Crypto - Zodia Markets

March 27, 2023March 27, 2023

The Shanghai upgrade: What it means for ETH prices

There has been much discussion around the upcoming Shanghai upgrade on the Ethereum network and what that means for ETH prices. The upgrade is designed to give network validators access to their staked ETH for the first time, which is a major change for the network. Initially, this looks like a potential increase in supply, but there are other nuances to consider.

Could there be an increase in staking?: The percentage of ETH staked relative to its free float is quite low, c14%, compared to other protocols (AVAX 62.5%, MATIC 39%). Having an undefined lock-up period was prohibitive to some participants, especially those who were uncomfortable with the counterparty risk. With the lockup period now removed, this may entice natural longs and allocators to stake their ETH, thus potentially reducing the free float.

Price Change since ETH was Staked: Most ETH currently staked was done when prices were higher than prevailing levels. Once unlocked, will these holders be enticed to liquidate? We believe this is unlikely. Anyone who staked for an undefined period is most likely a believer in the project and are long term holders, so we don’t anticipate a significant unwind of these positions.

Impact of Liquid Staking: 43% of staked ETH is in a liquid staking pool which means holders who want to trade still have a means to do so. This volume is essentially already free float and unlocking it is likely to have limited impact on supply.

ETHBTC spread: Whilst BTC and ETH have performed very well this year, there has been a relative underperformance in ETH. With the ETHBTC spread at multi month lows, suggesting uncertainties surrounding the Shanghai upgrade are holding back ETH prices (notwithstanding the recent flight to safety). For the merge there was a ‘buy the rumor sell the fact’; could this be a ‘sell the rumor buy the fact’ event?

SEC Kraken Ruling: Kraken has halted all staking services for US clients since the SEC ruling and has started redeeming staked coins. However, it cannot unlock any staked ETH until the Shanghai upgrade is complete. We estimate at least 50% of Kraken’s client base is US based, which equates to roughly 600,000 ETH that will be unlocked. Much of this ETH will find its way to another staking platform, but a proportion will be converted to USD as the US regulatory noose tightens, therefore increasing the free float.

Conclusion: Considering all the above, there should be a general decrease of the free float over time and a potential price increase, but macro drivers will have a greater impact, especially given the current environment. Traders are going to trade, holders are going to hold and as for the Shanghai upgrade, the market will likely shake it off.

Author : Mick Roche

February 23, 2023February 23, 2023

Proof of work mining: making it greener

In California in springtime, the sun is shining, the weather is often windy, and water levels are at their highest from snow-melt from the mountains, all providing plentiful sources of renewable energy. At the same time, the climate is mild, reducing the need for air conditioning or heating and resulting in lower energy consumption.[i] To balance supply and demand, electricity generation is scaled back and potential green energy is unrealised.

“Crypto mining, by design, can put that overabundance that would otherwise go unused, into productive use.” Evin Cheikosman, World Economic Forum.[ii]

Digital assets using proof-of-work (PoW) consensus methods have understandably drawn scrutiny on whether mining is an acceptable use of energy. Some blockchains, such as Ethereum, have resolved this by moving from PoW to proof-of-stake (PoS), which significantly reduces energy use. There is also increasing recognition that PoW mining, like that used by Bitcoin, can be done more sustainably – and use of energy this way may even provide benefits. The focus of these initiatives is on the sources of energy used for mining including curtailed, stranded, and wasted energy.

Curtailment is where production exceeds demand and generation must be reduced to maintain grid reliability. Curtailment may be necessary system-wide, meaning over a large area, or locally, where there is insufficient transmission infrastructure to deliver electricity from where it is produced to where it can be used.

Curtailment is a particular consideration for renewable energy because environmental factors result in higher supply at times of lower demand, either seasonally or intraday (the lights go on when the sun goes down), and where the generation is constrained by geographic and climatic factors. For example, hydroelectricity can be generated only near water sources with specific characteristics and solar power plants are most useful where sunshine hours per day are high. These are not always close to the population centres that consume electricity, or the locations of commercial or industrial demand. Storing energy at scale is difficult and expensive,[iii] and line losses impact transmission over distance.

