January 12, 2023
Happy Thursday! The FTX case (and all the bankruptcies) is raising an interesting philosophical question that no one is talking about too directly. Also, how an old banking program is relevant to crypto.
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Today's newsletter is 1,237 words, a 5-minute read.
🎭 1 big thing: Sunlight versus privacy
An issue keeps coming up in each crypto bankruptcy case: the customers' right to privacy, Brady writes.
- It's one thing failed companies and the customers with funds stuck inside them largely agree on.
Why it matters: U.S. bankruptcy law operates under the presumption that court documents in such a case should be made available to the public.
Driving the news: Another hearing with FTX and its creditors took place yesterday. The first issue under discussion was the question of the people who are owed money by FTX and its various subsidiaries or associated companies.
Be smart: FTX is called the "debtor" in its bankruptcy case (because it's the one that owes people money) and "creditors" refer to all its customers, investors, lenders and vendors.
The big picture: FTX wants to keep its creditor list private, arguing that it's a trade secret.
- If the list is published, it says, exchanges could pitch all their customers, which would diminish the eventual resale value of what's left of the firm.
- FTX also points to potential risks to people who hold crypto, such as becoming the target of hacks or, worse, a wrench attack.
Yes, but: The U.S. trustee, which monitors the administration of bankruptcy cases, notes that FTX has failed to show that many of its customers are not already using competing firms.
- It stands to reason that crypto traders aren't waiting to trade until the fate of their funds on FTX is resolved.
In the weeds: At yesterday's hearing, the trustee's attorney complained that a creditor's matrix still hasn't been filed. (This is a needlessly technical name for a list of people the bankrupt company (FTX) owes money.)
- As the judge was ruling, he noted that one problem with finalizing the matrix seems to be that they don't know which creditors are customers and which ones fall into other categories, like lenders and vendors.
- "We have very little information here. This is the opposite of a fishbowl," Juliet Sarkessian said on behalf of the trustee.
Flashback: In the bankruptcy of crypto lender Celsius, the names and transactions of its users were released with thousands of pages of documents.
- It would take some elbow grease, but there's enough there for a determined spy to use that to put names on thousands of Ethereum addresses. Once they have that, they can see lots of stuff those users have done, beyond Celsius.
- Strangely, no one seems to have asked that transactions be redacted in that case, based on the decision to release it from Judge Martin Glenn. That may be the most revealing data.
Quick take: The trustee has not attempted to articulate why releasing all this personal information serves the public interest, beyond basically saying that it's the law.
The bottom line: Judge John Dorsey said he'd give the parties three more months to come to an agreement around releasing names.
- He seemed to acknowledge that the customer's list might be a company secret, but said, "The difficulty here is I don't know who's a customer and who's not."
🍊 2. Charted: The orange pill
Bitcoin price is back up over $18,000 for the first time since December, Brady writes.
- This kind of uptick is only surprising to newbies and tourists.
💰 3. Silvergate's quasi-government assist
Who knew a liquidity program dating to the Hoover administration would staunch a crypto bank run 91 years later, Crystal writes.
- Silvergate Capital, the parent company of Silvergate Bank, last week preempted its regularly scheduled earnings report to say customers pulled more than $8 billion from its platform late last year.
The intrigue: A closer look at Silvergate's financials reveals that it survived the run with help from $4.3 billion in home loan advances from the Federal Home Loan Bank (FHLB) system, a public-private system that benefits from an implicit government backstop, as first reported by American Banker.
Why it matters: Federal banking regulators' recent posture toward digital assets would suggest that Silvergate's financing hack won't sit too well with them.
- Silvergate declined to comment.
Details: FHLBs have been under scrutiny because traditional firms under its umbrella have used the post-Depression era program — originally meant to spur low- to moderate-income housing — for quick, and usually cheap, funding for liquidity-strapped member banks.
- The U.S. government has been eyeing a reworking of it for a while.
- Basically, they are the bank for banks. Silvergate's loan came from the Federal Home Loan Bank of San Francisco, one of 11 regional banks in the system.
Context: Silvergate's roots in real-estate loans and previous contributions to the network enabled it to tap that source.
- "As customers began to withdraw deposits during the fourth quarter of 2022, Silvergate utilized wholesale funding to satisfy outflows," according to the company. That wholesale funding refers to the FHLB advances.
- "Subsequently, in order to accommodate sustained lower deposit levels and maintain its highly liquid balance sheet, Silvergate sold debt securities for cash proceeds," according to Silvergate. But that was also at a loss.
By the numbers: Silvergate shares are down 90% over the past year, according to Morningstar.
Flashback: A review of Silvergate's audited balance sheet before the bank run:
- It had $1.9 billion in cash and cash equivalents as of Sept. 30, 2022.
- It had $8 billion in securities available-for-sale at fair value.
- In all, it had roughly $15 billion in assets against roughly $13 billion in deposits for that time period.
Meanwhile, Silvergate's unaudited update last week shows:
- It had $4.6 billion in cash and cash equivalents as of December-end.
- It had $5.6 billion of total debt securities at fair value, all of which are U.S. government or agency-backed and available-for-sale.
- Silvergate intends to sell those early this year to reduce "wholesale borrowings." Again, that's in reference to the FHLB advances.
Between the lines: The FHLB financing helped Silvergate meet the rush of withdrawals while keeping its balance sheet in line, a requirement for banks.
- But there's still roughly $3.8 billion in customer deposits that could be withdrawn.
- Plus, FHLB advances aren't free. They come with interest rates, have to be backed by high-quality collateral and have to be paid back.
What we're watching: Silvergate is expected to report fourth-quarter earnings Tuesday.
📢 4. Catch up quick
🔎 DCG is reportedly considering selling venture assets to help close the $3 billion in debt at its lending unit, Genesis. (FT)
📝 Sam Bankman-Fried spelled out his case (again) for why he's innocent of fraud. (Axios)
😨 Crypto lender Nexo, which recently announced an exit from the U.S., was raided by Bulgarian police. (The Block)
🦥 5. Culture hash: Slow and steady
While the whole world looks at the massive drawdown from bitcoin's high in November and concludes that crypto must be done for, bitcoin keeps putting out blocks, Brady writes.
Similarly, while NFT prices are nothing compared to what they were, long-time makers keep making.
- I found the Hackatao team back before anyone really cared about NFTs, in 2018. When it was just a weird new corner of the blockchain world.
- Five years later, they are still cranking out work, just getting more ambitious.
The bottom line: This is how the industry survived prior bear markets. The public eye drifts away but the committed keep going. Creators keep churning out work. Entrepreneurs keep pushing out ideas. Bitcoin keeps mining blocks.
This newsletter was edited by Pete Gannon and copy edited by Carolyn DiPaolo.
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