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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I just wrote my first story for MIT Tech Review. 

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

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

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

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

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

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

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

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

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

Scaling to the moon

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

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

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

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

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

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

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

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

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

Ethereum, a centralized system

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

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

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

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

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

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

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

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

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

If you like my work, please consider supporting my writing by subscribing to my Patreon account for as little as $5 a month — or more, if you are feeling generous!

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

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

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

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

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

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

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

She had an active TikTok account featuring her rap moves.

@realrazzlekhan

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

♬ Island In The Sun – Weezer

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

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

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

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

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

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

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

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

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

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

BlockFi to pay $100M

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

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

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

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

BlockFi says funds are SAFU. (Tweet)

Forbes is taking Binance money 

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

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

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

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

More ‘Bitcoin Widow’ Reviews

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

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

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

If you missed my review earlier, it’s here

Another day, another blockchain bridge hack 

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

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

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

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

What does this tell you about blockchain bridges? 

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

What’s new in crypto regulations?

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

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

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

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

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

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

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

Crypto shilling at the Super Bowl, and other NFT news

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Other newsworthy bits

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Qubit also hacked

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

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

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

Now, they are resorting to threats:

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

Bored Ape founders revealed

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

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

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

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

A16z mulls buying a chunk of BAYC

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

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

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

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

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

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

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

What a tangled Web we weave

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

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

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

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

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

HitPiece and its shady founder

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

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

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

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

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

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

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

Gamers hate NFTs!

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

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

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

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

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

Other NFT news

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

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

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

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

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

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

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

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

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

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

Elsewhere in cryptoland

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Things are not so wonderland in Wonderland

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

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

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

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

What’s up with celebs and BAYC?

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

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

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

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

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

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

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

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

Twitter launches hex PFPs

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

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

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

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

OpenSea will refund, ask them

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

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

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

Elsewhere in NFT land

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

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

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

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

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

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

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

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

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

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

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

How VCs cash out on Web3

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

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

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

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

Regulations

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

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

Other news worth noting

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ZachXBT posted the news in a Twitter thread early today:

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

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

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

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

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

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

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

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

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

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

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

Who is Michael Patryn?

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

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

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

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

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

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

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

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

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

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

Robertson was married to Gerald Cotten, who ran QuadrigaCX like a Ponzi. He mysteriously died in India just before things fell apart. Robertson was clever enough to go to college and start a business, but somehow remained completely clueless when it came to her partner’s shenanigans. The lavish vacations, the houses, and private plane trips were nice, though. 

Globe and Mail interviewed Robertson. Actually, they interviewed the journalists who interviewed her. You still get to hear a little of Jen’s voice. The interview is pretty dry. No tough questions. (Globe and Mail) 

The National, CBC’s flagship current affairs program, was a lot tougher. As politely as possible, they asked why she wouldn’t simply allow Cotten’s body to be exhumed and checked to make sure it’s really him. I make an appearance on the show. (YouTube)

Matt Galloway on The Current spoke with Robertson at length. (The Current)

Galloway: “Did you ever ask why hundred dollar bills were scattered around your house?” 

Robertson:  “It was kind of a Gerry thing.”

As a follow-up to Galloway’s interview, CBC On The Coast interviewed me about QuadrigaCX and asked me what I thought about the book. Worth a listen! (CBC, My review of the book

BTC keeps falling

Bitcoin is down to $35,000 from its November record of nearly $70,000. The sell-off has outpaced that of the U.S. stock market. David Gerard opines his thoughts on what is driving down the price. (blog post)

He notes the crypto miners are holding on to their bitcoin. If they sell, they know they will crash the markets, so they’ve got to sit tight on their piles of BTC.

There are still $78 billion tethers out there. Tether hasn’t minted any new tethers in 2022, for some reason. And the Tether transparency page has a new look and feel. 

The Grayscale Bitcoin Trust is now trading at 28% below NAV, its lowest ever. (YCharts)

MicroStrategy stock is dropping in tandem with the price of BTC. MSTR tumbled nearly 18% this week. (And the SEC doesn’t care much for the company’s crypto accounting methods, either.) (CNBC)

Another exchange hack

Fortune favors the brave, or does it? Maybe not.

Crypto.com, the fourth largest crypto exchange, was hacked on Jan. 17 in a 2FA compromise. All told, the thieves got away with $34 million in crypto — 4,836 ETH, 443 BTC, and about $66,000 in another crypto. All funds are SAFU.

The hack was confirmed by Crypto.com CEO Kris Marszalek, but otherwise, the company has been murky on the details, noting “suspicious activities,” and referring to the event as an “incident.” (Crypto.com announcement, Techcrunch)

Crypto derivatives trading platform BitMEX aspires to become a “regulated crypto powerhouse” in Europe. Its European arm BXM Operations AG wants to purchase Bankhaus von der Heydt, a bank in Munich. BaFin, Germany’s financial watchdog, has yet to approve the transaction. The purchase price is undisclosed. (Bitmex blog, Decrypt)

Last summer, BitMEX agreed to a $100 million settlement with FinCEN and the CFTC. Regulators accused the Seychelles-based exchange of failing to maintain a compliant AML program.  

In an effort to clean up its image, BitMEX has hired former Coinbase managing director ​​Marcus Hughes as its chief risk officer. (Bitmex blog, WSJ)

Everybody still despises Binance.

