The dark side of the Luno crypto exchan…

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On Thurs­day last week, US-based cryp­tocur­ren­cy lender Gen­e­sis Glob­al Hold­co filed for bank­rupt­cy, becom­ing yet anoth­er cryp­to firm to col­lapse in the after­math of the FTX fias­co. South African cryp­to investors are affect­ed by this because SA’s lead­ing cryp­to exchange, Luno, was bought by the Gen­e­sis group in 2020. What exact­ly is going on here?

You are not going to believe me when I tell you this, but it’s com­pli­cat­ed. The first ques­tion hold­ers of cryp­to in Luno have is — of course — whether my bit­coin (or what­ev­er) is still worth any­thing.  And the short answer is that Luno was not includ­ed in the com­pa­nies of the group that were declared bank­rupt. So tech­ni­cal­ly, your bit­coin is safe — for now.

But lis­ten up because there is a ques­tion in the mar­ket now about whether Luno can avoid at least some of the fall­out from the cryp­to melt­down. On the pos­i­tive side, it’s impor­tant to note that as far as we know now, Gen­e­sis did not engage in the same kind of finan­cial shenani­gans as FTX. But it does have a dif­fer­ent problem.

The root of the prob­lem is sim­ply this: if you invest in cryp­to, that is your mon­ey and good luck to you. The val­ue of your invest­ment ris­es and falls with the mar­ket. The ques­tion for cryp­to inter­me­di­aries is: how do they make mon­ey? In nor­mal invest­ment finance, the answer would be sim­ple: inter­me­di­aries make mon­ey because you agree to pay them a fee for the plea­sure of invest­ing your mon­ey. If they invest it well, they get paid. And this is the joy of the finan­cial ser­vices indus­try: if they invest it bad­ly, they still get paid. Ha! But of course, there is a risk you will move your mon­ey elsewhere.

With cryp­to, actu­al­ly, you don’t real­ly need an invest­ment advis­er to make the tricky deci­sions about where in the world to invest your mon­ey and in what assets. You have already invest­ed it in your cho­sen cryp­to coin. Of course, you could move it from one form of cryp­to to anoth­er — you might need advice on that — but the nature of the cryp­to mar­ket is much sim­pler than, say, mak­ing com­pli­cat­ed invest­ments in the gazil­lions of com­pa­nies out there.

So for the cryp­to inter­me­di­aries, there has to be some kind of super­struc­ture that uses the val­ue of the cryp­to in the pos­ses­sion of cryp­to hold­ers — that would be you — and tries to make a turn on that val­ue. Enter, the tech­ni­cal finan­cial stuff.

Vis­it Dai­ly Maverick’s home page for more news, analy­sis and investigations

What FTX did, if you believe the press reports, was out­ra­geous. The com­pa­ny used the col­lat­er­al offered by cryp­to investors to invest in a cryp­to coin of its own mint­ing, which it then lent, for a fee, to itself. A‑maz­ing-ing.

I can hear you ask­ing, how is it human­ly pos­si­ble that any­one could get away with a scam so trans­par­ent? Well, like with so many scams out there, pret­ty eas­i­ly, it turns out. The whole infra­struc­ture rest­ed on two things: first, when you talk about cryp­to, people’s eyes glaze over. It’s too com­pli­cat­ed. And sec­ond — and this will real­ly shock you — greed. When there is mon­ey to be made, peo­ple look the oth­er way. Or pre­tend to under­stand. Or something.

Any­way, how is Gen­e­sis dif­fer­ent from FTX? Is it dif­fer­ent? How is it the same as FTX? The whole sto­ry is not out yet, so this could change, and change very fast. But, as far as I can see, the big dif­fer­ence is that Gen­e­sis’ prob­lem relates to a ques­tion about whether the organ­i­sa­tion was break­ing secu­ri­ties rules. A relat­ed enti­ty to Gen­e­sis, the Gem­i­ni Trust, offered cus­tomers the option of earn­ing “inter­est” on their pas­sive­ly held cryp­to by “lend­ing” cryp­to to Gen­e­sis, which then would go and invest.

The US Secu­ri­ties and Exchange Com­mis­sion (SEC) claims this prod­uct, called the Gem­i­ni Earn pro­gramme, effec­tive­ly amount­ed to the offer­ing of unreg­is­tered secu­ri­ties, which is ille­gal. But it’s tricky because Gen­e­sis claims this is like a bank account, it’s not a “secu­ri­ty” as legal­ly defined. To which the SEC would, you might expect, reply: Okay, so you are a bank then? So you com­ply with all those hun­dreds of bank­ing reg­u­la­tions, and have deposit insur­ance and all that stuff? To which Gen­e­sis pre­sum­ably replies: Er… sor­ry, I just have to take this call. Any­way, Gem­i­ni Earn has now been closed down, but the court case continues.

Gem­i­ni has, or had, around $3‑billion in assets. Or per­haps less. So, you ask, what did Gem­i­ni invest in? Sure­ly it invest­ed in “safe-as-hous­es” invest­ments, right? It sure­ly wouldn’t invest in more cryp­to, would it? That would be like increas­ing the risk, not decreas­ing it. They wouldn’t be that stu­pid, would they?

Oh dear, if you believe that, then you are a lit­tle unfa­mil­iar with the mind­set of the cryp­to set. Gem­i­ni did invest, huge­ly, in a cryp­to hedge fund called Three Arrows Cap­i­tal. Well, it wasn’t an “invest­ment” so much as a $1.1‑billion “loan”. The ques­tion is, how will that be paid back? And the answer is: nobody knows. Any­way, Gen­e­sis and Gem­i­ni are now in bank­rupt­cy pro­tec­tion, so, as far as I can see, Luno cryp­to hold­ers are protected.

But the prob­lem is that this is all still up in the air.  And in the larg­er scheme of things, it asks a tricky ques­tion not only about cryp­to itself, which is obvi­ous, but also for the cryp­to inter­me­di­aries out there. And the ques­tion is exis­ten­tial: how exact­ly are they adding val­ue? As of now, the answer is that in most cas­es they are not. DM/BM

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