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Why monopoly privatisation is really and truly not (even for) us

Published by Anonymous (not verified) on Tue, 09/08/2022 - 8:00am in

Privatisation, is actually based on a complete misunderstanding of the origin of money. We were told – and still are, that privatisation is effective because these private companies make their own investments and are not dependent on Treasury decisions to prioritise water infrastructure (say) over hospitals or education. If that were the case – then... Read more

Probably the most important sentence Mogg has ever uttered

Published by Anonymous (not verified) on Tue, 02/08/2022 - 10:54pm in

Is when he states quite categorically that Quantitative Easing is owed BY the government TO the government. Worth watching and bookmarking! this two minute clip: Even if I’m not sure if Rees-Mogg has the correct figures, he certainly has the correct principle. And that is a sentence I never expected to write! Let us hope... Read more

Shapps is thoroughly misleading again

Published by Anonymous (not verified) on Mon, 01/08/2022 - 9:20pm in

And ASLEF is this time taking on the Transport Minister: Quite how or why Shapps thinks working on rest days should be compulsory is surely another archaic rule from even before 1919. Does he really think rest is not required? Rather, he actually needs to modernise his own thinking. Indeed, it is quite remarkable how... Read more

The Shadow Bank That Owns The World

Published by Anonymous (not verified) on Sat, 30/07/2022 - 3:32am in

Who owns the world? Well, I’m about to tell you – And no, it’s not Oprah.

Now I’m going to drag out the suspense of who owns the world for this entire – BLACKROCK! It’s BlackRock! (Damn it… Should’ve dragged it out longer.)

BlackRock is the largest asset management firm on the planet. It’s essentially a shadow bank. And I don’t know what a shadow bank is other than what my uncle would always say the Greek guy at his construction job had. (Seemed vaguely racist but I couldn’t put my finger on it.)

BlackRock is enormous! However big you’re picturing, multiply it by the size of, like, a Toyota Sequoia. …Side note: why are giant SUV monster trucks always named after the thing they kill? Your dumbest friend is always like, “Yeah, I own a Nissan Polar Bear. But I’m thinkin’ of tradin’ it in for the Chevy Our Grandchildren’s Future. It has 18 cup holders and two cub holders for any bear cubs you run over with it.”

BlackRock literally has more assets than the gross domestic products (GDP) of every single country except China and the U.S. So picture India with their 1.4 billion people. BlackRock has more than their annual GDP! It’s ridiculous. BlackRock holds somewhere around 9 trillion dollars. That’s a tenth of the whole world’s yearly economic activity.

Here, this will put it in perspective. If you make $60,000 a year (after taxes), then you’re doin’ pretty well. But in order to grab up $9 trillion, you’d need to work for 150 million years. You’d have to work for the entire length of the existence of the dinosaurs. (And that’s if your stegosaurus boss paid you on time, which, you know how they are.)

And BlackRock is by far the biggest wealth fund or shadow bank in the world. “The grand total of the sovereign wealth funds managed by over 91 such funds across the world is projected to be worth approximately 8.2 Trillion US Dollars.” That’s right, 91 other such funds don’t have as much as BlackRock has.

So what do they do with all this money? I’ll tell you what – they own everything. But especially horrible shit. They’re like that friend you have who always goes, “Man, if you get a prostitute, I’ll pay for it. Seriously.” But that guy’s not offering to pick up the tab for your kid’s daycare. No way. They don’t care about that.

BlackRock is a huge investor in oil and they hold $85 billion in coal despite their pledge to sell fossil fuel shares. About that pledge – BlackRock’s CEO and founder, Larry Fink – yes, his name in the dictionary literally means “an unpleasant or contemptible person.” (We’re living in a stupid simulation, and it’s not even trying to hide it anymore. The next president will be named Daniel Yourfucked and we’re supposed to keep acting like everything’s fine?!)

In a public statement, BlackRock CEO Larry Fink announced that he would begin holding the companies they invest in accountable for being responsible corporate citizens.

A responsible corporate citizen? That doesn’t even make sense. That’s like a fun STD.

