1. FTX contagion spreads within the crypto industry

The Facts:

• After FTX filed for Chapter 11 last week, news were dominated by FTX aftermath headlines and fallouts this week.
• As such, asset manager Multicoin Capital lost more than 50% of its flagship fund’s capital this month, the financially entangled BlockFi prepares for a potential bankruptcy after halting withdrawals of customer deposits, $13m in funds from Huobi stuck on FTX, Genesis reported exposure to FTX of approximately $175M in their FTX trading account, Galaxy Digital disclosed a $76.8m exposure, Sequoia ($214m) and Temasek ($275m) wrote down their investments, SoftBank is expecting a $100m loss, and then there is also Galois Capital, Wintermute, Crypto.com, CoinShares, Amber Group, Pantera Capital or Nexo and likely more to come.
• On Wednesday, Genesis with $2.8b active loans in Q3 2022 suspended redemptions and new loan originations due to “unprecedented market turmoil, resulting in abnormal withdrawal requests” after it failed to get a $1b emergency loan by Monday.
• Gemini Earn has been paused too while dozens of companies leverage their earn product such as Gemini, that faces problems as well.
• Jump Crypto, one of the most capitalized and liquid firms in crypto, denied rumors about them leaving the crypto ecosystem and off-loading their assets.
• After an exploit on FTX happening on the weekend, the hacker wallet is now among the top ETH holders, after swapping vast amounts of stablecoins for ETH.
• According to CoinDesk and a court filing from Thursday, SBF was instructed by securities regulators of the Bahamas to transfer FTX funds to government wallet as they needed to take “urgent interim regulatory action” to protect clients – it is yet unclear if the hack is related to these instructions.
• The court filing also revealed other unprecedented findings.
• SBF's hedge fund Alameda for instance lent $2.3b to an FTX entity and $1.6b to SBF and other co-founders while FTX funds were used to buy homes and other items for employees and advisors partly without disclosing them as company loans.
• It also revealed that Alameda had secret exemptions from parts of FTX’s liquidation engine and that their “management practices included the use of an unsecured group email account as the root user to access confidential private keys and critically sensitive data for the FTX Group companies around the world, the absence of daily reconciliation of positions on the blockchain, the use of software to conceal the misuse of customer funds.”
• In other related news, Tom Brady, Steph Curry, the Golden State Warriors, and other high-profile celebrities were sued for endorsing FTX.

Why it’s important:

• Since the cycle peak about one year ago, the nascent crypto industry lost $2t in market cap facing the worst inflation in 40 years and forcing a multitude of related CeFi companies into bankruptcy that operated in opaque environments.
• As the dust slowly but surely settles around the FTX collapse, not only the massive contagion among the whole industry but also the gross mismanagement and the lack of regulatory oversight become visible.
• However, we are still not out of the woods yet as industry heavyweights still bear risk of collapsing and with that heavy sell pressure in a market that lost significant depth might be induced.
• For instance, the Digital Currency Group (DCG), parent to Genesis, founded by Barry Silbert in 2015, not only owns the news website CoinDesk but also Grayscale Investments, which manages the biggest cryptocurrency fund in the world.
• If Grayscale is forced to liquidation, there is a potential of $17b of assets flooding the market, 635k BTC (~$13.3b) and 3.1m ETH (~$3.7b).
• An event like that could have even more impact than FTX itself as Genesis is to some degree connected to any company in crypto.
• Genesis already faced a big default in June as 3AC’s biggest creditor (2.4b) where DCG stepped in.
• Within DeFi, the massive depeg of wrapped assets on Solana (soBTC down to $1’300) is another reminder of centralized points within decentralized infrastructures that bear risk.
• Wrapped tokens that are not issued natively are subject to trust assumptions, in the case of soBTC, the BTC was held in escrows by FTX and were not issued via a formal process.
• Centralized exchanges faced massive outflows while decentralized exchanges greatly outperformed their trusted counterpart.
• Crypto trading company Cumberland argues that crypto likely now leaves the “all-in-one platform centralization” and develops to a FX like market as “digital assets will reside in countless silos around the world and the functions of custody, lending, settlement, clearing, and [most importantly] liquidity will be offered by an array of intermediary nodes and providers in an interconnected but non-interdependent web.”
• To wrap up, some food for thought: products that stopped working: Celsius, BlockFi, FTX, Voyager, Gemini Earn, Genesis; products that still work: Uniswap, Aave, Rocketpool, Curve, GMX, Liquity.

2. Banking giants and the New York Fed launch digital dollar pilot

The Facts:

• On Tuesday, Citigroup Inc , HSBC Holdings Plc, Mastercard Inc, and Wells Fargo & Co and the New York Fed announced a 12-week digital dollar pilot in order to test a digital currency platform.
• The project called liability network will run in a test environment and leverage simulated data.
• According to the New York Fed, the liability network will explore the feasibility of an “interoperable network of central bank wholesale digital money and commercial bank digital money operating on a shared multi-entity distributed ledger”.
• Meanwhile, the EU is also investigating a digital euro.
• According to Burkhard Balz, Member of Executive Board at Deutsche Bundesbank, a future proof digital euro is mandatory and designing it is therefore challenging and time intense.
• The digital euro is currently in the investigation phase running until autumn 2023.
• Then the ECB’s governing council will decide in close consultation with the legislative bodies of the EU whether to launch a realization phase that will take another 3 years targeting a working digital euro in autumn 2026.

Why it’s important:

• Although authorities and those in the private sector have been investigating the digital dollar, federal regulators have not come to a decision on whether to introduce a digital dollar in the U.S.
• As crypto finds adoption in countries facing very high inflation, countries around the globe delve deeper into CBDCs to ensure sustained control over money in a digital age.
• China already advanced in development of its own CBDC while most people fear that the country will leverage the instrument to apply even more surveillance and government control.

In other news

• COP27, ConsenSys and others launch Ethereum Climate Platform (via Investing)
• Circle integrates Apple Pay (via The Defiant)
• Uniswap introduces Permit2 and Universal Router (via Uniswap)
• Leaked draft indicates EU push for a ban of privacy coins (via CoinDesk)
• Hong Kong is looking at authorizing crypto futures ETFs (via Bitcoin.com)
• Trump announces White House bid for 2024 (via BBC)
• SUI testnet Wave 1 launches (via Twitter)
• Nayib Bukele, President of El Salvador, announces to buy 1 BTC/day (via Twitter)
• Nike launches digital collectibles platform .Swoosh on Polygon (via Decrypt)

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The latest episode of Decrypt titled “Status quo of NFTs – Part II” highlights the breakthrough of NFT markets after the 2021 wave and looks at adoption trends beyond art and collectibles.