Cryptocurrency exchange Zipmex has requested another extension to its moratorium on debt payments in Singapore due to liquidity issues. The firm has filed a request in Singapore’s courts to extend its existing moratorium period by two months. Zipmex plans to use the extra time to plan and reopen Z Wallet withdrawals.
Zipmex initially filed for a moratorium in July, which allowed the company to postpone payments due to its exposure to Celsius, a cryptocurrency lending platform. The exchange suspended withdrawals earlier that month, while CEO Marcus Lim did not deny reports that the firm was facing insolvency. Singapore’s courts granted Zipmex’s moratorium request, giving the company until December 2022 to come up with a restructuring plan.
However, the platform has continued to request extensions on the moratorium, with the most recent one likely pushing its deadlines to June. In an announcement on April 18, Zipmex said it was in negotiations with investors to “maximize returns for customers” following a delay in payments.
It’s unclear which investor Zipmex was referring to in its latest announcement. In March, venture capital firm V Ventures reportedly did not provide a payment of more than $1 million necessary for Zipmex to avoid liquidating certain operations and stop distributing payroll to employees.
Zipmex’s latest request for an extension highlights the challenges faced by cryptocurrency exchanges in a volatile market. The crypto industry has seen significant fluctuations in value over the past year, with Bitcoin alone experiencing a dramatic rise and fall in value. This has led to liquidity issues for some exchanges, as investors are unable to withdraw funds and pay debts.
The company’s struggles also reflect the broader regulatory challenges facing cryptocurrency exchanges. Many countries are grappling with how to regulate the industry, with some governments taking a more restrictive approach. In Singapore, authorities have implemented strict rules for cryptocurrency exchanges, including requiring them to obtain a license from the Monetary Authority of Singapore (MAS).
Despite these challenges, the cryptocurrency industry continues to attract investors and users around the world. While some exchanges may struggle, others are thriving, and the industry as a whole shows no signs of slowing down. However, as the Zipmex case demonstrates, investors and exchanges must navigate a complex landscape filled with uncertainty and risk.
EquitiesFirst, an Indianapolis-based specialist finance company best known for lending cash to institutions secured against their stock holdings, is identified as a debtor to the prominent crypto lender Celsius Network. That is according to Celsius’ bankruptcy filings, as reported by Financial Times media outlets.
On Thursday, Celsius CEO Alex Mashinsky stated in a court filing that his firm was owed $439 million by a “private lending platform,” which he did not mention. However, two individuals familiar with the knowledge disclosed that the platform is EquitiesFirst.
The court filing said the relationship between the two companies initially came from deals in which Celsius started borrowing from EquitiesFirst in 2019 on a secured basis to support its business operations.
The relationship expanded and later it turned out that EquitiesFirst owed Celsius amounts worth $509 million on an unsecured basis.
EquitiesFirst had slowly paid down the debt since September last year. Although the firm is steadily paying off the debt, there is still an outstanding loan worth $439 million — made up of 3,765 Bitcoins and $361 million in cash — which are yet to be paid.
“EquitiesFirst is in ongoing conversation with our client and both parties have agreed to extend our obligations,” EquitiesFirst told Financial Times media.
EquitiesFirst, which was founded in 2002, specializes in loans secured against company stock. The firm began lending against cryptocurrencies around 2016.
According to the report, EquitiesFirst’s lending in the crypto landscape was typically at a 60% loan-to-value, secured against cryptocurrencies like Bitcoin and Ether.
Efforts to Rescue Business
The funds owed by EquitiesFirst is a huge amount of Celsius’s assets, which hundreds of thousands of its clients will be relying on to recover some of their deposits.
The EquitiesFirst debt, which Celsius had not disclosed before, now provides context to the difficulties the crypto lender encounters as crypto markets plunged hard this year.
On 12th June, Celsius suspended all customer transactions and withdrawals across its networks, citing extreme market conditions.
On Wednesday this week, Celsius filed for bankruptcy protection as it seeks to stabilize its business by restructuring in a manner that maximizes value for all of its stakeholders. In the meantime, Celsius stated that it has $167 million in cash on hand to support operations.
Celsius Network is “deeply insolvent”, Vermont’s Department of Financial Regulation (DFR) said on Tuesday, adding that the cryptocurrency lender is also not honouring its obligations to customers and creditors as it does not have the assets and liquidity to do so.