Armed with fake credentials, journalist Hary Clynch went undercover to interview for a top position at Binance. Naturally, he was offered the job. Part two of his three-part story is up. (Disruption Banking)

In her latest blog post, Carol Alexander, professor of finance at Sussex, provides visual proof that price manipulation bots on Binance caused massive liquidations on July 25-26, 2021. (blog post

In public, Binance CEO CZ welcomes regulatory oversight and boasts about his sparkly AML program. Behind the scenes, he withholds information about finances and corporate structure from regulators, according to a report in Reuters.

Everything is “FUD,” says CZ. (Twitter)

Regulations

The SEC shot down a spot market Bitcoin ETF from First Trust Advisors and SkyBridge. The ETF didn’t meet “the requirement that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and ‘to protect investors and the public interest,’” the regulator said.

In other words, all the things that the SEC previously objected to—wash trading, whale manipulation, mining manipulation, manipulative activity involving Tether, fraud and manipulation on exchanges, and so on—were never addressed in the proposal. (SEC, p. 15; Decrypt)

Meanwhile, in Europe, regulators are clamping down on crypto advertising.

Spain’s market regulator issued a mandate that ads for crypto assets must carry a warning that investors risk losing all their money. (Bloomberg)

In Singapore, the city-state is getting rid of bitcoin ATMs as it moves to dramatically limit consumer marketing of crypto. (Bloomberg)

In Italy, Consob, the country’s financial services regulator, has warned of risks linked to an increasing number of financially illiterate Italians investing in crypto. (FT)

And in the UK, the Treasury wants to bring advertising for the crypto industry under the same standards as other types of financial products. (Official statement, FT)  

Bitcoin miners running out of places to go

The bitcoin network consumes vast amounts of energy, mainly fossil fuels. As countries in Eastern Europe struggle to rein in electricity use in the coldest months of winter, they want the miners out. 

The Bank of Russia is doing all it can to pull the plug on crypto and make bitcoin mining and crypto trading illegal. (Bloomberg)

In Kosovo, where the government has temporarily banned bitcoin mining, miners are now rushing to get out of the business, selling their mining equipment at bargain-basement prices. (Guardian

And in the Ukraine, authorities bust another crypto mining farm illegally stealing power from the grid. (SSU)

NFTs and more NFTs

Every celebrity and big business wants to get into the NFT market, it seems.

Gamers won’t have it. They don’t like NFTs because they’re already familiar with broadly similar exploitative paid weapons, skins, loot, etc. When their favorite online games announce plans to incorporate NFTs, gamers push back. (NYT)

If only consumers would push back on this nonsense with a similar passion as gamers.

Dan Davies, author of “Lying for Money,” says gamers are more aware than most of AML compliance issues. He pointed out that Tencent shut down its online version of Call of Duty, after discovering the platform was being widely abused by criminals. (Twitter)

Scammers set up a new server at the URL previously used by Ozzy Osbourne’s NFT project, stealing over a hundred thousand dollars in ETH. (The Verge)

Flyfish Club is an exclusive NFT restaurant in New York City. When it opens in 2023, you can only enter if you buy an NFT. You still have to pay for your food in dirt fiat, because they won’t accept crypto in the establishment. Parent company Crypto VC Group has raised $14 million selling Flyfish tokens, which are being flipped on OpenSea. (Fortune

What would you expect from an NFT restaurant? Stephen Colbert investigates. (YouTube)

I see a new trend developing, and the SEC is not going to like it. BrewDAO just announced it wants to start a brewery. (Twitter)

Coinbase is teaming with Mastercard, so you can purchase NFTs with your credit card on its soon-to-launch NFT marketplace. (Coinbase blog, CNBC)

Walmart is considering creating its own crypto and selling NFTs. Of course, it is. (Bloomberg)

Meta wants to profit on NFTs as well. Facebook and Instagram are prepping a feature that will allow users to display their NFTs on their profiles. Meta is also working on a prototype for minting NFTs. (FT)

After spending $3 million on a rare Dune book, SpiceDAO is still looking for a way to justify the expense. It failed to negotiate IP rights. Now it wants to develop an entirely independent animated series. (Twitter)

RatDAO, which wants to accumulate blue-chip art, says it’s bought an unsigned Banksy print. Most DAOs I’ve looked at tend to focus on NFTs. (Twitter)

Cryptoland’s plans to buy a $12 million Fijian island have fallen through. The real estate agent selling Nananu-i-cake said the contract to sell it to Cryptoland’s backers fell through and the island is back on the market. Here is the listing, in case you’re interested. (Guardian)

One Jan. 18, Cryptoland founders Max Olivier and Helena López did an AMA. Molly White uploaded it to YouTube. It’s hysterical if you can stand to listen. If not, Molly has threaded the highlights.

