Why is bitcoin dropping in price?

As I write this at 9 pm ET, on May 5, the price of bitcoin is $36,300. It slid from $39,000 Thursday to below $36,000 at one point, causing a disturbance in the force.  

There were two sharp drops — at 15:00 UTC precisely and 19:00 UTC precisely, with attempts to walk the price back up both times. The last thing you want is to kick off a panic, so there will always be whales in the background trying to lift bitcoin back up when it falters. 

After starting the year at $46,700, bitcoin saw a January sell-off, which pushed the price down to $35,000. Apart from that, the world’s most popular crypto has been trading in a range of around $40,000 — a far cry from its record of $68,990 in November 2021. 

Why did it slip Thursday? Because bitcoin mirrors the stock market, mainly tech stocks. 

On Wednesday, Fed Chairman Jerome Powell said there may be .5% rate increases over the summer, but that officials weren’t considering a .75% increase.  

The momentary glee pushed stocks up on Wednesday, but those gains were erased on Thursday when the Federal Reserve raised its target federal funds rate by half a point — the second increase by the central bank this year.

Stocks tumbled. The Dow Jones fell 3.1%. The S&P 500 fell 3.6%, and the tech-heavy Nasdaq slid 5% — its biggest drop since June 2020.

Bitcoin is down 27% since the beginning of the year — and 47% since it’s November all-time high. Tech stocks have also done poorly this year. Google’s parent company Alphabet lost 20% of its share price, Microsoft is down 17%, and Meta has fallen 34% since the start of the year. 

Are the good times coming to an end? 

Over the last two years, the stock and crypto markets have been able to turn a blind eye to the reality of the pandemic because there was plenty of money flowing into the game to keep things going. 

Stimulus bills approved by Congress beginning in 2020 unleashed the biggest flood of federal money into the US economy ever. Roughly $5 trillion went to households, shops, restaurants, airlines, hospitals, local governments, schools, and other institutions. 

Stimulus checks ($1,200 in April 2020, $600 in December 2020, and $1,400 in March 2021) helped fuel a stock-buying spree — and a crypto buying spree. 

Starting in 2022, government programs meant to invigorate the economy during the pandemic ended. Now, reality is settling in. Americans are starting to think hard about the future. They are taking a good long look at their bank accounts and their budgets. 

The longer the Russia-Ukraine war goes on, the bigger its economic costs will be — and the war is looking like it will drag out for possibly years. 

Inflation is at its highest level since the 1980s, reaching 8.5% in March from a year ago. When I go to the grocery store, I can see the prices going up weekly. Avocados at Trader Joe’s are $2.29! 

Rising food prices are terrifying to a lot of people. Gas prices in parts of the country (California, Nevada) are over $5. It takes a lot of money to fill up the tanks in the SUVs Americans love. 

People are moving away from risky investments — like crypto — and fleeing to safety. They want to make sure they can weather inflation and any future slowdown in the economy. 

So they are putting their money into things like I Bonds right now. Just go to Treasury Direct. You can put $10,000 per year in I Bonds and they are paying 9.62%. That’s a lot safer than bitcoin. 

Of course, it’s not just rising interest rates that are rattling the crypto markets. Bitcoin needs fresh cash to keep prices buoyed, and it’s not clear where that next batch of fresh cash is going to come from. 

I wrote earlier about Grayscale’s Hotel California. The Grayscale Bitcoin Trust (GBTC) arb opportunity that pushed bitcoin to new heights in 2020 and early 2021 has dried up.  

Between January 2020 and mid-February 2021, bitcoin climbed from $7,000 to $56,000. GBTC is now trading at 25% below net asset value, and Grayscale stopped issuing new shares in March 2021. 

Grayscale is pushing for the SEC to convert GBTC into a spot bitcoin ETF to open the gates for more cash to flow into the cryptoverse. But it is doubtful that will happen. 

The SEC has rejected every spot bitcoin ETF to date, and — as I’m sure the commission will recognize — Grayscale can redeem those shares on its own at NAV if it wants.  

And then there’s Tether. On March 11, 2020, when the WHO declared COVID-19 a pandemic, causing a massive sell-off in stocks and crypto, Tether’s market cap was $5 billion. Today, 83 billion tethers are underpinning the price of bitcoin. What’s underpinning tethers?

It’s widely accepted amongst crypto critics that Tether is a fraud. Hindenburg’s Nate Anderson predicted that Tether’s two public faces would end 2022 in handcuffs. 

If you include the 48 billion USDC sloshing around in the crypto markets, I suspect insiders can pump the price of BTC past $50,000 anytime they want with stablecoins — but they don’t because there would not be enough cash in the system to keep up with withdrawals.

The same network effects that pushed bitcoin to its highs can unravel. At some point, people will want to sell their bitcoin for cash — not tethers or USDC. That means someone has to be on the other side of the deal ready to hand over real dollars. 

I don’t think the Big Crash is happening now, but the bitcoin sell-off on Thursday was an indication of just how wobbly things have become. All the conditions are ripe for a collapse in the crypto markets. It’s just a matter of time. 

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NFT news: BAYC breaks Ethereum, OpenSea accepts APE, NFTs are like Papyrus

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Yuga Labs had their massive land NFT sale for their Otherside MMO, which doesn’t even exist yet. The sale, on April 30, was a mess for anyone trying to buy, but a complete success for Yuga, which netted $320 million in APE. Ethereum became unusable for other projects during the sale. [Amy Castor]

Yuga Labs say they have refunded everyone for failed transactions — but those who paid ridiculous gas fees for transactions that did go through are stuck with the cost. [Tweet]

In total, Yuga spent 90.57 ETH ($265,000) on roughly 640 refunds. The largest individual refund was 2.6 ETH ($7,500). [Etherscan]

On Reddit, u/Atariconcarne has the perfect analogy: “It is like paying for your cheeseburger combo with a credit card and the guy with the paper hat at the register saying ‘Your 5 bucks transaction fee wasn’t enough. Want to try again for 10?’” [Reddit]

Ethereum doesn’t work, sure, but this is also what happens when you change plans at the last moment and upload crap to the blockchain. Yuga Labs’ smart contract had no optimizations for gas fees. [Tweet

If Yuga Labs can’t pull off a land auction without putting buyers through hell, how are they going to create an MMO? I expect Otherside to work at least as well as Axie-Infinity, which netted the DPRK $600 million. Bridges are the smart contract pinata!  

Burn it with fire!

Speaking of Axie, the Ronin hackers are laundering their funds through Tornado Cash. Nicholas Weaver argues that Tornado Cash needs to be sanctioned to prevent the DPRK from profiting from the theft. Let’s hope someone from OFAC reads his post and takes action. [Lawfare]

$450 million of WETH in users’ Ronin wallets is still unbacked. After VCs put in $150 million to stabilize the situation, we haven’t heard anything from Sky Mavis on how they are going to fix this yet. In March, they promised all users would be refunded.  

Axie-Infinity resembles a multi-level-marketing scheme. u/ale23arg on Reddit talks about how he earns income as a scholar: “im a manager in the US as well i peaked at about 22 scholars and now im holding around 12….” [Reddit]

Bored and empty

Bored & Hungry, the Bored Ape-themed burger pop-up in Long Beach, Calif., was only planning on being open for 90 days. Now, much to the horror of their neighbors, they have officially announced: “We are here to stay.” [Amy Castor, Instagram

The Chronicle’s Cesar Hernandez visited Bored & Hungry for a bite. “What’s most infuriating to me is that this restaurant model inspires the same hollow dread as some ghost kitchens. It’s a soulless attempt to capture the zeitgeist, combining pop culture with food trends.”

Whilst there, he asked one of the cashiers what he knew about NFTs: “He looked at me with a puzzled expression. ‘Not much, I just got hired to work here.'” [Chronicle]

While the pop-up opened with long lines, that’s apparently no longer the case. “I drive by this every day, and it’s almost completely empty,” Michael Narciso, who lives in the area, tweeted.

The NFT market is flatlining!

The Wall Street Journal’s Paul Vigna reports that “the NFT market is collapsing,” with daily average sales down 92% from a peak in September, according to data from NonFungible. [WSJ]

Believe me, I wish the NFT market would collapse, but it’s important to take these reports with a grain of salt — VCs are still pumping huge money into the space. They have investments to cash out on! 

To prove his point, Vigna pointed to a Snoop Dogg curated NFT that sold in April for $32,000 in ETH. It’s now up for $25.5 million ETH, and the highest current bid is for $210, he said.

This isn’t a great example, said Molly White. The original $32,000 sale was WAY higher than most resales of NFTs from this collection. Weird, but “less weird if we assume the original minter is wash trading.” [Twitter thread]

Enuff with celebs promoting NFTs

Last month, Tonight Show Host Jimmy Fallon, who also owns a Bored Ape NFT, tweeted about Moonbirds. He also changed his Twitter profile photo to a Moonbird owl — previously, it was a Bored Ape. Nobody will say if Fallon received a free Moonbird or not. [Buzzfeed]

Fallon isn’t alone. There is a long list of celebs mysteriously acquiring high-value NFTs and giving fans the (false) impression that they purchased these as an investment. A more likely scenario: they received the NFTs as gifts in exchange for promoting the projects. This is wrong and bad on many levels.

“Withholding such material information is illegal, and both the company and the influencer are on the hook for such deception,” Bonnie Patten, the executive director of consumer advocacy group Truth In Advertising, told BuzzFeed.

How are dozens of celebs acquiring Bored Ape NFTs? Are they getting them as gifts, without saying they are getting them as gifts? Because if that’s what’s happening, it’s a real sleazeball way of promoting the project. [Amy Castor]

Other stuff

Reddit co-founder Alex Ohanian, who owns a pile of APE and sits on the APE DAO foundation, compares NFTs to papyrus and the Gutenberg Bible. We only need to wait a few thousand years for NFTs to reach their full potential. The quote tweets on this are just fantastic. [Tweet]

OpenSea has started accepting APE. Why? Because the NFT marketplace is backed by a people (Coinbase, Creative Artists Agency, a16z, Ashton Kutcher) who stand to make a lot of money on APE. No surprise here. [Decrypt]

A few weeks ago, David Gerard wrote a popular story on how VCs cash out on the securities-fraud-as-a-business model. Everyone should read this — and then read it again. [David Gerard]

Apecoin shoots up 19% after Elon Musk provides a practical demonstration of how stupid NFTs are. (Hint: he changes his twitter profile pic to a collage of Bored Apes.) [CNBC] 

Asked on Reddit what the difference is between Zuck’s Metaverse and the old Second Life, u/AnimalFarmKeeper responds: “Second Life was as the name suggests an adjunct to the real lives of people. The Metaverse is largely touted as a place for those with no life.” [Reddit]

Last month, Zackxbt posted a leaked list of NFT and crypto shills. Vice reached out to the shills to learn more. Some get paid pretty well! Ashley Duncan is “earning more than she’s ever made in her life, pulling in more in two months than she used to make in an entire year by creating NFT projects, performing occasional consulting work, and pumping crypto.” [Vice]

Policy expert Elizabeth Renieris went on nonprofit ACT-IAC’s The Buzz podcast to dispel myths about Web3 for the government technology community. [The Buzz]

Coinbase opened up its NFT marketplace beta to the public, but so far, it’s hardly seeing the mad rush of users that was expected after bragging about all those early signups. [Bloomberg]

Kraken also wants to get in on the gold rush. It’s launching an NFT marketplace with zero gas fees. [Decrypt]

Me in the news 

I wrote a story for Artnet News on DAOs and the art market. Art dealers are seriously concerned about selling work to DAOs — their biggest fear is that the project will destroy the work and turn it into an NFT, so it only lives in the virtual world. [Artnet News, paywalled]

In another story for Artnet News, I spoke with several lawyers to get their feedback on a UK judge reportedly announcing that NFTs are property. Hint: Yes, NFTs are property. But there is nothing here that says if you own a token, you also own the thing the token points to. [Artnet News, paywalled]

Yuga Lab’s Otherside land sale turns into a giant gas war

Yuga Labs launched a land sale for its upcoming metaverse project Otherside Saturday night, which quickly morphed into a gas war — and broke Ethereum. 

As part of their psychedelic-fueled business plans, Yuga Labs offered 55,000 NFTs called “Otherdeeds” for 305 APE each ($5,800, at the time). Apecoin was the only crypto accepted for the minting.  

The sale, which started on April 30, at 9 p.m ET, immediately became a land grab for the rich. People paid between 1.3 ETH to 1.9 ETH ($3,500 to $5,500), on average, just to get their transactions to go through. Some even paid 5 ETH ($13,500) and higher — double the cost of the land itself.

The high fees lasted several hours, making Ethereum virtually unusable for any other projects. [Reddit]

By the time the sale was over, Yuga Labs netted 16.7 million APE ($310 million), helping to recentralize a coin they can then claim is decentralized. All of the APE acquired in the sale are locked up for one year. 

Gas fees

Ethereum — a “world computer” — ambles along at 15 transactions per second. You have to pay a fee, called “gas,” to Ethereum miners to process transactions. 

When transaction volumes are high, miners get to selectively process only transactions paying the highest gas fees. The higher the gas fee you are willing to pay, the better your chance of having a miner include your transaction in the next block on the blockchain.  

If you happen to pay too low a gas fee, your transaction will fail, and you lose your gas money. The Otherdeed mint saw lots of failed transactions. [Dune]

What happened?

Originally, Yuga Labs were going to do a Dutch auction. 

In a Dutch auction, also known as a descending price auction, you determine the price of something after you collect all of the bids. Bidders indicate how much they are willing to pay for an item and the number of items they want to purchase at that price. If there are insufficient bids to sell all of the items, you lower the price until you find a price that works for everyone. 

The phrase dates back to the 17th century when Dutch auctions were used to sell fresh flowers in Amsterdam.

However, Yuga Labs decided to scratch that plan at the last minute because — “Dutch auctions are bullshit.” [Otherside blog post]

Instead, they opted to sell the land to pre-approved KYC’d wallets for a flat price of 305 APE.

There were concerns from the beginning about a gas war erupting. Yuga Labs assured everyone that everything would be fine, because they were going to do the sale in waves, initially limiting the number of mints to two per wallet “to ensure as broad a distribution as possible and dramatically soften the potential for a massive gas war.”

The plan failed, and the mint consumed over $177 million in gas fees. Only those with enough ETH on hand got the land. So much for wide distribution. [Etherscan] 

Demand for NFTs was so high that even Etherscan crashed, said Yuga Labs. [Tweet]

Yuga Lab’s smart contract had no gas optimizations at all. They waited until the last minute, and then uploaded poorly written crap to the Ethereum blockchain.

Yuga Labs say they’re sorry for the whole mess, and they promise to do better next time. [Twitter]

They also said that they will refund any failed transaction fees. [Tweet]

Yuga Labs’ business acumen consists of finding a reliable pool of suckers who they squeeze regularly for more money. Their business acumen does not extend to any form of technical competence or even how to run an auction. But it does exactly the job it is supposed to do: it gets them their money. In that sense, the land mint was a success. 

In collectors’ hurry to mint the metaverse land NFTs, some inevitably fell victim to phishing sites. Crypto sleuth Zachxbt found scammer wallets that netted $6.2 million in stolen NFTs. [Twitter]

What’s next? 

Otherside, a massively multiplayer online (MMO) game that Yuga Labs is working on with partner Animoca Brands, doesn’t even exist yet. At this point, they just have a website with a trailer with The Doors’ “Break on Through” playing in the background.  

Yuga Labs is now talking about developing their own blockchain to alleviate network congestion problems in the future. 

Ethereum doesn’t work for the job it’s intended to do, even though a16z, Yuga Lab’s backer, keeps talking up Web3 as the future of the internet. 

As a result, blockchain game developers often resort to creating their own blockchains. Dapper Labs eventually moved CryptoKitties over to a new blockchain called Flow, after the game caused Ethereum to slow to a crawl in 2017. 

Axie Infinity, another popular game, created a new blockchain called Ronin. However, they had to create a bridge so that Ethereum tokens, in the form of WETH, could be used on Ronin. The result was a $600 million hack. Bridges are a risky proposition. David Gerard calls them smart contract Pinatas. 

In addition to the 55,000 Otherdeeds it sold on Saturday, Yuga Labs plans to airdrop another 45,000 land parcel NFTs to Bored Ape and Mutant Ape holders, as well as Yuga Labs and other project developers. Another 100,000 parcels are expected to be awarded later to certain Otherdeed NFT holders, according to the Otherside website. [Otherside FAQ]

If you missed out on buying an Otherdeed NFT on Saturday, several are currently being flipped on OpenSea for a floor price of 6.5 ETH ($17,000).

APE, which was trading as high as $26 before the land sale, has tumbled to $17. 

(Update: In an earlier version of this story, I said Yuga would refund gas fees for Otherdeed purchases. They will only refund failed transaction fees.)

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GBTC investors are spamming the SEC 

The Securities and Exchange Commission is being inundated by thousands of comments solicited by Grayscale to support the conversion of their Grayscale Bitcoin Trust (GBTC) into a spot bitcoin ETF. [Comments on NYSE Arca Rulemaking]

As part of the filing, the SEC provides a comment period of 240 days. NYSE Arca filed the application on October 19, 2021, so the last day for comments is June 16. 

Bitcoin skeptics refer to GBTC as the Bitcoin Roach Motel or Hotel California, a place you can check in but never leave because once bitcoin goes into the trust, it has no obvious way of getting out. I covered the details of how the trust works in an earlier blog post. [Amy Castor]

GBTC is currently trading at 25% below the price of bitcoin. Grayscale argues that converting it to a spot bitcoin ETF will allow GBTC to trade in line with its underlying asset. 

In truth, Grayscale can redeem shares and return investors their money, but it stands to make hundreds of millions of dollars more with an ETF, so you should definitely spam the SEC instead!

Grayscale has encouraged spamming the commission through a massive ad campaign at Amtrak stations. Grayscale CEO Michael Sonnenshein is going around giving press interviews, pointing out how mean and evil the SEC is for never having approved a spot bitcoin ETF in the past. 

On its website, Grayscale offers a link that opens up directly to a ready-made email, making it mindlessly easy to spam the SEC in a few simple clicks. 

Jorge Stolfi, a computer scientist in Brazil, has been reading through the SEC comments one by one and posting his thoughts on Twitter.  

Nearly 4,000 comments have been submitted so far, and 98% of them are positive in that they support converting GBTC to a bitcoin ETF. Some of the names look suspiciously made up.

Thousands of the comments are copies of the same Grayscale spam message, and many don’t even bother to edit the “[YOUR NAME HERE]” placeholders.

Many of the comments parrot Sonnenshein’s remarks to the press about how the SEC has approved a bitcoin futures ETF; therefore, it should also approve a spot. (This is nonsense. The former is an actual bet on dollars. Nobody touches BTC at any point in the process.)

Hopefully, the SEC will read the spam comments and understand them for what they are: clear evidence that thousands of GBTC investors do not understand the nature of bitcoin, and that GBTC should not be converted to an ETF for the sake of those same investors.

In reading through the comments something else becomes alarmingly clear — many retail investors are stuck with GBTC in their retirement accounts. Thanks to a television ad campaign that Grayscale ran in 2020, many falsely believed that bitcoin was a hedge against inflation, rather than an incredible risky and volatile asset.  

Amongst the positive comments, Coinbase submitted a ridiculously long (27 pages) letter trying to demonstrate that the bitcoin market cannot be manipulated. They somehow forgot to mention the 83 billion tethers currently sloshing around in the crypto markets. [SEC Comment 

Last year, Coinbase settled charges with the CFTC that one of its own employees was wash trading the vast majority of a certain coin’s volume on their own exchange, and they apparently weren’t aware of it until much later. I’m sure they have a lot of credibility on this subject!

Voices against the GBTC conversion

There are a few powerful letters to the SEC against the conversion. These are definitely worth a read for anyone who wants to get a better understanding of how GBTC works.  

Writing on behalf of a client, Ropes & Gray Attorney David Hennes does a fantastic job underscoring how Grayscale is royally screwing over GBTC holders. [SEC Comment

As Hennes points out, Grayscale bought $700 million worth of its own GBTC shares at a discount and is authorized to buy back $1.2 billion. 

If GBTC converts to an ETF, Grayscale would then be authorized to sell the corresponding bitcoins at the market price, thus making some $200 million to $350 million in profit at the expense of those who sold them the shares at discount. 

Since Grayscale is no longer issuing shares of GBTC, it can redeem GBTC at net asset value without running afoul of Regulation M, as it had in the past. However, it chooses not to because it is collecting a 2% management fee on $25 billion in BTC assets held in the trust.  

“The SEC should thus deny the conversion of GBTC into an ETF unless and until Grayscale first (a) initiates a redemption program for GBTC that complies with Regulation M; and (b) agrees to distribute to GBTC’s other shareholders on a pro-rata basis any and all gains resulting from any Grayscale purchases of GBTC shares at a discount and corresponding sales of GBTC shares on an undiscounted basis,” wrote Hennes.

Computer scientist David Rosenthal, who gave a popular lecture at Stanford warning about the hazards of crypto, says all of the reasons the SEC had for rejecting previous bitcoin spot ETFs — and there have been close to a dozen of them — are still valid. 

