Traditional finance history and crypto industry commentary suggest that crypto will be more prone to macroeconomic factors in 2023, even as the credit contagion risks of shadow banks in FTX’s latest creditor list wanes.
According to a recent court filing, FTX owes money to lenders BlockFi and Genesis Global Capital, who have acted as shadow banks to the crypto industry in recent years.
FTX Creditor Matrix Reveals Mysterious Debts to Regulators
FTX reportedly owes money to Swiss regulator FINMA, the U.S. Financial Crimes Enforcement Network, and former rival Binance. According to Reuters, FINMA could not explain its inclusion in the list as it had no dealings with FTX. The creditor matrix did not reveal the amounts owed.
FTX’s creditor list also includes Genesis Global Capital, a crypto lender that loaned money to companies during previous bull markets. Genesis recently filed for bankruptcy after creditors failed to service debt, stung by the downturn in crypto prices last year.
FTX filed for Chapter 11 bankruptcy on Nov. 11, 2022, after a leaked balance sheet of its market maker Alameda Research revealed large holdings of the illiquid FTT token. This revelation caused Binance CEO Changpeng Zhao to order the liquidation of Binance’s FTT, leading to the token’s decline and an FTX bank run.
Earlier this month, FTX bankruptcy Judge John Dorsey agreed to seal the names of almost 10 million FTX customers whose funds on the exchange have been frozen.
FTX revealed last year that it owes its top 50 creditors about $3.1 billion. Its new CEO, John J. Ray III, publicized considerations to restart the exchange to reimburse creditors sooner than bankruptcy proceedings.
Could the Genesis Bankruptcy the End of Shadow Banks?
Quasi-banks like Genesis borrowed and lent without traditional banking licenses, often relying on crypto or other illiquid assets as collateral. These “shadow banks” lent money to crypto hedge funds like Alameda Research and Three Arrows Capital, often accepting cryptocurrencies as collateral. Crypto lender Celsius reportedly used this collateral for additional borrowing while only asking for a 50% loan-to-value ratio.
However, because crypto lenders lacked sufficient capital reserves, they soon found themselves underwater when debtors suffered the 2022 crypto downturn. Collateral value also fell, resulting in smaller liquidations.
Genesis had a $1.2 billion hole in its balance sheet after liquidating a loan made to Three Arrows Capital. FTX filed for bankruptcy after collateral for numerous loans to Alameda Research depreciated.
VC Says Macroeconomics Will Influence Crypto in 2023
After the 2008 financial crisis, the U.S. government introduced additional regulations to protect the economy from shadow banks’ risky lending.
Speaking on a recent Bankless podcast, venture capitalist Vance Spencer pointed out that the bankruptcy filings that culminated in the collapse of Genesis Global Capital roughly a week ago mean most of the market’s credit contagion perpetuated by shadow banks has now been flushed out of the crypto industry.
Barring another Black Swan event, Vance believes crypto prices will be driven by prevailing macroeconomic conditions in 2023.
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