CeFi platforms relay incidents, with risks far higher than traditional banks. Examining the operational mechanisms of crypto banks through financial reports.

The cryptocurrency broker Voyager Digital has been dominating headlines due to its $650 million debt owed to 3AC, Three Arrows Capital. Despite positioning itself as a victim, the company's financial reports and operational mechanisms suggest otherwise. These so-called crypto banks, advocating for the abandonment of traditional finance, actually pose higher risks than traditional banks.

The following content is translated from jonwu's Twitter. For more details and discussions, please refer to the original link.

How Do Banks Operate?

In simple terms, banks take deposits from customers and lend those deposits to borrowers. jonwu previously wrote another analysis on traditional banks. If interested, you can view it here.

Although not intuitive, customer deposits are considered liabilities on a bank's balance sheet, while the loans they issue are their assets. Here's how it works:

• Bank owes customers' deposits - Bank's liability
• Customers owe the bank loans - Bank's asset

Banks make money by the difference between "paying interest to depositors" and "charging interest on loans," but this does not generate huge profits as other banks offer the same product.

Traditional Banks' Leverage

If a bank pays 4% interest to depositors and charges 6% on loans, it means the bank can earn a 2% return on every $1 deposited, which is not an ideal business model as the returns are low. Hence, banks utilize reserve ratios, which are usually below 10%.

It means that for every $1 lent out, there is less than $0.1 left in actual deposits. This 10x leverage boosts the original 2% return to 20%.

The author jonwu suggests that such a low reserve ratio is feasible for banks because:

• Assets and liabilities are matched - Fiat to fiat
• Can access liquidity from the Fed, other banks at any time
• Diversified loan portfolios

However, crypto banks, trading brokers violate the above three principles.

Crypto Banks' Leverage

1. High Leverage

Using the example of the crypto broker Voyager, which is indebted to Three Arrows Capital, its first-quarter balance sheet is as follows:

• Crypto assets, loans: about $6 billion
• Liabilities: $5.7 billion

This represents over 95% leverage, where a slight 5% decline could destroy all of the platform's assets.

2. Deposit Expenses Exceed Lending Income

As of March 31 this year, Voyager's staking income was $14.35 million, lending income was $31.02 million, totaling $45.38 million. However, the rewards to be paid to depositors amount to $59.32 million, resulting in approximately -23.4% negative returns.

Crypto banks like Voyager compensate for continuous losses in user rewards through trading profits.

3. Highly Unstable Trading Profits

The author cites Coinbase's financial changes from bull to bear markets to illustrate the instability of trading businesses.

In addition, 3AC's outstanding debt accounts for 17% of Voyager's total assets. Unlike traditional banks, Voyager cannot obtain liquidity from the Fed or other banks. Therefore, SBF intervened, and Alameda provided Voyager with $500 million in aid.

The author speculates that SBF did this to prevent Voyager from dumping assets to compensate depositors.

Author's Conclusion

He believes that crypto banks like Voyager seem to be completely unregulated. Ironically, Voyager even obtained FDIC insurance for USD deposits as early as 2019.

Furthermore, compared to lending platforms like Maker, Aave, Compound, the mechanisms of crypto banks are so flawed. Users have to deposit assets and provide collateral to borrow money from Maker and other DeFi platforms.

That is, the borrower and lender are the same person, and if unable to repay, the system will automatically liquidate, isolating risks in each account, known as "collateralized debt positions" in Maker.

The author concludes:

Unpaid loans are one thing, while using user funds for speculative trading is another.

He emphasizes that although Voyager seems innocent due to 3AC's malicious debt dumping, looking at the financial statements and comparing them with traditional bank operations, Voyager is not as innocent as it seems.