Crypto firms facing insolvency 'forgot the basics of risk management'

“The issues here were foreseeable and actually credit specific, not crypto specific in nature,” said three department heads at Coinbase.

Department heads at Coinbase have weighed in on the market downturn amid solvency concerns around Three Arrows Capital, crypto lending firm Celsius, and Voyager Digital, saying the crypto exchange had “no financing exposure” to the companies.

In a Wednesday blog post, Head of Coinbase Institutional Brett Tejpaul, Head of Prime Finance Matt Boyd, and Head of Credit and Market Risk Caroline Tarnok said Coinbase had not engaged in the “types of risky lending practices” exhibited by Three Arrows Capital, Celsius, and Voyager, claiming the firms were examples of practicing “insufficient risk controls.” According to the trio, crypto companies faced the possibility of insolvency caused by “unhedged bets,” large investments in Terra, and overleveraging with venture capital firms.

“The issues here were foreseeable and actually credit specific, not crypto specific in nature,” said Tejpaul, Boyd, and Tarnok. “Many of these firms were overleveraged with short term liabilities mismatched against longer duration illiquid assets. We believe these market participants were caught up in the frenzy of a crypto bull market and forgot the basics of risk management.”

A court in the British Virgin Islands reportedly ordered the liquidation of Three Arrows Capital. Voyager Digital filed for bankruptcy in July, later announcing its plan to restore users’ crypto could depend on funds from any proceedings with Three Arrows Capital, which failed to repay a 15,250 Bitcoin (BTC) and 350 million USD Coin (USDC) loan. Crypto lending platform Celsius also filed petitions for Chapter 11, with the platform’s lawyers seemingly using an unusual legal argument to avoid restoring users’ funds.

Though Coinbase said it had “no exposure to client or counterparty insolvencies” and “no changes in access to credit” for its users, the crypto exchange is still operating within a bear market that Grayscale predicted could last until 2023. Since May 4, shares of Coinbase stock have fallen more than 42% to reach $75.27 at the time of publication. CEO Brian Armstrong also announced in June that the exchange planned to cut 18% of its staff, citing concerns about a possible crypto winter.