Crypto shadow banking is our industry’s biggest secret, where billions of dollars are borrowed & lent, on an uncollateralized basis. The crypto shadow banking ecosystem is an entangled web of exchanges, lenders, market makers & hedge funds. To understand the complex fabric I present the visualization of the shadow banking ecosystem and point to key players & relationships causing the collapse & contagion.
Let’s explain the players:
- Digital Currency Group (DCG) is a crypto conglomerate with high-profile subsidiaries, Genesis and Grayscale (issuer of Bitcoin tracker GBTC)
- Genesis is a prime broker to trade, borrow, lend & custody cryptos
- FTX was the world’s 2nd largest crypto exchange, founded by Sam Bankman Fried (SBF)
- Alameda Research is a crypto market maker owned by SBF
- Three Arrow Capital (3AC) is a crypto hedge fund
- BlockFi is a crypto lender founded in 2017
- Gemini is a crypto exchange offering custody, trading & lending
- Voyager is a crypto broker
Here’s the madness:
- 3AC borrowed $2 billion from Genesis and $675 million from Voyager. 3AC filed for bankruptcy after Terra/LUNA collapse
- Voyager is in bankruptcy proceedings and has as a part of the recovery process issued a notice of default to 3AC on the outstanding $675 million debt
- FTX internal books show Alameda had an unlimited credit facility & owes FTX as much as $8 billion
- BlockFi in its bankruptcy protection blamed Alameda’s default on a $680 million collateralized loan for their fall. An additional $355 million is stuck on FTX, with little clarity on how or when it will be recovered
- 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 (yes, you read that correctly!). DCG borrowed from Genesis an additional $575 million due on March 2023 on an “arm’s length basis” for the buyback of DCG shares & 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
- Genesis as the largest player in the crypto shadow banking is at the epicenter of the contagion & collapse. On November 16th, it implemented a withdrawal freeze amid efforts to stave off potential bankruptcy & got a $140 million capital injection from DCG. It has $175 million in locked funds on FTX.
Crypto Shadow Banking is not just one player, like Sam Bankman Fried, hiding his intentions behind a computer, it is a network of players all bound together by an opportunity for profit.