 1>it's really that they are just lenders period. Even though

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<v Speaker 1>product that they're dealing with is cryptal, the back and

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<v Speaker 1>and operation of their business is nothing related to blockchain.

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<v Speaker 1>Oftentimes it's run on Excel sheet. It is the communications

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<v Speaker 1>are down through these social media channels. Therefore, they are

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<v Speaker 1>really not following the originalsource of cryptal, which is for

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<v Speaker 1>everyone to be able to track through blockchain. The transfer

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<v Speaker 1>of value and then for people to be able to

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<v Speaker 1>verify things publicly and remove the need to trust opaque player.

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<v Speaker 1>So I think in a way, given the series of

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<v Speaker 1>failures in the space, the centralized players are seen consequences

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<v Speaker 1>because they're not falling strictly the original intent of blockchain,

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<v Speaker 1>which is to be open and transparent. Coming up, we'll

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<v Speaker 1>be right back with more from Bloomberg Reports to ung.

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<v Speaker 1>If I think back to two thousand and eights, where

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<v Speaker 1>you had a very similar set of concerns around can

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<v Speaker 1>you trust that somebody knows what their positions are? How

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<v Speaker 1>are they marking these assets? Are their market prices they

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<v Speaker 1>can get for these assets. One of the concerns that

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<v Speaker 1>centralized players had about being more transparent was this idea

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<v Speaker 1>that people could like take advantage of knowing what your

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<v Speaker 1>positions are, they could potentially front run you or you know,

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<v Speaker 1>squeeze you, depending on like where you were playing or

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<v Speaker 1>even And I remember this consider learned about when the

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<v Speaker 1>bank's were getting stress tested that if your stress tests

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<v Speaker 1>came back and show that you were highly stressed, then

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<v Speaker 1>that might you know, precipitate a run on that particular bank.

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<v Speaker 1>Are you seeing any similar criticisms of these attempts to

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<v Speaker 1>transparency in crypto that we saw on Wall streets. You

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<v Speaker 1>know a while ago. I think there's this recognition within

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<v Speaker 1>the crypto space that financial regulation makes sense. There's a

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<v Speaker 1>reason that they're putting there by regulators. We had an

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<v Speaker 1>editor who joked that financial regulators have never been so

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<v Speaker 1>flattered after seeing that the series of crypto blobs, because

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<v Speaker 1>it shows what happens in the market when you do

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<v Speaker 1>not have these protections that that people have learned from

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<v Speaker 1>their past mistakes. Yeah. So I think it is an interesting,

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<v Speaker 1>like so searching period for for crypto native folks too.

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<v Speaker 1>On one hand, the whole industry started when they're trying

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<v Speaker 1>to run away from some of the established institutions and regulations,

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<v Speaker 1>but then on the other hand, they're really suffering from

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<v Speaker 1>the consequences from them. Yeah, what an interesting time to

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<v Speaker 1>be a regulator. You know, you're sort of writing your

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<v Speaker 1>performance review being like, look at all the things that

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<v Speaker 1>we prevented from happening over here. Just as a kind

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<v Speaker 1>of a closing question, I have covered financial markets for

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<v Speaker 1>a long time, and I have used to kind of

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<v Speaker 1>a breakneck pace of breaking news, but even by historical standards.

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<v Speaker 1>The speed at which things in crypto happen is genuinely

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<v Speaker 1>astonishing when you're talking to the sources that you have

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<v Speaker 1>that aren't sleeping much either, like what is their impression

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<v Speaker 1>of why things are moving so quickly? Is there something

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<v Speaker 1>unique to this asset class? Is it because it's such

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<v Speaker 1>a small industry and everybody knows and it is exposed

0:14:51.560 --> 0:14:54.160
<v Speaker 1>to each other, Like do they have a take on

0:14:54.320 --> 0:14:58.480
<v Speaker 1>why on Tuesday everything's fine. On Thursday everybody's bankrupt. I

0:14:58.520 --> 0:15:01.720
<v Speaker 1>would say that social media plays a huge part in

0:15:01.760 --> 0:15:05.040
<v Speaker 1>this because everything is being played out in real time

0:15:05.080 --> 0:15:09.560
<v Speaker 1>on social media. When ft X got into trouble, cz

0:15:09.840 --> 0:15:13.560
<v Speaker 1>and Sandbank my Free were announcing their deals real time

0:15:13.640 --> 0:15:16.320
<v Speaker 1>on Twitter, and that's how people find out the issue

0:15:16.320 --> 0:15:20.440
<v Speaker 1>of liquidity crunch at FTX. So I think in the

0:15:20.480 --> 0:15:23.440
<v Speaker 1>past few weeks, every day there's Twitter space being held

0:15:23.520 --> 0:15:27.520
<v Speaker 1>that are hours long, and there's just citizen journalism effort

0:15:27.720 --> 0:15:30.400
<v Speaker 1>on Twitter as well. So I think the pace is

0:15:30.520 --> 0:15:34.000
<v Speaker 1>very fast because in a way that everyone is crowdsourcing

0:15:34.000 --> 0:15:37.480
<v Speaker 1>information and sharing information at the same time on social media.

0:15:37.680 --> 0:15:40.960
<v Speaker 1>But that also comes with the challenge of verifying these information,

0:15:41.040 --> 0:15:43.640
<v Speaker 1>at least for us reporters because there are a lot

0:15:43.720 --> 0:15:47.120
<v Speaker 1>of rumors being put out as well. Interesting that none

0:15:47.160 --> 0:15:49.160
<v Speaker 1>of this is happening on Mastodon yet, but we'll see,

0:15:49.200 --> 0:15:51.600
<v Speaker 1>we'll see how that goes. Thank you very much, pleasure

0:15:51.600 --> 0:15:53.160
<v Speaker 1>to have you in the show. Thanks for having me.

0:15:53.680 --> 0:15:55.280
<v Speaker 1>You can find more of you It is reporting on

0:15:55.280 --> 0:15:57.960
<v Speaker 1>the Bloomberg Terminal and on Bloomberg dot com, and of

0:15:58.000 --> 0:15:59.840
<v Speaker 1>course you can check out our twice weekly news a

0:15:59.840 --> 0:16:08.520
<v Speaker 1>lot of Bloomberg Crypto. This is Bloomberg Crypto, a daily

0:16:08.560 --> 0:16:11.960
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0:16:18.680 --> 0:16:21.560
<v Speaker 1>your comments, questions, or suggestions for the show The Crypto

0:16:21.600 --> 0:16:28.040
<v Speaker 1>at Bloomberg dot net. The supervising producer of Bloomberg Crypto

0:16:28.160 --> 0:16:31.360
<v Speaker 1>is Vicky very Galina. Our senior producer is Janet Babin.

0:16:32.000 --> 0:16:35.600
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<v Speaker 1>producers are Ty Butler and Moses on Them. Desta wonder

0:16:39.480 --> 0:16:44.560
<v Speaker 1>At is our engineer. Original music by Leo Sidrin. I'm

0:16:44.560 --> 0:17:00.240
<v Speaker 1>Stacy Marie Schmal. We'll be back tomorrow. Two