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TBW #35: Saving the Genesis Soldier

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TBW #35: Saving the Genesis Soldier

Read all about The Big Whale's 35th Premium newsletter.

Hello Whales and welcome to the little newcomers who have just joined us in the Premium edition. There are already more than 1,500 of you reading us every week! Thank you so much 😍

To devour this week

🖊️ Editorial

🔥 Our exclusive news

⚡ ️ The FTX tsunami

🤖 The Big Focus

THE BIG SPLASH

Let's build ✊🔥

Where to start?

Already, if you're reading this, it's because the FTX crash hasn't totally turned you off cryptos, and rightly so! If this affair is a historic event in the ecosystem, the worst mistake would be to consider that everything is throwaway.

The technology is still there, the projects are developing and Web3 companies are continuing to innovate.

As you know (if you read us properly every week), we've been working for a few months on the launch of an NFT 'The Big Whale'. And guess what? It's ready 🔥

This NFT is an important step in the development of TBW because it will allow us to both thank our Premium subscribers and move a little further along the path to creating a real Web3 media.

There are 2022 NFTs in this collection. 300 of them are reserved for "lifetime" subscribers (there are still a few places left 😉 ) and they will offer them concrete utilities.

Watch out for your inboxes, news is coming very quickly!

As we keep saying, the Bear Market isn't going to stop real projects from developing. Let's build.

THE BIG NEWS

Our EXCLUSIVE NEWS

👉 It's time to save Private Genesis

Who will be able to help Genesis? That's the question that's been agitating the entire crypto ecosystem for the past 10 days and the start of difficulties at the US crypto lending platform, which is looking for between $500 million and $1 billion. Binance has already thrown in the towel and Gemini doesn't seem to be in a position to match. The reason why industry players are so mobilised is that Genesis is a subsidiary of Grayscale, which is none other than the world leader in the management of cryptos - bitcoin in this case - for institutional investors (funds, banks, etc.). The American company alone holds 630,000 bitcoins, worth just over 10 billion dollars! But "if Genesis falls, Grayscale falls and then there won't be much left", explains the head of a British fund 🫠. Seen from this angle, we need to find a solution. But is it still possible?

THE BIG STORY

Europe facing the FTX "wave"

What will be the next domino to fall? While the fall of FTX is doing a lot of damage in the US, the European ecosystem is far from immune.

A real hangover.

For the past few days, the crypto ecosystem has been realising the scale of the FTX scandal and above all its consequences. This is because the American platform worked with hundreds of other companies in the sector, and its bankruptcy will drag others down with it.

Several American players are already in the red, and even some of the sector's behemoths such as Genesis have been singled out (more on this below). Such is the doubt that even Coinbase boss Brian Armstrong has had to deny any problems.

On Twitter, the American explained that his Wall Street-listed company held around 2 million bitcoins on behalf of its customers. This intervention was at least enough to calm things down in the short term 😅.

Meanwhile, the wave of the FTX tsunami continues its mad rush and has hit Europe.

One of the first to communicate on the subject is France's Coinhouse. The broker that bills itself as "Europe's leading crypto-bank" (540,000 customers) last week announced losses, notably on its "crypto passbooks" that used FTX products.

FTX was one of Coinhouse's counterparties on its passbooks (up to 5% on the bitcoin and USDT passbooks, 20% on the ether passbook). The French company covered the losses.

But as we revealed, the French broker was also subsequently forced to halt withdrawals, until further notice, from its "crypto passbooks" due to the "temporary suspension" of operations by another of its counterparties, US-based Genesis (which is seeking between $500 million and $1 billion in liquidity to continue operating).

Genesis accounted for between 38% and 40% of Coinhouse's various passbooks. As its boss Nicolas Louvet confirmed to us, "no commercial gesture is planned" if Genesis goes bankrupt...

Coinhouse, which raised several tens of millions of euros in the spring from several large investors such as private bank Oddo BHF, claims that "fewer than 10,000 people" have subscribed to its "crypto passbooks".

For how much? The company did not wish to disclose, but it could be "several million euros", blows a source close to the company.

To justify himself, Nicolas Louvet explains that there is "a risk" in every interest-bearing investment. "Our conditions of use were clear," he insists.

Was it wise, however, to choose Genesis as a counterparty? Especially at 40%? According to one industry expert, "Genesis was a reference platform used by most crypto institutions. No one could have envisaged such a situation".

For its part, Coinhouse explains that it carries out all the necessary investigations into its partners. The company had, for example, ruled out the American Celsius well before the collapse of Terra (Luna). And BlockFi, which blocked customer withdrawals on the day of FTX's collapse, "never passed our teams' assessment", says Nicolas Louvet.

Coinhouse alone to announce losses

What about the other European players?

"Trading du Coin" has also been impacted, but it is an investment company, not a broker (more on this below).

