News: NYAG calls Bitfinex out, Bitfunder founder off to jail, Roubini pissed at Bitmex

A few people asked me where I’ve been lately. I’ve been working! I recently started a full time job. I’m the editor of a website about ATM machines. I recently wrote Spanish authorities: bitcoin ATMs expose hole in AML laws” and Bitcoin ATMs: Why Vancouver doesn’t want them.” (By the way, if you are curious how criminals use bitcoin ATMs to clean money, this moneylaunder.com article does a nice job of explaining the process.) 

I also write a newsletter on money. You should sign up for it

On to the news — 

Much ado about exchanges

Crypto exchange Bitfinex is doing a lot more business in New York than it’s led us all to believe. The NYAG’s recent court filings — a Memorandum of Law and an affirmation from assistant Attorney General Brian Whitehurst, along with 28 pieces of evidence — reveal a full picture of the company’s dealings in the state.  

Why does it matter? Because his means NYAG has jurisdiction to push ahead with its investigation into Bitfinex and Tether’s ongoing shenanigans. Decrypt’s Ben Munster also points out that Bitfinex “loaned tethers to a New York trading firm.” There’s an open question as to whether the funds were ever paid back.  

Also, Bennet Tomlin had a good thread on the NYAG’s filing.

By the way, there are now nearly $3.9 billion tether sloshing around in the markets, pushing up the price of bitcoin, which briefly crested $13,000 on July 10. 

I nearly missed this bit of news from a few weeks ago: Ireland-based cryptocurrency exchange Bitsane went poof!, leaving its 246,000 users high and dry. Users began having issues withdrawing crypto from the exchange in May. And on June 17, the exchange’s website along with its twitter and facebook accounts vanished.  

Bitmarket, the second largest Polish crypto exchange, has shut down citing a loss of liquidity. Approximately 1,300 bitcoin are stuck on the exchange, and users are rightfully pissed off. They have formed a Facebook group and are planning a class-action lawsuit. The exchange was acting goofy before the shutdown. Reddit user u/OdoBanks says users were asked to change passwords and provide additional KYC for withdrawals.

Founder of bitcoin stock exchange Bitfunder will be spending 14 months behind bars for lying to the SEC about a hack that cost clients 6,000 BTC. Instead of telling his customers the truth in 2013, operator Jon Montroll misappropriated funds to hide the losses.  

Cryptocurrency exchange hacks don’t happen too often — only once every few weeks. Japan’s Bitpoint is the latest to make headlines. The exchange’s hot wallets were hacked to the tune of $32 million worth of crypto, most of which were customer funds. On Monday, the exchange found another $2.3 million missing on exchanges “that use the trading system provided by Bitpoint Japan,” according to Japan Today

(Update, July 15, 11:30 a.m. EST — previously, I indicated Bitpoint located $2.3 of the missing funds, but actually the exchange found more money missing.)

Speaking of Japan, the country’s top regulator says 110 crypto exchanges are waiting for licenses right now. Under Japanese law, crypto exchanges need to register with the Financial Services Agency to operate in the country. As of now, there are only 19 licensed exchanges in Japan. The FSA has been slow to license after the Coincheck hack

Binance burned 808,888 of its native BNB tokens — about $24 million worth. This is the eighth burn of BNB coins, which are totally not a security. The price of the remaining BNB goes up every time there is a burn. Keep in mind, until any crypto is converted to fiat, its value is completely theoretical. 

Screen Shot 2019-07-14 at 11.26.10 PMBitMEX, the Hong Kong-based bitcoin derivatives exchange, has finally released the tapes (round 1 and 2) from its “Tangle In Taipei,” a July 3 debate between Bitmex CEO Arthur Hayes and NYU professor Nouriel Roubini. The two have been going at it online.

A man is suing Gemini — the NY exchange operated by the Winklevoss twins — after $240,000 was stolen from his money market account and wired to Gemini, where it was used to to purchase crypto on the exchange.  

