Melbourne-based crypto start-up Maple Finance has severed ties with crypto hedge fund Orthogonal Trading, alleging the firm has defaulted on $US35 million ($51 million) in loan repayments and has been trading insolvent after the dramatic collapse of crypto exchange FTX.
Orthogonal Trading’s financial woes are causing headaches for another Australian-founded crypto business called Nexus Mutual, which offers peer-to-peer insurance services, and had lent money through a borrowing and lending pool run by Maple Finance’s technology.
Sidney Powell, CEO and co-founder of Maple Finance. Eva Marie Uzcategui
Maple said in a statement that Orthogonal has been “operating while effectively insolvent”, and didn’t communicate that it would be unable to service the debt.
“Misrepresentation like this is in violation of Maple’s agreements, and all appropriate legal avenues to recover funds will be pursued including arbitration or litigation as necessary,” reads the statement.
Maple Finance is a decentralised finance (DeFi) company, which has developed blockchain-based lending technology that connects crypto lenders with crypto borrowers through trading pools. It functions similar to a private credit fund.
The idea behind this technology is to use blockchain software to automatically perform the borrowing and lending function of traditional banks and record transactions on a publicly visible blockchain.
Third party “owners” of the pools use the technology to run lending businesses and calculate an “interest rate” based on broader credit market trends.
These third-party “owners” of the pools perform their own due diligence on participants, but the platform does not require the borrower to pledge any assets against the debt that could be automatically liquidated if a default occurs.
Orthogonal Trading has defaulted on six loans across Maple Finance’s pools run by a third party called M11 Credit. The loans were worth about $US35 million in total.
M11 Credit has confirmed that Orthogonal executives spent several weeks insisting they had limited exposure to FTX, but they have now admitted they had a much larger position in FTX, and its collapse is the main reason for their insolvency.
These defaults have also hit fellow Australian-founded crypto business Nexus Mutual, which has warned it might lose 2461 ether ($3 million) because it was a lender in one of the pools that Orthogonal Trading was borrowing from. This loss accounts for about 1.5 per cent to 2.6 per cent of the company’s assets.
Nexus Mutual said in a statement it would start to withdraw its money from the Maple pool, but warned further funds might be tied up in other loans. Maple has a 10-day waiting period before depositors can withdraw capital.
Nexus Mutual was founded by Sydneysider Hugh Karp who now lives in London.
Earlier this year, Maple’s chief executive, Sidney Powell, knocked back FTX founder Sam Bankman-Fried’s sister quant trading business Alameda Research from participating on its platform, pointing to problems with Alameda’s balance sheet.
It was these problems that sparked the recent worldwide crypto rout. The leaked Alameda balance sheet revealed that the quant trading firm’s finances were inextricably linked with FTX Trading, which was the world’s third-largest crypto exchange at the time.
What followed were revelations that that Alameda had ultimately borrowed $US8 billion of customer money from exchange FTX and lost it on risky trades in a bid to plug large holes in its balance sheet.
Mr Bankman-Fried has described this as “bad risk management”.
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