In the California case study, electricity production is deliberately reduced to balance demand and maintain grid reliability. Rather than curtail this energy, it could be used to power digital asset mining using energy which would otherwise not be generated at all.

Similar considerations apply to waste and stranded energy which are often in locations where demand is low or non-existent. This energy can be most efficiently used close to its source, such as for bitcoin mining.

Crypto-asset mining that installs equipment to use vented methane to generate electricity for operations is more likely to help rather than hinder U.S. climate objectives… It can yield positive results for the climate, by converting the potent methane to CO2 during combustion. Climate and Energy Implications of Crypto-Assets in the United States, White House Office of Science and Technology Policy, September 2022

Waste energy is produced as a by-product of other activities. For example, at oil and natural gas wells, methane is produced. It is often too expensive to construct permanent pipelines or electricity transmission networks from remote oil and gas fields to consumers, and releasing the methane is environmentally harmful. Usually, it is burned on site as gas flaring. Methane is also produced from other industries, such as agriculture, landfill, and sewage treatment.

Instead of dissipating the energy, digital asset mining rigs can be installed at source. One study by Cambridge University identified that gas flaring could power the bitcoin network around seven times.[iv]

Using the waste energy this way improves environmental outcomes. Combustion of waste gases in generators connected to Bitcoin mining rigs results in an estimated 63% reduction in emission of CO₂ equivalents compared with flaring.[v]

Stranded energy assets are in locations where the distribution network is too far away for generation to be financially viable. Permanent stranding may result from remote terrain or undeveloped infrastructure, situations where mining rigs could generate revenue for isolated communities.

Energy assets may also be temporarily stranded. For example, a Canadian oil and gas company planned to set up bitcoin mining rigs near a previously out-of-operation gas well in Cooper Basin, Australia. The wells were ready to begin production but the pipeline to transport the gas was delayed. The company proposed the installation of mining rigs to generate income and improve cashflow until the pipeline was in place.[vi]

Provenance in the energy “supply chain”

All participants in the digital asset community must respond to the priorities of the society in which they operate. For Bitcoin and other PoW protocols, miners have a key responsibility. In the same way that responsible producers of clothing or shoes ensure their supply chains use responsible rather than exploitative labour, digital asset miners could take responsibility for their energy sources and use. By powering mining using surplus renewables or energy that would otherwise be unused, concerns from investors and the wider community about suitable use of energy will be allayed, and PoW assets can still form part of a responsible investment portfolio.

Author : Catherine Woods

[i] Zodia Markets analysis of California ISO data 2022 (http://www.caiso.com/market/Pages/ReportsBulletins/RenewablesReporting.aspx#MonthlyRenewables), US Energy Information Administration (https://www.eia.gov/todayinenergy/detail.php?id=42915), University of San Diego (https://www.sandiego.edu/soles/hub-nonprofit/initiatives/dashboard/electricity.php)

[ii] https://www.weforum.org/agenda/2022/06/crypto-sustainability

[iii] https://www.gatesnotes.com/energy/it-is-surprisingly-hard-to-store-energy

[iv] https://ccaf.io/cbeci/index/comparisons

[v] CO² equivalents provides a measure in which greenhouse gases are converted to the equivalent amount of carbon dioxide based on their global warming potential. https://www.crusoeenergy.com/digital-flare-mitigation

[vi] https://cointelegraph.com/news/bengal-energy-to-mine-bitcoin-using-stranded-wells-in-aussie-outback

January 25, 2023January 28, 2023

Protecting Client Cryptoassets: a novel approach with a long history

Recently, Chief US Bankruptcy Judge Martin Glenn ruled[1] that $4bn of cryptoassets that were deposited in “Earn Accounts” of bankrupt crypto lender Celsius did not in fact belong to the customers that made those deposits. According to Celsius’ terms of use, the company held “all right and title to such Eligible Digital Assets, including ownership rights.” Judge Glenn ruled that those terms, which most Earn customers agreed to, meant that their deposits were Celsius’ property and therefore part of the bankruptcy estate.