In other words, all of Coinhouse's competitors have said that they are "not affected" by the FTX affair. Whether it be Bitpanda (Austria), Feel Mining (France), Just Mining (France), Nexo (UK), Swissborg (Switzerland) or Young Platform (Italy), none have communicated on any losses or possible problems.

Should we be surprised or worried?

"Unless they are forced to do so, no player has any interest in sharing their exhibitions. On the contrary, they're more likely to want to send a reassuring message to avoid fuelling the prevailing panic," raises Charlie Méraud, boss of French market maker Woorton. "You only have to look at the example of BlockFi and Genesis who, within the space of 48 hours, announced that they would not be impacted before freezing withdrawals", he adds.

An hour before its operations were halted, FTX also explained that everything was fine...

Corpses in the closet

Coinhouse's transparency is therefore courageous, as the company has not been spared on social networks because of its losses.

Just Mining went through the same thing in the spring after its massive losses in the collapse of Terra (Luna) and the stablecoin UST.

But in both cases, the companies were forced to communicate because they were unable to cover all the losses.

Are the others able to?

"A number of European companies have managed to overcome the bankruptcy of Terra (Luna) and Celsius, but will they be able to absorb FTX's as well?" asks a lawyer specialising in the sector. "It is quite unlikely that Coinhouse will be the only company affected," he points out.

Among the start-ups we interviewed, Austrian Bitpanda (4 million customers) assures us that all its users' cryptos are kept in a cold environment (cold storage) and are regularly checked by an external auditor.

"Our customers are not treated as unsecured creditors and do not risk losing their assets as they can enforce their right to separation under Austrian law," says the company, which also acts as a white label for many apps that offer crypto investing, such as French apps Lydia and N26.

Bitpanda's good fortune is surely that it has never offered exposure to lending yield products (the company offers staking, but this method does not involve lending funds to financial companies).

The limits of "proof of reserves"

In contrast, Nexo (5 million customers) offers this type of product. It's even its trademark. Still, the London-based company wants to be reassuring. "We are one of the only companies in the sector to display the status of our reserves", the British company explained to us.

Nexo's report (which is issued every day) indicates that the assets deposited by its customers are $2.7 billion and are 100% collateralised.

The problem is that Nexo's audit is carried out by the American firm Armanino, which is none other than the firm that handled the audit of... FTX US(until March 2022). "I have nothing to say about Nexo's audit, but there are serious doubts about Armanino's methods when you look at what happened with FTX," says an industry insider. Armanino is also in charge of issuing the proof of reserve for the historic Kraken exchange platform.

"It's important to remember that a proof of reserve is not a silver bullet," insists Woorton's Charlie Méraud. "To assess a company's financial situation, you also need to know its debts," he hammers.

According to our information, several investment companies have received commercial proposals from Nexo to use its services. "This company is obviously looking for cash", blows the boss of one canvassed company. Nexo, for its part, claims to be "a profitable company based on prudent risk management". The start-up is also keen to reassure its customers: "Our ability to have strong liquidity and maintain financial stability is the result of sound decisions that have enabled the company to operate with confidence despite the prolonged market downturn."

Another area of concern about Nexo is that the platform is still offering yields of up to 12% on stablecoins, which seems (totally) uncorrelated with market conditions.

For its part, Italian start-up Young Platform tells us it has suspended its yield products because "the global context on this type of service does not allow us to guarantee 5% to 7%".

According to our information, its partnership with its provider Tesseract has been suspended, in particular because of exposure to FTX and its sister company Alameda. "Prevention is better than cure", tries the Turin-based company.

DeFi, the miracle solution?

While it is wiser to discontinue yield products from centralised sources (such as Genesis), other players continue to offer them based on decentralised finance (DeFi) protocols such as Aave or Compound. At any rate, this is what would have allowed Swissborg to slip through the net.

"Even though rates are not very high at the moment, DeFi allows us to offer attractive returns," says Cyrus Fazel, head of the Swissborg application (650,000 customers). "We are obviously very cautious, but unlike centralised solutions, the most tried and tested protocols such as Aave have never been caught out", he continues.

"We don't use centralised platforms, everything is placed in decentralised finance protocols", also asserts Chloé Desenfans, boss of Feel Mining.

"The problem for many companies currently in difficulty is that they are primarily financial whereas the focus should be on technology", says Cyrus Fazel. "FTX was a financial company, Celsius too. At Swissborg, half our employees are engineers and we use DeFi exclusively," he continues.

A plea that doesn't convince everyone.

"It's all very well to see Swissborg extolling the virtues of DeFi, but we still need to use its basic security principles and not see them once again fall for ponzis such as UST because the returns are attractive," Julien Bouteloup, founder of StakeDAO and a member of the DeFi Curve protocol development team, gently tackles.

