For those hit hard by the liquidity crunch in the crypto industry, a white knight with a black afro is on a bargain hunt. The afroman is Sam Blankman-Fried, a 30-year-old crypto billionaire known as “SBF.” His main business is FTX, a crypto exchange in which $10 billion sloshes around on any given day.
As the crypto winter bites, SBF has offered himself as the lender of last resort, but even hundreds of millions can’t stop the fall of dominoes.
In June, SBF told NPR, “I do feel like we have a responsibility to seriously consider stepping in, even if it is at a loss to ourselves. I think that’s what’s healthy for the ecosystem, and I want to do what I can to help it grow and thrive.”
SBF fires warning shots to the market
That made him sound benevolent, but in late June, SBF delivered a gut punch to the industry by suggesting many exchanges are “secretly insolvent.” This set off a wave of speculation and recriminations.
Some speculated that maybe FTX is in that group, but the company seems unfazed by the crisis that has pushed many of its peers underwater, shrewdly seeking out sweetheart deals that were unthinkable only a few months ago.
With a tight-knit workforce of 300, FTX resisted the hiring spree unlike others like Coinbase and Binance, both of which have around 4,000 head, as well as Crypto.com and Gemini, causing them to rescind job offers and fire staff.
Meanwhile, Forbes described SBF as a “smart vulture capitalist in the beleaguered crypto market,” and Anthony Scaramucci, founder of SkyBridge Capital, called him “the new John Pierpont Morgan” who twice bailed out the financial system back in the early 20th century with his own capital.
In the past month, FTX has become a de facto central bank, bailing out once-billion-dollar businesses. When FTX shareholders balk, SBF steps in with his own money, explaining, “FTX has shareholders and we have a duty to do reasonable things by them and I certainly feel more comfortable incinerating my own money.”
He accumulated a 7.6% stake in Robinhood and offered credit lines worth $800 million to BlockFI, which he now has the option to acquire if it recovers, and Voyager Digital, a crypto hedge fund, which just filed for Chapter 11 bankruptcy protection.
Apparently growing more comfortable with his industry clout, SBF delivered another kidney punch to the crypto space telling CNN that “a substantial fraction” of cryptocurrencies are “empty products” with “real crash potential.”
SBF paints himself as the savior of the crypto space, but it almost looks as if SBF is cutting competitors off at the knees before swooping in for the takeover. It’s the old Trump negotiation playbook, which SBF has employed masterfully, in great contrast to the comical incompetence of Elon Musk in his negotiations with Twitter. According to Forbes, SBF is number two in the ecosystem of digital assets, behind Changpeng Zhao, or CZ, but his influence may make him number one.
SBF walks away from Celsius
Then, there’s Celsius, now credibly accused in a lawsuit of operating a Ponzi scheme. Celsius did two enormous transfers of crypto to FTX, one for $320 million just hours before it halted withdrawals and another for $529 million on July 7.
As reported by the Block on June 30, SBF passed on a deal to buy Celsius, citing a $2 billion hole in their balance sheet and that they were “hard to deal with,” which in hindsight seems unsurprising. They must have known they were in deep shit.
On June 11, less than 24 hours before the firm halted all withdrawals, Celsius CEO Alex Mashinsky accused a Twitter user of spreading FUD (fear, uncertainty, and doubt) about his platform suspending withdrawals and suggested the user was getting paid to post and had betrayed their mission to “fight Tradfi together.” As many Twitter users were quick to point out, the tweet didn’t age well.
On June 8, a Twitter user dubbed “otteroooo” correctly predicted that Celsius was facing a liquidity crisis with a “95% confidence interval.” They posted a lengthy thread with research backed up by on-chain data.
Otteroooo alleged that Celsius lost $120 million in two hacks and sustained more losses from assets held in LUNA and Anchor Protocol, concluding that there would be a bank run on Celsius and a liquidity crunch, which would be followed by blocking withdrawals to buy time. Otteroooo pointed out that insiders were already bailing, citing the loss of Celsius auditor as a “MASSIVE RED FLAG.”
