- By Amy Castor and David Gerard
- Send us money for these delightful and informative newsletters! Our work is funded via our Patreons — here’s Amy’s, and here’s David’s.
- Our patrons can also get a couple of “Bitcoin: It Can’t Be That Stupid” stickers just by messaging one of us and asking.
- David has signed author copies of his books for sale.
- Sign up on Amy’s blog to see every new post she makes as it goes up, and click here and enter your email address for every new post on David’s blog as it goes up.
due to a mistake in the internal reporting system, it didn’t tell him that he’d taken all the customers’ money and given it to his hedge fund to gamble with— Qwertycoatl on SomethingAwful
When your auditor quits, that’s bad
Binance is broke. It’s got the same problem as the rest of crypto — the assets are imaginary, but the liabilities are real.
Remember the 2 billion BUSD bailout fund for distressed crypto enterprises that Binance announced in November? Bitfinex’ed suggested it was for a hole in Binance’s accounts — and now we’re seeing that Binance is sure behaving like there’s a huge hole in their books.
But Binance got an audit! Well, not an audit as such. But it was done by accountants who sometimes audit other things!
The “proof of reserves,” issued by Paris-based accounting firm Mazars, specifically disclaims being anything meaningful. But it makes sure to use the word “proof.”
The report didn’t address any of the tricky bits — it didn’t include non-crypto liabilities, it didn’t assess the effectiveness of internal financial controls, and it didn’t actually vouch for the numbers. Michael Burry: “The audit is essentially meaningless.” [Mazars, archive; WSJ; Twitter, archive]
Mazars has been issuing these “proofs of reserves” for Crypto.com and Kucoin as well. But now Mazars has abruptly halted all work for crypto firms — and scrubbed all mention of such work from its website. This is Mazars running like hell to get as far away from the bomb as possible before it goes off. [Bloomberg]
Meanwhile, users have been taking their cryptos off Binance and going home. Binance outflows hit $6 billion in the week Mazars halted its work for crypto. [FT]
Binance cut off USDC withdrawals again, claiming a “wallet upgrade.” It just looks a bit like a “wallet inspector.” [Twitter]
CZ went on CNBC Squawk Box to reassure everyone that everything is fine … though he didn’t seem as at ease as he usually does:
CZ: “We are financially okay.”
Rebecca Quick: “Can you have a 2.1 billion withdrawal?”
CZ: “We will let our lawyers handle that.”
CZ was asked why he wouldn’t engage a Big Four auditor to pick up where Mazars left off. CZ said most of these big firms “don’t even know how to audit crypto exchanges.” Andrew Ross Sorkin then pointed out that Coinbase has a Big Four auditor, Deloitte. Quick rolls her eyes at the end of CZ’s stumbling explanation (0:26 in the Twitter link). [YouTube; Twitter]
Why Binance may not have as much money as they want you to think
When FTX bought out Binance’s share in the company, Binance got paid $2.1 billion in funny money. CZ told Squawk Box that “it was all in FTT tokens, which are now worthless.” [Twitter]
70% of Binance’s reserves are in BUSD, Tether, and BNB — the last of which is their internal exchange token, akin to supermarket loyalty card points, in the style of FTX’s FTT.
The BNB token has crashed in the past week, from $290 to $240, according to Coingecko.
Keep in mind that BUSD on Binance is internal magic beans, and absolutely not the same as Paxos dollar-backed BUSD. If Binance thinks it could get away with cashing in the bridged BUSD at Paxos, that’s $2 billion of actual US dollars Binance could secure for itself.
BUSD on Binance is on their own BNB blockchain, formerly known as Binance Smart Chain — a very hacked-up fork of the Geth software for Ethereum. The idea is to have a platform that runs the Ethereum Virtual Machine, lets you rug pull, and so on. This “blockchain” features transactions that seem to parachute assets into the system from space with no verifiable history. Data Finnovation digs into the weird bits. “It’s probably not fair to call this a ‘blockchain’ anymore.” [Twitter, archive]
And there’s still no verifiable evidence that tethers can actually be cashed in for dollars — even if you’re Binance.