This episode and the unfolding drama around FTX have highlighted the importance of protecting clients’ assets. As the markets look for someone to blame in this narrative, the finger has often been pointed at regulators. Surely if Celsius or FTX were regulated then this would not have happened? There is, indeed, plenty of focus on the better treatment of client funds by FTX.US, formerly LedgerX, which was regulated not once, not twice but thrice by the CFTC as a Derivatives Clearing Organisation (DCO), Designated Contract Market (DCM) and a Swap Execution Facility (SEF). Indeed, protecting client assets is a regulatory requirement in multiple pieces of legislation around the world, such as the EU’s Delegated Directive 2017/593 in MiFID II and the UK FCA’s Client Assets Sourcebook (CASS).

All this ignores the fact that protecting client assets can easily be achieved without being a regulatory requirement. It is an act of both prudence and honesty practiced by many unregulated firms, protecting clients from both malice and accidents or, as Prof. Laurence Gower, a founding father of asset protection, put it, investors need to be protected from both ‘ignorant fools as well as convicted crooks’. In short, clients need to be protected from defalcation.

Defalc-what?

Defalcation. Literally to be cut with a scythe or in legal terms an act committed by professionals in charge of handling money or property. The first major development in the protection of client funds in the UK followed the Boer War when the stock market collapsed, bankrupting many law firms. Traditionally, English law firms had commingled their funds with those of their clients. In 1901, converting funds or property in trust was made illegal, followed by mandatory bookkeeping courses in 1907 and segregated client accounts in 1933.

This requirement was not extended to stockbrokers or financial services until the late 1980s after several scandals hit in quick succession. In March 1981 an investment management company collapsed having invested £2.5m of its clients’ money in its own group of companies, which subsequently failed. In July 1981 the Manchester stockbroker Halliday Simpson collapsed because of irregular bookkeeping. The subsequent Gower Report examining the deficiencies in investor protection led to the 1986 Financial Services Act and, in 1988, the protection of assets properly belonging to clients, particularly when a firm becomes insolvent, became a cornerstone of the UK regulatory regime and has been ever since.

In the US the story was a little different. Before 1938, there had been little protection for customers of a bankrupt stockbroker unless they could trace the cash and the securities. In 1938 Congress enacted section 60(e) of the Bankruptcy Act, creating a single and separate fund to limit losses to customers by giving them priority over claims of general creditors. However, these funds were often inadequate and customer losses continued.

In the 1960’s the US securities industry had grown rapidly and by the end of the decade the sheer mass of stock trades overwhelmed back offices resulting in significant settlement delays in what was known as the ‘Paperwork Crisis’. This was followed by a large contraction in 1969-1970, which led to a substantial number of brokerages filing for bankruptcy. Customers who had assets with these firms were embroiled in lengthy proceedings. In addition to mounting customer losses and the subsequent erosion of investor confidence, Congress was concerned with a possible domino effect involving otherwise solvent brokers that had substantial open transactions with firms that failed.

Congress directed the SEC to create rules regarding the custody and use of customer securities, which it did in 1972 with Rule 15c3-3. In short, the rule dictates the amount of cash and securities that broker-dealer firms must segregate in protected accounts on behalf of their clients to ensure they can withdraw the bulk of their holdings on demand, even if a firm becomes insolvent.

A novel approach with a long history

Many actors in cryptoassets have therefore overlooked practices that, as we can see, have a long history in both other industries and asset classes. Of course in some cases this oversight may have been deliberate, having been made possible by the general lack of regulation of the asset class.

In our view, cryptoassets are here to stay and, indeed, so should the good practices such as these that investors expect in other asset classes.

[1] MEMORANDUM OPINION AND ORDER REGARDING OWNERSHIP OF EARN ACCOUNT ASSETS : CELSIUS NETWORK LLC, et al

Authors : Nick Philpott, Chief Operating Officer and Dina White, General Counsel

November 23, 2022January 16, 2023

Beyond Bank Grade: trust is key to unlocking the success of digital assets

The recent events surrounding FTX and Alameda Research have shaken the crypto world to its core more than any other in its short history. Throughout this year we have seen continued failings and an erosion of trust in the crypto industry.

