A man entering Signature Bank in New York City on March 12, 2023.
Reuters
Two of the banks that were friendliest to the crypto sector and the biggest bank for tech startups all failed in less than a week. While cryptocurrency prices rallied Sunday night after the federal government stepped in to provide a backstop for depositors in two of the banks, the events sparked instability in the stablecoin market.
Silvergate Capital, a central lender to the crypto industry, said on Wednesday that it would be winding down operations and liquidating its bank. Silicon Valley Bank, a major lender to startups, collapsed on Friday after depositors withdrew more than $42 billion following the bank’s Wednesday statement that it needed to raise $2.25 billion to shore up its balance sheet. Signature, which also had a strong crypto focus but was much larger than Silvergate, was seized on Sunday evening by banking regulators.
Signature and Silvergate were the two main banks for crypto companies, and nearly half of all U.S. venture-backed startups kept cash with Silicon Valley Bank, including crypto-friendly venture capital funds and some digital asset firms.
The federal government stepped in on Sunday to guarantee all deposits for SVB and Signature depositors, adding confidence and sparking a small rally in the crypto markets. Both bitcoin and ether are nearly 10% higher in the last 24 hours.
According to Nic Carter of Castle Island Ventures, the government’s willingness to backstop both banks signifies that it’s back in the mode of providing liquidity, rather than tightening, and loose monetary policy has historically proven to be a boon for cryptocurrencies and other speculative asset classes.
But the instability once again showed the vulnerability of stablecoins, a subset of the crypto ecosystem investors can typically rely on to maintain a set price. Stablecoins are supposed to be pegged to the value of a real-world asset, such as a fiat currency like the U.S. dollar or a commodity like gold. But unusual financial conditions can cause them to drop below their pegged value.
A lot of crypto’s problems in the last year originated in the stablecoin sector, beginning with TerraUSD’s collapse last May. Meanwhile, regulators have been homing in on stablecoins in the last few weeks. Binance’s dollar-pegged stablecoin, BUSD, saw massive outflows after New York regulators and the Securities and Exchange Commission applied pressure on its issuer, Paxos.
Over the weekend, confidence in this sector again took a hit as USDC – the second-most liquid U.S. dollar-pegged stablecoin – lost its peg, dropping below 87 cents at one point on Saturday after its issuer, Circle, admitted to having $3.3 billion banked with SVB. Within the digital assets ecosystem, Circle has long been regarded as one of the adults in the room, boasting close connections and backing from the world of traditional finance. It raised $850 million from investors like BlackRock and Fidelity and had long said it planned to go public.
DAI, another popular dollar-pegged virtual currency that is partially backed by USDC, traded as low as 90 cents on Saturday. Both Coinbase and Binance temporarily paused USDC-to-dollar conversions.
On Saturday, some traders began swapping their USDC and DAI for tether, the world’s biggest stablecoin with a market value of more than $72 billion. Tether’s issuing company did not have any exposure to SVB and it’s currently trading above its $1 peg as traders flock to safer pastures, even though tether’s business practices have been called into question, as have the state of its reserves.
The stablecoin market began to rebound as of Sunday evening after Circle released a blog post saying that it would “cover any shortfall using corporate resources.” Both USDC and DAI have since shifted back toward their dollar peg.
Now that it is clear that SVB depositors will be made whole, Carter tells CNBC that he expects USDC to trade at par.
In the long run, the shutdown of the crypto banking trifecta could present problems for bitcoin, the world’s largest cryptocurrency, with a market value of $422 billion.
The Silvergate Exchange Network (SEN) and Signature’s Signet were real-time payment platforms that crypto customers considered core offerings. Both allowed commercial clients to make payments 24 hours a day, seven days a week, through their respective instant settlement services.
“Bitcoin liquidity and crypto liquidity overall will be somewhat impaired because Signet and SEN were key for firms to get fiat in on the weekend,” said Carter, who added that he is hopeful that customer banks will step in to fill the void left by SEN and Signet.
“These were the two most bitcoin-friendly banks, supporting the lion’s share of fiat settlement for bitcoin trades between trading counterparties in the U.S.,” wrote Mike Brock in a post on social media app Damus. Brock is the CEO of TBD at Block, a unit which focuses on cryptocurrency and decentralized finance.
Although Carter thinks the Fed stepping in to guarantee depositors of SVB will prevent a larger bank run on Monday, he says it is still dispiriting to see the three largest crypto-friendly banks taken offline in a matter of days.
“There are very few options now for crypto firms and the industry will be strapped for liquidity until new banks step in,” said Carter.
Mike Bucella, a longtime investor and executive in the crypto space, says that many in the industry are pivoting to Mercury and Axos, two other banks that cater to startups. Meanwhile, Circle has already publicly said that it is shifting is assets to BNY Mellon now that Signature bank is closing.
“Near-term, crypto banking in North America is a tough place,” said Bucella. “However there is a long tail of challenger banks that may take up that slack.”
An art exhibition based on the hit TV series “The Walking Dead” in London, England.
Ollie Millington | Getty Images
For some venture capitalists, we’re approaching a night of the living dead.
Startup investors are increasingly warning of an apocalyptic scenario in the VC world — namely, the emergence of “zombie” VC firms that are struggling to raise their next fund.
Faced with a backdrop of higher interest rates and fears of an oncoming recession, VCs expect there will be hundreds of firms that gain zombie status in the next few years.
“We expect there’s going to be an increasing number of zombie VCs; VCs that are still existing because they need to manage the investment they did from their previous fund but are incapable of raising their next fund,” Maelle Gavet, CEO of the global entrepreneur network Techstars, told CNBC.
“That number could be as high as up to 50% of VCs in the next few years, that are just not going to be able to raise their next fund,” she added.
In the corporate world, a zombie isn’t a dead person brought back to life. Rather, it’s a business that, while still generating cash, is so heavily indebted it can just about pay off its fixed costs and interest on debts, not the debt itself.
Life becomes harder for zombie firms in a higher interest rate environment, as it increases their borrowing costs. The Federal Reserve, European Central Bank and Bank of England all raised interest rates again earlier this month.
In the VC market, a zombie is an investment firm that no longer raises money to back new companies. They still operate in the sense that they manage a portfolio of investments. But they cease to write founders new checks amid struggles to generate returns.
Investors expect this gloomy economic backdrop to create a horde of zombie funds that, no longer producing returns, instead focus on managing their existing portfolios — while preparing to eventually wind down.
“There are definitely zombie VC firms out there. It happens during every downturn,” Michael Jackson, a Paris-based VC who invests in both startups and venture funds, told CNBC.
“The fundraising climate for VCs has cooled considerably, so many firms won’t be able to raise their next fund.”
VCs take funds from institutional backers known as LPs, or limited partners, and hand small amounts of the cash to startups in exchange for equity. These LPs are typically pension funds, endowments, and family offices.
If all goes smoothly and that startup successfully goes public or gets acquired, a VC recoups the funds or, better yet, generates a profit on their investment. But in the current environment, where startups are seeing their valuations slashed, LPs are becoming more picky about where they park their cash.
“We’re going to see a lot more zombie venture capital firms this year,” Steve Saraccino, founder of VC firm Activant Capital, told CNBC.
A sharp slide in technology valuations has taken its toll on the VC industry. Publicly-listed tech stocks have stumbled amid souring investor sentiment on high-growth areas of the market, with the Nasdaq down nearly 26% from its peak in November 2021.
A chart showing the performance of the Nasdaq Composite since Nov. 1, 2021.
With private valuations playing catch-up with stocks, venture-backed startups are feeling the chill as well.
Stripe, the online payments giant, has seen its internal market value drop 40% to $63 billion since reaching a peak of $95 billion in March 2021. Buy now, pay later lender Klarna, meanwhile, last raised funds at a $6.7 billion valuation, a whopping 85% discount to its prior fundraise.
Crypto was the most extreme example of the reversal in tech. In November, crypto exchange FTX filed for bankruptcy, in a stunning flameout for a company once valued by its private backers at $32 billion.
Investors in FTX included some of the most notable names in VC and private equity, including Sequoia Capital, Tiger Global, and SoftBank, raising questions about the level of due diligence — or lack thereof — put into deal negotiations.
Since the firms they back are privately-held, any gains VCs make from their bets are paper gains — that is, they won’t be realized until a portfolio company goes public, or sells to another firm. The IPO window has for the most part been shut as several tech firms opt to stall their listings until market conditions improve. Merger and acquisition activity, too, has slowed down.
In the past two to three years, a flood of new venture funds have emerged due to a prolonged period of low interest rates. A total of 274 funds were raised by VCs in 2022, more than in any previous year and up 73% from 158 in 2019, according to numbers from the data platform Dealroom.
LPs may be less inclined to hand cash to newly established funds with less experience under their belt than names with strong track records.
“LPs are pulling back after being overexposed in the private markets, leaving less capital to go around the large number of VC firms started over the past few years,” Saraccino said.
“A lot of these new VC firms are unproven and have not been able to return capital to their LPs, meaning they are going to struggle mightily to raise new funds.”
Frank Demmler, who teaches entrepreneurship at Carnegie Mellon University’s Tepper School of Business, said it would likely take three to four years before ailing VC firms show signs of distress.
“The behavior will not be as obvious” as it is with zombie firms in other industries, he said, “but the tell-tale signs are they haven’t made big investments over the last three or four years, they haven’t raised a new fund.”
“There were a lot of first-time funds that got funded during the buoyant last couple of years,” Demmler said.
“Those funds are probably going to get caught midway through where they haven’t had an opportunity to have too much liquidity yet and only been on the investing side of things if they were invented in 2019, 2020.”
“They then have a situation where their ability to make the type of returns that LPs want is going to be close to nil. That’s when the zombie dynamic really comes into play.”
According to industry insiders, VCs won’t lay off their staff in droves, unlike tech firms which have laid off thousands. Instead, they’ll shed staff over time through attrition, avoiding filling vacancies left by partner exits as they prepare to eventually wind down.
“A venture wind down isn’t like a company wind down,” Hussein Kanji, partner at Hoxton Ventures, explained. “It takes 10-12 years for funds to shut down. So basically they don’t raise and management fees decline.”
“People leave and you end up with a skeleton crew managing the portfolio until it all exits in the decade allowed. This is what happened in 2001.”
Bitcoin has had a strong start to the year with the cryptocurrency seeing a huge rally.
Jakub Porzycki | Nurphoto | Getty Images
Crypto markets rallied on Thursday, shrugging off a tougher regulatory stance from the U.S. government.
Bitcoin surged 11% to $24,655.94 at around 3:36 a.m. ET while ether was up more than 8% at $1,684.59, according to CoinDesk.
The value of the entire cryptocurrency market rose more than $84.8 billion in the 24 hours before 3:39 a.m. ET.
There are ” increasing signs that the market bottomed last November and has turned bullish,” Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno, told CNBC.
“We are gaining in momentum here and any bad news is being shrugged off, typical signs that the market believes the worst is over.”
Crypto markets were on edge earlier this week following increased regulatory scrutiny from U.S. authorities on digital currencies.
On Monday, the New York State Department of Financial Services told Paxos to stop minting new Binance USD, or BUSD, stablecoins. A stablecoin is a type of cryptocurrency pegged to a real-world asset and some are backed by assets such as bonds or cash. BUSD is pegged one-to-one to the U.S. dollar.
Paxos also confirmed that the Securities and Exchange Commission has notified the company that the agency could recommend an action that alleges BUSD is a security. The SEC has not yet formally levelled any charges against Paxos.
Bitcoin’s price on Thursday sat at its highest level since mid-August 2022. Last year, nearly $1.4 trillion was wiped off the crypto market after turmoil which saw bankruptcies, failures of projects and companies. All that was topped off by the collapse of major exchange FTX.
Yuya Hasegawa, an analyst at Japanese crypto firm Bitcoin Bank, said there is a shift from so-called altcoins, or alternative coins, to bitcoin in the wake of the regulatory action.
“Wednesday’s crypto rally was a bit of a surprise but one thing stood out: it was led by bitcoin,” Hasegawa told CNBC.
