The struggling ‘crypto’ sector hopes to avoid having fun staying poor by embracing financial bailouts the same way that a drowning man grabs the point of a sword.
The fate of BlockFi continues to hang in the balance after a wild week of efforts to rescue the struggling digital currency lending platform. BlockFi found itself on shaky foundations as the overall market struggles from a lack of liquidity thanks to overly interconnected major lending platforms and suspect stablecoins.
Last week, BlockFi announced that it had arranged—but not finalized—a $250 million credit facility with cryptocurrency exchange FTX. BlockFi CEO Zac Prince claimed the deal “reinforces the commitment that BlockFi has to serving its clients and ensuring their funds are safeguarded.” A few days later, the Wall Street Journal reported that FTX was in talks to acquire a significant stake in BlockFi.
Crucially, the original announcement stated that the $250 million was “intended to be contractually subordinate to all client balances across all account types,” meaning that customers would be first in line for a share of that cash should BlockFi go busto. That would put BlockFi’s major investors at the back of the bus, an inversion of the status quo that the blue-chip types weren’t about to take lying down.
On Sunday, media outlets reported that digital currency investment firm Morgan Creek Digital was looking to raise its own $250 million to take a controlling stake in BlockFi. Morgan Creek managing partner Mark Yusko reportedly told investors that FTX’s offer included an option to allow the exchange to acquire BlockFi “at essentially zero price,” effectively kicking Morgan Creek and other existing backers to the curb without anything to show for their investment.
Yusko, who founded Morgan Creek Digital alongside Jason Williams and Anthony Pompliano in 2018, appeared skeptical as to the fund’s ability to raise the necessary cash to preserve Morgan Creek’s stake in BlockFi, suggesting there was only a “10% possibility” of finding wealthy saps willing to throw more good money after bad.
Yusko has a hedge fund history that dates back to the 1990s, having served as chief investment officer for The Endowment Fund, a partnership between his Morgan Creek Capital Management and Salient Partners LP. Yusko was ultimately turfed from that role due to poor performance and the Fund ended up limiting investor withdrawals—sound familiar?—following a series of major redemptions. Future redemptions were allowed at significant haircuts. Clearly, Yusko would prefer that his firm isn’t subjected to such shoddy treatment should FTX acquire BlockFi.
SBF Morgan to the rescue
BlockFi hasn’t had the best start to the year, which began with the company paying a $100 million penalty to resolve U.S. state and federal probes into its unregistered lending products. Earlier this month, BlockFi sacked 20% of its staff due to ‘market conditions’ and conducted a funding round that valued the company at $1 billion, only one-third of the company’s supposed valuation one year earlier.
Morgan Creek’s self-interested motivation in a BlockFi bailout is obvious. It’s less apparent the benefit that FTX and founder Sam Bankman-Fried (SBF) hope to derive from bailing out a company that doesn’t appear to have exercised much in the way of sound judgment at multiple stops along its path to insolvency.
FTX/SBF are proving to be the bailer-outers of last resort for many troubled crypto projects. In February, FTX acquired the Liquid Group, just a year after FTX loaned the Japanese exchange $120 million because Liquid’s digital wallets were hacked. SBF also took a 7.6% stake in Robinhood, the platform that helped popularize retail crypto trading in the most recent bubble, but which posted a net loss of $3.7 billion in 2021. (This week, SBF denied rumors that FTX was about to acquire Robinhood outright.)
Earlier this month, Alameda Research—the FTX market-maker that was also founded by SBF—provided a revolving line of credit worth over $500 million in a combination of cash/USDC stablecoins/BTC tokens to yet another struggling digital currency lending platform, Voyager Digital, which announced Monday that crypto hedge fund Three Arrows Capital (3AC) had defaulted on a $670 million loan.
SBF’s willingness to open his wallet to bail out unrelated companies has led to comparisons with J.P. Morgan, who in 1907 personally injected liquidity to stem the so-called Bankers’ Panic, thereby preventing a complete collapse of the New York Stock Exchange. The crisis ultimately led to the creation of the Federal Reserve, that fiscal bugaboo of many a crypto libertarian.
Morgan’s apparent capacity to singlehandedly rescue the U.S. economy inevitably brought criticism as well as praise, and SBF may well be approaching that inflection point. It’s worth noting that SBF has so far not seen fit to rescue Celsius customers from what appears to be certain disaster. Earlier this month, SBF felt compelled to tweet his denial of a popular conspiracy theory that FTX had willfully contributed to Celsius’ dramatic collapse.
As far as his proven interventions, SBF told NPR that “we have a responsibility to seriously consider stepping in, even if it is at a loss to ourselves, to stem contagion. Even if we weren’t the ones who caused it, or weren’t involved in it … I want to do what can help [the crypto sector] grow and thrive.” However, a less noble quote from earlier in the NPR report may signal SBF’s true motivation. “People with money are scared.”
Those scared people likely include SBF, whose exchange has made billions pumping shitcoins and offering leverage trades as high as 100x (before abruptly capping this at 20x last summer to avoid further regulatory scrutiny). In other words, SBF has been preying on the same get-rich-quick desires that somehow convinced legions of suckers that crypto lending platforms could legitimately offer 20% annual returns.
SBF also publicly admitted that DeFi was essentially a Ponzi scheme yet saw no contradiction between that admission and FTX’s willingness to list the tokens that fueled these DeFi platforms. There’s also the fact that Alameda is one of the largest recipients of the scam stablecoin Tether, without which the past two BTC bubbles would never have occurred.
SBF has long proclaimed that he’s a devotee of ‘effective altruism,’ whose practitioners need to get stupidly rich before unleashing their wealth in a manner that effects true change. But despite SBF’s wealth already being measured in the double-digit billions, that magical day when he sheds his capitalist skin and reveals his true altruistic form remains a mirage on the horizon.
It’s almost as if an altruistic Sean Parker type sat SBF down one day and said: ‘A billion dollars isn’t cool. You know what’s cool? A trillion dollars.’ SBF’s not there yet, so it wouldn’t be prudent to swap his black hat for a white one. In the meantime, don’t question SBF’s motives for propping up the Crypto Crime Cartel, because he’s doing it for the kids.
We’ll close on the truly rich note that since SBF hasn’t seen fit to intervene, the fate of Celsius may lie with none other than Goldman Sachs. The Wall Street titan is reportedly looking to raise up to $2 billion to acquire the troubled lenders’ assets—what assets, we hear you cry—in the event of a bankruptcy filing.
Remember the headline that Satoshi inscribed in Bitcoin’s Genesis block? Something about yet another bailout for some financial institutions—like Goldman Sachs—that got themselves in a mess of trouble by gambling recklessly with their customers’ funds? When the entities that you so brutally mocked are now the ones hauling your ass out of the fire, it’s time to pack it in, crypto kiddies.
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