Several companies such as Swissborg and Just Mining were in fact offering returns from the UST stablecoin until it collapsed in the spring with significant losses for their customers...

THE BIG FOCUS

Coin trading: The underbelly of a huge loss

TDC

This crypto trading service, which is a sister company of "Le Journal du Coin", has been caught up in the FTX debacle. Its customers lost around ten million euros.

As we know, the consequences of the fall of FTX will gradually become apparent. But for some, like the customers of Trading du Coin, the consequences are already very much in evidence.

In the space of a few days, the company's customers, mainly French, have lost almost everything. The damage is said to amount to €10 million, the largest loss to date for a European player in this business.

To understand how the fall was so sudden and so significant, we need to know how Trading du Coin - which has since suspended operations - operated. We also need to address the questions that this type of company raises, particularly in terms of mixing genres.

👉 What is it already?

Created in 2018, Trading du Coin describes itself as "the investment arm of Journal du Coin", a well-known crypto news site in France.

While the two companies are not officially part of the same group, they are closely linked: they share the same branding (names, graphic charters) and they have at least two shareholders in common (Lucas Ermisse and Romain Didierlaurent).

Most importantly, the two companies do business together. Until the last few days, the Journal du Coin website offered numerous commercial links to Coin Trading and its products.

According to Grégory Guittard, the Journal's publishing director, "Coin Trading was our third largest source of revenue in 2022", while FTX was its largest source of revenue, a detail that matters.

We'll come back to this later.

👉 What did Trading the Coin offer?

Trading the Coin's flagship product is a system of automated trading robots that customers can rent as part of a monthly subscription. This type of service is quite common in crypto.

The problem is that nobody saw the FTX withdrawal freeze coming and the funds could not be withdrawn in time.

The reason for this "block" is simple: Trading du Coin had control over the orders (buy or sell), but could not withdraw the funds to place them safely outside FTX. It was up to users to do this themselves, and only them.

Is Trading du Coin blameless for this? "The company should have sent an email to its customers to alert them to FTX's situation," points out Cyril Gerbet, head of consultancy Genesis Partners.

In particular, its competitor HAL, developed by investment firm CoinShares, sent a message to its users, which we were able to view, before the announcement of the freeze on withdrawals. "A lot of people managed to get their assets out of FTX in less than 24 hours, so it was possible to make an emergency communication," he added.

From the Coin Trading side, they said they had been "following up daily" on the company's Discord and sent "several emails to our customers prior to our public announcement on 16 November".

One of the other problems, "was that FTX was the only platform offered by Trading du Coin when a service that had been in existence since 2018 should have offered a diversity of choice", Cyril Gerbet continued.

Competing HAL offered (in addition to FTX) Binance and Kraken.

After the FTX crash, and according to our findings, the Coin Trading site discreetly removed the FTX logo from the list of exchanges used by its robots in order to replace it with that of Binance (the latter has now disappeared). It was this change that prompted several internet users to call the company to account.

"An overhaul of our automated strategy on several other exchange platforms is currently under consideration", say the shareholders of Trading du Coin. "Binance, for its part, is currently being integrated," it continues. As for the exclusive choice of FTX, it justifies this on the grounds of its "high liquidity" and "technical functionalities".

Trading du Coin, which is registered in Estonia, was not content to offer trading robots and was also targeting wealthier clients via "management mandates". According to the site's team, these 'special' users accounted for around half of the €10 million in losses. The smallest customers had €100,000, while the largest had invested up to €300,000.

👉 Commercial contract between the Journal du Coin and FTX

From the Journal du Coin side, Grégory Guittard explains that the media outlet and FTX had signed a contract aimed at highlighting this platform on the Journal through commercial links placed in news articles. "I'm not at all ashamed of the publicity we've been able to generate for FTX. Its reputation was excellent until recently," he says.

But beyond the choice of FTX, it is the exchange system between Journal du Coin and Trading du Coin that is raising quite a few questions.

"There was a problem of neutrality between the two structures," challenges Cyril Gerbet of Genesis Partners. "FTX was a very big partner of both Le Journal du Coin and Le Trading du Coin", he points out.

"It would be less of a problem if Le Trading du Coin and Le Journal du Coin clearly displayed their closeness, but by keeping this façade of independence it can appear misleading to the public", he asserts.

"In the end, we end up with a company based in Estonia to escape regulation, while targeting French individuals", sums up the boss of Genesis Partners. "This situation is aberrant and probably not very legal", argues a player in the French sector.

On the Trading du Coin side, they brush it off. "While our community is essentially French-speaking, we don't particularly target the French. We have customers all over the world", its administrators reply. When questioned, the Autorité des Marchés Financiers declined to comment.

This edition was prepared with ❤️ by Raphaël Bloch and Grégory Raymond. The Big Whale is a free and independent media. By supporting us, you are contributing to its development.

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