The DFR also said that Celsius has been involved in an unregistered securities offering, selling cryptocurrency interest accounts to retail investors including investors in Vermont and the crypto lender also lacks a money transmitter license.
Celsius, until recently was operating largely without regulatory oversight.
The regulator said, “due to its failure to register its interest accounts as securities, Celsius customers did not receive critical disclosures about its financial condition, investing activities, risk factors, and ability to repay its obligations to depositors and other creditors.”
Furthermore, the multistate investigation of Celsius has been joined by the state agency. While, the company’s decision to suspend customer redemptions is being investigated by state securities regulators in Alabama, Kentucky, New Jersey, Texas and Washington.
Celsius had positioned itself in the market by promising more than 18% in interest to peoples’ holdings who gave it their digital coins. The crypto lender, in turn, lent those coins out, Bloomberg reported.
However, the crypto lender has already begun repaying debts as it continues tackling the potential insolvency issue.
Celsius Network on Monday repaid partial debts to decentralized finance and lending platforms Aave and Compound respectively, Blockchain.News reported citing sources.
According to tracker Etherscan, the crypto lender repaid $78.1 million worth of USDC stablecoin to Aave and $35 million worth of stablecoin DAI on the platform Compound.
The Block reported that Celsius also withdrew 6,083 wrapped bitcoin (worth approximately $124 million) from Aave and transferred them to an Ethereum address known to interact with centralized exchanges regularly.
Last month, Celsius froze withdrawals due to the recent market downturn, while other crypto firms, Voyager Digital Ltd. and Three Arrows Capital, recently filed for bankruptcy.
According to a report from Blockchain.News, besides clearing debts, the crypto lender has also started the restructuring process.
Celsius has hired new lawyers to advise the troubled cryptocurrency lender on restructuring, according to a report from the Wall Street Journal (WSJ), according to the report.
The much-needed restructuring plan has come as it seeks to escape the recent turmoil in crypto markets, the WSJ said, citing people familiar with the matter.
According to the WSJ report, Kirkland & Ellis LLP lawyers have been called on board to advise Celsius on options, including a bankruptcy filing.
CoinFLEX, a Hong Kong-based physical futures crypto exchange, announced last Saturday that it has taken legal action to recover $84 million from a single long-term serving client.
Last month, the exchange suspended withdrawals after a counterparty later revealed as longtime crypto investor Roger Ver failed to repay $47 million from a margin call.
Last Saturday, the exchange further revealed that the total amount owed by the investor is $84 million. The exchange said so after it calculated a final amount of losses from significant positions in its native FLEX token.
CoinFLEX co-founders Sudhu Arumugam and Mark disclosed that the exchange has begun an arbitration proceeding in Hong Kong to recover the $84 million. Founders said that process could take about 12 months before a judgment is delivered.
CoinFLEX co-founders commented: “We have commenced arbitration in HKIAC (Hong Kong International Arbitration Centre) for the recovery of this $84 million as the individual had a legal obligation under the agreement to pay and has refused to do so. His liability to pay is a personal liability which means the individual is personally liable to pay the total amount, so our lawyers are very confident that we can enforce the award against him.”
The founders further disclosed that CoinFLEX has signed a joint venture with a certain US-based crypto exchange as part of efforts to revive its fortunes.
Meanwhile, CoinFlex is planning to allow temporary withdrawals from its platform, though with some limitations. On Saturday, the founders revealed a “Locked Funds Plan” for the withdrawals. They mentioned that CoinFlex has been engaging in discussions with creditors, investors, and others, and now the exchange is looking into creating some temporary liquidity for its depositors.
Ripple Effects of Current Market Crash
On 23rd June, CoinFLEX halted withdrawals citing “extreme market conditions” alongside uncertainty regarding a certain counterparty. During that time, CoinFlex CEO Mark Lamb clarified that the counterparty is not any lending firm nor Three Arrows Capital.
CoinFLEX described the client as a “high integrity” individual, with liquidity issues linked to the recent plunge in crypto and non-crypto markets, who has “significant shareholdings in several unicorn private companies and a large portfolio.”
