The crypto market contagion has arrived

Nov 17, 2022

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The crypto industry got creamed by the demise of FTX and its affiliates. More pain is coming.

On Wednesday, the lending arm of Genesis Global Trading — a major institutional lender to digital investment firms, hedge funds and exchanges — suspended new loans and redemptions amid a wave of withdrawals that kicked off as Sam Bankman-Fried's multibillion-dollar digital empire sank in the Bahamas.

Soon after, Gemini – a crypto trading platform owned by the Winklevoss twins – said it couldn't meet its customer obligations due to its exposure to Genesis. Other companies, including digital lending businesses like BlockFi and SALT, are also teetering amid broad market volatility.

This isn't the first time Genesis has taken on water.

The company doled out $2.4 billion to the defunct hedge fund Three Arrows Capital prior to its collapse earlier this year. And while those losses were absorbed by its parent company — the crypto conglomerate Digital Currency Group — the latest debacle could be too severe for DCG to replicate that game plan. (Less than a week ago, Genesis received $140 million of equity from its parent to address losses sustained after FTX froze customer accounts).

"We have hired the best advisors in the industry to explore all possible options. Next week, we will deliver a plan for the lending business," Genesis said in a series of Twitter posts on Wednesday.

DCG spokesperson Amanda Cowie said the decision would not affect Genesis's other services — which include crypto trading and custody — and that it would have "no impact on the business operations of DCG and our other wholly owned subsidiaries."

Federal banking and market regulators outlined the potential for crypto contagion risk in an Oct. 3 report that cited Genesis by name. The industry's reliance on interconnected networks of lenders — coupled with a lack of basic controls and the potential for conflicts of interest — posed significant danger to customers who'd be left exposed losses as the dominoes toppled.

"The federal government, including Congress, also needs to move quickly to fill the regulatory gaps the Biden Administration has identified," Treasury Secretary Janet Yellen, who led the committee behind the report, said in a statement on Wednesday.

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Driving the Day

Atlanta Fed President Raphael Bostic speaks at 7:30 a.m. … St. Louis Fed President James Bullard speaks at 8 a.m. … Housing starts data out at 8:30 a.m. … Fed Gov. Michelle Bowman speaks about financial literacy at 9:15 a.m. … Fed Gov. Phillip Jefferson speaks about inclusive growth at 10:40 a.m.

LOOK, I KNOW I SAID IT'D BE HERE LAST WEEK — Our Ally Mutnick and Jessica Piper: "Republicans have won back control of the House , giving the GOP a toehold to check President Joe Biden and congressional Democrats despite a disappointing midterm election."

CHANGES COMING TO HFSC — Our Zachary Warmbrodt and Eleanor Mueller: "Rep. Patrick McHenry is poised to eliminate a diversity and inclusion subcommittee at House Financial Services if he becomes chair in a Republican majority, in what could trigger a clash with Democrats."

SCHWARZMAN DITCHES TRUMP — Reuters' Susan Heavey and Chibuike Oguh: "Blackstone Inc Chief Executive Stephen Schwarzman, who has been one of Wall Street's biggest donors to Donald Trump's election campaigns, said on Wednesday he will not back the former president in 2024 ."

Crypto

WATCH AN ATTORNEY SELF-IMMOLATE — Vox's Kelsey Piper direct messaged Sam Bankman-Fried and he "apparently wanted to talk. About how FTX and his hedge fund Alameda Research had gambled with customer money without, he claims, realizing that's what they were doing . About who gets lauded as a hero and who's the fall guy. About regulators. ('Fuck regulators.') About what he regrets ('Chapter 11,' the decision to declare bankruptcy) and about what he would have done differently with FTX and Alameda ('more careful accounting + offboard Alameda from FTX once FTX could live on its own')."

CONGRESS READIES FTX INVESTIGATIONS — From Sam: "House and Senate leaders plan to hold hearings on the bankrupt global crypto exchange FTX … House Financial Services is scheduling a hearing next month that is expected to include testimony from FTX founder Sam Bankman-Fried, his trading firm Alameda Research and Binance, the crypto exchange that briefly explored buying FTX."

