Diogo Mónica, the founder of Portuguese unicorn Anchorage Digital, reacts to the collapse of exchange FTX and fund Alameda Research, which had participated in its last investment round.
Days after the collapse of one of the largest cryptocurrency exchanges in the world, Diogo Mónica, co-founder of Portuguese unicorn Anchorage Digital, a cryptocurrency bank, assumes in an interview with ECO to have detected no signs that something was not right at FTX. What happened was a “surprise” and “terrible for the ecosystem”.
With what he knows now, Diogo Mónica knows that there was a criminal hand guiding FTX to insolvency. He goes further and calls Sam Bankman-Fried a “criminal”, who has been a shareholder in the Portuguese unicorn Anchorage Digital since 2021 through Alameda Research, a fund that also collapsed in recent days. He shows interest in buying the shares from the bankruptcy estate.
What went wrong was that Sam [Bankman-Fried] acted fraudulently and used customer deposits to bail-out the market-making firm Alameda [Research, also owned by Sam Bankman-Fried]. This is a criminal act and what went wrong was having a criminal as CEO.
How have you viewed the events of the past week in the crypto ecosystem?
I was surprised. It is completely unexpected. There is unfortunate here not only that there is a company of this size that is having solvency issues (it has no assets to pay its liabilities) but, also that it is Sam [Bankman-Fried, founder of FTX], who was a CEO who had a huge presence in Washington DC, who had given a lot of money to the Democrats, who had a lot of investors at the cap table, and they were big investors. A company that was growing a lot, that had everything, and it would look like it was doing well, that it was growing so fast. Being one of the newer ones, it was already the second or third-largest exchange in the world. It’s terrible for the ecosystem.
In your opinion, what went wrong?
What went wrong was that Sam acted fraudulently and used customer deposits to bail-out the market-making firm Alameda [Research, also owned by Sam Bankman-Fried]. This is a criminal act and what went wrong was having a criminal as CEO.
I have to ask because Alameda participated in your Series D investment round: what position does Alameda have in Anchorage? What’s going on right now?
Nothing. They are a very small investment. A $20 million investment out of the $350 [million raised in the Series D round in 2021]. It’s less than 5% of the capital that the company raised, and as investors, they do not influence at all. They don’t have access to data. They have no access, effectively, to anything. It’s worth bearing in the context that Anchorage has over 100 investors.
Alameda’s position is how much, as a percentage of the capital?
Very small, very small. Something… very small.
And what’s going to happen to that position? Something will happen…
Yes, something will happen, in the bankruptcy part. But it has nothing to do with us and it doesn’t affect us. Some shares are going to be part of the insolvency process and at some point, someone is going to buy them (maybe Anchorage itself, or someone else). Someone is going to take possession of the shares. They will probably assess what is the venture capital portfolio Alameda has and, therefore, the Anchorage shares will be part of that package and someone will buy them. But it does not influence us, it does not influence the company, it does not influence the capital itself, and there is no ability to claw back the capital (it was over a year ago). There is no influence whatsoever on Anchorage.
Some shares [from Anchorage Digital] are going to be part of the insolvency process and at some point, someone is going to buy them (maybe Anchorage itself, or someone else).
Have you spoken to them during this process?
No, we have not spoken to them about the process. We have no loans outstanding. We have no trading relationship with them. We are not even collaborating with them in the market at the moment and any conversation that there was in terms of collaboration stops very quickly once they file for insolvency.
Did you get to speak to them at the time when they went into that round?
This week, Bloomberg quoted a founder who implied that Alameda’s capital had no conditions attached and there was no due diligence. Have you had that experience?
I think that’s generally true in the venture capital world if you have a lead [investor leading the investment round] that people trust, that does the due diligence. In our case, we have one of the largest private equity firms in the world, KKR, which has over $400 billion in capital. One of our investors was BlackRock, another was Goldman Sachs, another was PayPal, and another was Apollo (which has over $500 billion). When you get into this phase, which is very serious and very institutional, some people don’t do any due diligence and put money in because they want to be part of the round, but, they’re not going to assess our room, they’re not going to assess our finances, in fact they will not assess anything.