“The current regulatory environment surely looks like a headwind for the crypto market, but it seems like some money is moving from altcoins to bitcoin, since bitcoin is the only cryptocurrency that is labeled ‘commodity’ by the SEC chair. Consequently, bitcoin’s market dominance is on the rise.”
Gary Gensler, chair of the SEC, reiterated last year that the agency views bitcoin as a commodity rather than a security. Commodities are assets like gold whereas stocks are considered securities. They are regulated differently.
Rising interest rates from the Federal Reserve designed to fight inflation also weighed on crypto markets. Bitcoin is also closely correlated to equity markets and in particular the tech-heavy Nasdaq index. The Nasdaq is up about 16% year-to-date. Bitcoin has outperformed the index and is up 49% this year.
Bullish sentiment in risk assets has been aided by a view that the economic downturn might not be as bad as expected, and the Fed might slow down the pace of interest rate hikes.
“In general, the markets like the fact that inflation is coming down, interest rate hikes are slated to ease from here, but also that we may end up with either no big recession or something very mild,” Ayyar said.
Bankruptcy filings from Celsius and Voyager have raised questions about what happens to investors’ crypto when a platform fails.
Rafael Henrique | Sopa Images | Lightrocket | Getty Images
Bitcoin briefly touched the $24,000 level on Thursday, reaching a key technical level and building on its January rally.
The up move came a day after the Federal Reserve raised its benchmark interest rate by a quarter percentage point. But Fed Chairman Jerome Powell noted that a disinflationary process has started, soothing investors that are betting on inflation to fall and causing them to take on more risk.
Bitcoin was last trading about 1% higher at $23,819.26, according to Coin Metrics. The cryptocurrency rose to $24,069.00 earlier in the afternoon, after rising as high as $24,249.70 Wednesday night, its highest level since Aug. 17.
“The market took the latest FOMC as dovish, but bitcoin’s rally remains precarious,” said Yuya Hasegawa, crypto market analyst at Japanese bitcoin exchange Bitbank. “The price did rise on Wednesday, but failed to close above $24k and its momentum seems to be on the decline.”
Hasegawa echoed the Fed’s warning that although inflation appears to be decelerating, it “remains elevated” and the central bank will need “substantially more evidence to confidently say that inflation is coming closer to their 2% target.”
The jump also coincided with a broader rally in stocks led by the Nasdaq as well as a drop in U.S. Treasury yields and the U.S. Dollar Currency Index (DXY), which tend to move inversely to crypto.
Bitcoin has rallied more than 40% since the start of the year, quickly paring losses from its disastrous 2022. Many investors and analysts are wary, however, that despite the current bullish trend, crypto isn’t ready for a rocket ship rally yet, and prices could pull back at least once more before it is.
January was bitcoin’s best month since October 2021 and its best January since 2013.
Bitcoin had a tough 2022. Now investors are looking toward 2023 with caution when it comes to cryptocurrencies.
Thomas Trutschel | Photothek | Getty Images
Bitcoin rose further over the weekend, as traders took news of another crypto bankruptcy in their stride and placed bets on a Federal Reserve “pivot” to cutting interest rates.
The price of the No. 1 token briefly topped $23,000 for the first time since Aug. 19, 2022, according to data from CoinGecko. It has since ebbed slightly to $22,917.94. The jump brings bitcoin up almost 39% since the start of January.
Ether, the second-biggest digital coin, rallied as high as $1,664.78 on Saturday. That’s the first time it has surpassed $1,600 since Nov. 7, 2022. As of 12:00 p.m. ET, ether was worth $1,620.94 apiece.
Bitcoin has kicked off 2023 on a positive note, with investors hoping for a reversal in the monetary tightening that spooked market players last year.
The Fed and other central banks began cutting interest rates in 2022, shocking holders of risky asset classes, like stocks and digital tokens. Publicly-listed tech stocks and private venture capital-backed start-ups particularly took a beating, as investors sought protection in assets perceived as safer, such as cash and bonds.
A chart showing bitcoin’s year-to-date price performance; the digital currency has climbed nearly 39% since the start of January.
With inflation now showing signs of cooling in the U.S., some market players are hopeful that central banks will start easing the pace of rate rises, or even slash rates. Economists previously told CNBC they predict a Fed rate cut could happen as soon as this year.
“Fed tightening seems to be lighter and inflation less of a risk,” Charles Hayter, CEO of crypto data site CryptoCompare, said in emailed comments to CNBC. “There is hope there will be more caution to rate rises globally.”
The Fed is likely to keep interest rates high for the time being. However, some officials at the bank have recently called for a reduction in the size of quarterly rate hikes, wary of a slowdown in economic activity.
The world’s top digital currency, bitcoin, is “increasingly looking like it has put in its bottom,” according to Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno.
Bitcoin short sellers have been squeezed by sudden upward moves in prices, according to Ayyar. Short selling is an investment strategy whereby traders borrow an asset and then sell it in the hope that it will depreciate in value.
A wipe-out of those short positions sparked by the rising price of bitcoin has added “fuel to the fire,” Ayyar said, as short sellers are forced to cover their bets by buying back the borrowed bitcoin to close them out.
Investors don’t seem to have been greatly perturbed by the collapses of top crypto companies, stemming from the fallout of digital currency exchange FTX’s insolvency in November.
Read more about tech and crypto from CNBC Pro
Last week, the lending arm of New York-based crypto investment firm Genesis became the latest casualty of the crypto crisis, seeking bankruptcy protection in a “mega” filing listing aggregate liabilities ranging from $1.2 billion to $11 billion.
“The Genesis debacle has been playing out for a while and is likely priced in already. FTX, on the other hand, has already had a significant impact on many investors, on market psychology and on the prices of several toxic assets,” Mati Greenspan, founder and CEO of crypto investment advisory firm Quantum Economics, told CNBC.
“It should be noted however that the price on bitcoin itself is quite limited since FTX didn’t have any on their balance sheets.”
Bitcoin is still about 67% off its all-time high, despite its recent surge.
The latest crypto plunge is different from past cycles, in large part due to the role played by leverage. Major crypto players became entangled in risky lending practices, offering lofty yields that many investors now say were unsustainable.
This began in May with the collapse of terraUSD — or UST — an algorithmic stablecoin that was supposed to be pegged one-to-one with the U.S. dollar. The failure of UST brought down terraUSD’s sister token luna and hit companies with exposure to both tokens.
Three Arrows Capital, a hedge fund with bullish views on crypto, plunged into liquidation because of its exposure to terraUSD.
Then came the November collapse of FTX, one of the world’s largest cryptocurrency exchanges. It was run by Sam Bankman-Fried, an executive who was often in the spotlight.
The fallout from FTX continues to ripple across the cryptocurrency industry. Roughly $2 trillion of value has been erased from the overall crypto market since the peak of the crypto boom in November 2021, in a deep downturn known as “crypto winter.”
One analyst cautioned that technical indicators suggest there could be some pullback from the token’s recent rally.
Yuya Hasegawa, crypto market analyst at Japanese bitcoin exchange Bitbank, said that while bitcoin’s trend indicators are “generally signaling a strong upward trend,” its relative strength indicator, or RSI, “is diverging from the price’s upward movement and starting to slide down, which is not a good sign for the current price trend.”
“Bitcoin could test its August high and be supported at the $20k~$21k level, but with its RSI’s divergence and a couple of big tech earnings ahead this week, it could get quite unstable,” Hagesawa said in a Monday note.
The recent bitcoin price boost has nevertheless offered some investors hope that the ice may be starting to thaw.
Greenspan said upward moment in bitcoin is typical of the cryptocurrency, as investors anticipate the next so-called “halving” event — a change to the bitcoin network that reduces rewards to miners by half. It is viewed by some investors as positive for the price of the token, as it squeezes supply.
The next halving is slated to take place sometime between March and May of 2024.
Bitcoin and other cryptocurrencies have been an unnecessary distraction for investors and the industry is rife with scams, JPMorgan Chase CEO Jamie Dimon said Thursday. “I think all that’s been a waste of time… Bitcoin itself has been a hyped-up fraud, a pet rock,” Dimon said on CNBC’s ” Squawk Box .” The crypto industry appeared to be making inroads into Wall Street before 2022, before a dramatic decline in market prices and the blow-up of several high profile firms dampened investor appetite and raised more questions about the safety of the digital assets. For his part, Dimon said that he was unsurprised by the collapse of crypto exchange FTX late last year. “I’m not surprised at all. I called it a decentralized ponzi scheme. The hype around this thing has been extraordinary,” Dimon said, pointing to FTX and controversies surrounding other crypto firms like Tether. “It’s outrageous. The regulators should have stopped this a long time ago,” he added. Dimon has been a longtime skeptic of cryptocurrencies, though his bank uses blockchain technology internally. He said that the technology itself has a future even if the tradable coins do not. “Blockchain is a technology ledger system that we use to move information. We’ve used it do overnight repo, intraday repo. We use it to move money. … That is a technology ledger that we think will be deployable,” Dimon said. The bank CEO’s comments came at the World Economic Forum in Davos, Switzerland. Bitcoin was trading at 20,734 on Thursday morning. The cryptocurrency has rebounded about 25% so far this year but is still more than 60% below its all-time highs.
A number of factors are behind bitcoin’s New Year rise, according to analysts, including an increased probability of interest rates being lowered and purchases by large buyers known as “whales.”
Filip Radwanski | Sopa Images | Lightrocket | Getty Images
Bitcoin has begun 2023 on a positive note, with the price of the world’s largest digital token up roughly 26% since the start of January.
On Saturday, bitcoin’s price rose above $21,000 per coin for the first time since Nov. 7.
It’s still a far cry from the $68,990 record high bitcoin notched in Nov. 2021. But it has given market players cause for some optimism.
Analysts say that a number of factors are behind bitcoin’s New Year rise, including an increased probability of interest rates being lowered, as well as purchases by large buyers known as “whales.”
Inflation is cooling down, and economic indicators suggest slowing U.S. economic activity. That’s made traders optimistic the Federal Reserve could reverse, or at least soften, its rate hiking strategy.
“Bitcoin looks to have recoupled with macro data as investors shrug off the FTX collapse,” James Butterfill, head of research at digital asset management firm CoinShares, told CNBC by email.
“The most important macro data investors are focussing on is the weak services PMI and the trending down of employment and wage data. This coupled with downwards trend in inflation has led to improving confidence, while it comes at a time when valuations for Bitcoin … are close to all time lows. The prospect of looser monetary policy off the back of weaker macro data and low valuations is what has led this rally.”
The Fed lifted borrowing rates seven times in 2022, forcing risky assets such as stocks — and tech stocks, in particular — into a tailspin. In December, the benchmark funds rate increased to 4.25%-4.50%, reaching its highest level since 2007.
Bitcoin has been caught up in the market drama around lending rates, as it is increasingly viewed by investors as a risky asset.
Backers previously talked up bitcoin’s potential as a “hedge” to buy in times of high inflation. But bitcoin failed to achieve that aim in 2022, instead slipping more than 60% as the U.S. and other major economies grappled with higher rates and living costs.
Yuya Hasegawa, crypto market analyst at Japanese crypto exchange Bitbank, said in a Jan. 13 note that this was “brewing a hope amongst market participants that the Fed will further slow down on the pace of rate hikes.”
The Fed is likely to keep interest rates high for the time being. However, some market players are hopeful that central banks will start easing the pace of rate rises, or even slash rates. Some economists predict a Fed rate cut could happen as soon as this year.
That’s as the risk of a recession is also playing on central bankers’ minds.
Some two-thirds of chief economists surveyed by the World Economic Forum believe a global recession is likely in 2023, according to research released by the Davos organizer on Monday.
The U.S. dollar has also sagged, with the greenback down 9% against a basket of currencies used by U.S. trade partners in the last three months. The majority of bitcoin trades against USD, making a weaker dollar better for bitcoin.
“We are seeing the dollar put in a top, inflation easing, interest rate hikes slowing down – all pointing to markets getting more risk-on over the next few months,” Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno, told CNBC.
