Latest from David and me! In this episode:
“funds are safe. we’ve done a risk assessment and found that 100% of hacks happen when someone has access to their coins, so we’re revoking that access to make them even safer”
— Boxturret
Crypto exchanges have trouble finding stable gateways for actual money. Proper banks won’t talk to them, so they turn to shadow banks, which cater to high-risk clients and use lots of tricks to skirt the traditional banking system.
Sometimes the exchanges just lose their gateway — and your money.
We wrote earlier about how Crypto.com customers’ euro deposits were seized by the Lithuanian government as part of an anti-money laundering enforcement action against the exchange’s payment provider, Transactive Systems UAB. Cryptadamus has a great post explaining what happened. [Substack]
If you had EUR on Crypto.com before this, it’s gone. The “EUR” you see in your account is unbacked. Work out what you can do to extract value from your outstanding balance, while Crypto.com gives you the runaround.
Transactive was also the payment channel for crypto lender Nexo, whose Bulgarian offices were recently raided by authorities. Transactive has an office in the UK as well — Transactive Systems Ltd. [Transactive]
After getting authorization from the UK Financial Conduct Authority and the Bank of Lithuania to act as an electronic money institution (EMI), Transactive grew astonishingly quickly in just five years — thanks to its clientele in crypto, gambling, and forex, and whoever else they were processing money for. [Bloomberg, archive]
Given Transactive’s sordid history, it’s amazing that the FCA authorized them at all.
Transactive emerged from the rubble of PacNet Services, an international payments company that started in Vancouver. PacNet was forced to wind down after the US Treasury sanctioned it as a “transnational criminal organization” — specifically, being the middleman for mail-fraud scam artists. Several PacNet executives were charged with fraud and money laundering. [US Treasury, 2016; DOJ, 2019]
A CNN investigative report from 2016 details how PacNet employees moved large piles of money around the world. PacNet set up bank accounts in the names of shell companies, they sent packages of cash labeled “legal documents,” they bribed Russian banking officials, and they even used a private plane to ferry cash to customers. [CNN, 2016]
So the money launderers left PacNet and moved over to a totally legitimate new business —Transactive, co-founded by convicted healthcare scammer Scott Roix.
In February 2022, the Bank of Lithuania fined Transactive 20,000 EUR for commingling customer and company funds. Transactive had also misreported its customer balances and its equity capital. [Lieutvos Bankas, in Lithuanian]
In January 2023, the Bank of Lithuania accused Transactive of massive money laundering and froze the company’s funds. It ordered Transactive to stop servicing clients in finance, forex, and crypto, pending a review. [Lietuvos Bankas, in Lithuanian]
Transactive notified clients about this trivial hiccup and said their funds were being “safeguarded” — a word meaning “you’ll never see your money again.” If an investigation discovers any of the money was dirty (if!), the government will seize the funds. [Reddit]
Crypto.com has told its euro-using customers that their SEPA (Single Euro Payments Area) transfers are being migrated to a new provider. Now the exchange has to find a new provider.
Here are Crypto.com customers screaming into the void to get their funds back. Crypto.com has yet to tell them what actually happened to their money. [Twitter, Twitter]
Unless Crypto.com had euros stored somewhere other than Transactive Systems UAB, they are likely insolvent in EUR and will have to start from scratch, paying withdrawals with new deposits until they can somehow fill the gap — or not.
In the US, Crypto.com still banks with Silvergate, which allows their institutional clients to transfer USD from their bank accounts to the exchange. This channel may have problems in the near future, due to Silvergate’s dealings with FTX.
The US Federal Reserve really, really hates banks touching crypto and is not putting up with it even a bit — especially after Silvergate needed a $4.3 billion bailout. The Fed issued a policy statement on January 27: [Federal Reserve; Federal Reserve, PDF]
“The statement makes clear that uninsured and insured banks supervised by the Board will be subject to the same limitations on activities, including novel banking activities, such as crypto-asset-related activities.
In particular, the preamble would provide that the Board would presumptively prohibit SMBs from holding most crypto-assets as principal, and also would provide that any SMB seeking to issue a dollar token would need to demonstrate, to the satisfaction of Federal Reserve supervisors, that the bank has controls in place to conduct the activity in a safe and sound manner, and to receive a Federal Reserve supervisory nonobjection before commencing such activity.”
That second paragraph directly addresses Silvergate’s plan to revive Diem (née Facebook’s Libra) and do their own private stablecoin for retail customers. Yeah, no. Silvergate says it’s written off its Diem investment after previous regulator refusals to let them print private money, but the Fed evidently thought it was still worth emphasizing their “no.”
The US Department of Justice is investigating Silvergate over its FTX and Alameda Research dealings. FTX customers were wiring money to Alameda and to Alameda’s dubious subsidiary North Dimension via the bank, thinking that money was going directly to FTX. The DOJ wants to know what Silvergate knew, and when they knew it. [Bloomberg]
In the UK, the Binance crypto exchange should have no access to pounds, ever. After the Financial Conduct Authority warned in March 2022 that “in the FCA’s view, Binance Markets is not capable of being effectively supervised,” UK banks cut off direct deposit to Binance immediately. [FCA, 2022]
But Binance knows you can’t keep a dedicated gambling addict down, so they keep trying to weasel their way back into the UK’s Faster Payments network, most recently through payments processor Paysafe. Sometimes this works. Binance recommends UK customers send money in and out via Visa — but even that’s being cut off by the banks. [Twitter; CoinDesk]
Cryptadamus traces Binance’s Visa connection — Binance owns crypto debit card issuer Swipe, which it bought in 2021! Swipe also issued a crypto debit card for FTX. [Twitter; Binance; FX Empire]
Australian users also report payment issues with Binance — even via Visa. [Twitter]
In the US, Binance users say they can’t withdraw funds in amounts of less than $100,000 from American banks. Binance says that’s fake news and everything is fine. Cryptadamus has been documenting the difference between Binance’s official statements and what customers report. [Reddit]
When Bitfinex was cut off from banking in 2017, users would buy bitcoins just to get their funds out of the exchange. This drove the price of bitcoin up and may have helped trigger the 2017 crypto bubble. So all of this is good news for bitcoin!
At the next FTX bankruptcy hearing on February 6, Judge John Dorsey will hear arguments for and against appointing an examiner. FTX and the Unsecured Creditors’ Committee are against hiring an examiner, but the US Trustee and various state regulators want one. John Reed Stark thinks it’s absolutely necessary. [Agenda, PDF; LinkedIn]
Brian Glueckstein of Sullivan & Cromwell for FTX filed a declaration in support of FTX’s objection to an examiner. It’s 3,855 pages of mainly exhibits. But the US Trustee wants it stricken from the record because the deadline to file was January 25, and Glueckstein filed on February 3, one business day before the hearing. Oops. [Declaration, PDF; Doc 617, PDF]
FTX is suing Voyager for repayment of $446 million of loans. After Voyager filed for bankruptcy in July, it demanded repayment of all outstanding loans to FTX and Alameda. FTX paid the money back for Alameda — but because they paid it back so close to FTX’s bankruptcy filing, FTX wants to claw it back again. [Complaint, PDF; Reuters]
In the legal case against Sam Bankman-Fried, Judge Lewis Kaplan has barred Sam from using Signal or Slack and from contacting any former FTX employees without lawyers present until February 9, when he’ll hear arguments. He wasn’t impressed when Sam reached out to a key witness, who we assume is FTX US counsel Ryne Miller, to “vet” things on the phone. [Order, PDF]
SBF’s bail conditions required two more sureties. These are now in, with their names redacted: $200,000 and $500,000. Judge Kaplan has agreed to unseal the names, but they’ll remain redacted pending possible appeals. [Bond, PDF; Bond; PDF, Memorandum Opinion, PDF]
The second day hearing in the Genesis bankruptcy is February 22. No agenda yet. We wonder if anyone will attempt to go after Genesis’ owners, DCG. [Notice, PDF]
The Gemini crypto exchange implied to its Gemini Earn customers in 2022 that their deposits were protected by FDIC insurance, and customers took Gemini’s statements to mean they were protected by the FDIC from Genesis failing. But Gemini didn’t technically say that! So it must be fine, right? [Axios]
DCG’s crypto news site CoinDesk claimed to have prospective buyers approaching them unsolicited and offering hundreds of millions of dollars for the site. The new rumor is that the prospective buyers are looking at buying only parts of the site — the conference business or the media outlet — and certainly not at paying hundreds of millions of dollars. [Twitter]
Coinbase was fined 3.3 million EUR (USD$3.6 million) by De Nederlandsche Bank for not registering as a money transmitter in the Netherlands. [Reuters]
Coinbase bragged about having proper registration in September 2022. But the violation occurred in the years prior when they weren’t properly registered. [Coinbase, 2022]
MicroStrategy posts another loss. This is its eighth straight quarterly loss in a row. Before former CEO Michael Saylor started to amass bitcoin in 2020, the company had $531 million in cash. Now it’s down to $43.8 million in cash. [Bloomberg]
MicroStrategy is one of the loans that Silvergate is particularly worried about. In March 2022, MicroStrategy borrowed $205 million in a three-year loan from Silvergate. The loan was collateralized with bitcoin — and Silvergate will need to worry about that too.
Image: PacNet’s part owner Don Davis (on the left) posted on LinkedIn. Airplanes are great for moving piles of cash.
We just wrote up the final examiner report for Celsius. This ended up being a 3,000-word post, mainly because the report was loaded with comedy gold. You can read our full analysis on David’s blog. [David Gerard]
Celsius was not just fraudulent. It was an utterly incompetent investment business. Here’s what we cover:
FTX’s lawyers have questions. Specifically, they have questions for Sam Bankman-Fried’s brother Gabriel and his parents, Joseph Bankman and Barbara Fried.
Joseph advised FTX. He recruited its first lawyers and joined FTX staff in meetings on Capitol Hill. When visiting the FTX offices in the Bahamas, he and Barbara stayed in a $16.4 million house with its title in their names. Barbara founded a political action committee called Mind the Gap, which received donations from FTX.
Gabriel launched Guarding Against Pandemics, an organization funded by Sam. Gabriel purchased a multimillion-dollar property in Washington D.C., which John Jay Ray III’s current FTX team believe was purchased using FTX customer funds.
Every member of Sam’s family had some involvement in FTX — and they aren’t responding to requests for documents. So Ray’s team and the Unsecured Creditors’ Committee (UCC) want to subpoena Joseph, Barbara and Gabriel under rule 2004. [Doc 579, PDF; Bloomberg]
We’ve detailed rule 2004 previously. Federal Rule of Bankruptcy 2004 allows tremendously broad discovery and deposition. A witness is not always entitled to attorney representation or cross-examination and has only a limited right to object to questions. 2004 exams are sometimes referred to as “fishing expeditions” — because they need to be.
Included in the same 2004 motion, Ray is also asking the court’s permission to subpoena Sam and several other FTX insiders, including FTX cofounders Gary Wang and Nishad Singh, former Alameda CEO Caroline Ellison, and former FTX COO Constance Wang. Along with SBF’s family, they have not been very responsive:
“Mr. Wang and Ms. Ellison expressly declined to provide the requested information, and Ms. Fried has ignored the Requests altogether. The Debtors have not received meaningful engagement or any response from Mr. Singh or Mr. Gabriel Bankman-Fried.”
Ray’s team are investigating the FTX hack on November 11-12, which saw $300 million in crypto siphoned off the exchange while crypto Twitter watched in horror. They’ve requested an order pursuant to Rule 2004 here too — under seal, because the information in the motion could “reveal or lead to evidence that will reveal the identity and activities of the perpetrator(s).” It sounds like they already have a very good idea who was behind the hack. [Doc 581, PDF]
A mostly-unredacted list of FTX creditors is now available. It includes investment banks, such as Goldman Sachs and JPMorgan; media companies, such as the New York Times and Wall Street Journal; commercial airliners, including American, United, Southwest, and Spirit; as well as several large tech players, including Netflix, Apple, and Meta. Individual customers’ names remain withheld. [Doc 574, PDF]
FTX objects to the US Trustee’s request to appoint an independent examiner. They argue an examiner would duplicate work that’s already underway by FTX, the UCC, law enforcement, and regulators. “Indeed, if history is a guide, the cost could near or exceed $100 million.” They point out that “it is difficult to imagine an examiner candidate whose qualifications exceed those of Mr. Ray.” Which is a good point. The UCC concurs. [Doc 573, PDF; Doc 571, PDF]
SBF is playing fast and loose with potential witnesses in his criminal trial. He contacted “Witness-1,” the “current General Counsel of FTX US” (Ryne Miller) to work out a story with. We doubt Miller would want anything to do with such a scheme. But this was enough for the government to ask Judge Lewis Kaplan to modify Sam’s bail: [DOJ letter to judge, PDF]
“Specifically, the Government respectfully requests that the Court impose the following conditions: (1) the defendant shall not contact or communicate with current or former employees of FTX or Alameda (other than immediate family members) except in the presence of counsel, unless the Government or Court exempts an individual from this no-contact rule; and (2) the defendant shall not use any encrypted or ephemeral call or messaging application, including but not limited to Signal.”
SBF’s lawyers responded by pounding the table. Judge Kaplan has told both sides to chill. The government should get its reply in, with substantiation of its claims, by February 2. [letter, PDF; order, PDF]
Dirty Bubble has found another link between FTX and the fraud-riddled binary options industry. In September 2021, FTX purchased the ZUBR derivatives exchange for $11 million. The exchange was registered in Gibraltar. By the time Gibraltar rescinded ZUBR’s license, the exchange had no active customers. The exchange was a collaboration between Belarusian binary options and crypto “billionaire” Viktor Prokopenya and his former business partner Said Gutseriev, the son of one of Russia’s wealthiest oligarchs. [Dirty Bubble]
(Update, March 15, 2023: Viktor Prokopenya tells us he “never had any commercial interest or other involvement in ZUBR.” Dirty Bubble has updated his story to note that FTX purchased ZUBR directly from Prokopenya’s business partner Said Gutseriev. Dirty also notes interesting connections between ZUBR and Prokopenya’s other entities in his story.)
Would it surprise you to learn that FTX made political donations to George Santos? [SFGate]
Celsius has rejected the Binance US bid for Celsius assets, and four other bids. In the January 23 hearing, Ross Kwasteniet of Kirkland & Ellis, speaking for Celsius, said the bids “have not been compelling.”
Instead, Celsius have concocted a plan to reorganize into a publicly traded company and issue a new “Asset Share Token” to creditors. Those following the Celsius disaster will recognise this as Alex Mashinsky’s very dumb and bad Kelvin Plan from September 2022.
Creditors weren’t told about the other bids. As it happened, Tiffany Fong — Celsius creditor and YouTuber — got all the bids in a leak in December. Bidders included Binance US, Bank To The Future (Simon Dixon), Galaxy Digital, Cumberland DRW, and NovaWulf. Fong posted full text of the leaked bids. [Substack; Youtube]
Many ad hoc creditors were disappointed that the Binance bid was rejected — but it shouldn’t be surprising, given the issues that Binance is already having with its bid for Voyager.
