Speaker 1: This is Bloomberg Crypto Daily, Bloomberg Ihad Podcast, and I'm
Speaker 1: Philip lagger Transfer, senior editor for Bloomberg News, standing in
Speaker 1: for Stacy Marie Eshmaal. It is Friday, February, the third well.
Speaker 1: January in the Northern Hemisphere can often feel like the
Speaker 1: longest month, but it's finally over. Surprising to some, it
Speaker 1: turned out to be a pretty good month for crypto.
Speaker 1: Bitcoin rose almost and a lot of smaller coins actually
Speaker 1: did a lot better than that. Even and speaking of
Speaker 1: risk taking, Wall Street is still keen on crypto despite
Speaker 1: all of last year's calamities, and a failed crypto lender
Speaker 1: known for its risk appetite, Celsius, just got some pretty
Speaker 1: harsh words from its bankruptcy examiner. Here to help me
Speaker 1: break down the news, it's Bloomberg Senior editor Anna Airera.
Speaker 1: These firms have very long horizons and it takes them very,
Speaker 1: very long to do things. So you know, they might
Speaker 1: have made announcements a couple of months ago during the rally,
Speaker 1: but they probably started working on things a few years ago.
Speaker 1: And Bloomberg reporter Emmilin Nicole, we don't even know if
Speaker 1: there may be more collapses to come, but FTX was
Speaker 1: one of the biggest tests I think that Crypto could
Speaker 1: have faced on that front. And so this week we
Speaker 1: had the Celsius bankruptcy examiner's report and it was pretty scathing.
Speaker 1: I guess we can say, Emily, you covered that story,
Speaker 1: what was the gist of it? So this was the
Speaker 1: final report that the court pointed examiner was doing into
Speaker 1: Celsius throughout its bankruptcy case, and unlike probably even some
Speaker 1: of the things that we've seen come from other bankruptcy
Speaker 1: cases so far, this one was pretty damning. I guess
Speaker 1: you could say. What the examiner found was that a
Speaker 1: lot of what Celsis was doing to track its assets
Speaker 1: and my abilities was insufficient. It made misrepresentations to customers
Speaker 1: quite regularly about its financial health and then tried to
Speaker 1: cover up the tracks after it lied about it. Um
Speaker 1: There was also a pretty evident picture of how for
Speaker 1: most of the time that Celtis was operasing from about
Speaker 1: twenty one onwards, it was essentially insolvent because most of
Speaker 1: how it was propping itself up was through its own token,
Speaker 1: cel Cell, and even with Cell, some of its top
Speaker 1: executives like Alex Muszynski, the former CEO, had been selling
Speaker 1: off really large amounts of self for their own personal gain,
Speaker 1: which was similarly then hitting the customers and balance sheet
Speaker 1: at the same time. And this was even as they
Speaker 1: spent I think it was north of five hundred million
Speaker 1: dollars on buying the cell token from the company account.
Speaker 1: The examiner report found that at least five million dollars
Speaker 1: was spent buying its token, and Sealsis was covering up
Speaker 1: from customers that much, like you know, how much it
Speaker 1: was spending on that and even out of that figure.
Speaker 1: While that was happening between twenty and the time that
Speaker 1: sells his father bankruptcy. Last year, mission Ski made about
Speaker 1: sixty eight million on selling this token for himself, while
Speaker 1: another count co founder made at least almost ten million.
Speaker 1: So there was a lot to be made. There a
Speaker 1: lot of stuff going on. Is there anything in this
Speaker 1: report that you either you Emily or Anna c as
Speaker 1: you know, speaking to the actual business model? Um? Is it?
Speaker 1: Is it another testament that the business model of crypto
Speaker 1: lending and the investing or that the sort of risk
Speaker 1: taking that underpinned crypto lending as we knew it at
Speaker 1: least until two two was out of whack. What's interesting here?