But even so, that statement by Fink made some of BlackRock’s investments – companies that do things like pump fossil fuels to destroy the planet – nervous. They thought, “Oh shit. BlackRock might start funding good stuff, like electric public transportation, free community health centers, or bringing back Beanie Babies™. Everybody loves Beanie Babies™.

So BlackRock then wanted to reassure everyone they aren’t actually changing. They wrote a letter stressing their commitment to destroying our future. “In the letter, BlackRock reported… its investment in fossil fuel companies totaled $259 billion globally… [proudly touting] that it is ‘perhaps the world’s largest investor in fossil fuel companies.’”

For the rest of this analysis of the people who own the world, please watch the full video above.

Lee Camp is an American stand-up comedian, writer, actor and activist. Camp is the host of Behind The Headlines’ new series: The Most Censored News With Lee Camp. He is a former comedy writer for the Onion and the Huffington Post and has been a touring stand-up comic for 20 years.

The post The Shadow Bank That Owns The World appeared first on MintPress News.

NS&I admits the reason why it doesn’t offer market-leading rates

Published by Anonymous (not verified) on Thu, 28/07/2022 - 8:09am in

Because actually it doesn’t need to… National Savings and Investments [NS&I] has often faced criticism for not offering higher interest rates, but there’s a reason behind this – suggests the magazine Which?:  When we [Which?] asked NS&I about its rates, it told us that it generally looks to position itself in the third quarter of... Read more

Why Celsius Network's depositors won't get their money back

Published by Anonymous (not verified) on Thu, 14/07/2022 - 10:36pm in

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banks

The crypto lender Celsius has filed for Chapter 11 bankruptcy. This should come as a surprise to absolutely no-one, though the grief and pain on Twitter and Reddit suggests that quite a few "Celsians" didn't want to believe what was staring them in the face. Celsius suspended withdrawals nearly a month ago. So far, every crypto lender that has suspended withdrawals has turned out to be insolvent. There was no reason to suppose that Celsius would be different.  

Celsius's bankruptcy filing says the company has assets of $1 - 10 bn and a similar quantity of liabilities: 


This doesn't tell us much about the extent of the company's insolvency. But rumours have been circulating of a $2bn hole in its balance sheet. In May, according to Coindesk, the company said it had $12bn of what Celsius calls "customer assets" and Coindesk calls "assets under management", and $8bn lent out to clients. So "assets under management" seem to have fallen by $2bn. Could this be the missing $2bn?

No, it couldn't. It's the wrong side of the balance sheet. What Celsius calls "customer assets" are its own liabilities. And here I must take issue with the wholly wrong and downright misleading terminology used both by Celsius itself and by journalists, including Financial Times journalists who really should know better. 

Celsius is not an asset manager, it's a shadow bank. And deposits in banks aren't even "customer assets", let alone "assets under management". They are unsecured loans to the bank. They are thus liabilities of the bank and fully at risk in bankruptcy. 

Depositors in a bank do not have any legal right to return of their funds. Even if the terms of the account say funds can be withdrawn whenever the customer chooses, the bank can refuse to allow customers to withdraw their funds if it doesn't have the cash to pay them. Closing the doors is the traditional way of stopping a bank run. Celsius, like other crypto lenders that have suffered bank runs since Three Arrows Capital collapsed, closed its doors to stop customers withdrawing their funds. If it hadn't, it would have run out of money. 

Furthermore, if the bank goes bankrupt depositors are only entitled to a share of the residual assets after all secured and senior claims (such as unpaid taxes and loans from central banks) have been met. This is why licensed banks have deposit insurance. And this is also why, in 2008, government chose to recapitalize banks, including unlicensed shadow banks. If they hadn't, millions of depositors would have lost some or all of their money. 

Celsius's terms of use make it completely clear that customers who deposit funds in Celsius's interest-bearing accounts are lending their funds to Celsius to do with as it pleases. And it specifically says that in the event of bankruptcy, customers might not get all - or indeed any - of their money back. 