Frankly, we don’t think the other bids look all that great either — they’re fanciful coiner dreams that first assume the crypto market is healthy, which it isn’t.
We think Celsius should have just liquidated in July rather than taking several months and handing millions of dollars to bankruptcy professionals to get to the same place.
Silvergate is short on cash, so it’s suspended dividend payments on its preferred stock. [Business Wire]
The stock in question (NYSE:SI) is going down the toilet. It’s crashed from $220 in November 2021 to below $14 in January 2023. Signature Bank (NASDAQ: SBNY) has gone from $365 to $127 over the past year.
Moonstone Bank says that “recent events” — FTX tried to use them as a financial laundromat — and “the changing regulatory environment around crypto businesses” — the regulators are on the warpath — have prompted it to ditch the “innovation-driven business model” it adopted in recent years. [WSJ, paywall]
Federal bank regulators are not keen on dodgy crypto banks authorized by captured Wyoming state regulators. Custodia Bank can’t get a Fed account: [Federal Reserve]
“The Board has concluded that the firm’s application as submitted is inconsistent with the required factors under the law. Custodia is a special purpose depository institution, chartered by the state of Wyoming, which does not have federal deposit insurance. The firm proposed to engage in novel and untested crypto activities that include issuing a crypto asset on open, public and/or decentralized networks.”
Crypto.com’s old gateway for GBP and EUR was Transactive Systems of Lithuania. Transactive has been cut off by the Bank of Lithuania, after it found “significant violations and shortcomings of the Law on the Prevention of Money Laundering and Terrorist Financing.” Transactive had apparently been giving accounts to a long list of low-quality institutions in low-quality jurisdictions. Transactive can no longer serve financial institutions, forex, or crypto clients. They also got cut off from the UK Faster Payments system. Your EUR and GBP sent to Crypto.com via Transactive are probably now stuck. [Twitter; Offshore CorpTalk; Bank of Lithuania, in Lithuanian]
Before Crypto.com got kicked off Silvergate, it used to get US dollar deposits via an oddly roundabout method: customers would send USD to Circle’s account at Silvergate, and Circle would mint that much USDC and send the USDC to Crypto.com. It is possible this was not in full compliance with KYC and AML regulations. [Twitter; crypto.com, archive]
London-based crypto exchange Luno, a subsidiary of DCG, is laying off 35% of its staff. About 330 employees will be let go from the firm, which has offices in Africa, Asia, and Europe. [WSJ, paywall; archive]
DeFi volumes are right down. The amount of money (or “money”) involved has been flat for months, and — most importantly — you can’t get the ridiculous yields you could in the bubble. Oh no! Anyway. [Bloomberg]
It was five years ago today, January 28, 2018, that the Prodeum initial coin offering took everyone’s money and disappeared, leaving behind only a new jargon term for “exit scam” or “rugpull.” You get a penis! And you get a penis! And you get a penis! Everybody gets a penis! [The Next Web, 2018]
Image: Sam Bankman-Sopranino and family.
Latest from David Gerard and me on EVERYTHING.
In this episode:
I think we made some tremendous progress in the six months before I left.
— Jeffrey Skilling, Enron
Amy’s first piece for Foreign Policy is out now! “The Crypto Dominoes Are Still Falling: The bankruptcy of Genesis shows the need for regulators to have teeth.” She advises that regulators be given the power to act much more quickly against obvious nonsense. [Foreign Policy, paywalled]
The lending arm of Genesis finally filed for chapter 11 in the Southern District of New York on January 19. This has been expected for months, as they froze withdrawals in November. [Amended Petition, PDF; docket on Kroll; press release; Bloomberg; Michael Lito declaration, PDF]
The corporate entities that filed were Global Holdco and its lending subsidiaries Genesis Global Capital and Genesis Asia Pacific, which managed Genesis lending for Three Arrows Capital. Genesis’ derivatives, spot trading, broker-dealer, and custody businesses were not part of the bankruptcy.
Genesis owes its top 50 creditors — mostly unnamed on the petition — over $3.4 billion. Gemini Earn clients are collectively owed $765.9 million. Other big claims include a $78 million loan payable from Donut (a “high-yield” DeFi platform — “high yield” is a euphemism for “Ponzi”) and a VanEck fund with a $53.1 million loan payable. [Reuters]
But fear not! Genesis has a plan to exit the bankruptcy by May 19. It will try to sell its assets at auction within three months. [Chapter 11 Plan, PDF]
The settlement proposal is written in a confusing and opaque manner — but DCG controls the bankrupt entities utterly. DCG is trying to declare its left hand solvent and its right hand bankrupt, and stick the creditors with the losses.
Page 50 of the chapter 11 plan (page 54 of the PDF) sets out the street corner shell game. Claims are shuffled between the bankrupt Genesis entities and the non-bankrupt DCG entities such that heads DCG wins, and tails the creditors lose. Any Gemini Earn creditor who accepts this settlement relinquishes all claims against DCG, Gemini, and the Winklevoss twins personally.
We think DCG screwed up by covering for Genesis in July 2022, when it took on the claim to 3AC and issued Genesis a $1.1 billion promissory note in return. It’s clear that nobody at Genesis could refuse the offer — that this was entirely in the control of DCG. Also, the 3AC loan was secured in part by shares of GBTC, as issued by DCG’s Grayscale. Genesis should have declared bankruptcy then.
In addition to the $1.1 billion note, DCG owes Genesis another $575 million, in cash and cryptos. The Genesis bankruptcy is all about shielding DCG from liability.
“This SHOULD be criminal,” Nicholas Weaver said. “You sell a billion dollars worth of unregistered investments (it is called ‘securities fraud’), they go sour, your victims should be able to go after you. But this is all designed to basically be a perfect crime: a billion dollar theft, in plain sight, and with legal protection.” He advises the unsecured creditors’ committee to reject the offer. [Mastodon]
Gemini Earn claims against Genesis are part of the bankruptcy. It’s unlikely the customers will get all their money back in chapter 11. The question is: will Gemini make Earn depositors whole, or will the Winklevosses argue that Earn depositors are creditors of Genesis?
Cameron Winklevoss is still fighting to get Genesis to pay up. He threatened to sue DCG over the bankruptcy: “Unless Barry and DCG come to their senses and make a fair offer to creditors, we will be filing a lawsuit against Barry and DCG imminently.” [Twitter]
As we noted previously, the SEC case against Gemini Earn makes Gemini and Genesis jointly and severally liable to pay back customers in full, should the SEC win or the defendants settle. And Gemini has the funds and isn’t bankrupt. So Cameron really wants DCG to pay.
DCG’s crypto news site CoinDesk is exploring a partial or full sale. CEO Kevin Worth says that CoinDesk has received multiple unsolicited offers of over $200 million. We raised an eyebrow at this claim, but hey. We doubt the offers were in actual cash dollars, though. [WSJ]
CoinDesk claims it received $50 million in revenue in 2022. It’s unclear where from. Its main income source was events — which are not so huge in the crypto winter. There are a few ads on the site. Staff expansions in the past year, particularly at CoinDesk TV, won’t have been cheap.
CoinDesk has been propped up by DCG since 2016 when Barry Silbert bought the site for $500,000. We understand that CoinDesk was about to go broke when Silbert dived in and rescued it. CoinDesk was still a small crypto blog then, but Silbert took it into the big time just in time for the 2017 bubble.
CoinDesk’s job is to be a PR machine for Silbert’s empire — often quite explicitly. [CoinDesk memo, archive] The only reason to buy CoinDesk would be to make it your PR machine.
Three Arrows Capital founders Zhu Su and Kyle Davies are looking to raise $25 million for a new crypto claims exchange. That is, an exchange for claims against bankrupt crypto companies. 3AC are, of course, experts in going bankrupt in a really big way.
Zhu and Davies were going to name their new thing GTX — a take on FTX because G comes after F. They claimed this was just a temporary name after everyone made fun of them.
The pair are working alongside CoinFLEX founders Mark Lamb and Sudhu Arumugam. CoinFLEX filed for restructuring in the Seychelles in June after it suffered $84 million in losses from a large individual customer — Roger Ver.
GTX will run on CoinFLEX’s software and a legal team will oversee the onboarding of claims for all the recent crypto bankruptcies —including Celsius, Voyager, FTX, and Mt. Gox. Creditors who transfer their claims to GTX will receive credit in a token called USDG. [The Block]
In its pitch deck, GTX estimated there was a $20 billion market for crypto claims, based on the notional value of those claims. “We can dominate the crypto claims market within 2-3 months of go-live.” [WSJ, paywalled; FT, paywalled; pitch deck, archive, PDF]
The pitch deck ends with a splash detailing 3AC and CoinFLEX’s extensive crypto market successes. This fails to mention that both companies went broke — and that 3AC went broke so hard they took out much of crypto all by themselves.
GTX gets full points for audacity, and here’s to Zhu and Davies going to jail.
Amy and Molly White live-tweeted the FTX hearing on Friday, January 20. It was about FTX’s applications to retain various bankruptcy professionals, mainly Sullivan & Cromwell. [Twitter; Twitter, Agenda, PDF]
Judge John Dorsey ruled FTX could continue using Sullivan & Cromwell, despite claims the law firm was too conflicted. [Order, PDF; Motion, PDF]
The US Trustee and the UCC had originally objected to S&C on the grounds the firm failed to make relevant disclosures regarding its prior dealings with FTX. But leading up to the hearing, the parties worked things out, and now the UST and UCC are on board. The only remaining objections came from FTX creditor Warren Winter, with a joinder from FTX creditor Richard Brummond. [Objection, PDF; Joinder, PDF]
In support of Winter’s objection, former FTX (and Ultimate Poker!) lawyer Daniel Friedberg filed a hilariously terrible declaration. Friedberg describes how shocked he was to learn that $8 billion of FTX customer money was missing. After reviewing his “ethical obligations” — a bodily organ hitherto unknown to Mr. Friedberg — he resigned. He tries to imply that S&C took FTX into bankruptcy so they could loot the corpse, helped from the inside by S&C’s former law partner, Ryne Miller. [Declaration, PDF]
Because Friedman filed his declaration late, White followed with an emergency motion to adjourn the hearing, so the court would have more time to chew on it. [Motion, PDF]
S&C’s James Bromely said Sam Bankman-Fried was behind all of this troublemaking. Friedberg’s declaration came hot on the heels of social media posts by SBF attacking the law firm. SBF is living in his parent’s home with an ankle bracelet and Friedberg has been questioned by the FBI. The pair were part of the inner circle that brought down FTX, said Bromely:
“If you are Mr. Bankman Fried or Mr. Friedberg, there is a concern about what is going on and what could happen to them. They can’t throw stones at the US attorney’s office. But they can throw stones at the Debtor’s counsel who are providing information to the prosecutors and the regulators, which is exactly what is happening.”
As far as Friedberg goes, Bromely added: “He’s got a checkered past. It takes a lot of guts for him to put something in writing that says, ‘I was the chief compliance officer at FTX.’”
Judge Dorsey dismissed everything in the Friedberg declaration saying, “It’s full of hearsay, innuendo, speculation, and rumor… certainly not something I would allow to be introduced into evidence in any event.”
FTX CEO John Jay Ray III said in his declaration S&C are not the villains. The villains are being pursued by criminal authorities. [Ray declaration, PDF]
We concur that S&C may be conflicted. But they’re competent to do the job, they’ve already spent 70 days on the case, which new counsel would have to do over, and it’s not like someone else would be cheaper.
The Trustee also wants to appoint an examiner in the case. The examiner motion will be heard on February 6.
A new mycrimes.blog just dropped, with more drafts from Sam’s forthcoming book* If Caroline and CZ and John Ray and Sullivan & Cromwell Did It. SBF claims that FTX US was solvent when he passed it off to the lawyers, Sullivan & Cromwell. John Jay Ray III responds: “This is the problem, he thinks everything is one big honey pot.” [Substack; WSJ]
FTX secretly channeled a $50 million loan to Deltec Bank in the Bahamas, in a deal struck with Deltec chair Jean Chalopin. “Deltec is emerging as a central figure in the scrum of lawyers, banks and unwitting associates FTX pulled into its orbit.” Our regular readers will recognize Deltec as the known banker for Tether, who have occasionally claimed to hold more dollars for Tether than are documented in the entire Bahamas banking system. [Forbes, paywall]
It was obvious to executives and software developers at FTX that financial arrangements between FTX and Alameda were somewhat odd as early as 2020. FTX employees have been leaking documents to the New York Times. [NYT]
CFTC commissioner Christy Goldsmith Romero gave a speech on FTX’s failure and the nature of public trust in crypto firms. She goes in hard, particularly after the professional gatekeepers: “lawyers, accountants, auditors, compliance professionals and other gatekeepers for crypto firms failed customers in their essential duties.” Venture capitalists and pension funds too. She wants Congress to give the CFTC more power over crypto exchanges. [CFTC]
Romero also went after FTX’s venture capital backers on Bloomberg TV: “What kind of due diligence did they conduct? Why did they turn a blind eye to what should have been really flashing red lights?” [Bloomberg]
* c’mon, you know he will
Everyone heard about the huge Fed announcement of an international cryptocurrency bust and went … who the hell is Bitzlato? Some tiny Hong Kong exchange run by some Russian living in Shenzhen? [Press release; order, PDF; affidavit, PDF]
Bitzlato, formerly called ChangeBot, was a small exchange with a peer-to-peer service, similar to LocalBitcoins. Its user base was Russian crooks doing crooked things with fake accounts. Users with valid Know-Your-Customer info would create “drop” accounts which they would then sell to crooks. So Bitzlato could say it had KYC, even if it didn’t do anything.
Bitzlato was not systemic to the crypto economy. But it was important to the Russia-based ransomware economy, and it was the exchange of choice for users of the Hydra darknet market that was busted in April 2022.
The Feds basically enacted Nicholas Weaver and Bruce Schneier’s 2021 plan to take out ransomware: hit the very few exchanges willing to touch such tainted coins. [Slate, 2021]
The fun part of the FBI affidavit is the tales of Bitzlato’s criminal customer service, page 10 onwards:
• On or about December 27, 2017, a user with the username “Dude Weed” wrote to Bitzlato’s customer service portal, stating: “I have a bitcoin wallet in my account on the Hydra site. I also have a wallet here … How do I recharge a Hydra wallet”? The user also provided transaction details. Based on my training and experience, this query reflects the user’s desire to send funds from Bitzlato to Hydra. A Bitzlato representative responded: “Hello dude weed,” apologized for the delay in the transaction, and stated that “The transaction successfully went online.” The Bitzlato representative provided a link to an online blockchain explorer, reflecting a completed Bitcoin transaction whose total amount was then equivalent to approximately $14,600.
