🏦 Bankruptcy 😯 - $197 Million Lost 🙈
Weekly News Recap: 🎙️ New pod on the banking crisis, ❌ Euler suffers an exploit, 👷 Shapella developments, 🤔 SBF's struggle, , and more ❕
Jim Bianco on Why the Banking System Has Always Been Broken
It’s been a historic week and a half, with three bank closures and a ton of gyration in the markets and interventions by the government and big banks. But is it a replay of the Great Financial Crisis? No, says this Friday’s guest on Unchained, Jim Bianco, founder and president of Bianco Research.
“This is a liquidity crisis, not a solvency crisis,” he says. “In 2008, banks made loans and they bought securities. Then they lost a ton of money on them …. In 2023, banks made loans and they owned securities, which were largely good. .... I know people are trying to make a big deal about this unrealized loss, but that's not a real problem. What happened was everybody wanted their money back on the same day.”
In this episode, we go over the role that high interest rates played, why the closure of Signature was highly irregular, and why the recent turmoil makes him bullish on DeFi. Be sure to check it out!
Weekly News Recap
SVB Financial Group Files for Bankruptcy
On Friday, SVB Financial Group filed for Chapter 11 bankruptcy in New York, making it the largest bank failure since Washington Mutual in 2008.
Silicon Valley Bank, now overseen by the FDIC, is not part of the Chapter 11 filing. The parent company will use the court-supervised bankruptcy process to find new owners for its other businesses not under federal control, such as SVB Capital, SVB Securities, and SVB Private.
Crypto Might Have Been ‘Debanked’
After I wrapped my interview with Jim, news broke on a few additional developments around crypto banking. The Blockchain Association, a leading crypto advocacy organization, is looking into the possible "de-banking of crypto firms" after the recent failures of Signature Bank, Silicon Valley Bank, and Silvergate.
The investigation aims to uncover any hidden truths about the potential de-banking, such as account closures and refusal to open new accounts for legitimate crypto businesses.
Also, on Thursday, global custody bank State Street announced the termination of its partnership with Copper, a crypto custody firm that recently decided to shut down its enterprise infrastructure division.
The two companies have mutually agreed to end their licensing agreement and will individually pursue their digital strategies. State Street plans to develop a "multifaceted solution for both tokenized securities and native tokens," acknowledging the evolving regulatory landscape for digital assets.
But it was not all bad news for tradfi companies and crypto this week. Fidelity, one of the largest funds in the world, opened Fidelity Crypto to millions of retail users, allowing commission-free bitcoin and ether trading, with a maximum 1% spread, positioning itself ahead of most U.S. peers in offering crypto to retail clients.
BTC and ETH Soar
Following weeks of hovering around $20,000, Bitcoin surged to a nine-month high, exceeding $26,000, in the wake of SVB’s collapse and the publication of February's U.S. inflation data that met expectations. This price surge can be attributed to the intervention to save SVB, leading market participants to foresee lower interest rates in the future.
Meanwhile, Ethereum is up 13% over the past 7 days and has reclaimed the $200 billion market cap line.
Euler Finance Loses Almost $200 Million in a Hack
Euler Finance, a decentralized finance (DeFi) protocol, lost $197 million in a flash loan exploit on Monday. Now, its team is collaborating with law enforcement and security firms to recover the stolen funds.
The Ethereum-based non-custodial lending platform, which raised $32 million in funding from Uniswap, Coinbase, and FTX in 2022, was targeted by an attacker who used flash loans to exploit the liquidation logic.
Blockchain security firm SlowMist's analysis revealed that the attacker donated funds to a reserve address, bypassing liquidity checks, and triggered a soft liquidation to obtain collateral funds without assuming all liabilities. The exploiter stole various tokens, including ETH, USDC, and BTC.
The exploit impacted other DeFi protocols, such as Balancer, Angle, and Idle Finance. Balancer temporarily disabled its user interface for exiting positions from the Euler Boosted USD pool, while Angle and Idle Finance have millions of dollars in USDC trapped in Euler.
The Euler Foundation is attempting to negotiate with the anonymous attacker and has communicated with them via blockchain transactions, demanding the return of 90% of the stolen funds or risk facing legal action. If uncooperative, Euler plans to offer a $1 million reward for information leading to the hacker's arrest.
Meanwhile, the hacker has moved 1,100 ETH (valued at $1.8 million) into the crypto mixer Tornado Cash, aiming to obscure the origin of the pilfered funds, according to security company BlockSec.
Ethereum Developers Deploy Shapella on Testnet
Ethereum's highly anticipated Shanghai upgrade moves closer to realization. The Shapella upgrade was activated on the Goerli testnet, which marks the final testing stage before deployment on the mainnet, which is expected to happen on April 12.
Shapella merges the names of the Shanghai and Capella hard forks. Shanghai corresponds to the fork on the execution layer, while Capella represents the consensus layer's upgrade. With Shapella, validators can test ETH withdrawals from the deposit contract after over two years of staking ETH. Several validators have already started testing the withdrawal feature, with 21,601 ETH distributed in 4,800 validator withdrawals.
Christine Kim and I had a great conversation about the upgrade in this week’s Tuesday episode of Unchained. Go listen if you haven’t already!
Coinbase also announced that it will start accepting unstaking requests approximately 24 hours after the Shanghai-Capella upgrade goes live.
