This week was packed full of news with huge reports landing on The Block’s desk, ranging from the near 700-page examiner review exploring the failures of bankrupt lender Celsius to the UK’s sweeping new regulatory framework proposal for the crypto industry.
We also had the usual sprinkling of drama from the closure of a sidechain by NFT platform Rally to a battle between VCs. Here are some of the major developments that caught our eye.
A damning report on Celsius
Bankrupt crypto lender Celsius was back in the spotlight at the start of the week following the release of a damning bankruptcy examiner report from Shoba Pillay, who was appointed by the bankruptcy court as an independent examiner.
The near 700-page tome explored how Celsius operated a riskier business than advertised and failed to report hundreds of millions in losses, all while CEO Alex Mashinsky cashed out more than $68 million.
"Behind the scenes, Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect,” Pillay wrote. “Celsius abandoned its promise of transparency from its start.”
Bankruptcy examiners provide the courts and creditors with an independent legal outlook on the failures of bankrupt companies. Celsius, according to the report, engaged in dubious investment practices from risky lending agreements to token manipulation and misleading statements to customers.
Pillay’s examination said that Celsius’s financial troubles had begun in 2020, long before it filed for Chapter 11 bankruptcy protection in July. At the height of the bull market, a third of Celsius’s institutional loan portfolio was wholly unsecured and more than half was under-collateralized, the examiner said. The firm also recognized $800 million in losses in 2021 from investments with Grayscale, KeyFi, Stakehound and Equities First Holdings.
Stablecoin issuer Tether pushed back on some of the claims in the report, which said that Celsius had lent more than $2 billion to Tether. Paolo Ardoino, Tether's chief technology officer, told The Block that it was "a mischaracterization” and that Celsius was a counterparty that had to post additional margin.
Mashinsky repeatedly equated the value of Celsius’s native token CEL with the lender’s value itself, according to the report. His team used several trading strategies to impact the price of the tokens and the company spent at least $558 million buying its own token on the market, the company said. Some of these questionable practices resulted in Celsius’s former chief financial officer writing “[w]e are talking about becoming a regulated entity and we are doing something possibly illegal and definitely not compliant,” the report said.
UK beefing up its crypto regulation
From one giant report on crypto lending to the next. On Wednesday, the UK unveiled its plans for regulating crypto trading and lending. A consultation paper from the Treasury outlined a new crypto regulatory framework that will cover crypto service providers, lending platforms, consumer protection, crypto issuance and more.
The paper proposed that operating a crypto exchange or lender will fall under the remit of the Financial Conduct Authority (FCA). Prospective companies will need to supply details of their operations, risk management processes and financial resources, among other requirements. They will also be responsible for designing control systems to detect market abuse.
Tokens that trade on UK exchanges will also be subject to traditional finance market abuse rules, which cover offenses from insider trading to market manipulation. For upcoming token offerings, they will likely be classed as security offerings under the guidelines. Exchanges will need to perform due diligence on the tokens being listed and ensure disclosure documents are filed.
The crypto industry has so far been receptive to the proposals and has until the end of April to submit responses on the paper.
“As the voice of the UK’s crypto sector we welcome this positive step towards greater regulatory clarity,” said Ian Taylor, board adviser of CryptoUK, in a statement. “Given the provisions within the proposed legislation, consultation with the industry could not be more critical.”
NFT platforms falter
One of the topics, however, that didn’t appear to be high on the UK’s regulatory agenda but still caused a stir this week was non-fungible token (NFT) platforms. Social token platform Rally told users that it will be shutting down its sidechain immediately. By shutting down the sidechain, which has no bridges to other chains, users will no longer be able to access their NFTs and therefore they will be effectively destroyed. Some users complained that this meant they had been “rugged,” a term that refers to being scammed.
Coinbase also announced this week that it would be pausing new NFT drops on its NFT platform. The recent developments with Coinbase and Rally show the struggles facing platforms that have not managed to capture significant market share in the NFT space. However, it’s not all bad news: Ebay’s NFT unit KnownOrigin is making a hiring push and NFT company Limit Break is airing a $6.5 million Superbowl ad.
VCs battle over Uniswap's governance
This week also gave us a taste of how venture capitalists may play a role in the governance of decentralized protocols and the challenges this could present. A behind-the-scenes battle took place between Andreessen Horowitz (a16z) and Jump Crypto over whether LayerZero or Wormhole would be a cross-chain used by decentralized exchange Uniswap.
A community "temperature check" vote landed on Wormhole, which is backed by Jump Crypto. However, A16z, which has 15 million voting tokens, was not able to participate in the temperature check due to the custodial set-up of its tokens. Supporters of both LayerZero and Wormhole had been pressuring Uniswap token delegates to vote in their favor, a source told The Block.
A final vote was expected to take place, but Uniswap Foundation's Executive Director Devin Walsh said that the "final governance vote will move forward with the results of the most recent snapshot poll," with Wormhole as the selected bridge. She also acknowledged that the vote had garnered "more attention than any Uniswap proposal in recent memory" and that she would propose an enhanced process for bridge selection in the future.
Speaking of VCs, the deals team covered several high-profile raises that are in the works, including Ethereum restaking platform EigenLayer trying to raise $50 million for a Series A round to Arpeggi Labs and Giga Energy attempting to raise funds around the $10 million mark.
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