• On December 17, 2020, a Bitzlato representative asked a user to provide his identity documents. The user protested, writing, “I don’t quite understand why you need a photo of this card? It’s not mine[.]” In further conversations, the user clarified that “everyone on the site trades with other people’s cards … they often discuss so-called ‘drops.’” The user commented that he had been told to create an account using credentials supplied by an online cryptocurrency training course that he had found on Instagram. The Bitzlato representative asked the user to provide his true identity documents and, rather than terminate that user, said the user could keep trading on Bitzlato.
Image: Cameron Winklevoss on Instagram
I just wrote my first story for Foreign Policy. [Foreign Policy]
After the highs of 2021, cryptocurrency crashed to the ground in 2022. One by one, multiple large crypto firms toppled, dragging many minor firms down along with them in a small-scale replay of the 2008 financial crisis.
Now, another large domino, Barry Silbert’s Digital Currency Group, may be about to topple. The crypto conglomerate had managed to survive a remarkably long time with a relatively clean legal record. But on January 19, Genesis, a major part of DCG, filed for bankruptcy.
The fall of the once-acclaimed DCG could be the final nail in the coffin of crypto’s credibility. It could also lead to a systemic collapse in crypto, as DCG is one of the biggest investors in the space.
A new crypto collapse update is out. This one is on David’s blog. [David Gerard]
Here’s what we cover in this episode:
There’s a huge conflict between the Gemini crypto exchange and the Genesis crypto investment firm over the Gemini Earn product — and what happened to the money.
Fortunately, the SEC has stepped in to clear things up — they’re suing both of them! [Press release; Complaint, PDF; Docket]
The charge is that the Gemini Earn program, which offered retail investors up to 8% return on crypto they lent to Genesis, was an unregistered securities offering. This is because it was really obviously an unregistered securities offering.
Genesis had hitherto only dealt with accredited and institutional investors, which is fine. But starting in February 2021, Gemini Earn gave Genesis access to money from ordinary retail investors. Somehow, this didn’t set off the “Howey test” alarms for anyone at either company.
(Coincidentally, February 2021 is when the GBTC premium dried up. Did someone need money quickly?)
The SEC says: “Both Defendants were integral to the operation and success of the Gemini Earn program.”
Retail customers suffered hugely — they are out $900 million — as Gemini froze withdrawals without warning in November, after Three Arrows Capital (3AC) collapsed in July, then FTX collapsed in November. The SEC has actual harm it can point at.
Gemini terminated the Earn program on January 8, when it pulled the plug on its Master Loan Agreement between Genesis and Gemini.
The SEC is getting out there and just busting unregistered crypto securities now that the government and public are onside.
Here’s Gary Gensler, explaining in a video what the SEC just did in very small words. [Twitter, video]
The SEC’s complaint outlines how Gemini Earn worked.
Genesis was founded in 2018. It marketed its services to institutional and accredited investors — and that was more or less fine.
With Gemini Earn, however, Genesis got into soliciting retail investors, via Gemini — and selling to retail requires companies to file paperwork with the SEC and make important financial disclosures, so the public can make an informed decision about what they are investing in. Of course, neither company bothered with that part.
Earn investors agreed they were sending their cryptos to Genesis. Gemini acted as the agent in the offer. In the first three months of 2022, Gemini received about $2.7 million in agent fees from the Gemini Earn program, according to the complaint.
Gemini Earn took in billions of dollars worth of cryptos — mostly from US retail investors. Both companies widely marketed Gemini Earn by promoting its high interest rates.
By November 16, 2022, when Genesis froze withdrawals, it was holding $900 million in Gemini Earn investors’ cryptos, from 340,000 customers, mostly in the US.
The SEC holds that Gemini Earn is an investment contract, per the Howey Test:
If you want to sell such an offering to retail investors, you have to file the paperwork. Or the SEC can bust you.
The SEC asks that the defendants don’t offer unregistered securities ever again, that they be enjoined from offering Gemini Earn and any similar offering in the future, and they disgorge all ill-gotten gains — that includes interest and all profits associated with Earn — and pay civil penalties.
Most SEC suits never go to trial, they just end in a settlement. There is no settlement as yet.
By the way, investors will likely be able to claim the right of rescission — if you buy something that’s found to be an unregistered security, you can just demand all your money back. Section 12(a)(1) of the Securities Act says “Any person who — (1) offers or sells a security in violation of section 5, … shall be liable, subject to subsection (b), to the person purchasing such security from him”
If the SEC prevails, investors will be able to demand their money back from Gemini as well as from Genesis — the SEC considers both companies were offering Gemini Earn, even as their internal agreement said Gemini was just acting as Genesis’ agent. After all, one of these two companies appears to be solvent.
Former SEC chief of Internet Enforcement John Reed Stark tells us:
An SEC victory would take disgorgement and penalties and perhaps deposit it all in a FAIR fund for investors. The sole priority of the SEC staff filing the action will be to give those investors their money back who hold the $900M of Earn that is now worth nothing. Any remedial steps would typically entail hiring a law firm to create and manage a distribution plan, working feverishly towards that goal of helping investors who incurred losses.
That the SEC seeks disgorgement of profits and penalties to make investors whole is good news for Gemini’s Earn investors. Given that Gemini has the assets to satisfy a judgment, there is cause for some optimism, as opposed to other situations involving bankrupt entities where angry customers are more likely stuck last in line as unsecured creditors.
Tyler Winklevoss of Gemini has responded to the SEC’s action: [Twitter]
It’s disappointing that the @SECGov chose to file an action today as @Gemini and other creditors are working hard together to recover funds. This action does nothing to further our efforts and help Earn users get their assets back. Their behavior is totally counterproductive.
Fortunately, there’s a remedy: the suit demands that Gemini and Genesis give everyone’s money back — $900 million — out of their own pockets, which the Winklevosses are entirely capable of doing because they still sit atop a mountain of bitcoins.
Tyler further pleads that “the Earn program was regulated by the NYDFS and we’ve been in discussions with the SEC about the Earn program for more than 17 months.”
That’s great! Were the SEC discussions along the lines of “you really need to register this stuff before we shut you down”? Perhaps Tyler could clarify.
Also, the SEC complaint notes specifically that New York didn’t regulate anything about how Gemini Earn operated. One of the points of the SEC complaint is that there was no other regulator.
The Daily Beast spoke to former Gemini employees about the Earn program. They had boggled at the terms and conditions — deposits were uninsured and crypto was lent out on an unsecured basis, meaning Genesis wasn’t putting up any collateral. “We were like, ‘Holy sh-t, are you f-ing kidding me?’” [Daily Beast]
The SEC had previously gone after BlockFi for failing to register its crypto-lending program, and they stopped Coinbase from launching its crypto-lending program, so they are getting serious about ending this sort of nonsense.
Current unconfirmed rumor: Gemini will get only this SEC charge and will settle with a fine — and disgorgement. But the Department of Justice and the US Attorney’s Office for the Eastern District of New York are coming quickly for Genesis and its parent company Digital Currency Group (DCG). [Twitter, archive]
Genesis owes more than $3 billion to creditors, according to sources who spoke to the Financial Times. DCG is looking for silverware to sell to plug the gap. DCG has a huge venture portfolio it’s looking at dipping into. [FT, archive]
DCG had been trying to raise capital — about $1 billion — after 3AC blew up Genesis’ books. But it couldn’t get any takers. So now DCG’s only option is to try to sell what it’s got.
DCG’s portfolio includes 200 crypto companies — and most of them are illiquid because crypto is a losing business right now.
Some direct customers of Genesis — not Gemini Earn customers, but Genesis’ accredited and institutional customers — are claiming that Genesis lied to them to get them to reinvest after they pulled out: [Protos]
He says he was lured back in by reassuring emails from Genesis salespeople and the delivery of monthly balance sheets that seemed to show in late summer and early fall that the firm’s financial position was stable. The creditor now says those financial documents were inaccurate and hid the firm’s growing financial problems.
David went on Blind Spot Markets Live on Friday morning. The transcript is up now. Izabella Kaminska talked to David about FTX, Nexo, Genesis vs. Gemini, and US banking for crypto companies. This episode was sponsored by Big Nocoin, the Federal Reserve, and the Pentagon. [The Blind Spot]
Image: They fired 10% of their staff and went on tour. Instagram.
We have a new post out. This one is on David’s blog. [David Gerard]
Cameron Winklevoss publishes another open letter — to DCG shareholders. Barry Silbert responds, sort of.
CeFi lending firm Nexo gets raided in Bulgaria. Voyager receives the go-ahead to sell $1 billion in customer assets to Binance US.
SBF is blogging now. He really needs a copy of Dan Lyon’s new book STFU.
Metropolitan Bank jumps ship — they are out of the crypto business entirely — and Signature Bank is doing just fine.
David’s on Blind Spots Markets Live tomorrow, Friday January 13 at 11 a.m. UTC. It’s basically a group text chat. He’ll be talking (typing) about the crypto markets trash fire. You need to login to a website called Coodash. Sign up here.
Oh, what a tangled web we weave, when first we practice to deceive!
— Sir Walter Scott, 1808
The Department of Justice’s Eastern District of New York and the SEC are looking into money flows between Barry Silbert’s Digital Currency Group and its lending subsidiary Genesis, and what investors were told about the transfers. [Bloomberg]
DCG has been playing all the same games as the rest of crypto — trying to create the illusion of money where there is no money, to keep the party going a little bit longer.
Genesis should have declared insolvency in June when Three Arrows Capital (3AC) blew a $2.4 billion hole in its accounts — but DCG purchased 3AC’s defaulted loan from Genesis and financed the purchase with a promissory note of $1.1 billion, to be paid back over 10 years.
That is: DCG and Genesis counted an internal IOU as money, to claim Genesis was still solvent.
The catch with the promissory note is that if the 10-year loan is “callable” — meaning DCG would have to pay Genesis the full amount immediately in the event of a liquidation or bankruptcy — then it could give Genesis creditors a claim on DCG itself, and take all of DCG down with it.
“The Promissory Note is like a noose wrapped tight around the neck of DCG. If Genesis goes over the cliff, it drags DCG with it,” said Ram Ahluwalia, the co-founder of Lumida, an investment advisory firm that focuses on crypto. [Twitter]
In a letter to shareholders in November, Silbert disclosed that DCG borrowed another $575 million from Genesis — due in May 2023. The funds were used for “investment opportunities” and buying back shares of DCG stock from outside investors. [Twitter]
A creditor committee that includes crypto exchange Gemini presented Genesis and DCG with a plan to recover the assets. Silbert had until January 8 to respond. Cameron Winklevoss threatened that “time is running out.” [Twitter; Twitter]
We think Gemini will try to force Genesis into involuntary chapter 11 — they just need three creditors to file a petition with the bankruptcy court. The judge then holds a hearing and decides if the matter will go through. [11 U.S. Code, section 303]
As is usual in crypto, DCG screwed itself by greed. DCG also owns Grayscale, which operates the Grayscale Bitcoin Trust (GBTC) — DCG’s cash cow. Grayscale collects a whopping 2% annual fee on its assets under management — currently, 633,000 BTC.
GBTC traded above the face value of the bitcoins in the fund up to early 2021 — then it dropped below net asset value (NAV).
Genesis took the crypto it got from Gemini Earn customers and lent those funds out to institutional investors and crypto hedge funds — such as Three Arrows Capital.
3AC was one of the biggest investors in GBTC, taking advantage of a lucrative arbitrage opportunity. They would borrow bitcoins from Genesis and swap those for GBTC shares at NAV from Grayscale. After a six-month lockup, 3AC could dump the shares on retail for a handsome profit. Rinse and repeat, and when GBTC was trading at 20% above NAV, they could make a 40% profit a year that way
This GBTC arb played a big role in keeping the price of bitcoin above water in 2020, setting the stage for the 2021 bitcoin bubble.
At the end of 2020, 3AC was the largest holder of GBTC with a position worth $1 billion at the time. After February 2021, the GBTC premium dried up, and GBTC began trading on secondary markets at a steep discount to NAV.
3AC had hoped the discount would be reversed when the SEC approved Grayscale converting its bitcoin trust to an ETF. But the SEC rejected the application, and the GBTC discount continued to widen. [Bloomberg]
When 3AC defaulted on its $2.4 billion loan to Genesis, Genesis seized the collateral backing the loan, including 17.4 million shares of GBTC, and filed a $1.1 billion claim against 3AC — a claim that is now on DCG’s books. [Coindesk; Affidavit Russell Crumpler, PDF]
Gemini partnered with Genesis for their Earn program. After Genesis lost $175 million in FTX in November, it froze withdrawals. Gemini Earn froze withdrawals in turn. Now Gemini Earn customers are out $900 million.
In an effort to get those funds back, three Gemini Earn customers are seeking class arbitration against Genesis and DCG.
Gemini and Genesis had a “master digital asset loan agreement,” which Gemini Earn customers entered into — when you became an Earn customer, you agreed you were lending money to Genesis.
The complaint alleges that Genesis breached this agreement by hiding its insolvency through a “sham transaction,” whereby DCG “bought” the right to collect a $2.3 billion debt owed to Genesis by 3AC with the aforementioned $1.1 billion promissory note. The plaintiffs also claim that the Genesis loan agreement created an unregistered sale of securities. [Press release; Complaint, PDF; Master Digital Asset Loan Agreement]
The master loan agreement states that: “Each Party represents and warrants that it is not insolvent and is not subject to any bankruptcy or insolvency proceedings under any applicable laws.”
This is why Silbert keeps insisting that Genesis has a liquidity issue and not a solvency issue — even as those are functionally identical in crypto. If Genesis was found to be insolvent and took customer funds in, it would be in violation of that contract. (As well as promptly calling that promissory note from DCG.)
Amidst all of this, Larry Summers, the former US Treasury Secretary and World Bank Chief Economist, has quietly left DCG — going so far as to remove all mention of DCG from his own website. Summers joined DCG as a senior advisor in 2016, a year after the company’s founding. [Protos]
Moody’s has downgraded Silvergate Bank’s long-term deposit rating to Ba1 from Baa2 after the crypto bank announced that its customers — who are almost entirely crypto firms now — withdrew $8 billion in deposits in Q4 2022: [Moody’s]
The negative outlook reflects Moody’s view that the bank’s profitability over the near term will be weak along with the risk of further declines in deposits from crypto currency centric firms further pressuring profitability. In addition, the negative outlook reflects the increasing regulatory and legal risks that the firm is currently facing.
Silvergate’s other customers are worried about the bank’s solvency and about the regulatory heat coming its way. Silvergate was key to FTX/Alameda having access to actual money — they helped funnel money to FTX from accounts in the name of Alameda and of Alameda’s dubious subsidiary, North Dimensions.