Trust is key when managing people’s money, and without it no customer, retail or wholesale, will use your services. For over three hundred years consumers and institutions have placed their trust in banks to safekeep and manage their money. Today the threshold a regulated financial institution must meet to become a bank afford those that successfully pass the regulatory scrutiny and ongoing supervision with this badge that conveys certain trust in consumers. In the banking world it is the understanding that those regulators and supervisors ensure daily that high standards and capital requirements are met by the institutions under their remit, so they can be trusted with their customers money.

Trust must be earned. Outside of crypto, many payments and e-money fintech start-ups look to transition to a banking license at some stage in their lifecycle where they can usually then hold funds on deposit and lend it out to others adding profitable net interest margin revenue. Even more critical is that it provides them with greater trust from their customers which is a must if they build up a large and sticky deposit base with the goal of overtaking their incumbent and archaic banking competitors.

Many in the crypto and digital asset world have held themselves up with the lofty statement of being “bank-grade” particularly in the areas of risk management, financial crime, compliance, and information security in the hope that they are assigned with the same trust to them as you would your bank. What does this really mean for crypto, which is for the most part currently unregulated, with supervisors having limited legislative powers under which to supervise the firms operating?

The numerous examples of failings this year across compliance, risk management, and information security breaches, such as large hacks and data leakage, highlight that at very least the controls in place are not working and certainly would not pass if they were part of a regulated financial institution:

Regulatory fines:

CFTC Orders Coinbase Inc. to Pay $6.5 Million for False, Misleading, or Inaccurate Reporting and Wash Trading – https://www.cftc.gov/PressRoom/PressReleases/8369-21

Risk Management:

Crypto lender Celsius looked a lot like a Ponzi, says state regulator – https://www.ft.com/content/7380ac24-76b1-4a3e-a2df-688ff4b6d0b1
US Regulators Probing Bankrupt Crypto Hedge Fund Three Arrows Capital – https://www.bloomberg.com/news/articles/2022-10-17/us-investigating-bankrupt-crypto-hedge-fund-three-arrows-capital

Hacks:

Crypto hackers steal $3 billion in 2022, set to be biggest year for digital-asset heists – https://www.moneycontrol.com/news/business/cryptocurrency/crypto-hackers-steal-3-billion-in-2022-set-to-be-biggest-year-for-digital-asset-heists-9347301.html

This is not to say banks are anywhere near perfect, and we continue to see many failings in traditional finance over recent years, in similar areas including financial crime, risk management and information security. This too has eroded trust in the financial services industry. However, these failings have resulted in tighter controls and regulation in traditional finance; the same is now very likely to be true of crypto and wider digital assets.

How does Zodia Markets uphold gold standards in compliance and security?

There are certainly better ways of doing things differently, whilst building on the frameworks and standards which have been formed through translating experience and learning from past failings, into legislation and regulation. Zodia Market is the only UK FCA registered cryptoasset firm majority owned by a Bank. Zodia Markets has built the exchange and brokerage business with the following key tenets:

Non-custodial exchange – Zodia Markets provides pure market access with no custody or market making services in a familiar segregation of duties which allows our clients to mitigate a lot of risks we have crystalise in crypto over recent years.
True bank standard compliance and regulation – Zodia Markets adheres to policies and standards which are inherited from our globally regulated bank parent.
Principal to transactions – all clients and counterparties face Zodia Markets in our matched principal trading model, enabling trust in the business they transact with.
Battle tested cyber security controls – Zodia Markets leverages controls and best practices specific to cryptoassets from our shareholder, OSL, sister company, Zodia Custody as well as Centres of Excellence within Standard Chartered itself.

Trust always has been a key to unlocking success in financial services and is just as important now in this world of digital assets. Zodia Markets has taken the rigour found in the well understood and highly regulated traditional finance world and applied this in running its digital asset business. Familiar standards bring trust, making Zodia Markets the obvious choice of the institutions we partner with.