Sounding smart doesn’t mean you are smart
Confidence men are called that because they can say the most outlandish things and not bat an eye. CZ has mostly come across in media as fundamentally being on the ball.
But remember that Sam Bankman-Fried projected being smart as well — until we got a look inside FTX, and saw how incredibly stupid every single smart guy in FTX really was.
After Reuters published multiple reports of money laundering at Binance — including Binance letting Iran cash out bitcoins in violation of international sanctions — the U.S. Justice Department is “split” over charging Binance with money laundering. The split seems to be whether to charge them now or later: “Some of the at least half dozen federal prosecutors involved in the case believe the evidence already gathered justifies moving aggressively against the exchange and filing criminal charges against individual executives including founder Changpeng Zhao, said two sources.” The DoJ has discussed various plea deals with Binance’s lawyers. The investigation has been going on since 2018. [Reuters]
It’s only a matter of time before Binance starts freezing withdrawals — just like FTX, Voyager, Celsius, and so many other crypto exchanges in the last seven months.
Who can bail out Binance? Only Tether is left. Perhaps some new crypto exchange will pop up and achieve improbable volumes in a remarkably short time. There should be some Jane Street wunderkind on hand to front the operation.
Strange things in the Bahamas
The FTX liquidation proceedings in the Bahamas are distinctly odd and in direct conflict with FTX’s Chapter 11 proceedings in the U.S. [Bloomberg]
FTX froze withdrawals on November 8. The Bahamas government placed FTX Digital Markets, FTX’s Bahamas subsidiary, into liquidation on November 10. And John Jay Ray III, who took over as CEO of FTX Trading, filed for Chapter 11 in the US on November 11.
The joint provisional liquidators (JPLs), the three men in charge of liquidating FTX Digital Market’s assets, now want dynamic access to FTX systems — they don’t want just lists of specific data, they want to be able to go fishing through the system themselves.
Ray, who cut the JPLs off from the system on November 12, is saying “no way.” He and his team are pissed because of all the pillaging of FTX that occurred after FTX froze withdrawals.
FTX objected to the Bahamas motion saying there was no urgency and the other side was being utterly uncooperative: [Objection, PDF]
“Debtors have made repeated overtures to JPLs and Commission to meet and those overtures were met with avoidance and obfuscation. The JPLs and the Commission have refused to provide responses to Debtors’ questions about the assets ‘secured’ by the Commission. Instead, the JPLs file baseless motions seeking extraordinary relief on an unnecessarily truncated timeframe.”
“The process in the Bahamian islands is not a transparent process. We have opened up the ability to share everything we have with the Bahamian government, similar to how we share with other liquidators around the world not only in this case but in other cases. It’s meant to be a very cooperative situation. The pushback that we’ve gotten is sort of extraordinary in the context of bankruptcy. It raises questions, it seems irregular to me, there are lots of questions on our part, and obviously, we’re investigating.”
James Bromley, one of FTX’s attorneys in the bankruptcy, has filed a declaration with rancorous correspondence between FTX and the Bahamas liquidators attached as exhibits. [Declaration, PDF]
Judge Michael Dorsey, who is presiding over the Chapter 11 proceedings in Delaware, told lawyers for the JPLs and Ray to try to find a middle ground. (His job is to be a referee, after all.) If they can’t work things out, they’ll be facing off in an evidentiary hearing tentatively scheduled for January 6, 2023. [Doc 197, PDF; Doc 203, PDF]
So that you can understand FTX’s concerns, here’s a rundown of all the questionable stuff that’s happened so far:
On November 9, the day after FTX froze withdrawals, SBF told Bahamas attorney general Ryan Pinder that he would open withdrawals for Bahamian customers. Pinder previously worked at Deltec Bank — Tether’s banker since 2018 — but we’re sure that hasn’t influenced his decision-making, probably. [Doc 203, PDF]
From November 10 to 11, roughly 1,500 individuals, who claimed to be Bahamian residents, withdrew $100 million in crypto from FTX. Every other FTX customer in the world remained locked out of the system.