Speaker 1: And I'm not sure how new this this is, but obviously,
Speaker 1: and it's quite common for the lenders, was that they
Speaker 1: were attracting the part it's by offering very high yields um.
Speaker 1: But what's interesting is that they were saying that the
Speaker 1: investments they were making or the loans, were not high risk.
Speaker 1: And obviously, if you have any experience investing, you know
Speaker 1: that generally you get high yields when there risk is higher.
Speaker 1: And so the examiner noted that obviously that wasn't the case,
Speaker 1: and that as they were trying to attract more deposits
Speaker 1: the investors, the investments got riskier and riskier. And Emily
Speaker 1: noted in her story how for a certain period in
Speaker 1: time the loans were completely uncollateralized. And just to take
Speaker 1: a step back, basically, if if anyone who's listening is unfamiliar,
Speaker 1: what happens is, you know, you deposit like just like
Speaker 1: a bank, you would deposit your tokens with a with
Speaker 1: a crypto lender, and they would give you yield by
Speaker 1: lending it out to someone else. Um. And what happened
Speaker 1: in crypto was that it's not wasn't actually a bank.
Speaker 1: Your deposits were insured and in many cases, they didn't
Speaker 1: have any risk management to make sure that they weren't
Speaker 1: just handing off your tokens to someone who would make
Speaker 1: very questionable bets on not great tokens. UM and the
Speaker 1: report also noted this lack of risk management. I think
Speaker 1: they said until they did not have anyone in risk management,
Speaker 1: no written risk management procedures, and then they hired four
Speaker 1: people who had some stop gap measures. I think UM
Speaker 1: were meant to cover holes until they would come up
Speaker 1: with more serious risk management procedures. Then they hired some
Speaker 1: more people. One person came up with some policies, but
Speaker 1: they were never implemented. I don't know the business model itself,
Speaker 1: but just in general sort of how it was being
Speaker 1: portrayed clients that it was that was supposedly safe and
Speaker 1: that you were depositing your money and something that was
Speaker 1: like a bank, and that it was going to be there,
Speaker 1: when in fact it was being lent out to people
Speaker 1: who took risky bets. UM didn't have to post any collateral,
Speaker 1: so that when when those risky bests started backfiring, lenders
Speaker 1: like Celsius lost a lot of money and it wasn't
Speaker 1: their own money, it was their client's money. And I
Speaker 1: noticed that you spoke about the kind of risk reward
Speaker 1: of equation and the concept of that there isn't really
Speaker 1: any free free lunch. I yes, um in finance. And
Speaker 1: you know, it's a segue over to a sector that
Speaker 1: actually does, probably at least most of the time, understand
Speaker 1: risk reward, and that's Wall Street. And you did a
Speaker 1: story together with some of our colleagues about Wall Streets
Speaker 1: sort of crypto ambitions as they stand now. And what
Speaker 1: did you guys find out. So anyone who's listening would
Speaker 1: imagine that with everything that's gone down in crypto, Wall
Speaker 1: Street would want to take a rain check or say
Speaker 1: we don't want to have anything to do with it.
Speaker 1: In reality, some of the firms that had stepped in
Speaker 1: during the sort of crypto rally by saying they would
Speaker 1: start launching crypto custody or start offering crypto to some
Speaker 1: of their clients have said that they're they'll continue with
Speaker 1: these plans. Uh. And in many cases, some of these
Speaker 1: banks see crypto not just as crypto in itself, as
Speaker 1: what we see now. So so you know, Bitcoin and
Speaker 1: ether and these assets that are existing, but as an
Speaker 1: opportunity to tokenize existing assets, so stuff that they already trade,
Speaker 1: like bonds, are other forms of securities. So it's a
Speaker 1: mix of firms trying to get into into actual you
Speaker 1: know cryptos, so bitcoin, and also to lay the foundation
Speaker 1: for a future which they believe will have you know,
Speaker 1: normal asset tokenized UM. And I think what's really interesting
Speaker 1: here is that you know, many of them flagged. How
Speaker 1: actually what's gone on in crypto gives them an opportunity
Speaker 1: to step in because with cases like FTX or you know,
Speaker 1: other other instances in which customer assets were mixed with
Speaker 1: assets of the firm and you know sort of there
Speaker 1: was no risk management and customer assets are now gone.