On Friday, October 15, 2021, U.S. President Joe Biden signed legislation raising the government’s borrowing limit to $28.9 trillion. Many Americans are now accustomed to this recurring bureaucratic process and don’t think much of it or its consequences. Two sides fight, they get close to a deadline (and sometimes pass it!) and eventually raise the “debt ceiling” so they can fight over it again some months later.
We Americans, as a collective and a government, are deciding to delay paying our bills. At an individual level, we understand what happens when we don’t pay our own bills. But what happens when the most powerful nation today stops paying bills? To understand the effects of this — and how we got here in the first place — we need to study history. Let’s start with a simple short-term debt cycle.
Lending And The Short-Term Debt Cycle
The short-term debt cycle arises from lending. Entrepreneurs need capital to bring their ideas to fruition, and savers want a way to increase the value of their savings. Traditionally, banks sat in the middle, facilitating transactions between entrepreneurs and savers by aggregating savings (in the form of bank deposits) and making loans to entrepreneurs.
However, this act creates two claims on one asset: The depositor has a claim on the money they deposited, but so does the entrepreneur who receives a loan from the bank. This leads to fractional reserve banking; the bank doesn’t hold 100% of the assets that savers have deposited with it, they hold a fraction.
This system enabled lending, which is a useful tool for all parties — entrepreneurs with ideas, savers with capital, and banks coordinating the two and keeping ledgers.
Lending aids the creation of new goods and services, enabling the growth of civilization (Source).
When Times Are Good
When entrepreneurs successfully create new business ventures, loans are repaid and debts are cancelled, meaning there are no longer two claims on one asset. Everyone is happy. Savers and banks earn a return, and we have new businesses providing services to people thanks to the sweat and ingenuity of the entrepreneurs and staff.
The debt cycle in this case ends with debts being paid back.
When Times Are Bad
When Alice the entrepreneur fails at her business venture, she is unable to repay her loan. The bank now has too many claims against the assets that they have, because they were counting on Alice repaying her loan. As a result, if all depositors rush down to the bank at once to withdraw (a “run on the bank”) then some depositor(s) won’t get all of their money back.
Depositors rushing to withdraw from a bank they believe to be failing (Source).
If enough entrepreneurs fail at once, say because of an “Act of God” calamity, this can cause quite an uproar and a lot of bank runs. However, the debts are still settled, either through repayment to depositors or default, leaving depositors without their money.
The debt cycle in this case ends with some portion of debts defaulting.
The debt cycle either ends with payment or default — there is no other option. When borrowing overextends, there must be a crash. These crashes are painful but short and contained.
The Mini Depression Of 1920
The year 1920 was the single most deflationary year in American history, with wholesale prices declining almost 40%. However, all measures of a recession (not just stock prices!) rebounded by 1922, making the crash severe but short. Production declined almost 30% but returned to peak levels by October 1922.
This depression also followed the 1918–1920 Spanish Flu pandemic and came one year after the conclusion of the First World War. Despite these massive economic dislocations, the crash was short and now relegated to a footnote in history.
Finance writer and historian James Grant, founder of Grant’s Interest Rate Observer, noted about the 1920 Depression in his 2014 book “The Forgotten Depression, 1921”:
“The essential point about the long ago downturn of 1920–1921 is that it was kind of the last demonstration of how a price mechanism works and the last governmentally unmediated business cycle downturn.”
The Free Market And Hard Money Curtail Debt Cycles
When an economy runs on a hard money system, free market forces rein in excessive borrowing and thus keep the debt cycle short.
What Is Hard Money?
Hard money is a form of money that is expensive for anyone to produce. This ensures a level playing field: Everyone has to work equally hard to gain money. Nobody can create money and spend it into the economy without incurring a cost almost equal to the value of the money itself. Gold and bitcoin are two examples of hard money, mining them requires so much time and energy that it’s almost not worth it to do so.
All those miners won’t run themselves (Source).
How Do Free Markets Rein In Borrowing?
Free market forces are crucial to limiting speculative manias. On one side, you have lenders and savers who hope to make a return on their capital, while on the other, you have borrowers hoping to take borrowed money and turn it into more money.
