Not six months ago, ether led a recovery in cryptocurrency prices ahead of a big tech upgrade that would make something called “staking” available to crypto investors.
Most people have hardly wrapped their heads around the concept, but now, the price of ether is falling amid mounting fears that the Securities and Exchange Commission could crack down on it.
On Thursday, Kraken, one of the largest crypto exchanges in the world, closed its staking program in a $30 million settlement with the SEC, which said the company failed to register the offer and sale of its crypto staking-as-a-service program.
“This should put everyone on notice in this marketplace,” SEC Chair Gary Gensler told CNBC’s “Squawk Box” Friday morning. “Whether you call it lend, earn, yield, whether you offer an annual percentage yield – that doesn’t matter. If someone is taking [customer] tokens and transferring to their platform, the platform controls it.”
Staking has widely been seen as a catalyst for mainstream adoption of crypto and a big revenue opportunity for exchanges like Coinbase. A clampdown on staking, and staking services, could have damaging consequences not just for those exchanges, but also Ethereum and other proof-of-stake blockchain networks. To understand why, it helps to have a basic understanding of the activity in question.
Here’s what you need to know:
What is staking?
Staking is a way for investors to earn passive yield on their cryptocurrency holdings by locking tokens up on the network for a period of time. For example, if you decide you want to stake your ether holdings, you would do so on the Ethereum network. The bottom line is it allows investors to put their crypto to work if they’re not planning to sell it anytime soon.
How does staking work?
Staking is sometimes referred to as the crypto version of a high-interest savings account, but there’s a major flaw in that comparison: crypto networks are decentralized, and banking institutions are not.
Earning interest through staking is not the same thing as earning interest from a high annual percentage yield offered by a centralized platform like those that ran into trouble last year, like BlockFi and Celsius, or Gemini just last month. Those offerings really were more akin to a savings account: people would deposit their crypto with centralized entities that lent those funds out and promised rewards to the depositors in interest (of up to 20% in some cases). Rewards vary by network but generally, the more you stake, the more you earn.
By contrast, when you stake your crypto, you are contributing to the proof-of-stake system that keeps decentralized networks like Ethereum running and secure; you become a “validator” on the blockchain, meaning you verify and process the transactions as they come through, if chosen by the algorithm. The selection is semi-random – the more crypto you stake, the more likely you’ll be chosen as a validator.
The lock-up of your funds serves as a sort of collateral that can be destroyed if you as a validator act dishonestly or insincerely.
This is true only for proof-of-stake networks like Ethereum, Solana, Polkadot and Cardano. A proof-of-work network like Bitcoin uses a different process to confirm transactions.
Staking as a service
In most cases, investors won’t be staking themselves – the process of validating network transactions is just impractical on both the retail and institutional levels.
That’s where crypto service providers like Coinbase, and formerly Kraken, come in. Investors can give their crypto to the staking service and the service does the staking on the investors’ behalf. When using a staking service, the lock-up period is determined by the networks (like Ethereum or Solana), and not the third party (like Coinbase or Kraken).
It’s also where it gets a little murky with the SEC, which said Thursday that Kraken should have registered the offer and sale of the crypto asset staking-as-a-service program with the securities regulator.
While the SEC hasn’t given formal guidance on what crypto assets it deems securities, it generally sees a red flag if someone makes an investment with a reasonable expectation of profits that would be derived from the work or effort of others.
Coinbase has about 15% of the market share of Ethereum assets, according to Oppenheimer. The industry’s current retail staking participation rate is 13.7% and growing.
Proof-of-stake vs. proof-of-work
Staking works only for proof-of-stake networks like Ethereum, Solana, Polkadot and Cardano. A proof-of-work network, like Bitcoin, uses a different process to confirm transactions.
The two are simply the protocols used to secure cryptocurrency networks.
Proof-of-work requires specialized computing equipment, like high-end graphics cards to validate transactions by solving highly complex math problems. Validators gets rewards for each transaction they confirm. This process requires a ton of energy to complete.
The source of return in staking is different from traditional markets. There aren’t humans on the other side promising returns, but rather the protocol itself paying investors to run the computational network.
Despite how far crypto has come, it’s still a young industry filled with technological risks, and potential bugs in the code is a big one. If the system doesn’t work as expected, it’s possible investors could lose some of their staked coins.
Volatility is and has always been a somewhat attractive feature in crypto but it comes with risks, too. One of the biggest risks investors face in staking is simply a drop in the price. Sometimes a big decline can lead smaller projects to hike their rates to make a potential opportunity more attractive.
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.
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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.
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.
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.
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.
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.
The logo of the cryptocurrency Terra Luna is seen on the screen of a computer in an office.
Silas Stein/picture alliance via Getty Images
The cryptocurrency market fell on Tuesday amid rumors of insolvency at crypto exchange FTX and worries about the financial conditions of its sister company Alameda Research.
Bitcoin and ether were lower by 6% and 8% respectively, according to Coin Metrics.