Celsius would rather drown than open its books because, according to Sam Dixon, CEO of BnkToTheFuture, Celsius lost out on a $6 billion capital injection due to its refusal to disclose the company’s financial records. After resisting Chapter 11 bankruptcy protection, Celsius finally caved on July 13, notifying state regulators, which have no intention of letting the company off easy.
Celsius has hired Citigroup to advise on its financial options, along with restructuring consultant Alvarez & Marshal.
However, Celsius is getting money from someone. On July 13, Celsius made a $81.6 million payment to Aave, on top of paying the remaining $41.2 million of a loan from Maker, which would free up $450 million worth of BTC posted by Celsius as collateral. Celsius says it has $167 million in cash on hand to support operations.
Alex Mashinsky, now facing a lawsuit by former investment manager Jason Stone who alleges the CEO was able to “enrich himself considerably,” tried to pose the capitulation in heroic terms: “I am confident that when we look back at the history of Celsius, we will see this as a defining moment, where acting with resolve and confidence served the community and strengthened the future of the company.”
I’m not so sure, but what do you know, SBF’s quantitative trading firm Alameda Research Ventures (Alameda) popped up as one of 100,000 creditors on Celsius’s bankruptcy filing with a $12 million loan. However, the largest creditor of Celsius also has ties to SBF. Pharos USD Fund loaned Celsius $81.1 million and the firm’s only public email was traced by Bloomberg back to Tara MacAulay, a co-founder of Alameda.
So, what about those two transfers for nearly $860 million? The question is hanging over the market. Fundstrat analyst Walter Teng predicted that Celsius will “de-leverage” by selling assets to meet demands by creditors and customers, which will dunk BTC yet again.
SBF’s Murky Dealings with Voyager Digital
The situation with Voyager Digital, a crypto lender, quickly got murky. First, Alameda provided Voyager Digital with a $500 million loan in June. Then, Voyager filed for Chapter 11, disclosing that in fact, Alameda owed $377 million to Voyager in the bankruptcy filing.
The crypto community was well aware of Voyager’s exposure to Three Arrows Capital, or 3AC, but it was a surprise to many that Alameda was Voyager’s second largest borrower.
Alameda, along with its venture arm, Alameda Ventures are the largest stockholders in Voyager, HODLing 11.6% of its shares. After its stake and debt came out, Alameda revealed in a press release that on June 22, it surrendered 4.5 million shares (worth $2.6 million at $.56 per share) for free, only 8 days before Voyager suspended trading, deposits, and withdrawals.
On or around June 17, Alameda reported that it had acquired 14.9 million shares of Voyager for $35 million bucks, valued at $2.34 per share. This increase, on top of the 7.7 million shares already owned by Alameda Ventures, officially made Alameda an insider, according to section (1) of Ontario’s Securities Act, where the firms are registered.
The reason for the mysterious surrender of 4.5 million shares was to bring its ownership down to 9.49%, avoiding this ‘insider’ designation. Now, it is free to sell the remaining 18.1 million shares without reporting it on the Syster for Electronic Document Analysis and Retrieval (SEDAR) of the Canadian Securities Administrators.
In an interview on the gm podcast, CZ, master of Binance, went so far as to criticize the deal, saying, “That was surprising even to me, to be honest. I try not to comment on our competitors or industry peers. But I would never do that type of deal. I would never say, ‘I will invest in your company and then you loan me some money.’ I would just not invest in that company, I’ll keep my money.”
However, not to be outdone, CZ announced that he’ll be looking at acquisition deals and Justin Sun, CEO of Tron, said he’ll throw $5 billion at failing crypto companies.
Voyager now faces criminal inquiries
When Voyager suspended withdrawals, a multitude of investors were left holding the bag. Fortune interviewed several investors whose losses reached six or seven figures.
One who identified himself only as ‘Robert’ said, “Every day, honestly, I cry. I don’t know what to tell my wife. As partners, we decided to [invest on Voyager], but she trusted me, more than anyone else, to make the proper decision. I had no idea that Voyager would be lending [customers’ USDC] out to a hedge fund. Had I known that it would be possibly lent out, I probably would have just kept it in cash in my safe.”
Voyager’s bankruptcy has raised questions, now pursued by the Federal Deposit Insurance Corporation (FDIC), as well as the securities regulators of Texas, New Jersey, and Alabama.
