Disruption continues in the alternate finance worlds – hot on the heels of Volt, one of the remaining Australian neobanks, throwing in the towel comes more confidence-sapping bad news from the crypto universe.
Volt’s decision to hand bank its Australian banking licence came after unsuccessful attempts to raise fresh capital to grow the business past around $100 million of assets.
No one wanted to inject more money, including existing shareholders, such as Brisbane-based Collection House which itself is looking for fresh capital and asked for its shares to be halted until Friday to allow it to look at “financing options”.
On Wednesday, the Canada-listed crypto broker Voyager Digital said it could lose $US650 million it had loaned to the hedge fund Three Arrows Capital.
Hours later Three Arrows Itself was reported to be in liquidation, crippled by the collapse in crypto prices since mid-May.
Voyager had been offering annual yields to depositors of 12%, far above traditional money market rates money rates from traditional banks.
While these old-fashioned banks in a zero/ultra-low interest rate world, could not offer such high returns, they did benefit from deposit insurance in the US, UK, EU, Australia, NZ and other advanced economies.
And, as the recent annual stress tests of America’s 33 biggest banks confirmed, these banks have thick walls in the shape of large capital reserves, more than enough to withstand the sort of pressures ripping the crypto word apart.
According to the US Federal Reserve’s stress tests results, the common equity ratio of large US banks has jumped from around 5% in 2009 to around 12% now – more than enough to survive a recession, a surge in unemployment to 10% and a 55% slump in share prices.
That would be more than enough to absorb more than $US600 billion in losses, leaving plenty of capital to continue trading.
The same can’t be said for many crypto companies, especially those ‘lenders’.
One of the earliest lenders to fail was Celsius Network which was offering depositors rates of up to 18%. It froze withdrawals a month ago, helping trigger the latest crisis for the sector.
Now American media reports say Three Arrows is “in liquidation”, according to CNBC and Sky News.
CNBC reported Thursday, Sydney time “Major cryptocurrency hedge fund Three Arrows Capital (3AC) has fallen into liquidation, a person with knowledge of the matter told CNBC.
“Teneo Restructuring has been brought on board in the last few days to deal with the liquidation process.
“A slump in digital currency prices, which has seen billions of dollars wiped off the market in recent weeks, has hurt 3AC and exposed a liquidity crisis at the company.”
“On Monday, Three Arrows defaulted on a loan from Voyager Digital made up of $US350 million in the US dollar-pegged stablecoin, USDC, and 15,250 bitcoin, worth about $US304.5 million at today’s prices, CNBC reported.
Three Arrows’ liquidation had been ordered by a court in the British Virgin Islands.
The news saw the price of bitcoin briefly dip back under $US20,000. It bounced back above that level and remains there Thursday morning.
Analysts say the highly leveraged nature of these businesses mean there is little capital to fall back on, meaning huge losses are likely unless some comes along to bail out the company.
That’s unlike traditional banks which have been forced by regulators to build high capital reserves to help withstand a severe economic slump – many of these same banks now thankful for these reserves, objected bitterly to being forced to put aside tens of billions in funds they could not lend.
Investors also voiced similar complaints – stupidly.
Many are now silent and thankful for the post-GFC conservatism of regulators as economies slow, interest rates rise quickly to battle surging inflation and the prospect of a jump in bad debts for banks looms large in investor thinking.