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This Week in Crypto: FTX, SVB Collapse, and Coinbase's SEC Battle
The cryptocurrency world has seen quite a bit of drama this week with FTX seeking to recover $460 million from a Bankman-Fried-backed VC firm, the Federal Reserve chairman expressing confusion over the collapse of Silicon Valley Bank (SVB), and Coinbase facing potential SEC enforcement for alleged violations of securities law. This article will explore these developments and their implications for the crypto industry.
FTX Seeks to Recover $460M from Bankman-Fried-Backed VC Firm
Background of the Case
FTX, a bankrupt crypto exchange, is looking to recover $460 million of allegedly misappropriated customer funds from venture capital firm Modulo Capital. Alameda Research, FTX's sister trading firm, reportedly invested around $400 million in Modulo in 2022.
The Settlement Agreement
As part of the settlement, Modulo has agreed to repay $404 million in cash and give up its claim to $56 million worth of assets held on FTX's crypto exchange. In addition, Alameda will lose any claim to its Modulo shares if the agreement is approved.
The Role of Sam Bankman-Fried
FTX claims that the investment from Alameda Research was directed by Sam Bankman-Fried, who is also reportedly in a romantic relationship with one of Modulo's founders, Xiaoyun "Lily" Zhang. Some speculate that this relationship may have motivated Bankman-Fried's push to invest in the VC firm.
The Upcoming Hearing
U.S. Bankruptcy Judge John Dorsey must still confirm the deal, with a motion hearing set for April 12.
Federal Reserve Chairman Powell Stumped Over Silicon Valley Bank's Collapse
Powell's Reaction to SVB's Collapse
Federal Reserve Chairman Jerome Powell expressed shock and confusion over the sudden collapse of SVB, admitting that the event blindsided the regulator. He called for an internal investigation to identify what went wrong.
The Internal Investigation
The Federal Reserve has launched an internal investigation led by Vice Chairman Michael Barr to examine the events surrounding SVB's failure and assess the Fed's supervision and regulation of the bank. Powell confirmed that Barr would be testifying next week.
Interest Rate Hikes and Their Effects
The collapse of SVB has been linked to the Federal Reserve's consecutive interest rate hikes aimed at curbing inflation. These rate hikes are believed to have eroded SVB's long-term bonds purchased at near-zero rates, ultimately contributing to the bank's downfall.
Elizabeth Warren's Criticism of Powell
U.S. Senator Elizabeth Warren has criticized Powell for his regulatory approach, arguing that the Fed's interest rate hikes risk pushing the economy into a recession. She also believes that the weakening of regulations over the past five years has allowed banks to take on excessive risk, leading to the recent banking crisis.
Coinbase Faces Potential SEC Enforcement for Alleged Securities Law Violations
Details of the Wells Notice
Coinbase has received a Wells notice from the U.S. Securities and Exchange Commission (SEC), warning the company of potential enforcement action due to possible violations of securities laws. The notice could target various aspects of Coinbase's operations, including its staking program, listed digital assets, wallet, or Coinbase Prime services.
Coinbase's Response to the SEC
Coinbase has asked the SEC to specify which assets on its platform are considered securities, but the regulator has declined. The exchange has also submitted multiple registration proposals to the SEC but has not received any response.
Ongoing Operations and Discussions
Despite the investigation, Coinbase stated that its products and services would continue to operate as usual. In addition, the company's chief legal officer, Paul Grewal, has criticized the SEC's lack of communication, noting that Coinbase has met with the regulator over 30 times during the past nine months without receiving substantial feedback.
Comparing Coinbase's Situation with Kraken and the Tron Lawsuit
Coinbase's situation is similar to Kraken's recent settlement with the SEC, which resulted in the exchange ceasing its staking program for U.S. users. Additionally, the SEC recently filed a lawsuit against Justin Sun and several celebrities over the offering, sale, and promotion of Tron (TRX) and BitTorrent (BTT).
What is the significance of FTX's settlement with Modulo Capital?
If approved, the settlement would allow FTX to recover a substantial portion of the allegedly misappropriated customer funds, helping to mitigate the financial shortfall the bankrupt crypto exchange faces.
Why is the Federal Reserve investigating the collapse of Silicon Valley Bank?
The Fed is trying to identify regulatory shortcomings or failures in its bank supervision and understand the events and factors contributing to SVB's sudden collapse.
How might the SEC's enforcement action against Coinbase impact the company and the broader crypto industry?
Depending on the outcome, the enforcement action could result in operational changes for Coinbase and set a precedent for regulatory action against other crypto exchanges and companies offering similar services.
What is a Wells notice, and why has Coinbase received one?
A Wells notice is a letter from the SEC warning a company that the regulator may take enforcement action against them. For example, Coinbase received a Wells notice due to potential violations of securities laws relating to its staking program, listed digital assets, wallet, or Coinbase Prime services.
How do the interest rate hikes by the Federal Reserve tie into the collapse of Silicon Valley Bank?
The consecutive interest rate hikes by the Federal Reserve, aimed at curbing inflation, are believed to have eroded the value of SVB's long-term bonds purchased at near-zero rates. This, in turn, contributed to the bank's collapse and the subsequent financial crisis.