Understanding The Collapse Of Crypto Shadow Banking

Understanding The Collapse Of Crypto Shadow Banking

Crypto & Blockchain

Hidden behind the public view is one of the crypto industry’s biggest secrets, the crypto shadow banking, where cryptos worth billions of dollars are borrowed & lent on an un-collateralized basis, between some of the biggest names. Crypto shadow banking was the biggest driver of the spectacular bull market, and the ongoing collapse & contagion.

Crypto shadow banks engage in bank-like activities such as borrowing & lending but are not licensed banks, hence falling outside of the regulatory requirements.

As a result, these shadow banks require capital reserves to cover losses from bad loans or available liquidity in case of a bank run. Crypto shadow banks can be lending platforms (BlockFi, Celsius), exchanges (FTX) when creating credit or lending out clients’ deposits to enhance liquidity, or credit networks (Genesis Trading, Hidden Road) facilitating institutional borrowing & lending.

The key player in the crypto shadow banking is Genesis Trading, namely its highly successful & lucrative lending desk. Genesis Trading is the world’s leading lending desk, facilitating two-way originations between lenders & borrowers, and is considered a trusted counterparty for institutional investors, market makers, hedge funds, & crypto companies with large treasuries.

Genesis was not immune to the stress in the crypto markets and as of November 16th, it has implemented a withdrawal freeze amid efforts to stave off potential bankruptcy. Genesis cited “unprecedented market turmoil” caused by the collapse of FTX & 3AC, which led to “abnormal” levels of withdrawals that exceeded its liquidity.

Perhaps the most fascinating data on crypto shadow banking comes from Genesis’s active loan book, which was transparently provided to the public until the end of Q3 2022. While Genesis loan origination does not fully cover all the shadow banking activities, it can be considered an excellent proxy, since the lending desk of Genesis was the largest player in the world’s crypto shadow ecosystem.

Genesis’ loan book peaked at almost $15 billion of active loans in Q1 2022, then collapsed to $2.8 billion in Q3 2022.

Resulting in a drop of over 80% over a period of fewer than 6 months. Crypto shadow banking is going through its collapse and the unique & valuable data points from Genesis Trading’s quarterly reports confirm this. 

Crypto shadow banking activities were the biggest driver of the spectacular bull market, as well as the ongoing collapse & contagion. World’s regulators are tapping into the dark, trying to understand the causes of the collapse. In the current crisis, crypto industry leaders & experts have an opportunity to provide insights into how the industry really operates & transparently explain crypto shadow banking activities. My goal is that my writing creates a platform for open discussion on how to enhance our industry & put a healthy foundation in place, that will support the world’s growth in the coming decades.

For further reading:https://www.rebellionresearch.com/crypto-shadow-banks-explained

Written by Anton Golub

Anton is a Strategic Advisor of Pazar, decentralized OTC marketplace. In addition, Anton founded & served as CEO of flovtec, Swiss market-maker providing liquidity solutions to digital asset exchanges, token issuers & protocols and offering investment products for professional & institutional investors. Anton is also a co-founder of Trust Square AG, a pre-eminent blockchain technology hub located in Zurich’s financial district. Furthermore, Anton co-founded Lykke Corp, a blockchain-powered exchange to trade all assets with zero fees. Where he served as a Chief Science Officer. Prior to Lykke, he worked as a quantitative researcher at Olsen Ltd. (successor to Olsen & Associates, founded in 1985), a boutique investment firm that pioneered the field of high-frequency trading.

As a Marie Curie Research Fellow at the Alliance Manchester Business School. Anton worked on high-frequency trading, market microstructure and flash crashes. In 2011, invited to participate in the Foresight Project. The Future of Computer Trading in Financial Markets. An international project on algorithmic trading funded by HM Treasury in the UK. Furthermore, Anton became involved in several research projects backed by the European Union (EU). In addition, a member of the Supervisory Board for the BigDataFinance project funded through Horizon 2020. He has co-authored 13 academic papers and two books.

Understanding The Collapse Of Crypto Shadow Banking