Millions of loops threaten Dutch crypto platform. What’s happening in Bitvavo?

The collapse of the crypto market also affects the largest Dutch cryptocurrency trading platform, Bitvavo. This company stole 280 million euros from its customers at the American crypto company Genesis, which is now in serious trouble. Bitvavo cannot access that money.

1 What happened?

Money from Bitvavo customers is owned by American crypto firm Genesis. Genesis has been in turmoil since the closure of the trading platform FTX, owned by American entrepreneur Sam Bankman-Fried (30). At the beginning of November, it turned out that money from FTX customers, without their knowledge, had been used to plug holes at a sister company. Also the self-issued crypto coins from FTX (known as FTT) were used as collateral in the companies. They wanted a market cap of $32 billion, but there’s nothing left of that. After the bankruptcy, it turned out that there was virtually no accounting. Sam Bankman-Fried is being prosecuted for fraud and money laundering. The fraud case is already considered one of the most spectacular cases in recent history. There are about a million victims.

FTX is pulling down other companies, including Genesis. Like FTX and Bitvavo, Genesis is a trading platform, but it also facilitates crypto lending. Crypto owners lend from and to each other without the intervention of banks and profit from it. To allow small investors to participate in this, there are services that collect and lend their crypto coins.

Genesis was already worried about the bankruptcy of a major crypto investment fund (Three Arrows Capital) in June and was dealt another blow by the turmoil after the fall of FTX. Many customers wanted to withdraw their money, causing the company to have payment problems. It froze customer assets to avoid bankruptcy.

Bitvavo claimed not to have been affected by the falling US companies, but had to in late December after a disclosure Financial Times came back to. The Dutch company was found to have placed 280 million euros from customers at Genesis.

2 Did Bitvavo make the same fun as FTX?

None. FTX customers had no idea what happened to their money and could not have known. They were under the impression that they were being held by the company.

People who bought cryptocurrencies through Bitvavo and then left them in Bitvavo to speculate with could choose to ‘stake’ their coins (pronounced: stabbing, from effort, commitment, interest). They had to give permission for that by hitting a ‘slide’ on the website. However, the explanation was not so clear. The question is therefore whether people knew exactly what they were saying ‘yes’ to and what risks it entailed.

Also read: 2022 was a disaster year for the crypto world

3 What is ‘stop’?

There is confusion around that term, and you can blame it on the crypto companies. Definitions are different. A common meaning is: to pledge. But with some of the trading platforms, including Bitvavo, ‘betting’ can also mean lending.

About the first meaning: people value cryptocurrencies because they can use them for mutual transactions without the intervention of banks or other institutions. These transactions are in a public database (blockchain), maintained by computers participating in the network. Its owners can earn cryptocoins by putting their computer at the service of the database’s security. To be judged on the quality of their work – no fake transactions are allowed in the database – they pledge their own crypto coins. They lose that if they do a bad job. This does not apply to the bitcoin blockchain, the most common cryptocurrency, but it does apply to many other major blockchains, such as ethereum or cardano. So ‘staking’ your cryptocoins means you give them as collateral for validating transactions. This is called in chain strike. And you get a reward for that.

Trading platforms that too off chain strike offering, i.e. lending of crypto-coins, could do so via Genesis. Of the 1.6 billion euros that customers had with Bitvavo, 280 million were borrowed through Genesis in this way. With both types of ‘effort’, the return is somewhat comparable to interest on savings, balances that a bank uses to lend.

4 Have those customers lost their money now?

None. Bitvavo has taken over the risk so that their customers can simply access their money. The main question is whether Bitvavo can still get the money back. Genesis is in bad shape, but it’s not bankrupt yet. Genesis has already offered Bitvavo to repay 70 percent. But Bitvavo wants the full pound. If only 70 percent return, it will itself have to pay its customers 84 million euros.

Bitvavo doesn’t seem to have that much money on its balance sheet. Final figures for 2022 are not yet available, but a year earlier the equity amounted to 33 million euros. On the other hand, the owners have paid themselves enough dividends in recent years that it is likely they can pay their customers out of pocket, and they have said they will.

5 So not everyone has done badly in the crypto market?

Crypto trading has certainly benefited Tim Baardse, Jelle de Boer and Mark Nuvelstijn. Since founding Bitvavo in 2018, the company has grown rapidly. Business magazine Quote estimates their wealth at 150 million per person. The three founders are also shareholders. Nuvelstijn (30) is now the face of the company.

In the years 2018-2020, the net profit amounted to 11 million euros, but 2021 was a top year for all crypto companies; people started trading crypto en masse. That year, Bitvavo made a profit of 173 million euros on a turnover of 247 million euros. According to his own statement, DKK 114 million has been paid out so far.

6 Will this be the end of Bitvavo?

Many crypto companies are doing poorly and many have already disappeared, but Bitvavo seems to be doing pretty well. Trading platforms profit from every transaction, so a year of great turmoil is not necessarily unfavorable. According to Bitvavo, the result for 2022 is 65 million euros, despite all the turmoil in the crypto market and customers running away.

Market researcher Multiscope reported two months ago that 1.9 million Dutch people have cryptos, together worth around 2.2 billion euros. About half of them use Bitvavo, which claims to have more than a million Dutch customers. Competitors like Binance and Coinbase are much smaller in the Netherlands and FTX hardly played with this.

7 Is it easy to check how crypto companies are doing?

Button. The crypto world is a parallel financial reality where rules from the traditional financial world hardly apply. Most companies are not listed on the stock exchange and do not publish annual figures. They usually do not have loans from banks.

Under pressure from authorities and consumers, who are frightened by the many scams, things are slowly changing. Within the EU, a law will come into force in 2024 to regulate the market. Until then, there is little oversight. There are no guarantees for consumers, as for example with bank balances. In fact, crypto companies themselves often have trouble opening a bank account.

Bitvavo works with a well-known accountant: Grant Thornton. The platform has announced that it will soon publish an audit for the first time.

A problem for many crypto companies is that reputable accountants hardly dare venture into the valuation of cryptos. Binance released a statement from major auditor Mazars in December, but this was only a verification of the method by which Binance proves it actually has crypto. The coins are therefore not channeled away, as with FTX.

Nevertheless, the statement immediately caused so much confusion and uproar that Mazars removed it from its website a week later. In addition, the accountant, who also had other crypto clients, announced that he temporarily stopped working for crypto companies.

Also read this profile of Binance’s boss: The mastermind of crypto

8 Why are accountants so hesitant?

Working in the crypto world is new to them and risky. It is virtually impossible to say what a cryptocurrency is worth – or even if it is worth anything. This makes it quite a challenge to prepare and audit annual accounts if the accounts largely consist of crypto-coins.

If someone wants to buy crypto coins with ‘traditional’ money, their price is determined solely by supply and demand. People buy them because they think the technology has a future. And to speculate with, because the wildly fluctuating prices provide opportunities for investors who like to gamble.

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