Ether Capital CEO believes challenges at Celsius, Voyager, and Vauld offer lessons for regulators and investors
It’s been a challenging summer for crypto as a souring of investor sentiment has led to a rout in the market. Against that backdrop, several crypto lending and trading businesses have seen their balance sheets collapse in real time, forcing many to halt redemptions and trading and, in some cases, declare bankruptcy.
Apart from collapsed valuations in key digital assets, some embattled platforms – most notably Voyager, Celsius, and Vauld – are grappling with soured loans from hedge fund investors. In the wake of these stories, some have raised concerns about contagion spreading across the broader crypto space.
Brian Mosoff is the CEO of Ether Capital, an Ethereum-focused investment firm based in Toronto, as well as the President and founding member of the Canadian Web3 Council. While he isn’t jumping to conclusions, he’s also not discounting the possibility of more dominoes falling later on.
Mosoff believes recent events have made it glaringly obvious how interconnected things are in the sector. When one major lender or hedge fund falls, he says chances are it will send shockwaves throughout the ecosystem that will be felt by not just companies but investors as well.
“It's possible there could be more information that comes to light as companies liquidate their assets and restructure their debt during the court process,” he says. “Are there more IOUs out there? Are there more companies related to Three Arrows, to the Voyagers, to the Celsiuses? I'm not sure. But I think we'll find out.”
The crypto lending businesses that collapsed recently, Mosoff notes, were interconnected with many having balance sheets tied tightly to venture funds; Three Arrows Capital, a cryptocurrency-focused hedge fund based in Singapore, was a central figure in the recent collapses. While the casualties that captured headlines were prominent players, he believes the majority of the market had no purview over or awareness of the shared risks they had been exposed to.
Some may see the volatility inherent in the crypto space as the spark that lit the fuse in the blowups. But Mosoff notes that many traditional financial institutions have overreached during booming markets, only to come crashing down when the music stopped. There’s a reason why the recent saga surrounding Celsius has been described as crypto’s “Lehman moment.”
“It's important to keep perspective that this is not a problem that’s unique to crypto,” he says. “This is a problem with mismanaged treasuries and overleverage.”
Because those businesses were running on centralized platforms, many have come to believe that that DeFi-based platforms, which didn’t face issues with liquidations, are safer. But Mosoff points out there have been several recent setbacks in the DeFi space including the failure of the algorithmic stablecoin UST, due to its flawed design, as well as hacks of various platforms and cases of smart contracts being exploited, leading to funds being stolen.
At the moment, he believes many new entrants in the DeFi space may not be fully accounting for the risks. Though he’s confident that the protocols will grow stronger over time, he acknowledges that today’s professional investors are probably unable to read the underlying code of a DeFi protocol, effectively making them a black box for anyone who’s not a programmer.
“DeFi isn’t perfect, and centralized finance is not perfect, either,” he says. “It's important for professional investors and retail investors to understand the differences in the risk profiles that are taking on when they participate in these activities.”
While there’s no denying the fact that many of their customers were hurt or ruined, Mosoff says it remains unclear if the fallout is due to mismanaged treasuries or bad actors. He also reinforces why transparency and open protocols are an important part of spotting dangers in the ecosystem.
“We didn’t find out what really happened to 3AC, Celsius and Voyager until it was too late,” he said. “There’s a reason why DeFi platforms like Uniswap, Aave and Compound remained unscathed. DeFi lending protocols are over collateralized, and all transactions are publicity verifiable on-chain. If there’s a problem, many people in the community will be quick to point out the landmines.”
The failures of the crypto lending and brokerage platforms, he adds, could help inform regulators as they formulate guidance and guardrails for decentralized entities intending to be good actors in the broader ecosystem of finance. That means clarifying who can participate and facilitate different activities in the crypto space, and establishing best practices and standards of care to serve as the cornerstones of a more robust digital financial system.
“Regulation is not perfect; policy frameworks are not perfect. Regulation has not stopped any of the financial meltdowns in the last couple of decades, and that probably will continue to be true,” he says. “But having more guidance and more clarity, may mitigate some of the risk and help ensure that the consumers or the lenders are protected.
“For the investors that are looking to participate in the space, be aware of the risks, do a lot of research. Be cautious about how much you're concentrating risk into any one entity or asset, but don't shy away from the space and assume that it's not going to evolve into something meaningful over the next number of years or decade,” Mosoff adds. “There's a lot of pieces of the puzzle still to be built. And therein lies the opportunity.”