You'd think that in the crypto Wild West of all places, where "caveat emptor" rules and fools deserve to lose their shirts, people would read the small print, wouldn't you?

Not only are customer deposits fully at risk in bankruptcy, collateral pledged against borrowing from Celsius is too. The above excerpt from Celsius's terms of use says that title to the collateral passes to Celsius. So you haven't pledged collateral to Celsius, you've sold it a bunch of crypto. Celsius is fully entitled to lend out the crypto you have sold to it. If it does, and it is unable to recover it, then you won't be able to repurchase your crypto. Anecdotally, I have heard of several instances of people being unable to recover their crypto even when they have repaid the loan. But again, they should have read the small print. They no more have the right to return of their collateral than depositors do to return of their funds. 

The only users of the Celsius platform who - in theory - have the right to return of their money are holders of "custody accounts". Celsius introduced these in April 2022 because several U.S. states had hit it with cease & desist orders for marketing unregistered securities. These custody accounts are only available to U.S. residents. All other deposits automatically go into interest-bearing accounts. 

The terms of use reassuringly say that title to funds in custody accounts remains with the customer. But that doesn't mean your funds are safe, nor that you will necessarily be able to withdraw them. Celsius controls the keys for these accounts, and it can suspend withdrawals from these accounts. Furthermore, funds in these accounts are not bankruptcy remote:


This could be called "Custody In Name Only". Custody accounts are merely a legal device to avoid Celsius having to register its products as securities. Unlike Voyager, Celsius seems to have made no attempt to segregate these funds or give holders of these accounts seniority over other unsecured creditors. And it explicitly says it is not a fiduciary: 

I wouldn't like to assume that people with funds in these "Custody In Name Only" accounts will get their money back. 

Celsius's insolvency is almost certainly a problem of high indebtedness and falling asset prices. When asset prices fall rapidly, as they have been doing in the crypto world recently, a highly leveraged bank's asset value can quickly fall below the value of its liabilities. The $2bn "hole" is Celsius's negative equity.  

Furthermore, lending in the crypto world relies on overcollateralization. Lenders demand collateral top-ups (margin calls) to maintain collateral ratios, and will foreclose loans and liquidate collateral if collateralization ratios fall too low. In DeFi, this process is often automated. 

This has happened to Celsius. In 2021, Celsius took out a $1bn USDT loan from Tether, which was 130% overcollateralized with BTC. As BTC's price fell, Tether repeatedly demanded that Celsius post more BTC collateral to maintain the 130% overcollateralization ratio. It seems that Celsius didn't manage to do this, since Tether has now liquidated the collateral and cancelled the loan

Celsius has also paid off loans from DeFi lenders, probably to prevent its collateral being liquidated. And I'm sorry, Celsians, but Celsius almost certainly used your deposits to repay these debts. After all, it's not your money. It belongs to Celsius. You agreed that it did. Why wouldn't it use its own money to repay its debts?

It will be some time before we know how much, if any, money there will be to distribute to depositors.  There are no current accounts for Celsius - the most recent accounts filed date from February 2020 - and Celsius appears to have removed from its website anything that might indicate its current financial position. It is astonishingly opaque, far more so than any bank, or indeed any publicly traded financial institution. You'd think, wouldn't you, that people in the crypto Wild West would want more transparency from crypto companies, not less?

Celsius marketed itself as "safer than banks". But in reality, it was the opposite. It didn't have deposit insurance, didn't have any of the capital or liquidity buffers that banks are required to hold, had little or no cash reserves backing its deposits, made highly risky loans, participated in complex and opaque investment schemes, and lent out collateral pledged against borrowing. It behaved like the worst of the shadow banks that brought the financial system to its knees in 2008. Why, I want to know, is the crypto world hell-bent on re-enacting historical financial disasters in a new and even more dangerous form? 

Inevitably, there are calls for tougher regulation of crypto shadow banks like Celsius. To some extent, I agree. At the very least, misleading marketing should be stamped on: no way was Celsius ever a safer alternative to a traditional bank. And crypto lenders should be held to the same standards of disclosure as other financial institutions. It should not be possible for a crypto lender to produce no accounts for over two years and scrub all mention of its current financial position from its website. 

