Top Stories of the Week - 1.6
In the newsletter this week, we cover Silvergate Bank, Gemini’s spat with Genesis, and SBF’s not guilty plea. Subscribe here and receive Galaxy's Weekly Top Stories, and more, directly to your inbox.
Crypto’s Most Important US Bank Faces Issues
Silvergate saw customer withdrawals of $8.1bn and took a $718m loss selling debt securities to help cover the outflow. This week Silvergate announced that $5.2bn of fixed income securities was sold to raise funds to meet withdrawals, leaving the bank with $4.6bn of cash and securities at the end of Q4 and $3.8bn of deposits from digital asset customers. This $713m loss exceeds the bank’s total revenue since 2013. In addition to the $713mn loss, Silvergate has halted work on its own digital currency, writing off a $196mn acquisition of the Diem Association from Meta and cut headcount 40% (200 employees). Per the Journal, early reports showed “crypto-related deposits plunged 68%in the fourth quarter.” To say that decline is historic is putting it mildly. According to a 1938 study by the Federal Reserve, only nine banks out of 67 that closed between 1930 and 1933 witnessed declines over 50%.
Silvergate has been a lender to both MicroStrategy and Marathon, as well as stalwarts Coinbase, Circle, Bitstamp, Kraken, and Paxos. Per CoinDesk, Silvergate was deeply entangled with FTX, with the now defunct exchange making up about 10% of deposits prior to collapse. Months later, those entanglements are still hampering the La Jolla, CA based bank.
At least as of September 30, 2020, Silvergate Bank had Primary Credit at the Federal Reserve’s discount window (The Fed reports this data on a 2-year lag, and only includes banks in its reporting if they hit the window during the period—Silvergate did during Q3 2020). Primary Credit allows member banks to borrow against securities for as long as 90-days at an annualized interest rate of 4.5%, the top of the current Fed Funds target, and is explicitly availableto “depository institutions that are in generally sound financial condition, and there are no restrictions on the use of funds borrowed.” Specifically, with Primary Credit, Silvergate could have borrowed against their fixed income portfolio sufficient cash to meet withdrawals at a cost that was significantly lower than their reported loss. Liquidity is easy to access at the Fed’s discount window for Primary Credit, particularly when delivering government securities (which comprised a large portion of Silvergate’s collateral). Secondary Credit, on the other hand, requires the Fed to specifically underwrite the loan, which still should have been easy given the quality of Silvergate’s assets. The big question is, why didn’t Silvergate hit the discount window to raise cash to meet withdrawals? That’s the exact purpose of the window. Were they downgraded from Primary to Secondary Credit in the time since Q2 2020? Given the quality of their securities, even a downgrade shouldn’t have prevented them from accessing the window, but it could have. It’s also worth noting that the Federal Reserve, FDIC, and OCC put out a joint statement earlier this week explicitly dissuading banks from getting involved in crypto in any way.
Or did Silvergate choose not to access the window? Perhaps they believed they’d need the money for a long time and the carry cost of the loan (4.5% per annum), if they rolled it every 90 days for 2 years, was actually higher than the $713m loss from outright selling their fixed income securities? They also accessed commercial credit from elsewhere (“wholesale funding”), and advances from the Federal Home Loan Bank (FHLB), an alternative lending option than the Fed. By selling the securities, they crystallized a significant loss, but they also end up with a lot of cash and perhaps less regulatory scrutiny (which may have been enhanced by accessing the window). Any possible regulatory issues regarding Silvergate aside, the move lets the bank survive another day without relying on the Federal Reserve, perhaps part of their calculus. -AT/WJS
Spat between Gemini and Genesis Goes Public
Cameron Winklevoss calls out DCG's Barry Silbert for "bad faith stall tactics." In a strongly-worded open letter directed at DCG CEO & Founder Barry Silbert, Cameron Winklevoss alleged that efforts to come to a resolution for Gemini Earn users have been dodged by Genesis parent company CEO. Recall on November 16, Gemini halted user withdrawals for its Earn product due to Genesis—the lending partner for Earn—pausing withdrawals due to liquidity constraints. Gemini users had ~$900m of funds in Earn.