“The constant pressure to approve a spot Bitcoin ETF exists because Bitcoin is a negative-sum game. Bitcoin whales need to increase the flow of dollars in so as to have dollars to withdraw. The SEC should not pander to them.” [SEC Comment] 

Rosenthal also comments on my Grayscale story in his blog. [DSHR blog]

Along that same vein, David Golumbia, author of “The Politics of Bitcoin,” warns “manipulators in the crypto space need a constant inflow of real dollars to prop up their manipulation so that they can continue to dump their tokens into the hands of ever more unsuspecting consumers. That they are obviously engaged in selling their own tokens for a profit while bullying others into buying at the same time is only one of many tactics they use that are illegal in well-ordered markets.” [SEC Comment]

In his own submission, Stolfi states that bitcoin is a tool of crime. It allows dark markets to exist and flourish. It has taken the place of the now-defunct criminal bank Liberty Reserve. And it functions as a natural Ponzi. [SEC comment]

“Bitcoin does not provide any benefits for society; on the contrary, it has caused enormous damage; and this balance cannot ever improve, because the technology is inherently wasteful, impractical, illegal, and insecure.”  

Someone going by “Concerned Citizen of the Word” noted that “It’s just a matter of time before the Bitcoin bubble pops due to any of many reasons, and a lot of people, especially Americans, are going to lose massively.” [SEC comment]

If you are similarly disturbed by Grayscale’s campaign of misinformation, I encourage you to write to the SEC and make your own voice heard — with original commentary, which I’m sure they would appreciate. You can submit your comments here.  

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Bored Ape Yacht Club: Unanswered Questions

I’m working on a chapter on Bored Ape Yacht Club for the NFT book that David Gerard and I are painfully slogging away on. It’s like dredging through a swamp full of stupid.  

Anyway, I’ve come across a series of unanswered questions that I need help answering. If you know anything, my DMs are open. I will update this document accordingly if I come up with more unanswered questions — which I’m sure I will. 

Why do we know so little about Yuga Labs’ founders? 

I can find almost nothing on Yuga Labs’ core founders, Wylie Aronow and Greg Solano, who operate under the pseudonyms Gordon Goner and Gargamel. 

Wylie Aronow and Greg Solano, founders of Yuga Labs

How is it these two have made it into their 30s with almost no Web presence? It just doesn’t make sense — unless, they never held down real jobs before. 

Their LinkedIn profiles, here and here, are blank.  

Most of what we do know about them comes from an interview they did with Rolling Stone, in an article published on November 1. This three months before Buzzfeed revealed their real names. (They weren’t doxxed; their names were clearly listed on public business records.)

Both grew up in Miami. They claim they met in a dive bar in their 20s and bonded over a heated discussion on David Foster Wallace. Apparently, they are somewhat literary, so this is likely true. 

While he was living in Chicago for a stint, Aronow was featured in the Chicago Tribune’s “Readers of the Week” in November 2014. 

Solano has some poetry reviews on ZYZZYVA, circa 2013 and 2014, but that’s all I can find on the two in terms of their literary obsessions.  

In the Rolling Stone interview, Aronow refers to his “gambling problem days,” and says he was a high-school dropout. He admits he never had a real job.  

On the other hand, Solano claims he did go to college and grad school. He previously worked as a writer and editor. His roommate from college was mining bitcoin in 2010, he said. 

Aronow and Solano became crypto traders during the crypto bubble/ICO period of 2017. 

If Solano went to college, where did he earn his degree? Where did he go to grad school? Inquiring minds want to know. 

Were the pair involved in any earlier crypto projects, like maybe a token offering? If so, did they use other pseudonyms?

What about Yuga Labs’ other two founders? 

Aronow and Solano hired two developers — Sass and Emperor Tomato Ketchup — who were also part of the founding team.

The two software engineers “doxxed” themselves in early February right after the Buzzfeed story came out on Aronow and Solano. They revealed their first names — Zeshan and Kerem — but not their surnames.  

Their full names are Zeshan Ali and Karem Atalay, as listed on Form D filed with the Security and Exchange Commission on March 22. 

Form D is a notice of an exempt offering of securities. These filings are specifically for the purpose of fully informing the public. Aronow and Solano’s names are also on the Form.   

The filing was so Yuga could sell shares in the company to accredited investors, such as A16z, and raise $450 million. It’s not clear that these shares were related to Apecoin.*  

Who did Aronow and Solano know? Early connections? 

Bored Ape Yacht Club has followed what appears to be a planned and well-strategized trajectory from launching an NFT project to getting a fungible token (APE) listed on Coinbase.  

The key to NFT collections is keeping holders holding, so they don’t sell their NFTs and go off to invest in other NFT collections, of which there are many. You want to keep the floor price up. 

This is usually done by airdropping holders more NFTs, which they can flip on OpenSea, and inviting them to networking events, where they can pitch their own NFT projects, etc.  

In their Rolling Stone interview, Aronow and Solano used words like “Web3” and “metaverse” and spoke about giving their NFTs real-world utility. This is investor speak. 

I suspect Solano and Aronow knew someone who advised them early on. What connections did they have? Who did they speak to before launching their project?

How are celebrities acquiring Bored Ape NFTs? 

Bored Ape Yacht Club has benefited from a number of high-profile celebrity endorsements. 

Celebs have been buying up Bored Ape NFTs, announcing their purchases on social media, and switching their Twitter profile pics to Bored Apes. 

Eminem, Jimmy Fallon, Stephen Curry, Post Malone, Lil Baby, Paris Hilton, and Madonna currently own Bored Ape NFTs, along with about a dozen other Hollywood influencers. 

Did these celebs pay full price for their Bored Apes? Is someone gifting NFTs to them for the purpose of promoting the project? 

Crypto payments company Moonpay has played a role in onboarding many celebs. Who is sending Moonpay ETH or cash to buy the BAYC NFTs?

The Federal Trade Commission has social media guidelines for influencers. If you endorse a product through social media, you have to make it obvious that you have a material connection with the brand. How is Yuga Labs getting around this? 

*Update, April 27: In an earlier version of this story, I said the Form D was related to distribution of Apecoin. It could just be equity in the company.

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After a guilty plea, Reggie Fowler faces up to 90 years in prison 

It was an unhappy day for Reginald Fowler, the man I’ve been following since his indictment on April 30, 2019. 

The ex-NFL co-owner went before a Manhattan judge today in a Zoom call from his home in Chandler, Arizona, to plead guilty to five counts: bank fraud, conspiracy to commit bank fraud, operating a money transmitter business, conspiracy to operate a money transmitter business, and wire fraud. 

In 2018, Fowler found himself in a new career. He was moving money for crypto exchanges on behalf of Crypto Capital, a Panamanian shadow bank. At the time, traditional banks wanted little to do with crypto exchanges due to the money laundering risks they posed. 

The fifth count, added later in a superseding indictment, involved Fowler defrauding a new football league called the Alliance of American Football by giving them $25 million that belonged not to him, but to the customers of the cryptocurrency exchanges he was holding money for.

Fowler was 23 minutes late for the hearing. He had a terrible time calling in. When he finally did log into the call, he had himself inadvertently muted. His lawyer Ed Sapone kept making excuses while federal prosecutors waited. 

Once Fowler was audible, Judge Andrew Carter read through the charges, making sure that he understood each and every one of them. And then finally: “How do you plead?” 

“Guilty your honor.”

The judge then proceeded to run through the statutory penalties: a combined 40 years for counts one and two, a combined 10 years for counts three and four, and 30 years for count five. 

Fowler, who is 63 years old, also faces a government forfeiture. Over a period of 10 months in 2018, he processed $750 million in crypto transactions in various currencies, nearly $600 million in US dollars, according to a DoJ press release.  

Fowler’s voice sounded muffled. At times he stuttered. He read from a prepared script at the end, trying to tell the judge and prosecutors his version of events, though he was almost impossible to hear and the court reporter kept asking him to repeat himself. 

“This has been a long and difficult road. I wanted to accept responsibility in the right way,” he said. “I am deeply sorry, and I plan to make full amends.” 

Fowler said he knew nothing about cryptocurrency when he opened the bank accounts under false pretenses, telling the banks that the accounts were for his real estate business. 

“I did not know they were dealing with digital assets,” he said, speaking of Crypto Capital. “My understanding was that all the money was lawfully clean money.”  

It is hard to understand what Fowler was going for. Perhaps hoping for leniency from the judge? If he had accepted a plea deal offered to him in January 2020, he would have faced a much lighter sentence, perhaps only five years. Instead, he bulked in front of the judge. Soon after, he lost his initial legal team, after neglecting to pay them.

Even if Fowler had gone to trial, it would have been up to the US government to find him guilty of all charges. He may have stood a better chance. But also, he would have had to endure press coverage, and the media picking apart his every word. 

His trial, originally scheduled for February, was set for May 16. Last week, his lawyer wrote to the judge and said that Fowler wanted to change his plea to guilty. 

Fowler’s sentencing is scheduled for August 30 at 2 PM EST. 

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Reggie Fowler, Bitfinex/Tether’s alleged US money man, to plead guilty

In another last-minute twist, Reggie Fowler, the man at the center of hundreds of millions of dollars in missing Bitfinex-Tether money, is going to forgo a trial and enter an open plea to charges next week. His trial was scheduled to begin in May.

Fowler is charged with bank fraud, money laundering, and running an unlicensed money transmitting business. An open plea leaves the defendant’s sentence in the hands of the court, with no agreement from the prosecutor.

Fowler’s lawyer, Edward Sapone, filed a letter with a Manhattan court on April 21, asking Judge Andrew Carter to schedule a Rule 11 change of plea hearing.  Fowler, who lives in Arizona, is hoping for a virtual hearing due to COVID, so he won’t have to get on a plane.  

The former football player allegedly ran a shadow banking service for Crypto Capital, a payment processor that crypto exchange Bitfinex was using to skirt the traditional banking system. Before his indictment on April 30, 2019, Fowler’s accounts were frozen by the Department of Justice.

This isn’t the first time Fowler has attempted to plead guilty. He came very close to a plea deal on January 17, 2020, but backed out in front of the judge at the very last moment.  

Had he accepted that deal, he would have likely spent five years in prison with three years of supervised release and paid a fine of up to $250,000.

But the deal, which required Fowler to forfeit $371 million held in some 50-odd bank accounts, fell apart at the last minute. Nobody was sure of the exact amount in the bank accounts and Fowler would have been on the hook for the difference.

On Feb. 20, 2020, the government followed up with a superseding indictment against Fowler, adding wire fraud to existing charges of bank fraud and illegal money transfer. 

According to federal prosecutors, from June 2018 to February 2019, Fowler obtained money through “false and fraudulent pretenses” to fund a professional sports league in connection with his ownership stake in the league. 

As it turned out, Fowler had invested $25 million in the Alliance of American Football — an attempt to form a new football league — shortly before his arrest in 2019.

Sapone has been Fowler’s lawyer since April 2021, when Fowler’s prior defense team withdrew from the case due to nonpayment. Fowler owed them $600,000.

Going to trial is a huge cost, which is why Fowler’s previous legal team stepped down when they did. They did not want to do all that work and risk not getting paid — for any of it. 

Sapone is stuck with the case. He cannot step down, as Judge Carter gave him fair warning when he took Fowler on as a client: “You are going into this with your eyes wide open.”

However, I do wonder if part of the reason Fowler is seeking an open plea has something to do with money. You would have to be a fool of a lawyer not to get paid upfront.

I have also heard that Fowler is strongly averse to media coverage, and journalists would have been all over the trial. He wouldn’t have liked that.

If you are just getting up to speed on all of this, the New York Attorney General charged Bitfinex and Tether with fraud in April 2019, claiming that Bitfinex covered up the fact that it had lost access to $850 million put in the trust of Crypto Capital, without so much as even a written contract.

The companies had to pay an $18.5 million fine as a result. They also can no longer operate in the state of New York, and Tether has to release public attestations on a regular basis. 

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Would you like fries with your Mutant Ape?

In Long Beach, California, there is a pop-up hamburger joint that is getting a lot of media attention because it’s got pictures of Bored Apes throughout. 

The restaurant, called “Bored & Hungry,” is operated by Andy Nguyen, who spent $267,000 (in crypto) on a Bored Ape NFT in March. He also holds two Mutant Ape NFTs, which cost him another $140,000 in ETH.

Nguyen has set out to prove that putting giant movie cutouts of slimy mutant apes inside a hamburger joint is proof that NFTs — tokens on a blockchain that point to JPEGs on a server somewhere — work in the real world. 

If you are lost on the logic here, don’t worry, you are not alone. 

Bored & Hungry is located at 2405 E. 7th Street, between Cherry and Obispo. It opened to the public on April 9, and it’s scheduled to stay open for 90 days.

Along with three cutouts of Bored Apes, a window facing a patio is painted with a gigantic Mutant Ape dripping with green slime — perfect to go with your meal. The floor is painted green, to resemble slime. Chips and burgers are served in colorful packaging with cartoon apes on them.

LA Times Food Editor Lucas Kwan Peterson describes it best:

“It feels more like a kiosk at Disneyland than a restaurant, and like some paint has been quickly slapped onto the previous Louisiana Famous Fried Chicken. A couple of movie theater-style cutouts of Mutant Apes have been trotted out onto the floor for photo opportunities.” 

The “grand opening” was complete with a ribbon-cutting, loud music, lines down the block, and a dozen “content creators” racing about, conducting interviews, and filming everything possible. You can see some of the camera action here. 

Bored & Hungry offers a simplistic In-N-Out-style menu. Yet, while a basic burger at In-N-Out costs $3.50, Bored & Hungry burgers start at $13.

The food, based on Nguyen’s existing meat and vegetarian burger concepts, doesn’t quite live up to the price tag, according to some Yelp reviewers. 

“Burned burger. Burned a hole in my pocket,” Robin W. wrote. 

Ernesto Z. described the French fries as the “frozen ones just deep-fried and topped off with salt and pepper.”

“I live near it and it’s awful,” Michael Narciso said in a tweet. The apes look terrible on the outside and burgers are triple the price of a better-tasting burger down the street.” 

Proof that NFTs (don’t) work!

The popup is intended as proof that NFTs are “more than just a JPEG.” As such, NFTs work as you might expect, meaning they didn’t work at all. 

If you own a Bored Ape, you got a free meal, but you had to present a paper ticket as proof. What about the NFT you spent hundreds of thousands of dollars on? Never mind that, you need a paper ticket. 

Bored & Hungry accepts payment in Apecoin or Ethereum, but almost nobody pays with crypto because, what a hassle, and it’s easier to use a credit card, the LA Times said. 

Cryptocurrency never functioned as money. Its value is based on speculation, people buying and selling. The same goes for NFTs. That’s it, that’s all they are good for.  

Unless that is, you are shilling your own NFT project. In that case, owning a Bored Ape token is a signal to other investors that you’re a success. You’ll be surprised to learn that Nguyen also has his own NFT project that he’s working on. It’s called Food Fighters Universe — “an NFT collection that will connect food and Web3,” according to the press release.

Search for utility 

When Yuga Labs launched Bored Ape Yacht Club in April 2021, the big deal was that holders had IP rights to their cartoon apes, meaning you could print your ape on T-shirts and hoodies and sell those on eBay. You can also put your Bored Ape on a beer can and a bag of weed. 

Bored & Hungry is proof that you can print a Bored Ape on hamburger wrappings. You still need a paper ticket or credit card to pay for the food. Nobody is talking about business expenses — I mean, you could lose money selling burgers this way. Nguyen is already $400,000 in the hole.

Bored & Hungry isn’t about selling hamburgers — it’s about promoting the Bored Apes brand to convince you that NFTs aren’t complete garbage, which they are. Like everything else behind Yuga Lab’s Bored Ape Yacht Club, it’s a publicity stunt.

Since day one, Yuga Labs has been pitching the idea that Bored Ape Yacht Club NFTs offer real-world utility. It’s a ticket to culture. It’s a ticket to a warehouse party in Brooklyn. You are part of a community. You can draw dick pictures on a virtual bathroom wall, one pixel at a time. 

If you’re amazed at the amount of hype behind Bored Ape Yacht Club, remember, the project is backed by A16z and Madonna manager Guy Oseary, who Yuga hired to represent them. Insiders are waiting to cash out on their ApeCoin once their shares are unlocked. 

I suspect we’ll be seeing lots of new ideas coming from Bored Ape Yacht Club promoters in the next year. Until investors can dump their bags on the public via Coinbase, events like this one are crucial to keeping Bored Apes in the public eye. 

Nguyen told LA Times that he is considering keeping his popup open beyond 90 days. If that’s the case, I’m curious to find out how long the lines are in June. I suspect people will tire of green slime decor and $13 hamburgers pretty quick. 

[Update: Bored & Hungry has officially announced on Instagram, “We are here to stay.”]

Update: June 24, 2022 – Bored & Hungry stops accepting $APE during the crypto crash. The LA Times writes: “Crypto skeptics have long warned that someone would get left holding the bag when the hype cycle played itself out. Better that bag should contain a burger and fries than nothing at all.” [LA Times]

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Welcome to Grayscale’s Hotel California 

If you happen to be taking Amtrak and pass through Penn Station or Union Station, you will notice something unusual: every available ad space has been taken up by Grayscale. 

“We care about crypto investors,” the crypto asset manager says in its ads. Grayscale is urging the public to write to the Securities and Exchange Commission and convince them to approve the first spot bitcoin ETF in the U.S.

Grayscale wants to convert its Grayscale Bitcoin Trust (GBTC) into a bitcoin ETF after flooding the market with shares. GBTC is trading 25% below its net asset value, and investors are rightfully pissed off. Grayscale wants them to be upset with the SEC, but the regulator isn’t really to blame. If anything, the SEC should have warned the public about GBTC years ago. 

Over the last eight years, Grayscale has been telling investors to buy shares of GBTC, advertising the fund as a way to get exposure to bitcoin without having to buy bitcoin.  

Accredited investors plowed dollars (or maybe bitcoins) into the fund all through 2020, looking to take advantage of an arbitrage opportunity. They could buy in at NAV, and after a 6 to 12-month lockup, sell on the open market for a premium. All through 2020, that premium was around 18%, on average.

Everybody was happy until February 2021, when the Purpose bitcoin ETF launched in Canada. Unlike GBTC, which trades over-the-counter, Purpose trades on the Toronto Stock Exchange, close to NAV. At 1%, its management fees are half that of GBTC. Within a month of trading, Purpose quickly absorbed more than $1 billion worth of assets. 

Demand for GBTC dropped off and its premium evaporated. Currently, 653,919 bitcoins (worth a face value of $26 billion) are stuck in an illiquid vehicle. Welcome to Grayscale’s Hotel California. 

The plan all along, Grayscale claims, has been to convert GBTC into a bitcoin ETF. On October 19, 2021, NYSE Arca filed Form 19b-4 with the SEC. The regulator has until early July to respond. 

In all probability, the SEC will reject the application, just as it has every single spot bitcoin ETF application put before it to date. 

Bitcoin’s price is largely determined by wash-trades, whales controlling the market, and manipulation with tethers. SEC Chair Gary Gensler knows this. He taught a course in blockchain and money at MIT Sloan before his appointment by the Biden administration. 

This is Grayscale’s second time around. It applied for a bitcoin ETF in 2016, but withdrew the application during the 2017 bitcoin bubble because “the regulatory environment for digital assets had not advanced to the point where such a product could successfully be brought to market.” Meanwhile, the trust’s assets under management grew as did Grayscale’s profits.

Closed-end fund

“Inflation is rising, we need to diversify!” a panicked woman tells her son over the phone in the middle of the night. “I’m buying crypto!” She hangs up. Her son rolls over in bed. The scene is from a series of TV commercials Grayscale ran in 2020 to convince the public that GBTC was a sound investment.  

Digital Currency Group is the parent company of Grayscale. Both firms were founded by Barry Silbert. DCG is invested in hundreds of crypto firms. It owns crypto outlet CoinDesk, which essentially functions as a PR machine for the entire crypto industry. 

Initially called the “Bitcoin Investment Trust,” GBTC launched in September 2013. It was promoted as an investment vehicle that would allow hedge funds and institutional investors to gain exposure to bitcoin, without having to deal with custody. Coinbase has been the custodian of the fund since 2019 when it bought Xapo, the previous custodian. 

Legally, GBTC is a grantor trust, meaning it functions like a closed-end fund. Unlike a typical ETF, there is no mechanism to redeem the underlying asset. The SEC specifically stopped Grayscale from doing this in 2016. Grayscale can create new shares, but it can’t destroy shares to adjust for demand. Grayscale only takes bitcoin out to pay its whopping 2% annual fees, which currently amount to $200 million per year.

​​In contrast, an ETF trades like a stock on a national securities exchange, like NYSE Arca or Nasdaq. An ETF has a built-in creation and redemption mechanism that allows the shares to trade at NAV via arbitrage. Authorized participants (essentially, broker-dealers, like banks and trading firms) issue new shares when the ETF trades at a premium and redeem shares when they trade at a discount, making a profit on the spread. 

How it all works 

Grayscale periodically invites rich investors to pledge money into the fund in private placements at its discretion. The minimum investment is $50,000. Grayscale uses the cash to buy bitcoin and issues shares of GBTC in kind. 

Investors can also pledge bitcoin directly — a great advantage if you happen to be a large holder who wants to unload your BTC without crashing the market. (More on this later.)

After a lockup period, investors can sell their GBTC on the open markets. Anyone can buy and sell GBTC on OTC Markets Group, the main over-the-counter marketplace, or via a brokerage account, like Schwab or Fidelity.  