With this high bar set, we will evolve and support our clients in navigating the fast-changing digital asset landscape to set them up for success. There is much more to deep dive into on this, including segregation of exchange and custody, the future path of regulation, and how, if approached thoughtfully and with impact, it can help build a stronger crypto industry.

November 15, 2022November 28, 2022

Digital Déjà Vu – FTX and Refco

It is a bit more of a challenge to find a historical analogy for the very recent FTX collapse. MF Global is not a bad comparison, with risky bets and a shortfall of customer funds.

The FTT token is another curiosity. Among other things, it allowed holders to access discounts on trading fees and OTC rebates. Its issuance has some similarities to a debt versus equity structure, which was a common contributing factor in the failure of several banks in the 2008 Financial Crisis.

A better example though, is the collapse of Refco in 2005, which showcased weaknesses in basic corporate governance controls as well as a failure to segregate client assets.

Refco was a New York-based financial services company that was mainly focused on commodities broking. It boasted over $75bn in assets, thousands of customer accounts and was the largest broker on the CME. In August 2005 it had an IPO that, somewhat ironically, had a sale price of $22 a share. This was the same price that Alameda offered to Binance for its FTT tokens.

In October 2005 the CEO, Phil Bennett, announced he was taking a leave of absence after he had been found to be in control of an entity that owed Refco $430m. He had been using this unregulated offshore entity, which was based in Bermuda (FTX is based in the Bahamas, so the similarity is not far off), to conceal millions in bad debts, The cause of the losses was immediately unclear, although leaks since the bankruptcy have pointed to losses by large clients as well as an offshore entity with $525m in fake bonds. What was clear was that at the end of each quarter the CEO had arranged for Refco to lend to a hedge fund called Liberty Corner Capital Strategy, which in turn lent to the Bermudan company Bennett controlled, Refco Group Holdings, which then paid the money back to Refco.

According to Reuters articles, a similar move took place between FTX and Alameda. In May and June Alameda suffered losses, so Sam Bankman-Fried sought to prop them up with a $4bn transfer of FTX funds secured by assets including FTT and shares in Robinhood. He did not tell FTX executives about the move, as was the case with Bennett.

In the bankruptcy proceedings, Refco’s large creditors managed to convince the court that its customers were unsecured creditors because of Refco’s failure to segregate the customer accounts from their general funds. This left Refco’s thousands of trading account customers with roughly 30 cents on the dollar. Reports indicate that FTX’s customer funds were similarly not segregated.

Refco made it into the top 20 bankruptcies in US history by size and Bennett was imprisoned for eight years. He was released from prison on health grounds in 2020 at the age of 71. The FTX story has some way to go.

October 17, 2022December 19, 2022

Responsibility and Sustainability in a Decentralised Environment: The ETH Merge

The Ethereum merge, completed in September, transitioned the blockchain’s consensus mechanism from an energy-intensive proof-of-work (POW) to a proof-of-stake (POS) protocol. This has reduced energy consumption by more than 99.9%.¹

For institutions, sustainability is a primary consideration when making investment decisions, as can be seen in the 5,000 signatories of the UN-backed Principles for Responsible Investment, including asset managers, pension funds, and banks.²

Sustainable investments are also a focus for individual investors: 53% of investors overall and 59% of millennials invest in companies or funds that have a strong profile of positive social or environmental impact.³ The improvement in Ethereum’s energy use enables it to act as a bellwether for broader investment into digital assets.

How Does ETH Proof-of-Stake Reduce Energy Consumption?

Proof-of-work protocols use computationally-intensive, and therefore energy-intensive, methods to validate and secure transactions. The cost of the energy and computer hardware required to gain control of 51% of the network, necessary for a hostile participant to have fraudulent transactions approved as valid, provides a preventative control.

With proof-of-stake, participants stake (pledge) 32 ETH, equivalent to around USD 41,000⁴ to become a validator. Validators are chosen at random to create a block of transactions or to verify (attest) blocks they do not create. They are rewarded for both. Since each node only validates a specified set of transactions, rather validating all new blocks under POW, the energy use is significantly reduced.