According to the letter, proposals from Gemini and its Creditor Committee were delivered to Barry Silbert on December 17th with an updated version sent on Christmas Day, yet Barry and the Genesis/DCG team has still refused to meet with the Gemini team to reach a settlement decision. Winklevoss writes that DCG owes Genesis ~$1.675bn, which "is money that Genesis owes to Earn users and other creditors." The letter goes further, claiming that Barry used this money "to fuel greedy share buybacks, illiquid venture investments, and kamikaze Grayscale NAV trades that ballooned the fee-generating AUM of your Trust; all at the expense of creditors and all for your personal gain." The letter ends with a demand that Barry publicly commits to working together to reach a resolution by January 8th.
Within an hour of the open letter posting, Silbert responded to Winklevoss on Twitter, writing: (i) "DCG did not borrow $1.675 billion from Genesis", (ii) "DCG has never missed an interest payment to Genesis and is current on all loans outstanding; next loan maturity is May 2023", and (iii) "DCG delivered to Genesis and your advisors a proposal on December 29th and has not received any response."
Winklevoss then responded to his tweet, calling Silbert’s efforts to present himself/DCG as innocent bystanders "completely disingenuous", and requested again for his commitment to work towards a resolution.
Cameron Winklevoss appears to be feeling the heat after a class-action lawsuit was filed against Gemini on behalf of Earn users on December 28th. Since pausing withdrawals on Earn, he and the Gemini team have certainly been working to provide answers to customers as illustrated by the formation of the Creditors Committee to coordinate efforts to recoup funds from Genesis. The open letter posted by Winklevoss appears to be an effort to shift any blame away from Gemini and towards DCG. However, the open letter appears to be a sign of weakness, and doesn’t have any particular legal weight. Instead, it appears to be focused on influencing public perception.
It was surprising to see how quickly Silbert had responded to the open letter despite not addressing the primary concerns. Silbert claims "DCG did not borrow $1.675bn from Genesis" – a claim that appears to be technically true given reports that DCG owes $575m to Genesis from a loan due in May 2023 and a $1.1bn promissory note due in June 2032 stemming from DCG’s assumption of Three Arrows Capital’s default to Genesis. All of this may not technically be considered a loan, but it does appear DCG owes Genesis $1.675bn in total. The big question here is whether Genesis' liabilities extend to DCG, which could make the $1.1bn promissory note callable. Determination of whether DCG and Genesis are separate economic entities will likely be the job of bankruptcy court, though we note that Genesis has not filed for bankruptcy (Genesis did layoff 30% of staff on Thursday and has been considering bankruptcy according to a WSJ article). Messari's Ryan Selkis has previously tweeted his belief that DCG would more likely pursue restructuring through a recapitalization rather than proceeding through bankruptcy court. Regardless of which route is taken, courts must grapple with the interconnected mess with DCG, GBTC, bankrupt CeFi lenders, SBF & FTX/Alameda, and we certainly aren’t expecting any resolution for Earn users to be delivered by the January 8 deadline laid out in Winklevoss’s open letter. -CY
SBF Pleads Not Guilty, Faces 115 Years in Prison
SBF pleads not guilty, judge allows bail co-signers to remain secret. Sam Bankman-Fried, the disgraced former CEO of FTX, traveled from his parents’ home in Palo Alto, CA back to New York City on Tuesday to plead not guilty to 8 counts of criminal charges brought by the US Department of Justice.
The judge also accepted a plea by SBF’s lawyers to keep the 2 non-parent bond co-signers secret after the DOJ did not object. For background, SBF was released on a $250m personal recognizance bond that requires that he stay on house arrest in his parents’ Palo Alto home, only allowed to leave for medical or legal reasons. SBF’s bond package is one of the largest in US history, and was secured by his parents’ home (worth about $4m) and co-signed by two other “financially responsible people,” one of whom is “non-family” to SBF. The identities of those people were not included in the bond document and they were not mentioned at SBF’s first hearing, but were expected to be made public at the Tuesday, January 3 hearing.
If convicted on all charges, SBF could face 115 years in prison.
While it doesn’t matter much to the market, the identity of the non-family cosigner is one of the great mysteries of this FTX saga. We won’t offer specific speculation on who it might be, but some categories of possibilities are compelling and juicy. That the DOJ didn’t object isn’t a huge surprise, given that the agreement is between the US government, the Court, and SBF, and so long as the government is confident it will retrieve the $250m in the event that Sam flees, that’s all that matters to the directly-involved parties. But it is absolutely in the public interest to learn the cosigners’ identities, and at least one news organization has filed an appeal to unseal the information. -AT
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