Speaker 1: It just shows that for investors it's sort of probably
Speaker 1: better to work with a regulated firm who has to
Speaker 1: follow certain rules, and one of which, which is very basic,
Speaker 1: is not mixing assets and keeping assets safe and custody
Speaker 1: by a third party. There's a lot going on, and
Speaker 1: I guess, you know, another thing to point out is
Speaker 1: that these firms have very long horizons and it takes
Speaker 1: them very very long to do things. So you know,
Speaker 1: they might have made announcements a couple of months ago
Speaker 1: during the rally, but they probably are working on things
Speaker 1: a few years ago, and so in some cases they
Speaker 1: might not really be swayed by the crypto prices now
Speaker 1: and they might be actually generally looking at doing things
Speaker 1: in the long term so that if another rally comes,
Speaker 1: they might actually make some money and fees from from
Speaker 1: the trading. And what happens that being said, a big
Speaker 1: caveat is you know a lot of these firms say
Speaker 1: they do things because of client demand and that's what's
Speaker 1: driving them to launch new products. And now with crypto
Speaker 1: prices down like and so many investors haven't been hurt,
Speaker 1: you have to wonder is this demand still there at
Speaker 1: the same time. I mean, if you look at the banks,
Speaker 1: at least to a certain extent, they're at least being
Speaker 1: held back by the regulations on them right now. I mean,
Speaker 1: for instance, they cannot hold crypto directly on their balance sheet.
Speaker 1: How do you think that is playing into the time
Speaker 1: horizons here and what impact wall Stree you can actually
Speaker 1: have on crypto. That's definitely a big role. A lot
Speaker 1: of them have been wary because there weren't clear enough
Speaker 1: regulations and as you mentioned, the balance issue, it's it's
Speaker 1: sort of a risk issue. So you know, post crisis
Speaker 1: rules have made banks a lot safer. They've imposed that
Speaker 1: banks hold a lot more collateral for risky assets, and
Speaker 1: in many cases banks believe or in many countries that
Speaker 1: assets that crypto would be classified as the riskiest assets,
Speaker 1: and so they'd have to hold a lot of collateral
Speaker 1: to hold bitcoin on their balance sheet, which would make
Speaker 1: it sort of not really worth it, which is the
Speaker 1: reason why they've held back. So, you know, now we've
Speaker 1: we're seeing a big regulatory push globally from regulators in
Speaker 1: all major jurisdictions to regulate crypto more. That would bring
Speaker 1: more clarity and we can maybe I think that it
Speaker 1: would help banks step in, but at the same time,
Speaker 1: you know, they might just think it's not really worth
Speaker 1: the headache at the moment. We'll be right back with
Speaker 1: more of the week's top crypto stories with Anna and Emily.
Speaker 1: And Emily, you've sort of come at this from a
Speaker 1: slightly more I guess crypto side, do you. Is it
Speaker 1: your impression that firms that are crypto native are in
Speaker 1: any way, shape or form concerned about you know, the
Speaker 1: trad fire as they call them, moving in on their
Speaker 1: turf right now, or is it's sort of like, no,
Speaker 1: they're too big, they're too slow, they're too hampered by regulation.
Speaker 1: How would you read the mood on that. I mean,
Speaker 1: there's always the idea that more competition is better for innovation,
Speaker 1: but also it means that you have to work harder
Speaker 1: as a company to draw in users. I think probably
Speaker 1: at the minute though, volumes are so low in crypto
Speaker 1: that it's difficult for any one to get users trad
Speaker 1: fire crypto native. It doesn't matter who you are. Um.