In a free market that utilizes hard money, there are two options to conclude the extension of credit: Debts are repaid, or debts are defaulted on. The greed of lenders wanting more return on their capital by making more loans is kept in check by the risk of default. The greed of borrowers wanting more capital is kept in check by the burden on their future self or business from increased debt.
This applies at an individual level as well: As any borrower increases their debt pile, they become riskier and riskier to lend to. That risk means lenders will demand to be paid a higher interest rate on their loan. That higher rate makes it harder for the borrower to borrow more, leading them to either turn toward paying down some of their existing debts or default outright.
These forces keep lending in balance, cutting down speculative manias before they go too far.
The Lengthening Of The Debt Cycle
Powerful entities — like governments — can use their sheer power to make them a less risky borrower.
Over the past century or so, we’ve seen many governments take on debt so that they can lend to individuals and businesses, especially during hard economic times. Those loans help individuals and businesses pay their bills and debts, easing the pain of a crash. However, this lending by governments does not resolve debts; it simply transfers debt from private individuals to the government, putting it in a large pile of public debt.
That debt didn’t disappear (Source).
Governments can build such a huge pile of debt because lenders know that a government has special tools for paying back that debt. You and I may not be able to seize the property of others in order to pay our debts, but a government can. Even the bastion of the free world, the United States, seized the privately held gold of its citizens in order to keep itself afloat in 1933.
This government debt issuance leads to a lengthening of the debt cycle. The depth of each drop is tempered, but the unwinding of debts is not completed — it is only delayed. Frequent short and sharp downturns are transformed into longer cycles with infrequent but devastating collapses.
This brings us back to the debt ceiling: The reason our politicians keep having this debate is thanks to ongoing debt issuance by our government in order to fund bailouts during downturns as well as government outlays that exceed government revenues. All this debt climbs on top of that massive $28+ trillion pile of public debt.
The U.S. Debt Clock (Source).
However, at some point, even powerful governments feel the heat from angsty lenders and need a new set of tools. Throughout history, governments in a corner have employed another tool to service their debt and continue to prolong the debt cycle: debt monetization. The U.S. government opened this toolbox in 1971 by disconnecting the U.S. dollar — and all global currencies — from gold thus creating the fiat currency system we still live with today.
Fiat currency, like that friend who only calls when he needs something, shows up often in history but never stays for long. “Fiat” roughly translates from Latin as “by decree.” Fiat currency is thus money which derives its use — and value — by decree from a governing body. Fiat currency is not hard money; the governing body often (solely) reserves the right to create the currency and distribute it through some mechanism.
In a fiat currency system where depositors are placing fiatcurrency into banks, we have a new trick for unwinding debts.
Remember how bad times in the debt cycle led to the bank having more claims against their assets than assets on their books? Within a fiat currency system, the governing body can now solve this little ledger problem by just creating more currency. Poof, everyone gets paid.
We call this tool for ending debt cycles monetization, because we “monetize” the debts by paying them with newly created currency.
Today, we often call these governing bodies that create currency “central banks,” and together with their partners in government we believe these entities are capable of “softening” the frequent crashes endemic to an economy with any kind of lending. We like lending, because when it goes well, everyone benefits, so this fiat currency system appears to be a decent way of easing the pain of downturns.
The Effect Of Monetizing Debt
We already know that paying down debts costs the borrower, whereas defaulting on them costs the lender. Many central bankers and politicians would like to drown you in jargon at this point, leaving you with the impression that monetization solves the painful dilemma of pay or default, even if they can’t articulate just how.
So who foots the bill when we monetize debts?
When debts are monetized, new currency enters circulation, diluting the value of all the existing currency in circulation. This dilution of value of new currency is felt through inflation, which we’re hearing a lot about lately.
Those citizens who work on a fixed salary or wage and keep most of their net worth in the currency suffer from inflation the most, while those closest to the government and banking system with most of their net worth in non-cash assets benefit. It is those former citizens, the ones furthest away from the currency “spigot” and least aware of the effects of inflation, who pay for debt monetization.
The endgame of debt monetization is hyperinflation, which occurs when the central bank decides to go bananas and print, print, print to pay down every debt. Zimbabwe, Venezuela, and pre-WWII Germany come to mind. This is not a pretty event for anyone involved. Unlike defaulting or paying down debt, where effects are contained to the lenders and borrowers involved, monetization leads down a road ending in not just economic collapse but societal collapse.