But there were warning signs all over Celsius. The risk to depositors and borrowers was clear from the terms of use documentation. And many people (including me) pointed out the ponzi-like nature of its business model. I am sad for those people who foolishly put their life savings into Celsius and other failed lenders. And if there has been actual fraud, then those responsible should be brought to justice. But people who don't read the small print or take any notice of red flags really shouldn't be surprised if they are swept away in the tide of bankruptcy.

Related reading:

The sinking of Voyager
Shipwrecked

Shipwrecked

Published by Anonymous (not verified) on Thu, 14/07/2022 - 1:46pm in

Tags 

banks

Two days after I published my last post, the ship went down. Voyager Digital filed for Chapter 11 bankruptcy protection

The bankruptcy filing revealed the extent of its indebtedness. Tragically, most of its creditors are customers, some of whom hold claims worth millions of dollars. But its largest creditor is Alameda Research, to whom it owes $75m. This is the maximum that Voyager could draw down from Alameda's credit line in a 30-day period. So it appears that Alameda did not pull its credit line as I thought. Rather, Voyager maxed it out - but still ran out of money. Voyager's desperate shortage of cash is the proximate reason for its bankruptcy. 

But for its customers, the hole in its balance sheet is the bigger problem. Voyager admits that it cannot repay all, or even most, deposits in full. Its press release outlines a resolution plan that distinguishes between two classes of depositor (click image for a larger view):

US dollar deposits on Voyager don't earn interest. To earn interest, depositors must exchange their US dollars for one of the cryptocurrencies and stablecoins listed as available for trading. Typically, depositors do this as soon as the dollars have been transferred to the platform. So the vast majority of deposits on Voyager are crypto deposits. These will now be subject to a haircut, the size of which will depend on the outcome of the bankruptcy proceedings of Three Arrows Capital (3AC). And that is a complete can of worms.

On 29th June, a court in the British Virgin Islands (BVI) ordered 3AC into compulsory liquidation. This would have resulted in the winding up of 3AC and distribution of its assets to its creditors, including Voyager. But 3AC responded by filing for U.S. Chapter 15 bankruptcy protection, thus preventing its assets in the United States from being seized by the BVI liquidators. 

Normally, filing for bankruptcy protection means immediate freezing of assets. But in the decentralized crypto world, freezing assets is voluntary. And it seems 3AC's co-founders, Su Zhu and Kyle Davies, don't think they should have to do it. Shortly after filing for bankruptcy, 3AC moved a sizeable part of its remaining stablecoin holdings to a wallet on the KuCoin exchange that, according to the exchange, did not belong to 3AC. And according to a major NFT investor, 3AC had also started to move its NFT collection. There was a real risk that the remaining assets would simply disappear and creditors would end up with nothing. 

Two days ago, annoyed investors obtained a court order to freeze 3AC's assets , saying that the 3AC pair were not cooperating. Liquidators were not being granted access to company documentation, the company's offices in Singapore appeared to be deserted, and Su Zhu and Kyle Davies had disappeared.  

The court order had a remarkable effect. Su Zhu popped up on Twitter complaining that the liquidators were "baiting", and accusing them of negligence: 


It does not appear that Su Zhu has any intention of handing over 3ACs assets without a fight - not least because he claims to be a creditor himself. 

For Voyager's customers, the 3AC shenanigans are very bad news. If the 3AC loan is not recovered, then they could be facing a haircut of at least 30% and possibly quite a bit more. 

But not all of them will. USD depositors won't be subject to this haircut. Their money (and Voyager is at pains to insist that it is their money) is supposedly safely held in an omnibus account at Metropolitan Commercial Bank.

Voyager says it intends to restore access to USD deposits "after a reconciliation and fraud prevention process". I find this rather concerning. If Voyager was keeping proper records of customer deposits and regularly reconciling them with the balance in the bank account, such a process would not be necessary. And what fraud do they think they need to prevent? Could they be planning to blame the bank if there is a discrepancy between their customer records and the balance in the account, and advise customers to sue the bank?