If Silvergate are found to be complicit in FTX’s fraud, they will be fined. But if there was money laundering and sanctions busting, they could be shut down. They will at the very least be fined. We would guess some individuals will also get a bar from being bankers. Here’s a list of enforcement actions on Federal Reserve member banks. [Federal Reserve]
Silvergate’s 8-K SEC filings this year are full of bad news. We noted Silvergate’s layoffs and writing off its Diem investment last time. [SEC 8-K; SEC 8-K; SEC 10-Q]
After a series of knock-down-drag-out filings — and the hilarious revelations of how FTX Digital Markets (FTX DM) was functionally Sam Bankman-Fried’s Bahamas partying fund — the US and Bahamas bankruptcies are working together now. John Jay Ray III and his team met in Miami with the joint provisional liquidators (JPLs) handling the FTX DM liquidation, and they’ve reached an agreement. [press release; agreement, PDF]
The Bahamas JPLs will handle everything to do with FTX DM, and the US administrators will handle everything to do with all the other FTX companies. The JPLs will handle the Bahamas real estate and the cryptos being held by the Securities Commission of the Bahamas. (This doesn’t mean that the Bahamas will handle the disbursement of the crypto they have under their control — only that FTX is fine with them holding the funds for now.) The parties will share information. FTX DM’s chapter 15 foreign entity bankruptcy in the SDNY will continue.
We suspect it was clear the US side would win in court, and the Bahamas liquidators realized they weren’t being paid enough to damage their reputations this way. The agreement is subject to approval by the courts in the US and the Bahamas, but it would be surprising for them not to allow it.
The Department of Justice has put out a call for victims of “Samuel Bankman-Fried, a/k/a ‘SBF.’” That’s his rapper name now. [Justice]
Huobi has always been a dodgy crypto exchange — even before it was run by Justin Sun from Tron. Huobi has $2.6 billion in reserves, and 40% of that is its own HT token. If you don’t count its own internal supermarket loyalty card points, Huobi is insolvent. [Twitter]
Huobi is desperately searching its pockets for spare change. On December 30, Wu Blockchain reported that Huobi was canceling year-end bonuses and planning to slash half its staff of 1,200 people and cut the salaries of senior employees. Sun denied the rumors. [Twitter; South China Morning Post; Twitter]
Other unofficial reports from small accounts on Twitter said that Huobi was offering to pay its employees in stablecoins — USDC and tethers — instead of actual-money yuan. If they objected, they would lose their jobs. [Twitter]
Employees revolted at being paid in magic beans — so Sun cut off internal communications. On January 4, Bitrun said that “all communication and feedback channels with employees” had been blocked. [Twitter]
Here’s the unofficial details on how Huobi is treating its employees. Those who quit because they’re getting paid in tethers get no severance pay either. This is what a doomed company does. [Twitter]
After initially denying Huobi was cutting staff, Sun finally admitted that Huobi was indeed laying off 20% of its employees in the first quarter of 2023 — after rumors swirled that half of all employees would be let go. [FT]
Huobi users rushed to get their funds off of the exchange. Blockchain analytics platform Nansen noted a wave of withdrawals on January 5 and 6. Following the withdrawals, Peckshield reported a wallet associated with Tron moved $100 million in stablecoins — USDC and tethers — into Huobi. [Twitter, Twitter]
In a lengthy Twitter thread, Sun assures you that your funds are totally safe. We fully expect the exchange to blow up at any moment. [Twitter]
US prosecutors for the Western District of Washington in Seattle are sending subpoenas to hedge funds for records of their dealings with Binance. John Ghose, formerly a Justice Department prosecutor who specialized in crypto and now a lawyer at compliance vendor VeraSafe, thinks this is about money laundering. [Washington Post]
We noted previously that “BUSD” on Binance is not the BUSD issued by Paxos, which claims to be backed by actual dollars in Silvergate Bank. Binance “BUSD” is a stablecoin-of-a stablecoin, maintained internally. This is the sort of arrangement that’s fine until it isn’t.
It turns out that Binance has been issuing uncollateralised “BUSD” on its own BNB blockchain. Data Finnovation looked at the Ethereum and BNB blockchains and saw that Binance has a history of minting fake “BUSD” internally on BNB. At some points in 2021, there were $500 million to $1 billion of fake dollars circulating on BNB. They’re caught up now, though — so that’s all fine, right? [Medium]
Dirty Bubble thinks Binance US isn’t meaningfully separate from Binance.com, if you look at how the cryptos flow. But that shouldn’t be news to anyone here. [Dirty Bubble]
Reuters is still on the Binance beat. Here’s a special report on Binance’s accounts, as far as can be told. Reuters calls Binance’s books a “black box.” Private companies don’t have to disclose their financials, especially if they’re operating outside all effective regulation — but even Binance’s former CFO, Wei Zhou, didn’t have full access to the company’s accounting records in the three years he was there. We’ve noted previously how regulators have a heck of a time getting the most basic information out of Binance. [Reuters]
John Hyatt from Forbes notes how Binance is spending tens or hundreds of thousands of dollars sponsoring Politico’s Playbook newsletter to reach politicians and bureaucrats. Worked great for FTX! [Twitter thread]
Discussions of crime on the blockchain hardly ever point out that almost all of what goes on in DeFi was always just straight-up illegal under US law.
Pretty much every token was always an unregistered security. The sort of market manipulations that are standard practice in the DeFi trash fire have been illegal under Dodd-Frank since 2010. And that’s before we get to the rugpulls, hacks, and “hacks.”
The authorities are finally moving in. Every DeFi trader should consider themselves on notice.
Hotshot DeFi trader Avraham “Avi” Eisenberg was arrested in Puerto Rico on December 27 on a Department of Justice (Southern District of New York) indictment for commodities fraud and commodities manipulation in the $110 million trade that took out Mango Markets. [indictment, PDF; case docket]
Mango Markets is a decentralized exchange that runs on Solana. Users can lend, borrow, swap, and trade on margin. The exchange is overseen by a DAO, made up of people who hold MNGO — the native token of the exchange.
On October 11, someone drained the project of $110 million by manipulating the platform’s price oracle. After others had traced it to him, Avi Eisenberg came forward and explained the trade.
Eisenberg sold MNGO perpetual futures from one account he controlled to another account also under his control. He then bought large amounts of MNGO, which had the effect of increasing the value of his large holding of MNGO perpetuals. He then borrowed against these holdings and withdrew $110 million in assorted cryptocurrencies.
This also rendered the Mango platform insolvent. Eisenberg himself explained that the insurance fund in place was “insufficient to cover all liquidations.” He gave back some of his trading profits. [Twitter; Bloomberg]
Eisenberg tweeted: [Twitter, archive]
I believe all of our actions were legal open market actions, using the protocol as designed, even if the development team did not fully anticipate all the consequences of setting parameters the way they are.
Eisenberg’s lawyer will likely explain his client’s erroneous legal reasoning to him.
Eisenberg wasn’t just arrested, he was denied bail as a flight risk — he has significant ties outside the US, he already left the US for two months just after the alleged offense, he likely has crypto stashed away somewhere, the charge carries a heavy penalty, and his background could not be checked. (Compare Sam Bankman-Fried’s release on bail.) [Order of detention pending trial, PDF]
It’s not clear why prosecutors went after Eisenberg in particular. We’d guess the CFTC and DoJ were looking for someone to make an example of. The bit where Eisenberg tweeted a complete confession probably helped, much as SBF’s confession tour of the press helped get him indicted.
What Eisenberg did to Mango was not remarkable at all. DeFi traders pull this nonsense all the time. Perhaps you don’t think DeFi trading shenanigans should be crimes, and that’s nice for you that you think that.
As Avi tweeted on October 19: “What are you gonna do, arrest me?” [Twitter, archive]
Barely a week into 2023, and we’ve already got another post for you. This one is on David’s blog. [David Gerard]
We’ve reached the stage in the crypto collapse where everyone is pointing at someone else. Gemini is pointing at Genesis and DCG. Three Arrows Capital is also pointing at DCG.
Also in this update:
Image: We’re all trying to find the guy who did this, but in stereo.
i wonder how many times someone’s managed to hack in to a bitcoin exchange and found there wasn’t any money there and just left
— Boxturret, SomethingAwful
There’s a turf war going on between the FTX Digital Markets (FTX DM) liquidation in the Bahamas and the FTX Trading Ltd bankruptcy proceedings in the U.S. We wrote about it earlier, along with some of the fishy stuff going on in the Bahamas.
The Securities Commission of the Bahamas (SCB) filed their liquidation for FTX DM, a small subsidiary of FTX Trading, just one day before John Jay Ray III filed for Chapter 11 on behalf of FTX. Sam Bankman-Fried helped the SCB get in before Ray by waiting until the wee hours of November 11 to hand control over to Ray. Now the SCB feels it is entitled to FTX assets so that the liquidators can distribute them to creditors of FTX DM — whoever those might eventually turn out to be. [PwC]
The Bahamas side seems to be working on the theory that FTX DM was the operating center of the FTX companies. But FTX DM wasn’t even incorporated until July 22, 2021. It lay dormant for nearly a year and didn’t start operating in any manner until May 13, 2022. Note that’s a few days after the Terra-Luna collapse — FTX and Alameda were already utterly screwed by the time FTX DM was used for anything, suggesting that that may have been part of SBF’s reason to activate it.
The SCB pissed off Ray even further when, on December 29, they valued the FTX funds they seized late in the night on November 11 — in violation of the Chapter 11 stay — at $3.5 billion. This is mostly a pile of FTT tokens, whose market value is way less than $3.5 billion. FTX says the assets were worth just $296 million — “assuming the entire amount of FTT could be sold at spot prices at the time.” [SCB press release, PDF; FTX press release]
Christina Rolle, SCB executive director, said the Commission sought control of the crypto held by FTX after SBF and FTX cofounder Gary Wang told them about “hacking attempts overnight” — a perfect justification to seize the assets. Her affidavit, filed with the Supreme Court of the Bahamas, confirmed that SBF and Wang were behind the transfers on November 11 and 12. [Affidavit of Christina R. Rolle, PDF]
U.S. Federal prosecutors are looking into the $370 million hack — or “hack.” [Bloomberg]
Rolle also said that Tether gave the SCB 46 million tethers (USDT). SCB had asked Tether to freeze some USDT held by FTX DM or FTX Trading Ltd (it’s not clear which entity), then create 46 million fresh USDT and send it to SCB:
76. Additionally, the Commission sent instructions for the transfer of approximately US $46 million Tether tokens to a secured wallet under the control of the Commission. These Tether tokens were not transferred to the Commission’s wallet but, after a meeting with Tether representatives, the Commission agreed that Tether, in light of the Chapter 11 proceedings, would maintain a freeze over the Tether tokens until ownership of the tokens is resolved.
This sounded odd to us — a “meeting with Tether representatives”? Coincidentally, the Bahamas Attorney General, Ryan Pinder, used to work for Deltec Bank, the bank associated with Tether.
The SCB then put out a press release on January 3 accusing Ray of “material misstatements” and having a “cavalier attitude to the truth.” They claim Ray is “promoting mistrust of public institutions in the Bahamas.” Well, yes, he is. [LinkedIn]
The joint provisional liquidators (JPLs) handling the FTX DM liquidation in the Bahamas have been pushing for access to substantial amounts of FTX data. Ray and his lawyers are working to make sure that never happens. Ray’s team has submitted piles of evidence pointing to the Bahamas government acting in bad faith.
FTX has filed an incendiary objection to the JPLs’ motion to compel the turnover of electronic records. This is a 37-page must-read rant: [FTX objection, PDF]
10. Finally, the stunning press release issued late yesterday, on December 29, 2022, by the Commission, along with certain related materials, is a game changer. The press release (and the supporting affidavit of the Executive Director of the Commission) boldly admits that the Commission violated the automatic stay in taking certain of the Debtors’ digital assets and then recklessly values the assets taken at $3.5 billion. As described in more detail below, yesterday’s disclosures demonstrate conclusively that the JPLs and the Commission are cooperating closely to do an end run around this Court and chapter 11. In a situation where maximizing recoveries for creditors should be the primary goal of all concerned, one can only wonder why.
We expect Ray isn’t wondering at all. He believes that “an elaborate and intentional game is being played” by the JPLs, the SCB, and the Bahamas government. As FTX says in their objection: “The fact that the founders left the Debtors more closely resembling a crime scene than an operating business cannot be ignored.”
FTX lawyer James Bromely filed a 675-page declaration, presenting exhibits to support their case. FTX financial advisor Edgar Mosley at Alvarez & Marsal also filed a 185-page declaration loaded with exhibits. [Bromely declaration, PDF; Mosley declaration, PDF]
The Mosley declaration details what business FTX Digital Markets actually did. FTX DM seems to have been Sam’s local partying fund:
17. The Debtors’ records reflect that $15.4 million for “Hotels & Accommodation” was paid primarily to three hotels in The Bahamas: the Albany ($5.8 million), the Grand Hyatt ($3.6 million), and the Rosewood ($807,000). The $6.9 million for “Meals & Entertainment” was paid primarily to Hyatt Services Caribbean ($1.4 million), Six Stars Catering ($974,000), and to three other catering and delivery services ($2.3 million in total).
18. The Debtors’ records reflect that in the first three quarters of 2022, FTX DM had total operating expenses of approximately $73 million, including over $40 million labeled “other expenses.”
19. The Debtors’ records reflect that FTX DM’s 2022 income statements show that FTX DM made no disbursements in connection with transaction, engineering or product expenses.
The newly formed Unsecured Creditors’ Committee in the U.S. chapter 11 also objects to the Bahamas motion. “These requests are sweeping and appear to be based on the faulty theory advanced by the JPLs that FTX DM was actually the nerve center of the FTX enterprise.” [Committee objection, PDF]
There was a scheduling conference in the Delaware FTX bankruptcy hearing on January 4. This wasn’t expected to be interesting — but Department of Justice Attorney Seth Shapiro made a surprise appearance over Zoom to let Judge Michael Dorsey know that the DoJ has been seizing assets.
SBF held a 7.6% stake in day trading brokerage Robinhood. He admitted to borrowing from Alameda in April and May to purchase the shares, in an Antigua court affidavit shortly before his arrest. [CoinDesk; affidavit, PDF]
SBF pledged the Robinhood shares to multiple companies as loan collateral. Who was getting the shares in the bankruptcy was a point of some contention. Now the DoJ has seized the shares.
Various bank accounts connected to the FTX Digital Markets (Bahamas) case and the JPLs motions for provisional relief, and the money in them, have also been seized. “We didn’t just want the court to read that in the papers filed by Silvergate and Moonstone” (FTX’s banks), said Shapiro. The DoJ also seized some cryptocurrency, though Shapiro didn’t say who from — the banks? The DoJ is working things out with the parties.
Shapiro told Judge Dorsey that the bank accounts had been seized with a view to “a criminal or asset forfeiture proceeding at some point down the line, in the Southern District of New York, to which entities could file claims.”
Shapiro said: “We either believe that these assets are not the property of the bankruptcy estate or that they fall within the exceptions under sections 362(b)(1) and/or (b)(4) of the bankruptcy code.” 362(b) is about criminal proceedings. [LII]
The Bahamas JPLs, who were also hoping for the contents of these bank accounts, are in touch with the DoJ.