Due to heightened oversight on online crypto exchanges, users are increasingly asked to fork over their IDs and addresses. The shift is giving peer-to-peer exchanges, which typically don’t impose such KYC checks, a boost, according to Bloomberg

Other interesting stuff

Founders of the Tezos crypto platform object to sharing emails between them regarding the Tezos “fundraiser” because they are married. Steven Palley has the full story

New York City’s Monroe College was hit with a ransomware attack that shutdown the college’s computer systems. The attackers want the college to fork over $2 million worth of bitcoin to free up the computers.  

President Trump blasted bitcoin on Twitter. He is no fan of Facebook’s Libra either. There’s only room in this country for one currency, and that’s the almighty dollar.

The Federal Trade Commission has fined Facebook a gobsmacking $5 billion for privacy violations. It’s the biggest fine in FTC’s history. Surprise, surprise, Facebook’s stock went up on the news. 

An angry mob burned down the home of a man behind bitcoin ponzi scheme in South Africa after he admitted all the money was gone. 

Finally, police in China cracked down on a cartel of illicit bitcoin miners who stole nearly $3 million worth of electricity. A local power company tipped off authorities after they noticed a peculiar surge in power use.  

My story in Decrypt: “QuadrigaCX CEO traded millions in fake funds to fund luxury lifestyle, alleges trustee”

Ernst & Young released its fifth report of the monitor last night, and it was a doozy. I covered the report for Decrypt. If you have not read my story yet, check it out here.

The monitor’s report is 70 pages long, and I recommend finding a nice comfortable spot and reading all of it. It is page after page, paragraph after paragraph, of “What the hell?”

According to the report, from 2016 onwards, QuadrigaCX went completely off the rails. Gerald Cotten, the exchange’s now deceased CEO, appears to have had no interest in running a legitimate business. He treated customer funds like his own personal bank account—a bit like Bernie Madoff, only a lot more recklessly.

Cotten gambled with his customers’ money, went on lavish vacations, flew on private jets, and bought properties, an airplane, a yacht, whatever toys he wanted. Now most of the funds on the exchange are gone, and EY still has no clue as to where the cash proceeds went. The big question is, did Cotten really act alone?

Quadriga co-founder Michael Patryn is not mentioned in the report. According to what we know, he completely stepped away from the business in early 2016. After that, Cotten allegedly became a recluse and ran the business into the ground single handedly.

EY has also released a three-part (1, 2, 3) sixth monitor’s report detailing the costs of professional services related to Quadriga’s Companies’ Creditor Arrangement Act. Moving forward, EY is now the trustee in Quadriga’s bankruptcy proceedings.

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I wrote “Bitcoin ATMs—Why Vancouver doesn’t want them”

I started digging into Bitcoin ATM machines, and the research led me to write “Bitcoin ATMs—Why Vancouver doesn’t want them.” Vancouver, as we know, does not like Bitcoin ATMs. The mayor of the city wants them banned.

I suspect that the collapse of crypto exchange QuadrigaCX, which was based in Vancouver, also left a bad taste in the city’s mouth.

A source close to the matter told me that Quadriga had between two to four Bitcoin ATMs in its early days, but those were gone by 2017. The exchange was offering cash withdrawals. Where did all that cash come from? It’s own Bitcoin ATMs and later, the company had partnerships with other Bitcoin ATM operators, the source told me.

IMG-7392Recently, I visited a Bitcoin ATM in Los Angeles and spent time chatting with the owner of the machine. He told me that his machine charged a 7% transaction fee for bitcoin purchases—5% if you are selling bitcoin—and they only do ID checks for amounts over $280.

Bitcoin ATMs vary. Some charge up to 19%, and some only let you buy bitcoin and other crypto—no selling.

In other news, I am now the editor of ATM Marketplace and World of Money. I’ll be writing about cryptocurrency, but also covering ATM machines, money and payments in general. As long as I get to read, research and write all day, I’m happy. 