Speaker 1: There's obviously the elements that were mentioned about how if
Speaker 1: you're in the crypto companies don't have the best reputation
Speaker 1: right now, and so maybe Wall Street has an edge there.
Speaker 1: But Wall Street also can't offer what crypto offers. I mean,
Speaker 1: if we look at Fidelity as a as a case example,
Speaker 1: they can only really offer bitcoin ethereum at the minute,
Speaker 1: and they're not able to even offer you know, the
Speaker 1: top old coins in the sector like Toolana or Cardano,
Speaker 1: because those aren't things that we really have regulatory cliracy on.
Speaker 1: We're still not sure, for example, in the US, whether
Speaker 1: um something is a security or a commodity, and that
Speaker 1: makes things very difficult for Wall Street firms to really
Speaker 1: think about, so crypto natives can can continue to keep
Speaker 1: that edge and when volumes are this though, it's really
Speaker 1: in those smaller tokens actually where there's there's potentially money
Speaker 1: to be made for traders. It's where they can get
Speaker 1: probably the best arbitrage opportunities, and that's not something that
Speaker 1: big banks or Wall Street are anywhere close to offering
Speaker 1: at the minute. Okay, let's pivot to regulation then, because
Speaker 1: the UK just came out with a proposal. I guess
Speaker 1: you can say, from a regulatory standpoint, at least bring
Speaker 1: crypto and tried fy sort of under the same roof,
Speaker 1: and when you did that story, what can tell us
Speaker 1: about that and how significant does it look at this point?
Speaker 1: So the UK announced a consultation this week that will
Speaker 1: basically form the cornerstone of what will be the country's
Speaker 1: broadest set of crypto regulations. It's announced a couple of
Speaker 1: proposals last year and too, like specific areas like stable
Speaker 1: coins or how we can promote crypto assets in general advertising.
Speaker 1: But this is this is the big one um and
Speaker 1: most of what it goes through things like how crypto
Speaker 1: exchanges should be regulated, transitioning away from a bit of
Speaker 1: a registration regime that the UK has a minute that
Speaker 1: just looks at anti money laundering standards and how crypto
Speaker 1: companies on masks can just be treated like regular financial
Speaker 1: services companies. Um. There's some bits in there about how
Speaker 1: crypto exchanges should put in place requirements for tokens issuers
Speaker 1: when they want to listen a new token. UM. There's
Speaker 1: also things like there should be stricter rules on custody,
Speaker 1: on crypto lenders, on into ned areas. Basically everything that
Speaker 1: you could think of as an issue that's been thrown
Speaker 1: up in two with all the bankruptcies and collapses and
Speaker 1: scandals we've had, the UK has tried to address in
Speaker 1: this one document. It's interesting that you mentioned that, Emily,
Speaker 1: because as I read this story, it's sort of like
Speaker 1: it was kind of check check, check point by point,
Speaker 1: kummingling things like the stuff that came up again and
Speaker 1: again and again over two It almost reads like either
Speaker 1: they anticipated this or they have been working very hard
Speaker 1: in the last couple of weeks and months to get
Speaker 1: this ready. Hum. I mean, it's it's definitely the latter, right.