This brings us back to the question of FDIC insurance. Metropolitan Commercial Bank has FDIC insurance. Voyager does not, but it claims that US deposits are covered by FDIC insurance on an individual customer basis by virtue of being held in an FDIC-insured bank. Voyager insists that US depositors are customers of the bank. This implies that FDIC passthrough insurance applies. And if it does, then the bank is indeed liable. 

Back in 2018, FDIC introduced a rule change that forced banks to be able to identify all of their insured depositors, including any that qualify for passthrough insurance, so that FDIC insurance claims could be settled quickly. So if Voyager is correct, then Metropolitan Commercial Bank must know each of Voyager's USD depositors. It cannot argue - as its statement appears to - that customer records are held by Voyager and it has no responsibility for them. 

However, Voyager's claims regarding FDIC coverage for its depositors are decidedly suspect. Voyager's marketing material strongly implied that cash deposits were FDIC-protected in the event of the company's failure: a 2019 blogpost stating this remained up on the company's website and was frequently pointed to in marketing communications. FDIC is now investigating whether the company misled customers. 

Whether the bank is liable for any missing funds will depend on whether passthrough insurance applies to Voyager's USD deposits. But Voyager is not a trust company or a licensed broker, and nowhere in its documentation does it say it acts as a fiduciary or agent for its customers. It thus does not appear to meet the requirements for FDIC passthrough insurance. And if it does not, then it is unclear what if any liability the bank has for losses suffered by Voyager's customers. 

It is notable that Voyager's statement only says it will "restore access" to USD deposits. It does not say it will refund them in full. If the bank account has a shortfall, therefore, USD depositors could suffer a haircut. Pursuing recovery of any missing money through the courts could take a long time and ultimately be unsuccessful - especially if the bank is not liable. 

But it is the crypto customers who face the biggest losses. To use banking parlance, they are going to be bailed in. A substantial part of their crypto will be coercively exchanged for new shares in Voyager (which will initially be worthless) and Voyager tokens (currently trading at 7 cents).

It is easy to say "they should have done their due diligence", but it is nonetheless heartbreaking to read the stories of people who have lost their life savings. Whether they ever recover their losses will depend on the performance of the company once its restructuring is complete and it starts trading again. They will be the new owners of the company and the holders of its native token. Like the Bitfinex depositors who suffered haircuts of 36% in 2016, it will be in their interest to ensure it succeeds. 

Related reading:

 The Demon Barber of Bitcoin - Forbes

The Great Greek Bank Drama, Act II; The Heist

A failure of compassion 

The RMT think that the bankers have it

Published by Anonymous (not verified) on Thu, 14/07/2022 - 6:57am in

This wonderful clip from the RMT’s Eddie Dempsey giving evidence to The Transport Select Committee suggests that all is not what it seems at Network Rail, which, of course, we are all told ‘must get more efficient’ … In fact, it is so efficient that it actually spends more on debt repayment than it does... Read more

The sinking of Voyager

Published by Anonymous (not verified) on Sun, 03/07/2022 - 10:32pm in

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Friday was quite a day. The crypto lender BlockFi provisionally agreed a bailout deal with FTX. The hedge fund Three Arrows Capital (3AC), already in compulsory liquidation in its home territory the British Virgin Islands, filed for Chapter 15 bankruptcy protection in the United States. And the crypto broker Voyager suspended trading and withdrawals

Voyager's press release revealed a massive hole in its balance sheet. Some 58% of its loan book consists of loans to 3AC:

And its loan book is nearly 50% of total assets:

So approximately 28% of Voyager's assets are in default. And since 3AC now has creditor protection, Voyager must wait for bankruptcy courts to decide how much, if anything, can be recovered. That will take months. 

But the balance sheet hole doesn't explain why Voyager has suspended US dollar withdrawals. Despite its apparently healthy "cash held for customers" balance, it seems to be dreadfully short of cash. There is something else going on here. 

