Crypto Bail-out Funds; CZ and the double-edged sword.
For active participants in the crypto space, the title already gives context to the topic for discussion. But for those who aren’t active, and have no idea what the title seems to be talking about, then we need to begin with a little backstory.
THE BACKSTORY.
Crypto market update: 5 — 11 March, 2023.
At the start of that week, the crypto market was choppy, with no major fundamental activity causing any drastic change towards sentiments, or prices. However, rumors of a potential liquidation began to raise dust, which eventually became public news on the 9th of that same week.
US Banks crashing spree.
Popular US based crypto bank, Silvergate Bank, was forced to announce its liquidation, after running into billions of dollars in loss (of shareholders and customers funds), as a spinoff consequence of FTX’s collapse last year. Silvergate’s crash was worrisome, as protocols stakers, spot holders, institutional investors and day traders began to exit the market with fears of another “FTX-like” dump.
Just a few days later, Silicon Valley Bank, a startup and investment bank also announced its crash. But this time, the US banking sector (and its board’s “rookie mistakes”) were to blame for this collapse. Read more about SVB’s collapse here.
Within that same week, a third bank, Signature bank, and popular centralized exchange KuCoin, all suffered consequences of the US financial industry regulations, which as a result, spread and solidified FUD within the crypto ecosystem.
Circle bears the burden.
The biggest effect of that week’s events was on Circle, issuers of USDC. News of Circle’s holdings at SVB, at the time of crash, went viral, and the normally USD- pegged stable coin depegged, causing a familiar withdrawal FOMO. Some USDC stakers hastily began to unstake, even before an official announcement of the rate of casualty from the company. And at that point, people thought it was time to pack their bags and dust their resumes.
However, things didn’t get as bad as was expected.
Read tweet here.
The following day, Circle made an announcement, claiming that they only had a minimal exposure(<2.5% of their reserves held in fiat) to SVB, and were going to be able to continue business as usual. The worries about the consequences of the now depegged coin was resolved by burning some USDC supply to repeg the now unstable coin.
This was good enough to mitigate further catastrophe, as traders and investors who didn’t panic, were rewarded for their diamond hands. For those interested in more details, find them here.
Now that you have an understanding of what happened, it’s time for the double-edged sword and its handler.
CZ and the double-edged sword.
At the wake of the banking crisis, and weeks after the rumors of Binance’s insolvency, Changpeng Zhao, aka CZ, decided he had had enough of TradFi inefficiencies, and was ready to go all in on crypto.
Remember that after the FTX crash, CZ had initiated an Industry Recovery Fund. This idea was to protect web3 projects from liquidity problems, in cases that they were free of corporate mismanagement or internal fraud.
Now, following the events of the week described above, CZ came to a realization and decided to make a move, which seemed like the right thing to do, whereas some argue that in the long run, could have a greater impact.
A few days after the meltdown series, and as btc fell below $19500, CZ announced that Binance would be moving the balance of the industry recovery fund portfolio into crypto spots. He cited banks inability to protect stable pegs as grounds for their decision. And of course, depositing as much as $1bn into the crypto market did send the market back into the greens, dispelling fears and pumping excitement. Read tweet here.
The sword, where is it then?
Now this is where things become interesting, and speculative. CZ’s actions, seemingly of good intentions, could eventually become the double edged sword that some presently see it as. Note that I have only written this to share thoughts, and this isn’t any form of financial advice or prediction of future cryptocurrency events.
-Who bails us at the next dip?
We may not realize it now, but CZ has just set bailouts as an expectation during dips. Crypto participants may begin to expect a bail out, when things go really south again. So who bails crypto at the next dip? Agree to it now or not, more FTXs and SVBs would happen. We would continue to see selfish actions from important players wreck mayhem in crypto. But when the next big crash happens, who would bring in more money to save the floor?
-Crypto Fundamentals.
One of the fundamental ethos of cryptocurrencies is its decentralization. The fact that no single entity can possess control over distribution, ownership, or decision making, is the foundational tenet of crypto and decentralization. The power available to the community has helped build people’s trust in crypto activities.
But if we have CZ, and more whales like him “bailing out” crypto by stacking their bags when the market isn’t green, how decentralized does the future seem?
A strong counter argument here may be that the whales aren’t against selling, but what if they become? Lots of people complained about the rumors of Elon mass stacking of Doge, but don’t see how pile buying during crisis is similar. Also, know that the US government presently owns 1% of the entire $BTC in circulation. Now how did that make you feel?
I don’t think CZ may have malicious intent, but we all know that businessmen would do EVERYTHING possible to keep themselves at the top.
-Attacks and FUD.
Particularly for an organization that has faced attacks from external and internal industry players, the decision to expose up to $1b to such targeted attacks should have taken the Binance team more time to decide. Certainly, the awareness of such exposure, could become a vantage point for adversaries to attack from. Market manipulations to affect the value of Binance’s holdings aren’t unrealistic, and when this happens, would Binance be well insulated from these attacks? We’ve seen such in traditional financial markets, and could witness it again, if such powerful enemies rally to cause Binance a headache.
-Crossfire setups.
Imagine another LUNA-UST situation occurs. And like BTC, a token which Binance may be heavily exposed to becomes the victim. What happens then? Binance, being caught in the middle, may be a straw strong enough to hurt the camel. And as that may also cause another dip, would another billion dollar company swoop in to “save the day”?
I must make it clear again, that all these are only speculative ifs and whens. As a writer, I have conjured the possibilities of these scenarios from past events, and is not categorically saying any of these things would happen. If you are an openminded analyst, the possibilities of these events shouldn’t vex, but rather expose your mind to issues that could generate from this presently vindicating act from CZ’s team.
While I leave you to regurgitate and discern, I’d make just one promise statement here. BULLISH ON CRYPTO.
