Why Bitcoin's most fundamental principle has become crypto's biggest problem

Why Bitcoin’s most fundamental principle has become crypto’s biggest problem

On Nov. 9, Genesis stated that it had “no material exposure” to FTX or its plummeting FTT token, and estimated that the fallout from FTX’s collapse cost it about $7 million ($10.4 million). could cost. The next day, Genesis recalled that it had $175 million tied up in FTX, which most people would consider at least a little little material, but that it “would not interfere with our market-making activities.”

However, by the middle of the following week, Genesis had suspended payouts from its credit arm, and by the next day, the Wall Street Journal reported that Genesis is seeking a $1 billion capital injection to overcome a “liquidity crisis.” In a statement, Genesis said it had “no plans to file for bankruptcy immediately.”

For readers who see a “cash crisis” as the result of trying to eat a Cadbury’s Creme Egg in one bite (is there another way?), it means Genesis has the money, but it’s in the form of something other things that might take a while to sell. Regrettably, the same phrase was used to describe FTX’s predicament in the days before it became apparent that the illiquid assets on their balance sheet consisted largely of FTT and Solana – tokens, the Bankman-Fried and his friends, to be honest , invented, and which were not the store of value that some people had previously believed.

‘unhackablah blahchain’

There is no indication that Genesis did anything inappropriate, but Genesis has many friends, too. Its central position as a lender exposes it to the broader ills of the cryptocurrency market: its two biggest borrowers, a source told Reuters, are Bankman-Fried’s bankrupt hedge fund Alameda Research and Three Arrows Capital (also a hedge fund, also now in bankruptcy). This also means that problems for Genesis are problems for other financial institutions that rely on Genesis as a lender.

In fact, Genesis doesn’t just have friends, it has siblings: Grayscale Investments, also owned by Digital Currency Group, is the largest active holder of Bitcoin through the original and largest Bitcoin investment fund, the Grayscale Bitcoin Trust. That, too, is looking a little tight at the moment, with the shares trading at a discount of more than 40 percent to the market value of the underlying assets.

Genesis, Grayscale, and others are now vulnerable to the very problem Bitcoin was designed to solve: trust.

Crypto evangelists have spent a decade cornering people at parties (I never get invited to such things, but I hear reports) and explain that in their world, the messy business of trusting fallible people is different from the immutable , unhackable blockchain is swept aside. But this immutable, unhackablah blahchain is also amazingly wasteful — a single bitcoin transaction can consume as much energy as 1.8 million credit card transactions — and that made trading costly and inefficient in the early days. To create a liquid market, they had to bring in all the other things that make modern financial markets fast and efficient: market makers, trading firms, lenders, exchanges, and of course people.

Trust in people and institutions hadn’t gone away: it had simply shifted from trust in established banks and regulators to trust in new companies like FTX and people like Bankman-Fried.

The reason many people are rushing to withdraw (or attempt) their money from crypto exchanges and testing the liquidity of this market is because they have realized that there could be more Sam Bankman frieds in a system that does this, let’s be honest , looks more like it was designed by and for exactly that type of person.

It shouldn’t be difficult for crypto markets to overcome this lack of confidence. Every exchange, currency provider, and money manager could publish a detailed, independent audit of its assets by a well-known auditor. But few are willing to do so.

It should be easy for Grayscale to demonstrate to investors exactly what and where its assets are (they’re registered on the notoriously immutable and unhackable blockchain, after all), but on Monday Grayscale declined to do so, citing “security concerns” (the company). has since released a letter from crypto exchange Coinbase stating that it owns Grayscale’s digital assets but has not shared any of the “addresses” used to identify those assets).

The largest “stablecoin” — a cryptocurrency backed one-for-one by real dollars to facilitate trading — is Tether, which has also never released a full, detailed audit of its $65 billion reserves. The largest crypto exchange Binance does not even say where its headquarters are located.

The cryptocurrency market is well aware of this issue, and companies are belatedly adding “proof of reserves” to their websites to reassure investors that they are solvent, but simple trust in crypto technology has been eroded. The crypto community is waking up to the fact that you can be a friend or a believer, but you cannot be both.

Will Dunn is the business editor of the New statesman

New statesman

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