Larger purchasers of digital coins known as “whales” may be leading the latest rally in bitcoin, according to Kaiko.
The crypto data firm said in a series of tweets Monday that trade sizes had climbed from an average of $700 on Jan. 8 to $1,100 today on the crypto exchange Binance, indicating renewed confidence in the market by whales.
Whales are investors who’ve hoarded large piles of bitcoin. Some are individuals, like MicroStrategy CEO Michael Saylor and Silicon Valley investor Tim Draper. Others are entities such as market makers, which act as the middlemen in trades between buyers and sellers.
Skeptics of digital currencies say this makes the market prone to manipulation by a select few investors with large piles of tokens. The wealthiest 97 bitcoin wallet addresses account for 14.15% of the total supply, according to fintech firm River Financial.
In December, Carol Alexander, a professor at the University of Sussex, told CNBC that bitcoin could see a “managed bull market” in 2023 in which bitcoin travels north of $30,000 in the first quarter, and to $50,000 in the second half. Her reasoning was that with trading volumes evaporating, and the level of fear in the market extremely high, whales would then step in to prop up the market.
Several bitcoin miners have been flushed out by the drop in prices. Bitcoin miners, who use power-intensive machines to verify transactions and mint new tokens, have been squeezed by the slump in prices and rising energy costs.
That’s historically a good sign for bitcoin, according to Ayyar.
These actors accumulate massive piles of digital currency, making them some of the biggest sellers in the market. With miners offloading their holdings to pay off debts, that removes much of the remaining selling pressure on bitcoin.
More recently, however, bitcoin’s network “difficulty” has been increasing, meaning more computing power is being deployed to unleash new tokens into circulation.
Mining difficulty reached a record 37.6 trillion on Sunday, according to BTC.com data, meaning that, on average, it would take 37.6 trillion hashes, or attempts, to find a valid bitcoin block and add it to the blockchain.
“Bitcoin mining difficulty is a measure of how difficult it is to create the next block of transactions,” said Marcus Sotiriou, market analyst at digital asset broker GlobalBlock, told CNBC.
“Bitcoin mining difficulty fell 3.6% before the last update, after a winter storm led some miners to shut down. However, now miners appear to have come back online, with new and more efficient machines.”
Meanwhile, events further down the crypto calendar could give traders cause for some New Year cheer. It is still a year away, but the so-called bitcoin “halving” is an event that often leads to excitement for crypto investors.
The halving, where bitcoin rewards to miners are cut in half, is viewed by some investors as positive for bitcoin’s price as it squeezes supply.
“There are signs this could be the beginning of a new cycle with Bitcoin, as it typically does around 15-18 months before halving,” Ayyar told CNBC.
The next halving is slated to happen sometime between March and May of 2024.
However, Ayyar cautioned, “At this point, we’re in overbought territory with Bitcoin and hence could definitely see a dip.” Prices could go for a dip if bitcoin closes below $18,000 in the next few days, he added.
The Securities and Exchange Commission on Thursday charged crypto firms Genesis and Gemini with allegedly selling unregistered securities in connection with a high-yield product offered to depositors.
Gemini, a crypto exchange, and Genesis, a crypto lender, partnered in February 2021 on a Gemini product called Earn, which touted yields of up to 8% for customers.
According to the SEC, Genesis loaned Gemini users’ crypto and sent a portion of the profits back to Gemini, which then deducted an agent fee, sometimes over 4%, and returned the remaining profit to its users. Genesis should have registered that product as a securities offering, SEC officials said.
“Today’s charges build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws,” SEC chair Gary Gensler said in a statement.
Gemini’s Earn program, supported by Genesis’ lending activities, met the SEC’s definition by including both an investment contract and a note, SEC officials said. Those two features are part of how the SEC assesses whether an offering is a security.
Regulators are seeking permanent injunctive relief, disgorgement, and civil penalties against both Genesis and Gemini.
The two firms have been engaged in a high-profile battle over $900 million in customer assets that Gemini entrusted to Genesis as part of the Earn program, which was shuttered this week.
Gemini, which was founded in 2015 by bitcoin advocates Cameron and Tyler Winklevoss, has an extensive exchange business that, while beleaguered, could possibly weather an enforcement action.
But Genesis’ future is more uncertain, because the business is heavily focused on lending out customer crypto and has already engaged restructuring advisers. The crypto lender is a unit of Barry Silbert’s Digital Currency Group.
SEC officials said the possibility of a DCG or Genesis bankruptcy had no bearing on deciding whether to pursue a charge.
It’s the latest in a series of recent crypto enforcement actions led by Gensler after the collapse of Sam Bankman-Fried’s FTX in November. Gensler was roundly criticized on social media and by lawmakers for the SEC’s failure to impose safeguards on the nascent crypto industry.
Gensler’s SEC and the Commodity Futures Trading Commission, chaired by Rostin Benham, are the two regulators that oversee crypto activity in the U.S. Both agencies filed complaints against Bankman-Fried, but the SEC has, of late, ramped up the pace and the scope of enforcement actions.
The SEC brought a similar action against now bankrupt crypto lender BlockFi and settled last year. Earlier this month, Coinbasesettled with New York state regulators over historically inadequate know-your-customer protocols.
Since Bankman-Fried was indicted on federal fraud charges in December, the SEC has filed five crypto-related enforcement actions.
Solana logo displayed on a phone screen and representation of cryptocurrencies are seen in this illustration photo taken in Krakow, Poland on August 21, 2021.
Jakub Porzycki | NurPhoto | Getty Images
Solana was touted as the cryptocurrency that would challenge ether with an eco-friendlier approach, faster transaction speeds and more consistent costs.
Investors who made that bet had a miserable year. The token’s market cap collapsed from over $55 billion in January to barely above $3 billion at year-end.
Among Solana’s biggest problems in late 2022 was its close relationship to FTX founder Sam Bankman-Fried, who faces eight criminal fraud charges after his crypto exchange went bankrupt last month. The disgraced former crypto billionaire was one of Solana’s most public boosters, touting the advantages of the blockchain technology and investing over a half-billion dollars in Solana tokens.
Bankman-Fried’s companies held nearly $1.2 billion worth of the token and associated assets in June, according to documents reviewed by CoinDesk.
When FTX fell apart, investors bailed on Solana to the tune of about $8 billion. But in recent days, as the rest of the crypto world has been relatively quiet and prices stable, Solana has plummeted further.
Two of the biggest non-fungible token (NFT) projects built on Solana announced their migration off of Solana’s platform on Christmas Day. But the recent slides came after that news had already broken, making Solana’s recent slide something of a mystery.
In the last week, Solana has declined over 30%. Ether has held steady, shedding 1.7% in the same time period, while bitcoin has only dropped 1.2%. Among the 20 most-valuable cryptocurrencies tracked by CoinMarketCap, the next biggest loser over that stretch is Dogecoin, which has fallen 9%.
In just one hour of trading on Thursday, Solana slid 5.8%, bringing it to the lowest since early 2021, around the time that Bankman-Fried began to vocally offer his support for the project.
Solana has since come off the lows, with a market cap now crossing $3.5 billion. Its 24-hour trading volume is up over 200% on a relative basis.
During the crypto market’s heyday in 2021, Bankman-Fried was hardly alone in his bullishness.
Developers raved about Solana’s support for smart contracts, pieces of code that execute pre-programmed directives, as well as an innovative proof-of-history consensus mechanism.
Consensus mechanisms are how blockchain platforms assess the validity of an executed transaction, tracking who owns what and how well the system is working based on a consensus between multiple record-keeping computers called nodes.
Bitcoin uses a proof-of-work mechanism. Ethereum and rival Solana use proof-of-stake. Rather than relying on energy-intensive mining, proof-of-stake systems ask big users to offer up collateral, or stake, to become “validators.” Instead of solving for a cryptographic hash, as with bitcoin, proof-of-work validators verify transaction activity and maintain the blockchain’s “books,” in exchange for a proportional cut of transaction fees.
Solana’s supposed differentiating factor was augmenting proof-of-stake with proof-of-history — the ability to prove that a transaction happened at a particular moment.
Solana soared over the course of 2021, with a single token gaining 12,000% for the year and reaching $250 by November. Yet even before the collapse of FTX, Solana faced a series of public struggles, which challenged the protocol’s claim that it was a superior technology.
Much of Solana’s popularity was built around growing interest in NFTs. Serum, another exchange backed by Bankman-Fried, was built on Solana. When the calendar turned to 2022, Solana’s limitations started to become apparent.
Barely a month into the year, a network outage took Solana down for over 24 hours. Solana’s token fell from $141 to a low of a little over $94. In May, Solana experienced a seven-hour-long outage after NFT minting flooded validators and crashed the network.
A “record-breaking four million transactions [per second]” took out Solana and caused the price of its token to drop 7%, CoinTelegraph reported at the time, pushing it further into the red during the bruising onset of crypto winter.
In June, another outage prompted a 12% drop. The hours of downtime came after validators stopped processing blocks, immobilizing Solana’s touted consensus mechanism and forcing a restart of the network.
The outages were concerning enough for a protocol that sought to upend ether’s dominance and assert itself as a stable, rapid platform. Solana was experiencing growing pains in public. The project was first built in 2020 and is a younger protocol than ether, which went live in 2015.
Technology challenges are to be expected. Unfortunately for Solana, something else was brewing in the Bahamas.
The SEC called it “brazen” fraud. Bankman-Fried’s use of customer money at FTX to fund everything from trading and lending at his hedge fund, Alameda Research, to his lavish lifestyle in the Caribbean roiled the crypto markets. Bankman-Fried was released on a $250 millionbond last week while he awaits trial for fraud and other criminal chargesin the Southern District of New York.
Solana since November 2022, the month that FTX failed and filed for bankruptcy protection.
Solana lost more than 70% in total value in the weeks following FTX’s November bankruptcy filing. Investors fled from anything associated with Bankman-Fried, with prices for FTT (FTX’s native token), Solana, and Serum plunging dramatically.
Solana founder Anatoly Yakovenko told Bloomberg that rather than focusing on price action, the public should remain focused on “having people build something awesome that’s decentralized.”
Yakovenko did not immediately respond to CNBC’s request for comment.
FTT has fared the worst, losing practically all its value. But Solana has seen a continued flight in recent days, reflecting ongoing concerns about FTX contagion and skepticism about the long-term viability of its own protocol.
Developer flight is the most pressing concern. Solana’s raison d’etre was to solve bitcoin and ether’s struggle “to scale beyond 15 transactions per second worldwide,” according to developer documentation. But active developers on the platform have dropped to 67 from an October 2021 high of 159, according to Token Terminal.
Multicoin Capital, a cryptocurrency investment firm, has maintained a bullish stance on Solana. Even after the implosion of FTX, Multicoin continued to strike an optimistic tone about the suddenly beleaguered blockchain.
“We recognized that SOL was likely to underperform in the near term given the affiliation with SBF and FTX; however, since the crisis began we’ve decided to hold the position based on a variety of factors,” Multicoin wrote in a message to partners obtained by CNBC.
Multicoin, and other prominent crypto voices, maintain that the fallout from FTX underscores the need for a return to basics for the crypto industry: A transition away from juggernaut centralized exchanges in favor of decentralized finance (DeFi) and self-custody.
An uptick in daily activity at now peerless Binance might suggest that many crypto enthusiasts have yet to take that missive to heart.
It’s unsurprising that Yakovenko continues to believe in Solana. Yet even Vitalik Buterin, the man behind ethereum, voiced his support for Solana on Thursday. “Hard for me to tell from outside, but I hope the community gets its fair chance to thrive,” Buterin wrote on Twitter.
2023 may prove a seminal year for defi, as crypto-curious investors look for safer ways to garner returns and custody their assets. Bitcoin was born out of the 2008 financial crisis. Now the cryptocurrency industry faces a test of its own.
“Lehman was not the end of the banking industry. Enron was not the end of the energy industry. And FTX won’t be the end of the crypto industry,” Multicoin told investors.
– CNBC’s Ari Levy and MacKenzie Sigalos contributed to this report.