CLAM flash crash forces Poloniex to socialize $14 million worth of BTC in losses—what happened

Crypto markets are extremely volatile. You never know which way the wind will blow—or how hard. On May 26, this turned out to be a disaster for US crypto exchange Poloniex.

CLAM, an obscure token that Poloniex offered peer-to-peer margin trading on, suffered a flash crash. Its price dropped so violently that margin borrowers blew their margin multiple times over. The loss was huge—1,800 BTC, worth around $14 million.

Now Poloniex has to figure out how to extract the losses from the borrowers. For now, lenders have to suck up the loss. On 14:00 UTC on June 6—a full 10 days after the incident—Poloniex applied a 16.202% haircut to the principal of all active BTC loans. Even lenders not active at the time of the crash were affected.

Prior to announcing the haircut, Poloniex suspended trading for several hours on Wednesday as part of a “planned” maintenance. It wasn’t until trading resumed that margin lenders realized a portion of their BTC was missing. 

In a Medium postPoloniex revealed that a large part of the loans were collateralized in CLAM—so both the borrowers’ positions and their collateral lost most of their value. In other words, the funds simply evaporated, and there was nothing to repay loans with.  

The exchange says it has frozen all defaulted borrowers’ accounts until they repay their loans, as spelled out in the the company’s terms of service“As we recover funds, we will return them to affected lenders. We’re also exploring other ways to help defray margin lender losses,” Poloniex said. It adds that lenders only account for 0.4% of its user base.

Naturally, the margin lenders are completely pissed off. Why did Polo not have better risk management in place? Why did it not have an insurance fund set up to absorb the loss? And why did it allow margin trades—and collateral loans—on an extremely illiquid coin in the first place?

What is margin trading?

Margin trading is risky business, even more so when you are trading crypto assets, due to their high volatility. When you trade on margin, you put down a collateral and borrow against that, doubling, tripling, quadrupling—or whatever—your trade.

Trading on margin magnifies your profits, but also your losses. If the trade goes in your favor, you can repay the loan and tuck in a nice profit. But if the price of the asset slips enough so it looks like your trade won’t pay off, the exchange can call in your margin, and you lose all of the collateral you put down for the loan.  

Bitcoin derivatives exchange BitMEX loans you the funds for margin trades. Poloniex does something different. It uses peer-to-peer margin trades, where a common pool of lenders puts up BTC, CLAM, and another coins. They get paid in interest. According to Poloniex’s website (archive), only customers who are outside of the US are allowed to loan their funds on the exchange.

As a lender, you set your own daily interest rate, and Poloniex takes a fee of 15% from the interest earned. Margin traders consume lending offers starting with the lowest rate. If your rates are too high, your funds sit in the pool, and you don’t earn any interest. 

CLAM, the casino coin

Screen Shot 2019-06-06 at 10.36.34 PMIf you were paying close attention a year ago, you may have heard John Oliver mention CLAM on “Last Week Tonight,” along with Titcoin, Jesuscoin, Trumpcoin and a bunch of other coins with hilarious names.  

CLAM stands for “Caritas Libertas Aequitas Monetas,” which roughly translates to freedom, fairness, equality coins—whatever that means. The coin launched in May 2014, as a fork of Blackcoin (BLK), which launched in February 2014 as a fork of Peercoin, an early proof-of-stake coin.  

On May 12, 2014, CLAM was sent to all active users of bitcoin, litecoin and dogecoin—three popular coins at the time. Every unique wallet address pulled from those blockchains that had a balance above zero got about 4.6 CLAM. The total amount of CLAM distributed to those addresses was 14,897,662.

CLAM was mainly intended for use on Just-Dice, a gambling site created by a Canadian known only as “dooglus.” Originally Just-Dice relied on bitcoin. But due to new bitcoin regulation in Canada, dooglus decided to switch to CLAM in late 2014. 