The cost of one kilogram of tomatoes in Venezuelan bolivars in 2018 (Source).
Monetizing debt has serious costs, so operators of fiat currency systems must act cautiously. However, monetizing debt throughout history has often been more politically favorable than paying or defaulting, likely owing to the fact that it’s harder for people to understand who is footing the bill.
Governments And The Never-Ending Debt Cycle
Now that we understand how fiat currency enables debt monetization, let’s jump back to governments and their giant debt piles.
The government debt to national GDP ratios of every nation in the world, pre-COVID (Source).
As a government’s pile of debt grows, it becomes ever more difficult and painful to pay it down, default on it or monetize it. Nobody from the politician to the politically connected elite to the welfare recipient wants budget cuts in their area, especially in the name of paying down the public debt. Defaulting would mean lenders would lose confidence in the government, demanding higher interest rates in order to make further loans thus forcing budget cuts. Debt monetization, taken too far, rips apart the fabric of society.
This results in an increasing desperation by the government to keep the status quo intact. Just keep the debt growing and push the problem onto the next generation.
The free market can bring an end to this debt cycle by simply “shorting” (selling) government bonds (loan contracts), making it more expensive for the government to borrow. However, a fiat currency system makes this difficult, because the central bank can print unlimited fiat currency and use it to buy bonds. Since the central bank incurs no cost to print currency, they are the ultimate player in the market. An investor who sells government bonds is destined to lose to a central bank that will never stop buying, so most investors go along with the game. This destroys the free market’s ability to bring an end to overborrowing.
Central banks for the past 50 years have proven to us, unequivocally, that they will support their governments’ borrowing habits and fight off the free market that would keep the debt cycle in check.
Interest rates for major government bonds have trended down since the early 1980s, following the birth of a global fiat monetary system in 1971 (Source).
When central banks buy government bonds, they pay for them with newly printed currency. This is what I mean by monetizing debt. Too much of this, and we get the hyperinflation scenario we all want to avoid.
As debts climb, all options — from paying and defaulting to monetizing — become more and more painful. So what is a government to do in order to continue lengthening the debt cycle?
We’re Doing This For Your Own Good
Continuing the borrowing bonanza without an unwinding force by the free market requires governments to employ tools of a more authoritarian or subversive variety. The United States has a long and well-hidden history of these tactics, from seizing the gold of its citizens in the 1930s to partnering with oil-rich despots in the 1970s to issuing jargon-clad explanations for quantitative easing during the Global Financial Crisis of 2008.
Monetary debasement is the powerful government’s tool of choice to forego the inevitable, but sustaining that tool’s power requires preventing free individuals from forcing a return to rationality. As public debt rises, governments will consider new measures to kick the can such as:
Raising revenue through increased taxation like unrealized capital gains.
More intense financial surveillance and controls to stabilize the currency’s value.
Legal workarounds to mint trillion dollar coins to further dilute the currency supply and “monetize” the problem of excessive government spending.
As long as governments like the United States continue to overspend, bailing out every short-term debt cycle, they will simply delay paying the bills and either increase the severity of an eventual unwinding — via payments or default — or trigger a collapse of society through debt monetization. We will all pay for a century of foregone debts through some combination of increased taxation, inflation and loss of freedom.
Waking Up
When will we wake up and see this system for what it is? Unfortunately, most probably never will. They will blame immigrants or billionaires, depending on their political bent, for the ills of our time. They will continue to defend the system, even as the tightness of its controls and severity of its punishments increase.
“Many of them are so inured and so hopelessly dependent on the system that they will fight to protect it,” (Source).
This knowledge is your power. Now that you see the trajectory of the long-term debt cycle, what steps will you take to bring a better future?
The realizations I’ve written here are the reasons I buy, hold and support Bitcoin — an accessible form of hard money that can support a modern, digital and global economy. Bitcoin is a lifeline extending to a world where debt cycles are kept short and crashes are contained, where governments are robbed of a critical tool for lengthening the end of the debt cycle into a societal collapse. Supporting Bitcoin forces governments to be rational yet again, to balance their budgets and pay down debts, to avoid monetization.
Will you be part of the solution or part of the perpetuation?
This is a guest post by Captain Sidd. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
