The Crypto Players Caught in FTX’s Contagion

discuss Genesis, Galaxy and even Gemini. Is Bloomberg Report um. I think the centralized players recognize the need to provide more transparency, just so that they can convince people that they are a legitimate business and they are not misusing your fund a. Welcome back to the podcast. Have you been getting a lot of sleep? Ah, that's a great question. Not as much as I hope to. This past few weeks has been crazy. Every since the collapse of FTX happened,

which nobody really saw it coming. Before we jump into some of the people who have been affected or maybe affected by the collapse of FTX, reminder our listeners who you are and what you cover. I am Us Young, and I'm a crypto market structure reporter at Boomberg in New York, and I cover crypto exchanges, including by nights, f t X, and coin Bass, so all of the people that have a lot of stuff going on right now.

But in addition to covering the exchanges, you have also, along with some of our colleagues, been reporting on a lot of different kinds of crypto companies that have in the past couple of weeks been you know, making it clear that they're affected and big and small ways by the fallout from FTX. One of the things that I've noticed is there are a lot of companies in crypto

that have like really similar names to each other. And there's some that we cover that all begin with G. One of them is Genesis and they have really in the past couple of weeks come to people's attention alongside Gemini, another G, and you know a few other folks in that area. Can you just share with our listeners what are some of the things that have been happening in the reporting that you've been doing on them the crypto space.

There are two companies starting with the letter G that are highly critical in terms of the role that they play in the market space. One is Genesis UM and now there is Galaxy Digital, and both of them are institutional facing only, which means that they're not really household name for people outside of the cryptal industry, but they're essentially providing financial services similar to what Wall Street is

in finance in the crypto space. And recently the collapse of f t X really shed a light on the business model of some of these companies, especially with Genesis, because they're also caught in the contagion effect from ft X. Now how and why are they caught in the contagions? So you know, you mentioned they provide financial services, like what are some of the wieze that companies like Genesis

and Galaxy are exposed to the collapse of FTX. So Genesis is one of the earliert and biggest lenders in the cryptal industry and what they do is that they provide lending to cryptal players in the space. And as we know that lenders have been hit hard in the current collapse with the of prices, there's a question about the level of clasterization that's widely accepted in the industry.

And even though Genesis is an institutional company, because they provide such a central role in providing lending to the space, some of the retail facing products, such as Gemini Earned

product is in essence supported by Genesis. And this means that for retail users who use the Gemini Cryptal exchange when they opt into this yield product, which means they can deposit their cryptal and get say a percent yield from the product, the back end of it is supported by Genesis because what Gemini does is essentially pairing retail users who are wanting to get yield from their deposits with lenders like Genesis who's paying out the yield. Got it.

So here we have another g Gemini. So we've got Gemini, Genesis Galaxy. Now Genesis, as you mentioned, is this pivotal lender in the crypto space, and one of the challenges that they've had is this is not their first crisis. They lent money to Three Arrows Capital now collapsed, another bankrupt touch fund. They lent two point four billion dollars

to Three Arrows Capital. You mentioned collateralization earlier, but Three Arrows had put up about half as much of that in collateral, so they had an overall exposure of one point two billion. What happened to that exposure and how does that kind of relate to genesis parent company DCG. So Genesis was the biggest creditor to Three Arrows with Three Arrows blew up, so this is really a one to punch for Genesis. They were just recovering from Three

Arrows loss. After that they had this new generation of leadership. Their CEO, Michael Mara departed and they had new top seats with executives and they laid off people as well, so they were really try in to restructure their business and recover from the head and then just a few months into it, now we have the FTX collapse and this time it seems that they're being hit pretty hard given that it just came on the heel of the

earlier damage. And the parent company d c G. Digital Currency Group is the cryptal conglomerate founded by Barry Silbert, and they are the one who again stepped in to help our with Genesis, this time with their ft X exposure. They injected capital over a hundred million into Genesis. When Genesis realized that it has some of its money stuck on the ft x platform, but it seems like this

is not enough to fully sustain the business. And as we have reported, Genesis has been in talks for emergency fundraising to raise over one billion dollar during the past few days, and they have told investors that if they can't get that money, they're at risk of entering bankruptcy. What are some of the expectations that people have for crypto right now? It's like, clearly there's no evidence of bitcoin is going back to sixty anytime soon. But at the same time, you don't really see a lot of

people saying, well, everything is going to zero. We seem to be in an in between place, like what is the vibe you're getting from your reporting? I think the series of blobs and failures at major companies into crypto space, it's going to lead to major market structure changes in crypto. And then one big one is really the lending business in crypto. We are going to see fewer lenders who

accept underclasterized or even uncollasterized loans. Some of them just had to shut down because they're suffering from these losses. And on the other hand, DeFi is becoming a bright spot because with DEFA you have the transparency and in theory you can track data on chain, and that's one part that people in the industry are expecting to grow and to become more dominant going forward in the crypto space.

But then at the same time, we also have regulatory uncertainty when it comes to either centralized players such as lenders or exchanges, or decentralized players, which we call defy. So I think there's just market forces that are reshaping the market structure, especially when it comes to the type of lenders that are surviving the industry. But then there are also regulatory forces that will come into play as well.

