Crypto Shadow Banking: Visualizing the Contagion and Collapse

🚩 Crypto shadow banking is our industry’s biggest secret, where cryptos worth billions of dollars are borrowed & lent, mostly on an un-collateralized basis. The crypto shadow banking ecosystem is an entangled web of crypto exchanges, lending platforms, market makers and hedge funds. To understand the complex fabric I will present the visualization of the crypto shadow banking ecosystem and point to key players and relationships causing the collapse and contagion of the industry.

💡 First, let’s explain the players:

• Digital Currency Group (DCG) is a crypto conglomerate with high-profile subsidiaries, Genesis and Grayscale (issuer of Bitcoin tracker GBTC),
• Genesis is a prime broker providing a marketplace to trade, borrow, lend & custody cryptos,
• FTX was the world’s 2nd largest crypto exchange, founded by Sam Bankman Fried
• Alameda Research is a crypto market maker owned by SBF,
• Three Arrow Capital (3AC) is a crypto hedge fund & proprietary trading firm,
• BlockFi is a crypto lender founded in 2017,
• Gemini is a crypto exchange offering custody, trading & lending,
• Voyager is a crypto broker.

Here’s the madness:

❗️ 3AC is said to have borrowed $2 billion from Genesis and has as well borrowed $675 million from Voyager. 3AC filed for bankruptcy following the Terra/LUNA collapse,

❗️ Voyager is currently in bankruptcy proceedings and as a part of the recovery process

has issued a notice of default to 3AC on the outstanding $675 million debt,

❗️ FTX internal books show Alameda had with them an unlimited credit facility and owes FTX as much as $8 billion (or more),

❗️ BlockFi in its bankruptcy protection mentioned Alameda’s default on a $680 million collateralized loan as blame for their fall. An additional $355 million is stuck on FTX, with little clarity on how or when it will be recovered,

❗️ DCG is said to owe $1.675 billion to Genesis. Genesis lost $1.1 billion on a loan to 3AC, which pledged shares of GBTC as collateral on the loan. DCG took on Genesis’ liabilities, hence owing $1.1 billion to Genesis. The $1.1 billion is in a form of a promissory note which is due on June 2032 (yes in 10 years, you read that correctly!). DCG borrowed from Genesis an additional $575 million due on March 2023 on an “arm’s length basis” to fund the buyback of DCG shares and purchase of GBTC hoping the NAV gap would close,

❗️ Alameda is said to have borrowed $2.6 billion from Genesis. In the midst of the Terra/LUNA collapse, Genesis called in the loan and on-chain data shows many frantic transactions as Alameda was scrambling to repay the loan. The transaction data indicate that FTX client deposits might have been funneled to Alameda to pay off the massive debt to Genesis,

❗️ Gemini through its lending program Earn has lent $900 million to Genesis and has paused withdrawals of clients' funds from the Earn program,

❗️ Genesis as the largest player in the crypto shadow banking ecosystem is at the epicenter of the contagion & collapse. On November 16th, it implemented a withdrawal freeze amid efforts to stave off potential bankruptcy and required a $140 million capital injection from DCG. Its derivatives business has approximately $175 million in locked funds on FTX.

❇️ As you can see, Crypto Shadow Banking is not just one player, like Sam Bankman Fried hiding his intentions behind a computer. It is a network of players all bound together by an opportunity for profit.