Wikipedia editors have voted not to classify NFTs as art, sparking outrage in the crypto community. Beeple and Pak will not be included on its list of the most expensive art sales by living artists. (Artnet)

A women-led NFT project, Famed Lady Squad, is actually being led by guys, the same guys who are behind a bunch of failed NFT projects. (Input magazine

Other interesting bits

President Nayib Bukele, thinking Moody’s had downgraded El Salvador’s credit rating, said he “DGAF.” It turns out, Moody’s had not downgraded his country’s credit rating. Moody’s has rated El Salvador Caa1, a very high credit risk, since a downgrade in July. (Bloomberg)

Crypto media outlet CoinDesk is offering employees an equivalent of stock in its parent company DCG, which has its hands in hundreds of crypto companies. David Gerard notes that DCG has a history of pressuring CoinDesk employees to pump company interests. (Blog post) 

VC firm A16z wants more money for crypto investments. It’s seeking another $4.5 billion—more than double than what it raised less than a year ago. VCs are fueling the boom in everything crypto. (FT

MetaMask founder Dan Finlay acknowledges they’ve failed to remedy an IP address leak vulnerability that’s been “widely known for a long time.” (Twitter)

A flood of crypto rich are moving to Puerto Rico for the tax breaks, driving up real estate prices and making the natives unhappy (CNBC)

Ethereum founder Vitalik Buterin and Elon Musk exchange tweets about synthetic wombs. (Twitter)

Dan Olsen posted a two-hour YouTube video explaining NFTs and the problems with blockchain in general. The video is going viral. (YouTube)

Martin Walker explains Web 3.0 in a 20-minute interview. (YouTube)

Crypto promoters often tell us it’s still “early days.” Molly White says the nauseating phrase sounds like it’s coming from people with too much money sunk into a pyramid scheme. (blog post)

Stephen Diehl has a great take on Web3, if you haven’t read it yet. (blog post)

Cryptocurrency is a giant Ponzi scheme. (Jacobin

Fais Khan illustrates that Coinbase Ventures-backed coins tend to underperform bitcoin after an initial pop on crypto exchange Coinbase—when the VCs cash out. (blog post)

Laura Shin’s book “Cryptopians” is coming out next month. It’s nearly 500 pages long. Public Affairs is the publisher. If you don’t have the time to read it, Patrick McGinty, who teaches in the English Department at Slippery Rock University, wrote up a great review. (Baffler)

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News: Signal goes worldwide with payments, IRS sets sights on NFTs, Bukele’s bad bets on BTC

Encrypted messaging app Signal made its new payments feature, which uses MobileCoin (MOB), available to the world in mid-November. Signal made no big announcement at the time, but the stories are coming out now. (Wired)

I wrote about MobileCoin back in April 2020 — and so did David Gerard — when Signal first announced the feature. MobileCoin was a side hustle for Signal creator Moxie Marlinspike. He was an advisor to the project and then got Signal to integrate the token.

I suspect Marlinspike was paid in MOB — advisors to crypto projects typically are paid in shitcoins — and is now looking to dump his bags. (My blog; David Gerard

Other messaging apps, like Whatsapp and Facebook, have payments built in. What sets Signal apart is it wants to combine end-to-end encryption in messaging and a cryptocurrency with privacy features designed to make any transactions anonymous.

That has Signal employees worried. They’re concerned anonymous payments will attract criminals and thus draw regulator scrutiny, ruining everything that’s good about Signal. Signal supporters warned Signal this was a terrible idea. Signal went ahead with its plans anyway. (Verge)

Anyone can use MobileCoin via the Signal mobile app to make payments — the directions are here. The problem is getting MOB to put in your wallet. MOB is listed on Bitfinex and FTX, but it’s not available to U.S. consumers. You would have to use a VPN to get around that. 

Marlinspike wrote a blog post about Web3 that’s gotten a lot of attention. (Fortune)

The story is good; he blasts Web3. However, in it, he says he was “never particularly drawn” to crypto. That’s not quite accurate. He simply put his crypto into his messaging app.

On Jan. 11, only a few days after word of Signal’s shitcoin hit the whirling blades of the fan, Marlinspike  stepped down as CEO of Signal — with no notice and no replacement. Executive chairman Brian Acton will serve as acting CEO until someone new is found. (Moxie’s blog post)

Signal, which was introduced in 2014, gets its support via donations. With 40 million active users, the project is now poised to transition into a sustainable and profitable model, so it will be telling to see who steps in to take over.

In the meantime, Signal supporters are losing confidence in the app.  

Nicholas Weaver, an infosec expert and staff researcher at UC Berkeley, says that even by shitcoin standards, MobileCoin is “high on the fraud factor.” (Twitter Thread).​​

MobileCoin’s primary privacy mechanism is that the ledger runs inside the SGX enclave (a separate and encrypted region on the Intel chip for code and data), which means privacy rests entirely on the hardware — not the blockchain. You have to trust the nodes in the system. 

Marlinspike is a cryptographer and a computer security researcher. He should know better.

“Put bluntly, the only way as a security professional you would endorse this as a valid ‘privacy coin,’ let alone push it out to your huge user base, is if you were faced with a dump-truck full of money,” Weaver said. “I hope Moxie’s dump-truck was suitably large.”

Day trading is hard

El Salvador President Nayib Bukele has been day trading public bitcoin, and he is not very good at it. Bloomberg says he is probably losing money. (Bloomberg)

The country is about $1 billion in debt already. It doesn’t help that bitcoin took a nosedive recently, losing 40% of its value since its early November high of $69,000.

I know of someone else who gambled away other people’s money: Gerald Cotten, the CEO of failed Canadian crypto exchange QuadrigaCX. The exchange carried the seeds of its demise for two years before the Ponzi was exposed. Cotten died mysteriously in India just before things fell apart.

I don’t see Bukele disappearing, so who will he blame when things fall apart? Probably his adoring bitcoin supporters.