In other words, that’s what happened, but isn’t it unusual?
It’s super common. Have you seen the list of investors? Imagine you have a round with 40 investors. You will not do a round with 40 sessions (for due diligence). You do it with the majors, the leads, which in this case is KKR, who does most of the work, do the negotiations, do the term sheets, do due diligence and share that with other people. The big guys, in this case, when they are large institutions, also do their independent due diligence. Goldman Sachs did, and Apollo did. But small cheques, like Alameda, have no impact at all.
Some people don’t do any due diligence and put money in because they want to be part of the round, but, they’re not going to assess our room, they’re not going to assess our finances, in fact they will not assess anything.
Do you feel that this may have damaged trust in Anchorage?
Not at all, because people know that there is no influence here, no direct influence. In this case, with this capital, you have no access to anything. You don’t even have the right to access the company’s data.
What about Anchorage’s solidity? Something like this couldn’t happen to your company?
Me being a criminal? I don’t think so.
That wasn’t the question. The liquidity issue. He being a criminal is something that the authorities are going to assess now whether it is or is not.
No, this does not happen to Anchorage because Anchorage does not do commingling [broadly speaking, lending clients’ money to another fund]. We do separation of all assets and there is no run on the bank because we have deposits; we are full-reserve. When a client (institutional, because we only work with institutions) deposits bitcoin in Anchorage, the bitcoin stays there; it doesn’t move.
You don’t lend to other funds to do trading?
No. When they deposit in our bank, it stays there. We can lend, and be part of the process, but with the explicit consent of the company. There is independent trading. As an independent company, there is a relationship. There’s an assessment of what the asset is. It’s a completely separate loan. It comes from a separate company. It has nothing to do with the bank. If everybody today wanted to make withdrawals from Anchorage, it’s all there. And that’s not all. They can check independently. They don’t even have to trust us. And they can see the deposits on-chain (on the public blockchain registry). They deposited it a year ago, it’s still there, and nothing has changed.
That good practice you refer to is your choice, your business. Should that be mandatory, or regulated?
I think it should be mandatory. Exchanges cannot do custody of clients’ deposits. They can’t in the traditional market, why should they be able to in the crypto market? In the crypto market, we created these companies that have a verticalisation, they effectively verticalise their business. They do lending; they do execution [buy and sell]; they do custody; they do all the services. Then, when something like this happens, there are no checks & balances. There are no third parties.
In the traditional market, there’s a custodian, who holds the assets, and there’s an exchange. Those things are not the same. And there is constant communication from the client to the exchange, which says I have a $1,000 deposit, and the custodian says I have a $1,000 deposit at the exchange in my name. This verification makes it so that neither of them can act independently without realising there are problems.
In the specific case of Anchorage, what is the main risk you identify?
It’s probably the main one, which is the cybersecurity risk. You have private keys that are worth tens of billions of dollars, that are completely unrecoverable and the loss can be total. We have SOC 1, SOC 2 [protocols], insurance, all those things. We are audited, and we have a very big background in security, but it’s still a big point and one of the primary points in terms of the trust.
Some companies in this area are sending messages to customers to reassure them after this situation. Are they doing the same? And what are they saying?
For every customer who asks us questions, we respond immediately. But we are an institutional product. People have individual relationships with their account managers. Customers are sophisticated, they are institutional, and it’s hard for a person to say everything is fine when FTX’s big problem was taking money from customers and putting it in a separate account.
Does the cryptocurrency devaluation that has been happening affect Anchorage in any way?
Yes, it does, because crypto assets being down is worse for the business. We make a percentage of the business the percentage of the assets. The secondary effects are those of Alameda. Although there are no direct effects, there are side effects. If crypto assets go down by half the price, the market cap is half. So there’s less business and less trading volume to do.