The staked ETH and rewards for validating and attesting are incentives for good behaviour. For bad behaviour, including collusion in attesting to malicious blocks or failing to validate when required, part or all of the staked ETH may be forfeited.

Institutional-grade Change

The Merge represents more than just a reduction in energy use and an improvement in the sustainability of the network. It also demonstrates that a decentralised blockchain community can come together to successfully implement change with the reliability and rigour expected of institutional-grade financial market infrastructure.

Unlike the traditional financial system, Ethereum does not have a central issuer or controlling body. Instead, it has a community which includes core protocol developers, validators/miners, application developers, market participants (exchanges, brokerages, and custodians), and holders of Ethereum.

The Merge has taken many years and the fact the final stage was implemented on a live global 24/7 network, which processes more than a million transactions per day⁵, without taking it offline is a significant achievement. The Merge has been likened by some to changing the engines of an aircraft, mid-flight. While time is needed to fully measure the outcomes, so far it is a success.

Looking to the future, it is time for the blockchain community more broadly to continue to do their part in improving the sustainability of digital assets, their energy use, and their energy sources, and for the Ethereum community to respond to other network challenges such as scalability or transaction costs.

1. https://digiconomist.net/ethereum-energy-consumption (8 November 2022)
2. https://www.unpri.org/annual-report-2021/how-we-work/more/new-and-former-signatories
3. Morgan Stanley (2021) study of 800 US investors and 203 millennial investors with minimum investible assets of USD100,000 https://www.morganstanley.com/assets/pdfs/2021-Sustainable_Signals_Individual_Investor.pdf
4. messari.io: 1.4million on (12 September 2022)
5. messari.io: USD 1,270 (13 October 2022)

October 16, 2022December 20, 2022

Digital Déjà Vu – ICOs and 17th Century Treasure Hunters

Cryptoasset markets are often thought of as innovative, which is true in some cases, but not all. Slow processes and regulation can certainly be frustrating, but market participants should always be careful to not be blinded by neophilia, or a love of novelty. In this article we show that the growth of finance in England in the late seventeenth century, and the craze in Initial Public Offerings (IPO) that it gave rise to, provides a direct parallel with the Initial Coin Offering (ICO) craze that swept cryptoasset markets in 2017.

The late seventeenth century was a period of swashbuckling and piracy. In the late 1680s the Duke of Albemarle assembled a group of investors to form a joint stock company to fund and expedition under Captain William Phipps to search for treasure near modern day Cuba. While it is difficult to put a date on the first joint stock companies, it was still a novel concept in England at the time. The idea had arrived from Holland along with several other financial innovations such as sovereign bonds, which Holland had first adopted in 1517, and stock exchanges, one of the first of which was the Amsterdam stock exchange, which had been established in 1602.

In late 1686 Phipps discovered the wreck of a Spanish ship and recovered 34 tons of treasure, which yielded the investors a 10,000% return on their original investment. This sparked a craze in diving companies with some IPOs rising 500% after listing. The mania for diving stocks translated to other companies promoting newly patented technologies including linen, paper, burglar alarms and even a system that used lights for catching fish. For example, the White Paper Company tripled, and the Linen Company quadrupled in value during the four years after their IPO. Even celebrities became involved: Daniel Defoe, who went on to write Robinson Crusoe, invested in, and became treasurer of a diving company.

Cryptoasset markets had a similar experience with the craze in Initial Coin Offerings (ICO). This is a form of fundraising using cryptoassets that many innovative companies used to raise capital, which started on the Bitcoin network with the ICO of Mastercoin in 2013. Ethereum was also originally funded through an ICO, which took place in 2014 and raised over $17m. ICOs were not limited to digital asset projects: Brave, a new internet browser, raised $35m in approximately 30 seconds after launch. In all, the ICO craze saw some 800 companies raise a total of about $20 billion. Similarly, celebrities such as Paris Hilton and Floyd Mayweather became involved, endorsing some ICOs. Mayweather’s promotions included a message to his Twitter followers that Centra’s ICO:

“Starts in a few hours. Get yours before they sell out, I got mine…”

The crash in 1696 was significant. 70% of companies that had been listed in 1693 companies went under. Tighter regulation swiftly followed. To dampen speculation the number of market makers (jobbers) and brokers was limited to 100, proprietary trading was forbidden, and high commissions were abolished. Similarly, to bring the ICO craze to an end, the SEC asserted its jurisdiction in 2017 and pursued high-profile cases against issuers and endorsers, including Block.one who settled charges related to the ICO of EOS for $24m. Consumer warnings were issued by regulators in Australia, Switzerland, and the UK, and ICOs were banned in places like China and South Korea.

