Tl;dr: In recent weeks, some firms have struggled to remain solvent due to insufficient risk controls. See how Coinbase implements secure and comprehensive risk management practices that enable institutions to successfully navigate the cryptoeconomy.
By Brett Tejpaul, Head of Coinbase Institutional, Matt Boyd, Head of Prime Finance, and Caroline Tarnok, Head of Credit and Market Risk
The shocks to the crypto credit environment over the last few weeks are likely to be a major inflection point for the industry. 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.
We believe these market participants were caught up in the frenzy of a crypto bull market and forgot the basics of risk management. Unhedged bets, huge investments in the Terra ecosystem, and massive leverage provided to and deployed by 3AC meant that risk was too high and too concentrated. These events are, unfortunately, more common in traditional financial markets than we would hope. We are reminded frequently of Long Term Capital Management in the 1990s, Lehman Brothers in the 2000s, and even Archegos Capital Management in 2021.
Coinbase had no financing exposure to the groups above.¹ We have not engaged in these types of risky lending practices and instead have focused on building our financing business with prudence and deliberate focus on the client. Now, more than ever, our leading institutional clients demand a high-quality financing counterparty.
Our goal is to be the safest, easiest, and most trusted bridge to the cryptoeconomy. We offer the most secure, comprehensive, and scalable products and services — including financing — and our multifaceted risk management programs are designed to protect our clients, our shareholders, and the broader cryptoeconomy.
Prudent risk management is key to our long-term strategy.
At Coinbase, risk management is a first principle in our product design. We hold customer assets 1:1. Any institutional lending activity at Coinbase is at the discretion of the customer and backed by collateral, which serves as a…
Click Here to Read the Full Original Article at The Coinbase Blog – Medium…