We know Bukele doesn’t like the press. Turns out he has been spying on them. Since mid-2020, dozens of journalists in El Salvador have been subjected to phone hacks using Pegasus software, according to Citizen Lab and Access Now. Pegasus is the spyware developed by Israeli company NSO Group for governments. It can infect phones running either iOS or Android. (Project Torogoz, Reuters)

If you can get past the bitcoin boosterism, this story in Bitcoin Magazine by Anita Posch has a wealth of information in it about Bukele’s plans for bitcoin in El Salvador. 

I wrote before about “volcano bonds” — bonds Bukele is using to lure $1 billion from outside investors he will use to buy more bitcoin and build a crypto metropolis. Bitcoin City is set to go near the Conchagua volcano, so geothermal energy can power the city. It is uncertain whether the volcano is even active. “I was told that the volcano is dead, and there is no geothermal energy left to be used,” said Posch.  

We don’t hear much from Strike CEO Jack Maller on El Salvador anymore. Rumor has it, the reason he didn’t build the government’s official Chivo wallet is because he wanted $300 million for the job, and because Algorand or Cardano or Koibanx paid the government $20 million to get the contract.

Mallers is now boasting about how Strike is going to save the poor in Argentina. “Today, we use the world’s open monetary network, bitcoin, to give hope to the people of Argentina,” he tweeted. Only he left out the part where it only works with tethers, not bitcoin. (Decrypt)  

NFTs collectors, the IRS wants your money

The NFT market ballooned to $44 billion in 2021, and the IRS is on the case. It wants its cut of the profits.

It’s not clear if NFTs are taxed as regular capital gains or as “collectibles,” which means you will have to pay slightly more — but that doesn’t mean you should put off filing. (Bloomberg)

Media outfit Dirt raised money selling NFTs. Now it wants to incorporate those NFTs into a DAO, so members can vote on the editorial process. What could possibly go wrong? (Verge)

CityDAO bought 40 acres of land in Wyoming for a blockchain city. The group is offering citizenship and governance tokens in exchange for the purchase of a “land NFT,” which gives you rights to a plot of land. Everything was going swimmingly until the project’s Discord server was hacked and members’ funds were stolen. So far investors have lost 29.67 ETH, worth about $92,000. (Vice)

The news industry is struggling. The Associated Press has found a solution: It is launching a marketplace for selling NFTs of its photojournalism. (Press release; Verge)

Arthur Suszko was into Beanie Babies as a kid and began collecting them again as an adult. His current project is to create NFTs of his Beanie Babies. “It’s a merger of my childhood dreams and modern passions coming together,” he said. (Vox)

The Seattle NFT Museum is charging $175 to $200 a ticket for opening weekend, for those who want to “explore the future of art,” ensuring only the most gullible will walk through its doors. (Eventbrite)

Did you read about the woman selling fart jars as NFTs? It turns out the farts-in-a-jar story was just a big publicity stunt. The entire thing appears to be made up. (Input Mag)

CZ wants to give it all away

Binance CEO Changpeng Zhao (aka “CZ”) has a net worth of $96 billion. This is impressive given that his company does not even have an official headquarters. (Bloomberg)

That’s okay because CZ told the AP he is giving it all away. When you are constantly on the move dodging regulators, it’s nearly impossible to buy a mansion and settle down anyway. 

CZ said the only coin he holds is Binance Coin because he doesn’t like a conflict of interest and he doesn’t want to do anything unethical. Binance never does anything unethical. (AP)

An undercover journalist applied for a job at Binance under a fake name with fake credentials. Four interviews later, he was offered the senior role in Binance’s futures business. (Disruption Banking)

Elsewhere in the news

Crypto venture capital firm Paradigm is investing in Citadel Securities. Sequoia Capital and Paradigm will invest a total of $1.15 billion in the stock trading giant at a valuation of about $22 billion. 

Citadel handles 27% of the shares that are traded in the U.S. stock market. A large part of that comes from processing trades for online brokerages such as Robinhood. (Press release, WSJ)

Citadel does not trade crypto. CEO Ken Griffin has been dismissive of crypto in the past — “I don’t see the economic underpinning of cryptocurrencies,” he told CNBC. But something changed his mind, probably the money.

After banning crypto mining in the country in an effort to deal with its energy crisis, Kosovo police seized hundreds of crypto miners. One crypto-miner admitted to paying 170 euros ($193) per month for electricity and getting 2,400 euros ($2,700) per month in profit. (Kosovo police, Balkan Insight)

Metamask is a popular browser plugin that serves as an Ethereum wallet. Matthew Green, a cryptographer and computer scientist, took a casual look at its code. He came back with “an uncomfortable feeling about the complexity and quality of MetaMask’s (current) crypto code, and some unhappy feelings about its dependency structure.” (Blog post)

Tesla now accepts dogecoin for accessories. It takes up to six hours for a transaction to go through. You cannot cancel an order. You cannot return or exchange an item bought with dogecoin. All purchases made with dogecoin are final. The future of finance! (Tesla website, Verge)

The disclaimer from Tesla’s merch store is worth a read. “..if you enter an amount MORE than the Dogecoin price, we might not be able to return the extra amount.”

Block (formerly Square) CEO Jack Dorsey is pissed off at Craig Wright’s legal nonsense. He is leading a legal defense fund for bitcoin developers, according to an email he sent to the bitcoin developers list. The fund’s first task will be to assist developers facing a lawsuit from Tulip Trading Limited, the firm associated with Wright. (Email, NYT)

Last year, Wright filed a lawsuit against bitcoin core developers after losing a pile of bitcoin in a hack, saying they refused to help him recover the lost coins. 