SBF later told Tiffany Fong that he let the locals get their cryptos out because “you do not want to be in a country with a lot of angry people in it.” Could he have had in mind, not a mob, but particular individuals who might have had very robust opinions about not getting their cryptos back? [YouTube]
Separately from these withdrawals, at least two actors accessed FTX systems and withdrew another $477 million — hours after Ray filed for Chapter 11 on November 11. They also minted new FTT tokens. [Elliptic]
Ray and his lawyers say that SBF and Wang, who, acting on orders from the Bahamas Security Commission, minted FTT and transferred funds to a cold wallet under the control of the Commission. Ray still hasn’t figured out who the other actor was, but he’s working on it.
The JPLs have been tight-lipped as to what assets the Commission seized or how the assets were transferred.
There’s also the issue of the $256 million that FTX spent on 35 properties in the Bahamas — including land for a massive headquarters that never got built. The Bahamas regulators want to claim the properties back and they want the sale of the properties administered locally. Ray is likely to push back on this as well. [CNBC]
It’s hard to say for sure what’s going on here. We are beginning to suspect that FTX was a money-laundering chop shop, with some crypto businesses on the side. This would further suggest possible bribery of some local authorities. But the dots aren’t yet joined up.
Rats turn on each other
After four days, SBF has decided that Bahamas prisons aren’t so great, and he would rather be in a nice U.S. jail instead. [Reuters]
Ryan Salame, co-chief executive of FTX Digital Markets, is the first FTX insider on record as spilling the beans on SBF. He told the Bahamas Security Commission on November 9 that FTX customer funds had been used to cover losses at Alameda Research. [Doc 225, PDF, page 34; FT, archive]
In 2021, Salame was a budding megadonor to U.S. Republican Party candidates — in step with SBF donating to Democratic candidates. Salame took out a $55 million loan from FTX, paid cash for a $4 million home in Maryland, and was buying up restaurants in Lenox, a town in Western Massachusetts. [NYT]
We’re not saying that’s what he used it for — but restaurants are notorious as a vehicle for laundering dubious cash.
Total donations by FTX to US politicians seem to be about $89 million when you trace all the darkish money as best as possible. [Institute for New Economic Thinking]
$73 million of those political donations are at risk of being clawed back in the bankruptcy proceedings. [Bloomberg]
The correct regulator for crypto is the Department of Justice
Here are all of the written testimonies. [Senate Housing Committee, PDFs]
John Jay Ray III wants to sell FTX subsidiaries, starting with LedgerX, FTX Japan, and FTX Europe AG. [Doc 233, PDF]
FTX now has an official creditors’ committee of nine firms or individual investors, including crypto trading firm Wintermute. They still need to pick counsel, which should happen any day now. One of the first matters they will be weighing in on is a proposal to redact personal information rather than publishing a full list of creditors. [Doc 231, PDF]
When the Ontario Teachers’ Pension Plan invested in FTX, it asked the company a slew of questions related to their financial affairs — but received answers only to a few of them. OTPP put in $95 million anyway. [Globe and Mail, archive]
How a crypto exchange can inveigle itself into the banking system — and how FTX seems to have done this with its Farmington equity purchase. Buy a bank, convert to a Federal Reserve member bank, notify the Fed that you’re going into digital assets and you’ve determined it’ll all be fine and you’re totally going to set up risk management. “If you’re lucky, your bank won’t be examined for a year or two. By then, you might have cranked up quite a dumpster fire.” [American Banker; Wall Street on Parade]
Canada has tightened crypto regulation even further in the wake of FTX. Client cryptos must be stored with a custodian and have no margin or leverage for Canadian customers. Non-Canadian platforms with Canadian customers will also be required to follow these rules. The Ontario Securities Commission had already refused FTX permission to operate in the province, but other provinces didn’t — and many Canadian FTX customers got caught up in the bankruptcy. [Leader Post]
Eliezer Yudkowsky, the AI risk guy who named “Effective Altruism,” advises his fellow Effective Altruists to take the FTX money and run. For the sake of charity, you understand. Others mention that clawbacks in bankruptcy exist — but ehh, it’ll probably be fine, right? [Effective Altruism forum, archive]
Celsius and Voyager
There’s no interesting news in the Celsius Network or Voyager Digital bankruptcies. Looking through the filings, it’s all procedural sports ball and not matters of real import. Everyone’s on holiday and nothing is going to happen until January. Perhaps Celsius won’t have run out of cash by then.