Sam Bankman-Fried stood before U.S. District Judge Lewis A. Kaplan on January 3 and pleaded not guilty to all eight counts against him. SBF actually flew to New York for his arraignment and had to squeeze through a mob of reporters to enter the courthouse. The judge set a tentative trial date of October 2. [Twitter; Twitter thread; NYT]
Sam thinks he’s too smart, rich, and pretty to go to jail. He just needs to explain things properly to the people in charge, and it’ll all be fine.
SBF’s not-guilty plea doesn’t necessarily mean a trial will happen. SBF and his lawyer Mark Cohen are likely just buying time so they can negotiate a better deal with the prosecutors. We very much doubt the case will go to trial, or that Sam’s parents would be able to foot the legal bill if it did.
More funds mysteriously moved out of Alameda wallets on December 27, mainly illiquid altcoins being swapped for ETH and BTC. Over $1 million in funds were sent through crypto mixers, according to crypto intelligence firm Arkham. [Twitter; Decrypt]
This isn’t the work of a liquidator. Sam says it wasn’t him, even though Sam, FTX co-founder Gary Wang, and FTX director of engineering Nishad Singh were the only ones who had access to the keys. Reddit user Settless notes that SBF had previously claimed to own these addresses: “The pattern is similar — the wallet receives funds and swaps them via no-KYC exchange to launder the funds.” [Twitter; Reddit]
The U.S. isn’t happy about this movement of crypto. During SBF’s arraignment in Manhattan, the prosecutors asked the court to add a new condition to the bond: that Sam be prohibited from accessing or transferring any FTX or Alameda assets. Judge Kaplan agreed.
Molly Crane-Newman from the NY Daily News said: “SBF became animated when prosecutors successfully requested that the judge prohibit him from accessing or transferring FTX assets — furiously writing notes to his attorneys on a legal pad and pointing to them with a biro.” [Twitter]
The judge also agreed to the redaction of names and addresses of Sam’s two additional bail signers — who he may not have actually found yet. The press has until January 12 to file any objections to this. Matthew Russell Lee of Inner City Press has already filed an application to unseal the names. [Motion, PDF; Twitter; Application to Unseal]
Two of SBF’s associates, Caroline Ellison and Gary Wang, have already pleaded guilty in the hopes of getting a lesser sentence. John Reed Stark ordered and posted their plea agreements and hearing transcripts. [LinkedIn; Ellison plea, PDF; Ellison agreement, PDF; Wang plea, PDF; Wang agreement, PDF]
* except all the things he may possibly, hypothetically, have done wrong
North Dimension, the company that FTX customers were unknowingly sending their actual U.S. dollars to, was a fake online electronics retailer. North Dimension has two accounts at Silvergate Bank. [archived website; NBC News]
The assorted shenanigans with FTX likely explain why Silvergate Bank (NASDAQ: SI) has 54% of its shares sold short. Smart investors know how this will end. [Fintel]
John Reed Stark discusses FTX investors getting hosed on CNBC Squawkbox. [YouTube]
“Beyond Blame: The philosophy of personal responsibility has ruined criminal justice and economic policy. It’s time to move past blame” — by Barbara H. Fried. Now, you might say that if Sam’s circumstances are to blame for his apparent crimes, then Barbara happens to be one of those circumstances. [Boston Review, 2013]
Someone made an NFT with actual artistic value. We’ve used it as the feature image for this article. [OpenSea]
It’s time to look into our crystal ball! David Gerard and I wrote up a prediction piece. This one is over on David’s blog. [David Gerard]
With all these gutted crypto buyers, there are plenty of convenient entrails for divination just lying around. So it’s time to channel our inner Maren Altman and see what the blockchain tells us will happen in 2023!
Our 2022 predictions were right about almost everything — except when we underestimated the power of human stupidity.
* within acceptable margins of error
The entire industry is Wile E Coyote and they don’t want to look down because if they don’t look down gravity won’t acknowledge they are standing on the clear blue sky.
Patrick McKenzie
How did Sam Bankman-Fried get out on $250 million bail with only his parent’s $4 million Palo Alto house put up as security? A lot of people — including lawyers! — are confused by this.
The short answer is that federal court, unlike state courts, defaults to the presumption of release.
Sam was released to stay with his parents on his own personal recognizance — which is little more than a promise that he’ll show up in court again. There’s no financial obligation. The terms of Sam’s bond initially required the signatures of Sam and his parents — Barbara Fried and Joseph Bankman — for his initial release on December 22. [Bail disposition, PDF; Appearance bond, PDF]
The idea of bail is to make sure that the accused will show up in court. In the federal court system, the Bail Reform Act of 1984 says that unless someone is a flight risk, they should get bail — and the court has great leeway in setting conditions.
The judge was reasonably sure that SBF wasn’t a flight risk. This was his first arrest, he wasn’t accused of a violent crime, he was a publicly-known person, and he complied with extradition. He did have to give up his passport, though. He can’t leave Palo Alto other than to show up in court in New York.
Bail works completely differently for federal white-collar defendants than for poor people accused of crimes in a state court — where bail can be arbitrary without regard to ability to pay, and is often punitive and used to try to coerce the defendant into pleading guilty. This is the sort of bail most people will have heard about, and that seems to be the source of the confusion.
Compare Reggie Fowler, Bitfinex/Tether’s money man in the U.S. The government pushed hard to have Fowler held as a flight risk. But the judge let Fowler out on a $5 million personal recognizance bond, and he hasn’t flown yet — though his sentencing has been delayed to March. In SBF’s case, federal prosecutors weren’t even pushing to hold him.
Many are also wondering why SBF’s parents did not have to come up with 10% of the bail, or $25 million, for the bond. This is also a misconception about state versus federal bail — where the convention is that you can pay a bail bondsman a nonrefundable 10% of your bail and he’ll put up the rest. Again, this is not at all a requirement at the federal level.
While Sam and his parents didn’t have to put any money down, it’s another story if Sam disappears. Sam’s parents’ home could be seized and the government could hold the bond co-signers liable for the full amount of the bond — which Sam’s parents obviously won’t be able to pay.
In SBF’s bail is a provision that by January 5, he has to find two wealthy friends, one of whom must be a non-family member, to put up surety — they need to sign bonds in lesser amounts “to be agreed to.” But if Sam can’t find anyone else to sign, it’s not clear how concerned the court will be, as long as Sam doesn’t flee and doesn’t violate other bail conditions. Sam’s parents have until January 12 to post the equity interest in their home.
The house is technically owned by Stanford University — the original Stanford land grant said that the land could not be sold. Professors buy a multi-decade lease on houses on campus, and Bankman and Fried put up their interest in that lease as security for the bail. This does not mean that Stanford is putting up Sam’s bail, as some have been claiming.
Ken White, better known as Popehat, a criminal lawyer in Los Angeles, was surprised that the court agreed to let Sam out on bail. Is the prospect of bankrupting his parents enough to keep Sam from misbehaving? “Personally, he strikes me as a man-child sociopath unlikely to be deterred by the complete destruction of his family.”[Serious Trouble]
Caroline Ellison and Gary Wang had their plea hearings on December 19. The hearings weren’t open to the public. Bloomberg reporters went and got the transcript from the court. (You have to go to the court physically.) Ellison and Wang both said they acted as directed by Sam Bankman-Fried, and they knew what they were doing was wrong. [Bloomberg]
Ronnie Abrams, the Southern District of New York judge who was overseeing the SBF case, has stepped down: “It has come to the Court’s attention that the law firm of Davis Polk & Wardwell LLP, at which my husband is a partner, advised FTX in 2021, as well as represented parties that may be adverse to FTX and Defendant Bankman-Fried.” [Bloomberg]
SBF appears to have pledged the same shares in day-trader brokerage Robinhood as collateral for multiple loans. There are now four jackals circling the corpse: BlockFi, FTX creditor Yonathan Ben Shimon, FTX led by John Jay Ray, and SBF himself, who has mounting legal bills. FTX has asked the court to freeze the shares until the issue is sorted out. [Doc 291, PDF]
SBF hasn’t posted to Twitter since December 12. But he’s still using Twitter, and just followed Dogecoin co-creator, Billy Markus. [Reddit]
The collapse of FTX had systemic effects on crypto. Basically, everyone was just using FTX as their bank.
Didier J. Mary follows crypto-colonialism, where cryptocurrency missionaries try to inveigle themselves into poor countries — now that America is sick of crypto. Smart but poor people in Africa, wanting an opportunity, thought crypto might work to help them get ahead. The usual flurry of crypto-trader academies, masterclasses, and hype followed. Bank the unbanked!
A huge number of these African enterprises kept their cryptos at FTX — the blockchain contingent at the World Economic Forum promoted FTX in particular. That’s all gone now, and everyone’s wrecked. This post is in French but is very readable with a translator. [LinkedIn, in French]
Sam Bankman-Fried ended up putting $100 million into Elon Musk’s purchase of Twitter. John Ray will definitely be calling to get that back. [Semafor]
Brendan Greeley from the Financial Times has locked down his Twitter in these post-Musk times, but in 2018 he gave us “Greeley’s First Law of Capitalism: Any industry that can afford stadium naming rights needs more aggressive regulation.” [Twitter]
Even Zhu Su from Three Arrows Capital (3AC) was calling out Alameda in 2019. [Twitter, archive]
As you sit around the Christmas table with the family, don’t forget to ask that relative how their “bot-coins” are going. Merry Christmas, and don’t let the buttcoins bite.
Feature image: This terrible picture is from a 2021 FTX Christmas tweet, in which Santa Sam takes treats out of the stockings and sends them to Alameda. [Twitter]
We just posted our latest coverage on the FTX saga. This one is on David’s blog. [David Gerard]
SBF is back on US soil, after being escorted by the FBI from the Bahamas to NY, and yes, he is free on bail. His parent’s secured their Palo Alto home on a $250 million personal recognizance bond. Their home is only worth a fraction of that.
SBF’s friends Caroline Ellison and Gary Wang have been charged as well, but they’ve ratted Sam out to save themselves.
Expect more superseding indictments to come. The DoJ is coming down fast and hard on FTX.
The entire game in crypto right now is pretending you’re solvent when you’re not. We’ve put together a list of clever tricks that crypto firms are currently employing to do this.
due to a mistake in the internal reporting system, it didn’t tell him that he’d taken all the customers’ money and given it to his hedge fund to gamble with
— Qwertycoatl on SomethingAwful
Binance is broke. It’s got the same problem as the rest of crypto — the assets are imaginary, but the liabilities are real.
Remember the 2 billion BUSD bailout fund for distressed crypto enterprises that Binance announced in November? Bitfinex’ed suggested it was for a hole in Binance’s accounts — and now we’re seeing that Binance is sure behaving like there’s a huge hole in their books.
But Binance got an audit! Well, not an audit as such. But it was done by accountants who sometimes audit other things!
The “proof of reserves,” issued by Paris-based accounting firm Mazars, specifically disclaims being anything meaningful. But it makes sure to use the word “proof.”
The report didn’t address any of the tricky bits — it didn’t include non-crypto liabilities, it didn’t assess the effectiveness of internal financial controls, and it didn’t actually vouch for the numbers. Michael Burry: “The audit is essentially meaningless.” [Mazars, archive; WSJ; Twitter, archive]
Mazars has been issuing these “proofs of reserves” for Crypto.com and Kucoin as well. But now Mazars has abruptly halted all work for crypto firms — and scrubbed all mention of such work from its website. This is Mazars running like hell to get as far away from the bomb as possible before it goes off. [Bloomberg]
Meanwhile, users have been taking their cryptos off Binance and going home. Binance outflows hit $6 billion in the week Mazars halted its work for crypto. [FT]
Binance cut off USDC withdrawals again, claiming a “wallet upgrade.” It just looks a bit like a “wallet inspector.” [Twitter]
CZ went on CNBC Squawk Box to reassure everyone that everything is fine … though he didn’t seem as at ease as he usually does:
CZ: “We are financially okay.”
Rebecca Quick: “Can you have a 2.1 billion withdrawal?”
CZ: “We will let our lawyers handle that.”
CZ was asked why he wouldn’t engage a Big Four auditor to pick up where Mazars left off. CZ said most of these big firms “don’t even know how to audit crypto exchanges.” Andrew Ross Sorkin then pointed out that Coinbase has a Big Four auditor, Deloitte. Quick rolls her eyes at the end of CZ’s stumbling explanation (0:26 in the Twitter link). [YouTube; Twitter]
When FTX bought out Binance’s share in the company, Binance got paid $2.1 billion in funny money. CZ told Squawk Box that “it was all in FTT tokens, which are now worthless.” [Twitter]
70% of Binance’s reserves are in BUSD, Tether, and BNB — the last of which is their internal exchange token, akin to supermarket loyalty card points, in the style of FTX’s FTT.
The BNB token has crashed in the past week, from $290 to $240, according to Coingecko.
Keep in mind that BUSD on Binance is internal magic beans, and absolutely not the same as Paxos dollar-backed BUSD. If Binance thinks it could get away with cashing in the bridged BUSD at Paxos, that’s $2 billion of actual US dollars Binance could secure for itself.
BUSD on Binance is on their own BNB blockchain, formerly known as Binance Smart Chain — a very hacked-up fork of the Geth software for Ethereum. The idea is to have a platform that runs the Ethereum Virtual Machine, lets you rug pull, and so on. This “blockchain” features transactions that seem to parachute assets into the system from space with no verifiable history. Data Finnovation digs into the weird bits. “It’s probably not fair to call this a ‘blockchain’ anymore.” [Twitter, archive]
And there’s still no verifiable evidence that tethers can actually be cashed in for dollars — even if you’re Binance.
Confidence men are called that because they can say the most outlandish things and not bat an eye. CZ has mostly come across in media as fundamentally being on the ball.
But remember that Sam Bankman-Fried projected being smart as well — until we got a look inside FTX, and saw how incredibly stupid every single smart guy in FTX really was.
After Reuters published multiple reports of money laundering at Binance — including Binance letting Iran cash out bitcoins in violation of international sanctions — the U.S. Justice Department is “split” over charging Binance with money laundering. The split seems to be whether to charge them now or later: “Some of the at least half dozen federal prosecutors involved in the case believe the evidence already gathered justifies moving aggressively against the exchange and filing criminal charges against individual executives including founder Changpeng Zhao, said two sources.” The DoJ has discussed various plea deals with Binance’s lawyers. The investigation has been going on since 2018. [Reuters]
Binance was also slashing staff in late November. [Twitter, archive]
It’s only a matter of time before Binance starts freezing withdrawals — just like FTX, Voyager, Celsius, and so many other crypto exchanges in the last seven months.
Who can bail out Binance? Only Tether is left. Perhaps some new crypto exchange will pop up and achieve improbable volumes in a remarkably short time. There should be some Jane Street wunderkind on hand to front the operation.