The crypto market has been battered this year, with more than $2 trillion wiped off its value since its peak in Nov. 2021. Cryptocurrencies have been under pressure after the collapse of major exchange FTX.
Jonathan Raa | Nurphoto | Getty Images
2022 marked the start of a new “crypto winter,” with high-profile companies collapsing across the board and prices of digital currencies crashing spectacularly. The events of the year took many investors by surprise and made the task of predicting bitcoin’s price that much harder.
The crypto market was awash with pundits making feverish calls about where bitcoin was heading next. They were often positive, though a few correctly forecast the cryptocurrency sinking below $20,000 a coin.
But many market watchers were caught off guard in what has been a tumultuous year for crypto, with high-profile company and project failures sending shock waves across the industry.
It began in May with the collapse of terraUSD, or UST, an algorithmic stablecoin that was supposed to be pegged one-to-one with the U.S. dollar. Its failure brought down terraUSD’s sister token luna and hit companies with exposure to both cryptocurrencies.
Then came the November collapse of FTX, one of the world’s largest cryptocurrency exchanges which was run by Sam Bankman-Fried, an executive who was often in the spotlight. The fallout from FTX continues to ripple across the cryptocurrency industry.
On top of crypto-specific failures, investors have also had to contend with rising interest rates, which have put pressure on risk assets, including stocks and crypto.
Bitcoin has sunk around 75% since reaching its all-time high of nearly $69,000 in November 2021 and more than $2 trillion has been wiped off the value of the entire cryptocurrency market. On Friday, bitcoin was trading at just under $17,000.
CNBC reached out to the people behind some of the boldest price calls on bitcoin in 2022, asking them how they got it wrong and whether the year’s events have changed their outlook for the world’s largest digital currency.
In 2018, at a tech conference in Amsterdam, Tim Draper predicted bitcoin reaching $250,000 a coin by the end of 2022. The famed Silicon Valley investor wore a purple tie with bitcoin logos, and even performed a rap about the digital currency onstage.
Four years later, it’s looking pretty unlikely Draper’s call will materialize. When asked about his $250,000 target earlier this month, the Draper Associates founder told CNBC $250,000 “is still my number” — but he’s extending his prediction by six months.
“I expect a flight to quality and decentralized crypto like bitcoin, and for some of the weaker coins to become relics,” he told CNBC via email.
Bitcoin would need to rally nearly 1,400% from its current price of just under $17,000 for Draper’s prediction to come true. His rationale is that despite the liquidation of notable players in the market like FTX, there’s still a huge untapped demographic for bitcoin: women.
“My assumption is that, since women control 80% of retail spending and only 1 in 7 bitcoin wallets are currently held by women, the dam is about to break,” Draper said.
In April, Antoni Trenchev, the CEO of crypto lender Nexo, told CNBC he thought the world’s biggest cryptocurrency could surge above $100,000 “within 12 months.” Though he still has four months to go, Trenchev acknowledges it is improbable that bitcoin will rally that high anytime soon.
Bitcoin “was on a very positive path” with institutional adoption growing, Trenchev says, but “a few major forces interfered,” including an accumulation of leverage, borrowing without collateral or against low-quality collateral, and fraudulent activity.
“I am pleasantly surprised by the stability of crypto prices, but I do not think we are out of the woods yet and that the second and third-order effects are still to play out, so I am somewhat skeptical as to a V-shape recovery,” Trenchev said.
The entrepreneur says he’s also done making bitcoin price predictions. “My advice to everyone, however, remains unchanged,” he added. “Get a single digit percentage point of your investable assets in bitcoin and do not look at it for 5-10 years. Thank me later.”
On Jan. 12, Guido Buehler, the former CEO of regulated Swiss bank Seba, which is focused on cryptocurrencies, said his company had an “internal valuation model” of between $50,000 and $75,000 for bitcoin in 2022.
Buehler’s reasoning was that institutional investors would help drive the price higher.
At the time, bitcoin was trading at between $42,000 and $45,000. Bitcoin never reached $50,000 in 2022.
The executive, who now runs his own advisory and investment firm, said 2022 has been an “annus horribilis,” in response to CNBC questions about what went wrong with the call.
“The war in Ukraine in February triggered a shock to the paradigm of world order and the financial markets,” Buehler said, citing the consequences of raised market volatility and rising inflation in light of the disruption of commodities like oil.
Another major factor was “the realization that interest rates are still the driver of most asset classes,” including crypto, which “was hard blow for the crypto community, where there has been the belief that this asset class is not correlated to traditional assets.”
Buehler said lack of risk management in the crypto industry, missing regulation and fraud have also been major factors affecting prices.
The executive remains bullish on bitcoin, however, saying it will reach $75,000 “sometime in the future,” but that it is “all a matter of timing.”
“I believe that BTC has proven its robustness throughout all the crisis since 2008 and will continue to do so.”
Paolo Ardoino, chief technology officer of Bitfinex and Tether, told CNBC in April that he expected bitcoin to fall sharply below $40,000 but end the year “well above” $50,000.
“I’m a bullish person on bitcoin … I see so much happening in this industry and so many countries interested in bitcoin adoption that I’m really positive,” he said at the time.
On the day of the interview, bitcoin was trading above $41,000. The first part of Ardoino’s call was correct — bitcoin did fall well below $40,000. But it never recovered.
In a follow-up email this month, Ardoino said he believes in bitcoin’s resilience and the blockchain technology underlying it.
“As mentioned, predictions are hard to make. No one could have predicted or foreseen the number of companies, well regarded by the global community, failing in such a spectacular fashion,” he told CNBC.
“Some legitimate concerns and questions remain around the future of crypto. It might be a volatile industry, but the technologies developed behind it are incredible.”
A key theme in 2022 has been bitcoin’s correlation to U.S. stock indexes, especially the tech-heavy Nasdaq 100. In June, Deutsche Bank analysts published a note that said bitcoin could end the year with a price of approximately $27,000. At the time of the note, bitcoin was trading at just over $20,000.
It was based on the belief from Deutsche Bank’s equity analysts that the S&P 500 would jump to $4,750 by year-end.
But that call is unlikely to materialize.
Marion Laboure, one of the authors of Deutsche Bank’s initial report on crypto in June, said the bank now expects bitcoin to end the year around $21,000.
“High inflation, monetary tightening, and slow economic growth have likely put additional downward pressure on the crypto ecosystem,” Laboure told CNBC, adding that more traditional assets such as bonds may begin to look more attractive to investors than bitcoin.
Laboure also said high-profile collapses continue to hit sentiment.
“Every time a major player in the crypto industry fails, the ecosystem suffers a confidence crisis,” she said.
“In addition to the lack of regulation, crypto’s biggest hurdles are transparency, conflicts of interest, liquidity, and the lack of reliable available data. The FTX collapse is a reminder that these problems continue to be unresolved.”
In a Nov. 9 research note, JPMorgan analyst Nikolaos Panigirtzoglou and his team predicted the price of bitcoin would slump to $13,000 “in the coming weeks.” They had the benefit of hindsight after the FTX liquidity crisis, which they said would cause a “new phase of crypto deleveraging,” putting downside pressure on prices.
The cost it takes miners to produce new bitcoins historically acts as a “floor” for bitcoin’s price and is likely to revisit a $13,000 low as seen over the summer months, the analysts said. That’s not as far off bitcoin’s current price as some other predictions, but it’s still much lower than Friday’s price of just under $17,000.
A JPMorgan spokesperson said Panigirtzoglou “isn’t available to comment further” on his research team’s forecast.
Ian Harnett, co-founder and chief investment officer at macro research firm Absolute Strategy Research, warned in June that the world’s top digital currency was likely to tank as low as $13,000.
Explaining his bearish call at the time, Harnett said that, in crypto rallies past, bitcoin had subsequently tended to fall roughly 80% from all-time highs. In 2018, for instance, the token plummeted close to $3,000 after hitting a peak of nearly $20,000 in late 2017.
Harnett’s target is closer than most, but bitcoin would need to fall another 22% for it to reach that level.
When asked about how he felt about the call today, Harnett said he is “very happy to suggest that we are still in the process of the bitcoin bubble deflating” and that a drop close to $13,000 is still on the cards.
“Bubbles usually see an 80% reversal,” he said in response to emailed questions.
With the U.S. Federal Reserve likely set to raise interest rates further next year, an extended drop below $13,000 to $12,000 or even $10,000 next can’t be ruled out, according to Harnett.
“Sadly, there is no intrinsic valuation model for this asset — indeed, there is no agreement whether it is a commodity or a currency — which means that there is every possibility that this could trade lower if we see tight liquidity conditions and/or a failure of other digital entities / exchanges,” he said.
Veteran investor Mark Mobius has probably been one of the more accurate predictors of bitcoin.
In May, when the price of bitcoin was above $28,000, he told Financial News that bitcoin would likely fall to $20,000, then bounce, but ultimately move down to $10,000.
Bitcoin did fall below $20,000 in June, and then bounce in August before falling again through the rest of the year.
In December 2021, a month on from bitcoin’s all-time high, Carol Alexander, professor of finance at Sussex University, said she expected bitcoin to drop down to $10,000 “or even more” in 2022.
Bitcoin at the time had fallen about 30% from its near $69,000 record. Still, many crypto talking heads at the time were predicting further gains. Alexander was one of the rare voices going against the tide.
“If I were an investor now I would think about coming out of bitcoin soon because its price will probably crash next year,” she said at the time. Her bearish call rested on the idea that bitcoin has little intrinsic value and is mostly used for “speculation.”
Bitcoin didn’t quite slump as low as $10,000 — but Alexander is feeling good about her prediction. “Compared with others’ predictions, mine was by far the closest,” she said in emailed comments to CNBC.
The collapse of FTX, once a $32 billion crypto exchange, has shattered investor confidence in cryptocurrencies. Market players are trying to gauge the extent of damage it has caused — and how it will reshape the industry in the years to come.
Sam Bankman-Fried, FTX’s former boss who stepped down on Nov. 11, was arrested in the Bahamas last week. He has been charged by the U.S. government with wire fraud, securities fraud and money laundering.
“It’s hugely disappointing for investors, or more so devastating for investors,” said Louise Abbott, a partner at law firm Keystone Law who specializing in crypto-asset recovery and fraud.
It’s clear the FTX drama could radically reshape crypto in the years to come. Here are three big ways the industry could change.
For one, the disaster will looks certain to stir regulators into action.
Crypto as an industry is still largely unregulated, meaning investors don’t have the same protections they would have placing their funds with a licensed bank or broker.
That may be about to change. Governments in the U.S., European Union and the U.K. are taking steps to clean up the market.
If there’s no regulation, the investors are left without that protection that they need.
Louise Abbott
Partner, Keystone Law
The EU’s Markets in Crypto-Assets is the most comprehensive regulatory framework to date. It aims to reduce the risks for consumers buying crypto, making exchanges liable if they lose investors’ assets.
But MICA is not due to start until 12 months from now. Keystone Law’s Abbott said it’s important that regulators act quickly.
“People need to see that there’s steps being taken to regulate it. And I think If we are able to offer some regulation, we will build confidence,” she said. “If there’s no regulation, the investors are left without that protection that they need.”
Read more about tech and crypto from CNBC Pro
The saga has set back adoption of crypto assets by “one or two years,” according to Evgeny Gaevoy, founder and CEO of crypto market maker Wintermute.
“Everything that failed this year, if you look at Celsius, Three Arrows, FTX now — all those guys were taking the worst of both worlds because they were not completely decentralized, and they were not properly centralized either,” he said.
For Kevin de Patoul, CEO of crypto market maker Wintermute, the biggest lesson from FTX’s bankruptcy is that “you cannot have complete centralization and lack of oversight.”
“We are evolving to a world where you are going to have both centralization and decentralization,” he said. “When you do have that centralization, you need to have proper oversight and a proper balance of power.”
I don’t think all the dominoes have fallen out from the contagion. The impact that this will have is that a lot of projects actually are not going to have the funds…
Marieke Flament
CEO, Near Foundation
“The challenge for the whole space when you think about contagion is that FTX and Alameda were extremely active investors in this space,” Peter Smith, CEO of Blockchain.com, said in a CNBC-moderated talk at a crypto conference in London.
