More contagion to come…at least according to Coinbase CEO Brian Armstrong in the first paragraph of his layoff letter.
As you know, SBF took money from investors who thought they were just trading on his FTX platform, and then he “loaned” his investor deposits to his hedge fund, and subsequently lost it on delusional investments. At the height of the craze, SBF claimed he was worth $100 billion on paper. Retail investors thought using FTX was akin to using Fidelity. OOPS!
Unfortunately, SBF is not the only degenerate “genius” in the space. It is filled with similar characters and ways of doing businesses. A common strategy is to create a subsidiary lenders. The lender entity takes investor deposits and loans them to businesses. In this space however, the investments where typically hedge funds, trust or venture capital funds designed to enrich the degenerates at the top.
One of these geniuses is Barry Silbert who started DCG. DCG is the largest Coinbase customer. Barry claims he is a good guy, just as SBF did on his apology tour last month. Today he wrote a letter to his investors saying he had installed an “independent” management team at the lender (Genesis) owned by the DCG that is facing bankruptcy. While banks have auditors and regulators, none of these have been necessary this space.
Once lender gets your money, but whatever mechanism concocted, they do whatever they want to do with it. In the case of DCG, Genesis loaned money to a hedge fund (3 Arrows Capital) that in turn invested in Grayscale. Grayscale exists to pay fees to DCG. It pays 2% of its holdings every year to DCG and Barry Silbert. It holds more of the most popular digital coin than anyone except Satoshi Nakamoto. DCG/Grayscale of course did not stop here. They have set up a large array of Trusts to hold similar assets. According to an article I read today, the annuity stream to DCG has been as large as $800 million per year.
It was not uncommon for the degenerates to exploit internal data to front-run customers and generate profit at their expense. The brother of an employee of Coinbase made almost a million buying new coins just before they were listed on Coinbase, and he's being locked up for it soon.SBF was doing the same thing at FTX via his hedge fund, Alameda Research. DCG has been accused of using insider information to the detriment of their clients.
Genesis should BK any day now. Although Barry Silbert paid independent directors to serve on the board, a surprising number have fled as fast as possible recently to avoid future prosecution.
The practices above appear to have been the norm versus the exception. Unfortunately, in the short term the digital asset house of cards is coming down. The recent rush of institutions withdrawing cash from these “exchanges” / “trading platforms” / sham entities should pick up further scheme when the next shoe drops.
All of the Grayscale “Trust” assets are all stored at Coinbase. When the next shoe drops, it could be disastrous. The price of these assets will plummet if sold in liquidation, and their revenue is based on a percentage of assets that could go away. Coinbase has $3.4 billion in debt. They lose $500 million per year before paying interest. Cutting 20% of its costs won't come close to fixing the problems this mess will create.
I believe investors will flee long before regulation happens. In other words, if you are jumping on the Coinbase wagon, be careful
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