The FTX liquidation proceedings in the Bahamas are distinctly odd and in direct conflict with FTX’s Chapter 11 proceedings in the U.S. [Bloomberg]
FTX froze withdrawals on November 8. The Bahamas government placed FTX Digital Markets, FTX’s Bahamas subsidiary, into liquidation on November 10. And John Jay Ray III, who took over as CEO of FTX Trading, filed for Chapter 11 in the US on November 11.
The joint provisional liquidators (JPLs), the three men in charge of liquidating FTX Digital Market’s assets, now want dynamic access to FTX systems — they don’t want just lists of specific data, they want to be able to go fishing through the system themselves.
Ray, who cut the JPLs off from the system on November 12, is saying “no way.” He and his team are pissed because of all the pillaging of FTX that occurred after FTX froze withdrawals.
FTX objected to the Bahamas motion saying there was no urgency and the other side was being utterly uncooperative: [Objection, PDF]
“Debtors have made repeated overtures to JPLs and Commission to meet and those overtures were met with avoidance and obfuscation. The JPLs and the Commission have refused to provide responses to Debtors’ questions about the assets ‘secured’ by the Commission. Instead, the JPLs file baseless motions seeking extraordinary relief on an unnecessarily truncated timeframe.”
Ray thinks FTX cofounders Bankman-Fried and Gary Wang, the JPLs, and the Bahamas Securities Commission are all in cahoots. He told Congress: [Twitter, archive]
“The process in the Bahamian islands is not a transparent process. We have opened up the ability to share everything we have with the Bahamian government, similar to how we share with other liquidators around the world not only in this case but in other cases. It’s meant to be a very cooperative situation. The pushback that we’ve gotten is sort of extraordinary in the context of bankruptcy. It raises questions, it seems irregular to me, there are lots of questions on our part, and obviously, we’re investigating.”
James Bromley, one of FTX’s attorneys in the bankruptcy, has filed a declaration with rancorous correspondence between FTX and the Bahamas liquidators attached as exhibits. [Declaration, PDF]
Judge Michael Dorsey, who is presiding over the Chapter 11 proceedings in Delaware, told lawyers for the JPLs and Ray to try to find a middle ground. (His job is to be a referee, after all.) If they can’t work things out, they’ll be facing off in an evidentiary hearing tentatively scheduled for January 6, 2023. [Doc 197, PDF; Doc 203, PDF]
So that you can understand FTX’s concerns, here’s a rundown of all the questionable stuff that’s happened so far:
On November 9, the day after FTX froze withdrawals, SBF told Bahamas attorney general Ryan Pinder that he would open withdrawals for Bahamian customers. Pinder previously worked at Deltec Bank — Tether’s banker since 2018 — but we’re sure that hasn’t influenced his decision-making, probably. [Doc 203, PDF]
From November 10 to 11, roughly 1,500 individuals, who claimed to be Bahamian residents, withdrew $100 million in crypto from FTX. Every other FTX customer in the world remained locked out of the system.
SBF said the Bahamas Securities Commission had told him to let the local customers in. The BSC denied this. [Twitter, archive]
SBF later told Tiffany Fong that he let the locals get their cryptos out because “you do not want to be in a country with a lot of angry people in it.” Could he have had in mind, not a mob, but particular individuals who might have had very robust opinions about not getting their cryptos back? [YouTube]
Separately from these withdrawals, at least two actors accessed FTX systems and withdrew another $477 million — hours after Ray filed for Chapter 11 on November 11. They also minted new FTT tokens. [Elliptic]
Ray and his lawyers say that SBF and Wang, who, acting on orders from the Bahamas Security Commission, minted FTT and transferred funds to a cold wallet under the control of the Commission. Ray still hasn’t figured out who the other actor was, but he’s working on it.
The JPLs have been tight-lipped as to what assets the Commission seized or how the assets were transferred.
There’s also the issue of the $256 million that FTX spent on 35 properties in the Bahamas — including land for a massive headquarters that never got built. The Bahamas regulators want to claim the properties back and they want the sale of the properties administered locally. Ray is likely to push back on this as well. [CNBC]
It’s hard to say for sure what’s going on here. We are beginning to suspect that FTX was a money-laundering chop shop, with some crypto businesses on the side. This would further suggest possible bribery of some local authorities. But the dots aren’t yet joined up.
After four days, SBF has decided that Bahamas prisons aren’t so great, and he would rather be in a nice U.S. jail instead. [Reuters]
Ryan Salame, co-chief executive of FTX Digital Markets, is the first FTX insider on record as spilling the beans on SBF. He told the Bahamas Security Commission on November 9 that FTX customer funds had been used to cover losses at Alameda Research. [Doc 225, PDF, page 34; FT, archive]
In 2021, Salame was a budding megadonor to U.S. Republican Party candidates — in step with SBF donating to Democratic candidates. Salame took out a $55 million loan from FTX, paid cash for a $4 million home in Maryland, and was buying up restaurants in Lenox, a town in Western Massachusetts. [NYT]
We’re not saying that’s what he used it for — but restaurants are notorious as a vehicle for laundering dubious cash.
Total donations by FTX to US politicians seem to be about $89 million when you trace all the darkish money as best as possible. [Institute for New Economic Thinking]
$73 million of those political donations are at risk of being clawed back in the bankruptcy proceedings. [Bloomberg]
Molly White live-tooted the Senate hearing on FTX and summarized it in her newsletter. [Mastodon; Substack]
Here are all of the written testimonies. [Senate Housing Committee, PDFs]
John Jay Ray III wants to sell FTX subsidiaries, starting with LedgerX, FTX Japan, and FTX Europe AG. [Doc 233, PDF]
FTX now has an official creditors’ committee of nine firms or individual investors, including crypto trading firm Wintermute. They still need to pick counsel, which should happen any day now. One of the first matters they will be weighing in on is a proposal to redact personal information rather than publishing a full list of creditors. [Doc 231, PDF]
When the Ontario Teachers’ Pension Plan invested in FTX, it asked the company a slew of questions related to their financial affairs — but received answers only to a few of them. OTPP put in $95 million anyway. [Globe and Mail, archive]
How a crypto exchange can inveigle itself into the banking system — and how FTX seems to have done this with its Farmington equity purchase. Buy a bank, convert to a Federal Reserve member bank, notify the Fed that you’re going into digital assets and you’ve determined it’ll all be fine and you’re totally going to set up risk management. “If you’re lucky, your bank won’t be examined for a year or two. By then, you might have cranked up quite a dumpster fire.” [American Banker; Wall Street on Parade]
Canada has tightened crypto regulation even further in the wake of FTX. Client cryptos must be stored with a custodian and have no margin or leverage for Canadian customers. Non-Canadian platforms with Canadian customers will also be required to follow these rules. The Ontario Securities Commission had already refused FTX permission to operate in the province, but other provinces didn’t — and many Canadian FTX customers got caught up in the bankruptcy. [Leader Post]
Eliezer Yudkowsky, the AI risk guy who named “Effective Altruism,” advises his fellow Effective Altruists to take the FTX money and run. For the sake of charity, you understand. Others mention that clawbacks in bankruptcy exist — but ehh, it’ll probably be fine, right? [Effective Altruism forum, archive]
David spoke on CBC on Tuesday about FTX. It went pretty well. “TWO AND TWO MAKES FOUR! GRAVITY WORKS! MAGIC DOESN’T HAPPEN!” [Twitter; Yahoo News]
There’s no interesting news in the Celsius Network or Voyager Digital bankruptcies. Looking through the filings, it’s all procedural sports ball and not matters of real import. Everyone’s on holiday and nothing is going to happen until January. Perhaps Celsius won’t have run out of cash by then.
The next report of the examiner on Celsius was supposed to be out in December — but the court still hasn’t resolved the question of who investigates whether Celsius was Ponziing, which is the big bomb here.
Voyager is just sitting around and giving money to expensive bankruptcy professionals. Binance was talking about buying Voyager’s assets — but frankly, that’s a deal we suggest the creditors not take. They only just escaped being caught up in FTX’s bankruptcy.
Celsius has filed a motion to commence a $7.7 million clawback action against Voyager, as well as an extension of time to file a claim against Voyager’s estate. The Voyager Unsecured Creditors’ Committee is reviewing Celsius’ motion with the intention to object. [Twitter, archive]
Bankruptcy professionals will cost Celsius $115 million in the three months leading up to mid-February. [Doc 1676, PDF]
Crypto broker Genesis owes the Gemini exchange $900 million. Gemini has now formed a creditors’ committee to recoup the funds from Genesis and its parent DCG. [FT]
Did you know that 80% of the current market cap (613 million) of Gemini’s dollar stablecoin GUSD was printed in the weeks before the FTX collapse? Even odder, one unlabeled wallet appears to have minted 460 million GUSD. [Twitter, archive]
On September 30, 2022, Gemini sought to incentivize GUSD adoption by increasing GUSD deposits to MakerDAO’s PSM (peg stability mechanism). MakerDAO was unimpressed. [The Defiant]
Tether’s accountant, BDO Italia, is reconsidering whether it wants to do crypto attestations. “In common with several other professional service firms, we are currently evaluating our approach to this sector and the work we undertake for our clients.” Tether only hired them in August. [WSJ, paywalled]
In the lead-up to FTX going down, CZ from Binance was very upset that SBF appeared to be destabilizing Tether’s peg with … a mere $250,000 trade. We know this because there’s a secret chat group for the exchanges to conspire, er, sort out issues. SBF also put screenshots from these chats into the Congressional Record in his bizarre written testimony before the hearing, which he didn’t manage to attend. [WSJ; Forbes]
The secret ingredient is still crime. Police in China have arrested a gang who laundered $1.7 billion via crypto, including Tether — even after Beijing’s crackdown on crypto. [CNBC]
Three Arrows Capital (3AC)’s liquidator Teneo estimates 3AC’s assets at $1 billion as of July. That’s $37 million of actual money, $238 million in cryptos, $22 million in NFTs, and $502 million in venture and other investments. A lot of those “assets” are obviously imaginary. 3AC’s liabilities, which are extremely real, are over $3 billion. [The Block]
Grayscale wanted to turn GBTC into an exchange-traded bitcoin fund. The SEC said “LOL, no.” Grayscale sued claiming unequal treatment compared to the bitcoin futures ETFs, and even questioning whether the SEC had the right to decide against its ETF proposal. Now the SEC has written a 73-page response to Grayscale’s dumb lawsuit. [SEC, PDF]
Argo Blockchain Plc, a UK-incorporated bitcoin miner, has had trading in its shares suspended by the Financial Conduct Authority. The company is planning to file for bankruptcy. [Twitter; Bloomberg]
MicroStrategy is still going down the toilet. Bitcoin prices fell well below the “low watermark” for carrying value in Q3 2022. The company will likely face a new record digital-asset impairment charge in Q4. [Marketwatch]
Dump on retail managed: Coinbase founder Brian Armstrong no longer holds any Coinbase stock. But he’s very bullish on crypto, he wants to make clear! [Protos]
Image: Robyn Damianos for the Wall Street Journal
While I’ve been sick with a bug for a few days, David was able to finish up and post our latest. This one is on his blog. [David Gerard]
“Take the money and run” is a plan with just two parts. Sam Bankman-Fried completely failed to get around to the second part.
After SBF’s extensive tour of confessing financial crimes to anyone from the press who would listen, the Weasel of Wall Street was arrested in the Bahamas at the request of the U.S. on Monday, December 12, where he awaits extradition.
Image by npcdad on Reddit
Celsius is bankrupt, with liabilities that are hugely greater than its assets. So they’re selling what can be sold — such as subsidiaries that are solvent going concerns.
Celsius bought Israeli crypto custody company GK8 in October 2021 for $115 million — $100 million in cash, and the rest in their own CEL tokens.
Now Celsius wants to sell GK8 to Mike Novogratz’s Galaxy Digital for $44 million, plus $100,000 assumed liabilities (debts that Galaxy will be responsible for). This is a huge loss — but Galaxy was the only qualified bidder. [Notice of successful bidder, PDF]
Galaxy wants GK8’s assets free and clear. The tricky bit is whether creditors in the bankruptcy have any claims against Celsius subsidiaries and affiliates. So the December 8 hearing was about this sale. [Amended agenda, PDF]
Judge Martin Glenn, who is overseeing the bankruptcy, was inclined to approve the sale — if the tricky details can be resolved.
This was a “hybrid hearing,” taking place both in the Southern District of New York courtroom and over Zoom. This hearing was on Thursday after a long, exhausting week of hours of hearings on Monday on Earn accounts and more hours of hearings on Wednesday on Custody and Withhold accounts.
Lawyers were dumping GK8 documents on Judge Glenn at the last minute on Wednesday, so he was up late the night before reading them — much to his displeasure. Everyone knows Celsius is running out of money. The holidays are coming up, and the mood was tense. The judge blew up at the lawyers more than once.
Galaxy Digital is Mike Novogratz’s crypto hedge fund. Galaxy is publicly traded on the Toronto Stock Exchange (GLXY.TO). Its stock is down 83% in the last year.
GK8 was founded in 2018 by two former Israeli government cybersecurity experts, Lior Lamesh and Shahar Shamai, the CEO and CTO of the company. Even though the firm has forty employees, these two pretty much are the company.
Celsius had planned to integrate GK8’s custody product into its own platform. But alas, Celsius filed for bankruptcy in July. So it started shopping for a buyer for GK8.
GK8 is a going concern — but it doesn’t seem ever to have made money. In fact, it needs funds to keep going.
We don’t understand what Galaxy wants GK8 for. This sale doesn’t make sense.
This could be an acquihire — Galaxy wants the founders, and the founders insist on bringing the company.
Or the sale could be Galaxy attempting to plug a hole in its books by buying a custody firm — if they account for assets in custody US-style, as company money with a liability, and not as customer money. (Now, you might think that resolving this would mean eventually stiffing the customers.)
But we’re speculating here. Maybe Novogratz will get a GK8 tattoo to go with his Terra-Luna tattoo?
We just know that Celsius needs to sell GK8 as soon as possible — and Galaxy Digital are a keen buyer, and GK8 would be very happy to go to Galaxy.
Do creditors have claims against just particular Celsius entities, or do they also have claims against Celsius subsidiaries and close affiliates? Such as ones the company wants to sell?
Celsius and the Unsecured Creditors’ Committee (UCC) both feel that Celsius’ terms of use — in all eight versions — made it clear that depositors were contracting with Celsius Network LLC and its affiliates.
But Andrew LeBlanc from Milbank, for the preferred equity holders in Celsius, had a different interpretation of the terms of service: “there are limitations in the documents that exclude claims against affiliates.”
Celsius, the UCC, and the preferred equity holders want the court to approve a briefing schedule that would allow them to clear a path for Celsius to come up with a reorganization plan. Here’s the briefing schedule. [Doc 1338, PDF]
Judge Martin Glenn said this is a gating issue — a blocker on a reorganization plan — and he wants it resolved sooner rather than later. He told the lawyers to gather their extrinsic evidence — evidence of contractual intent that isn’t written in the contract — so they can work out everything in a single hearing.