In the end, Floyd Mayweather settled with the SEC for the sum of $615k. Daniel Defoe was not as fortunate. He lost his fortune after a further speculation failed, this one involving civets, and became a lifelong critic of financial speculation. However, he started his writing career the year after the crash in 1697 so it can be argued that his failure in the markets was a net benefit to mankind.

October 16, 2022October 20, 2022

Digital Déjà Vu – Voyager Digital and Knickerbocker Trust

This story covers three topics. First, as markets evolve, they often see a wave of new entrants who are subject to lower regulatory requirements than the incumbents, sometimes known as ‘regulatory arbitrage’. Second, since crypto asset firms and crypto assets do not pose a systemic risk to the economy, there tends to be no lender of last resort, although the hazard of state support does not exist as a moral hazard. Third, while markets are seemingly impersonal and digitised, the importance of trust remains paramount. Once a reputation is damaged, the effect on confidence can be swift and devastating.

The nineteenth century saw the growth of trust companies. Originally formed to handle various financial tasks for private estates and corporations, these provided similar services to banks but were less heavily regulated and capitalised, meaning they could generate higher returns.

Among other services, trusts, unlike banks, provided uncollateralised loans to brokers for the purchase of stocks that had to be repaid by the end of the day. The brokers used the securities as collateral for overnight loans from banks, which were used to repay the initial loan from the trusts. Similarities are found in crypto asset flash loans, which are also short-term, uncollateralised and designed to facilitate trading.

Voyager Digital, which recently filed for bankruptcy, had similarities to a trust company. Clients deposited crypto assets at Voyager and were able to earn returns that were not available from traditional financial service providers. For example, Voyager offered 12% annual interest on Polkadot deposits, with other crypto assets earning up to 8%. This led to it experiencing significantly rapid growth, reporting in Q1 2022 that it held over $5bn in deposits. Voyager then lent these assets to market makers and hedge funds on a largely uncollateralised basis. One of their borrowers was Three Arrows Capital.

By 1907 the Knickerbocker Trust company was one of the largest in the US. Its president, Charles Barney, was a leading figure in New York society with a good reputation. In the same year Charles Morse, an associate of Barney’s, tried and failed to repeat a successful corner of the ice market by trying to corner the market in United Copper stock. The New York Clearing House was almost able to contain the failure. However, Barney’s previous association with Morse became public and this was enough to cause a run on Knickerbocker. The impact on the overnight lending market against stock collateral was rapid as rates jumped from 9.5% to 100% in two days and the market seized.

Voyager was similarly impacted by the collapse of 3AC. Its bankruptcy filing showed it was owed $689 million by 3AC with no indication that this was collateralised in any way. Voyager’s earnings for Q2 2022 showed it held $227m of collateral against over $2bn of loans. In addition, it was impacted by both the fall in prices of stETH, a promissory note for ETH on the upcoming Ethereum 2.0, and GBTC, which began to trade at discounted rates to the Bitcoin that backed it. All these circumstances, combined with Celsius’s collapse, led to a run-on Voyager very similar to the one on the Knickerbocker. In 1907, J.P. Morgan convened the presidents of 14 banks in his New York office who pledged nearly $25m, saving numerous firms from collapse, however, Knickerbocker was not among them. Sam Bankman-Fried of FTX similarly attempted to save Voyager but, unlike J.P. Morgan, he was unable to gain support from any other parties. As we can see, the comparison between Sam Bankman-Fried’s and JP Morgan’s experience is not a perfect one.