Rapture #219: BlockFi Equity Potentially Going to Zero and Gensler Comments

Rapture #219: BlockFi Equity Potentially Going to Zero and Gensler Comments

Welp, the bad news is piling up for crypto. This bear market continues to ravage the heroes of the previous bull market, and more pain is likely to come. Alex Mashinsky, CEO and Founder of Celsisus, was allegedly stopped by US authorities from leaving the US, though the company has formally denied the allegations. Additionally, BlockFi is truly on the brink of implosion, as the SBF deal I mentioned in previous newsletters is set to wipe out all of the equity value of current holders. Finally, Gary Gensler came out swinging, stating that BTC was the only cryptocurrency he would label a commodity.

Let's analyze some of these events in a bit more depth.

BlockFi in a precarious situation

Man, would I hate to be an equity investor in BlockFi right now. Equity investors in BlockFi, who previously saw their investments go up by multiples if not orders of magnitude, now have to face the reality that their equity investments might be worth nothing.

The $250 million credit facility SBF proposed for BlockFi effectively gave FTX the option to buy BlockFi at essentially zero price, wiping out all of BlockFi's existing equity holders. While retail depositors in BlockFi would effectively be made whole in this situation, its investors would not.

Mark Yusko of Morgan Creek is now spearheading a process to save BlockFi via equity financing, though he admitted he thought the chances of this deal going through were around 10%.

Pomp was one of the major investors in BlockFi's recent rounds as well, so this situation will seriously affect him in addition to other VC firms like Bain, DST, and Tiger Global.

Gensler calls BTC a commodity

While Gensler further cemented everyone's already held views that BTC is indeed a commodity, he continued to state that many cryptoassets have key attributes of securities and therefore are under the SEC's jurisdiction. Gensler has avoided giving similar answers on assets like ETH, despite previous CFTC commissioners acknowledging that ETH is a commodity. Furthermore, in 2018 SEC director for the Division of Corporation Finance William Hinman stated that he believed both Ethereum and Bitcoin should be classified as commodities since they were sufficiently decentralized.

Much of these comments were politically targeted at trying to build bridges with the CFTC, giving them a win on BTC being a commodity and acknowledging that the two agencies should work together to regulate crypto.

The political battle over purview between the CFTC and SEC will likely continue for some time. Still, I do believe the SEC will continue to increase the legal actions they levy against industry players in the near future, which I have outlined before, regardless of how the CFTC feels about those cases.

Takeaways

On the BlockFi deal, all I will say is that effective altruism seems to be a double edged sword. Capitalists are capitalists.

On Gensler, I see increasing sabre rattling and posturing to placate the CFTC. The fact that Gensler feels he has to placate the CFTC means the jurisdiction question is by no means answered.

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