Near Foundation, which is behind a blockchain network called Near, was among the firms that took investment from FTX. Marieke Flament, Near’s CEO, said the firm had limited exposure to FTX — though the collapse was still “a surprise and a shock.”
“I don’t think all the dominoes have fallen out from the contagion,” Flament said. “The impact that this will have is that a lot of projects actually are not going to have the funds, and therefore the resources, for them to continue and develop.”
Fears have risen over the financial health of other major crypto exchanges after FTX’s failure. Since early 2020, about 900,000 bitcoins have flowed out of exchanges, according to data from CryptoQuant.
Binance, the world’s largest exchange, is facing questions about the reserves it holds to backstop customer funds. The company saw billions of dollars in outflows in the past week.
Currently, there is no reason to suspect Binance faces any risk of bankruptcy. But exchanges like Binance and Coinbase face a bleak market backdrop ahead amid falling trading volumes and account balances.
Experts believe they’ll continue to play a role — though their survival will be determined by how seriously they take risk management, governance and regulation.
“There will be exchanges that are doing things the right way and that will survive,” said Abbott.
As for tokens — bitcoin, being the longest-living digital currency, may be better positioned than its smaller rivals.
“My bet would be that bitcoin and DeFi [decentralized finance] are decoupled from the rest of crypto and actually start to have a life of its own,” Gaevoy from Wintermute told CNBC.
Despite the depressed state of crypto markets, and the toll it’s taken on investors, the digital asset industry is likely to pull through.
Proponents of “Web3,” a hypothetical blockchain-based internet, expect 2022’s crypto winter to pave the way for more innovative uses of blockchain, rather than the speculative uses crypto is associated with today.
“What we’re seeing a lot is companies having digital innovation arms or metaverse innovation arms,” Flament said. “They understand that the technology is here. It’s not going to go away.”
NFTs, or nonfungible tokens, could alter users’ relationships with properties in games and events, for example. These are digital assets that track ownership of unique virtual items on the blockchain.
“Digital assets will be an increasing part of our lives, whether that is a collectible, a ticket, value, identity,” Ian Rogers, chief experience officer at crypto wallet firm Ledger, told CNBC. “Identity could be membership … [people] using NFTs they own to get access to a particular event or something like that.”
But for many, there’s still a learning curve to overcome. “It’s hard creating wallets and storing keys and going through different platforms,” Cordel Robbin-Coker, CEO of mobile games firm Carry1st, told CNBC at the Slush startup conference in Helsinki, Finland.
Robbin-Coker compared Web3 today with the internet in the early 90s. “It was clunky. You had dial-up, it took four minutes to get on, the original web browsers were not very intuitive,” he said.
“It’s really the early adopters that really engage at that stage. But over time, companies build smoother interfaces. And they cut steps out of it.”
Monitors display Coinbase signage during the company’s initial public offering (IPO) at the Nasdaq MarketSite in New York, U.S., on Wednesday, April 14, 2021.
Michael Nagle | Bloomberg | Getty Images
Heading into 2022, Coinbase debtholders showed little reason for concern. Even though third-quarter earnings missed estimates, revenue at the crypto exchange had more than quadrupled from the prior year and the company was wildly profitable.
Coinbase ended last year with $7.1 billion in cash and equivalents as crypto traders swarmed to the app to get in on the boom in prices of bitcoin, ether and other digital currencies. The company was minting so much money that, in April of last year, it went public through a direct listing instead of an IPO, foregoing the opportunity to reel in a bundle of money from new investors.
Rather than raising dilutive cash through a stock sale, Coinbase tapped the bond market over the course of the year for $3.4 billion in long-term debt, choosing to pad its balance sheet with what it described as “low-cost capital.”
As 2022 nears its end, Coinbase’s debt load is looking more worrisome. Cash and equivalents dropped to $5 billion as of Sept. 30, having fallen for three straight quarters — and that was before the FTX collapse in November caused a panic across the crypto industry.
Bond holders have been running for the exits. For over a month, Coinbase notes set to mature in 2031 have been trading around 50 cents on the dollar, down from about 92 cents at the beginning of the year. The company laid off 18% of its staff in July, when CEO Brian Armstrong admitted that he’d hired too quickly and needed to cut costs “to ensure we can successfully navigate a prolonged downturn.”
Coinbase CFO Alesia Haas said in an emailed statement that the company is in a “strong capital position” and does “not have a liquidity problem.”
For now, debt investors are in the clear. The first tranche of bonds — $1.4 billion in convertible notes — don’t mature until June 2026. But the company is projected by analysts to run up a $2.6 billion loss this year and another deficit of $1.4 billion in 2023, according to Refinitiv estimates. Bankruptcies in the industry have hit with such speed that the future has become increasingly hard to predict.
Moody’s Investors Service has placed its rating outlook for Coinbase under review for possible downgrade. The firm currently has a Ba3 rating on the corporate family, which is three notches below investment grade. It has a Ba2 rating on the bonds, one notch higher.
“They had a very strong 2020 and 2021, but those are in the rearview mirror now,” said Fadi Abdel Massih, senior analyst at Moody’s, in an interview. “The company is in a strong liquidity position, but at the same time they have to deal with a changing operating environment.”
Brian Armstrong, CEO and Co-Founder, Coinbase, speaks during the Milken Institute Global Conference on May 2, 2022. in Beverly Hills, California.
Patrick T. Fallon | AFP | Getty Images
Equity investors started bailing on Coinbase long ago, selling their positions as they saw the price of bitcoin and ether tumble and as other high-multiple tech stocks got whacked. The stock fell by at least 30% a month for three straight months starting in April, and is down 83% this year, pinning the company’s market cap under $10 billion.
Coinbase’s bond prices also dropped significantly over that stretch, reflecting the deteriorating operating environment in crypto and the number of firms being forced to exit the market. But the alarming slide came last month, when the 2031 notes fell below 50 cents on the dollar for the first time. They’re now at close to 52 cents. The yield is near 13%, just below its high. Bond yields move in the opposite direction of price.
Coinbase’s $1 billion worth of notes that mature in October 2028 are trading at about 55 cents on the dollar, up just barely from their November low and down from about 94 cents at the start of the year.
Analysts at Mizuho Securities raised additional concerns on Friday, in downgrading the firm’s rating on Coinbase shares to the equivalent of a sell from a hold. Mizuho’s stock price target of $30 is the lowest among analysts tracked by FactSet. The stock closed Monday at $42.60
Coinbase’s 2022 slump
CNBC
The Mizuho analysts flagged Coinbase’s tight relationship with Circle, the company behind the stablecoin USD Coin (USDC), as a potential emerging problem. While transaction revenue has been plummeting at all the major exchanges, Coinbase has been able to soften the blow because of a dramatic increase in revenue from its holdings of USDC.
Backed by U.S. dollars, USDC has gained value with the rise in interest rates. In the third quarter, the value of Coinbase’s USDC holdings climbed to $368.1 million from $100.1 million at the end of 2021. Net interest income soared to $101.8 million from $8.4 million a year earlier.
Mizuho estimates that roughly 80% of interest income was due to Coinbase’s relationship with Circle, which was supposed to go public through a special purpose acquisition corporation but canceled that transaction last week.
Mizuho speculates that Circle may be looking to “rethink its business model” and to eventually take advantage of the leverage it has with respect to its control over USDC.
“Any potential change to COIN’s USDC income from Circle could have an amplified adverse effect on its profitability,” the analysts wrote in a report subtitled, “Is interest income the next shoe to drop?”
In the risk factors section of its latest quarterly report, Coinbase pointed to “ongoing relationships with third parties” as an area where “operating results could fluctuate” should there be changes.
Moody’s puts Coinbase’s USDC holdings in the category of cash and cash equivalents, where the firms says the company has “financial strength.” Massih, the analyst covering Coinbase, said bond holders aren’t in a dire situation because Coinbase has enough cash on hand that it could pay off all its debt now if it so desired.
“Why would they do that?” he said, answering his own question with, “There’s no reason to do that.”
For bondholders, today isn’t what matters. Rather, they’re betting that Coinbase won’t keep bleeding cash at the rate it has over the course of the past year. To get paid back, investors don’t need revenue growth to return to the crypto hype days of 2021 — they just need to see some measure of stability.
Kris Marszalek, CEO of Crypto.com, speaking at a 2018 Bloomberg event in Hong Kong, China.
Paul Yeung | Bloomberg | Getty Images
Kris Marszalek wants everyone to know that his company, Crypto.com, is safe and in good hands. His TV appearances and tweets make that clear.
It’s an understandable approach. The crypto markets have been in freefall for much of the year, with high-profile names spiraling into bankruptcy. When FTX failed last month just after founder Sam Bankman-Fried said the crypto exchange’s assets were fine, trust across the industry evaporated.
Marszalek, who has operated out of Asia for over a decade, subsequently assured clients that their funds belong to them and are readily available, in contrast to FTX, which used client money for all sorts of risky and allegedly fraudulent activities, according to court filings and legal experts.
Bankman-Fried has denied knowing about any fraud. Regardless, FTX clients are now out billions of dollars with bankruptcy proceedings underway.
Crypto.com, one of the world’s largest cryptocurrency exchanges, may well be in fine health. After the FTX collapse, the company published its unaudited, partial proof of reserves. The release revealed that nearly 20% of customer funds were in a meme token called shiba inu, an amount eclipsed only by its bitcoin allocation. That percentage has dropped since the initial release to about 15%, according to Nansen Analytics.
Marszalek said in a Nov. 14 livestream on YouTube that the wallet addresses were representative of customer holdings.
While no evidence has emerged of wrongdoing at Crypto.com, Marszalek’s business history is replete with red flags. Following the collapse of a prior company in 2009, a judge called Marszalek’s testimony unreliable. His business activities before 2016 — the year he founded what would become Crypto.com — involved a multimillion-dollar settlement over claims of defective products, corporate bankruptcy and an e-commerce company that failed shortly after a blowout marketing campaign left sellers unable to access their money.
Court records, public filings and offshore database leaks reveal a businessman who moved from industry to industry, rebooting quickly when a venture would fail. He started in manufacturing, producing data storage products for white label sale, then moved into e-commerce, and finally into crypto.
CNBC reached out to Crypto.com with information on Marszalek’s past and asked for an interview. The company declined to make Marszalek available and sent a statement indicating that there was “never a finding of wrongdoing under Kris’s leadership” at his prior ventures.
After CNBC’s requests, Marszalek published a 16-tweet thread, beginning by telling his followers: “More FUD targeting Crypto.com is coming, this time about a business failure I had very early in my career. I have nothing to hide, and am proud of my battle scars, so here’s the unfiltered story.” FUD is short for fear, uncertainty and doubt and is a popular phrase among crypto executives.
In the tweets, Marszalek described his past personal bankruptcy and the abrupt closure of his e-commerce business as learning experiences, and added that “startups are hard,” and “you will fail over and over again.”
Marszalek founded a manufacturing firm called Starline in 2004, according to his LinkedIn profile. Based in Hong Kong, with a plant in mainland China, Starline built hardware products like solid state drives, hard drives, and USB flash drives. Marzsalek’s LinkedIn page says he grew the business into a 400-person company with $81 million in sales in three years.
There was much more to the story.
Marszalek owned 50% of the company, sharing ownership and control with another Hong-Kong based individual, who partnered with Marszalek in multiple ventures.
In 2009, Marzsalek’s company settled with a client over a faulty shipment of flash drives. The $5 million settlement consisted of a $1 million upfront payment and a $4 million credit note to the client, Dexxon. The negotiations over the settlement began at some point after 2007.
CNBC was unable to locate Marszalek’s business partner.
Court documents don’t show whether Starline made good on either the $1 million “lump sum settlement fee” or the $4 million credit note. Starline was forced into bankruptcy proceedings by the end of 2009, court records from 2013 show.