Dorsey manages a bitcoin exchange, a bitcoin development fund, a bitcoin L2 project — and now a legal defense fund. Bitcoin is decentralized. 

Cryptoland is a dream project to turn a private Fijian island into a libertarian utopia. After software engineer and Wikipedia editor Molly White made fun of them on Twitter, Cryptoland sent a cease and desist letter to her for making fun of them on Twitter. (Twitter)

They also sent a “cease and decease.” (Twitter)

After getting a lot of bad press, Cryptoland is fighting back! (FT)

As part of that, Cryptoland took down its cringe-worthy video. However, the Internet is decentralized. Someone uploaded a copy to Peertube. There is also an extended version if you really enjoy torture.

Celsius Network is a crypto lending and borrowing platform, whose former CFO was arrested last year. Network data shows CEO and founder Alex Mashinsky and his wife Krissy have sold approximately 20 million CEL since October 2020, netting at least $60 million. (blog post)

How Matt Damon thought we’d react to his crypto.com commercial. (Youtube)

Jamie Zawinski, the creator of Mozilla, who makes the Firefox web browser, wrote “Today on Sick Sad World: How The Cryptobros Have Fallen.”

Dave Troy, the creator of Mailstrom, has a great thread on the awful history of cryptocurrency. (Twitter)

(Updated on Jan. 17 to include how much money investors lost on CityDAO.)

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News: ‘Dead Man’s Switch’ streaming in US, Kazakhstan switches off the internet, volcano bonds, 6-hour rug pull 

Dead Man’s Switch: a crypto mystery, a film about failed Canadian crypto exchange QuadrigaCX, is out in the U.S. You can now stream it on the Discovery Channel

I’m in the film, along with fellow bitcoin skeptic David Gerard. You can read the reviews in the New York Times, the New York Post, and the Wall Street Journal. My picture is in the WSJ!  

I wrote a review of Jennifer Robertson’s book “Bitcoin Widow.” She was married to Quadriga CEO Gerald Cotten. Her book comes out Jan. 18, near the three-year anniversary of when she announced Cotten’s death to stunned investors—a month after he died! David Gerard also wrote a scathing review of the book, which you can find here

A new year has begun. I wrote up my crypto predictions for 2022. Like several other skeptics, I thought bitcoin would crash months ago. I still think it will crash. All the conditions are ripe for a crash. It’s just taking a little longer than we anticipated. 

Kazakhstan switched off the Internet

Amid anti-government protests, Kazakhstan—the world’s second biggest bitcoin mining hub next to the U.S.—switched off the Internet on Jan. 5. (Netblocks)

A few hours after the blackout, bitcoin saw a 12% drop in its hashrate. The incident shed light on how much bitcoin is being produced using fossil fuels. (Fortune)

Kazakhstan’s energy system has been struggling to keep up with increased crypto mining in the country, driven by the rise in bitcoin’s price and a rush of miners to its borders after China banned bitcoin mining last year. The electricity in Kazakhstan is some of the world’s dirtiest—70% coal-powered.

Countries that once welcomed crypto miners with open arms now want them gone because of the strain they put on their power networks. (Fortune)

After suffering blackouts, Kosovo recently banned crypto mining. Last month, Kosovo’s largest coal-fired plant closed due to technical issues, forcing it to import 40% of its electricity at higher prices. If it’s going to survive this energy crisis, the miners need to go. (BBC

Elsewhere, Iran is putting another moratorium on bitcoin mining. Argentina also recently went after bitcoin mining companies following blackouts. (La Politica Online, Spanish)

Volcano bonds

El Salvador, which adopted bitcoin as a national currency last year, is creating roughly 20 bills to serve as a legal framework to issue $1 billion bitcoin bonds, aka “volcano bonds.” 

Alejandro Zelaya, the country’s minister of finance, told El Mundo that the bills will cover regulations about issuing securities as cryptocurrency to ensure the viability of the bonds, which President Nayib Bukele originally proposed in November. (El Mundo, Spanish; Reuters)

Half of the $1 billion raised by the bond issuance will go toward buying BTC and half will be used to fund Bitcoin City, a crypto utopia at the base of a volcano. The idea is that the city will harness the geothermal power generated by the volcano for its electricity—ergo the term “volcano bonds.”  

Blockstream, the company responsible for a huge chunk of bitcoin’s code, along with iFinex—the parent company of stablecoin issuer Tether and crypto exchange Bitfinex—are partnering with El Salvador to create the volcano bonds. The bonds will be issued on Blockstream’s Liquid Network. Bitfinex will be the book runner for the bonds.  

Not only will Bukele destroy what is left of El Salvador’s economy with his insane plan, but he will attract hordes of scammers to the country. Bukele is, at this point, trading public bitcoin on his phone, and bragging about it on Twitter. David Gerard has a full update. (DG’s blog)

Binance up to its old tricks 

We learned a lot about Binance in 2021. Looks like nothing has changed.

Binance does not have a securities registration in Ontario. Yet, incredibly, after promising the Ontario Securities Commissions (OSC) that it would stop allowing Ontario residents to use its platform after Dec. 31, the crypto exchange turned around and told its users not to worry.

“As a result of ongoing and positive cooperation with Canadian regulators, there is no need for Ontario users to close their accounts by December 31, 2021,” Binance said in a letter to its users. It turned out Binance hadn’t spoken to any OSC staff at all. (Bloomberg)

Understandably, the OSC was pissed off. “This is unacceptable,” the regulator said in a statement. “Crypto asset platforms that have or will be applying for registration with securities regulators should be aware that misrepresenting their registration status raises concerns about the fitness of the firm and its principals for registration.” (OSC statement)

Binance blamed its actions on a “miscommunication.”  