Up until early last year, GBTC has typically always traded at a premium on the open market. That premium occasionally soared to over 100%. During the 2017 bitcoin bubble, GBTC traded as high as 130% above NAV.

Why would anyone pay the premium? Many institutional investors can’t buy bitcoin directly for compliance reasons. And there are a lot of individuals who don’t want the headache of figuring out how to set up a bitcoin wallet. GBTC was initially the only option for getting exposure to BTC, without having to buy BTC, at least until bitcoin futures came along. However, bitcoin futures contracts came with their own risks, costs, and headaches. GBTC was easier.  

In early 2020, GBTC became an SEC reporting company. This allowed investors who purchased shares in the trust’s private placement to sell their shares in 6 months instead of the previous 12 months. You could now make more money faster!

Unsurprisingly, the trust went into overdrive in 2020. Starting in January 2020 up to Feb. 23, 2021, Grayscale filed 35 reports with the SEC indicating that it sold additional shares to accredited investors, according to Morning Star’s Bobby Blue.  

The trust’s holdings doubled from roughly 261,000 BTC in January 2020 to 544,000 BTC by mid-December 2020, per Arcane Research.

Red flags

Harris Kupperman, who operates a hedge fund, explained in a November 2020 blog post how GBTC’s arbitrage opportunity created a “reflexive Ponzi,” responsible for sending the price of bitcoin hyperbolic.

There were several versions of the arb. You could borrow money through a prime broker. You could use futures to hedge your bet. You could recycle your capital twice a year. 

Every version involved Grayscale purchasing more bitcoin, thus increasing demand, widening the spread in the premium, and pushing the price of bitcoin ever higher. Between January 2020 and February 19, 2021, the price of BTC climbed from $7,000 to $56,000. 

“When the spread is 26% wide and liquid to the tune of hundreds of millions per week, you can bet the biggest guys in finance are all over it,” Kupperman said. “As you can imagine, everyone big is putting on some version of this trade.” 

Kupperman wasn’t the only person to raise alerts about the fund, which mainly benefited wealthy investors. As soon as GBTC launched, skeptics voiced their concerns. 

“You can put a nice wrapper around a turd, and present it in a very well-manicured product to investors that you say is safe,” Barry Ritholtz, a wealth manager and founder of The Big Picture blog, told Verge. “But at the end of the day, it’s still crap.”

In September 2017, Citron Research called GBTC “the widow maker” and “the most dangerous way to own bitcoin.” Citron’s Andrew Left accurately predicted GBTC’s collapse:

“Citron believes that as new methods become available for investors to gain exposure to bitcoin — including traditional ETFs — that money will move to these regulated instruments and out of the uncertain waters of GBTC, which we believe can fall by 50% easily.”

Who holds GBTC?

The press has repeatedly credited Grayscale as a massive buyer of bitcoins, and evidence of institutional money entering the cryptoverse. This may not be the case.

Even though Grayscale states its holdings in dollars, it accepts deposits of bitcoins. A whale, or a good friend of Grayscale, can trade in their BTC for shares of GBTC, which they can flip six months later at well above the actual price of bitcoin.  

The last time Grayscale broke out the numbers in Q3 2019, they said that the majority of deposited value into their family of trusts was in crypto, not dollars: 

“Nearly 80% of inflows in 3Q19 were associated with contributions of digital assets into the Grayscale family of products ‘in-kind’ in exchange for shares, an acceleration of the recent trend, up from 71% in 2Q19.”

Grayscale stopped breaking out the percentage of crypto deposits into its trusts after 2019, and just stated everything in dollars. They may want to break out the numbers again, as this is something the SEC might be interested in. 

Crypto lender BlockFi’s reliance on the GBTC arbitrage is well known as the source of their high bitcoin interest offering. Customers loan BlockFi their bitcoin, and BlockFi invests it into Grayscale’s trust. By the end of October 2020, a filing with the SEC revealed BlockFi had a 5% stake in all GBTC shares.  

Here’s the problem: Now that GBTC prices are below the price of bitcoin, BlockFi won’t have enough cash to buy back the bitcoins that customers lent to them. BlockFi already had to pay a $100 million fine for allegedly selling unregistered securities in 2021. 

As of September 2021, 47 mutual funds and SMAs held GBTC, according to Morning Star. Cathie Wood’s ArkInvest is one of the largest holders of GBTC. Along with Morgan Stanley, which held more than 13 million shares at the end of 2021.

Such a lovely place

Grayscale was happy to take investor money during the bitcoin bull runs of 2017 and 2020-21 and saturate the market with shares of GBTC. Anyone sitting on GBTC now is forced to take their losses, or hold out in the hopes Grayscale will do something to fix this. 

Investors, many of whom are regular folks with GBTC in their IRAs, have every reason to be upset. Meanwhile, Grayscale is pointing the finger at the SEC as the reason we can’t have nice things.

Michael Sonnenshein, Grayscale’s chief executive, told Bloomberg he would even consider suing the regulator if Grayscale’s application to convert GBTC into a bitcoin ETF is denied. 

Sonnenshein argues that because the SEC has approved bitcoin futures ETFs, it should also approve a bitcoin spot ETF.  

This makes absolutely no sense. The two investment vehicles are totally different animals. 

A bitcoin futures ETF indexes a bitcoin futures contract on the CME. It is a bet in dollars, paid in dollars. Nobody touches an actual bitcoin at any point. In contrast, Grayscale’s spot bitcoin ETF application represents an investment that is backed by bitcoins — not derivatives tied to it.

A spot bitcoin ETF is good for bitcoin, because it means more actual cash flowing into the cryptoverse. Crypto promoters are pushing hard for this. Bitcoin is a negative-sum game that relies on new supplies of fresh cash to keep it going.  

But what happens if the SEC doesn’t approve Grayscale’s application?  

Grayscale can issue more buybacks. In the fall of 2021, DCG began buying back over $1 billion worth of GBTC. In March 2022, it announced another $250 million in buybacks for Grayscale trusts. The effort had little impact. GBTC continued to trade well below the price of bitcoin.

As Morning Star points out, Grayscale has the power to make this right. It can redeem shares at NAV and simply return investors their cash or bitcoin. That is, if Grayscale really does care about crypto investors.

Grayscale offered a redemption program before 2016. However, the SEC issued a cease and desist order because the repurchases took place at the same time the trust was issuing new shares, in violation of Regulation M.

The situation is different now. Grayscale stopped issuing new shares in March 2021. That leaves the door open for it to pursue a redemption program and bring GBTC closer inline with the price of bitcoin.

I doubt this will ever happen. Grayscale is sitting on a cash cow. As long as it can redirect investor anger at the SEC, why change?

“There is no obligation to convert to an ETF,” David Fauchier, a fund manager at London’s Nickel Digital Asset, told me in a tweet. “If things stay as they are, they will print money into perpetuity basically, it’s a FANTASTIC business if BTC doesn’t zero.”

Fed by stimulus money, tethers, and a new grift in the form of NFTs, the price of bitcoin reached a record of nearly $69,000 in November 2021. Bitcoiners rah-rahed the moment.

However, the same network effects that brought BTC to its heights are working in reverse and can just as easily bring it back down again. At its current price of $40,000, amidst 8.5% inflation, bitcoin is not proving itself to be the inflation hedge Grayscale hyped it up to be. 

It’s worth noting, that Barry Silbert left Grayscale in August 2021. Incidentally, Jeff Skilling jumped ship at Enron in August 2001, shortly before disaster hit, for some reason.  

Submit your comments!

I encourage anyone reading this to submit your comments to the SEC regarding Grayscale’s application for a spot bitcoin ETF. Jorge Stolfi, a computer scientist in Brazil, has provided an excellent example, and so has David Rosenthal, also a computer scientist. You can submit your own comments here.  

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Cash App’s dangerous new feature — bet your paycheck on bitcoin

Volatility, the frequency with which you experience big wins and losses, is one of the hallmarks of gambling. One day you win big, the next, you could lose your shirt. It’s what makes gambling so attractive to addicts. 

It’s why you see people in Las Vegas sitting next to slot machines, zoned out, feeding their coins in one by one. They are waiting for that jackpot. It doesn’t matter if the game is rigged or if most people lose most of the time. Someone wins big sometimes, and it could be them. 

At least with slot machines, you’re only putting in one coin at a time. 

Cash App, a mobile payment service, just introduced a new feature that will allow you to funnel your entire paycheck directly into bitcoin. It’s called “Get Paid in Bitcoin.”

If you receive your paycheck through Cash App’s direct deposit feature, you can opt to receive all or a portion of your salary in bitcoin. 

In other words, you can send 100% of your hard-earned cash directly into a naturally occurring Ponzi scheme.  

Instead of paying rent, or tucking money away into your 401K, you can gamble on the erratic price movements of bitcoin. When you can’t pay your rent because the crypto markets took a tumble, you can tell your landlady you lost everything in the decentralized casino. 

Over 8 million people, many of whom recently learned they were victims of a data breach, use Cash App’s investing product to buy stock and bitcoin.

Cash App isn’t breaking new ground. Crypto exchange Coinbase has a direct deposit feature that allows you to have your paycheck deposited into Coinbase and get paid in crypto. Other companies, including Strike and BitPay, also offer some form of crypto payroll, invoicing, or benefits.

What it is doing is contributing to a dangerous trend that has been developing over the past few years, where companies are making it increasingly easy for people to gamble their livelihoods on crypto. 

Play to lose

Bitcoin is a negative-sum game. Stocks pay dividends and have buybacks. In contrast, money is continually taken out of bitcoin by miners, who generate 900 new bitcoins per day. They sell these coins for cash — or borrow against them — to pay their monstrous power bills. That money will never come back to investors.  

The only money that comes out of bitcoin is from new traders putting money into the system. Bitcoin’s price is completely fictitious and wildly unpredictable. 

After setting a record of $69,000 in November, bitcoin lost half its value by the end of January. It’s now trading at $43,000, meaning anyone who bought at the high, believing that bitcoin was headed for the moon, lost the better part of their investment. 

After converting a $750,000 paycheck into bitcoin in November, NFL player Odell Beckham Jr. suffered a major loss in salary when the price fell months later. At least, he could afford the loss. Not everybody can. 

Meet the missionary

Cash App is operated by Block, the company founded and headed by Jack Dorsey, who stepped down as CEO of Twitter last year to focus on his growing crypto obsession. 

Dorsey is a missionary who preaches the gospel of bitcoin to his six million Twitter followers. He is known for bizarre tweets like: “#Bitcoin will unite a deeply divided country. (and eventually: world).” In March 2021, he sold an NFT of his first tweet for $2.9 million, in crypto. Proceeds went to a charity.

It’s hard to know if Dorsey, whose net worth is $7.5 billion, according to Forbes, believes his own sermons or if he is a grifter, looking for suckers whose pockets he can purge to feed his own hubris. 

Dorsey’s company is sitting on a large stash of bitcoin. In October 2020, Block bought 4,709 bitcoin. Four months later, the company purchased another 3,318 BTC, for a total spend of $220 million. 

In early 2021, Block announced that it was going to start a bitcoin mining system. 

Dorsey is deep into crypto, so naturally, he wants you to become deep into crypto too, whether or not you can afford the risk.

Low on cash

Cash App’s new feature is timely.  There are signs that the cryptoverse is running desperately low on real money. 

Bitcoin miners are stockpiling bitcoin — while companies like investment management firm Galaxy Digital and VC firm Digital Currency Group lend them cash, so they can pay their power bills and keep their businesses afloat.

A Mt Gox settlement is about to hit the market soon. When those creditors get their 141,686 bitcoin after waiting for eight long years, a good guess is many will be anxious to sell. Where will the cash come from to buy their $6 billion worth of BTC?

The Grayscale Bitcoin Trust (GBTC), which owns 3.5% of the world’s bitcoin, is trading 25% below the value of its underlying asset.  

Luring fresh cash into the system is a priority for crypto boosters, which is why Grayscale is pushing so desperately for the Securities and Exchange Commission to approve its application for a spot bitcoin ETF. 

Unlike cash-settled bitcoin futures, spot bitcoin ETFs are designed to buy and hold bitcoin directly, injecting much-needed U.S. dollars into the crypto universe. 

Bitcoin doesn’t work as a payment system. Nobody uses bitcoin to buy anything other than drugs or pay for ransomware. The market has long been manipulated by tethers, a dubiously backed stablecoin, but cash is the lifeblood of crypto. Insiders need real money, so they can dump their coins. And miners need it to pay their electric bills.

Preying on the vulnerable

Bitcoin has gotten progressively easier for people to buy, which means a larger share of the public is exposed when the market goes south. 

In November 2020, payment giant PayPal announced that all account holders in the U.S. would be able to buy and sell crypto including bitcoin through its platform. PayPal has 400 million users.

In April 2021, Venmo (owned by PayPal) announced that its customers will be able to buy, sell, and trade as little as $1 worth of crypto. Venmo has more than 70 million customers.

It’s worth noting that PayPal and Venmo don’t actually allow users to buy bitcoin. You can’t make deposits or withdrawals on the platform. You can only “buy” bitcoin from the company, sell it to the company, or trade it with other users within the app. 

In other words, these companies have become online casinos, where people can bet real money on the future price of bitcoin.

Stock trading app Robinhood allows users to buy and trade cryptocurrency, a feature it started adding in early 2018. 

If you don’t want to purchase bitcoin on an app on your smartphone, there are 33,000 bitcoin ATMs and tellers throughout the U.S. that will gladly accept your cash for BTC, as long as you don’t mind paying the high fees.  

You can also go on Coinbase and buy crypto with money taken directly out of your bank account. Or you can pay with a debit card, PayPal, Apple Pay, or Google Pay. 

If you are a compulsive gambler, addicted to bigger and bigger risks, you can mainline bitcoin by signing up for Cash Apps’ Get Paid in Bitcoin. 

Systems that make it easy to buy bitcoin prey upon society’s most vulnerable — those who can least afford the risk and those who don’t understand that the game is rigged.

When the crypto markets crash — and it is no longer an “if” but a “when” — people are going to get hurt. Features that allow people to invest their paychecks in crypto are an irresponsible abomination.

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The Art Angle: ‘The Whole Bored Ape Yacht Club Phenomenon, Explained’

I was recently interviewed by Artnet News Editor Julia Halperin on Yuga Lab’s Bored Ape Yacht Club project for an Art Angle podcast. We talked about how Yuga Labs got its start, the launch of BAYC, and how Yuga is currently transforming itself into a gaming company. 

One thing I keep stressing is the importance of fungible tokens like Apecoin in these NFT projects. They allow investors and insiders to sell to the general public, while BAYC itself becomes just a publicity stunt. 

It’s very difficult to find buyers outside of the crypto universe for a $250,000 NFT. You are much better off creating an ERC20 token and getting it listed on Coinbase — which is exactly what Yuga Labs did in conjunction with its backer a16z.

In any case, it was a delight speaking with Julia. She asked a lot of good questions.

You can listen to the podcast on iTunes and on Spotify. The podcast was based on a related story I wrote on BAYC for Artnet News last month.

News: Axie Infinity hacked, Germany takes down Hydra, SEC rejects Cathie Wood’s spot bitcoin ETF application

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About that Axie-Ronin hack

On March 23, a hacker stole an eye-watering $625 million in crypto from the Ronin network, the blockchain powering the popular play-two-earn game Axie Infinity.

Six days later, the hack was discovered. Where was Axie cofounder Jeff Jiho Zirlin on that day? He was at a party in Los Angeles caught off guard by the press. (CNN Business)

“Shortly after his first interview, which was on the record and recorded, Zirlin asked if CNN could run his answers by his PR team before publishing. CNN declined the request.”

Axie originally ran on Ethereum. But since Ethereum is too sluggish and costly to use, it now runs on Ronin. How do you get your ETH onto Ronin? The Ronin Bridge. 

In the world of DeFi, a bridge lets you use crypto from a different blockchain.

The Ronin bridge locks up ETH, the native crypto of Ethereum, and issues a token on the Ronin sidechain that represents ETH called wrapped ETH, or WETH.  

Molly White wrote a post describing how everything works. A bridge is like a casino where you trade in your actual money for casino chips. Someone robbed the money and now you’re stuck with worthless chips. (Blog post)

Bridges are a honeypot for hackers. Qubit Bridge, Wormhole Bridge, Meter.io Bridge, and Poly Network Bridge have all suffered similar fates.

Why does this keep happening? David Gerard says DeFi is akin to a piñata. “You whack it in the right spot, and a pile of crypto falls out.” (Blog post) 

Ed Zitron points out that the real ones suffering from the Ronin hack are not the investors, the developers, or those in power, but regular folks who needed the money. (Substack)

The hackers are now in the process of cleaning their ill-gotten ETH. After a six-day head start, they sent $70 million in ETH through privacy mixer Tornado Cash. (Decrypt)

Venture capitalists need P2E

Venture capitalists are betting big on play-to-earn games, like Axie. A hack this size should put Axie and its developer Sky Mavis out of business, however, this is crypto.

Axie is backed by a16z. The Silicon Valley VC firm also has a big stake in Yuga Labs, which is transforming itself into a P2E gaming company as I type. Even though its founders have zero experience in gaming. I predict someone will bail Axie out with magic beans shortly. (My blog post)

In fact, Sky Mavis just raised $150 million in a funding round led by Binance, a leading Tether exchange, with help from the usual suspects, including a16z. (Substack)

Gensler wants Coinbase to register with the SEC

The SEC is weighing a path forward for Coinbase, and other crypto exchanges, so they can register with the agency. (FT)

Coinbase is not registered as a securities broker-dealer, even though the majority of tokens that it lists resemble securities. SEC Chair Gary Gensler has been urging Coinbase to submit to SEC oversight for months.

In speaking at Penn Law, Gensler said that he’s asked his staff to work with the CFTC to find ways to “register and regulate platforms where the trading of securities and non-securities is intertwined.” (Prepared remarks)

Crypto exchanges trade both crypto commodities and crypto securities, so Gensler wants to get the CFTC involved as well. 

Since crypto exchanges also custody crypto assets and act as market makers, he also wants to see if it makes sense to separate custody and market-making. 

Gensler’s comments come just weeks after Yuga Labs launched Apecoin, which resembles an unregistered securities offering. The same day Apecoin launched, it was listed on Coinbase.

SEC rejects yet another bitcoin ETF 

The SEC rejected an application for a spot bitcoin ETF led by Cathie Wood of Ark Invest. (SEC form S-1, SEC order, Decrypt)

The regulator rejected the application for all of the same reasons it has rejected every spot bitcoin ETF application put before it in the past: fraud, manipulation, wash trading, manipulative activity involving Tether, and so on.

At this point, the SEC is simply copying and pasting text.

Grayscale is clinging on to hope. The asset manager is so desperate to get its application for a spot bitcoin ETF approved that it is threatening to sue the SEC. (Bloomberg)

It’s also running a targeted ad campaign — taking over the entire advertising space between two mass transit hubs and their Amtrak trains for three months, so bitcoiners will drown the SEC in comment letters. (Business Insider)

The SEC’s deadline to rule on Grayscale’s application to convert its $30 billion GBTC into a physically-backed ETF is July 6. 

GBTC is now trading at 25% below NAV, meaning that investors, who are subject to a six-month lockup period, are losing money compared to those buying BTC directly. In addition, the fund has an investment minimum of $50,000 and an annual management fee of 2%. 

Grayscale CEO Michael Sonnenshein says the SEC has created an unfair playing field and forced investors into a futures-based bitcoin. 

There is a good reason why the SEC will allow a bitcoin futures contract and not a spot bitcoin ETF. Doomberg wrote a great post explaining it, which I highly recommend reading. (Doomberg Substack)

It comes down to this: Bitcoin futures are settled in cash, and the direct flow of dollars never enters the crypto ecosystem. In contrast, bitcoin spot ETFs are designed to buy and hold bitcoin directly, injecting much-needed U.S. dollars into the crypto universe. 

The bitcoiners need a bitcoin spot ETF because utility companies don’t accept tethers, and miners need to pay their power bills. Galaxy and DCG are propping up the U.S. miners. They’ve been lending U.S. miners money so they don’t have to sell their “stockpile” of freshly mined BTC.

Germany takes down Hydra

German federal police — known as the BKA — shut down Hydra, the largest Russian darknet market for selling drugs and money laundering. 

Working with U.S. law enforcement, BKA seized Hydra’s servers in Germany, along with 543 BTC ($25 million). (BKA statement, US Dpt. of Treasury press release) 

In conjunction with the shutdown of Hydra, the DOJ announced criminal charges against Dmitry Olegovich Pavlov, the site’s alleged operator.

Since it launched in 2015, Hydra facilitated more than $5 billion in transactions for 17 million customers. The site was written in Russian and most of its drug-related business was with sellers in Russia, Ukraine, Belarus, Kazakhstan, and surrounding countries. (Elliptic)

Hydra was more than just a drug market. It offered a mixing service to launder dirty crypto and exchange it for rubles, taking in $200 million in stolen crypto in 2021 and early 2022 alone. 

Vendors on Hydra even sold bundles of rubles for bitcoin, buried in dead drops for customers to dig up. (Wired)

Hydra was also used to launder funds from the 2016 Bitfinex exchange hack

The BBC has a story on how the police sting began with a tip-off and led to finding the “bullet-proof” hosting company in Germany. (BBC)

Elsewhere in crypto

Bitcoin miner Riot Blockchain produced 511 BTC in March and holds 6,062 BTC. Why are they holding? Coindesk didn’t bother asking. (Coindesk)

HIVE Blockchain released its March 2022 mining figures. It produced 278.6 BTC and over 2,400 ETH. As of April 3, 2022, HIVE is sitting on 2,568 BTC and 16,196 ETH. (Yahoo Finance)

I guess miners figure bitcoin will go up in price forever. Or may there is just nobody left to sell it to?

