Cryptonite February 2023

from plata to plomo

Mar 5

It’s time for Cryptonite - our monthly roundup of all things crypto - with Tejaswi Nadahalli.

You can follow Tejaswi on twitter @nadahalli and he blogs at tejaswin.com

We discussed a bunch of things, some highlights:

Looks like Silvergate, a crypto focused bank, is going under.

Silvergate reported a $1 billion loss for the fourth quarter in January (reuters). Depositors started panicking and withdrawing funds, raising doubts about its ability to continue as a “going concern” (reuters).

Crypto-related deposits plunged 68% in the fourth quarter. To satisfy the withdrawals, Silvergate liquidated debt it was holding on its balance sheet. The $718 million it lost selling the debt far exceeds the bank’s total profit since at least 2013 (wsj).

Silvergate vs. ARKK - looks like “innovation” is really out of favor.

Banks are supposed to be boring. Get out the minute it gets described as exciting or exceptional.

Wasteland Capital @ecommerceshares

Morgan Stanley’s 2021 initiation of $SI. The stock went to $239, but today opened at $6.80 today, 96% below MS’ price target. “A bank like no other.” No sh*t, Sherlock! Life in the Ponzi-lane.

Adverse selection at work.

John Paul Koning @jp_koning

Crypto advocates like to say that banks have mostly refused to serve crypto companies because they want to destroy an emerging competitor. Silvergate Bank's fate suggests it's the opposite: crypto customers are inherently risky and can destroy the bank. Bankers beware.

As usual, taxpayers will be left holding the bag.

Silvergate, received at least $3.6 billion in loans from FHLB (cointelegraph). Looks like that’s a write-off.

Another bank down bad: Credit Suisse. At least this one is getting bailed out by the Swiss.

Speaking of things that are down bad, will emerging markets ever make money? Both bonds and equities are negative over the last 15 years. Maybe it’s the ETFs but what in God’s name is going on?

DeFi was supposed to be censorship-resistant decentralized finance. Well.

web3 is going just great @web3isgreat

Per a court order, Oasis rewrites the rules for Jump Crypto to recover stolen assets February 24, 2023 web3isgoinggreat.com/?id=oasis-rewr…

Per a court order, Oasis rewrites the rules for Jump Crypto to recover stolen assets In a world where "code is law", crypto users don't necessarily expect that the smart contracts might change out from under them — particularly given contracts are often assumed to be immutable once they're deployed. However, for various reasons including the need to patch bugs in deployed contracts, some projects use upgradable smart contracts. This decision was what allowed Jump Crypto to obtain a court order requiring the Oasis platform to "upgrade" a smart contract in such a way that Jump Crypto could remove stolen funds from where the hacker had placed them on the Oasis protocol. Oasis released a defensive statement, writing that their cooperation in the recovery was "only possible due to a previously unknown vulnerability in the design of the admin multisig access", and that "we will be making no further comment at this time". Oasis is a frontend for the MakerDAO project, which was originally sta

The stolen funds in question were the proceeds of the February 2022 Wormhole bridge exploit, in which attackers stole 120,000 wETH (then ~$326 million; now $192 million). After the hack, Wormhole's parent company Jump Crypto plugged the hole left by the hack with their own funds. Since then, the attackers have been moving the funds throughout the cryptocurrency ecosystem, even taking out a highly-leveraged position on in Lido-staked Ether last month. Ultimately, Jump was able to recover around $140 million via their "counter-exploit". While many celebrated the recovery, some were concerned about the precedent of a so-called defi platform changing a smart contract to remove funds from a wallet at the direction of a court. Some described the upgradability as a "backdoor". "If they'd do it for Jump, what does that say about possible coercion via state actors?" wrote one trader on Twitter.

The Ethereum hard-fork back in 2016 was the original sin. I don’t think anybody believes DeFi is really “de-fi” any more.

Looks like everybody was stealing customer funds…

Binance used customer funds for its own purposes in a move similar to FTX scandal. (businessinsider)

… and regulators have some thoughts…

John Paul Koning @jp_koning

This bit from Gary Gensler suggests that once Coinbase and other US crypto exchanges are regulated, they will look very different than they do now, with the many roles they perform (custody, trading, etc) broken up and performed by other entities. via nymag.com/intelligencer/…

… and are after stablecoin issuers and staking services.

The SEC and the NYDFS have been after Paxos, a firm that issues the 3rd largest stablecoin - the Binance USD (theverge, forbes, cnbc).

Tether and Bitfinex banked with fake documents and shell companies (wsj).

Kraken got a $30 million wrap on the knuckles.

When a company or platform offers you these kinds of returns, whether they call their services 'lending,' 'earn,' 'rewards,' 'APY,' or 'staking' - that relationship should come with the protections of the federal securities laws.
Gary Gensler, SEC Chair. (reuters)