“I don’t want this being prolonged. I think this is an important issue,” said the judge. He told Patrick Nash (Kirkland & Ellis), Andrew Zatz (White & Case), and LeBlanc to revise the briefing schedule accordingly.
Celsius will run out of cash by early 2023. It needs this GK8 sale to go through soon. Here’s the sale motion. [Doc 1615, PDF]
Dan Latona from Kirkland, for Celsius, told the court that the GK8 sale was a result of “hard-fought and arms-length negotiations between the debtors and potential bidders and their respective advisors.”
Judge Glenn cut him off immediately to point out that this wasn’t just Celsius and the advisors negotiating — GK8 insiders also heavily negotiated, insisting on employment contracts and transfer of all potential avoidance claims, so that Galaxy could buy GK8 assets clear of any reclamation rights. “I have real questions on whether this is an arms-length transaction,” he said.
An avoidance action is an action to undo (avoid) certain transactions that the debtor engaged in before the bankruptcy. These include clawbacks.
Centerview, an investment banking advisor, managed the marketing and bidding. The GK8 sale started as an equity sale but morphed into an asset sale. In his declaration, Centerview’s Ryan Keilty said: “During the second round, all prospective bidders indicated an asset sale was the only structure in which bidders were willing to bid.” [Doc 1622, PDF]
Keilty explained that Celsius would have preferred an equity sale, as “a path of least resistance” — but the bidders insisted on an asset sale, given the backdrop of potentially billions of dollars of exposure in customer-related claims.
Galaxy’s bid was conditioned on retaining GK8 founders Lamesh and Shamai. In turn, Lamesh and Shamai were unwilling to continue with Galaxy without certainty as to their future. On December 2, the parties struck an agreement: Galaxy would pay $44 million in cash, plus $100,000 of assumed liabilities for GK8.
To complete the sale, Celsius filed Chapter 11 for the GK8 corporate entity. They want approval to appoint Celsius CEO Chris Ferraro as a foreign representative and to file recognition proceedings in Israel to seek enforcement of the sale order. Later in the hearing, Judge Glenn approved first-day motions for GK8.
The asset purchase agreement contemplates assuming all operational liabilities. “The purpose of the sale is to insulate the GK8 assets from the hang of potential Celsius account-related claims,” said Latona.
GK8 has forty employees. Judge Glenn was concerned that if any of them had crypto on Celsius and withdrew those assets within 90 days (if retail buyers), a year (if insiders), or even up to two years (in the case of fraudulent conveyance) before Celsius filed bankruptcy, it might raise so-called “avoidance issues.”
Judge Glenn wanted to know if anyone had looked into potential avoidance claims. “If that analysis showed there were $50 million in claims for the individuals, the $44 million price tag just disappeared. You’re getting nothing.”
Latona for Celsius said was unlikely it would be $50 million in avoidance actions, but the judge pushed on this topic. “How do you know?”
The judge, who had only just read some of the GK8 filings — because they were all sprung on him the day before — went ballistic. “You’ve provided the court with zero analysis of the potential avoidance claims against any of these people. Maybe there aren’t any. But I don’t know whether you are proposing to transfer a valuable asset of the estate to Galaxy. And I am not approving a sale until I understand that, with evidence.”
Latona stressed that the legal claims would have little if any value. Zatz for the UCC said that avoidance claims, if any, would remain property of the bankruptcy estate, and are not being transferred.
The judge was somewhat mollified by Latona and Zatz. But he still wanted one or more declarations along with a memorandum of law summarizing the analysis that Zatz provided about specific provisions of the purchase agreement — i.e., what potential claims are being transferred to Galaxy and what claims remain with Celsius.
Shara Cornell for the US Trustee thought GK8 should have its own creditors’ committee. Cornell also noted that GK8 hadn’t filed schedules yet. Judge Glenn said he couldn’t imagine there being a separate creditors’ committee for GK8, and overruled her objections.
Ron D’Aversa from Orrick, for Galaxy Digital, worried that Judge Glenn’s additional request for memorandums of law and declarations would delay the GK8 sale: “The timeline, the sequence, along with everything else in this agreement was painstakingly negotiated for months,” he told the court.
Judge Glenn, who had already been doing double time reading Celsius bankruptcy filings all week, didn’t like being told he had to move faster. He ripped into D’Aversa: “You are not going to cram down unreasonable deadlines for me to act. So go back to your client and tell them that you can either negotiate now for a revised schedule or you can just blow up the deal. And that is too bad, as far as I am concerned, but don’t tell me that I have to act today or tomorrow or Monday, because it isn’t going to happen.”
Pro se creditor Simon Dixon asked if the GK8 deal could be settled in bitcoin, rather than dollars. Galaxy has an OTC (over-the-counter) trading desk, so in his mind, this made sense. “Any sale in bitcoin would be very beneficial to the estate” — that is, creditors could get their bitcoins back. The judge told Dixon that was not going to happen.
Judge Glenn said he would withhold a ruling on the GK8 asset sale until he got memoranda of law and one or more declarations specifically addressing the issues regarding the avoidance claims. But he was “tentatively inclined to approve the sale of the GK8 assets.”
Latona and Zatz said they would both do a filing in support of the sale by Monday at 5 p.m.
Judge Glenn granted several administrative motions, including the motion allowing Celsius CEO Chris Ferarro to represent GK8 as a foreign entity in Israel. [Doc 1626, PDF; Doc 1628, PDF; Doc 1637, PDF)
Celsius wants to repay a DeFi loan of $3.26 million loan in USDC and get back collateral (wrapped BTC and USDC) worth $7.5 million. The revised order just says that the judge has to rule that Earn is a property of the estate. [Doc 1360, PDF; Doc 1636, PDF]
The judge said that Celsius could go ahead and pay back the loans — but the collateral would have to be held in a separate wallet subject to the court’s determination on whether Earn assets are property of the estate, which he hadn’t ruled on yet.
An omnibus hearing in the Celsius bankruptcy is scheduled for December 20. We expect that issues in the sale of GK8 will be in that somewhere. Further omnibus hearings are scheduled for January 24, 2023, and February 15, 2023. [Doc 1393, PDF]
It’s important to keep in mind that this week’s hearings have been furious arguments over the alignment of the deck chairs on the Titanic. But the iceberg is still there. Celsius is flat broke. There’s no business. There are pennies left for creditors at best. Celsius is a shambling zombie. It should have been liquidated in July.
There’s also the much-anticipated final version of the Examiner’s Report, including the question of whether Celsius was operating a Ponzi. And there are still multiple state regulators looking to issue charges against Celsius, and possibly against founder Alex Mashinsky personally. The fun stuff should really get going in 2023.
I sat through the Celsius bankruptcy hearing on Wednesday to learn the fate of the Celsius Custody and Withhold accounts. I passed my notes along to David. Our coverage is on his blog. [David Gerard]
This hearing was very technical with lots of lawyer details and bankruptcy details But we think we have the issues explained.
The judge wants Celsius to open withdrawals for “pure” Custody accounts and for Custody accounts below $7,575 because these aren’t subject to preference claims — but everything else is!
Judge Martin Glenn is still mulling over the Withhold account situation.
Phase II will be a doozy. That’s when the parties argue clawbacks on customer withdrawals in the 90 days before filing.
Image: Scrooge McDuck
The Celsius Network bankruptcy held two hearings on Monday, December 5. The first was to establish ownership of Earn accounts and see if Celsius can sell $18 million in stablecoins. The second was an omnibus hearing, dealing with multiple motions. Amy sat through six tedious hours of this, so you wouldn’t have to. [Agenda, PDF; Agenda, PDF]
A Chapter 11 bankruptcy generally has two outcomes: a bankruptcy sale (known as a “363 sale”) and the confirmation of a plan of reorganization. Celsius wants to find a buyer for this ransacked corpse. But first, they have to decide who owns what. They can only sell what’s theirs to sell. The morning hearing was bitter arguments about the spare change in the stiff’s pockets.
Celsius is burning cash at a furious rate. They have no idea how to even coherently propose an ongoing business. So they need to keep finding new ways to keep up the farce and pay tens of millions in advisor and professional fees per month.
The word “liquidation” came up a few times in the first hearing. This ice cube is melting fast.
Celsius wants permission to sell $18 million in stablecoins to pay for ongoing business operations. The stablecoins are held in Earn accounts — Celsius’ main product. You would deposit cryptos and be paid interest on them.
But do the stablecoins belong to the bankruptcy estate or do they belong to the individual Earn account holders? This is what Judge Martin Glenn needs to decide.
Celsius will be out of cash to pay ongoing bills — payroll, vendors, and expensive professionals for the bankruptcy — by late February or early March. The burn rate for Chapter 11 legal costs and professional fees is $15 million to $20 million per month. Celsius needs a cash injection by January or March 2023 the latest. [Doc 1328, PDF]
Interim CEO Chris Ferraro says that right now, the bitcoin mining business is cash positive (which surprises us) — but that too will need a cash infusion by March 2023.
Celsius (the debtors) and the Unsecured Creditors’ Committee (UCC) think the stablecoins belong to the bankruptcy estate, which would give them the right to sell the coins for cash. But the account holders want their personal money back.
The stablecoins that Celsius wants to sell add up to $18,111,551. That’s 16,549,259 USDT, 1,119,089 NCDAI, 360,743 BUSD, and some shrapnel. Alvarez & Marsal’s Robert Campagna, Celsius’ restructuring advisor, admitted that the stablecoins buy them just a month of continued operations.
“If we sell $18 million now and have access to cash, we can always buy stablecoins again later,” said Campagna. LOL, like Celsius is going to have cash later. But anyway.
If Celsius is allowed to sell the stablecoins, the funds will not be used to cover the bitcoin mining operations. [Doc 1325, PDF]
So what happens after they burn through their stablecoins? Other sources of money include the settlement with Prime Trust, worth around $17 million — but Prime Trust will refund in crypto, not cash. Celsius also hopes for $44 million from the potential sale of Celsius’ custody solution GK8 to Galaxy Digital. GK8 is an Israeli firm that Celsius bought in November 2021 for $115 million. So they’ll take a 60% loss.
Other options to keep the business afloat include intercompany loans and debtor-in-possession financing — but those carry their own risks, Ferraro said. “They require us to post collateral and risk that coins would not be returned if the coins drop in value.”
What company is going to lend money to Celsius? What collateral? What bank? What?
The terms of service for the Earn product changed a lot — in ways that contradicted what Celsius founder Alex Mashinsky had told customers.
Celsius updated its terms eight times between 2018 and September 2022, asking customers to accept changes each time by clicking a box. If they didn’t click on the box, they couldn’t access their coins.
Later versions of the terms, such as version six, more clearly asserted that Celsius owned the deposited cryptos — as is normal with any bank or investment firm, who then have a liability to the depositors. Even as Mashinsky said things that sounded like the investors owned their deposits.
Many small creditors objected that they weren’t aware of the important changes, or that they didn’t even agree to the changed terms.
More than 90% of Earn account holders signed off on version six of the terms of service, per court filings. These customers held the majority of the coins in the Earn program.
Oren Blonstein, Celsius’ chief compliance officer, was called to the stand. Here are his original and supplementary declaration. [Doc 1327, PDF; Doc 1584, PDF]
Blonstein spent his time at Celsius administering the company’s compliance with the Bank Secrecy Act — money laundering law.
The state attorneys — Layla Milligan for Texas and Karen Cordry for multiple other states — went in hard on Blonstein.
Blonstein told Milligan that they tracked customer activity including acceptance of the terms of use.
This is an amazing interchange between Milligan and Blonstein (as quickly noted by Amy, please excuse errors):
Milligan: To your knowledge, was the business ever in compliance with money transmission laws?
Blonstein: My understanding is based on a discussion with money transmission laws.
Milligan: But you are not aware if the company was in compliance with state or federal securities laws?
Blonstein: Yes, correct.
Cordry closely questioned Blonstein on how they flagged the change of terms — if the changes were ever called out to the customers. Judge Glenn asked Blonstein if the change of ownership in particular was brought to the customers’ attention.
Blonstein admits they didn’t flag the changes, but the customers had to tick the box and agree before they could proceed. Nor was the prior version of the terms available for a customer to compare them.
But Blonstein didn’t think any of this was a substantive issue: “I viewed the wording on the Earn program as you are giving coins to the company to use.”
Despite the arguments over ownership of the stablecoins, Judge Glenn was leaning toward putting them into the bankruptcy estate — because that’s what the terms said, and that’s what you’d expect of an investment product.
Judge Glenn seemed skeptical of the terms meaning anything other than that Celsius owned the coins and had a liability to the depositor. “It was a lending platform, so they had to deploy the assets. There wasn’t a commitment to pay back specific assets.”
It wasn’t like Celsius would use the money to gamble in a “slot machine in Monte Carlo” — they’d use it to pay the bills, noted the judge.
He was also more comfortable if the stablecoins were converted to actual dollars anyway, given how crazy crypto is right now: “The dollars will frankly be safer than crypto.”
Shara Cornell for the US Trustee and Layla Milligan for Texas were not happy. Celsius had not complied with state regulations. The terms of service may have been an illegal contract, and thus void, Milligan argued.
Judge Glenn responded that ownership of Earn cryptos had been a “gating issue” (an obstacle to recovery) ever since Celsius filed for bankruptcy in July 2022. “They didn’t only just spring this on anyone.”
Celsius had failed hard at compliance, but any buyer would have to comply with regulations — and if Celsius had broken securities laws, “you’ll get your pound of flesh against them,” he told Milligan.
Judge Glenn said that he wouldn’t rule on the stablecoins this week. But we think he’s going to let Celsius sell the coins. Matt Levine at Bloomberg concurred — because not having the money to pay back a liability is what “bankruptcy” means. [Bloomberg]
Celsius employees have been running away screaming. In early 2022, the company had over 900 employees. They are now down to 167 employees. Attrition is a real problem.
In the afternoon omnibus hearing, Judge Glenn approved Celsius’ Key Employee Retention Plan (KERP) to give out up to $2.8 million in bonuses to 59 key employees, so they don’t quit. Previously, he had denied the motion because Celsius and their lawyers had blacked everything pertinent out. [Doc 1426, PDF; Bloomberg]
You can’t really say no to a KERP if a company is trying to stay a going concern. We know very well that Celsius is a shambling zombie — but while it’s in Chapter 11, the judge probably has to treat it otherwise.
Celsius lawyers also need to look into who transferred crypto within 90 days of the bankruptcy filing. Those employees will not get bonuses.
Most of the KERP payments will be no more than $75,000. Salaries for the KERP employees range from $25,000 to $425,000.
Next, Judge Glenn agreed to grant Celsius’ motion to extend exclusivity — the exclusive right to come up with a new business plan — until February 15.