Crypto hacks in the first quarter of 2022 have amounted to $1.2 billion in crypto — that’s up nearly 700% from the same period last year. Web3 is going great. (Techcrunch) 

Buzzfeed did an in-depth story on Worldcoin, a bizarre crypto project that involves scanning the retinas of people in Africa and elsewhere in the global south in return for crypto. But with Worldcoin’s token yet to launch, participants feel robbed. (Buzzfeed)

Worldcoin is backed by Y Combinator President Sam Altman, a16z, and Khosla Ventures. It’s raised $100 million in funding so far.  

After purchasing 9.2% of the social media giant, Elon Musk has become the largest shareholder of Twitter. He also got a Twitter board seat. (NYT)

MicroStrategy purchased another 4,167 BTC for $190 million. It took out a loan against its bitcoin holdings to buy more bitcoin. What could possibly go wrong? Michael Saylor’s company now holds a total of 129,218 bitcoins. (SEC form 8-K, Bloomberg)

Federal prosecutors in Miami seized $34 million worth of crypto in one of the largest crypto forfeiture actions ever filed by the U.S. (DOJ press release, Miami Herald) 

After the horrible Kevin Roose story, the New York Times interviewed crypto critic Dan Olson to get his views on crypto. This is worth a listen. The transcript is also available. (Ezra Klein show, transcript)

Crypto investor Katie Haun has raised $1.5 billion for her new firm Huan Ventures after leaving a16z last year. (Wired)

Crypto asset funds are seeing surging assets under management. A16z’s crypto-focused funds are worth around $9 billion.(Cointelegraph)

While the SEC drags its feet to enforce securities laws, which are clear and have been in existence since the 1930s to protect investors, the powers-that-be are gathering more money to invest in token projects. 

Axie-Ronin hackers and the crypto laundromat — will they succeed in cleaning 174,000 ETH?

Axie Infinity, a popular play-to-earn game, suffered a breach, losing $625 million in crypto — 173,600 ETH and 25.5 million USDC, a popular stablecoin.

It’s the biggest hack ever in the GameFi sphere and a bit of a public relations problem for P2E promoters, such as VC firm Andreessen Horowitz (a16z), who ambitiously describes P2E as “the future of games and really, the Web as we know it.”

The hack took place on Ronin, the Ethereum sidechain that Axie runs on. Ronin uses proof of authority, a modified version of proof of stake, where it only has nine validator nodes, all officially whitelisted — so it’s not even decentralized. 

Via a backdoor, the hacker got a hold of four nodes that were controlled by the game’s Vietnamese developer Sky Mavis, and a fifth node controlled by the Axie DAO.

Because Sky Mavis wants to distance itself from Axie Infinity and in-game tokens, like AXS and SLP (smooth love potion), it created a decentralized autonomous organization. 

Once the hacker controlled the majority of nodes, they were able to forge transactions, and simply remove the money from the Ronin bridge, without a hitch.

Axie said in a tweet that the hack was the result of social engineering combined with human error from December 2021, but did not elaborate. Axie promised to add new validators to the network to make it more decentralized. 

Social engineering suggests something along the lines of a phishing scam. 

This is different from other recent bridge attacks, like Wormhole, wherein the attack was a result of a vulnerability in the smart contract. 

Six days to run for the hills

Ronin reported the hack on March 29 — but according to a Ronin blog post, the theft occurred six days earlier. Sky Mavis unwittingly discovered the breach after a user reported having trouble withdrawing funds from the network. 

How on earth do you lose hundreds of millions of dollars in crypto and nobody notices for nearly a week? Axie developers not only left the door open, but they also neglected to turn on the security cameras!  

All eyes are on the stolen crypto, as internet sleuths watch to see how the hackers will pull off the next part of this massive heist: laundering the funds. Clean crypto is always worth more than dirty crypto.

As soon as you convert stolen crypto to cash in your bank account, you risk revealing your identity. (Recall the two individuals recently nabbed after trying to launder bitcoin stolen from Bitfinex in 2016.)

Stablecoins can be frozen by the issuer — in this case, Circle. So the Ronin hacker laundered them quickly as possible, sending the ill-gotten USDC to decentralized exchanges Uniswap, and 1inch, and swapping it for ether. 

Most of the stolen ETH remains in the attacker’s wallet, but so far, the Axie-Ronin hacker has sent 3,750 ETH ($12 million) to Huobi and 1,220 ETH ($4 million) to FTX, according to Dirty Bubble Media. Funds were also sent to Binance and Crypto.com. 

Tornado Cash 

Once centralized exchanges realize where the funds are coming from, they can freeze accounts and even route the money back to Ronin — if they want to, and if the funds haven’t already been chain swapped away. 

Chain swapping, or chain hopping, involves sending the funds to an exchange, swapping them for another crypto, and then quickly moving those funds to another exchange. Many offshore exchanges have lax KYC controls.

Still, why didn’t the hackers use a mixer like Tornado Cash to scramble up the ETH instead? 

A mixer takes funds from different users and jumbles them all together, making it difficult to track the movement of funds on a blockchain. 

Tornado Cash works as a series of pools, each for a different value. You deposit coins in a pool, and sometime later, you can withdraw an equal number of coins.

The problem is, once you send crypto to a mixer, you have to wait for deposits and withdrawals from other users to achieve any real anonymity. That takes time.

And, since pretty much all of the big flows are identified as dirty, any large withdrawal is likely to be dirty as well. Also, exchanges may be reluctant to touch crypto coming out of a mixer, believing it’s all just tainted money.

“Exchanges are probably starting to get wise and just blocking Tornado Cash for non-KYC accounts because it is just SO cesspool even for them,” Nicholas Weaver, a researcher at the International Computer Science Institute in Berkeley, told me. 

Binance, which integrated the Ronin wallet in September, said that as of Tuesday, it has suspended all deposits and withdrawals on Axie Infinity’s Ronin network, and it is on the lookout for unusual transactions — but again, the hackers were already ahead of the game, so it’s unclear what good this does.

(Update, April 4: The Ronin hacker is now routing funds through Tornado Cash, according to an address associated with the hack — a combined total of 2,000 ETH, or roughly $6.9 million.)

Refunding the money

Sky Mavis needs to find a way to refund Axie players, many of whom are now sitting on unbacked WETH — the ERC20 token that represents the ETH on the Ronin network.  

If the game developer can’t refund players, it may have to retire the game or face insolvency, putting the entire P2E space to shame. Right now, the firm has no idea how it is going to come up with the money. 

“We are fully committed to reimbursing our players as soon as possible,” Aleksander Leonard Larsen, Sky Mavis COO, told Bloomberg. “We’re still working on a solution, that is an ongoing discussion.”

The stolen funds include the deposits of players and speculators and the Axie Infinity Treasury, used to create a base revenue for the AXS token. Of the ETH stolen, 56,000 belonged to the Axie Infinity Treasury, Bloomberg said.   

The real losers

Play-to-earn games are exploitive. They promise users the ability to earn money while playing. But to play, you have to first purchase expensive NFTs, which not everyone can afford. 

In the case of Axie Infinity, that means purchasing three Axies — cartoon monsters that live on the Ethereum blockchain as ERC721 tokens — at a cost of up to a thousand dollars. Players pay because they see it as an income opportunity. 

In the Philippines, many players resort to borrowing Axies, and becoming indentured servants, playing for weeks on end just to recoup their initial investment. Playing the game becomes a mindless slog for those trying to earn a living wage, so they can buy food and keep a roof over their heads. The game itself functions as a pyramid scheme. 

Many of these players sold their in-game NFTs for ETH, which they hoped to turn into cash. Only now, the WETH in their Ronin wallets is worth nothing because there is no ETH to cover it, and they have nothing to show for all the days, weeks, and months of endless game playing. They are the real losers in all of this. 

As for the P2E boosters, Axie Infinity is too important to fail. In December, Sky Mavis closed a $152-million Series B led by FTX and a16z. That was on top of a $7.5 round six months earlier with contributions from billionaire investor Mark Cuban.

A16z-backed Yuga Labs, the firm behind the popular Bored Apes Yacht Club, is also making moves into the P2E space. Its APE token will serve as the in-game currency for Animoca Brand’s Benji Bananas. The firm also recently dropped hints of another game called Otherside, where virtual land will be sold as NFTs.  

Unless the Ronin hacker has a change of heart and returns the money, it looks like a superhero may have to step in to save the day. In the world of crypto, more often than not, that means pulling more money out of thin air in the form of tokens. 

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The gorilla in the room: Yuga Labs investors pretend to care about the planet. They don’t.

Yuga Labs, the startup behind the popular Bored Apes Yacht Club project, finally got its long-rumored investment from venture capitalist firm Andreessen Horowitz. It now has plenty of funds to transition into a game company — and create the illusion that its newly launched Apecoin is something other than an unregistered securities offering. 

Apecoin, an ERC20 token that lives on Ethereum, is a path to liquidity from Bored Ape Yacht Club NFTs, of which many more are soon to come in the form of virtual land. “Blue-chip” NFTs are too expensive for the average Joe, and you can’t buy a fraction of an NFT, the way you can a fungible token.

As with the Bored Ape NFTs, Apecoin has zero intrinsic value. The money you get when you cash out comes from new investors buying in. Unlike virtual land or ERC20 tokens, the supply of suckers in the world is finite. Eventually, the tokens will crash in value and retailers will get stuck holding the bag.

After acquiring the IP for CryptoPunks and Meebits, Yuga Labs now controls three of the most popular NFT collections. All three live on Ethereum, a proof of work blockchain that consumes a country’s worth of energy. Each transaction on Ethereum is equivalent to the power consumption of an average U.S. household over nine days, according to Digiconomist. 

Destroying the planet, one NFT at a time

Other participants in Yuga Labs’ $450 million round, which valued the company at $4 billion, include Animoca Brands, The Sandbox, LionTree, Sound Ventures, FTX, and MoonPay.  

Animoca Brands is the Hong Kong-based outfit behind the play-to-earn game Benji Bananas, which plans to incorporate Apecoin — an attempt to give the token utility and avoid regulatory scrutiny. P2E games have received criticism for being digital sweatshops. Players, often in poor areas of the world, are required to purchase an NFT, worth several months’ salary, to start “earning” tokens they then have to sell to recoup their initial investment in the game.  

The Sandbox, a subsidiary of Animoca, is the creator of a play-to-earn game that sells virtual land as NFTs. The company bills itself as “one of the pillars of the open crypto metaverse.” As of September, The Sandbox — ‘The’ is part of its name — owned 31 different BAYC NFTs. 

According to a leaked pitched deck, Yuga Labs plans to create a gaming metaverse and raise another $455 million selling virtual land NFTs. In a recent tweet, Yuga Labs hinted at a new project called “Otherside,” which will accept APE and launch in April. Yuga Labs can create as much virtual land as they want, so maybe they’ll create virtual forests for their virtual primates? 

In the real world, the one we all live in, great apes are running out of natural habitat. Gorillas, chimpanzees, and bonobos are already endangered or critically endangered. A combination of the climate crisis and the destruction of their natural habitats is threatening their very existence as a species. 

By promoting Web3 and Ethereum-based tokens, Yuga Labs is speeding the demise of these creatures. To compensate for this evil, Yuga is throwing chimps a banana by donating 1% of the Apecoin supply of 1 billion to the Jane Goodall Legacy Foundation. (I wrote to Jane Goodall to see how she feels about this. If I get a response, I’ll post the comments here.)

Investment bank LionTree is headed by Aryeh Bourkoff, who told investors in his 2021 year-end letter that climate change is something we should all care about: “Widening our gaze, as the market chases growth, the climate crisis is reminding us that infinite growth on a finite planet is irrational and that we must commit to a long-term outlook guided by purpose rather than short-term gains.” 

Bourkoff appears blind to the hypocrisy of backing an NFT project — or maybe he cares more about the money. Investing in tokens that resemble securities is a lucrative business. Just ask Marc Andreessen, who recently bought a $44.5 million house in Malibu down the street from the $177 million home he bought in October. Forbes estimates his net worth at $1.7 billion.

Sound Ventures is a fund controlled by Guy Oseary and actor-turned investor Ashton Kutcher, who also pretends to care about the planet.

Kutcher was a founding member of World War Zero, an American coalition launched by John Kerry in 2019 to fight the climate crisis. He and his wife bought a Hummer EV, and they live in a Los Angeles home powered entirely by solar energy.

“Ashton and Mila are concerned about the quality of the soil, the purity of the food they eat, and the water they drink. The ideals of sustainability and regenerative farming aren’t just abstract concepts to them,” the house designer told Architectural Digest.

Crypto exchange FTX is one of Tether’s biggest customers. (If you are not familiar with Tether, its web of lies, and the role it plays in the crypto economy, read my Tether timeline.) The company’s answer to the climate problem is to purchase carbon credits.

Finally, MoonPay is the company behind all the strange celebrity purchases of Bored Ape NFTs, where nobody is quite sure if the celebrities are buying the NFTs themselves, or if they are playing a part in promoting the project, without fully disclosing their motives.

MoonPay’s response to Ethereum’s waste is a similar greenwashing. It claims the media exaggerates the impact of crypto mining on the world and points out that Ethereum has plans to transition to a more energy-efficient proof of stake. Ethereum has talked about shifting to a proof of stake system since 2014. It has yet to make the big move.

These are the backers of Yuga Labs, full of contradictions. On one side of their mouths, they talk about saving the planet or they preach exploitive play-to-earn games as a way for players to “own their digital assets.” (They don’t, the assets are stored in central servers.) And on the other side, they promote Web3 and the metaverse, fuzzy marketing terms that point to ways to justify the creation of new tokens.

It all gets a little tough to stomach when you read reports that climate change is already worse than expected and see actual images of an ice shelf the size of Los Angeles collapsing in Antarctica. 

Another celeb joins the circus

On Thursday night, Madonna announced on social media that she now owns a bored Bored Ape NFT. It’s not clear if she bought the token — or if the token was gifted to her by a certain someone who is using her celebrity status to promote Bored Ape Yacht Club.

The material girl’s manager, Oseary, has known her since he was 17 years old. He’s probably been talking her ear off about Bored Apes since October when he signed a deal to represent Yuga Labs. Now he owns a chunk of the company via Sound Ventures as well. 

Oseary has a history of tapping into his celebrity connections to shill cryptocurrency. He also has a history of investing in alleged unregistered security offerings. 

He and Kutcher previously invested in Ripple. In 2018, they donated $4 million in XRP, the token widely associated with Ripple, to “save the gorillas” on the Ellen Degeneres show. Degeneres has a wildlife fund.  

Two years later, the Securities and Exchange Commission charged Ripple and two of its execs for conducting a $1.3 billion unregistered securities offering. The firm is still battling the lawsuit in court.

History repeated?

Yuga Labs likely never contacted the SEC before launching APE — and there is good reason for that. If they had, the regulator probably would have told them, “No, don’t do this.” So they went ahead and did it anyway, figuring they could get away with it, or worst-case scenario, pay a multi-million-dollar fine years later.

The APE DAO or decentralized autonomous organization, which supposedly launched Apecoin, is not a legal entity. It is also neither decentralized nor autonomous. The Ape Foundation — the committee that enforces decisions made by the DAO — is registered in the Cayman Islands. 

The Ape Foundations’ five members get paid $125,000 in Apecoin for their six-month terms. The Apecoin community votes on whether they get reinstated. Votes are weighted by how many Apecoin you own. Since Yuga Labs and its investors hold the majority of Apecoin, ultimately, they decide who gets reinstated and what proposals get passed.

Reddit founder Alexis Ohanian serves on the Apecoin Foundation. (The other four members are Amy Wu, who leads a venture fund at FTX; Maaria Bajwa, a venture investor at Sound Ventures; Yat Siu, the cofounder of Animoca Brands, and Dean Steinbeck, cofounder of Horizen Labs, one of the companies that partnered with Yuga Labs in developing Apecoin.) 

Like all the others, Ohanian also talks a big story when it comes to combatting climate change. He recently launched the 776 Foundation, a fellowship that will give $20 million to young people over the next decade to work on climate solutions.

People who care about the planet, don’t back massive NFT projects. They just don’t. Every NFT transaction on Ethereum comes at a destructive cost to the environment.

Bored Ape Yacht Club is about creating perceived value where there is none to pump tokens. Not only do retail investors risk losing money, but the project itself is contributing to our last remaining chances at escaping climate disaster — all in the hopes of making a few grifters rich.   

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News: Yuga Labs goes APE, Meebits insider trading, ConsenSys raises another $450M to focus on Web3 buzzword

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BAYC: Money for nothing

Yuga Labs finally launched its Apecoin — oops, sorry, not Yuga, but the Apecoin DAO launched APE. On March 17, the same day the coin launched, it was listed on all the major crypto exchanges in the U.S., including Coinbase, Kraken, and Gemini. (My blog post)

Apecoin has a fixed supply of 1 billion. So far, about 130 million Apecoins have entered circulation, according to CoinGecko. Today, Apecoin is up to $11, and 40% of the volume is on Binance trading against two stablecoins with dubious backing — USDT (35%) and BUSD (5%).

Soon after Apecoin launched, Bored Ape Yacht Club NFT holders took to Twitter, proclaiming how rich they had become overnight. Each bored ape holder got ~10,094 APE tokens, valued anywhere between $80,000 to $200,000.

It’s the same Ponzi promotion story we have heard since bitcoin launched in 2009 — buy this token and you will get rich for free. Everyone who holds Apecoin now wants you to buy APE, so the value goes up, and they can cash out. That value right now is being artificially pumped by tethers.

Hundreds of millions of dollars worth of Apecoin also went to Yuga Labs founders, Yuga Labs itself, contributors to the project, and to the newly formed Ape DAO. Just like that, everyone is rich.

What about Andreessen Horowitz (a16z)? How many Apecoins were they allotted? We may never be privy to the details.

“A spokesperson for Yuga said Andreessen received coins in exchange for assisting with ‘overall DAO governance design’……Yuga and Andreessen both declined to comment on the potential financing.” (FT)

Apecoin serves as a governance token, giving holders voting rights in the newly formed Ape DAO. Big holders, like Yuga Labs and a16z, have a greater say in the future of BAYC. This is the problem with the Ape DAO — it’s centralized decision-making. (Bloomberg)

Someone figured out a clever way to make $1.1 million by “borrowing” another person’s bored apes just long enough to claim Apecoin. (The block; Web3 is going just great)

Benji Bananas, the play-to-earn game that Yuga Labs is using via Animoca Brands to give Apecoin some utility so the SEC doesn’t sue its issuers, was bad and exploitative from the get-go. (Twitter)

The Block got a hold of Yuga Labs’ pitch deck. According to the deck, Yuga Labs hopes to make $455 million in 2022 through virtual land sales. It’s aiming to build a gaming metaverse called MetaRPG, compatible with a host of NFTs, powered by Apecoin. (The Block; Pitch Deck)

Yes, that’s right. Yuga’s next project is selling make-believe land. You can buy the land with APE.

Bored Ape Yacht Club NFTs along with Apecoin are inherently worthless. The BAYC project doesn’t offer a service; it doesn’t manufacture a product. Its business model is based on filling a balloon with hot air and getting high-profile celebs to shill its product on prime-time TV.

Sure, holding a bored ape NFT will gain you entrance into a warehouse party — but they don’t even work properly for that. NFTs literally, don’t work for anything they are intended to do.  

Insiders acquire Meebits

​​On March 11, Yuga Labs announced it acquired the IP for CryptoPunks and Meebits collections from Larva Labs. It’s giving the NFT holders the IP, so they can create derivative products, like hoodies, T-shirts, and other merch. (Press release; Techcrunch) 

Yuga also got 423 Punks and 1,711 Meebits in the deal. The terms were undisclosed, so we don’t know how much they paid Larva Labs.

The floor price of Meebits doubled after the announcement, climbing to 6.134 ETH ($15,800).

Insiders took the opportunity to buy Meebits in advance and make some easy money.

Lesley Silverman, the head of digital assets at United Talent Agency, formally representing Larva Labs, is one of those people. She bought two Meebits in the days prior to the announcement. (Twitter)

All told, 14 Ethereum addresses, with no previous history of mainstream NFT collection purchases, quietly acquired 159 Meebits between March 5 and March 11. The top address purchased 24 Meebits at once on March 5. (Bloomberg)

Insider trading in the securities business is illegal and comes with harsh consequences, but NFTs are not regulated, so people get away with this stuff, literally, all of the time.

Smile for the camera

Yuga Labs and its partner Animoca Brands want bored ape holders to submit a government-issued ID and have their photos taken to confirm their real identities, so they can register for a mystery project. Bored ape holders are pissed off, some thinking they were going to be turned over to the IRS. (Cointelegraph)

The irony is that this all happened only a month after Yuga Lab’s founders made a big to-do about Buzzfeed revealing their true identities. They responded by directing an onslaught of anger and harassment from the crypto community toward Buzzfeed reporter Katie Notopoulos.

Coinbase class-action

Apecoin resembles a security, like a stock or bond, but that didn’t stop Coinbase from listing it asap.