Speaker 1: So they started announcing these kinds of things back in
Speaker 1: between January and April two, and it was all in
Speaker 1: the kind of slight aftermath of coming off of bitcoin's peak,
Speaker 1: but crypto was still almost in its ballmarket to bear
Speaker 1: market transition mode. We hadn't yet had terror collapse or
Speaker 1: anything like that, and the UK wanted to be a
Speaker 1: global crypto hub. So these were all the kinds of
Speaker 1: like stepping stones paving the way for a big crypto
Speaker 1: framework that would make the UK this like haven for
Speaker 1: crypto companies. Um then terror happened, and also the UK
Speaker 1: had its own kind of government chaos with multiple prime
Speaker 1: ministers and and all the rest we won't name. But
Speaker 1: what that did is it gave the country time to
Speaker 1: kind of step back, watch all this chaos unfold and
Speaker 1: really know how to get that framework in place properly
Speaker 1: so that it did address all those concerns. They obviously
Speaker 1: picked now is the time to come out with that,
Speaker 1: and we don't even know if there may be more
Speaker 1: collapses to come. But FTX was one of the biggest
Speaker 1: tests I think that crypto could have faced on that front,
Speaker 1: and so making sure that exchanges is in here was
Speaker 1: a really big thing. Well, it certainly feels like two
Speaker 1: served as a kind of blueprint for exactly how different
Speaker 1: things can go wrong in an industry. I mean, there
Speaker 1: might be more to come in a way, but part
Speaker 1: of me feels like we've seen so many things go
Speaker 1: wrong in so many different ways that, as you said, Emily,
Speaker 1: it would be somewhat surprising if regulators hadn't picked up
Speaker 1: on some of those. I want to finish today's episode
Speaker 1: with a little bit more of a sort of crypto
Speaker 1: only and maybe more lighthearted topic, and that's n f
Speaker 1: T s are coming to the Bitcoin blockchain, which is
Speaker 1: not being received and equivocally happily. I guess you could say,
Speaker 1: Emily looked into that. What's happening there? Yes, so, my
Speaker 1: lovely colleague David pan He wrote out the story on Monday.
Speaker 1: What we're looking at here is potentially a very big
Speaker 1: deal for bitcoin because Ethereum as a blockchain has been
Speaker 1: much faster and much more adaptable than it's older counterpart
Speaker 1: um Bitcoin. For for all it's good and worth while
Speaker 1: still being one of the more valuable tokens, the blockchain
Speaker 1: itself hasn't been that useful. And if they're and meanwhile
Speaker 1: has had n f T s and smart contracts and
Speaker 1: all the old coins you could dream of. And so
Speaker 1: in the more recent years, Bitcoin has been undergoing some
Speaker 1: changes to try and make it so that the blockchain
Speaker 1: itself can be a little bit more adaptable in similar ways,
Speaker 1: and one big upgrade called tap root did actually make
Speaker 1: it possible so that you could store images directly on
Speaker 1: the network itself. That's something that even ethereum can't do
Speaker 1: at the minute. An n f T on Ethereum, let's
Speaker 1: you put in a link that will then point you
Speaker 1: to a web page where your images, but the actual
Speaker 1: picture itself isn't on the chain. And with this change,
Speaker 1: a company called Ordinals said that they could put the
Speaker 1: actual picture on the blob chain. The reason why people
Speaker 1: aren't happy about that though, is that it takes up
Speaker 1: a lot of space, and that's something that Bitcoin really
Speaker 1: can't afford at the minute, given how slow it is
Speaker 1: already compared to the rest. And if you're adding in
Speaker 1: massive transactions for n f t s where you're storing
Speaker 1: the whole picture on there and it takes up a
Speaker 1: ton of block space, that's just a massive, massive turn off,
Speaker 1: and it created a bit of a debate. Let's say, problems, problems, problems,
Speaker 1: all right, thank you, Anna and Emily. This was Bloomberg
Speaker 1: Senior editor for Crypto Anna Arera and Bloomberg reporter Emily Nicole.
Speaker 1: You can find more of their reporting on the Bloomberg Terminal,
Speaker 1: on Bloomberg dot com and on Twitter. For more, be
Speaker 1: sure to check out our twice weekly newsletter, Bloomberg Crypto.
Speaker 1: This is Bloomberg Crypto, a daily podcast from Bloomberg and
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Speaker 1: The supervising producer of Bloomberg Crypto is Vicky Vergolina. Our
Speaker 1: senior producer is Janet Babin. Our producers are Mohammed Farup
Speaker 1: and Sharon Burriro. Our associate producers are Ty Butler and
Speaker 1: Moses on Them. Desta wonder At is our engineer. Original
Speaker 1: music by Leo Sidron. I'm Stacy, Marie Ishmael. Have a
Speaker 1: great weekend.