In India, Binance-owned crypto exchange WazirX was busted for tax evasion. The goods and services tax authority in Mumbai says the exchange dodged paying Rs 40.5 crore ($5.4 million) in GTS.

WazirX lets you trade bitcoin in two ways: using Indian rupees or WRX, its native crypto. If a trader sells bitcoin for WRX instead of rupees, they pay lower fees. 

Binance figured it only had to pay GST on commission earned in rupees but could skip out on paying taxes on commission earned in WRX. A GST of 18% was applicable on these coins. At the end of the day, WazirX ended up handing over Rs 49.2 crore ($6.6 million), including penalties and interest. 

Zanmai Labs Pvt., which manages WazirX, told the media it was a mistake. The tax code was ambiguous. (India’s press information bureau, The Economic Times)

Samsung’s ‘groundbreaking’ new TV feature: NFT support  

You can now display your Bored Ape NFT on your 65” TV. Your guests will be so impressed. 

Samsung is offering extensive support for NFTs as part of its 2022 TV lineup—“the world’s first TV screen-based NFT explorer and marketplace aggregator, a groundbreaking platform that lets you browse, purchase, and display your favorite art—all in one place.” Basically it’s offering support for JPGs. What will technology think of next? (Press release, ArsTechnica)

The electronics maker has also opened up a metaverse store in Decentraland, an Ethereum-based virtual world, based on its flagship store in New York. (Press release, Decrypt)

The comments in the ArsTechnica coverage are gold. In response to the NFT TVs, one reader said:  

“Thank Christ. It’s really a colossal pain in the ass to display my NFTs now.

First I have to fire up Twitter and spend like 20 minutes laughing at the last guy who got scammed into transferring his token to some Nigerian prince.

Then I have to wade through the hundreds of good samaritans who are thoughtfully pasting my man’s lost ape into replies.

I have to find just the right one to save to my camera roll.

Then I have to wait like hours for my Canadian lingerie model friends to come over so we can talk about investment opportunities and that guy in Starbucks who made such a biting observation about student loan forgiveness that the whole place clapped.

Then I have to freaking cast my camera roll to the TV so that everyone there can really see and understand the rare variations in my apes. Which, really, is all I need a TV for in the first place.”

Six-hour rug pull

On Dec. 31, a new token called $YEAR was airdropped. It was set up as a “year in review” of your Ethereum transaction history. It quickly morphed into a painful lesson for investors. 

$YEAR came from a Twitter account called EtherWrapped. Users could connect their wallets and view a history of ETH and ETH NFT transactions over 2021. Then, EtherWrapped would hand out a token reward based on the user’s history. Several folks on Twitter warned that it was a honeypot.

The creator wasted no time. Six hours later, he pulled the rug on the project, draining 30 ETH from the $YEAR liquidity pool, and sending the token’s value to zero. Ladies and gentlemen, the future of finance!

Twitter user @meows.eth posted a thread explaining how the rug pull took place. (NFT Evening, Twitter)

Matt Damon is making everyone ill

Actor Matt Damon has hit peak cringe. The actor appeared in a Jan. 2 NFL Super Bowl ad—tagline “fortune favors the brave”—for Crypto.com, a crypto exchange and NFT marketplace. (Youtube)

In the ad, he struts about equating some of the greatest human accomplishments with buying shitcoins and NFTs of bored apes. His performance has sparked a backlash online. 

FT’s Jemima Kelly says “there is something grotesque about seeing a man whose net worth was recently valued at $170m shilling for a platform that is already making so much money that it can afford to spend $700m rebranding Los Angeles’ Staples Center as the Crypto.com Arena.” (FT)

Tim Draper still supports Elizabeth Holmes

A jury convicted Elizabeth Holmes of fraud on Jan. 4. As Bloomberg’s Matt Levine puts it: “Theranos raised a lot of money from investors who did not do too much due diligence, because the world was awash in money and investors got careless; that is much, much, much, much more true now, and Theranos looks a little quaint.” (NYT, Bloomberg)

Tim Draper—aka ”Bitcoin tie guy”—proves once again he is completely delusional. He is still supporting Holmes, even after she was convicted. He told Fortune: “This verdict makes me concerned that the spirit of entrepreneurship in America is in jeopardy.” (Fortune)

Unsurprisingly, Draper also supports President Bukele’s bitcoin efforts in El Salvador. “This is a great video from President @nayibbukele of El Salvador. He is a fresh face of visionary global politics speaking plainly and clearly about #bitcoin and #health at a time when most governments are flailing,” he tweeted, pointing to Bukele’s latest ad campaign. (Twitter)

Also in the news

Bitcoin is decentralized. Just 0.01% of bitcoin holders control 27% of the currency in circulation (WSJ)

Coinbase CEO Brian Armstrong spent $133 million on a Bel-Air eyesore. This is what happens when you have wads of money and no taste (WSJ)

In a last ditch effort to save “The One,” a Los Angeles real estate monstrosity he has spent over a decade creating, Nile Niami wants to launch “The One Coin.” I’m sure it is totally not a security. (LA Times)

Mozilla, the nonprofit behind the Firefox web browser, has paused accepting crypto donations following a backlash, triggered in part by a Mozilla founder Jamie Zawinski. (The Verge)

“Hi, I’m sure that whoever runs this account has no idea who I am, but I founded @mozilla and I’m here to say fuck you and fuck this. Everyone involved in the project should be witheringly ashamed of this decision to partner with planet-incinerating Ponzi grifters,” Zawinski tweeted.