​​SEC Chair Gary Gensler has already stated that Coinbase lists dozens of tokens that may be securities. According to securities laws, exchanges that list securities must register with the SEC as a securities exchange or a broker-dealer. Coinbase has not registered as either.

A recent class-action against Coinbase alleges that 79 tokens the exchange lists meet the definition of securities, but plaintiffs were not warned of the risks. The claim, filed by three Coinbase users, asks for monetary relief and an injunction enjoining Coinbase from offering the tokens without having to register with the SEC. (Complaint; Cointelegraph)

I think you should leave

Time magazine wrote a lengthy profile on Ethereum founder Vitalik Buterin, calling him the “prince of crypto.” Buterin is concerned about what Ethereum has morphed into.

“Buterin worries about the dangers to overeager investors, the soaring transaction fees, and the shameless displays of wealth that have come to dominate public perception of crypto.” (Time)

It’s funny Buterin should have these feelings.

Ethereum was literally designed for all of these things. It fueled the ICO bubble of 2017. Most ICO tokens live on the Ethereum blockchain, just as most NFT tokens today are bought and sold on Ethereum. And Ethereum’s proof-of-work consumes the energy of a small country.

Buterin is the guy in the hotdog suit in a sketch from the comedy series “I think you should leave.”

In the sketch, a hot-dog-shaped car has crashed through the window of a menswear shop. Everyone is looking around to see who is responsible. Suddenly a man in a hot-dog costume appears out of nowhere and says, “Yeah, whoever did this, just confess. We promise we won’t be mad!”

Never forget, Vitalik created Ethereum because World of Warcraft nerfed his favorite warlock

VCs shovel more millions into ConsenSys

Joe Lubin’s ConsenSys got another $450 million round of funding with a $7 billion valuation. This comes just four months after its Series C that raised $200 million and valued it at $3 billion.

The company has more than doubled in value, thanks to the venture capitalists.

Lubin is one of the cofounders of Ethereum who struck it rich in Ethereum’s early crowdfunding sale.

ConsenSys invested in ICO projects throughout 2017 — mostly hilariously bad ideas like Civil. When none of these projects had any hope of making it, and some like Airfox and Paragon, had to pay hefty fees to the SEC for securities violations, ConsenSys went through a “strategic transformation.” It cut staff and converted its failing portfolio business into a separate company called ConsenSys Mesh, effectively pushing the ugly mess off into the corner.

Nowadays, Lubin is busy hyping software like Infrura and Metamask to build Web3.

Stephen Dhiel explains why Web3 is “bullshit.”

The latest round will “accelerate the global adoption” of Infura and ConsenSys’s efforts to “drive NFT adoption for artists, content creators, brands, intellectual property owners, game publishers, and sports leagues.” (ConsenSys blog; Decrypt)

Anyone who thinks NFTs are going to crash soon has little understanding of how much money VCs are shoveling into this space. This money will keep the space propped up long enough for investors and insiders to cash out, just like they did with ICO tokens.

Elsewhere in cryptoland

Vice did a story on nocoiners — bitcoin skeptics, as we call ourselves. It has some good content, but also a misleading flaw: it makes it seem that nocoiners are insignificant because the “nocoiner industry” moves a tiny amount of money compared to the crypto industry. (Vice)

NYT reporter Kevin Roose wrote a lengthy story explaining crypto to the masses. Don’t be fooled. This is a piece of crypto boosterism, where Roose continually tries to convince the reader that he is a “crypto moderate.” The story is especially pernicious because of its “reasonable” tone. (New York Times)

Vice reporter Edward Ongweso went to the first SXSW post-covid, only to find out it was overtaken by crypto-mania and NFT nonsense, like 3D anthropomorphic rabbits plastered everywhere, “which I gathered were somehow related to crypto though it wasn’t clear how.” (Vice)

Mark Zuckerberg says that in the coming months you’ll be able to mint NFTs within Instagram. “I would hope that, you know, the clothing that your avatar is wearing in the metaverse, you know, can be basically minted as an NFT and you can take it between your different places,” he said. (Engadget)

There is no actual metaverse. Zuckerberg is lying. Metaverse is a meaningless marketing term used by companies in an effort to separate people from their money.

“Zuckerberg created this conversation to distract from his problems and made fertile ground for truly evil people to profit,” Ed Zitron wrote in a blog post last month.

Jorge Stolfi, a computer science professor in Brazil, says Web3 is nothing more than a new way to frame cypherpunk’s utopia: “The cypherpunks are a bunch of ‘socially challenged’ nerds who dream of building a society on the internet that is totally beyond the reach of governments. That the cops cannot monitor, regulate, or control.” (Reddit: here and here)

The CFTC is looking into Binance to see if the exchange permitted U.S. residents to buy and sell derivatives traded on its platform. (Bloomberg)

Also, Binance has stopped serving residents of Ontario, this time for real. (Binance Letter of Undertaking and Acknowledgment; OSC press release)

Münecat just came out with a brilliant video (100 minutes) explaining Web 3.0. Picture this: The year is 2063, and the global currency is Moosecoin. (Youtube)

Wikipedia editor and software engineer Molly White did a podcast with “Scam Economy” talking about her “Web3 is going just great” project. (Youtube)

If you haven’t read it yet, this Verge article on Tron CEO Justin Sun is an amazing piece of reporting. Sun has a huge tolerance for risk. The story also explains what happened with Poloniex, the crypto exchange that Circle bought in early 2018 for $400 million and spun out for a $156 million loss. (Verge)

Me in the news

I recently wrote a story on BAYC for Artnet News, and one on Ethereum’s move to POS for MIT Tech Review. I did a podcast for Artist’s Well and made some minor updates to my “Bitcoin Widow” review.

Podcast: I was interviewed by Alan Keane for ‘Artist’s Well.’ We talked about NFTs

Earlier this week, I was interviewed by artist Alan Keane for a podcast. He edited the recording and posted it on Youtube today. Keane runs a weekly arts program via Zoom in Ireland. He has a large following of professional artists.

Several of them had been asking him about NFTs, so he found me on the internet, and roped me into an interview. I explained what an NFT is — basically a crypto token on a blockchain that points to an image on a website somewhere. It doesn’t contain any actual art, and if the link pointing to the JPEG goes bad, the NFT becomes worthless.

In other words, NFTs are nothing more than a gimmick to get artists to feed their hard-earned cash into the crypto ecosystem, and more often than not, they get nothing in return.

I also tried to capture the importance that fungible tokens play in helping NFT promoters cash out on NFTs. This was, of course, just a few days before Bored Ape Yacht Club announced their Apecoin, which I wrote about yesterday on my blog.

The volume on my end is a little low in this interview, so I may need to adjust my microphone next time. I’m open to ideas and suggestions!

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Bored Apes Yacht Club launches Apecoin. It looks like an unregistered penny stock offering  

The Bored Ape Yacht Club project now has a fungible token called Apecoin (APE), which officially launched today.

The announcement came from Apecoin itself, in the form of a Tweet thread and a post on the new APEcoin website. 

Yuga Labs, the startup behind Bored Apes Yacht Club, is trying to distance itself from its own coin — much in the same way that Ripple tried to distance itself from XRP.  

Apecoin is like a ventriloquist’s dummy on the lap of Yuga Labs. The dummy is doing all the talking, and we are supposed to pretend that we don’t see Yuga Lab’s lips moving. 

Yuga Labs developed its Ethereum-based ERC20 token with help from blockchain developer Horizen Labs, blockchain game company Animoca Brands, and law firm Fenwick & West.  

The goal here is to create a new magic bean that can be sold for real money, without having to register that magic bean with the Securities and Exchange Commission. Yuga Labs founders think all they have to do is make sure the coin is “decentralized” and has some sort of utility, outside of “number go up.”

Yuga Labs is calling its coin “a token for culture, gaming, and commerce.” Culture is a completely meaningless word here. And I’m not sure what commerce means either. I’m guessing it means you will be able to buy things, potentially even bored ape NFTs, with the token.

There will be 1 billion Apecoins, and 150 million will be airdropped to holders of bored ape or mutant ape NFTs. They can claim their coins on Apecoin.com for up to 90 days. 

Also, starting today, the coin will be listed on several major exchanges: Coinbase, FTX, Kraken, and Gemini, according to a tweet by Guy Oseary, who represents Yuga Labs in the entertainment sector. APE will also be listed on OKX, Binance, and Binance US.

Coins tend to shoot up in price as soon as they get listed on Coinbase, the largest crypto exchange in the U.S. 

It’s decentralized, see?

Speaking through Apecoin, Yuga Labs also announced an Apecoin DAO, or decentralized autonomous organization. If you own APE, you are a member of a DAO, and you get to weigh in on important decision-making, probably things like what bands will play at the next warehouse party.

I won’t go into all the details, but if you are interested, an Apecoin forum addresses how the DAO works. 

In 2018, Bill Hinman, who was then the director of the SEC’s Division of Corporation Finance, stated that ether (ETH), the native crypto of Ethereum, was not a security because it was sufficiently decentralized. Ever since that time, token projects have been trying to copy Ethereum, and come out with something that is decentralized, even as the SEC tried to walk back how significant this statement was when Ripple tried to use it in the XRP case. 

However centralized the actual operations are, “decentralized” only ever meant “you can’t sue me, bro.”

DAOs are supposed to be decentralized, but they never are. Similarly, the Apecoin DAO will have its own central gatekeeper: the Ape Foundation.  

The Ape Foundation is based in the Cayman Islands, and it maintains the Apecoin.com website and the Apecoin Twitter account.

Members include Alexis Ohanian, founder of Reddit; Amy Wu, who leads a venture fund at crypto exchange FTX; Maaria Bajwa, a venture investor at Sound Ventures; Yat Siu, cofounder of Animoca Brands, and Dean Steinbeck, cofounder of Horizen Labs. 

All of these members own one or more bored ape NFTs. Advisors and contributors in token projects are generally paid in magic beans, so I suspect they got plenty of APE for their efforts, too.

Anyone who was around the crypto space in 2016 remembers the earliest DAO — called “The DAO.” After the project stupendously crashed and burned, the SEC came out with an investigative report, saying the DAO’s tokens were securities. Still, that hasn’t stopped thousands of DAOs from launching this year. There is even a website now that tracks DAOs.

In 2017, we had initial coin offerings. In 2022, DAO governance tokens are stepping in to take their place — and they resemble offerings of securities in all the same way ICO tokens do. 

Play-to-earn

Yuga Labs knows it is not enough for Apecoin to simply be a governance token. It needs more utility than that, so the coin will be incorporated in a game app — and that’s where Animoca Brands comes in. 

The game developer converted its mobile game Benji Bananas to play-to-earn for the occasion. By playing Benji Bananas you earn tokens that can be swapped for ApeCoin starting in Q2 2022. The game is available on the App Store and Google Play.

Benji Bananas is an action game, where you make Benji the monkey swing from vine to vine through the jungle, collecting bananas. If you want to play, you have to first buy a Benji Pass, which is an NFT. Animoca offers more details in a Medium post. 

Play-to-earn games have been criticized as a growing cancer in the gaming space, where they transform games into a grinding, difficult slog. They are known to target vulnerable populations in countries like the Philippines, where people use the game as a way to earn a living. If players lose money or the in-game token drops in value, they risk sinking ever deeper into debt, having to take out loans from other players to stay in the game.

Somehow, I don’t think a banana game will be the biggest use case for Apecoins. Like most ERC20 tokens, the biggest use case will be speculating on its price: buying APE and hoping it goes up in value.

One for you, three for me

Yuga is creating 1 billion APE. A portion will be unlocked over a period of four years, starting on March 17, 2022. The distribution looks like this: 

  • 470 million to the DAO treasury 
  • 150 million to bored/mutant ape holders 
  • 150 million to Yuga Labs 
  • 140 million to launch contributors
  • 80 million to Yuga Labs founders  
  • 10 million to charity 

Notice how many APE Yuga Labs is setting aside for itself, and for all its contributors. The firm is happy to distance itself from the Apecoin project, but not the piles of APE it is getting.

A few weeks ago, the Financial Times wrote that Andreessen Horowitz (a16z) was in investment talks with Yuga Labs, which was seeking to sell a multi-million dollar stake in a new funding round. 

We don’t know yet if that deal has gone through, but I suspect if and when it does, a16z will get a large allotment of Apecoin. The venture capital firm has two directors sitting on Coinbase’s board, so they likely played a key role in getting the token listed. (Note how a16z’s shitcoin bag gets listed on Coinbase routinely.)

This is a win-win deal for a16z. If the SEC steps in and deems Apecoin an unregistered security, which I can totally see happening, a16z is not assuming any risk. Yuga Labs is taking on all of the risks. A16z simply gets tokens they can dump on the general population — a quick return on their investment. 

The founders of Yuga Labs imagine they can create a token out of thin air, pay themselves 80 million APE — and another 150 million for their company — and regulators are going to sit back and not blink an eye.

I would be curious to know if Yuga Labs even reached out to the SEC before launching APE.

In 2019, the SEC published a framework for analyzing whether a digital asset is an investment contract and, therefore, a security. The “not a security” path for most tokens is a fraught one. 

We’ve already seen several ICO projects pay the price of selling unregistered securities. Telegram had to return $1.2 billion to investors and pay $18.5 million in penalties. Block.one had to pay a $24 million penalty. Similarly, these companies also argued their tokens were decentralized and had utility. 

Yuga Labs is unwilling to learn lessons from the past. They think they know better. And a16z encourages this stuff directly because they know the game is rigged in their favor.

If you like my work, please consider supporting my writing by subscribing to my Patreon account for as little as $5 a month or more. Every little bit helps.

Artnet News: ‘The Creators of Bored Ape Yacht Club Want to Become the Amazon of the NFT Space. Can They Pull It Off?’

My latest story on the Bored Apes Yacht Club was published in Artnet News today. It’s paywalled but worth subscribing to Artnet News if you want to read it!

I spent a few weeks working on this nearly 2,000-word story, and Artnet News editor Julia Halperin really helped me pull it together. We had the story ready to go on Friday when suddenly, Yuga Labs announced they had just acquired the IP to CryptoPunks and Meebits from Larva Labs. So of course, that meant lots of last-minute editing along with a new headline.

Usually, you make big announcements at the beginning or middle of the week, not when people are clearing off their desks and getting geared up for the weekend. 

But then the floor price of Bored Apes was dropping, slipping below $200,000 in ETH—and Yuga Labs needed to act quickly. 

Yuga Labs is giving Punk and Meebits owners the IP for their avatars, so they can create derivatives and hopefully further the branding and marketing of the project.

They’ll probably also get to attend yacht parties and warehouse concerts, and benefit from all of the other perks and freebies, like NFT airdrops.

Token projects have been promising real-world utility since the ICO era of 2017, and NFT projects are no different. The goal is to somehow justify the insane prices of these things. 

When NFTs became “the next big thing” in early 2021, many people started asking: “What good are these? All they do is point to a JPEG on the internet. I can copy and download that JPEG myself.”

In response to the criticism, many NFT projects now promise utility, and BAYC is no different. Owning a bored ape is a key to a club. It’s culture. It’s a digital identity, or whatever Yuga Labs can think of next.

Ultimately, it’s about marketing. High-value NFTs are illiquid. It’s very difficult to find a 1:1 buyer for a $200,000 bored ape, outside of celebrities. So the goal is to keep bored apes in the public eye and to keep bored ape holders from selling off their NFTs.

In the meantime, Yuga is working on a fungible token that will likely “democratize” their high-priced NFTs. All the better for a16z, if they proceed with reported plans to invest millions into the project.

The Silicon Valley VC firm could potentially get ERC20 tokens in return for their investment, and see quick returns if the coin lists on Coinbase. A16z has two directors sitting on the Coinbase board.

A fungible token combines the best of both worlds — the scarcity of a collectible NFT with the liquidy of an ERC20 token. But it’s complicated, you see. Too often these things resemble securities offerings.

Yuga Labs knows the big money is temporary. Until they work out the legalities of a fungible token, they need to do everything possible to keep the price of Bored Apes Yacht Club tokens up. 

So far, the plan is working. Soon after the announcement on Friday, the floor price of Bored Apes went up again. As of today, the cheapest bored ape NFT is $227,000 (90 ETH), according to CryptoSlam.

My first story in MIT Tech Review with added ramblings on Web3 and Ethereum’s Beacon Chain

I just wrote my first story for MIT Tech Review. 

It is an explainer piece on Ethereum’s move to proof of stake. What follows are notes from the story — along with additional ramblings and quotes from your favorite crypto skeptics.

When NFTs became a big thing in 2021, that drew a lot of attention to Ethereum, where most NFTs are traded. It also brought a lot of attention to the environmental horrors of proof of work.

Bitcoin and Ethereum both rely on proof of work to add new blocks to the chain. Together, they consume as much electricity as the entire country of Italy, according to Digiconomist

Meanwhile, venture capitalists are shoveling cash at companies building Web3 — a supposedly new iteration of the internet where apps will run on permissionless blockchains, mainly Ethereum. 

The problem is that permissionless blockchains — those that are open to the public and depend on a cryptocurrency to incentivize miners and maintain their security — are incredibly inefficient. They are sluggish. They can’t handle much data, and they don’t scale.

Case in point: CryptoKitties slowed the entire Ethereum network to a crawl in 2017. 

In his article “The Web3 Fraud” Nicholas Weaver, a researcher at the International Computer Science Institute at Berkeley, explains that Web3 is “a technological edifice that is beyond useless as anyone who attempts to deploy a real application will quickly discover.”

Andreessen Horowitz (a16z), one of Silicon Valley’s top venture capital firms, is a big promoter of Web3. It has invested heavily in at least a dozen platforms that support NFTs alone, among them: Dapper Labs, OpenSea, Manifold, and soon, possibly, Bored Ape Yacht Club. Ethereum is crucial to a16z’s Web3 story.

Clearly, that story needs something more to support it. It needs a rocket-boosted ETH 2.0.

Scaling to the moon

In a proof of stake system, validators replace miners. Instead of investing in expensive ASIC systems that eventually end up in landfills, you invest in the native coins of the system.

Ethereum Foundation, the nonprofit behind Ethereum, says its proof of stake will consume 99.95% less electricity than proof of work. Ethereum currently handles roughly 15 transactions per second. Its founder Vitalik Buterin said ETH 2.0 could potentially handle a whopping 100,000 transactions per second. That would beat out Visa, which claims 65,000 transactions per second.

Ethereum was supposed to be a proof of stake blockchain from the start, according to its whitepaper. But in 2014, Buterin concluded that developing a proof of stake algorithm was non-trivial. So Ethereum settled for proof of work instead, while it went to work developing a proof of stake algorithm. Ethereum’s switch to proof of stake has been six months away for years. 

Now, supposedly, the big moment is soon to arrive.

Ethereum is currently testing a proof of stake blockchain called the Beacon Chain. This will be the heart of ETH 2.0. So far, 9.7 million ETH ($25 billion) is staked on the Beacon Chain. To become a validator, you have to lock up 32 ETH. If you don’t have that much ETH on hand, you can join a staking pool.

In an upcoming event called “The Merge,” which was supposed to happen in Q1 2022 but got pushed to to Q2 2022 in October, Ethereum will combine the Beacon Chain with the Ethereum Mainnet.  

After The Merge takes place, the next step is sharding — splitting the Ethereum chain up into 64 separate chains, so the network can scale. Sharding won’t happen until 2023. This is where the network reaches toward that theoretical number of 100,000 transactions per second.

Critics, however, doubt sharding will be any more efficient than a single chain. 

Jorge Stolfi, a computer science professor at the State University of Campinas in Brazil, told me: “Almost every transaction will require updating two shards in an ‘atomic’ way (either both are updated or neither is updated). That will be the job of the central (Beacon) chain. I doubt very much that they can do that more efficiently than the current single-chain scheme.”

Ethereum, a centralized system

Scaling isn’t the only issue at hand in Ethereum’s move to proof of stake.

Proof of work’s decentralization suffers from economies of scale. Large mining operations are better able to maximize profits while lowering costs. This resulted in five mining operations controlling more than half of Bitcoin’s hash rate in 2020.

Like proof of work, proof of stake will naturally tend toward centralization.

Those who have the deepest pockets and stake the most coins will have the best chances of “winning the lottery,” thus reaping newly minted coins in the form of the block reward.

The big staking validators are already getting themselves into position. US crypto exchanges Coinbase and Kraken hold 78,000 out of 296,000 validators on the Beacon Chain.

A16z is also getting in on the action. It invested $70 million into staking provider Lido and is using Lido to stake an undisclosed portion of its venture arm’s ETH holdings on the Beacon Chain.

Proof of work and proof of stake both aim to get rid of a central gatekeeper, but that comes at a huge cost. One wastes electricity; the other wastes coins, which get locked up and pulled out of circulation.

“Whatever Sybil defense they use, economics forces successful permissionless blockchains to centralize; there is no justification for wasting resources in a doomed attempt at decentralization,” David Rosenthal said in a recent blog post. Rosenthal is known for co-creating Stanford University’s LOCKSS technology for the distributed preservation of digital content. 

The one advantage of proof of stake that we can count on? At least it won’t destroy the planet.

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News: DoJ locates Bitfinex’s stolen BTC, BlockFi fined $100M, Forbes sells out to Binance

The DOJ found 119,754 bitcoins stolen from crypto exchange Bitfinex in a hack in 2016. Federal officials were able to seize 94,643.29 BTC ($3.6 billion). The rest is still out there. (Washington Post)

On Jan. 31, those funds were spotted moving out of the hacker’s wallet, but nobody realized at the time it was the feds moving the funds. Most people assumed it was the hackers themselves!

