Fresh out of the studio, Cosmo Jiang, founder of Nova River and host of Liquid - Web3 investing podcast with Global Coin Research, joined us to break down the consequences of FTX's collapse and how it triggered the crisis for Digital Currency Group (DCG) with the potential insolvency of Genesis and its crown jewel, Grayscale. Cosmo shared his perspectives on how the crypto and web3 space will evolve and the potential backlash coming from the regulatory authorities in different countries. Last but not least, he offered an optimistic outlook on how the narratives for crypto and web3 will look in the future.
"Yes FTX was a very large institutional player, Genesis whatever happens out there was a very large institutional player and so it'll take a lot of time for the fallout to fully play out. But just taking a step back and looking at the big picture, none of this has any impact on crypto's multi-year arc towards enabling innovation. Ethereum as a trustless, decentralized digital asset set on one layer is ground breaking that nothing will change. Tokens as a form of capital creation is a paradigm shift for business formation. Nothing's gonna change that. And talented builders are still continuing to come into the system and soon their work and their labor will bear fruit." - Cosmo Jiang
Editor's Note: This video podcast with Cosmo is recorded in the first week of December and will not take into account events which happened after 9 Dec 2022.
- Cosmo Jiang (@cosmo_jiang, Linkedin), Founder of digital assets fund Nova River, Head of Strategy, Skolem, Member of Global Coin Research (GCR) and host of Liquid - Web3 investing Podcast by GCR (Apple Podcasts)
- Since our last conversation, what have you been up to?
Genesis' Potential Insolvency & FTX Collapse
- Let’s start with the FTX collapse first, what is the chronology of events that led to the collapse of FTX and the spectacular downfall of Sam Bankman-Fried aka SBF?
- It is widely known that the relationship between Alameda Research and FTX is a tenuous one in the industry. How did Alameda Research end up being bailed out by FTX and that in turn, caused FTX to collapse?
- One can think of the cryptocurrency exchange as a casino, and the casino always wins. What are the contributing factors that led to the collapse from your perspective?
- I have read a couple of analyses from the Chopping Block in Unchained podcast and Bankless. One playbook that SBF is to launch new tokens such as FTT, and Serum and use Alameda to front-run the trade during the bull market, but when the market turns sour, the FTT price was too high and largely insolvent, people can dump the token and trigger a bank run in this case. What are your thoughts on why they screwed up here?
- What is the fallout from FTX filing for bankruptcy? Will creditors, investors, and the users on FTX exchange get back their money?
- What about the crypto protocols? For example, Solana was badly affected by the FTX collapse.
- How about the VCs such as Sequoia who invested in FTX? For example, I was surprised by the lack of board seats and the minimum due diligence done in the process. To be fair to Temasek, and this is also mentioned in the Chopping Block podcast as well, they were the only ones who admitted that they were wrong in this one.
- When you were here in early July on the podcast, we discussed the collapse of 3AC, Terra-Luna, and Celsius. We explained how the algorithmic stablecoin model did not work and led to the crypto contagion. At that point, Sam Bankman-Fried was hailed as the JP Morgan of crypto in bailing out Voyager and BlockFi. In fewer than 2 weeks in early November, the world changed with FTX filing for chapter 11 bankruptcy and Alamada research becoming insolvent. During that conversation, we discussed Genesis and GBTC, because it appears that all the contagion started from this. Can you briefly introduce Digital Currency Group (DCG as we know it) which owns Grayscale (with the GBTC), Genesis (its lending arm), Coindesk (their media outlet), and who Barry Silbert is?
- Can you describe how Genesis works as a lending institution and how the crypto hedge funds, for example, 3AC and Alameda Research, and the exchanges, for example, Gemini interacts with them?
- Genesis was the largest creditor to 3AC with 1.2B as mentioned in the chapter 15 filing. The whole thing seems to originate with 3AC and Alameda Research being caught with GBTC going from trading at a premium to now trading at a discount (as of today about 40%). What is the mechanics behind this trade?
- Of course, this was exacerbated by the Terra Luna collapse, asset prices falling as the Federal Reserve raised rates and the FTX collapse. Can you talk about the current situation of Genesis?
- How do Genesis’ issues impact DCG given that there are intercompany loans, and what happens with Grayscale?
- If Genesis files for bankruptcy, what are the likely scenarios for the crypto industry in general? In some sense, FTX collapse can be constituted to a crypto near-extinction level.
- SBF, 3AC and Do Kwon all went on media tours to talk about their side of the story. What are your thoughts on whether they can redeem themselves?
- Specifically for SBF and Do Kwon, if they were proven guilty based on the present allegations out in the open, do you think that they should go to jail?
- Do you think that the exchanges going for a proof of reserves audit, for example, Binance will restore investors’ confidence?
- Can the industry recover from this setback? Will there be a larger regulatory pushback?
- What are the narratives that have sprung out from this collapse, for example, centralized exchanges are the problem and not DeFi, and not your keys, not your crypto and shitcoins?
- Any recommendations that have inspired you recently?
- How can my audience find you?