Is it having a material impact on your business?
Yes, it has a material impact. It has a material impact on our turnover, as expected. If bitcoin is half off, we make half less money in bitcoin.
And in your valuation? You are one of the Portuguese unicorns. Are you still a unicorn?
Yes, we are a unicorn and there is no change in valuation. We have a lot of runaways [time that the business can operate before it runs out of money]; we have lots of money in the bank. We’ve got loads of time.
If they did a round right now, would the rating drop?
I don’t know. We haven’t tried it, so we don’t know. It’s unlikely it would. And if it did, it wouldn’t drop much. The truth is, we’re growing during the bear market. In a way, there are negative components here, like the assets I had are worth less today, but as we are growing in the bear market, adding clients, adding assets, we also show that the team is delivering and that the product is growing. The price goes down, but Anchorage grows in terms of turnover.
How much money does Anchorage manage in assets?
Tens of billions.
You said in the summer that you weren’t planning to lay off or slow down hiring at Anchorage. Are you sticking to that strategy?
Yes, we’re not making any changes regarding the plan. The goal has always been to complete the plan. The market is changing, and it’s changing a lot, and as a company, we have to review what the goals are. We don’t know what’s coming tomorrow. I wasn’t expecting (the collapse of) FTX; I wasn’t expecting (the collapse of) Alameda, and we’ll see what the impact is on the market. But we don’t have any plan to change course at this point.
The plan is to reach how many employees by the end of the year?
In Portugal, how many do you have?
I don’t know, but I think we are almost at 100.
Do you admit to having to make redundancies in 2023? Or is it just a question of slowing down or freezing hiring?
I think everything is on the table, and I never exclude anything. What I would say is that right now, there are no plans for any of those paths. The current plan is to maintain the product targets, maintain the targets of the commitments we’ve made with customers and re-evaluate every six months.
Do you admit to an IPO in the future?
It’s a company goal. Being a public company adds a lot of confidence.
It wouldn’t be in Portugal…
I hadn’t even thought about that possibility, to be honest.
[New tax regime for crypto in Portugal] is better than Germany’s, and it is sufficiently competitive.
Is the Government’s proposed new cryptocurrency tax regime competitive enough? Is it better than Germany’s?
It is better than Germany’s, and it is sufficiently competitive. I am thrilled with this result because it is completely reasonable. It shows what I said: we don’t need zero taxation, what we need is clear taxation, that is not variable, and that is competitive. We have exactly that. I was very happy. I don’t know if I had any influence on this or not, but I am happy that this was the result.
Why do you say that?
Because a person never knows what influence they have. But it is unlikely that I had any influence, so I am happy that the Government came to this conclusion independently.
The Government has created a visa for digital nomads, which is generating controversy. It is fractious. Is the Portuguese Government doing the right thing in pursuing this strategy of attracting digital nomads?
I am of the extreme opinion that we want more digital nomads. I get there is a gentrification effect here, and I get people having a hard time dealing with change, but the velocity of money in the country increases GDP (Gross Domestic Product). It’s clear to all economists. (laughs)
The only people who don’t believe that are the people who don’t want houses to go up in price in the most popular areas. And I understand that as well. But of course, there is a positive influence in having people go to Portugal, feel that Portugal is a safe country, soak up the culture, and invest money. To be honest, I would go to the extreme and the more Portuguese citizens we generate, who have a greater affinity with our culture, even if they have an affinity that is not the same as the one we have with our country, is completely positive.
And do you disagree with the end of golden visas?
I don’t agree with the end of gold visas because gold visas are something even more important than digital nomads. Digital nomads are temporary, and gold visas end up being permanent. Adjust the programme to meet the objectives. We’re not going to say we’ve met the objectives when the goal isn’t short-term, it’s constant, which is to bring more talent to Portugal.