In other words, difficult to tell because you know, you're describing a series of forces that are both working against and for each other. For instance, we're really really hearing from a lot of folks that we're talking to this idea of it's not that crypto failed, it's that centralized crypto players failed, right Like that's that's a very strong drumbeat that's coming from one particular element of the market.

And then over in the side of defy, you know, we've had some pretty interesting types of blow ups and defy at the same time, right you, whether it's billions of dollars worth of hacks, whether it's questions around the legality of certain types of dows, whether it's even though you do have this transparency, it's still appears to be very possible for the dynamics of these things to not exactly be what you're expecting, so you still you lose

your money. There's a risk profile question of as interest rates continue to rise, do you need to be taking fairly substantial risks to get that eight percent yield? Can you just like put money in a bank account instead. So definitely an interesting time. But just to go back to this idea of no need for centralized lenders, what the lenders themselves will say and what other folks who work in the more centralized part of the market will say, is they bring kind of clarity and ease of use

and a better user experience. Then you can necessarily get from DeFi right, if you are trying to have somebody who will pick up the phone when you have a question, having a centralized lender seems to be the way forward. Are you seeing any evidence that instead of it being these extremes of completely anonymous, decentralized protocol where your help desk is like a discord channel and major centralized player with like expensive offices in Manhattan. Is there something emerging

in the middle at all. I think there's this effort among centralized platforms such as bine eye that has been pushing to disclose more of the proof of user funds. For example, there are some of them are disclosing the

blockchain addresses of their customer funds. So I think the centralized players recognize the need to provide more transparency just so that they can come the people that they are a legitimate business and they are not misusing your fund, which people in the industry can no longer take it for granted. I think one helpful way that I've told to think of these centralized players, such as centralized lenders,

it's really that they are just lenders period. Even though product that they're dealing with is cryptal, the back and and operation of their business is nothing related to blockchain. Oftentimes it's run on Excel sheet. It is the communications are down through these social media channels. Therefore, they are really not following the originalsource of cryptal, which is for

everyone to be able to track through blockchain. The transfer of value and then for people to be able to verify things publicly and remove the need to trust opaque player. So I think in a way, given the series of failures in the space, the centralized players are seen consequences because they're not falling strictly the original intent of blockchain, which is to be open and transparent. Coming up, we'll be right back with more from Bloomberg Reports to ung.

If I think back to two thousand and eights, where you had a very similar set of concerns around can you trust that somebody knows what their positions are? How are they marking these assets? Are their market prices they

can get for these assets. One of the concerns that centralized players had about being more transparent was this idea that people could like take advantage of knowing what your positions are, they could potentially front run you or you know, squeeze you, depending on like where you were playing or even And I remember this consider learned about when the bank's were getting stress tested that if your stress tests came back and show that you were highly stressed, then

that might you know, precipitate a run on that particular bank. Are you seeing any similar criticisms of these attempts to transparency in crypto that we saw on Wall streets. You know a while ago. I think there's this recognition within the crypto space that financial regulation makes sense. There's a

reason that they're putting there by regulators. We had an editor who joked that financial regulators have never been so flattered after seeing that the series of crypto blobs, because it shows what happens in the market when you do not have these protections that that people have learned from their past mistakes. Yeah. So I think it is an interesting, like so searching period for for crypto native folks too.

On one hand, the whole industry started when they're trying to run away from some of the established institutions and regulations, but then on the other hand, they're really suffering from the consequences from them. Yeah, what an interesting time to be a regulator. You know, you're sort of writing your performance review being like, look at all the things that

we prevented from happening over here. Just as a kind of a closing question, I have covered financial markets for a long time, and I have used to kind of a breakneck pace of breaking news, but even by historical standards. The speed at which things in crypto happen is genuinely astonishing when you're talking to the sources that you have that aren't sleeping much either, like what is their impression of why things are moving so quickly? Is there something

unique to this asset class? Is it because it's such a small industry and everybody knows and it is exposed to each other, Like do they have a take on why on Tuesday everything's fine. On Thursday everybody's bankrupt. I would say that social media plays a huge part in this because everything is being played out in real time on social media. When ft X got into trouble, cz and Sandbank my Free were announcing their deals real time on Twitter, and that's how people find out the issue

of liquidity crunch at FTX. So I think in the past few weeks, every day there's Twitter space being held that are hours long, and there's just citizen journalism effort on Twitter as well. So I think the pace is very fast because in a way that everyone is crowdsourcing information and sharing information at the same time on social media. But that also comes with the challenge of verifying these information, at least for us reporters because there are a lot

of rumors being put out as well. Interesting that none of this is happening on Mastodon yet, but we'll see, we'll see how that goes. Thank you very much, pleasure to have you in the show. Thanks for having me. You can find more of you It is reporting on the Bloomberg Terminal and on Bloomberg dot com, and of course you can check out our twice weekly news a lot of Bloomberg Crypto. This is Bloomberg Crypto, a daily

podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions, or suggestions for the show The Crypto at Bloomberg dot net. The supervising producer of Bloomberg Crypto is Vicky very Galina. Our senior producer is Janet Babin. Our producers are Mohammed Faruk and Sharon Barrero. Our associate producers are Ty Butler and Moses on Them. Desta wonder

At is our engineer. Original music by Leo Sidrin. I'm Stacy Marie Schmal. We'll be back tomorrow. Two