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Crypto predictions for 2022: A bitcoin crash is coming—eventually. Regulators will kill stablecoins, soon NFTs

I wrote a prediction piece last year, wherein I spoke to several nocoiner luminaries to get their predictions for 2021. I also gave my own predictions. Were we right? Did any of our predictions hold true?

Well, yes, we were spot on. All our predictions were 100% correct!

We predicted 2021 would be a year of comedy gold. It was! Where to begin? El Salvador adopted bitcoin as a national currency. You can’t get any dumber than that—or maybe you can. How about Bitcoin Volcano bonds? Or Elon Musk sending the bitcoin price falling when he tweeted a broken heart emoji?

Several of us also predicted bitcoin would collapse in value. Bitcoin has not suffered a stupendous crash yet, but the conditions are ripe for a crash—loose regulatory oversight and a lack of real dollars in the system. It’s just taking a little longer than we thought. 

Bitcoin started 2021 at $32,000. It went on to set a new record high of $69,000 in November 2021. It’s now below $50,000—already a 30% drop in price. The higher it goes, the farther it has to fall. The question is not if crypto will plunge, but when.  

Nicholas Weaver, a researcher at the International Computer Science Institute in Berkeley, who has been following Bitcoin since 2012, told me he expected the crypto markets to collapse six months ago. 

“I’m surprised the [bitcoin] mining hasn’t collapsed yet, but I think it’s being propped up by mining companies HODLing and going into debt on power bills.” Bitcoin miners mint 900 new bitcoins per day and they have to sell those for cash to pay their monstrous electricity bills.

Weaver added: “I think the huge hype with Crypto.com, Robinhood, and the others IS drawing in some retail suckers, just not enough.”

Robinhood, the popular stock trading app, starting shifting into crypto in 2020. In an attempt to become a household name, Singapore crypto exchange Crypto.com plastered its name on L.A.’s Staples Center. The media attention helps lure more real dollars into the crypto ecosystem.

Carol Alexander, professor of finance at Sussex University, told CNBC that she expects bitcoin to collapse to as low as $10,000 in 2022. As far as she’s concerned, bitcoin “has no fundamental value.” It’s not a real investment, just a “toy.”

To keep the game going a little bit longer, coiners will need to come up with a new way to lure dumb money into the crypto markets. How will they do this in 2022?

In 2017, initial coin offerings were the answer. In 2021, NFTs lured in the dumb money. David Gerard, author of “Attack of the 50-foot Blockchain,” predicts “there will be some attempt to invent a new form of crypto magic bean that’s more blitheringly stupid than NFTs, but I’m at a loss as to what it could be.”

Changing tides

Jorge Stolfi, a computer science professor at the State University of Campinas in Brazil, is reluctant to make bitcoin price predictions but he thinks change is definitely in the air. “If 2022 doesn’t see a massive crash plus regulations, enforcement, etc then I will be really shocked,” he said in a private chat. 

Stolfi pointed out that critics are less restrained now. In the past, they would tell you to “be careful.” Now they are outright calling bitcoin a Ponzi. Headlines tell the story. A recent opinion piece in the FT carried the headline: “Why bitcoin is worse than a Madoff-style Ponzi scheme.” On CNBC: “‘Black Swan’ author calls bitcoin a ‘gimmick’ and a ‘game,’ says it resembles a Ponzi scheme.” And a June 2021 headline in Vice read: “President of the Minneapolis Federal Reserve Called DOGE a Ponzi Scheme.”

Stablecoins

Stablecoins spun completely out of control in 2021. The supply grew 388%, driven by decentralized finance (DeFi) and derivative trading, according to research by The Block

In early 2021, there were 21 billion tethers sloshing around in the crypto markets. Twelve months later, that number quadrupled to 78 billion. Tether is now shamelessly moving tethers in 1 billion and 2 billion batches. And where are Tether’s two remaining principles—CEO Jean-Louis van der Velde and CFO Giancarlo Devasini? Nowhere to be seen is where. They disappeared from the public eye long ago. I suspect we won’t see them again until the U.S. DOJ catches up to them. 

Growth in the second most popular stablecoin was even more staggering in 2021. Circle’s USDC went from 4 billion to 42 billion. In July 2021, Circle shocked everyone when it announced plans to go public via a SPAC, thereby sidestepping the financial scrutiny of an IPO.

We haven’t heard any news on that SPAC since, even though the merger was supposed to close in Q4 2021. My guess is the heat is excessive.

Both Tether and Circle claim that their stablecoins are fully backed by reserves, but the big question is — how carefully are these reserves audited? Some of those reserve assets, like commercial paper, are riskier to convert to cash. Regulators are worried that stablecoins could fuel digital-era “bank runs” if a large number of investors rush to redeem them.

The Biden administration said in 2021 that it wants to regulate stablecoin issuers the same way as banks. SEC Commission Chairman Gary Gensler likened stablecoins to “poker chips at the casino.”

I predict stablecoin companies will continue to feel the pressure from regulators in 2022, and eventually, it will become impossible for them to stay in business. They are becoming too big of a risk.