In other news around blockchains and DeFi:
Arbitrum, one of the biggest Layer 2 projects on Ethereum, plans to airdrop its governance token, ARB, to community members on March 23. The token will govern the Arbitrum One and Nova networks via a DAO, backed by a security council. With 12.75% of the total supply distributed, the airdrop aims to “give governance power over to the community members and try to identify the real community members that are active in the chain,” according to Offchain Labs' CEO Steven Goldfeder.
Decentralized storage platform Filecoin introduced smart contract support through its new virtual machine.
MetaMask updated its crypto wallet to address privacy concerns, allowing users to maintain separate accounts when connecting to applications.
Uniswap announced its expansion to BNB Chain after a governance proposal was passed with support from over 55 million UNI token holders.
Meta Stops Working on NFTs
Meta has decided to end support for non-fungible tokens (NFTs) across its social media platforms, including Facebook and Instagram. Announced on Monday by Meta's head of commerce and fintech, Stephane Kasriel, the company will “apply the lessons learned from NFTs” to other products supporting creators, users, and businesses on their apps and in the metaverse.
The decision comes less than one year after CEO Mark Zuckerberg first announced plans to integrate NFTs on Meta’s platforms, and less than 10 months after NFTs were first introduced on Instagram.
The crypto community's reaction to Meta's decision has been mixed. Critics argue that digital ownership is the future, while others believe that Meta's withdrawal from NFTs could be beneficial, providing more time for the industry to improve products, user experience, and safety measures.
Hunter Solaire from Pixelmon said, “NFTs aren't ready to reach the masses yet… The "metaverse" is real but it's going to take 5 years not 5 months.”
Bankruptcy Lawyers Seek Pause on Bankman-Fried's Share Dispute
Bankruptcy lawyers are discussing a deal to pause litigation concerning Sam Bankman-Fried's $465 million worth of Robinhood shares until his criminal case is resolved. Defunct crypto companies FTX and BlockFi are both attempting to claim the shares, which were seized by the Justice Department in January. Prosecutors are concerned that disputes over the shares could interfere with Bankman-Fried's ongoing criminal case. Working on the deal are the lawyers for Emergent Fidelity Technologies, which bought the shares, as well as attorneys for FTX and BlockFi.
The FTX founder is facing multiple criminal charges over his alleged misconduct and could face life imprisonment if convicted. He has argued that he needs the Robinhood shares to fund his legal defense.
Moreover, Bankman-Fried has requested to use FTX's director and officer liability insurance to cover his legal expenses. If granted, this would place him at the front of the line for an FTX payout, ahead of the company's creditors. FTX's new leadership has not agreed to the request, prompting Bankman-Fried to seek a court order to enforce it.
In another FTX-related development, several social media influencers, including Erika Kullberg, Ben Armstrong (aka Bitboy), and Kevin Paffrath, face a lawsuit accusing them of promoting FTX without disclosing payment details or compensation.
The suit alleges some influencers removed FTX endorsement videos and posted apology messages instead. With both US and non-US plaintiffs, the lawsuit seeks class-action status, aiming to help victims recover damages.
US Government Calls for Pause on Binance.US-Voyager Digital Deal
The U.S. government has called for a halt on the $1 billion deal between Binance.US and bankrupt crypto lender Voyager Digital The U.S. Trustee, a Department of Justice branch responsible for bankruptcy cases, expressed concerns that the deal could grant Voyager and its staff immunity from past tax or securities law violations. U.S. Attorney Damian Williams argued that the court should either put the deal on hold or at least those parts that limit the government's ability to enforce the law until higher courts address the appeals.
Terraform Labs Is Under Investigation
According to a report from The Wall Street Journal, the Justice Department is investigating the 2022 collapse of the TerraUSD stablecoin, which may result in U.S. criminal charges against its creator Do Kwon.
The FBI and the Southern District of New York have questioned former Terraform Labs team members and are exploring similar issues as those in the SEC's civil fraud lawsuit against Kwon and TFL, which accuses Kwon of misleading investors about the risks of TerraUSD, which lost its $1 peg and wiped out $40 billion in market value.
In another development, U.S. prosecutors are examining chat-group conversations among trading firms, including Jump Trading Group, Jane Street Group, and the FTX affiliate Alameda Research, about a potential TerraUSD bailout that did not end up happening. Prosecutors are investigating whether market manipulation was involved in the conversations.
Gary Gensler Suggests PoS Tokens Are Securities
SEC Chair Gary Gensler has suggested that tokens native to staking protocols could be considered securities under U.S. law because of the returns token holders expect from staking. If so, token issuers would be required to register with the SEC under U.S. law. His comments come only days after New York Attorney General Letitia James claimed that ether is a security in a lawsuit against Kucoin.
Gensler has previously mentioned that proof-of-stake tokens could be considered securities, and the SEC recently undertook its first staking-as-a-service enforcement action, settling with Kraken.
Chinese Businessman Is Arrested for Orchestrating Multiple Fraudulent Schemes
Exiled Chinese businessman Guo Wengui, with connections to Steve Bannon, was arrested in New York and charged with fraud, including a $500 million crypto scam. Guo allegedly orchestrated multiple schemes defrauding investors out of a total of $1.4 billion. Three of the schemes were related to GTV Media Group, which Guo co-founded with Bannon. The fourth scheme, called H-Coin or Himalaya Coin, raised $500 million from retail investors.
The SEC accused Guo of falsely claiming H-Coin was 20% backed by gold and promising to cover 100% of investment losses. Authorities have seized over $630 million from his bank accounts.
Fun Bits
As mentioned earlier, this week Bitcoin and the price of other crypto assets rallied, with Bitcoin up 20% and ETH up 7% as of press time. Ginny Hogan from Unchained has the scoop.
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