Summary:
- Coinbase has stated that it has no financial exposure to Three Arrows Capital, Celsius Network, Voyager Digital, or any crypto company that has collapsed in the last few months.
- Coinbase points out that these crypto firms’ issues were ‘foreseeable’ as they were overleveraged.
- The crypto exchange has pointed out that it ‘stress tests its exposures’ through Monte Carlo Simulations.
The San-Francisco-based crypto exchange known as Coinbase has stated that it had no financial exposure to Three Arrows Capital, Celsius Network, and Voyager Digital, which have all recently filed for bankruptcy.
Issues Facing Three Arrows Capital, Celsius Network and Voyager Digital were ‘Foreseeable.’
The Coinbase team added that the crypto exchange had no financial exposure to similar counterparties undergoing economic turmoil due to the ongoing bear market conditions. They also added that the ongoing issues facing these firms were ‘foreseeable’ as these companies were overleveraged. They explained:
Solvency concerns surrounding entities like Celsius, Three Arrows Capital (3AC), Voyager, and other similar counterparties were a reflection of insufficient risk controls, and reports of additional struggling firms are fast becoming stories of bankruptcy, restructuring, and failure.
Notably, the issues here were foreseeable and actually credit specific, not crypto specific in nature. Many of these firms were overleveraged with short term liabilities mismatched against longer duration illiquid assets.
3AC, Celsius, and Voyager’s Issues Were Reminiscent of Wall Street in the 90s and 2000s.
According to the Coinbase team, these companies got ‘caught up in the frenzy of a crypto bull market and forgot the basics of risk management.’ They went on to utilize unhedged bets, overinvest in the Terra ecosystem, and use ‘massive leverage.’ These activities were reminiscent of ‘Long Term Capital Management in the 1990s, Lehman Brothers in the 2000s, and even Archegos Capital Management in 2021.’
Coinbase Stress Tests its Exposures Through Monte Carlos Simulations.
Concerning how Coinbase analyzes and mitigates against financial risks, the team explained that the exchange performs rigorous due diligence with counterparties. It also carries out multiple stress tests of its exposures through Monte Carlo simulations to ‘several standard deviations.’
The Coinbase team also highlighted the following ways in which it handles risks.
- Continually understanding how things go wrong by identifying potential points of failure in its products, trading, and counterparties.
- Anticipating internal deficiencies and failure of processes in use within the company.
- and Expecting external surprises by leaving room for Murphy’s law (Anything that can go wrong will go wrong.)
