Understanding the Complex Fabric of Crypto Shadow Banking
Crypto shadow banking, also known as crypto lending, is a complex and rapidly growing ecosystem in which billions of dollars are borrowed and lent without the use of traditional collateral. The ecosystem is made up of a web of exchanges, lenders, market makers, and hedge funds, all of which are interconnected and play a role in the functioning of the system. In this article, we will examine the crypto shadow banking ecosystem, the players within it, and the events that led to the collapse and contagion currently taking place within the system.
Key Players in the Crypto Shadow Banking Ecosystem
One of the key players in the crypto shadow banking ecosystem is Digital Currency Group (DCG). DCG is a crypto conglomerate that owns several high-profile subsidiaries, including Genesis and Grayscale. Genesis is a prime broker that offers services such as trade, borrow, lend, and custody of cryptos, while Grayscale is the issuer of the Bitcoin Tracker GBTC. Another key player is FTX, which was the world’s 2nd largest crypto exchange and was founded by Sam Bankman Fried (SBF). SBF also owns Alameda Research, a crypto market maker.
Other players in the ecosystem include Three Arrow Capital (3AC), a crypto hedge fund; BlockFi, a crypto lender founded in 2017; Gemini, a crypto exchange that offers custody, trading, and lending; and Voyager, a crypto broker.
The Collapse and Contagion: Understanding the Events that Led to the Current Crisis
The collapse and contagion in the crypto shadow banking ecosystem began with the bankruptcy of 3AC, which had borrowed $2 billion from Genesis and $675 million from Voyager. As a result of the bankruptcy, Voyager is now in bankruptcy proceedings and has issued a notice of default to 3AC on the outstanding $675 million debt.
Internal books at FTX show that Alameda had an unlimited credit facility and owes FTX as much as $8 billion. BlockFi, in its bankruptcy protection, has blamed Alameda’s default on a $680 million collateralized loan for its fall. Additionally, an additional $355 million is stuck on FTX, with little clarity on how or when it will be recovered.
The Madness: Understanding the Interconnectedness of the Players
DCG owes $1.675 billion to Genesis. Genesis lost $1.1 billion on a loan to 3AC, which pledged GBTC as collateral on the loan. DCG took on Genesis’ liabilities, hence owing them $1.1 billion in the form of a promissory note, due in June 2032. DCG borrowed from Genesis an additional $575 million due on March 2023 on an “arm’s length basis” for the buyback of DCG shares and purchase of GBTC, hoping the NAV gap would close.
Alameda borrowed $2.6 billion from Genesis and in the midst of the Terra/LUNA collapse, Genesis called in the loan. On-chain data shows frantic transactions as Alameda was scrambling to repay the loan, indicating FTX client deposits might have been funneled to Alameda to pay off the massive debt to Genesis. Gemini through its lending program Earn lent $900 million to Genesis.
As the largest player in the crypto shadow banking ecosystem, Genesis is at the epicenter of the contagion and collapse. On November 16th, it implemented a withdrawal freeze amid efforts to stave off potential bankruptcy, and received a $140 million capital injection from DCG. It has $175 million in locked funds on FTX.
Conclusion: The Complexity of Crypto Shadow Banking and the Risk of Contagion.
In conclusion, crypto shadow banking is a complex ecosystem made up of a network of players all bound together by the opportunity for profit. However, as the events of the past few months have shown, the lack of traditional collateral in the system can lead to a contagion of defaults and bankruptcies, causing significant damage to the crypto lending ecosystem
