Crypto – darkest before the dawn

January 5, 2023
Crypto – Darkest Before the dawn

The bad news continues in crypto, almost entirely from firms with money-transmitter licenses…

Wyre bit the dust. Rumor is that they were offering such cheap rates because they were using customer assets for lending, staking and other investments to try to make money. Now, even in an asset fire sale whoever buys it will need to ensure they don’t have successor liability if customer assets have vaporized. As I keep saying, you should not have any assets held by any company operating as a money transmitter. Period.

Celsius assets are not customers, but property of the Celsius bankruptcy court. That’s $4.2 billion in customer assets that’ll go first to secured creditors and others. As I keep saying, you should not have any assets held by any company operating as a money transmitter. Period.

Gemini and it’s primary owners the Winklevoss twins have a class action lawsuit filed against them for over $1 billion in potential losses from their “Earn” program, where they held assets as, and parked assets with a money transmitter. As I keep saying, you should not have any assets held by any company operating as a money transmitter. Period.

Coinbase’s staking operation, which I understand holds assets as a money transmitter (and not in their trust company) is, from what I hear, telling people “that feature is not currently available” when asked for proof of assets. As I keep saying, you should not have any assets held by any company operating as a money transmitter. Period.

Silvergate Bank, the primary bank for counterparty settlements in crypto, saw deposits drop in the 4th quarter from $11.9 billion down to $3.8 billion as customers moved funds out of the bank. They also cut 40% of staff, wrote off $196 million from their failed stablecoin project and incurred a $718 million loss from their fixed income portfolio. 

The hits just keep coming in crypto, with a seemingly endless flow of bad news. And without a doubt there’s more to come…unfortunately a lot more, I think. Almost every exchange, every payment processor, and every lender only does business with a money transmitter license. Thus we don’t really know what they are doing with customer assets on their balance sheets. And when regulations don’t prevent you from doing stupid things with other peoples’ money, greed almost always prevails. So until regulations make it clear that assets can only be held by a Qualified Custodian (e.g. trust company, clearing broker), off balance sheet, then we’ll continue to see carnage and losses as more shoes drop. 

It’s dark: Fear, Uncertainty and Doom (“FUD”) rule the land and negatively influence the decisions and risk appetite of bankers, venture capitalists, and others. 

In 2008 we saw FUD with the collapse of mortgage-backed markets. Access to capital dried up, and scores of brokers and banks went under or were merged together by regulators. “Toxic assets” were sold for pennies on the dollar. Getting a loan to buy a house was almost impossible. Citibank’s stock hit $2.00/share. Did that mean real estate was going away? That it wasn’t worth anything? Of course not. Houses and condo’s were being sold off for literally less than the cost of materials. But FUD had banks, investors and regulators in a panic. Smart people made billions of dollars in profits as they bought the assets that banks deemed to be toxic, but of course really weren’t. 

In 2001 we saw the dot-com bubble burst, causing the collapse of the internet sector. Apple’s stock price was less than $1.00/share and Amazon’s stock fell to $5.51/share. Sure, lots of crap got washed out, but FUD also killed or hamstrung really good businesses as access to capital dried up. Heck, you couldn’t even open a new bank account if you were internet-related, let alone get venture capital. Everyone was terrified. Did this mean the internet was done and that it wouldn’t change the world? Ha. 

So in 2023 it’s nearly impossible to get funded if your business is crypto related. Banks won’t hold your accounts as a start up. FUD distorts decision making. But smart people will reap enormous gains; FUD=Opportunity. As the saying goes, “buy straw hats in winter”.

Dawn: so what’s the good news?

Blockchain technology is going to change the world. The nonsense with crypto and NFT prices is irrelevant to the fact that this is transformative technology that will revolutionize finance, asset ownership, and data access/storage. As someone who is building a company providing financial, regulatory and technology infrastructure for this, I have an “in the trenches” view. And as someone with a 30-year career in securities and internet industries, I’m pragmatic and not a fanboy of crypto for crypto’s sake. 

At Fortress we are signing customers at a rapid clip. Customers who have real applications and use-cases for blockchain technology. These include gig-economy businesses who want to modernize their payments to their workers, reps, partners, employees, vendors and others via stablecoins and integrated on-and-offramps globally. It means using this next-gen tech for unbanked people around the world. It includes IRA providers and neo-banks who want to offer not just crypto as investments, but other alternative assets that are being tokenized such as real estate and private company (crowdfunding) securities. It includes Hollywood firms and ad agencies who are de-risking Instagram, Facebook and Twitter by forming one-to-one, direct relationships with their fans via non-fungible tokens. It includes firms who are taking their rewards programs to a whole new level by tokenizing their legacy programs. And so much more.

Dawn is coming, this industry is called “Web3” for a reason…the blockchain interconnects everything and is ushering in a new era of provenance, portability, security and utility. It will touch your life in ways you can only begin to imagine. 

Disclaimer: as always, these are just my musings…my thoughts and observations as someone who is deeply involved in both crypto and banking. That said, I am in no way making a recommendation that anyone invest or divest in anything, ever. Only rely on the advice of your licensed investment, legal, and accounting professionals. These matters are extremely complex and something as short as my blog is just to reflect my opinions, not a complete analysis of any of the events or situations I discuss. So only make decisions after consulting with the professionals you employ.


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