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Huge reports that arrived on The Block’s desk this week included the over 700-page examiner study investigating the shortcomings of insolvent lender Celsius and the UK’s expansive new regulatory framework proposed for the cryptocurrency industry. This week was jam-packed with news.
Along with the typical drama, we also saw the closing of a sidechain by NFT platform Rally and a conflict between venture capitalists. Here are a few of the significant changes that attracted our attention.
At the beginning of the week, insolvent cryptocurrency lender Celsius was once again in the news with the publication of a devastating report by Shoba Pillay, an independent examiner chosen by the bankruptcy court.
The almost 700-page book described how Celsius ran a riskier company than it had represented and neglected to disclose hundreds of millions of dollars in losses, even while CEO Alex Mashinsky made more than $68 million.
In every significant way, Celsius operated its company in sharp contrast to how it presented itself to clients, according to Pillay. “From the beginning, Celsius abandoned its promise of transparency.”
The courts and creditors receive an unbiased legal assessment of failed company failures from bankruptcy examiners. The investigation alleges that Celsius participated in questionable investing activities, including dangerous lending arrangements, token manipulation, and deceptive customer communications.
According to Pillay’s investigation, Celsius’s financial issues started in 2020, a long time before the company requested Chapter 11 bankruptcy protection in July. According to the examiner, at the height of the bull market, a third of Celsius’s institutional loan portfolio was entirely unsecured and more than half had insufficient security. The company also suffered losses of $800 million in 2021 as a result of investments in Equities First Holdings, Grayscale, KeyFi, and Stakehound.
Some of the allegations in the paper, which said that Celsius had given Tether more than $2 billion, were refuted by stablecoin issuer Tether. The Block was informed by Paolo Ardoino, the chief technical officer of Tether, that it was “a mischaracterization” and that Celsius was a counterparty who needed to deposit more margin.
According to the study, Mashinsky frequently conflated the value of Celsius’s native token, CEL, with the worth of the lender itself. His team employed a number of trading techniques to influence token prices, and according to the company, it spent at least $558 million purchasing its own token from the market. The former chief financial officer of Celsius wrote “we are talking about becoming a regulated organization and we are doing something perhaps illegal and definitely not compliance,” the study added, in response to some of these dubious actions.
One massive article on crypto lending after another The UK outlined its ideas for regulating cryptocurrency lending and trade on Wednesday. A new regulatory framework for cryptocurrencies was proposed in a Treasury consultation paper. It will include provisions for consumer protection, lending platforms, crypto issuance, and crypto service providers.
The study said that the Financial Conduct Authority will have authority over running a cryptocurrency exchange or lender (FCA). The criteria for prospective organizations include providing information about their operations, risk management procedures, and financial resources. They will also be in charge of creating the controls necessary to spot market fraud.
The traditional financial market abuse laws, which include offenses including insider trading and market manipulation, will also apply to tokens that trade on UK exchanges. Future token sales will probably fall under the regulations’ definition of securities offerings. Exchanges will have to conduct their homework on the coins they plan to offer and make sure disclosure paperwork are submitted.
The recommendations have so far been well received by the crypto sector, which has until the end of April to respond on the document.
Ian Taylor, board adviser of CryptoUK, stated in a statement, “As the voice of the UK’s crypto sector, we applaud this encouraging move towards more regulatory clarity.” “Consultation with the industry is essential given the elements in the proposed legislation.”
Non-fungible token (NFT) platforms, however, were one of the subjects that didn’t seem to be high on the UK’s regulatory agenda but yet generated controversy this week. Rally, a social token platform, informed users that it will be immediately shutting down its sidechain. Users won’t be able to access their NFTs when the sidechain, which has no bridges to other chains, is shut down, therefore they will essentially be destroyed. As a result, several users claimed they had been “rugged,” a euphemism for being defrauded.
This week, Coinbase also disclosed that it will halt new NFT drops on its NFT platform. The recent developments involving Coinbase and Rally demonstrate the challenges that platforms that haven’t been able to gain a sizable market share in the NFT field are experiencing. Not all the news is terrible, though; NFT business Limit Break is launching a $6.5 million Super Bowl ad, while NFT company KnownOrigin of Ebay is actively recruiting.
The issues that may arise from venture capitalists’ involvement in the management of decentralized protocols were also introduced to us this week. Andreessen Horowitz (a16z) and Jump Crypto engaged in a contest behind the scenes to determine whether LayerZero or Wormhole will be the cross-chain used by decentralized exchange Uniswap.
A “temperature check” vote from the public chose Jump Crypto-supported Wormhole. However, because to the custodial setup of its tokens, A16z, which possesses 15 million voting tokens, was unable to take part in the temperature check. According to a source who spoke to The Block, Uniswap token delegates have been under pressure to support LayerZero and Wormhole.
Although a final vote was anticipated, Uniswap Foundation Executive Director Devin Walsh said that Wormhole will be the bridge used in the final governance vote based on the results of the most recent snapshot poll. In addition, she said that the vote had received “more attention than any Uniswap proposal in recent memory” and that she would go on to suggest an improved procedure for choosing bridges in the future.
Speaking of venture capitalists, the deals team reported on a number of high-profile fundraises that are currently underway, including those by the Ethereum restaker EigenLayer, which is looking to raise $50 million for a Series A round, Arpeggi Labs, and Giga Energy, which is seeking to raise funds of about $10 million.
