Sam Bankman-Fried’s stated goal of stopping a few insolvent crypto lenders from cascading into a failed string of dominoes is starting to look a lot more like bargain hunting.
The billionaire founder of the FTX exchange had positioned himself as the industry’s lender of last resort, announcing plans to “stem contagion” from plunging cryptocurrency prices and the bankruptcy of hedge fund Three Arrows Capital, which lost a fortune in the wake of a stablecoin’s $48 billion failure in May.
But after announcing a deal, at a bargain basement price, to acquire one of the two firms he offered backstop lines of credit totaling $750 million, and telling Bloomberg over the holiday weekend that he was looking at acquiring crypto mining firms if he finds “a really compelling opportunity,” Bankman-Fried’s role of crypto’s lender of last resort is sounding a bit hollow.
Or possibly just not that successful.
A $500 million backstop line of credit his Alameda Research investment firm provided crypto broker Voyager Digital last month appears to have proven to be insufficient to the task of keeping its head above water. After limiting withdrawals two weeks ago, Voyager halted them altogether late on July 1. Voyager declared Three Arrows in default of a $650 million loan last week.
While Voyager had “taken steps to avoid this outcome — including securing a credit facility from Alameda and lowering daily withdrawal limits,” CEO Steve Ehrlich tweeted on Friday that the step was necessary “to protect assets and preserve the future of the Voyager platform” as it explores strategic alternatives.
Along with Voyager, Bankman-Fried provided crypto lender BlockFi with a $250 million line of credit recently.
“I do feel like we have a responsibility to seriously consider stepping in, even if it is at a loss to ourselves,” Bankman-Fried said in June. “I think that’s what’s healthy for the ecosystem, and I want to do what I can help it grow and thrive.”
However, the backstop line of credit he extended via FTX to crypto lender BlockFi, which also lost heavily to Three Arrows, was quickly revealed to be a way to buy the firm at bargain-basement prices.
While not as low as the $25 million figure batted around last week, the purchase price of BlockFi was $240 million — cheap for a firm that was close to raising venture funds in a “down round” valuing it at $1 billion rather than its previous $3 billion.
An earlier investor, cryptocurrency investment firm Morgan Creek Digital, reportedly struggled to raise funds to counter Bankman-Fried’s initial deal with BlockFi, which Morgan Creek said would wipe out earlier investors.
Bankman-Fried’s latest target may by crypto mining firms. On July 1, he told Bloomberg that he was considering acquiring mining firms, as “they do play a little bit of role in the possible contagion spread,” Bankman-Fried said. “There might come along a really compelling opportunity for us — I definitely don’t want to discount that possibility.”
Crypto mining firms often borrow heavily to buy the specialized and quickly outdated computers used to create new bitcoin, ether and other cryptocurrencies, paying the loans with earnings from newly minted coins — which are worth a fraction of their previous value.
Bargain Hunters Approach
The crypto lenders damaged in the Three Arrows collapse also included Celsius, which is now struggling to avoid bankruptcy, and Singapore-based Vauld, which also halted withdrawals over the holiday weekend.
So, the contagion doesn’t appear to be all that well contained.
However, FTX isn’t the only well-funded firm on the prowl. Crypto lender Nexo — which made an early, rebuffed offer to acquire Celsius — is now reportedly close to buying Vauld.
FTX also reportedly looked into a deal with Celsius, but found its finances too damaged, The Block reported last week. Celsius is now struggling to avoid bankruptcy.
The Block reported on Tuesday (July 5) that Nexo had signed a 60-day exclusive “term sheet with Vauld with a plan to acquire up to 100% of the Singapore-based company” while it pursues due diligence on the state of Vauld’s loan portfolio.
On a retail level, crypto lenders like BlockFi offer a centralized version of decentralized finance, or DeFi, collateralized loans. These generally require 125% to 150% collateral locked in, which is liquidated if the crypto used to get the loan drops too far. But large private clients can get much looser terms.
They also offer high interest rates to crypto owners who lend them their tokens. While they looked a lot like higher-interest savings account on the surface, they come with far more risk, and the Securities and Exchange Commission deemed them to be securities offers, joining with state regulators to fine BlockFi $100 million.
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