The circulating supply of CLAM is only 3,624,208. Nearly all of that—99.81%—is traded on Poloniex. At one point, CLAM was listed on Bittrex and Cryptopia, but Bittrex delisted the coin in October 2018 and Cryptopia went belly up in May 2019.   

According to CoinMarketCap, CLAM has a daily trading volume of less than $100,000, meaning the coin barely has a pulse. Three months ago, two traders complained on Reddit of long delays withdrawing CLAM as they waited for the lifeless network to pick up their transactions.

I withdrew CLAM 11 days ago. Poloniex Support said ‘as soon as a miner picks up the transaction’ How f@%#$%g long is that?,” wrote Reddit user interop5. (Technically, CLAM is a proof of stake coin, so it relies on stakers, not miners.)

CLAM’s lack of liquidity makes it extremely easy to manipulate. All you need is one person to put up a large sell order to crash the price. Poloniex has yet to release details on what happened, but we can guess it was something along those lines. 

History repeats 

As a result of the flash crash debacle, Poloniex has removed CLAM from margin trading, along with three other coins: bitshares (BTS), factom (FCT), and maidsafecoin (MAID). The exchange outright admits these coins lacked sufficient liquidity:

“In order for margin liquidations to process in an orderly manner, the market must have sufficient liquidity, and these tokens currently lack that liquidity. We will continue to monitor them and may reinstate margin trading for them in the future”

This is not the first time Poloniex removed CLAM as a margin market and collateral coin. It was removed in early November 2017 due to low liquidity, after an earlier flash crash, despite CLAM’s liquidity never recovering, at some point, Poloniex decided to add CLAM back as a margin market and collateral coin—though I’m not sure exactly when.   

Screen Shot 2019-06-08 at 7.20.19 AMAnd then, of course, the exact same thing happened. In February 2019, the price of CLAM started to climb rapidly on Poloniex. In a matter of six weeks, it went from around $1.50 to a high of nearly $20 on May 26. At that point, the bottom fell out with CLAM losing three-quarters of its value in the blink of an eye. It sunk down to around $5.

According to Andrew Hires, a neurobiology professor at the University of Southern California, who has been watching the exchange, Poloniex had been struggling with its CLAM wallet for months. He tweeted:

“All deposits had to be manually credited via ticket. This screwed up the sell-side liquidity. Huge bids (>500BTC), presumably margin longs, crept up over months, pushing $ price up 17x. Just after it hit $20, everything imploded.” 

Spreading the loss

Socializing losses is unique to crypto exchanges. Like Poloniex, OKEx also socializes extreme margin losses, but literally requires customers to pass a test on their terms of service before they can trade futures, so they are absolutely clear on how it works.

According to crypto lawyer David Silver, socializing losses could open Poloniex to a lawsuit. Another lawyer, Stephen Palley, disagrees. Palley told The Block, he doesn’t think Poloniex breached its terms of service.

On the other hand, Emilien Dutang, who was pinged by the haircut and says he offered margin lending on the exchange after the flash crash, is threatening legal action.

None of this bodes well for Poloniex. Circle acquired the exchange in early 2018 with the intention of cleaning it up and dealing with a humongous backlog of support tickets. But at this level, Poloniex appears only slightly more competent than QuadrigaCX.

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The HODLcast: “QuadrigaCX with Amy Castor and David Gerard”

Sasha Hodder of The HODLcast interviewed me and David Gerard, author of “Attack of the 50-foot Blockchain,” about collapsed Canadian crypto exchange QuadrigaCX.

Sasha is an attorney with DLT Law Group, P.A., which focuses on supporting crypto-related businesses. David’s work has had a huge influence on me, so you can imagine how much fun I had doing a podcast with him.

QuadrigaCX is the story of how two sketchy characters—one, a convicted felon, and the other, a young man who seemingly had been running ponzi schemes since his teenage years—came together and launched a crypto exchange. A match made in heaven, right?