Over the course of 2008 and 2009, Marszalek and his partner were transferred nearly $3 million in payments from Starline, according to the documents.
Over $1 million was paid out to Marszalek personally in what the court said were “impugned payments.” His partner took home nearly $1.9 million in similar payments.
“It appears that there was a concerted effort to strip the cash from Starline,” Judge Anthony Chan later wrote in a court filing.
Some $300,000 was paid by Starline to a British Virgin Islands holding company called Tekram, the document says. That money went through Marszalek, and Tekram eventually returned it to Starline.
By 2009, Starline had collapsed. Marszalek’s representatives told CNBC in a statement that Starline went under because customers failed to pay back credit lines that the company had extended them during the financial crisis of 2007 and 2008. Starline borrowed that money from Standard Chartered Bank of Hong Kong (SCB).
“The bank then turned to Starline and the co-founders to repay the lines of credit and filed for liquidation of the company,” the statement said.
Starline owed $2.2 million to SCB.
Marszalek said on Twitter that he had personally guaranteed the loans from the bank to Starline. As a result, when the bank forced Starline into liquidation, Marszalek and his partner were forced into bankruptcy as well.
The court found that the $300,000 transfer to Tekram was “in truth a payment” to Marszalek.
Marszalek said the money in the Tekram transfer was repayment of a debt Starline owed to Tekram. The judge described that claim as “inherently incredible.”
“There is no explanation why the repayment had to be channelled through him or why the money was later returned to the debtor,” the judge said.
Bankruptcy didn’t sever the ties between Marszalek and his partner or keep them out of business for long. At the same time Starline was shutting down, the pair set up an offshore holding company called Middle Kingdom Capital.
Middle Kingdom was established in the Cayman Islands, a notorious hub for tax shelters. The connection between Middle Kingdom and Marszalek and his partner, who each held half of the firm, was exposed in the 2017 Paradise Papers leak. The Paradise Papers, along with the Panama Papers, contained documents about a web of offshore holdings in tax havens. They were published by the International Consortium of Investigative Journalists.
Middle Kingdom was the owner of Buy Together, which in turn owned BeeCrazy, an e-commerce venture that Marszalek had started pursuing. Similar to Groupon, retailers could use BeeCrazy to sell their products at steep discounts. BeeCrazy would process payments, take a commission on goods sold, and distribute funds to the retailers.
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Sellers and buyers flocked to the site, drawn in by considerable discounts on everything from spa passes to USB power banks. Buy Together drew attention from an Australian conglomerate called iBuy, which was on the verge of an IPO and pursued an acquisition of BeeCrazy as part of a plan to build out an Asian e-commerce empire.
Court filings and Australian disclosures show that to seal the deal, Marszalek and his partner had to remain employed by iBuy for three years and clear their individual bankruptcies in Hong Kong court. The partner’s uncle came forward in front of the court to help his nephew and Marszalek clear their names and debts, filings show.
While the judge called the uncle’s involvement “suspicious,” he allowed him to repay the debt. As a result, both Marszalek and his partner’s bankruptcies were annulled. A few months later, in October 2013, BeeCrazy was purchased by iBuy for $21 million in cash and stock, according to S&P Capital IQ.
A month and a half after buying BeeCrazy, iBuy went public. Marszalek was required to remain until 2016.
The company struggled after its IPO as competition picked up from bigger players like Alibaba. Marszalek was eventually promoted to CEO of iBuy in August 2014, according to filings with Australian regulators.
Alibaba headquarters in Hangzhou, China.
Bloomberg | Bloomberg | Getty Images
Marszalek renamed iBuy as Ensogo in an effort to retool the company. Ensogo continued to suffer, running up a loss in 2015 equal to over $50 million.
By the following year, Ensogo had already reportedly laid off half its staff. In June 2016, Ensogo closed down operations. The same day, Marszalek resigned.
After the sudden shuttering of Ensogo, sellers on the site told the South China Morning Press that they never received proceeds from items they’d already delivered as part of a final blowout sale.
“[Many] sellers had already sold their goods but had yet to receive any money from the platform at that time, their money thus vanished altogether with the online shopping platform,” according to translated testimony from a representative for a group of sellers before Hong Kong’s Legislative Council.
One seller told Hong Kong’s The Standard that she lost more than $25,000 in the process.
“It seems to us that they wanted to make huge business from us one last time before they closed down,” the seller told the publication.
Marszalek’s representative acknowledged to CNBC that “the shutdown angered many customers and consumers” and said that was “one of the reasons Kris was opposed to the decision.”
Marszalek moved quickly on to his next thing. The same month he resigned from Ensogo, Foris Limited was incorporated, marking Marszalek’s entry into the crypto market.
Foris’ first foray into crypto was with Monaco, an early exchange.
With a leadership team composed entirely of former Ensogo employees, Monaco told prospective investors they could expect three million customers and $169 million in revenue within five years.
The exterior of Crypto.com Arena on January 26, 2022 in Los Angeles, California.
Rich Fury | Getty Images
By 2021, the company had smashed its own goals, crossing the 10 million user mark. Revenue for the year topped $1.2 billion, according to the Financial Times. That’s when crypto was soaring, with bitcoin climbing from about $7,300 at the beginning of 2020 to a peak of over $68,000 in November of 2021.
The company inked a deal with LeBron James for a Super Bowl ad, aired a prior commercial with Matt Damon and spent a reported $700 million to put its name on the arena that’s home to the Los Angeles Lakers. It’s also a sponsor of the World Cup in Qatar.
The market’s plunge in 2022 has been disastrous for all the major players and goes well beyond the FTX collapse and the numerous hedge funds and lenders that have liquidated. Coinbase’s stock price is down84%, and the company laid off 18% of its staff. Kraken recently cut 30% of its workforce.
Crypto.com has laid off hundreds of employees in recent months, according to multiple reports. Questions percolated about the company in November after revelations that the prior month Crypto.com had sent more than 80% of its ether holdings, or about $400 million worth of the cryptocurrency, to Gate.io, another crypto exchange. The company only admitted the mistake after the transaction was exposed thanks to public blockchain data. Crypto.com said the funds were recovered.
Marszalek went on CNBC on Nov. 15, following the FTX failure, to try and reassure customers and the public that the company has plenty of money, that it doesn’t use leverage and that withdrawal demands had normalized after spiking.
Still, the market cap for Cronos, Crypto.com’s native token, has shrunk from over $3 billion on Nov. 8 to a little over $1.6 billion today, reflecting a loss of confidence among a key group of investors. During the crypto mania at this time last year, Cronos was worth over $22 billion.
Cronos has stabilized of late, hovering around six cents for the last three weeks. Bitcoin prices have been flat for about four weeks.
Marszalek’s narrative is that he’s learned from past mistakes and that “early failures made me who I am today,” he wrote in his tweet thread.
He’s asking customers to believe him.
“I’m proud of my scar tissue and the way I persevered in the face of adversity,” he tweeted. “Failure taught me humility, how to not overextend, and how to plan for the worst.”
Correction: Crypto.com’s Super Bowl ad featured LeBron James, not Matt Damon. The commercial with Damon came out in late 2021.
Clarification: This story has been updated to more accurately reflect where in Asia Marszalek has operated.
FTX CEO Sam Bankman-Fried attends a press conference at the FTX Arena in downtown Miami on Friday, June 4, 2021.
Matias J. Ocner | Miami Herald | Tribune News Service | Getty Images
Sam Bankman-Fried, the disgraced former CEO of FTX — the bankrupt cryptocurrency exchange that was worth $32 billion a few weeks ago — has a real knack for self-promotional PR. For years, he cast himself in the likeness of a young boy genius turned business titan, capable of miraculously growing his crypto empire as other players got wiped out. Everyone from Silicon Valley’s top venture capitalists to A-list celebrities bought the act.
But during Bankman-Fried’s press junket of the last few weeks, the onetime wunderkind has spun a new narrative – one in which he was simply an inexperienced and novice businessman who was out of his depth, didn’t know what he was doing, and crucially, didn’t know what was happening at the businesses he founded.
It is quite the departure from the image he had carefully cultivated since launching his first crypto firm in 2017 – and according to former federal prosecutors, trial attorneys and legal experts speaking to CNBC, it recalls a classic legal defense dubbed the “bad businessman strategy.”
At least $8 billion in customer funds are missing, reportedly used to backstop billions in losses at Alameda Research, the hedge fund he also founded. Both of his companies are now bankrupt with billions of dollars worth of debt on the books. The CEO tapped to take over, John Ray III, said that “in his 40 years of legal and restructuring experience,” he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” This is the same Ray who presided over Enron’s liquidation in the 2000s.
In America, it is not a crime to be a lousy or careless CEO with poor judgement. During his recent press tour from a remote location in the Bahamas, Bankman-Fried really leaned into his own ineptitude, largely blaming FTX’s collapse on poor risk management.
At least a dozen times in a conversation with Andrew Ross Sorkin, he appeared to deflect blame to Caroline Ellison, his counterpart (and one-time girlfriend) at Alameda. He says didn’t know how extremely leveraged Alameda was, and that he just didn’t know about a lot of things going on at his vast empire.
Bankman-Fried admitted he had a “bad month,” but denied committing fraud at his crypto exchange.
Fraud is the kind of criminal charge that can put you behind bars for life. With Bankman-Fried, the question is whether he misled FTX customers to believe their money was available, and not being used as collateral for loans or for other purposes, according to Renato Mariotti, a former federal prosecutor and trial attorney who has represented clients in derivative-related claims and securities class actions.
“It sure looks like there’s a chargeable fraud case here,” said Mariotti. “If I represented Mr. Bankman-Fried, I would tell him he should be very concerned about prison time. That it should be an overriding concern for him.”
But for the moment, Bankman-Fried appears unconcerned with his personal legal exposure. When Sorkin asked him if he was concerned about criminal liability, he demurred.
“I don’t think that — obviously, I don’t personally think that I have — I think the real answer is it’s not — it sounds weird to say it, but I think the real answer is it’s not what I’m focusing on,” Bankman-Fried told Sorkin. “It’s — there’s going to be a time and a place for me to think about myself and my own future. But I don’t think this is it.”
Comments such as these, paired with the lack of apparent action by regulators or authorities, have helped inspire fury among many in the industry – not just those who lost their money. The spectacular collapse of FTX and SBF blindsided investors, customers, venture capitalists and Wall Street alike.
Bankman-Fried did not respond to a request for comment. Representatives for his former law firm, Paul, Weiss, did not immediately respond to comment. Semafor reported earlier that Bankman-Fried’s new attorney was Greg Joseph, a partner at Joseph Hage Aaronson.
Both of Bankman-Fried’s parents are highly respected Stanford Law School professors. Semafor also reported that another Stanford Law professor, David Mills, was advising Bankman-Fried.
Mills, Joseph and Bankman-Fried’s parents did not immediately respond to requests for comment.
Bankman-Fried could face a host of potential charges – civil and criminal – as well as private lawsuits from millions of FTX creditors, legal experts told CNBC.
For now, this is all purely hypothetical. Bankman-Fried has not been charged, tried, nor convicted of any crime yet.
Richard Levin is a partner at Nelson Mullins Riley & Scarborough, where he chairs the fintech and regulation practice. He’s been involved in the fintech industry since the early 1990s, and has represented clients before the Securities and Exchange Commission, Commodity Futures Trading Commission and Congress. All three of those entities have begun probing Bankman-Fried.
There are three different, possibly simultaneous legal threats that Bankman-Fried faces in the United States alone, Levin told CNBC.
First is criminal action from the U.S. Department of Justice, for potential “criminal violations of securities laws, bank fraud laws, and wire fraud laws,” Levin said.
A spokesperson for the U.S. Attorney’s Office for the Southern District of New York declined to comment.
Securing a conviction is always challenging in a criminal case.
Mariotti, the former federal prosecutor is intricately familiar with how the government would build a case. He told CNBC, “prosecutors would have to prove beyond a reasonable doubt that Bankman-Fried or his associates committed criminal fraud.”
“The argument would be that Alameda was tricking these people into getting their money so they could use it to prop up a different business,” Mariotti said.