After a Chapter 11 filing, you normally have 120 days to come up with a bankruptcy plan. Celsius still doesn’t have a plan. Judge Glenn said that this is not unusual for large companies. The court can extend the period of exclusivity, though the total period with extensions cannot exceed 18 months.
Once that exclusivity period is up, any party in the bankruptcy can introduce their own reorganization plan. There are already some plans being floated by Celsius creditors. More court time — and bankruptcy estate money — will then be spent discussing all the plans.
Kirkland’s Patrick Nash, appearing for Celsius, wanted to avoid such a free-for-all. Celsius is working to sell the GK8 custody business, and they are working with the UCC on a reorganization they can both agree on. The US Trustee also agreed on extending exclusivity.
Judge Glenn concurred that lifting exclusivity now would lead to a free-for-all. He worried that a pile of new plans would be “a crushing load on my chambers.” Remember, he has to actually read all these hundreds of pages of legal filings.
The judge can see that Celsius is a melting ice cube and it’s just consuming money. But Celsius has to come up with something. He granted the motion.
For Celsius, this is just a game that they have to play to keep shambling forward and paying themselves from creditor funds.
Jason Stone of KeyFi was Celsius’ DeFi trading guy. Stone is suing Celsius for non-payment. Celsius has countersued, calling Stone incompetent and a thief.
Later in the hearing, Judge Glenn denied a motion by KeyFi and Stone to dismiss Celsius’ counterclaims. [Doc 17, PDF].
Stone is being represented by Kyle Roche, formerly of Roche Freedman. He is now in his own practice. Roche is not an eloquent courtroom speaker. He rambles interminably, and Judge Glenn was getting noticeably annoyed at him.
Roche said that Celsius’s claim should be dismissed because the issue is a contractual dispute, and Stone was authorized to transfer the assets in dispute to KeyFi under an asset purchase agreement. Celsius argued that Stone was not a party to the cited APA.
Judge Glenn said he would be denying the motion for now. He told the parties to complete discovery before a scheduled January hearing on Celsius’ motion for a preliminary injunction in the dispute — and he didn’t want them dragging their feet.
Roche said he had collected 150,000 documents as part of discovery. Glenn asked when Roche would produce the documents. Roche said that he had been busy because his grandmother died.
Judge Glenn approved the settlement with Prime Trust, returning $17 million in cryptos to Celsius that Prime had been holding since the two stopped doing business in June 2021. [Doc 20; PDF]
Celsius gets cryptos, not the actual dollars it needs to pay the bankruptcy professionals — hence why they want to sell the stablecoins to pay the bills.
We’ll be writing up the December 7 hearing on who owns the Custody and Withhold accounts and the December 8 hearing on the GK8 sale. Send Amy money for eardrops! [Agenda, PDF; Agenda, PDF]
We just posted a new crypto update. This one is on David’s blog. [David Gerard]
In this episode, we cover:
Image: “We are all trying to find the guy who did this!”
the wonderful thing about bitcoin is that ‘sorry i was too dumb to do things properly so it all collapsed’ is not only a feasible explanation but historically likely
— Boxturret on SomethingAwful
If you may be in legal trouble, any lawyer has one piece of advice: stop talking. If you’ve just filed a high-profile bankruptcy with maybe billions of dollars missing: stop talking. If you’ve got prosecutors sniffing around your activities: stop talking.
Sam Bankman-Fried never got the memo, or he did and threw it in the trash. In reference to his lawyers, he told Tiffany Fong: “they know what they’re talking about in an extremely narrow domain of litigation. They don’t understand the broader context of the world.” [YouTube; Twitter]
Despite producing reams of potential “evidence” that could one day be used against him, SBF will talk to any reporter, anywhere, any time of day. On Wednesday, November 29 he spoke on an NYT DealBook panel. On Thursday, November 30, he spoke to Good Morning America.
He loves the camera. But he still can’t tell you where the money went.
In the DealBook interview with Andrew Ross Sorkin, SBF said he “never tried to commit fraud,” and he didn’t knowingly commingle $10 billion in customer funds. He frames the whole matter as he seemingly lent Alameda customer funds from FTX as a risk management problem that got out of hand. Well, it sure did that. [Video; Transcript]
George Stephanopoulos from Good Morning America, who actually flew to the Bahamas to talk to SBF, was a lot tougher on him. SBF again denied “improper use of customer funds,” saying he failed at oversight. “You said one of your great talents in a podcast was managing risk.” “That’s right.” “Well, it’s obviously wrong.” [GMA; Twitter]
As Lying for Money author Dan Davies points out, prosecutors just have to show that SBF intentionally deceived clients as to what was happening to their money. When you tell people their money is segregated and it’s not, that’s fraud. “The offence was committed the minute it went in the wrong account.” [Twitter]
If you ignore your lawyer because you’re smarter than everyone, no lawyer is going to work with you. Martin Flumenbaum at Paul Weiss already dumped SBF. We’re hearing unconfirmed rumors that David Mills, his father’s colleague at Stanford, who was advising SBF, is also refusing to work with him further. [Semafor; Twitter]
A lot of FTX employees bailed after the company filed for bankruptcy. But a few have soldiered on — likely so they can nail SBF, who screwed them over about as much as he screwed over all of his customers and investors. While SBF is telling his side of the story to reporters, FTX employees are leaking emails. NYT wrote about the absolute chaos that FTX lawyers and execs endured in wresting power away from the deluded SBF in the wee hours of November 11. [NYT]
If Sam’s lawyer had jumped in front of the camera and ripped Sam’s larynx out with his bare hands, he could reasonably bill it as extremely valuable and important legal services to his client.
In January, there were three big crypto lenders — Celsius, Voyager, and BlockFi. Now all three are bankrupt, and our emails are clogged with new bankruptcy filings.
After weeks of frozen withdrawals, BlockFi filed for voluntary Chapter 11 on November 28 in New Jersey. [Petition, PDF; bankruptcy docket on Kroll; CNBC; press release]
BlockFi was already a dead firm walking. They were dead after Three Arrows blew up in May. FTX kept BlockFi’s head above water with a $400 million credit facility — but then FTX imploded. [Twitter]
The New Jersey firm doesn’t just have more liabilities than assets — a lot of the assets are missing too. All of BlockFi’s cryptos were in FTX. They were using FTX as their crypto bank.
BlockFi has over 100,000 creditors. Assets and liabilities range between $1 billion and $10 billion. There’s $1.3 billion in unsecured loans outstanding and $250 million in customer funds locked on the platform.
BlockFi has $256.5 million cash on hand — after selling their customers’ crypto:
In preparation for these chapter 11 cases, BlockFi took steps to liquidate certain of its owned cryptocurrency to bolster available cash to fund its business and administrative costs. Through the process, BlockFi was able to raise $238.6 million of additional cash, for a total unencumbered cash position as of the Petition date of $256.5 million.
Ankura Trust is BlockFi’s largest unsecured creditor to which it owes $729 million. Ankura is typically brought in to represent the interest of others in bankruptcy. If so, who are those creditors? We’d love to know.
FTX US is BlockFi’s second-largest unsecured creditor, with a $275 million stablecoin loan. This is the credit facility that SBF “bailed out” BlockFi with in June.
BlockFi’s fourth-largest unsecured creditor is the SEC — BlockFi still owes $30 million of its $50 million in penalties from February. The total settlement was $100 million, with half owed to the SEC and half owed to state regulators. [SEC; Twitter]
All the other creditors’ names are redacted. Very crypto.
BlockFi is entangled in FTX in multiple ways. BlockFi had a $680 million loan to SBF’s Alameda Research. This was collateralized by SBF’s personal shareholding in popular day-trading broker Robinhood — just days before FTX filed for bankruptcy. BlockFi is suing SBF for his stake in Robinhood. It doesn’t help that SBF was shopping his Robinhood shares around as collateral after he’d pledged them to the BlockFi loan. [Filing, PDF; Complaint, PDF; Bloomberg]
We set out in detail in August this year how publicly traded bitcoin mining companies were always going to leave their lenders and investors as the bag holders.
We predicted that the miners would default on billions of dollars in loans, leaving the lenders with worthless mining rigs and unsaleable piles of bitcoins. They would then go bankrupt — with all the paperwork in order.
The miners depreciated their mining rigs over five years — and not the 15 months they should have — to make their companies look like better investments.
And miners are now defaulting on their rig-backed loans. Lenders — New York Digital Investment Group, Celsius, BlockFi, Galaxy Digital, NYDIG, and DCG’s Foundry — are getting stuck with worthless e-waste. [Bloomberg]
Iris Energy (IREN) faced a default claim from its lender NYDIG on $103 million “worth” of mining equipment. The company’s miners aren’t making enough money to service their debt. So Iris defaulted! And NYDIG now owns some obsolete mining rigs. [SEC filing, Global Newswire; Coindesk; CoinTelegraph]
Shares in Argo Blockchain (ARBK) dropped 40% after the firm announced that its plans to raise $27 million by selling shares were no longer happening. [Twitter; Decrypt]
Core Scientific hired law firm Weil, Gotshal & Manges and financial advisors PJT Partners to help figure out ways to stave off bankruptcy. The options include exchanging existing debt for equity or additional debt, asset sales, equity, or debt financing. They’re gonna go bankrupt — because that was always the exit strategy. [The Block]
In the financial crisis of 2008, when banks were dropping like flies, some big banks would buy smaller banks that had healthy books — so they could patch the holes in their own books. Bigger and bigger shells to hide the Ponzi under.
Crypto is doing the same. FTX was buying up, and planning to buy up, small bankrupt crypto firms to try to hide the hole in its own books. And Binance, the largest crypto exchange, just bought Sakuro Exchange BitCoin (SEBC), a Japanese exchange that is already licensed with the country’s Financial Services Agency. [Binance; Bloomberg]
Japan learned its lesson early. Tokyo-based Mt. Gox, one of the first big bitcoin exchanges, blew up in 2014. Japan went on to become one of the first countries to regulate crypto exchanges with a licensing system. Crypto exchanges in Japan are required to keep customer assets separate, maintain proper bookkeeping, undergo annual audits, file business reports, and comply with strict KYC/AML rules. They are treated almost like banks! [Bitcoin Magazine]
Binance tried to set up operations in Japan in 2018, after getting kicked out of China — but Japan’s FSA told Binance they needed to play by the rules and apply for a license or pack their bags. [Bitcoin Magazine]
Binance announced a $2 billion “industry recovery fund” to prop up all of the other flailing crypto firms that have been struggling since FTX blew up. They claim that 150 crypto firms have applied for a bailout. [Bloomberg]
Binance has its own stablecoin, BUSD, that it claims is run by Paxos and Binance, “and is one of the few stablecoins that are compliant with the strict regulatory standards of NYDFS.” The crypto bailout fund is $2 billion in BUSD.
BUSD is a Paxos-administered dollar stablecoin. Each BUSD is backed by an alleged actual dollar in Silvergate Bank, and attested by auditors. (If not actually audited as such).
That’s true of BUSD on the Ethereum blockchain. It’s not true of BUSD on Binance.
BUSD on Binance is on their internal BNB (formerly BSC) blockchain, bridged from Ethereum. It’s a stablecoin of a stablecoin. Binance makes a point of noting that Binance-BUSD is not subject to the legal controls that Paxos BUSD is under. We’re sure it’ll all be fine if there are any issues, which there totally won’t be. [Binance]
Treating FTX’s claims about other crypto firms as confessions would have given you pretty detailed correct answers — it was all projection. FTX was accusing others of what they were doing themselves. You should look at what Binance has been saying the same way.
We’re going to go so far as to assert that Binance is a hollow shell too, and the bailout fund is most likely for a hole in its own books.
Every one of the crypto companies accounts for their value in dollars by calculating their mark-to-market value. “We have a billion dollars of $CONFETTI!” Even if they couldn’t get $10,000 in actual money for it.
All of crypto is bankrupt if you account for the crypto assets at realizable value rather than mark-to-market. Realizable value depends on the inflow of actual dollars into crypto — and that inflow has plummeted because the retail suckers went home.
All crypto companies are Quadriga. Pull back the curtain and you’ll see Celsius/FTX-style non-accounting, a Google spreadsheet if you’re lucky, and incompetence. Such utter blithering didn’t-understand-the-question incompetence. It’s been this way since 2011.
Tether has been issuing tethers by lending out its USDT stablecoin, rather than exchanging the USDT one-to-one for dollars (LOL).
As of Tether’s attestation for September 30, 2022, 9% of USDT are loans to Tether customers. Tether claims these are collateralized — but they won’t say who the borrowers are or what the collateral is. [Tether; WSJ, paywalled]
In their long-winded response to the WSJ writeup, Tether blames …. the media. [Tether]
We know from the CFTC settlement in October 2021 that Tether was issuing USDT to its big customers with a kiss and a handshake. Now they’re admitting it publicly.
CoinDesk’s report on the hole in Alameda’s balance sheet and Alameda’s close ties to FTX did so much damage to the crypto industry — and to Coindesk’s parent company Digital Currency Group — that the news site has attracted take-over interest. [Semafor]
CoinDesk did not blow apart the crypto industry. This was an unexploded bomb that was set up in May.
It was all going to explode eventually as soon as someone looked inside the box. As CZ told The Block’s Larry Cermak in 2019: “some things are better left unsaid.” [Twitter]
Japanese social media company Line is shutting down Bitfront, a US-based crypto exchange that it launched in 2020. They said the closure was unrelated to “certain exchanges that have been accused of misconduct.” [Announcement; Bloomberg]
AAX exit scam completed. Hong Kong-based exchange AAX froze withdrawals on November 13, and its executives quietly slipped away as opposed to filing bankruptcy — social media pages removed, LinkedIn profiles deleted. Sources tell us that employees have been laid off and the founders are nowhere to be found. [Hacker News; AAX]
John Reed Stark: Since the FTX debacle, Big Crypto’s SEC hit pieces and talking points calling for “regulatory clarity” are pure pretense and subterfuge, intended to distract and dissemble the truth — that the crypto-emperor has no clothes. [Duke FinReg Blog]
Image: Sam talking on GMA
We just posted our latest on the crypto crash series. This one is on David’s blog. [David Gerard]
Here’s some of what we cover in this episode:
Image: The FTX legal team entering the court.
The editor of Al Jazeera Asia contacted me for a story about crypto, so I wrote about how the collapse of FTX will result in regulators coming down hard on the space. This was my first story for Al Jazeera. [Al Jazeera]
South Korea, Singapore, and Japan had the greatest number of users on FTX, according to CoinGecko. After Binance pulled out of Singapore last year, many crypto traders in the city-state switched to FTX.
This story was a bit of work because I had to interview five different people. You may recognize some of them — David Gerard, Martin Walker, and Stephen Diehl, among others.
One of my favorite quotes is from Stephen, who predicted: “the crypto industry will mostly be relegated to the dark corners of the financial system as it slowly slides into irrelevance.”
Amy Castor 