David and I talk about how this was even possible; the appalling, amateurish way the business was run; and the impact this could have on future crypto regulation.

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News: LEO getting pumped, Cryptopia scrambles to save its data, Poloniex says it’s stopped ignoring customers

This newsletter is reader supported. If you appreciate my work enough to buy me a beer or cup of coffee once a month, that’s all it costs to become a patron. I’m trying to pick up freelance gigs when I can, but one of the joys of writing for my own blog is I can write whatever I want, when I want. On to the news…

Bitfinex and LEO

Screen Shot 2019-05-29 at 5.43.17 PMUNIS SED LEO, the full name of Bitfinex’s shiny new utility token, is in its second week of trading. The price started at around $1, but it’s already climbed to a high of $1.52, according to CoinGecko. I’m sure the price increase is totally organic—not.

There are 1 billion LEO in circulation—660 million issued on Ethereum and 340 million issued on the EOS blockchain. 

Crypto Rank warns that 99.95% of LEO coins are owned by the top 100 holders. Also, Bitfinex still has not disclosed information about the investors. “We consider that the token can be manipulative,” Crypto Rank tweeted.

Given its $850 million shortfall, Bitfinex needs to pull in more money. It recently entered the initial exchange offering (IEO) business. IEOs are similar to initial coin offerings (ICOs), except that instead of handing you money directly to the token project, you give it to the exchange, which acts as a middleman and handles all of the due diligence.

Tethers

As the price of bitcoin goes up—at this moment, it is around $8,730—the number of tethers in circulation is going up, too. There are now more than $3 billion worth of tethers sloshing around in the crypto markets, pushing up the price of bitcoin.

Whale Alert says $25 million worth of tethers were taken out of the supply and put into the Tether Treasury. Kara Haas tells me, don’t worry, $150 million Ethereum-based tethers were just issued, and they more than make up for the difference.

Omni tethers, Ethereum tethers, Tron tethers. Tethers appear to be constantly coming and going, bouncing from one chain to another. It gets confusing. But maybe that is the point—to keep us confused. And to add to the jumble, tethers are now executing on EOS.

In the next couple of weeks, Tether is also planning to issue tethers on Blockstream’s federated sidechain Liquid. And later this year, the Lightning Network.

I updated my recent tether story to note that if you want to redeem your tethers via Tether, there is a minimum redemption of $100,000 worth—small detail. Also, I still haven’t found anyone who has actually redeemed their tethers.

Cryptopia’s data—held to ransom?

Cryptopia filed for liquidation on May 14. Liquidator Grant Thornton New Zealand is now scrambling to save the exchange’s data, held on servers hosted by PhoenixNAP in Arizona. The tech services wants $1.9 million to hand over the data.

Grant Thornton is worried Phoenix will erase the SQL database containing critical details of who owned what on the exchange. It filed for Chapter 15 and provisional relief in the Bankruptcy Court of the Southern District of New York. (Here is the motion.)

According to the motion, Cryptopia paid Phoenix for services through April. But when it offered to pay for May, Phoenix ended the service contract and “sought to extract” $1.9 million from the exchange. Grant Thornton says only $137,000 was due for the month of May. Phoenix also denied the liquidators access to the data.

On May 24, the court granted motion. (Here is the order.) Phoenix has to preserve the data for now, but Cryptopia has to pay $274,408 for May and June as security in the temporary restraining order. 

Meanwhile, Cryptopia liquidators’ first report is out. The New Zealand exchange owes 69 unsecured creditors $1.37 million (these are just the ones who have put in claims thus far) and secured creditors over $912,000, with an expected deficit of $1.63 million.

Turns out January 14, the day Cryptopia suffered its fatal hack was the exact same day Quadriga announced the death of its CEO Gerald Cotten, who, uh, had been dead since December 9. The two defunct exchanges had a few other things in common, which I outline in my first story for Decrypt.