Executive Director Mikkel Morch of ARK36, a crypto hedge fund, told Yahoo Finance, “Voyager’s bankruptcy filing basically confirms that the crypto lender did use its customers’ funds as a source of dollar liquidity and lent them to entities like 3AC as a leveraged trade of sorts while it would constantly borrow money itself to meet current withdrawal requests.”
If that wasn’t enough, Voyager lied to depositors, claiming that they were covered by FDIC insurance due to its partnership with Metropolitan Commercial Bank.
In December 2019, Voyager informed investors in a blog post, “In the rare event your USD funds are compromised due to the company or our banking partner’s failure, you are guaranteed a full reimbursement (up to $250,000).”
That turned out not to be the case. It’s not a good look for the industry, and especially not for SBF who was secretly in bed with Voyager. It makes one wonder how much SBF knew about his counterparty’s practices.
Alameda distances itself from Voyager
Alameda tried to clear up confusion with an incendiary first tweet, but Twitter users weren’t having it.
Users variously accused Alameda of not being customer-focused, of selling stETH and causing the depeg with insider information, and of grandstanding and being hypersensitive. Most of all, people called SBF’s purportedly altruistic motives into doubt.
What it looks like to me is that Alameda and SBF are trying to distance themselves from Voyager. That seems wise because Voyager is now unsure how much clients will be reimbursed, claiming that it will “depend on what happens in the restructuring process and the recovering of 3AC assets.” Oh great! 3AC is a bunch of empty offices and the founders have disappeared and gone into hiding.
Not to worry, Voyager tweeted, “all customer cash is held at Metropolitan Commercial Bank” and customer crypto will receive a mix of “pro-rata share of crypto, pro-rata share of proceeds from the 3AC recovery, pro-rata share of common shares in the newly reorganized Company, and pro-rata share of Voyager tokens.”
You can imagine how well that went over.
So Much for DeFi
Like every banking crisis going back to the Great Depression, the so-called crypto winter has forced consolidation in the space, revealing unknown and often clandestine links between big players. In many cases, the DeFi world has been more centralized than we were led to believe.
As Raj A. Kapoor, Founder of India Blockchain Alliance, told the Economic Times, that the bigger players have deeper pockets and the smaller fishes may be sold at steep discounts. Such has been the case with FTX’s acquisition overtures to BlockFi, Bitvo, and Embed Financial.
“The present scenario flips the paradigm as an undercurrent of centralisation where the power of control will be vested in a few large corporations and that essentially neutralises the concept of decentralisation in any case.”
Contrary to popular belief, crypto and Web3 are quite centralized and extremely well organized, especially on Capitol Hill, where SBF now spends a lot of his time. He gave $5 million to Biden’s campaign, five times what Peter Thiel gave to Donald Trump in 2016. Fun fact: Peter Thiel’s Vauld suspended withdrawals and will likely be another casualty of the crash.
In 2024, SBF will likely become a household name in the U.S. because he is going to effectively buy the U.S. government, which if you didn’t hear, is for sale. SBF has “north of $100 million” saved up to pay for a pliant president and a “few billion” to save the crypto industry. When asked why he got involved in politics, he deflected, saying he “sees it much more as policy than politics” and blathered on about pandemic prevention.
Methinks the man doth protest too much.
The scope of SBF’s support to the Democratic Party is on par with what the Koch Brothers were for the Republicans.
So, let us review
SBF, the guy who used to donate half of his salary to save animals, is posing as the leader of last resort to beleaguered crypto firms.
He claims to want “to protect consumers and get real federal oversight of the industry,” yet Voyager, one of his closest partners, just massively defrauded investors. That’s okay because he has legislators on speed-dial and generously funded Joe Biden’s campaign.
Next, SBF is going after mining operations. Come to think of it, he is a lot like J.P. Morgan; he’s building an empire.
Author: Tim Tolka, writer, journalist, and BI researcher
The editorial team at #DisruptionBanking has taken all precautions to ensure that no persons or organizations have been adversely affected or offered any sort of financial advice in this article. This article is most definitely not financial advice.