Heather Morgan, 31, and Ilya Lichtenstein, 34, were charged with trying to launder the bitcoins. They were arrested in NYC, where they live. (DoJ press release, Complaint, Statement of facts)

Lichtenstein is Russian-American. Morgan is a U.S. citizen, who grew up in California. We don’t know if the pair were behind the actual theft, but they probably were given the majority of the coins were in the same wallet as when they left Bitfinex.  

David Gerard describes the 2016 hack in Chapter 8 of his book “Attack of the 50-foot Blockchain,” as told to him by Phil Potter. He summarized it on Twitter

Morgan is a rapper with loads of embarrassing videos online. (Vice)

She had an active TikTok account featuring her rap moves.

@realrazzlekhan

How a #nyc $PACE Pımp starts their #holographic day in #manhattan 🧞‍♀️ #grwm #winterfit

♬ Island In The Sun – Weezer

Morgan was also a prolific Forbes contributor, which should surprise nobody. (Forbes)

And she gave a talk at NYC Salon on how to social engineer your way into anything. (Youtube)

The couple sat on those coins from August 2016 to January 2017, before trying to launder some of them. Almost all of the BTC they moved went through AlphaBay, which they used as a mixer. The feds were able to spot this because they seized AlphaBay in July 2017. 

This arrest underscores how difficult it is to actually launder bitcoin. All of the transactions are traceable. Even when you are sitting on piles of BTC, as these two allegedly were, it is really difficult to cash out.  

A judge ruled the pair could be released on bonds — $5 million for Lichtenstein; $3 million for Morgan. But the government, which originally asked for a $100 million bond, ordered a review of the detention order, saying the couple have the means to flee — $330 million in BTC have yet to be found. Also, Russia has no extradition treaty with the U.S. (Stay of release)

It’s not clear what will happen to the recovered funds at this point, but likely they will be held up by the U.S. government for a long time to come. (Decrypt)

Bitfinex is absolutely convinced it will receive the recovered funds. It wants to use 80% of them to “burn” one of its shitcoins — LEO. (Bitfinex blog)

Naturally, LEO saw a surge in value after the announcement. (Defiant)

Bitfinex is the sister company of Tether. The 2016 hack set off a string of calamities for the two firms. Rather than claim insolvency, Bitfinex gave its customers a 36% haircut, repaid them in BFX tokens, and then lost its banking. Thus began a prolific printing of tethers, telling lies and other nonsense that has continued to this day. Also, it was Bitfinex’s reliance on third-party payment processors after it lost its banking that led to all the problems with Crypto Capital, some missing $850 million in funds, and the NYAG telling Tether to take its business out of New York. I detail most of this in my timeline.

Bitfinex never really paid its customers back for the 36% haircut. Ultimately, all of those customers were paid back in tethers, so why should Bitfinex get that money?

BlockFi to pay $100M

Crypto lender BlockFi is paying $50 million to the SEC and $50 million to various state regulators to settle claims that it illegally offered high-yielding crypto lending products, say sources. (Bloomberg)

It’s clear as mud how BlockFi is able to offer the rates it does. “Executives at BlockFi have said they are able to pay such high yields to customers because institutional investors will pay them even more to borrow the deposits. But the companies don’t provide a detailed accounting of how the funds are used or in what circumstances investors could lose their cryptocurrency,” writes Bloomberg.

Crypto lending programs are obviously securities subject to SEC regulation. BlockFi was funding its crypto lending operations and proprietary trading through the sale of unregistered securities. The SEC similarly warned Coinbase against launching “Lend.” And the regulator is currently looking into Celsius, Voyager Digital, and Gemini Trust regarding crypto yield products.

I didn’t realize this earlier, but apparently BlockFi is one of the largest holders of GBTC, buying it for the premium. GBTC is now trading at -24% of NAV, according to Ycharts.

BlockFi says funds are SAFU. (Tweet)

Forbes is taking Binance money 

Forbes, the publication that featured alleged bitcoin money launderer Heather Morgan as a contributor, is now taking $200 million from Binance, the crypto exchange that has been thus far kicked out of every corner of the world for blatantly ignoring laws and regulations. ​​(CNBC)

The funds will help Forbes follow through on its plan to merge with a special purpose acquisition company (SPAC) in the first quarter. Forbes is owned mainly by Chinese Firm Integrated Whale Media, which bought a controlling stake from the Forbes family in 2014.

This will make Binance one of the biggest owners of Forbes after its listing. Binance will also have two director positions on Forbes’ board of executives. Binance tried to sue Forbes in 2020 for defamation, but the suit was quietly dropped.

If you are looking for an unbiased crypto news source in the future, you probably want to look elsewhere. 

More ‘Bitcoin Widow’ Reviews

The Toronoto Star has a review of Jennifer Robertson’s “Bitcoin Widow.” This one is worth reading:

“Does she have regrets? I kept waiting to hear them and she comes closest in the final few pages (after chapters of what does seem like a Kafkaesque nightmare in both legal and emotional terms). ‘I regret every moment of every day of the terrible year that followed Gerry’s death,’ is what she confesses. A weaselly mea culpa that reminded me of when people, often on reality shows, apologize by saying, ‘I am sorry you feel that way.’”

The Sun also has a review of the book. It’s mostly just… a review of the book. Nice photos of Jen and Gerry though. 

If you missed my review earlier, it’s here

Another day, another blockchain bridge hack 

On Feb. 5, a loophole in the Meter Passport smart contract allowed an attacker to siphon 1,391 ETH ($4.2 million) and 2.74 wrapped Bitcoin ($83,000) from the Meter Passport blockchain bridge. 

Blockchain bridges allow you to conveniently spend crypto from one blockchain — such as ETH or, in this case, BTC — on another blockchain. 

@ishwinder explains the hack in layman’s terms. (Twitter)

This is one of three recent hacks on blockchain bridges lately! On Feb. 3, we had the Wormhole exploit, with $320 million in funds stolen. And on Jan. 17, Qubit was hacked for $80 million in crypto. 

What does this tell you about blockchain bridges? 

Meter urged its users not to trade any meterBNB, which are currently unbacked, and said that they were “working on compensating funds to all affected users.” (Twitter)

What’s new in crypto regulations?

The U.S. Department of Treasury released a report: “Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art.” The report was mandated by Congress in the AML Act of 2020. It specifically mentions NFTs. (Press release, Study, Blockchain Law Center)

According to the report, NFTs are vulnerable to money laundering because “NFT platforms range in structure, ownership, and operation, and no single platform operates the same way or has the same standards or due diligence protocols.”

The report specified that NFTs used for payment or investment may fall under the virtual asset definition, and some NFT platforms may qualify as virtual asset service providers (VASPs), depending on the characteristics of the NFTs that they offer.

The report makes it clear that the Treasury department is carefully monitoring digital art assets, including NFTs, and the online marketplaces where they are traded. (JDSupra)

Grayscale wants to turn its Grayscale Bitcoin Trust (GBTC) into an exchange-traded fund. The SEC is seeking advice from the public about whether ETFs tied to Bitcoin’s spot price could be a vehicle for fraud. The SEC has denied six similar applications since November, including those from VanEck, WisdomTree and SkyBridge Capital. (SEC notice, Coindesk)

Only licensed banks should be allowed to issue stablecoins, according to Jean Nellie Liang, the under secretary for domestic finance at the Department of the Treasury. She appeared before the House of Representatives Committee on Financial Services to reaffirm the PWG’s November report on stablecoins. (Liang’s written testimony, Bloomberg)

Time is running out for crypto firms to be approved for the UK’s anti-money laundering register before the end of March. Ninety-six applicants are still waiting for a decision on their application. Without approval before a March 31 deadline, the future of these crypto firms’ UK operations — including exchanges, wallets and other businesses — hangs on a limb. (The Block)

Crypto shilling at the Super Bowl, and other NFT news

It’s Super Bowl weekend. Expect to see a massive amount of marketing dollars go toward shilling crypto and NFTs. Crypto.com, FTX, and Binance are among the major advertisers. (Hollywood Reporter) (NYT)

Bored Apes are also rumored to appear at the Super Bowl, in some shape or form. (Bloomberg)

Twitter accounts that have been speaking out against NFTs are being reported by bots, their accounts suspended and/or locked. This happened to @NFTEthics and @interlunations. (Twitter)

Sotheby’s is planning to auction off a set of 104 CryptoPunks on Feb. 23. The set is expected to bring $20 million to $30 million in crypto. The original buyer was 0x650d, who scooped them all up in July 2021. Here is the Etherscan confirming his purchase. (Artnet News

He bought them for $7 million because he “chose wealth.” (Twitter)

Following the news of the Sotheby’s auction, the celebrity shilling begins. German-American model Heidi Klum just announced on Twitter she owns a Punk. (Tweet)

Who paid for her Punk? That’s not exactly clear. Mike Burgersburg (not his real name, obviously) has tracked down links between Bitclout investor Reade Seiff and Klum’s Punk. (Dirty Bubble)

Burgersburg also says whoever is funding Reese Witherspoon’s NFT purchases probably has a financial interest in promoting the WOW project. (Dirty Bubble)

In addition to proper FTC disclosure requirements, fans and retail buyers deserve more transparency about how these deals are made and who’s providing the money to pump up these assets. 

John Reed Stark was chief of the SEC office of internet enforcement for 11 years. He has a few things to say about NFTs: Market manipulation of NFTs appears not only rampant and tolerated, but also encouraged. Fraud not only rewarded, but also taught. (Linkedin)

The counterfeit NFT problem is getting worse. Bots are scraping artists’ online galleries, or even keyword searches on Google Images, and then creating collections with auto-generated texts. Those listings have proliferated on OpenSea. (Verge)

Sotheby’s made headlines last year when it sold Kevin McCoy’s Quantum NFT (2014) for $1.47 million. Now, that sale is in the headlines once more, this time for a lawsuit being filed against McCoy and the auction house by a holdings company whose owner claims he owns Quantum. (Artnews)

Indie game platform itch.io has come out strongly against NFTs: “NFTs are a scam. If you think they are legitimately useful for anything other than the exploitation of creators, financial scams, and the destruction of the planet the we ask that [you] please reevaluate your life choices.”(Twitter, PC Gamer)

YouTube is launching new creator tools to expand monetization, including allowing creators to sell content as NFTs so fans can “own” videos. (NBC News)

The Alfa Romeo Tonale SUV is the “first car on the market” to come with an NFT digital certificate that the automaker says will increase the car’s residual value. How? Technical details are thin. (Verge)

A group supporting WikiLeaks founder Julian Assange raised $50 million in ETH by selling an NFT of a clock to a DAO (called AssangeDAO) set up to support his legal bills. The NFT, titled “Clock,” is a joint creation by Assange and digital artist Pak. AssangeDAO contributors receive $JUSTICE. (Wired)

Other newsworthy bits

David Rosenthal’s talk at Stanford is a summary of everything that is wrong with crypto and blockchain technology. This is a great read. (DSHR blog)

Vice interviewed Dan Olsen, whose Youtube video on NFTs went viral. “I’ve been keeping my thumb on what’s going on in crypto. By and large, it’s been the story of the evolution of fraud.” (Vice)

The BBC published and then took unpublished a story about a “self-made crypto millionaire giving back” without mentioning his scam coin. (archive)(missing story)

“City Coins — free, magical money for your city! Maybe” (David Gerard)

Fais Khan’s part II of his work explaining how VCs cash out on tokens: “The Unstoppable Grift: How Coinbase and Binance Helped Turned Web3 into Venture3.” (Fais Khan)

The U.S. government’s system for spotting money laundering has received a surge of suspicious activity reports from a set of San Francisco financial companies that includes some of the world’s leading crypto exchanges. (FT, Dynamics Securities Analytics report)

Mark Zuckerberg is lying about the Metaverse. The CEO of one of the most valuable companies in the world is shoving $10 billion into a concept he cannot describe. (Ed Zitron)

The Russian government will treat bitcoin and digital assets as currency. The proposal includes subjecting crypto transactions (not just within exchanges) to AML/KYC rules, which, being technically impossible to execute, should be equivalent to a ban…(Blockworks)

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NEWS: Wormhole hit by exploit, BAYC and its tangled celebrity web, HitPiece’s dirty dealings 

Software is inherently unforgiving. Stupid mistakes render stupid consequences. Recently, this led to one of the largest thefts in a DeFi protocol.

Wormhole, a bridge for connecting Ethereum and Solana and other DeFi blockchains, was hit by a hacker, who stole $326 million in cryptocurrency.

An exploit in the code allowed the attacker to mint 120,000 wETH (wrapped ether) on the Solana blockchain out of thin air. The hacker then exchanged 93,750 wETH for ETH on Ethereum and the rest for SOL, the native token of Solana, and USDC. (Elliptic, Cointelegraph)

Cross-chain bridges allow you to stake crypto (generally, ETH) so you can spend it like the native crypto on another blockchain. In the case of Wormhole, wrapped ETH, an ERC-20 token that represents ETH one-to-one, serves as a sort of I.O.U. The hack resulted in Wormhole sitting on lots of unbacked wETH. 

Wormhole developers offered the hacker a $10 million bug bounty for the return of the funds. Why the hacker would want to relinquish $326 million for $10 million, I’m not sure.

Security researcher Sam Sun explained how the thief carried out the heist: “Wormhole didn’t properly validate all input accounts, which allowed the attacker to spoof guardian signatures and mint 120,000 ETH on Solana, of which they bridged 93,750 back to Ethereum.” (Twitter)

How did the hacker even know about this vulnerability? According to DedmundFitzgrld: “The fix was pushed to GitHub a couple weeks ago but not deployed. So the attacker found the exploit by scanning the commits to GitHub. The vulnerability was out there for all to see.” (Twitter)

Jump, a high-frequency trading group with crypto ambitions, stepped in to save the day. The Chicago-based firm somehow came up with the funds to replace all of the 120,000 ETH. Apparently, it had a spare $326 million sitting around? (Twitter, Fortune)

What do we know about Jump? Last August, it bought Certus One, which helped develop the Wormhole bridge. Jump also executes some crypto orders for Robinhood. 

Jump holds a heavy bag of Solano tokens. It can’t risk a lack of confidence in the market, so it likely borrowed a pile of ETH to fix the problem. Who did it borrow the funds from? One guess: Tether, who last year issued the firm $1.1 billion in USDT, according to one analysis

Qubit also hacked

Days before Wormhole was hacked, Qubit Finance was breached for $80 million in crypto. Similar to Wormhole, Qubit operates a bridge between Ethereum and the Binance Smart Chain network.

In this case, the hacker was able to exploit a security flaw in Qubit’s smart contract code that let them send in a deposit of 0 ETH and withdraw almost $80 million in Binance Coin in return. (Verge)

Qubit has been trying to convince the bank robbers to return the money. They started by offering a bounty of $250,000, and eventually upped it to $2 million — still, a piddling amount compared to what the hackers stole.  

Now, they are resorting to threats:

“If you don’t come forward to claim the generous bounty and return the funds, you will face lasting consequences that vastly outweigh the benefits of holding onto funds that you can’t readily access,” Qubit said in a tweet.

Bored Ape founders revealed

Buzzfeed just identified the two main founders of BAYC — Greg Solano, a 32-year-old writer and editor, and Wylie Aronow, a 35-year-old originally from Florida. The pair don’t have any dark pasts, as far as anyone knows. (Buzzfeed)

“These 2 amazing partners of mine,” Guy Oseary tweeted with a pic of them at Apefest. Oseary is the music industry veteran who represents them. He also represents NFT project World of Women. And he is a buddy of Jimmy Fallon, so that explains a few things.

Oseary says the founders were “doxxed against their will,” which is a bizarre statement given you are talking about the founders of a multi-billion-dollar enterprise.

As Buzzfeed puts it: “This reveals a unique problem with the idea of a billion-dollar company run by an unknown person: How do you hold them accountable if you don’t know who they are?”

A16z mulls buying a chunk of BAYC

Yuga Labs, the startup behind Bored Apes Yacht Club, is in talks with Andreessen-Horowitz (a16z), who is considering buying a major stake in the startup, which would value it at $5 billion. (FT

I’m losing count of all of the NFT projects a16z is funneling money into — over a dozen, for sure. The VC firm is a major force behind the frothy NFT market. 

Celebrities are shilling Bored Apes left and right to the point where it is downright nauseating and rumor has it the Bored Apes will make an appearance in the Super Bowl halftime show on Feb. 13.

The problem with investing in high-value NFTs is they are not easy to dump on retail. You have to find that special buyer with loads of disposable ETH. Fungible tokens, on the other hand, are much more liquid — especially if you can get them listed on Coinbase

This is why DAOs (with their ERC-20 governance tokens) and fractionalized NFTs are becoming the thing. It’s like the 2017 initial coin offering craze all over again. Only now we’re talking about Web3 and “democratizing” companies and JPEGs.

Sometime soon, expect Yuga Labs to issue an ERC-20 token with a huge pre-mine for investors. The token will likely represent its NFTs in some way or else give holders special access to future Yuga Lab NFTs — something like that. Bored Apes have been heavily pumped, so at this point, it’s just a matter of creating a fungible token to lure in suckers at a much greater scale. At the end of the day, it is all about creating the illusion of exclusivity or having access to something special.

Yuga Labs has talked about issuing ERC-20 tokens in the past, saying the plan was to work with law firm Fenwick and West and Horizon Labs — issuers of the ZEN token, which is already listed on Coinbase. So this is nothing new. It’s been in the works all along.

What a tangled Web we weave

We’ve been wondering a lot about why celebs are hyping Bored Apes. Who is talking them into this? What’s the deal? 

Max Read did the smart thing — he followed the money trail, and mapped out the celebrity NFT complex. Jimmy Fallon (who was shilling his Bored Ape on National TV) is represented by talent and sports agency Creative Artists Agency. Lo and behold, CAA is an investor in OpenSea and recently signed a deal to represent the NFT collector 0xb1, who owns NFTs from Bored Ape Yacht Club and World of Women. There’s more. Lots more. Take a look at the map. (Substack)

Last week Justin Beiber bought a Bored Ape NFT for $1.3 million (500 ETH), as one of several purchases he made on OpenSea within a short period. As Dirty Bubble Media explains, all of the NFTs were gifted. They were bought by the InBetweeners project, a collection of NFTs owned by artist Gianpiero D’Alessandro, who has designed merchandise for Bieber, Snoop Dogg, and others. 

Bieber never disclosed any financial relationship between himself and the inBetweeners project. As Dirty Bubble points out, this is a big no-no, according to FTC rules. (Substack)

Gwyneth Paltrow also has a Bored Ape, thanks again to MoonPay Concierge. Every time someone buys a Bored Ape via MoonPay, they seemingly have to announce it on social media. (Twitter)

HitPiece and its shady founder

A new project called HitPiece appeared out of nowhere and started scraping Spotify and “staking” songs as NFTs — without the artists’ permission. 

Naturally, artists found out and started hurling obscenities at the project via social media. 

“Yo a bunch of industrial scene acts (including me) have NFTs for sale on the site hitpiece.com I did not put it online and I assume you probably didn’t either, fucked up,” Choke Chain tweeted.

“Each HitPiece NFT is a One of One NFT for each unique song recording. Members build their Hitlist of their favorite songs, get on leaderboards, and receive in real life value such as access and experiences with Artists,” Hitpiece said on its website. (NNE)

The brains — or lack of brains — behind HitPiece turns out to be music industry guy, Rory Felton, who has a history of shady dealings. (Twitter thread) 

Felton launched HitPiece in December along with music exec and former rapper Michael Barrin (aka “MC Serch”), and venture capitalists Ryan Singer and Blake Modersitzki. (Festival News)

Anyhow, Hitpiece.com has been taken down. If you go to the website, all you get now is a message that says, “We Started The Conversation And We’re Listening,” whatever that means. (archive)

Gamers hate NFTs!

Gamers want nothing to do with NFTs. They see NFTs as a cash grab and forcefully push back on any game company’s efforts to incorporate NFTs in anything.

Clueless to that trend, GameStop has teamed with Immutable X to launch an NFT marketplace. They’re also creating a $100 million fund for grants to build on the platforms. While Gamestonk investors might think this is great, it should thoroughly piss of GameStop customers. (Verge)

Team17, the outfit behind the many Worms games, pulled the plug on its MegaWorms NFT project (they wanted to create NFTs of all the Worms games characters) only 24 hours after announcing the project, due to extreme backlash from customers, fans, and teamsters. (IGN)

Notice the editor’s note on the IGN story: “The subject of NFTs is currently a very controversial topic in the gaming community. IGN urges community members to be respectful when engaging in conversation around this subject and does not endorse harassment of any kind.

Electronic Arts, another game publisher, is also backtracking from earlier NFT enthusiasm. (Eurogamer

Other NFT news

Nike sues online sneaker reseller StockX for selling NFTs of Nike shoes. (Reuters) 

How did OpenSea take over the NFT trade and become a multibillion dollar company? (Hint: they got lots of help from a16z.) (Verge)

One of the founders of Larva Labs, the project behind CryptoPunks, sold all of his v1 Punks for 260 ETH. In response, Larva Labs released an official statement saying the v1 Punks are worthless, because the project re-released all the Punks in 2017 to fix a bug.

