Crypto Winter in Financial Services
It’s been a over a year since we last focused on the cryptocurrency sector. From the end of 2021 to present day, we’ve seen a steady decline in the price range of BTC (top coin/token by market cap) from a high of ~$60K to recent lows of $16K - $20K.
The high-yield wars in which DeFi platforms promised returns above 5% (some as high as 12%) went away early last year as regulators stepped in with enforcement actions and notices.
Many established companies folded in 2022 as key exchanges and lenders going bankrupt had a domino effect on other players. Criminal charges against founders & executives are commonplace as investigations uncover wrongdoing and misrepresentations — impacting investors and creditors claiming what’s owed.
Layoffs (taking place across all tech companies, regardless of size and industry) hit the crypto sector especially hard.
Here’s a recap of challenges the cryptocurrency sector faces at the start of 2023 and what’s needed to move forward in the industry.
THe US REGULATORY shakeup
In the last 8 months we’ve witnessed more regulatory action (in the form of guidance, letters, findings) across multiple agencies, than in the last 8 years.
The difference now is that other regulators (outside the SEC) are often involved. Working side-by-side, multiple parties are participating with enforcement notices, most recently the US Department of Justice (DOJ):
A warning was made of “major international currency enforcement action” coming from the DOJ, in conjunction with the FBI and Eastern District attorney of New York;
The founder and majority owner of crypto exchange Bitzlato was charged and arrested for money transmission of $700M of illicit funds (which didn’t meet anti-money laundering standards);
The SEC charged Genesis and Gemini last week with selling unregistered securities in connection with a high-yield product for depositors.
Already active, the Securities and Exchange Commission (SEC) increased rigor rigorous in its evaluation of private crypto companies looking to go public. Continuous flow of letters with requesting responses from applicants is now the norm. Firms like Bullish Global, Circle Internet Financial, and eToro Group Ltd. have yet to secure proper approvals (current process taking more than a year for some).
Overall, the bankruptcy announcement by FTX, crash of a well-known TerraLabs, and the failure of large crypto hedge fund (Three Arrows Capital) hit many exchanges and lenders hard. Regulators worry about further aftershocks in the US financial system.
FALLEN CRYPTO COMPANIES
Since last May, there were announcements of 8 notable cryptocurrency companies declaring bankruptcy or being asked to shut down. Here’s the lineup (with the most recent announcement this month):
TerraLabs (May 2022): popular blockchain known for the US dollar-pegged stablecoin, TerraUSD (UST), paused operations due a major drop (UST from $1 to $0.35) and meltdown of LUNA (companion token that stabilized UST) from $80 to $0.10 (washing out $1T in assets);
Three Arrows Capital (July 2022): 3AC, crypto hedge fund, had $10B in assets when it filed for bankruptcy (Chapter 15) due to significant exposure to TerraUSD;
Voyager Digital (July 2022): this crypto broker suffered a $660M default from 3AC, pausing transactions before its Chapter 11 bankruptcy filing; an estimate of $1.3B is owed across its 100K creditors;
Hodlnaut (August 2022): crypto lender from Singapore also paused transaction activity in advance of applying for creditor protection (based on market conditions);
FTX (November 2022): top trading platform and exchange market for retail investors announced its bankruptcy filing — liabilities estimated at $9B; CEO (Sam Bankman-Fried) was criminally charged for his involvement;
BlockFi (November 2022): well-known crypto currency lender that previously offered high-yield on deposits, filed for bankruptcy as a result of FTX’s collapse and has over $1B in liabilities;
Core Scientific (December 2022): a large, publicly traded bitcoin mining firm filed for bankruptcy despite mining operations continuing; it’s estimated that up 5K creditors are owed about $1.3B;
Genesis (January 2022): another top cryptocurrency lender in the US announced Chapter 11 bankruptcy filing;
The major takeaway is how interconnected companies are in the crypto sector — from lenders, brokers, hedge funds, exchanges, and even mining companies. As one major player goes down, the network effects pull down others in a matter of days. Across the global landscape, billions in savings/wealth stored by investors seeking alternative investment opportunities was wiped out last year.
LAYOFFS in the Cryptocurrency sector
Not immune to job losses in the tech industry, top cryptocurrency companies also felt the pressure to cut back with expenses and conserve cash. Growth at all costs and increasing headcount were priorities back in 2021, but no longer acceptable with current market conditions.
Coinbase, top crypto exchange that went public in 2021, just announced a second round of layoffs. About 20% of its workforce (950 jobs) were added to the 1.1K jobs eliminated last June — over 2K in the last 8 months. Economic conditions and turbulence in crypto markets (especially after FTX) were key drivers.
Blockchain.com announced last week a major cut to staffing (28%) of 110 — a cutback was also made last July (of 150). The crypto broker booked a $270M loss with loans in connection to Three Arrows Capital.
Crypto.com also joined the wave of recent layoffs — unable to weather the storm caused by FTX, it reduced its workforce by 20%.
As 2023 rolls along, expect further cutbacks from startups having to shut down operations due to lack of funding and/or profitability.
RECOVERY OF market VALUATION (POST-FTX)
For the majority of 2022, Bitcoin was following stock market fluctuations as large investors leaned towards crypto exposure as part of their portfolio in 2021. Economic policy moves by the Federal Reserve kept valuations steady.
The bottom fell out (from $21K, down to $15K) in November as investors tried to gauge the fallout of FTX and potential rescue acquisition from Binance. As of mid-January, Bitcoin recovered back to $21K.
Performance of the Nasdaq this month has boosted Bitcoin back to 2022 levels, but uncertainty of recession (and its impact) may not hold this for long. Investors are also expecting a second (and even third) aftershock to come this year within the crypto sector.
ANY WARM SPOTS FOR CRYPTO in 2023?
There’s a glimmer of hope with valuations stabilizing or even improving by the end of Q1. Signals of improvement from the Fed and economic indicators ease market fears of cryptocurrency improving as a sector.
Financial institutions and central banks are still committed to cryptocurrency in some fashion, anticipating Central Bank Digital Currencies (CBDCs) or stablecoins as the evolution of monetary & payment systems. Bank of America’s global research team published findings a report on global cryptocurrencies, digital assets, and CBDCs. Improving efficiency with international & domestic transfers, and increasing financial inclusion as benefits in developing the sector.
Fintechs or non-fintechs adding crypto products or programs is another story. With regulatory scrutiny on the rise, bank partners taking part in these offerings are staying on the sidelines with a ‘wait-and-see’ approach. Approving a program that may be shut down by regulators soon after launch is waste of time & resources for banks and fintechs. The crucial component comes down to Wyre (possibly shutting down), Paxos, Fireblocks, and other crypto-processing API vendors being able to work with banks and regulators going forward.
NFTS (non-fungible tokens, popular as collectibles for digital art) may come under fire next. In the UK, government agencies recently published made an inquiry into this niche of digital assets. NFTs are associated with cryptocurrency due to their speculative nature in valuation — some tokens generating yield via future profits in secondary sales, making them appear as investments. Investment products should be regulated and marketing practices of NFTs examined to confirm there’s no unfair or deceptive practices (aka UDAAP violations in the US).
Join our community @FinTechtris for more industry content & insights (including deep dives & sector spotlights).
As a bonus, access our subscriber-only resources for evaluating and building the next generation of financial services. Signup today —>