San Antonio Express-News (Sunday)
The summer of crypto’s discontent
To borrow a line from Mark Twain, June was a peculiarly dangerous month to invest in cryptocurrency. The others have been July, January, September, April, November, May, March, December, August, February and October.
There were declines in prices among all the major cryptocurrencies, which is sad. More fundamentally, crypto enthusiasts must face the idea that the three big goals of crypto were undermined in June.
The three most popular features of cryptocurrencies, and the blockchain technology they’re based on, are:
• Freedom from regulations and laws.
• Decentralization, so the currencies can’t be controlled by any single power.
• A chance for the “little guy” to win, rather than the “whales” favored in the 2008 bailouts of Wall Street.
Now, those ideals are under threat. Let’s do a quick review of recent events.
Crypto lenders
South Korean developer Do Kwan created a cryptocurrency known as TerraUSD, whose sole purpose was to maintain a 1-to-1 equivalence with the U.S. dollar. To make this boring function attractive, however, it offered 19 percent annual yields for holders of TerraUSD.
At its peak, roughly $45 billion of TerraUSD existed. In mid-May, however, investors lost confidence in the coin, and the value tumbled over the course of a week to the approximately nothing it is worth today. Back in the Wild West, promoters of this scheme would have been hung or shot, which is why we have sheriffs. In the modern, regulated financial world, promoters of this scheme would be arrested and jailed. So far, Do Kwan and about 15 colleagues who built the cryptocurrency platform are under investigation by Korean and U.S. authorities. Nobody has been arrested, however, which is a crying shame.
In mid-June, cryptocurrency lender Celsius froze billions of dollars of cryptocurrency deposits for up to 500,000 users after what was likely the crypto equivalent of a “run on the bank” at Celsius.
Meanwhile, another crypto lender, Babel, announced an investment May 25 that valued the lender at $2 billion based on its reported 500 users and a $3 billion loan portfolio. By midJune, Babel had also frozen withdrawals from its accounts, again presumably due to a run on the bank. Celsius and Babel are not reporting much to their users after the freezes.
An allegedly multibilliondollar crypto hedge fund named Three Arrows Capital has ceased communicating with its lenders and appears to have sustained massive losses that impair its ability to repay loans. We know it’s a multibilliondollar fund because one of its crypto lenders, named Voyager, has announced a $660 million
exposure to Three Arrows Capital. That loan, Voyager fears, may never be paid back.
The Federal Deposit Insurance Corp. will not show up for depositors in Celsius or Babel. I am a deep outsider to the situation, but I’d guess depositors are as likely to get their coins back from Celsius and Babel as you would be of getting your car keys back if you accidentally dropped them into a volcano. To paraphrase former “Saturday Night Live” writer Jack Handey, just walk away, man, because those keys are gone.
SBF bailout
The Federal Reserve and Treasury are not going to show up for Voyager, either. So who is going to show up?
Before answering, it’s worth noting that what is happening with cryptocurrencies enables us to experience a sped-up history of the creation and regulation of modern finance.
J.P. Morgan famously bailed out the U.S. financial system in 1907. This was before the creation of the Federal Reserve in 1913, the FDIC in 1933 and retail investor protections in the Securities Act of 1933.
Today, 30-year-old crypto billionaire Sam Bankman-Fried — aka SBF — is playing the role of J.P. Morgan, offering lifeline loans to other lenders and a line of credit.
Voyager secured a $500 million credit line from SBF’s entities to protect itself in case Three Arrows never repays its loan.
BlockFi, another crypto lender, announced it has a $250 million line of credit from SBF’s exchange, FTX.
This is all great, and hopefully it helps keep these institutions alive and saves people’s bacon, but it does seem to suggest the need for regulation and centralization. To say the least, I’m not convinced these events will be good for the “little guy.”
Meanwhile, on another network called Solana, in midJune, the members in cryptocurrency project Solend voted to take over the digital coins of a massive owner of coins, estimated at $206 million. The stated reason was to avoid a sudden liquidation of that owner’s coins to pay back debts and therefore stave off market disruption. Seemingly realizing the irony of the centralization and the theft, the members voted a day later to undo the group takeover.
The lesson, however, is that certain pockets of the cryptocurrency world are not decentralized at all. In fact, they are subject to a vote to freeze the assets of any individual holder, should they choose that path.
Winter is coming
If this all sounds like a bewildering series of names and lingo, let me simplify it: June 2022 was like the 2008 crisis but for cryptocurrency. The digital money stuff stopped going up. Then it dropped in value, and people wanted their money back. And then the crypto banks froze.
But unlike 2008, there’s no government bailout coming.
Here is at least one irony of the crypto winter. To stay true to their “unlinked to traditional finance” and “unregulated by government” premises, the systemically important lenders in crypto have had to centralize dependence on SBF as a savior, like the U.S. financial system did with J.P. Morgan in the early 20th century. If SBF succeeds in bailing out the crypto lenders, he will have created the kind of centralization that crypto enthusiasts claim to hate.
Do cryptocurrencies survive? Do they evolve and even thrive from here? I don’t know, man.
After June 2022, it feels much more likely to be regulated and centralized — and to favor the big guys.