The next report of the examiner on Celsius was supposed to be out in December — but the court still hasn’t resolved the question of who investigates whether Celsius was Ponziing, which is the big bomb here.
Voyager is just sitting around and giving money to expensive bankruptcy professionals. Binance was talking about buying Voyager’s assets — but frankly, that’s a deal we suggest the creditors not take. They only just escaped being caught up in FTX’s bankruptcy.
Celsius has filed a motion to commence a $7.7 million clawback action against Voyager, as well as an extension of time to file a claim against Voyager’s estate. The Voyager Unsecured Creditors’ Committee is reviewing Celsius’ motion with the intention to object. [Twitter, archive]
Bankruptcy professionals will cost Celsius $115 million in the three months leading up to mid-February. [Doc 1676, PDF]
Crypto broker Genesis owes the Gemini exchange $900 million. Gemini has now formed a creditors’ committee to recoup the funds from Genesis and its parent DCG. [FT]
Did you know that 80% of the current market cap (613 million) of Gemini’s dollar stablecoin GUSD was printed in the weeks before the FTX collapse? Even odder, one unlabeled wallet appears to have minted 460 million GUSD. [Twitter, archive]
On September 30, 2022, Gemini sought to incentivize GUSD adoption by increasing GUSD deposits to MakerDAO’s PSM (peg stability mechanism). MakerDAO was unimpressed. [The Defiant]
Tether’s accountant, BDO Italia, is reconsidering whether it wants to do crypto attestations. “In common with several other professional service firms, we are currently evaluating our approach to this sector and the work we undertake for our clients.” Tether only hired them in August. [WSJ, paywalled]
In the lead-up to FTX going down, CZ from Binance was very upset that SBF appeared to be destabilizing Tether’s peg with … a mere $250,000 trade. We know this because there’s a secret chat group for the exchanges to conspire, er, sort out issues. SBF also put screenshots from these chats into the Congressional Record in his bizarre written testimony before the hearing, which he didn’t manage to attend. [WSJ; Forbes]
The secret ingredient is still crime. Police in China have arrested a gang who laundered $1.7 billion via crypto, including Tether — even after Beijing’s crackdown on crypto. [CNBC]
Other crypto firms who are fine
Three Arrows Capital (3AC)’s liquidator Teneo estimates 3AC’s assets at $1 billion as of July. That’s $37 million of actual money, $238 million in cryptos, $22 million in NFTs, and $502 million in venture and other investments. A lot of those “assets” are obviously imaginary. 3AC’s liabilities, which are extremely real, are over $3 billion. [The Block]
Grayscale wanted to turn GBTC into an exchange-traded bitcoin fund. The SEC said “LOL, no.” Grayscale sued claiming unequal treatment compared to the bitcoin futures ETFs, and even questioning whether the SEC had the right to decide against its ETF proposal. Now the SEC has written a 73-page response to Grayscale’s dumb lawsuit. [SEC, PDF]
MicroStrategy is still going down the toilet. Bitcoin prices fell well below the “low watermark” for carrying value in Q3 2022. The company will likely face a new record digital-asset impairment charge in Q4. [Marketwatch]
Dump on retail managed: Coinbase founder Brian Armstrong no longer holds any Coinbase stock. But he’s very bullish on crypto, he wants to make clear! [Protos]
Image: Robyn Damianos for the Wall Street Journal