The NFT community feels differently. They are saying that v1 Punks are the originals! What’s on the blockchain, stays on the blockchain. (NFT evening)

Coachella is selling lifetime festival passes for the first time — but you have to buy an NFT to get one. The music festival launched an NFT marketplace built by FTX US, with three collections of NFTs going on sale on Feb. 4th. (Verge)

This is part of a trend, I mentioned before. NFTs are being used to give people special access to clubs, events, restaurants, breweries, and whatnot. Wanna be part of the exclusive group? Buy our NFTs.

Tampa Bay Buccaneers quarterback Tom Brady is retiring after 22 seasons with the NFL. His business ventures, including NFT platform Autograph, will keep him busy moving forward. (Fortune)

Last year, a16z-backed Meta4 Capital created a new fund to invest up to $100 million in NFTs. In a twitter thread, Meta4Capital justifies spending money on “historically significant” or “iconic” NFTs, as if any of this means anything. It doesn’t. At the end of the day, an NFT is just a number in a database.

A racist project called “Meta Slave” offered NFTs made from photographs of Black people (all algorithmically-generated). After a swift backlash, the project rebranded to also feature “white, Asian, etc.” NFTs. The project’s Twitter and Instagram accounts have been deactivated. The collection has also been removed from OpenSea where the NFTs were being auctioned. (Vice)

Artist bayneko airdropped NFTs of microscope pictures of SARS-COV-2 to all 96,186 users of NFT platform Hic et Nunc (HEN) who hold at least one NFT. The NFT description read: “Your wallet has been infected by SARS-CoV-2, the virus responsible for COVID-19… in an act symbolic of the invasive and ubiquitous nature of the virus and its psychological effects.” (Twitter thread)

Elsewhere in cryptoland

Quote of the day: “So much dumb stuff happens in crypto, and if you are a smart intermediary that dumb stuff is your profit margin. Crypto markets are lightly regulated and brutally Darwinian, and every day the smart find exciting new ways to take money from the dumb. The returns to smart are very high.” ~ Matt Levine (Bloomberg)

On that note, another day, another rug pull. Realux promised to democratize real estate at a “very low cost in a very easy way” using a complex system of tokens backed by real estate investments. After collecting everyone’s money, the project shut down and its creators vanished. (Motherboard)

Riot Blockchain, a large crypto miner located just outside of Austin shut down ahead of a cold blast. Bitcoin miners have been drawn to Texas because of the state’s cheap electricity. They’ve been lobbying Governor Greg Abbott to make things even easier for them. (Bloomberg)

How Facebook’s Diem died. A post mortem. (Washington Post)

Jeremy Allaire’s Circle, the company behind USDC, is running ads in everything. (Twitter)

The IRS is coming for you. Intuit CEO Sasan Goodarzi warned that Americans who invested in crypto or NFTs, and actively traded equities on commission-free websites, could be dumbfounded when they learn how much they own in taxes because “they were in essence gambling with their money.” (Bloomberg)

In a podcast, Sohale Mortazavi talks about his piece for Jacobin that went viral: “Cryptocurrency Is a Giant Ponzi Scheme.” (Youtube)

The CEO of US-based crypto exchange Cryptsy, Paul Vernon, was indicted on 17 counts, including tax evasion, wire fraud, money laundering, computer fraud, tampering with records, documents, and other objects, and destruction of records in a federal investigation. (IRS

This has been a long time coming. Cryptsy shut down in 2016, after announcing 13,000 BTC and 30,000 LTC were stolen two years prior. It was later discovered that “Big Vern” stole the money.

According to the indictment: “Between May 2013 through May 2015, Vernon used his control over Cryptsy’s accounts, known as wallets, to steal over one million dollars from Cryptsy’s cryptocurrency wallets. Once Vernon stole his customers’ funds from Cryptsy’s wallets, he deposited the funds into a personal cryptocurrency wallet and then transferred the same funds into his personal bank account.”

Sam Bankman’s FTX got a $400 billion funding round, valuing the company at $32 billion, as investors, including Softbank and Canada’s Ontario Teachers’ Pension Plan, hog piled into the madness. (I mentioned earlier that the exchange’s US arm also got a $400 million round.) (Bloomberg)

Taylor Monohan’s MyCrypto joined the Metamask team. ConsenSys acquired MyCrypto for an undisclosed sum and plans to merge MyCrypto with the MetaMask wallet. (Taylor appeared in the QuadrigaCX documentary “Dead Man’s Switch” along with me and David Gerard.) (Coindesk)

On the subject of QuadrigaCX — my review of Jennifer Robertson’s “Bitcoin Widow” was reprinted and is getting lots of attention. (Saltwire)

Steven Kimber, the Halifax author who helped author “Bitcoin Widow,” was interviewed on CBC radio about the book. He spent 50 hours listening to Robertson, he said. (CBC radio)

Douglas Johnston, a Winnipeg lawyer and writer, also reviewed “Bitcoin Widow.” His review was more critical than others. “This is autobiography, so it’s told in the first person. But Robertson puts herself at the forefront of far too much of the narrative.” (Winnipeg Free Press)

Also on the subject of Quadriga, Michael Patryn, the fraudster who was recently voted off his latest Ponzi scheme Wonderland, has been laundering his crypto. According to his wallet, he has been sending thousands of ETH through mixer Tornado Cash(Coindesk, Etherscan)

Crypto risks destabilizing emerging markets, says the International Monetary Fund. (FT)

Binance builds a $1 million insurance fund. (Bloomberg)

El Salvador’s Chivo wallet keeps breaking. (The Block)

Silvergate Bank is paying $50 million in cash and 1,221,217 shares to buy Facebook Diem’s “intellectual property.” Silvergate wants to do a stablecoin running on the Diem blockchain. (press release, CNBC)

USDC, the second biggest stablecoin next to Tether, crossed 50 billion in circulation. (Circle)

Meanwhile, Tether is still sitting at 78 billion USDT. No new prints in 2022 yet. (Tether)

Bitcoin has climbed back to $41,500 despite no new Tether prints. (It was down to as low as $34,000 recently.) Retailers who bought BTC for $69,000 in November are still hurting.

Corey Doctorow on the great crypto crash event looming in the future: “If you think Coinbase is looking shaky and take your money out, you’d better hope they last for at least three more months, or you might have to give the money back to the bankruptcy trustees.” (Twitter thread)

Australian billionaire Andrew Forrest launched a criminal case against Facebook, alleging the company failed to prevent scam ads that used his image, and breached Australian AML laws over the spread of crypto fraud. (BBC)

The search for a crypto use case continues. (One Zero)

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News: Chaos in Wonderland, celebs shilling Bored Apes, how VCs get rich on Web3

It’s the end of January 2022, and everything in crypto land keeps getting nuttier. The news is filled with so much crypto and NFT stuff, I can barely keep up anymore.

BTC is at $38,000, after losing nearly half its value since its all-time-high of $69,000 in November. Tether has yet to save the day. It is still hanging around 78 billion, with no recent prints. 

Shares of crypto exchange Bakkt (BKKT) are down 90% since the company went public on NYSE in October. Shares in Coinbase (COIN) are also at a low, down 50% since its debut in April 2020. (Bloomberg)

The VCs and insiders have already made their money. It’s the retailers getting burnt once again. Paul Krugman calls crypto the new subprime. (NYT)

Things are not so wonderland in Wonderland

It’s been a tough few weeks for Wonderland. The drop in crypto set off “cascading liquidations” in the DeFi project after its TIME token sunk to record lows.

Wonderland’s founder Daniele Sestagalli and its chief developer “Sifu” also suffered liquidations — $15 million and $1.6 million respectively. (Crypto Briefing)

Following the calamity, Sifu — aka 0xSifu — was doxxed. Lo and behold, it’s Michael Patryn, the fraudster who helped launch QuadrigaCX. Patryn’s been watching over Wonderland’s treasury. Don’t worry. Your funds are SIFU! I wrote about this, as did David Gerard. (My blog post, David Gerard

The Wonderland DAO voted Sifu out of the project. Now they are considering winding down the whole big silly mess. Once you’ve been uncovered, best to move on to another Ponzi. (The Block)

What’s up with celebs and BAYC?

Jimmy Fallon was hyping his Bored Ape Yacht Club NFT on national TV, along with Paris Hilton, who also owns a Bored Ape Yacht Club NFT. (LA Times)

In case you were wondering, Fallon and many other celebs get their Bored Apes via MoonPay.

Justin Bieber also recently purchased a Bored Ape, for $1.3 million. (Benzinga)

It looks like Bieber didn’t buy that Bored Ape himself. All of the ETH in his wallet came from a single transfer of 916 ETH from the @inBetweenersNFT project. (Twitter thread)

We’ve lost a bunch of celebs to NFTs — Tom Brady, Serena Williams, Edward Snowden, Tony Hawk, Matt Damon, William Shatner, and more. (Gizmodo)

The founders of BAYC are so far a mystery. Nobody knows who they are.

A blog post has been circulating suggesting that the BAYC was started by a bunch of Nazis. There are a lot of ugly things about BAYC, but this is not one of them. 

“That blog post trying to argue that the bored ape nfts are a Nazi project is the kind of thing no serious researcher of the far right should be sharing at face value. Getting bad QAnon-ish vibes from parts of the theory argued there,” Jared Holt said. Holt knows his Nazis, so I’ll take his word for this. He studies extremism at the Atlantic Council’s Digital Forensic Research Lab. (Twitter)

Twitter launches hex PFPs

Twitter will allow you to display your NFT in your profile pic in a hexagon — if you subscribe to Twitter Blue for $3 a month, you have an iOS device, and you use a supported wallet (Argent, Coinbase Wallet, Ledger Live, MetaMask, Rainbow, or Trust Wallet). (Twitter

The good news? You can easily mass-mute everyone with a hex-profile on Twitter. (PC Gamer)

For some reason, the Twitter PFP feature works with any NFT in a collection, not just verified ones. Justin Taylor, Twitter’s head of consumer marketing, encourages people to use unverified NFTs — plagiarize someone else’s work just to create an NFT and get a hex badge! (Twitter)

YouTube wants to capitalize on NFTs, too. It’s exploring new opportunities for revenue. YouTube’s CEO says she is looking to Web3 “as a source of inspiration,” noting crypto, DAOs and NFTs. (CEO’s letter, Verge)

OpenSea will refund, ask them

OpenSea is reimbursing users who lost money via an loophole on the platform. Hackers were buying NFTs previously listed for much less even though those listings didn’t appear active to the seller — if the seller neglected to delete the listing. The hackers then flipped the NFTs for huge profits.

OpenSea has so far reimbursed $1.8 million. However, many NFTs are still vulnerable, leaving the door open for bad actors, including one account named “opensee_​will_​refund_​ask_​them.” (Twitter)

On Jan. 27, OpenSea announced limits on free NFT minting — a feature that let you create NFTs without a gas fee, which you only had to pay if you sold the NFT — then reversed the decision hours later, after revealing that nearly all of the items created through the feature were either spam or plagiarized. (Vice)

Elsewhere in NFT land

MetaMask admitted last week that it neglected to patch an IP leakage issue that has been “widely known for a long time.” The issue exists in many wallets and NFT marketplaces, including MetaMask and OpenSea. (Alex Lupascu explains why this is so dangerous in a blog post.) Some researchers are now creating NFTs that grab a viewer’s IP and display it back to them, just to illustrate how NFT marketplaces like OpenSea allow attackers to load custom code when someone simply views an NFT listing. (Verge)

Neil Turkewitz interviewed “Bor,” a member of activist group @NFTtheft. The group hears from a lot of artists who claim they’ve made “life changing” money selling NFTs. But an inspection of those artist’s accounts on NFT marketplaces tells a different story. “Many times, they’ve only made a single sale. Most of the time, they haven’t sold any NFTs yet.” (blog post)

Another day, another NFT rug pull. Blockverse was a planned NFT Minecraft project, with access restricted to those who owned a particular NFT. The initial supply of 10,000 NFTs, priced at 0.05 ETH, sold out in minutes. A few days later, the founders deleted their website, Discord server, and game server, and took off with all the money. (PC Gamer)

Someone just came up with the idea of selling NFTs of colors. Why? Because you can. Behold the Color Museum, another example of how ridiculous some of these NFT projects have become. (Twitter thread)

LooksRare is a new NFT platform. It’s doing gangbusters! In fact, it’s the biggest rival to top NFT marketplace OpenSea. There’s just one thing — all of the buyers and sellers are the same people. CryptoSlam identified $8 billion sales on the platform that were wash trades. (Decrypt)

A German museum lost two CryptoPunk NFTs, worth $400,000 in crypto. Last spring, while trying to move them to another wallet, a cut-and-paste error sent the Punks to the wrong wallet address. Oops!(The Art Newspaper)

Melania Trump’s NFT auction didn’t go as planned. The sale came in under 30% of its starting bid, due to a crash in SOL, the token of the Solano blockchain. Sad! (NYT)

A disturbing trend is developing in the NFT world, wherein promoters seek to destroy physical art, so items only exist in the digital world. New Zealand auction house Webb’s is selling two NFTs of historic photos along with the glass negatives. If you buy the NFT, you get the glass negative along with a hammer to smash the artifact. (Webb’s auction portal, Newshub)

A French surgeon faces legal action after he tried to sell an NFT of an X-ray without the patient’s consent. The patient was shot in the November 2015 Paris attacks. The image was up for sale on OpenSea for $2,800. (Guardian)

Game developers have zero interest in NFTs, according to a survey by the Game Developers Conference. The comments at the end of the article are gold: “Burn ‘em to the ground. Ban everyone involved in them. I work at an NFT company currently and am quitting to get away from it.” (Kotako)

Crypto NFTs are rife with fraud. “We’re just seeing mountains and mountains of fraud in this area,” a special agent at the IRS’s criminal investigation division, said. (Bloomberg)

How VCs cash out on Web3

Fais Kahn wrote a blog post a few weeks ago on how VCs dump their shitcoins on retail by getting the coins listed on Coinbase. A16z is a Coinbase backer and holds a seat on the company’s board. Coinbase also has its own investment arm — Coinbase Ventures. Kahn’s post has gotten some attention! 

As a follow up, Ed Zitron wrote “Crypto, Web3 and The Big Nothing.” Most startups fail, and a liquidity event, if it does happen, can take years. “What Web3 allows founders to do is create companies that might do something and immediately capitalize on those promises. Instead of having to provide a service to users, you incentivize them by involving some sort of token — fungible or otherwise — that will theoretically increase in value as the company grows and does the thing it theoretically might do.”

Also referencing Kahn’s work, the FT wrote: “The Coinbase model, profit from companies it lists.” The FT did its own research. It found 20 tokens that Coinbase listed while holding an investment in a related project. Of those 20 projects, Coinbase disclosed only 12 as holdings on Coinbase Ventures.

“In the securities world, conflicts of interest have to be identified, disclosed and managed,” Tyler Gellasch, executive director of Healthy Markets, an investor focused nonprofit, told FT. “In crypto, it seems to be a free-for-all.”

Regulations

The SEC is taking a look into Celsius Network, Voyager Digital and Gemini Trust, companies with high-yield product offerings. These firms offer rates on tokens of 3% to as high as 18%. The question is whether these tokens are securities. The answer is, probably. (Bloomberg)

Alexis Goldstein has joined the Consumer Financial Protections Bureau, a federal agency created in the wake of the 2008 financial crisis. In her previous position as financial policy director at the anti-monopoly organization Open Markets Institute, she has been a vocal critic of crypto. (Read her Senate Banking Committee testimony on stablecoins if you haven’t already. It’s full of good info.) (Bloomberg)

Other news worth noting

Jennifer Robertson is getting criticized for “Bitcoin Widow.” Folks keep asking how she could have been so oblivious to Gerald Cotten’s shenanigans. Stephen Kimber, her ghostwriter, wrote an an entire article defending her. He points the finger back at Quadriga investors — the ones who actually lost money and are still waiting, three years later, to get a tiny portion of it back. “And yet no one asks them what the hell they were thinking, trusting this scam artist with their life savings?” (Halifax Examiner

FTX US gets a $400 million Series A with an $8 billion evaluation. Paradigm, Temasek, Multicoin Capital, and SoftBank led the round. The crypto exchange plans to use the funds to “accelerate its growth,” so it can leave Coinbase in the dust. (CNBC

Bermuda-based FTX also announced a $400 million Series C round, valuing the company at $32 billion. Existing investors included Japan’s SoftBank and Canada’s Ontario Teachers’ Pension Plan. FTX is one of Tether’s biggest customers. (FT)

The International Monetary Fund wants El Salvador to remove bitcoin’s status as a legal tender, dissolve the $150 million trust fund it created when it made BTC legal tender, and eliminate the $30 incentive for people to start using the digital wallet Chivo. It suggested there could be benefits to Chivo, but only if it uses actual dollars, not BTC.

The IMF warned President Nayib Bukele of the risks crypto poses — money laundering, corruption, etc. — and stressed that it would be difficult to get a loan from the institution. (IMF, Bloomberg 

Facebook Diem is having a fire sale, so it can return some money back to Diem’s investors. The project is officially dead. It’s just a matter of getting rid of the body. (Bloomberg, David Gerard)

Tether’s new accounting firm is the same as the old one. Moore Cayman is now operating under the MHA Cayman name. Also, the firm’s parent, MacIntyre Hudson, is under investigation in the U.K. (MHA announcement, Coindesk)

Texas Governor Greg Abbott thinks bitcoin miners can save the energy grid. (Decrypt)

In her latest blogpost, “Abuse and harassment on the blockchain.” Molly White says that in order to responsibly develop new technologies, we need to ask: “How will this be used for evil?” (Molly White)

Frances Coppola has returned to writing again after a break. She has taken a look at the Bitcoin ETF applications the SEC keeps rejecting. The problem isn’t the applications, it’s the market. (blog post)

This is fascinating. Ponzi schemer Stefan Qin was interviewed days before heading off to prison. The 24-year-old ran a crypto hedge fund until it imploded in late 2020 and lived in a posh $24,000/month NYC apartment — with extra bedrooms for all the sugar babies. (Youtube)

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QuadrigaCX cofounder Michael Patryn resurfaces — as 0xSifu, treasury manager of Wonderland 

Michael Patryn, the early cofounder of failed crypto exchange QuadrigaCX, has returned to crypto. A convicted felon, Patryn slid out of public view after Quadriga CEO Gerald Cotten died in India, and all the news came out about Cotten running Quadriga like a Ponzi. 

In Patryn’s latest incarnation, he is 0xSifu, cofounder and treasury manager of Wonderland (TIME token), a DeFi protocol that runs on the Avalanche network.

ZachXBT posted the news in a Twitter thread early today:

“This needs to be shared. @0xSifu is the Co-founder of QuadrigaCX, Michael Patryn. If you are unfamiliar that is the Canadian exchange that collapsed in 2019 after the founder Gerald Cotten disappeared with $169m. I have confirmed this with Daniele over messages.”

Daniele Sestagalli is the founder of Wonderland, who fully admitted to keeping 0xSifu’s true identity hidden from the rest of the group for a month.

Sestagalli posted a response to the doxxing in a Twitter thread, saying he felt Patryn — who he called a friend and “part of my family” — deserved a second chance:

“Today allegations about our team member @0xSifu will circulate. I want everyone to know that I was aware of this and decided that the past of an individual doesn’t determine their future. I choose to value the time we spent together without knowing his past more than anything.”

Sestagalli also issued an official statement on Mirror.xyz, reiterating that he believes in second chances. And reassuring everyone all the funds are safe, even though a convicted fraudster is watching over them. TIME’s treasury balance, as of Jan. 27, is nearly $680 million.

“I found out about this 1 month ago, I am of the opinion of giving second chances, as I have mentioned on Twitter. I’ve seen the community very divided about my choice of maintaining him as the treasury manager after finding out who he was and his past,” he said.

He added that Patryn will step down from his position at Wonderland. And there will be a vote as to whether or not he rejoins the team. “Wonderland has the say to who manages its treasury not me or the rest of the wonderland team,” said Sestagalli.

Of course, it wasn’t until now, they were working with full information.

Wonderland is a fork of OlympusDAO, an obvious Ponzi, as pointed out by Coindesk, who literally wrote: “Yes, it’s a Ponzi scheme. But who cares?” The project promised an annual yield of 7,000%. Compare that to Wonderland, which is currently offering crypto lenders 83,000% APY.

In addition to Wonderland, Sestagalli is behind Popsicle Finance and Abracadabra. He also headed the now-defunct Zulu Republic. Members of the collective, call themselves, “Frog Nation.”

Sestagalli doesn’t like to tell people who his is or talk about his background. When asked about himself at a 2021 conference, he replied, “I’m a frog. I identify as a frog.” You can see him speaking here.

Who is Michael Patryn?

Patryn is former convicted felon Omar Dhanani, who legally changed his name to cover up his criminal past. Patryn left Quadriga in early 2016, after he and Cotten allegedly had a quarrel and split ways. 

Prior to founding Quadriga, Patryn was one of 28 people arrested in connection to operating an identity theft ring called Shadowcrew. He pled guilty and was sentenced to 18 months in a US federal prison. Upon his release, he was sent back to Canada, where he went right back to doing what he had been doing all along — moving money. 

Operating as a type of middle man, Patryn ran several exchangers for early digital currencies, such as E-Gold and Liberty Reserve, both widely popular among underground economies. 

Five years older than Cotten, Patryn was Cotten’s mentor, his big brother, and the controlling mind behind QuadrigaCX. The two had connections that went back to their early days on TalkGold, when Cotten was just settling into his career as a con man, running small time Ponzi’s and disappearing before they went bust. He died just as QuadrigaCX, a gold mine for the small-time con, was losing its wheels.