Crypto assets tied to Alameda, the trading company also owned by billionaire Sam Bankman-Fried, were suffering steeper losses. FTX Token (FTT), the native token of the FTX trading platform, has fallen 23% in the past 24 hours. The token tied to Ethereum competitor Solana, of which Alameda is a big backer, has lost 12%.
In crypto equities, Coinbase fell 12.5%, while Robinhood, in which SBF has a 7.6% stake, fell 9%. Crypto banks like Silvergate and Signature and bitcoin miners like Hut 8 and Riot Blockchain were down double digit percentages.
“There are a lot of mirrors to the Celsius and Three Arrows crisis that happened months ago and what you’re seeing is investors having deja vu and fear leaking into the markets,” said Conor Ryder, research analyst at Kaiko.
On Tuesday FTX halted withdrawals from its platform, after spooked investors attempted to pull their funds en masse. Investor confidence has been shaken after Binance founder Changpeng Zhao tweeted over the weekend that the company would sell its holdings of FTT. Binance is the largest crypto exchange in the world by trading volume and was an early backer of FTX.
Zhao said in his tweet that Binance has about $2.1 billion worth of FTT and BUSD, the fiat-backed stablecoin issued by Binance and Paxos, combined.
“Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books,” he said.
Those revelations refer to rumors about the solvency of FTX, the second-biggest crypto exchange in the world by trading volume. A report last week on the state of Alameda’s finances showed a large portion of its balance sheet is concentrated in FTT and its various activities leveraged using FTT as collateral. Alameda has disputed that claim, saying FTT represents only part of its total balance sheet.
“The Alameda hedge fund is tied to FTX through a ton of FTT tokens and the rumors started that if they are using all of these FTT tokens as collateral… there are two issues,” said Jeff Dorman, chief investment officer at Arca. “If the price of FTT goes way down then Alameda could face margin calls and all kinds of pressure; two is if FTX is the lender to Alameda then everyone’s going to be in trouble.”
“What could have been just an isolated issue at Alameda became a bank run,” he added. “Everybody started to pull their assets out of FTX and there’s this fear that FTX would be insolvent.”
‘Another black eye for trust’
Ryder said he has confidence that FTX and its customers “will be fine” but that the panic is understandable. Bankman-Fried, also known as SBF, has said little on the matter to quell fears.
The problem is the opaque nature and the lack of transparency about FTX reserves, Alameda’s reserves, the links between the two – no one really knows how to intertwined the two are,” he said. “From that side of things, it mirrors Celsius issues a lot in that we have no transparency of funds, and FTX hasn’t come out and reassured investors so that’s what we’re seeing now leak into markets.”
It’s a good argument for more regulation of centralized entities, Ryder added, saying it’s imperative for all centralized entities – be it hedge funds like Three Arrows Capital or Alameda Research or centralized exchanges like FTX and Binance that aren’t publicly listed – to maintain a proof of reserves for the sake of investor protection.
Dorman echoed Ryder’s sentiment, saying that while it may be at worst a short-term liquidity issue, it’s “another black eye for trust.”
“Do they put [the reserves] in a bank account? Do they use them to lend out?” Dorman said. “This is where the lack of transparency comes in: something that probably isn’t a problem and shouldn’t be a problem becomes a short-term liquidity problem if FTX can’t immediately process all withdrawals.”
After years of anticipation, the cryptocurrency ethereum finally implemented a major network upgrade that completely changes how the blockchain verifies transactions, mints new coins and secures its network. Called proof-of-stake, this system has reduced ethereum’s energy consumption by more than 99%.
Energy usage has been one of the cryptocurrency industry’s biggest targets for critique. But it’s not likely that bitcoin will follow suit.
Instead, the bitcoin network is sticking with a system called proof-of-work, in which highly specialized computers try to guess a winning number that serves to validate transactions and create new coins. This is what’s known as mining.
At the moment, guessing a winning number takes over one hundred sextillion tries. All of this work helps to secure the network by making it nearly impossible for bad actors to accrue enough computing power to take control. But recent research also shows that in 2020, mining Bitcoin consumed 75.4 terawatt hours of electricity, more than all of Austria or Portugal.
This is the system formerly used by ethereum. But now the network has swapped out miners for validators. Instead of playing a massive computational guessing game, validators are assigned to verify new transactions, and earn ether as a reward for doing so.
To ensure that these validators act honestly, they essentially have to make a security deposit by staking a certain amount of ether coins into the network. If a validator tries to attack the network, they’ll lose their stake. Ethereum proponents say this penalty will make the network more secure, while bitcoin enthusiasts see proof-of-work as the more secure, tried and true approach.
However, the optics of bitcoin’s energy use in the midst of the global climate crisis has become a problem for the network. In response, some major bitcoin miners are starting to seek out renewable energy to power their data centers and trying to change the narrative by touting bitcoin’s energy use as an asset, as it helps drive investment into the nation’s aging electrical grid.
