The Last Two Weeks: A Story of Risk, Confusion, and Shocking Decisions
These past few weeks have danced to the same chaotic and out-of-key tune, keeping in line with turbulent market conditions.
These past few weeks have danced to the same chaotic and out-of-key tune, keeping in line with turbulent market conditions. This time, I’ll take you, reader, on a rollercoaster that seemingly has no seat buckles, safety protocols, or even a trained employee. This time, we will explore short selling, Credit Default Swaps, bankruptcy, and international banking (I’m getting 2008 flashbacks as well).
Some highlights
Korean firm Uprise, probably won’t rise up from this one
What is the venture-capital backed company, Uprise, you ask? It’s a Korean firm running a crypto trading arm in the cryptocurrency futures market, primarily using their “AI-infused robo advisor technology”. In a show of financial responsibility and stellar judgment, Uprise managed to get $20M…yes, $20M, liquidated due to short-trading LUNA back in May. Now where did these funds come from? Well, client capital of course.
The $20M loss accounted for a staggering 99% of customer funds and, to add insult to injury (although compared to customer losses, this injury amounts to no more than a paper cut), the firm lost $2.9M of its own assets. In response, the firm stated, “It is true that damage to customer assets has occurred due to unexpected great volatility in the market. We plan to finalize the report on virtual asset business soon”. The comment, reminiscent of Donald Rumsfeld's “Known Unknowns” speech, did little to quell customer concerns and general market ire.
Voyager grounded (I hope there are Star-Trek fans reading)…for now
In more crypto collapse news, another company seems to be going under at an astonishing rate; Voyager Digital recently filed for Chapter 11 bankruptcy as part of the fallout from the digital asset- and bad debt-disaster of fellow crypto company, Three Arrows Capital (3AC).
3AC has an outstanding loan of a dizzying $350M USDC and 15,250 BTC with Voyager and, through some “clever” financial maneuvering (I know you fans of “The Office” get the reference), filed for Chapter 15 bankruptcy after a court in the British Virgin Islands ordered liquidation of 3AC’s assets. Voyager has suspended all trading, deposits, and withdrawals (so pretty much anything useful), citing the market conditions and a notice of default it issued to 3AC.
The restructuring should be best understood as an unmitigated disaster as, surprise-surprise, traditional filing forms are ill-suited for crypto adjacent companies. A stark and painfully funny illustration of this is Voyager ticking off the “none of the above” box in the section of the filing asking to describe their business, from a meticulously tedious list of options. The proposed restructuring would see customers holding crypto receive a currently unknown mix of crypto, common shares in the Company after reorganization (I’m sure that’s what they want), Voyager token(s) (this is serious, no joke), and proceeds from funds recovered from 3AC. If you happen to be a USD holding customer, you would be allowed to access your funds after a reconciliation and fraud prevention process.
It is worth noting, the Company has $100M in cash-on-hand and crypto assets, plus $350M worth of cash-on-hand in a For Benefit of Customers (FBO) account with Metropolitan Commercial Bank.
Moscow, the exchange, and cryptocurrencies
The current global pariah known as Russia has lifted its head from the sands of kinetic war, for a brief second, to deliver a laughably confusing statement. Parliamentary official, Anatoly Aksakov (head of the Russian Banking Association) indicated that the Moscow Exchange (MOEX) would be the best match for housing and supporting a regulated crypto exchange, of course, still under the draconian-like requirements of the Russian Central Bank. Mr. Aksakov expressed his belief that a MOEX launch of a crypto trading division could be feasible due to the exchange being fully compliant with the Bank of Russia.
There is little precedent for this, with only a few global stock exchanges launching digital asset divisions for crypto investment products. Much like that pesky ex that seems to dip in and out of your life, this statement adds confusion, as it seems to fly in the face of the nation’s anti-organized crypto trading platform stance. This is starkly highlighted by a deputy minister, who only last year, expressed that crypto trading should only occur on foriegn trading platforms.
So if you happen to find yourself in Russia, in dire need to buy and/or sell crypto for god-knows-what, you will have to go to a foreign exchange or settle for a “reliable” unregulated local exchange.
You think you’ve seen risky? Meet: Anzen & Percent Technologies
Credit Default Swaps (if you need a refresher, go watch that Margot Robbie scene in “The Big Short'') have become an unmentionable term, comparable to “he who must not be named”, after the 2008 financial crisis. Most importantly, the average Joe finally understood: the Credit Default Swap is immensely complex and increasingly risky.
Now, combine Credit Default Swaps with Shadow Lenders (who are about as transparent as black coffee) and the inherent risk of cryptocurrencies…what do you get?
The new product by Percent Technologies and Anzen (a new player to DeFi with anonymous founders). The idea here being that Percent can use stable coin capital from investors to offer Percent’s high-yield securitizations protection from a default. Although stable coins are, well, considered stable (think of money-market funds), the recent turmoil of digital asset markets have people questioning just how stable they are (among other concerns).
What makes this riskier than your grandpa’s Credit Default Swap is where the capital to cover the potential losses in Percent investments will come from. Most will come from a reserve fund which contains stablecoins staked on the Anzen protocol. Some of the capital will come from interest and amortization payments from Percent. If you have a debilitating need for risk, and this is for you, as your risk lies both in the asset quality and availability.
Now, for my risk lovers, what’s the proverbial carrot here? According to Anzen, they will provide investors yield-farming opportunities to help reserves expand, with the end goal to to create sustainable yields “indefinitely” by creating a “perpetually scaling reserve pool”. Yeah, I don’t know either. This default coverage for Percent investors will come into effect after losses worth 10% of the notes’ face value (there are a myriad of other stipulations and exceptions).
This move is right in line with Percent’s ethos, being known for connecting accredited investors seeking double digit returns to the private credit markets with unconventional lenders needing financing. They have long-helped originators bundle staggering amounts of loans into short-term notes. Percent has underwritten over $850M worth of assets since 2018 (including those backed by point-of-sale financing for Botox injections, motorcycle taxis in Sub-Saharan Africa, among others). The new product will be exposed to individual deals on percent’s platform, crypto loans, receivables from app and game developers, and perhaps others.