STABLECOIN RULES — Our Victoria Guida reports: Fed regulatory czar Michael Barr made a vehement case for the central bank to have oversight authority over stablecoins in any legislation passed by Congress, arguing that they are a form of private money and tokens linked to the dollar "are really borrowing the trust of the Federal Reserve."

Barr suggested that a regulatory regime for firms that issue stablecoins, whether banks or not, would include capital and liquidity rules, as well as reserving requirements to ensure the tokens are properly backed. "All of that is really critical," he said.

He also said the Fed should have the ability to approve applications for issuance: "Once you get a bad apple in the system, it's very hard to get it out."

— From Sam: Sen. Kirsten Gillibrand on Wednesday plans to introduce a bill to regulate stablecoins before the end of the year. The New York Democrat is working on the measure with Sen. Cynthia Lummis (R-Wyo.) — with whom she introduced a comprehensive crypto bill earlier this year — as well as Sen. Pat Toomey (R-Pa.), who released the draft language of a stablecoin bill this spring.

MORE ON GENESIS — Bloomberg's Katherine Greifeld and Vildana Hajric: "With Genesis's halted redemptions, the health of DCG is called into question ."

Regulatory Corner

TREASURY MARKET DATA — Victoria Guida again: "A top Treasury official said Wednesday that regulators are looking to make more information about trades in the market for U.S. government debt publicly available in a bid to improve the durability of the market.

— Also from Victoria: "Federal Reserve regulatory czar Michael Barr on Wednesday said capital rules are not a primary culprit of choppier trading in the market for U.S. government debt, in a sign that the central bank might not pursue modifications sought by banks."

WIND IT UP, WIND IT DOWN — Our Declan Harty: "SEC Chair Gary Gensler said Wednesday that he has asked staff to work on new rules related to the recovery and wind down processes of clearinghouses for Treasury securities ."

FINTECH FURY — From Sam: "The emergence of fintechs as a powerful force in the consumer credit and nonbank lending space has made the financial system more complicated and more competitive — but without many traditional safeguards, according to a Treasury report released on Wednesday ."

Fed File

ICYMI: KANSAS CITY FED'S ESTHER GEORGE — "I'm looking at a labor market that is so tight, I don't know how you continue to bring this level of inflation down without having some real slowing, and maybe we even have contraction in the economy to get there," Kansas City Fed President Esther George, who is set to retire in January, told WSJ's Nick Timiraos.

Economy

WE'RE GOING SHOPPING —WSJ's Austen Hufford: "U.S. retail sales rose sharply in October, a sign of economic strength that leaves the Federal Reserve likely to keep raising interest rates as it tries to reduce persistently high inflation. Retail sales rose a seasonally adjusted 1.3% in October compared with September, when they were unchanged, the Commerce Department said Wednesday."

MORE FOR THE MAGIC — WSJ's Jacob Passy: "Walt Disney Co. will soon be charging more for families to experience the magic in Florida. Beginning in December, single-day, single-park tickets to Walt Disney World in Florida will vary in price based on which of the four theme parks people visit at the Orlando-area resort. Prices will also depend on when a person visits, as is already the case, with tickets being more expensive on more popular dates."

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Fly Around

President Vladimir Putin urged the Russian government on Wednesday to control car prices , as one industry head said Western sanctions could send annual sales crashing to below 1 million for the first time since records began. — Reuters' Caleb Davis and Gleb Stolyarov

The UK braces for "austerity on steroids" as Prime MInister Rishi Sunak's government plans to plug a £55 billion fiscal hole with spending cuts and tax increases . — Bloomberg's Emily Ashton, Philip Aldrick and Suart Biggs

The Chinese economy remains a massive opportunity for Western companies , and a recent easing of US-China tension offers tailwinds for the global economy, said Axel Weber, former UBS Group AG Chair. — Bloomberg's Enda Curran

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