It should be of no surprise to anyone that Patryn has resurfaced again, or that he has found a trusting partner such as Sestagalli to kick off another business with.  

Patryn is a one-trick pony. He’s not clever enough to reinvent himself, and his hubris makes it impossible for him to simply disappear and go and enjoy a quiet life somewhere. 

MyCrypto founder Taylor Monohan, who was in the QuadrigaCX documentary Dead Man’s Switch, tagged Patryn’s wallet in 2019, after she herself lost money on QuadrigaCX. The wallet has remained active and shows transactions totaling 20 ETH to 0xSifu’s address, as Monohan points out on Twitter.

0xSifu’s wallet currently has $70 million worth of crypto in it. It’s been apparently offloading funds all day. Earlier, it held over $450 million worth of various coins.

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News: Jennifer Robertson speaks (QuadrigaCX), BTC tumbles, Crypto.com hacked, SEC shoots down another Bitcoin ETF

“Bitcoin Widow” went on sale this week. Jennifer Robertson was busy giving interviews to promote her book. It’s the first time we’ve gotten to see her live and hear her voice.   

Robertson was married to Gerald Cotten, who ran QuadrigaCX like a Ponzi. He mysteriously died in India just before things fell apart. Robertson was clever enough to go to college and start a business, but somehow remained completely clueless when it came to her partner’s shenanigans. The lavish vacations, the houses, and private plane trips were nice, though. 

Globe and Mail interviewed Robertson. Actually, they interviewed the journalists who interviewed her. You still get to hear a little of Jen’s voice. The interview is pretty dry. No tough questions. (Globe and Mail) 

The National, CBC’s flagship current affairs program, was a lot tougher. As politely as possible, they asked why she wouldn’t simply allow Cotten’s body to be exhumed and checked to make sure it’s really him. I make an appearance on the show. (YouTube)

Matt Galloway on The Current spoke with Robertson at length. (The Current)

Galloway: “Did you ever ask why hundred dollar bills were scattered around your house?” 

Robertson:  “It was kind of a Gerry thing.”

As a follow-up to Galloway’s interview, CBC On The Coast interviewed me about QuadrigaCX and asked me what I thought about the book. Worth a listen! (CBC, My review of the book

BTC keeps falling

Bitcoin is down to $35,000 from its November record of nearly $70,000. The sell-off has outpaced that of the U.S. stock market. David Gerard opines his thoughts on what is driving down the price. (blog post)

He notes the crypto miners are holding on to their bitcoin. If they sell, they know they will crash the markets, so they’ve got to sit tight on their piles of BTC.

There are still $78 billion tethers out there. Tether hasn’t minted any new tethers in 2022, for some reason. And the Tether transparency page has a new look and feel. 

The Grayscale Bitcoin Trust is now trading at 28% below NAV, its lowest ever. (YCharts)

MicroStrategy stock is dropping in tandem with the price of BTC. MSTR tumbled nearly 18% this week. (And the SEC doesn’t care much for the company’s crypto accounting methods, either.) (CNBC)

Another exchange hack

Fortune favors the brave, or does it? Maybe not.

Crypto.com, the fourth largest crypto exchange, was hacked on Jan. 17 in a 2FA compromise. All told, the thieves got away with $34 million in crypto — 4,836 ETH, 443 BTC, and about $66,000 in another crypto. All funds are SAFU.

The hack was confirmed by Crypto.com CEO Kris Marszalek, but otherwise, the company has been murky on the details, noting “suspicious activities,” and referring to the event as an “incident.” (Crypto.com announcement, Techcrunch)

Crypto derivatives trading platform BitMEX aspires to become a “regulated crypto powerhouse” in Europe. Its European arm BXM Operations AG wants to purchase Bankhaus von der Heydt, a bank in Munich. BaFin, Germany’s financial watchdog, has yet to approve the transaction. The purchase price is undisclosed. (Bitmex blog, Decrypt)

Last summer, BitMEX agreed to a $100 million settlement with FinCEN and the CFTC. Regulators accused the Seychelles-based exchange of failing to maintain a compliant AML program.  

In an effort to clean up its image, BitMEX has hired former Coinbase managing director ​​Marcus Hughes as its chief risk officer. (Bitmex blog, WSJ)

Everybody still despises Binance.

Armed with fake credentials, journalist Hary Clynch went undercover to interview for a top position at Binance. Naturally, he was offered the job. Part two of his three-part story is up. (Disruption Banking)

In her latest blog post, Carol Alexander, professor of finance at Sussex, provides visual proof that price manipulation bots on Binance caused massive liquidations on July 25-26, 2021. (blog post

In public, Binance CEO CZ welcomes regulatory oversight and boasts about his sparkly AML program. Behind the scenes, he withholds information about finances and corporate structure from regulators, according to a report in Reuters.

Everything is “FUD,” says CZ. (Twitter)

Regulations

The SEC shot down a spot market Bitcoin ETF from First Trust Advisors and SkyBridge. The ETF didn’t meet “the requirement that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and ‘to protect investors and the public interest,’” the regulator said.

In other words, all the things that the SEC previously objected to—wash trading, whale manipulation, mining manipulation, manipulative activity involving Tether, fraud and manipulation on exchanges, and so on—were never addressed in the proposal. (SEC, p. 15; Decrypt)

Meanwhile, in Europe, regulators are clamping down on crypto advertising.

Spain’s market regulator issued a mandate that ads for crypto assets must carry a warning that investors risk losing all their money. (Bloomberg)

In Singapore, the city-state is getting rid of bitcoin ATMs as it moves to dramatically limit consumer marketing of crypto. (Bloomberg)

In Italy, Consob, the country’s financial services regulator, has warned of risks linked to an increasing number of financially illiterate Italians investing in crypto. (FT)

And in the UK, the Treasury wants to bring advertising for the crypto industry under the same standards as other types of financial products. (Official statement, FT)  

Bitcoin miners running out of places to go

The bitcoin network consumes vast amounts of energy, mainly fossil fuels. As countries in Eastern Europe struggle to rein in electricity use in the coldest months of winter, they want the miners out. 

The Bank of Russia is doing all it can to pull the plug on crypto and make bitcoin mining and crypto trading illegal. (Bloomberg)

In Kosovo, where the government has temporarily banned bitcoin mining, miners are now rushing to get out of the business, selling their mining equipment at bargain-basement prices. (Guardian

And in the Ukraine, authorities bust another crypto mining farm illegally stealing power from the grid. (SSU)

NFTs and more NFTs

Every celebrity and big business wants to get into the NFT market, it seems.

Gamers won’t have it. They don’t like NFTs because they’re already familiar with broadly similar exploitative paid weapons, skins, loot, etc. When their favorite online games announce plans to incorporate NFTs, gamers push back. (NYT)

If only consumers would push back on this nonsense with a similar passion as gamers.

Dan Davies, author of “Lying for Money,” says gamers are more aware than most of AML compliance issues. He pointed out that Tencent shut down its online version of Call of Duty, after discovering the platform was being widely abused by criminals. (Twitter)

Scammers set up a new server at the URL previously used by Ozzy Osbourne’s NFT project, stealing over a hundred thousand dollars in ETH. (The Verge)

Flyfish Club is an exclusive NFT restaurant in New York City. When it opens in 2023, you can only enter if you buy an NFT. You still have to pay for your food in dirt fiat, because they won’t accept crypto in the establishment. Parent company Crypto VC Group has raised $14 million selling Flyfish tokens, which are being flipped on OpenSea. (Fortune

What would you expect from an NFT restaurant? Stephen Colbert investigates. (YouTube)

I see a new trend developing, and the SEC is not going to like it. BrewDAO just announced it wants to start a brewery. (Twitter)

Coinbase is teaming with Mastercard, so you can purchase NFTs with your credit card on its soon-to-launch NFT marketplace. (Coinbase blog, CNBC)

Walmart is considering creating its own crypto and selling NFTs. Of course, it is. (Bloomberg)

Meta wants to profit on NFTs as well. Facebook and Instagram are prepping a feature that will allow users to display their NFTs on their profiles. Meta is also working on a prototype for minting NFTs. (FT)

After spending $3 million on a rare Dune book, SpiceDAO is still looking for a way to justify the expense. It failed to negotiate IP rights. Now it wants to develop an entirely independent animated series. (Twitter)

RatDAO, which wants to accumulate blue-chip art, says it’s bought an unsigned Banksy print. Most DAOs I’ve looked at tend to focus on NFTs. (Twitter)

Cryptoland’s plans to buy a $12 million Fijian island have fallen through. The real estate agent selling Nananu-i-cake said the contract to sell it to Cryptoland’s backers fell through and the island is back on the market. Here is the listing, in case you’re interested. (Guardian)

One Jan. 18, Cryptoland founders Max Olivier and Helena López did an AMA. Molly White uploaded it to YouTube. It’s hysterical if you can stand to listen. If not, Molly has threaded the highlights.

Wikipedia editors have voted not to classify NFTs as art, sparking outrage in the crypto community. Beeple and Pak will not be included on its list of the most expensive art sales by living artists. (Artnet)

A women-led NFT project, Famed Lady Squad, is actually being led by guys, the same guys who are behind a bunch of failed NFT projects. (Input magazine

Other interesting bits

President Nayib Bukele, thinking Moody’s had downgraded El Salvador’s credit rating, said he “DGAF.” It turns out, Moody’s had not downgraded his country’s credit rating. Moody’s has rated El Salvador Caa1, a very high credit risk, since a downgrade in July. (Bloomberg)

Crypto media outlet CoinDesk is offering employees an equivalent of stock in its parent company DCG, which has its hands in hundreds of crypto companies. David Gerard notes that DCG has a history of pressuring CoinDesk employees to pump company interests. (Blog post) 

VC firm A16z wants more money for crypto investments. It’s seeking another $4.5 billion—more than double than what it raised less than a year ago. VCs are fueling the boom in everything crypto. (FT

MetaMask founder Dan Finlay acknowledges they’ve failed to remedy an IP address leak vulnerability that’s been “widely known for a long time.” (Twitter)

A flood of crypto rich are moving to Puerto Rico for the tax breaks, driving up real estate prices and making the natives unhappy (CNBC)

Ethereum founder Vitalik Buterin and Elon Musk exchange tweets about synthetic wombs. (Twitter)

Dan Olsen posted a two-hour YouTube video explaining NFTs and the problems with blockchain in general. The video is going viral. (YouTube)

Martin Walker explains Web 3.0 in a 20-minute interview. (YouTube)

Crypto promoters often tell us it’s still “early days.” Molly White says the nauseating phrase sounds like it’s coming from people with too much money sunk into a pyramid scheme. (blog post)

Stephen Diehl has a great take on Web3, if you haven’t read it yet. (blog post)

Cryptocurrency is a giant Ponzi scheme. (Jacobin

Fais Khan illustrates that Coinbase Ventures-backed coins tend to underperform bitcoin after an initial pop on crypto exchange Coinbase—when the VCs cash out. (blog post)

Laura Shin’s book “Cryptopians” is coming out next month. It’s nearly 500 pages long. Public Affairs is the publisher. If you don’t have the time to read it, Patrick McGinty, who teaches in the English Department at Slippery Rock University, wrote up a great review. (Baffler)

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News: Signal goes worldwide with payments, IRS sets sights on NFTs, Bukele’s bad bets on BTC

Encrypted messaging app Signal made its new payments feature, which uses MobileCoin (MOB), available to the world in mid-November. Signal made no big announcement at the time, but the stories are coming out now. (Wired)

I wrote about MobileCoin back in April 2020 — and so did David Gerard — when Signal first announced the feature. MobileCoin was a side hustle for Signal creator Moxie Marlinspike. He was an advisor to the project and then got Signal to integrate the token.

I suspect Marlinspike was paid in MOB — advisors to crypto projects typically are paid in shitcoins — and is now looking to dump his bags. (My blog; David Gerard

Other messaging apps, like Whatsapp and Facebook, have payments built in. What sets Signal apart is it wants to combine end-to-end encryption in messaging and a cryptocurrency with privacy features designed to make any transactions anonymous.

That has Signal employees worried. They’re concerned anonymous payments will attract criminals and thus draw regulator scrutiny, ruining everything that’s good about Signal. Signal supporters warned Signal this was a terrible idea. Signal went ahead with its plans anyway. (Verge)

Anyone can use MobileCoin via the Signal mobile app to make payments — the directions are here. The problem is getting MOB to put in your wallet. MOB is listed on Bitfinex and FTX, but it’s not available to U.S. consumers. You would have to use a VPN to get around that. 

Marlinspike wrote a blog post about Web3 that’s gotten a lot of attention. (Fortune)

The story is good; he blasts Web3. However, in it, he says he was “never particularly drawn” to crypto. That’s not quite accurate. He simply put his crypto into his messaging app.

On Jan. 11, only a few days after word of Signal’s shitcoin hit the whirling blades of the fan, Marlinspike  stepped down as CEO of Signal — with no notice and no replacement. Executive chairman Brian Acton will serve as acting CEO until someone new is found. (Moxie’s blog post)

Signal, which was introduced in 2014, gets its support via donations. With 40 million active users, the project is now poised to transition into a sustainable and profitable model, so it will be telling to see who steps in to take over.

In the meantime, Signal supporters are losing confidence in the app.  

Nicholas Weaver, an infosec expert and staff researcher at UC Berkeley, says that even by shitcoin standards, MobileCoin is “high on the fraud factor.” (Twitter Thread).​​

MobileCoin’s primary privacy mechanism is that the ledger runs inside the SGX enclave (a separate and encrypted region on the Intel chip for code and data), which means privacy rests entirely on the hardware — not the blockchain. You have to trust the nodes in the system. 

Marlinspike is a cryptographer and a computer security researcher. He should know better.

“Put bluntly, the only way as a security professional you would endorse this as a valid ‘privacy coin,’ let alone push it out to your huge user base, is if you were faced with a dump-truck full of money,” Weaver said. “I hope Moxie’s dump-truck was suitably large.”

Day trading is hard

El Salvador President Nayib Bukele has been day trading public bitcoin, and he is not very good at it. Bloomberg says he is probably losing money. (Bloomberg)

The country is about $1 billion in debt already. It doesn’t help that bitcoin took a nosedive recently, losing 40% of its value since its early November high of $69,000.

I know of someone else who gambled away other people’s money: Gerald Cotten, the CEO of failed Canadian crypto exchange QuadrigaCX. The exchange carried the seeds of its demise for two years before the Ponzi was exposed. Cotten died mysteriously in India just before things fell apart.

I don’t see Bukele disappearing, so who will he blame when things fall apart? Probably his adoring bitcoin supporters.

We know Bukele doesn’t like the press. Turns out he has been spying on them. Since mid-2020, dozens of journalists in El Salvador have been subjected to phone hacks using Pegasus software, according to Citizen Lab and Access Now. Pegasus is the spyware developed by Israeli company NSO Group for governments. It can infect phones running either iOS or Android. (Project Torogoz, Reuters)

If you can get past the bitcoin boosterism, this story in Bitcoin Magazine by Anita Posch has a wealth of information in it about Bukele’s plans for bitcoin in El Salvador. 

I wrote before about “volcano bonds” — bonds Bukele is using to lure $1 billion from outside investors he will use to buy more bitcoin and build a crypto metropolis. Bitcoin City is set to go near the Conchagua volcano, so geothermal energy can power the city. It is uncertain whether the volcano is even active. “I was told that the volcano is dead, and there is no geothermal energy left to be used,” said Posch.  

We don’t hear much from Strike CEO Jack Maller on El Salvador anymore. Rumor has it, the reason he didn’t build the government’s official Chivo wallet is because he wanted $300 million for the job, and because Algorand or Cardano or Koibanx paid the government $20 million to get the contract.

Mallers is now boasting about how Strike is going to save the poor in Argentina. “Today, we use the world’s open monetary network, bitcoin, to give hope to the people of Argentina,” he tweeted. Only he left out the part where it only works with tethers, not bitcoin. (Decrypt)  

NFTs collectors, the IRS wants your money

The NFT market ballooned to $44 billion in 2021, and the IRS is on the case. It wants its cut of the profits.

It’s not clear if NFTs are taxed as regular capital gains or as “collectibles,” which means you will have to pay slightly more — but that doesn’t mean you should put off filing. (Bloomberg)

Media outfit Dirt raised money selling NFTs. Now it wants to incorporate those NFTs into a DAO, so members can vote on the editorial process. What could possibly go wrong? (Verge)

CityDAO bought 40 acres of land in Wyoming for a blockchain city. The group is offering citizenship and governance tokens in exchange for the purchase of a “land NFT,” which gives you rights to a plot of land. Everything was going swimmingly until the project’s Discord server was hacked and members’ funds were stolen. So far investors have lost 29.67 ETH, worth about $92,000. (Vice)

The news industry is struggling. The Associated Press has found a solution: It is launching a marketplace for selling NFTs of its photojournalism. (Press release; Verge)

Arthur Suszko was into Beanie Babies as a kid and began collecting them again as an adult. His current project is to create NFTs of his Beanie Babies. “It’s a merger of my childhood dreams and modern passions coming together,” he said. (Vox)

The Seattle NFT Museum is charging $175 to $200 a ticket for opening weekend, for those who want to “explore the future of art,” ensuring only the most gullible will walk through its doors. (Eventbrite)

Did you read about the woman selling fart jars as NFTs? It turns out the farts-in-a-jar story was just a big publicity stunt. The entire thing appears to be made up. (Input Mag)

CZ wants to give it all away

Binance CEO Changpeng Zhao (aka “CZ”) has a net worth of $96 billion. This is impressive given that his company does not even have an official headquarters. (Bloomberg)

That’s okay because CZ told the AP he is giving it all away. When you are constantly on the move dodging regulators, it’s nearly impossible to buy a mansion and settle down anyway. 

CZ said the only coin he holds is Binance Coin because he doesn’t like a conflict of interest and he doesn’t want to do anything unethical. Binance never does anything unethical. (AP)

An undercover journalist applied for a job at Binance under a fake name with fake credentials. Four interviews later, he was offered the senior role in Binance’s futures business. (Disruption Banking)

Elsewhere in the news

Crypto venture capital firm Paradigm is investing in Citadel Securities. Sequoia Capital and Paradigm will invest a total of $1.15 billion in the stock trading giant at a valuation of about $22 billion. 

Citadel handles 27% of the shares that are traded in the U.S. stock market. A large part of that comes from processing trades for online brokerages such as Robinhood. (Press release, WSJ)

Citadel does not trade crypto. CEO Ken Griffin has been dismissive of crypto in the past — “I don’t see the economic underpinning of cryptocurrencies,” he told CNBC. But something changed his mind, probably the money.

After banning crypto mining in the country in an effort to deal with its energy crisis, Kosovo police seized hundreds of crypto miners. One crypto-miner admitted to paying 170 euros ($193) per month for electricity and getting 2,400 euros ($2,700) per month in profit. (Kosovo police, Balkan Insight)

Metamask is a popular browser plugin that serves as an Ethereum wallet. Matthew Green, a cryptographer and computer scientist, took a casual look at its code. He came back with “an uncomfortable feeling about the complexity and quality of MetaMask’s (current) crypto code, and some unhappy feelings about its dependency structure.” (Blog post)

Tesla now accepts dogecoin for accessories. It takes up to six hours for a transaction to go through. You cannot cancel an order. You cannot return or exchange an item bought with dogecoin. All purchases made with dogecoin are final. The future of finance! (Tesla website, Verge)

The disclaimer from Tesla’s merch store is worth a read. “..if you enter an amount MORE than the Dogecoin price, we might not be able to return the extra amount.”

Block (formerly Square) CEO Jack Dorsey is pissed off at Craig Wright’s legal nonsense. He is leading a legal defense fund for bitcoin developers, according to an email he sent to the bitcoin developers list. The fund’s first task will be to assist developers facing a lawsuit from Tulip Trading Limited, the firm associated with Wright. (Email, NYT)

Last year, Wright filed a lawsuit against bitcoin core developers after losing a pile of bitcoin in a hack, saying they refused to help him recover the lost coins. 

Dorsey manages a bitcoin exchange, a bitcoin development fund, a bitcoin L2 project — and now a legal defense fund. Bitcoin is decentralized. 

Cryptoland is a dream project to turn a private Fijian island into a libertarian utopia. After software engineer and Wikipedia editor Molly White made fun of them on Twitter, Cryptoland sent a cease and desist letter to her for making fun of them on Twitter. (Twitter)

They also sent a “cease and decease.” (Twitter)

After getting a lot of bad press, Cryptoland is fighting back! (FT)

As part of that, Cryptoland took down its cringe-worthy video. However, the Internet is decentralized. Someone uploaded a copy to Peertube. There is also an extended version if you really enjoy torture.

Celsius Network is a crypto lending and borrowing platform, whose former CFO was arrested last year. Network data shows CEO and founder Alex Mashinsky and his wife Krissy have sold approximately 20 million CEL since October 2020, netting at least $60 million. (blog post)

How Matt Damon thought we’d react to his crypto.com commercial. (Youtube)

Jamie Zawinski, the creator of Mozilla, who makes the Firefox web browser, wrote “Today on Sick Sad World: How The Cryptobros Have Fallen.”

Dave Troy, the creator of Mailstrom, has a great thread on the awful history of cryptocurrency. (Twitter)

(Updated on Jan. 17 to include how much money investors lost on CityDAO.)

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