“If you’re a hedge fund and you’re accepting customer funds, you actually have a fiduciary duty [to the customer],” Mariotti said.
Prosecutors could argue that FTX breached that fiduciary duty by allegedly using customer funds to artificially stabilize the price of FTX’s own FTT coin, Mariotti said.
But intent is also a factor in fraud cases, and Bankman-Fried insists he didn’t know about potentially fraudulent activity. He told Sorkin that he “didn’t knowingly commingle funds.”
“I didn’t ever try to commit fraud,” Bankman-Fried said.
Beyond criminal charges, Bankman-Fried could also be facing civil enforcement action. “That could be brought by the Securities Exchange Commission, and the Commodity Futures Trading Commission, and by state banking and securities regulators,” Levin continued.
“On a third level, there’s also plenty of class actions that can be brought, so there are multiple levels of potential exposure for […] the executives involved with FTX,” Levin concluded.
The Department of Justice is most likely to pursue criminal charges in the U.S. The Wall Street Journal reported that the DOJ and the SEC were both probing FTX’s collapse, and were in close contact with each other.
That kind of cooperation allows for criminal and civil probes to proceed simultaneously, and allows regulators and law enforcement to gather information more effectively.
But it isn’t clear whether the SEC or the CFTC will take the lead in securing civil damages.
An SEC spokesperson said the agency does not comment on the existence or nonexistence of a possible investigation. The CFTC did not immediately respond to a request for comment.
“The question of who would be taking the lead there, whether it be the SEC or CFTC, depends on whether or not there were securities involved,” Mariotti, the former federal prosecutor, told CNBC.
SEC Chairman Gary Gensler, who met with Bankman-Fried and FTX executives in spring 2022, has said publicly that “many crypto tokens are securities,” which would make his agency the primary regulator. But many exchanges, including FTX, have crypto derivatives platforms that sell financial products like futures and options, which fall under the CFTC’s jurisdiction.
“For selling unregistered securities without a registration or an exemption, you could be looking at the Securities Exchange Commission suing for disgorgement — monetary penalties,” said Levin, who’s represented clients before both agencies.
“They can also sue, possibly, claiming that FTX was operating an unregistered securities market,” Levin said.
Then there are the overseas regulators that oversaw any of the myriad FTX subsidiaries.
The Securities Commission of The Bahamas believes it has jurisdiction, and went as far as to file a separate case in New York bankruptcy court. That case has since been folded into FTX’s main bankruptcy protection proceedings, but Bahamian regulators continue to investigate FTX’s activities.
Court filings allege that Bahamian regulators have moved customer digital assets from FTX custody into their own. Bahamian regulators insist that they’re proceeding by the book, under the country’s groundbreaking crypto regulations — unlike many nations, the Bahamas has a robust legal framework for digital assets.
But crypto investors aren’t sold on their competence.
“The Bahamas clearly lack the institutional infrastructure to tackle a fraud this complex and have been completely derelict in their duty,” Castle Island Ventures partner Nic Carter told CNBC. (Carter was not an FTX investor, and told CNBC that his fund passed on early FTX rounds.)
“There is no question of standing. U.S. courts have obvious access points here and numerous parts of Sam’s empire touched the U.S. Every day the U.S. leaves this in the hands of the Bahamas is a lost opportunity,” he continued.
Investors who have lost their savings aren’t waiting. Class-action suits have already been filed against FTX endorsers, like comedian Larry David and football superstar Tom Brady. One suit excoriated the celebrity endorsers for allegedly failing to do their “due diligence prior to marketing [FTX] to the public.”
FTX’s industry peers are also filing suit against Bankman-Fried. BlockFi sued Bankman-Fried in November, seeking unnamed collateral that the former billionaire provided for the crypto lending firm.
FTX and Bankman-Fried had previously rescued BlockFi from insolvency in June, but when FTX failed, BlockFi was left with a similar liquidity problem and filed for bankruptcy protection in New Jersey.
Bankman-Fried has also been sued in Florida and California federal courts. He faces class-action suits in both states over “one of the great frauds in history,” a California court filing said.
The largest securities class-action settlement was for $7.2 billion in the Enron accounting fraud case, according to Stanford research. The possibility of a multibillion-dollar settlement would come on top of civil and criminal fines that Bankman-Fried faces.
But the onus should be on the U.S. government to pursue Bankman-Fried, Carter told CNBC, not on private investors or overseas regulators.
“The U.S. isn’t shy about using foreign proxies to go after Assange — why in this case have they suddenly found their restraint?”
Wire fraud is the most likely criminal charge Bankman-Fried would face. If the DOJ were able to secure a conviction, a judge would look to several factors to determine how long to sentence him.
Braden Perry was once a senior trial lawyer for the CFTC, FTX’s only official U.S. regulator. He’s now a partner at Kennyhertz Perry, where he advises clients on anti-money laundering, compliance and enforcement issues.
Based on the size of the losses, if Bankman-Fried is convicted of fraud or other charges, he could be behind bars for years — potentially for the rest of his life, Perry said. But the length of any potential sentence is hard to predict.
“In the federal system, each crime always has a starting point,” Perry told CNBC.
Federal sentencing guidelines follow a numeric system to determine the maximum and minimum allowable sentence, but the system can be esoteric. The scale, or “offense level,” starts at one, and maxes out at 43.
A wire fraud conviction rates as a seven on the scale, with a minimum sentence ranging from zero to six months.
But mitigating factors and enhancements can alter that rating, Perry told CNBC.
“The dollar value of loss plays a significant role. Under the guidelines, any loss above $550 million adds 30 points to the base level offense,” Perry said. FTX customers have lost billions.
“Having 25 or more victims adds 6 points, [and] use of certain regulated markets adds 4,” Perry continued.
In this hypothetical scenario, Bankman-Fried would max out the scale at 43, based on those enhancements. That means Bankman-Fried could be facing life in federal prison, without the possibility of supervised release, if he’s convicted on a single wire fraud offense.
But that sentence can be reduced by mitigating factors – circumstances that would lessen the severity of any alleged crimes.
“In practice, many white-collar defendants are sentenced to lesser sentences than what the guidelines dictate,” Perry told CNBC, Even in large fraud cases, that 30-point enhancement previously mentioned can be considered punitive.
Bankman-Fried could also face massive civil fines. Bankman-Fried was once a multibillionaire, but claimed he was down to his last $100,000 in a conversation with CNBC’s Sorkin at the DealBook Summit last week.
“Depending on what is discovered as part of the investigations by law enforcement and the civil authorities, you could be looking at both heavy monetary penalties and potential incarceration for decades,” Levin told CNBC.
In the most famous fraud case in recent years, Bernie Madoff was arrested within 24 hours of federal authorities learning of his multibillion-dollar Ponzi scheme. But Madoff was in New York and admitted to his crime on the spot.
The FTX founder is in the Bahamas and hasn’t admitted wrongdoing. Short of a voluntary return, any efforts to apprehend him would require extradition.
With hundreds of subsidiaries and bank accounts, and thousands of creditors, it’ll take prosecutors and regulators time to work through everything.
Similar cases “took years to put together,” said Mariotti. At FTX, where record keeping was spotty at best, collecting enough data to prosecute could be much harder. Expenses were reportedly handled through messaging software, for example, making it difficult to pinpoint how and when money flowed out for legitimate expenses.
In Enron’s bankruptcy, senior executives weren’t charged until nearly three years after the company went under. That kind of timeline infuriates some in the crypto community.
“The fact that Sam is still walking free and unencumbered, presumably able to cover his tracks and destroy evidence, is a travesty,” said Carter.
But just because law enforcement is tight-lipped, that doesn’t mean they’re standing down.
“People should not jump to the conclusion that something is not happening just because it has not been publicly disclosed,” Levin told CNBC.
Could he just disappear?
“That’s always a possibility with the money that someone has,” Perry said, although Bankman-Fried claims he’s down to one working credit card. But Perry doesn’t think it’s likely. “I believe that there has been likely some negotiation with his attorneys, and the prosecutors and other regulators that are looking into this, to ensure them that when the time comes […] he’s not fleeing somewhere,” Perry told CNBC.
In the meantime, Bankman-Fried won’t be resting easy as he waits for the hammer to drop. Rep. Maxine Waters extended a Twitter invitation for him to appear before a Dec. 13 hearing.
Bankman-Fried responded on Twitter, telling Waters that if he understands what happened at FTX by then, he’d appear.
Correction: Caroline Ellison is Bankman-Fried’s counterpart at Alameda. An earlier version misspelled her name.
Tim Draper, founder of Draper Associates, onstage at the Web Summit 2022 tech conference.
Ben McShane | Sportsfile via Getty Images
Venture capitalist Tim Draper thinks bitcoin will hit $250,000 a coin by the middle of 2023, even after a bruising year for the cryptocurrency marked by industry failures and sinking prices.
Draper previously predicted that bitcoin would top $250,000 by the end of 2022, but in early November, at the Web Summit tech conference in Lisbon, he said it would take until June 2023 for this to materialize.
He reaffirmed this position Saturday when asked how he felt about his price call following the collapse of FTX.
“I have extended my prediction by six months. $250k is still my number,” Draper told CNBC via email.
Bitcoin would need to rally nearly 1,400% from its current price of around $17,000 for Draper’s prediction to come true. The cryptocurrency has plunged over 60% since the start of the year.
Digital currencies are in the doldrums as tighter monetary policy from the Fed and a chain reaction of bankruptcies at major industry firms including Terra, Celsius and FTX have put intense pressure on prices.
FTX’s demise has also worsened an already severe liquidity crisis in the industry. Crypto exchange Gemini and lender Genesis are among the firms said to be impacted by the fallout from FTX’s insolvency.
Last week, veteran investor Mark Mobius told CNBC that bitcoin could crash to $10,000 next year, a more than 40% plunge from current prices. The co-founder of Mobius Capital Partners correctly called the drop to $20,000 this year.
Nevertheless, Draper is convinced that bitcoin, the world’s largest cryptocurrency, is set to rise in the new year.
“I expect a flight to quality and decentralized crypto like bitcoin, and for some of the weaker coins to become relics,” he told CNBC.
Draper, the founder of Draper Associates, is one of Silicon Valley’s best-known investors. He made successful bets on tech companies including Tesla, Skype and Baidu.
In 2014, Draper purchased 29,656 bitcoins confiscated by U.S. Marshals from the Silk Road dark web marketplace for $18.7 million. That year, he predicted the price of bitcoin would go to $10,000 in three years. Bitcoin went on to climb close to $20,000 in 2017.
Some of Draper’s other bets have soured, however. He invested in Theranos, a health startup that falsely claimed it was able to detect diseases with a few drops of blood. Elizabeth Holmes, Theranos’ founder, has been sentenced to 11 years in prison for fraud.
Draper’s rationale for bitcoin’s breakout next year is that there remains a massive untapped demographic for bitcoin: women.
“My assumption is that, since women control 80% of retail spending and only 1 in 7 bitcoin wallets are currently held by women, the dam is about to break,” Draper said.
Crypto has long had a gender disparity problem. According to a survey conducted for CNBC and Acorns by Momentive, twice as many men as women invest in digital assets (16% of men vs. 7% of women).
“Retailers will save roughly 2% on every purchase made in bitcoin vs dollars,” Draper added. “Once retailers realize that that 2% can double their profits, bitcoin will be ubiquitous.”
Payment middlemen such as Visa and Mastercard currently charge fees as high as 2% each time credit cardholders use their card to pay for something. Bitcoin offers a way for people to bypass the middlemen.
However, using the digital coin for everyday spending is tough, since its price is very volatile and the coin is not widely accepted as currency.
“When people can buy their food, clothing and shelter all in bitcoin, they will have no use for centralized banking fiat dollars,” Draper said.
“Management of fiat is centralized and erratic. When a politician decides to spend $10 trillion, your dollars become worth about 82 cents. Then the Fed needs to raise rates to make up for the spend, and those arbitrary centralized decisions create an inconsistent economy,” he added. Fiat currencies derive their worth from their issuing government, unlike cryptocurrencies.
