“Those who do not manage their risk will have the market manage it for them” Su Zhu, Three Arrows Capital
Dear oh dear
Safe to say things aren’t going particularly well in crypto.
For many it seems the decentralised libertarian dreams of the bitcoin white paper “… allowing any two willing parties to transact directly with each other without the need for a trusted third party….” were subverted by a number of very centralised and unscrupulous intermediaries (ironically the type bitcoin was a response to), and the industry needs to go back to first principles.
In 2022, we saw a chain reaction set off by the collapse of the Terra network, and the domino effects continue into 2023 with Silvergate announcing voluntary liquidation today. We’ve got to the stage where there are very few centralised crypto lenders or crypto banks still standing – the latter a big concern due to implications for the on/off ramp.
DCG, the next domino?
The eye of Sauron now falls on Digital Currency Group (DCG) – one of the OG’s of centralised crypto – a big player across asset management, media, trading, and previously lending (Genesis was their lending arm).
The KPMG team have, for your reading pleasure, set out the context to DCG’s current issues. The paper helps answer the following questions:
- Who are DCG and why do they matter?
- How were the different parties connected?
- What went wrong?
- Drivers of the Grayscale Bitcoin Trust Discount
- Why DeFi was unscathed?
- Other likely hotspots to watch out for across crypto infra – crypto banks, stablecoins, and exchanges
- What we should do about it? – be this from the perspective of regulators, CeFi operators, TradFi Operators or Investors
But how bad are things really?
There is a diversity of views on this, which – as regulators sharpen their pencils and production houses drafts their scripts – reminds me of this dialogue from the TV show ‘The Thick of It’.
Hugh: How fucked am I?
Ollie: Well, you look awful, you look terrible. I mean, you often look quite bad, but…
Hugh: I mean, in terms of negative publicity, on the fuckometer, where am I?
Glenn: Oh, 12.
Ollie: Yeah. 12, say.
Hugh: Out of what?
Glenn: Er… 50.
Ollie: Oh. Mine was out of ten.