As always when something doesn't quite add up, I take a look at the books. In May, only a few days after Terra's collapse, Voyager released its quarterly financial update, dated 31st March. The income statement makes grim reading: 

Voyager is making whopping losses. Like all crypto companies this year, it has taken a mammoth hit on the fair value of its crypto assets. But it's the operating loss that concerns me. In the nine months ended March 31, 2022, it spent over $82m on marketing and sales and a further $182m on customer rewards, far above what it was earning from staking and loan fees. This turned what might have been a decent if uninspiring operating profit into a $68m loss. Such exorbitant expenditure on building a customer base reminds me of WeWork during Adam Neumann's tenure as CEO - and we all know how that ended, don't we?

More worrying still is Voyager's cash flow. Voyager is haemorrhaging cash (remember these figures are in thousands):


It has burned through nearly $200m in nine months. During this time, Voyager did a $75m private placement shares issue to raise some cash. But it wasn't anywhere near enough. At the end of the period its total cash and cash equivalents, including cash held for customers, was down by nearly $145m. 

So Voyager has no cash and deeply negative income. And its available assets are now considerably less than its liabilities. It is almost certainly insolvent, though it has not yet filed for bankruptcy. 

But Voyager wasn't insolvent when these accounts were produced. Its current assets were easily enough to cover its current liabilities, its net assets were positive, and its ratio of equity to assets (unweighted) was a thin but comfortable 4.2%. 


Voyager's liquidity was strained, but as long as it could borrow against its assets, it would be able to meet its obligations as they fell due. 

The collapse of 3AC created a golden opportunity for Voyager to borrow the money it desperately needed. The crypto billionaire Sam Bankman-Fried, CEO of FTX and founder of the asset manager Alameda, was bailing out distressed crypto lenders like BlockFi. Voyager's management decided they wanted a piece of that - after all, Alameda was already a Voyager shareholder. So, saying it wanted to "safeguard customer assets in light of current market volatility", Voyager arranged new revolving credit facilities of $200m USD/USDC and 15,000 BTC with Alameda.  Simultaneously, Voyager Digital issued a notice of default against 3AC. 

Presumably Alameda looked at Voyager's books and decided that the company was basically sound. And presumaly they also thought Voyager had a good chance of getting its money back from 3AC. So their decision to provide Voyager with additional liquidity wasn't unreasonable. Shoring up liquidity when the market is turbulent can prevent basically sound companies from failing. 

But 3AC's BVI compulsory liquidation and US Chapter 15 bankruptcy was a game changer. Suddenly, Voyager no longer had a strong balance sheet. It had a steaming pile of extremely distressed and probably unrecoverable loans. And shoring up liquidity for a company whose assets are evaporating is a mug's game, as Carillion's lenders discovered to their cost. Did Alameda pull its credit lines?  

If it did, that would explain why Voyager suspended all withdrawals including US dollars. It does not have sufficient ready cash to pay its customers, and it can't borrow any more. 

But Voyager has told its customers that their US dollar balances are safely held in an omnibus account at its FDIC-insured partner bank. Furthermore, its customer service agreement says that because all movements in and out of the account are controlled by the bank, the customers are therefore customers of the bank:


Now, this is odd. If movements in and out of the account are controlled entirely by the bank on behalf of Voyager's customers, then Voyager should not be able to suspend US dollar withdrawals. But it has.  Clearly, therefore, Voyager is controlling access to the money, despite its statement that it does not provide "any services pertaining to the movement of, and holding of, USD". 

And there is a second mystery. If all US dollars belonging to its customers are in the omnibus account as it claims, why has Voyager suspended US dollar withdrawals? It clearly had to suspend conversion of crypto balances into US dollars, because it now has no means of obtaining those dollars. But there seems no reason to suspend withdrawal of existing US dollar balances - unless there isn't enough cash in the omnibus account to reimburse all US dollar depositors. 