Meanwhile, the next so-called bitcoin halving — which cuts the bitcoin rewards to bitcoin miners — in 2024 will also boost the cryptocurrency, according to Draper, as it chokes the supply over time. The total number of bitcoins that will ever be mined is capped at 21 million.
The bitcoin logo displayed on a smartphone with euro banknotes in the backgrouund.
Andrea Ronchini | NurPhoto via Getty Images
The European Central Bank gave a strong critique of bitcoin on Wednesday, saying the cryptocurrency is on a “road to irrelevance.”
In a blogpost titled “Bitcoin’s last stand,” ECB Director General Ulrich Bindseil and Analyst Jürgen Schaff said that, for bitcoin’s proponents, the apparent stabilization in its price this week “signals a breather on the way to new heights.”
“More likely, however, it is an artificially induced last gasp before the road to irrelevance — and this was already foreseeable before FTX went bust and sent the bitcoin price to well below USD16,000,” they wrote.
Bitcoin topped $17,000 Wednesday, marking a two-week high for the world’s largest digital coin. However, it struggled to maintain that level, falling slightly to $16,875. Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno, warned that the bounce is likely just a bear market rally and would not be sustained. “This is just a bearish retest,” he told CNBC.
The remarks from the ECB officials are timely, with the crypto industry reeling from one of its most catastrophic failures in recent history — the downfall of FTX, an exchange once valued at $32 billion. And the market has been largely down in the dumps this year amid higher interest rates from the Federal Reserve.
Bindseil and Schaff said that bitcoin didn’t fit the mold of an investment and wasn’t suitable as a means of payment, either.
“Bitcoin’s conceptual design and technological shortcomings make it questionable as a means of payment: real Bitcoin transactions are cumbersome, slow and expensive,” they wrote. “Bitcoin has never been used to any significant extent for legal real-world transactions.”
“Bitcoin is also not suitable as an investment. It does not generate cash flow (like real estate) or dividends (like equities), cannot be used productively (like commodities) or provide social benefits (like gold). The market valuation of Bitcoin is therefore based purely on speculation,” they added.
Analysts say that FTX’s insolvency is likely to hasten regulation of digital currencies. In the European Union, a new law called Markets in Crypto Assets, or MiCA, is expected to harmonize regulation of digital assets across the bloc.
Bindseil and Schaff said it was important not to mistake regulation as a sign of approval.
“The belief that space must be given to innovation at all costs stubbornly persists,” they said.
“Firstly, these technologies have so far created limited value for society — no matter how great the expectations for the future. Secondly, the use of a promising technology is not a sufficient condition for an added value of a product based on it.”
They also raised concerns with bitcoin’s poor environmental credentials. The cryptocurrency’s technical underpinnings are such that it requires a massive amount of computing power in order to verify and approve new transactions. Ethereum, the network behind bitcoin rival ether, recently transitioned to a new framework that backers say would cut its energy consumption by more than 99%.
“This inefficiency of the system is not a flaw but a feature,” Bindseil and Schaff said. “It is one of the peculiarities to guarantee the integrity of the completely decentralised system.”
It’s not the first time the ECB has raised doubts about digital currencies. ECB President Christine Lagarde in May said she thinks cryptocurrencies are “worth nothing.” Her comments came on the back of a separate scandal for the industry — the multibillion-dollar implosion of so-called stablecoin terraUSD.
Binance’s Co-founder & CEO Changpeng Zhao has given several interviews discussing the outlook for cryptocurrency following a turbulent couple of weeks in the market.
NurPhoto / Contributor / Getty Images
Cryptocurrency exchange Binance on Thursday announced new details about its industry recovery fund, which aims to prop up struggling players in the wake of FTX’s calamitous bankruptcy.
In a blogpost, Binance said it will devote $1 billion in initial commitments to the recovery fund. It may increase that amount to $2 billion at a point in time in the future “if the need arises,” the company added.
It has also received $50 million in commitments from crypto-native investment firms including Jump Crypto, Polygon Ventures, and Animoca Brands.
Binance CEO Changpeng Zhao shared the public wallet address showing its initial commitment and said: “We do this transparently.” Public blockchain data reviewed by CNBC showed a balance of around $1 billion in Binance’s own BUSD stablecoin.
BUSD is a stablecoin issued by blockchain infrastructure firm Paxos and is approved and regulated by the New York State Department of Financial Services, according to Paxos’ website.
The fund is an attempt by Binance to keep the crypto industry afloat after controversial entrepreneur Sam Bankman-Fried’s exchange FTX filed for bankruptcy earlier this month.
Zhao has emerged as a new savior-like figure for the ailing industry, filling a gap left by Bankman-Fried, whose firm had bought or invested in a number of beleaguered crypto firms — from Voyager Digital to BlockFi — prior to its collapse.
FTX’s failure was triggered in part by a tweet posted by Binance’s CEO which drew attention to a CoinDesk report raising questions over its accounting. Since FTX’s rapid winddown two weeks ago, investors have fretted over a possible crypto contagion affecting every corner of the industry.
In the first court hearing for the bankruptcy case on Tuesday, a lawyer for the company gave a damning verdict of FTX and its leadership, saying the company was run as the “personal fiefdom” of Bankman-Fried.
Binance said the vehicle “is not an investment fund” and is intended to support companies and projects that, “through no fault of their own, are facing significant, short term, financial difficulties.” Zhao has said previously it is his intention to prevent further “cascading contagion effects” stemming from FTX’s collapse.
Binance said it anticipates the program will last around six months. It is accepting applications from investors to contribute additional funds.
Binance said it is “flexible on the investment structure” and is accepting contributions in tokens, cash and debt. “We expect individual situations to require tailored solutions,” the company added.
Around 150 companies have already applied for support from the fund, Binance said.
Crypto markets didn’t react significantly to the news. In the past hour, bitcoin was up about 0.2%, while ether was trading flat for the session.
Thin trading volumes are expected in the U.S. as Americans celebrate the Thanksgiving holiday.
In this photo illustration of the ripple cryptocurrency ‘altcoin’ sits arranged for a photograph on April 25, 2018 in London, England.
Jack Taylor | Getty Images News | Getty Images
U.S.-based crypto company Ripple no longer derives most of its income from America and is looking to expand its reach in Europe, its top lawyer said.
Speaking in an interview with CNBC earlier this week, Ripple General Counsel Stuart Alderoty said that “effectively, Ripple is operating outside of the U.S.” today due to the fallout from its extensive legal fight with the Securities and Exchange Commission.
“Essentially, its customers and its revenue are all driven outside of the U.S., even though we still have a lot of employees inside of the U.S.,” he added.
At the same time, Ripple is expanding its presence in Europe.
The startup has two employees on the ground in the Republic of Ireland currently. It is seeking a virtual asset service provider (VASP) license from the Irish central bank so that it can “passport” its services throughout the Eurpean Union via an entity based there, Alderoty told CNBC.
Ripple also plans to file an application for an electronic money license in Ireland “shortly.” Its commitment to invest in Europe comes despite a deep downturn in crypto markets that’s been referred to as “crypto winter.”
The Irish central bank previously handed a VASP license to crypto exchange Gemini.
Ripple, which helps financial institutions move money around the world using blockchain technology, has over 750 employees globally, with roughly half of them based in the U.S. About 60 are based in its London office, which Alderoty was visiting this week during a trip to the U.K. for its annual Swell event.
In 2020, the U.S. Securities and Exchange Commission initiated a lawsuit against Ripple alleging the company and its executives illegally sold XRP, a cryptocurrency its founders created in 2012, to investors without first registering it as a security.
Ripple disputes the claim, saying the token should not be considered an investment contract and is used in its business to facilitate cross-border transactions between banks and other financial institutions.
Alderoty said he expects a ruling on the case to arrive in the first half of 2023. Final legal briefs are due by Nov. 30, after which a judge can either make a ruling or refer it to a jury trial if they find there are any issues of disputed fact.
“We are at the beginning of the end of the process in our case,” Alderoty said.
As part of the proceedings, Ripple fought to obtain documents related to a June 2018 speech from former SEC official Bill Hinman, which it says has aided its case. In the speech, Hinman says that sales of ether, a rival token, “are not securities transactions.”
Despite its tense dispute with the SEC, Ripple is still “work very closely with policymakers in the U.S.,” Alderoty said.
XRP was once the third-largest cryptocurrency, commanding a $120 billion market value in early 2018. It has dropped sharply since, however, amid U.S. regulatory scrutiny and a wider downturn in bitcoin and other digital currencies.
Last week, the shock collapse of Sam Bankman-Fried’s crypto exchange FTX sent cryptocurrencies into a tailspin. Bankman-Fried’s investment firm allegedly used FTX client funds to make risky trades, CNBC reported previously. The company spiraled into a liquidity crisis as customers demanded withdrawals and rival exchange Binance scrapped its nonbinding agreement to buy the company.
Bankman-Fried has said he got “overconfident” and “careless” as he grew FTX into a $32 billion juggernaut. He said that, to the best of his knowledge, he thought FTX had built up around $5 billion of leverage, when in actuality it was around $13 billion.
Alderoty said FTX’s bankruptcy was “a call to action for responsible economic centers to work to get it right.”
On Wednesday, Ripple CEO Brad Garlinghouse told CNBC that the idea that crypto is not regulated is “overstated.” But, he added, “transparency builds trust.”
“Crypto has never just been sunshine and roses and as an industry, it needs to mature,” Garlinghouse said on CNBC’s “Squawk Box Europe.”
Ripple is unlikely to refer to the FTX collapse and how it was handled by regulators in its case, Alderoty added.
Some of the confusion surrounding XRP stems from the company’s part ownership of the token. Ripple previously held as much as 60% of the XRP tokens in circulation. It has since reduced that amount to below half, or 49%, according to Alderoty.
Ripple generates a chunk of its sales by releasing its supply of XRP on the open market. For the last three years, it only has only sold XRP to enterprise customers rather than retail traders, Alderoty said.
As a private company, Ripple doesn’t disclose its revenues publicly. This year, the firm processed $10 billion in cross-border transactions with payment providers and other financial institutions using XRP, a token it is closely associated with.
Ripple, the company, was last valued by investors at $15 billion. XRP has a market capitalization of $19 billion, according to CoinMarketCap data.
Ripple’s European expansion drive comes in anticipation of the EU’s MiCA crypto regulations going into effect in the coming years. MiCA seeks to align rules on crypto assets across the 27-member bloc. It was passed by EU lawmakers earlier this year.
The EU has said it may still need to come up with a separate regime for nonfungible tokens, or NFTs, a specific type of digital asset that tracks ownership of art and other assets on the blockchain.
“I think MiCA’s a very good start,” Alderoty said.
The U.K. is also a priority. Ripple on Monday released a set of guidelines outlining how it thinks Britain should regulate crypto.
A bill is making its way through the U.K. Parliament that would give the financial regulator greater oversight of crypto, however this is yet to become law.
Crypto executives are hoping Prime Minister Rishi Sunak, who is a fan of crypto and so-called “Web3,” will issue regulatory clarity to make the country a more attractive place for businesses to set up shop.
Bitcoin continues to trade in a tight range of $18,000 to $25,000 mark, keeping investors on edge about where the price is going next. The crytpo market has been plagued with a number of issues from collapsed projects to bankruptcies.
Bitcoin fell 6% to $16,576.50, while ether lost 7% to $1,215.67, according to Coin Metrics. They’re down 21% and 25%, respectively, for the week.
Sam Bankman-Fried – the CEO of the company that became a so-called white knight for the industry, helping bring crypto to the masses through his relationships with high-profile celebrities, regulators and institutions in addition to his exchange product – has also resigned, according to a statement posted to FTX’s Twitter account Friday.
Investors are still monitoring the fallout of FTX and its sister company, the trading firm Alameda Research, still unclear on the extent of the damage that will spread to the rest of the market.
FTX was valued at $32 billion during its last funding round. Some of the biggest names in finance — including SoftBank, BlackRock, Tiger Global, Thoma Bravo, Sequoia and Paradigm.