Poloniex 

Living in Cambridge, I found it strange that nobody in the local blockchain community knew anyone who worked at Poloniex, based in Somerville, the next town over. I was told Polo staff kept a low profile for security reasons. But I also wonder if they were trying to avoid pissed off customers, whose inquiries they ignored for months.

When Circle acquired Polo in February 2018, it inherited 140,000 support tickets. Now, more than a year later, Circle says it’s all caught up. Polo’s customer support has been “completely transformed” and 95% of inquiries are now handled within 12 hours.

Coinbase

Yet another executive has left Coinbase, president and COO Asiff Hirji. This is the third C-level executive to leave the San Francisco crypto exchange this year.

Recently, Coinbase said it was offering a crypto debit card in the UK—a Visa with a direct link to your Coinbase wallet that lets you spend crypto anywhere Visa is accepted. Financial Time’s Izabella Kaminska thinks that could open a back door for dirty money.

Coinbase plans to add margin trading. Leveraged trading lets you supersize your trading power, because you are borrowing from the exchange, but it also supersizes your risk.

It is easy to understand why Coinbase would want to get a piece of the margin trading business. BitMEX has been reeling in the profits with its bitcoin derivative products. The company’s co-founder is now a billionaire who has so much money, he is giving it away.

Binance is also talking about putting margin trading on the menu.  

Elsewhere in cryptoland 

Kik, the messaging app that raised $100 million selling its kin token in 2017, thinks decades old securities laws need revamping. It wants to create a new Howey test.

The Canadian startup launched DefendCrypto.org, a crowdfunding effort to fight the SEC. It’s contributed $5 million in crypto, including its own kin token, toward the effort.

Ted Livingston, Kik’s CEO says there was no promise kin would go up in value, like a stock. But that is not what at all what he implied during a presale pitch.

Craig Wright, the self-proclaimed inventor of bitcoin, created a hoopla when he filed registrations for the bitcoin code and Satoshi white paper. Disagreements over the significance of the registration have spilled out into his Wikipedia page. Drive-by editors even tried to change Wright’s name to “Craig Steven Fart face.”

Taotao, a new crypto exchange is launching in Japan. It is fully licensed by the Financial Services Agency, the country’s financial watchdog, and it is 40% owned by Yahoo Japan.

As long as the price of bitcoin keeps going up, that is all that matters to bitcoiners. David Gerard delves into the origin of the phrase “Number go up.”

Geoff Goldberg, well-known for his battles against the relentless XRP armies, has been mass reported for calling out the bots that run rampant on twitter. No good deed goes unpunished, apparently. Twitter has effectively silenced him for seven days.

Finally, the Associated Press has a new entry on crypto—sorry, cryptocurrency.

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Related stories:
Social media startup Kik is kicking back—at the SEC
Turns out, you can make money on horse manure, and tethers are worth just that
“QuadrigaCX traders lost money on Cryptopia on the same day in January”—my first story for Decrypt

 

 

“QuadrigaCX traders lost money on Cryptopia on the same day in January”—my first story for Decrypt

Screen Shot 2019-05-28 at 6.56.36 PM.pngI just had my first story published in Decrypt, and you should read it!

Some background — I had been getting a few direct messages from QuadrigaCX traders who also lost money on Cryptopia, the NZ-based altcoin factory that recently went kaput. This led me into researching Cryptopia and learning the two exchanges shared a few commonalities.

Oddly, the death of Quadriga CEO Gerald Cotten was announced on January 14, the exact same day Cryptopia was hacked. This could be a wild coincidence, but still, it’s weird.

Both companies were run by amateurs, both had dollar-pegged tokens—Quadriga used Quad Bucks and Cryptopia came up with the idea for NZDT on a lark—and they both experienced crippling banking issues.

The Canadian Imperial Bank of Canada froze accounts belonging to Quadriga’s third-party payment processor Costodian in January 2018. And ASB Bank closed Cryptopia’s NZDT account just weeks later—another weird coincidence.

More details in the article!

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