Major crypto companies struggle to restore customer confidence
Following the FTX collapse, many centralized crypto custodians rushed to publish their addresses or audited Merkle tree proofs of reserves, while US regulatory agencies opened investigations into FTX and other crypto companies.
One of the largest crypto exchanges Binance released a proof-of-reserves system, allowing its customers to use a privacy-preserving cryptographic tool called Merkle tree in order to verify that the exchange holds their assets.
Jesse Powell — CEO of US-based crypto exchange Kraken — has heavily criticized Binance’s new system, urging news outlets not to oversell the news. Powell pointed out that only a proper audit can verify that such a Merkle tree doesn’t include accounts with negative balances and that the exchange doesn’t have significant liabilities.
Binance CEO Changpeng Zhao — better known as CZ — said that the proof-of-reserves will be verified in the upcoming audit.
CZ also questioned Coinbase’s Bitcoin holdings in the now-deleted tweet, after which Coinbase CEO Brian Armstrong explained that CZ’s sources contained false numbers and linked to company’s Q3 shareholder letter.
On that note, billion-dollar cryptocurrency fund Grayscale Investments — a subsidiary of Digital Currency Group (DCG) — announced it won’t disclose its wallet addresses, nor provide an on-chain proof of reserves due to “security concerns”. The company stores its digital assets at Coinbase Custody.
Grayscale Bitcoin Trust (GBTC) launched in 2013 and quickly expanded its holdings when there was a lack of better institutional-grade custodial options for investing in BTC. At the moment of writing, GBTC is world’s largest bitcoin investment fund, holding about 3.3% of bitcoin circulating supply and has an annual fee of 2%.
Since February 2021, GBTC has been trading at a discount to its underlying bitcoin assets, reaching a sharp -45% on November 18, 2022. Until last month, Genesis was responsible for issuing new shares for Grayscale Bitcoin Trust.
More companies fall during crypto market uncertainty
Following the crypto drama caused by FTX, some crypto firms didn’t find enough liquidity to cope with unprecedented amount of withdrawals during market turmoil.
Centralized crypto lending platform BlockFi has filed for bankruptcy protection two weeks after halting withdrawals due to lack of clarification on the status of FTX. BlockFi has about $355 million in crypto assets frozen on the now-bankrupt exchange. Earlier in June, the troubled lending platform secured a $400 million credit line from FTX.
BlockFi has also filed a lawsuit against Emergent Fidelity Technologies — a holding company for FTX founder Sam Bankman-Fried (SBF) — which bought a 7.6% stake in US-based brokerage firm Robinhood (HOOD) for $648 million earlier in May. According to court documents, Emergent guaranteed the repayment of obligations of FTX’s sister trading company Alameda Research, but defaulted on its obligations. Emergent was not listed as one of the companies on FTX Group’s bankruptcy filing.
Genesis Global Capital — yet another crypto lending company and a subsidiary of Digital Currency Group (DCG) — has suspended withdrawals, denied rumors of a bankruptcy filing, and reportedly hired investment bank Meolis & Company to explore various options, as the firm is seeking to raise between $500 million and $1 billion in liquidity. Meanwhile, US regulators opened investigation into Genesis.
In other news
After more than 100 days in custody, the Dutch court ruled that Tornado Cash developer Alexey Pertsev — a Russian national living in Netherlands — is to remain jailed at least until February. A Dutch public prosecutor announced money-laundering charges during a preliminary court hearing. Earlier in August, US regulators sanctioned privacy protocol Tornado Cash, while its 29-year-old developer was arrested in ’s-Hertogenbosch, Netherlands.