This brings us back to Voyager's enormous cash burn over the last nine months. "Cash held for customers" is supposed to be segregated, but as it's on Voyager's own balance sheet this is merely an accounting fiction. There's nothing to stop Voyager borrowing its customers' dollars. So, what if Voyager has used the omnibus account as a source of dollar liquidity? What if it has drained that account to defray its exorbitant operating expenses, and now can't put the money back? Indeed, what if all along it has funded that account on a just-in-time basis, borrowing US dollars when needed to meet withdrawal requests, and now it can't fund it any more because its credit lines have been pulled? This would explain why it has had to suspend US dollar withdrawals. It can't pay out money it doesn't have and can't get. 

The omnibus account at Metropolitan Commercial Bank comes with FDIC insurance of up to $250,000. This protects the money in that account from loss in the event of the bank's failure. It does not protect Voyager's customers from losses in the event of Voyager's failure. This is clearly stated in Voyager's own customer service agreement (cited above):

FDIC insurance does not protect against the failure of Voyager or any Custodian (as defined below) or malfeasance by any Voyager or Custodian employee. 

However, Voyager's marketing material incorrectly states that FDIC insurance protects customers from the company's failure:

It is hardly surprising that Voyager's customers, deprived of their US dollars, are asking "When FDIC?"

An enterprising Voyager customer rang FDIC to ask how they could claim on the insurance. The answer was clear and comprehensive: 

(source: reddit)

Metropolitan Commercial Bank has also put out a statement confirming that FDIC insurance would only be triggered in the event of its own insolvency, not Voyager's: 


Oh, and in case you were wondering, SIPC protection doesn't apply either - not surprisingly, since Voyager's products are not registered as securities. Again, this is clearly stated in Voyager's own customer service agreement: 

Voyager is not a member of the Financial Industry Regulatory Authority, Inc. ("FINRA") or the Securities Investor Protection Corporation ("SIPC"), and therefore Cash is not SIPC-protected.

There will no doubt be calls for retail depositors in risky enterprises like Voyager to have some form of insurance protection. But to my mind, the biggest problem here is mis-selling. Voyager deliberately marketed its accounts as safe products for retail customers, using FDIC insurance as the "hook" to trawl them in. It did so knowing that FDIC insurance would not protect those customers in the event of Voyager's insolvency. 

Furthermore, for FDIC insurance limits to apply to individual Voyager customers as if they were customers of the insured bank, as Voyager's customer service agreement implies, Voyager would have to be acting as agent or fiduciary for its customers in the placing of US deposits with its banking partner, and those deposits would have to be properly segregated as client funds. But nowhere in Voyager's legal agreements does it say that it acts as agent or fiduciary for its US dollar customers. It shows the funds on its own balance sheet, so they clearly aren't segregated. And it controls access to the funds. So it is hard to see why passthrough insurance limits would apply. And if they don't, then in the event of Metropolitan Commercial Bank failing, FDIC insurance would be limited to $250,000 in total, not $250,000 per customer, and would go to Voyager, not its customers. So customers would lose some or all of their money if the bank failed. Voyager's marketing was seriously misleading. 

Voyager also gave the impression that its investments were safe when they were anything but. The loan book is extremely concentrated: almost all the lending is to only 7 counterparties, of which the largest by far is 3AC. 


And the loans are seriously undercollateralized. In the earnings call on 16th May, Voyager's CEO, Steve Ehrlich, admitted that there isn't much collateral, but insisted that high levels of effectively unsecured lending were absolutely fine: 

But his largest borrower, 3AC, was already heading for bankruptcy because of its exposure to Luna/UST. Clearly, he didn't know his borrowers nearly as well as he needed to. 

I have no problem with a hedge fund lending only to seven counterparties, if it is lending its own funds or those of professional investors who understand the risks they are taking. But Voyager marketed high-risk investments to retail depositors with promises of safety and (non-existent) insurance. To my mind, this isn't just bad, it is criminal. But crypto is an unregulated, borderless space. Even if Voyager has lied to its customers and embezzled their funds, it is unclear what if any power national authorities have to hold it to account. And even though there will undoubtedly be a forest of lawsuits, the money is gone. 

Sorry, Voyagers. You are going down with this ship, and no lifeboat will save you. 

Related reading:

Liquidity Matters

Image by Reimund Bertrams from Pixabay

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