NFTs — another regulatory loophole to be closed

In 2021, NFTs became dinner table talk after a Beeple piece sold for $69.3 million in crypto at a Christie’s auction. It turned out, the person behind the sale was the former operator of a shady cryptocurrency exchange in Canada, who partnered with Beeple on plans to fractionalize the NFT with a B20 token. He actually gave Beeple 2% of the B20 supply and kept 60% for himself.

Out of seemingly nowhere, NFTs have now become a $40 billion market.  

The initial coin offering market was huge in 2017, until regulators gave fair warning that most ICO tokens were unregistered securities. I predict the regulatory noose will tighten on the NFT market as well. Regulators are already warning that fractionalized NFTs resemble illegal securities. 

If NFT marketplaces are deemed art dealers, they could fall under the bank secrecy act, which means platforms will have to ID their customers and submit suspicious activity reports to the government. 

In short, 2022 will be a year that regulations put a stranglehold on crypto. Until then, expect more comedy gold and corruption in El Salvador, where President Nayib Bukele is now trading bitcoin on his phone and tweeting about it.

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Review: ‘Bitcoin Widow,’ by Jennifer Robertson (QuadrigaCX)

In January 2019, QuadrigaCX, the largest cryptocurrency exchange in Canada, went belly up after its founder, Gerald Cotten, died under bizarre circumstances in India. Roughly $200 million (Canadian) in customer funds disappeared along with him. 

Investigations revealed that Cotten had been running Quadriga like a Ponzi, treating customer deposits like his own personal slush fund. The timing of his death was peculiar, as the clock was ticking on his Ponzi. Cotten was struggling to keep up with customer withdrawals. Instead of getting caught and going to jail, he died and went to heaven. Although some still think he faked his demise.

Six months prior to his death, Cotten wed Jennifer Robertson, a woman he met four years earlier. Weeks before he died, he signed a detailed will leaving everything to her. When Quadriga’s customers realized they had been duped, they had questions — lots of questions — and some of those question were directed at Robertson, the person closest to Cotten when he passed.

During Quadriga’s bankruptcy hearings, Robertson refused interviews with the press. Little was known about her. Now she has a book: “Bitcoin Widow: Love, Betrayal and the Missing Millions.” The 330-page memoir comes out Jan. 18 and is available on Amazon (USCanadaUK). HarperCollins Canada is the publisher.

Robertson did not pen the memoir alone. Instead, she enlisted the help of Canadian journalist Stephen Kimber. Here he is a year ago talking about the project. Kimber actually did a pretty good job piecing all of this together, but despite his professionalism, the book is still a slog. I don’t recommend it.

Robertson lacks the depth and introspection you might expect from someone who was “betrayed.” She also lacks empathy. The book is mostly about her feeling wronged by the press—e.g. me. She treats the 76,000 Quadriga customers who Cotten hurt only as an afterthought. 

Here is what she wants us to believe: She wants us to believe that Cotten is really dead. (Jilted investors at one point wanted his body exhumed to prove this wasn’t a massive exit scam.) She wants us to believe she truly loved Cotton, who she describes as her “soul mate.” She also wants us to believe she had no inkling of the massive fraud that her partner was committing — and that she was benefiting from.

“The possibility that Gerry had committed fraud never even crossed my mind,” she writes.

The book contains mostly what we already know from court documents and investigations. It also includes details most readers could probably care less about, such as she lost her virginity in tenth grade, her mother worked at a post office, and she is obsessed with the number eight. Coincidentally, the first chapter opens on December 8, 2018. 

On that day, Robertson and Cotten are on their honeymoon in Jaipur, India. After they check into the opulent Oberoi Rajvilas hotel for $800 (Canadian) a night, Cotten, age 30, who was diagnosed with Crohn’s before the pair met, has come down with a horrendous bellyache. 

All told, 2018 was the year Quadriga started losing its wheels. In January, the Canadian Imperial Bank of Commerce (CIBC) froze $30 million (Canadian) in Quadriga funds. On top of that, as the price of bitcoin plummeted, more and more people were exiting their positions and trying to get their cash off of the exchange. Little did they know, hardly any cash, or any crypto, was left.

Robertson gets Cotten into the upscale Fortis hospital where his condition worsens. The following day, he goes into cardiac twice times. Doctors revive him. When he goes into cardiac arrest a third time, he dies. She is with him throughout the entire event and is tasked with getting his body back to Halifax, where they were living before things fell apart. A closed-casket funeral is held and Cotten’s body is put into the frozen earth. His body was severely swollen, too swollen for public viewing, Robertson says.

The book jumps back and forth in time as Robertson relives the trauma of losing the alleged love of her life. I have to admit, it is difficult picturing Cotten as a catch outside of all of his money, as charming as many people said he was. Looking at the Youtube videos he posted, he appears immature. Here he is holding his brother Brad upside-down in 2012. “Have you ever tried drinking water upside down?” Brad says, the two of them in fits of giggles. This is the man child Robertson fell in love with.

Anyway, as Robertson recounts her life, she takes us through her on-again-off-again relationship with Jacob Forgeron, who she met in 10th grade and later married. The marriage ends in divorce, and soon after, she meets Cotten on Tinder, a popular dating app. They are both 26.

Cotten founded Quadriga in late 2013 with business partner Michael Patryn, who turns out to be ex-con Omar Dhanani, who spent 18 months behind bars in the US, before being sent back to Canada. Robertson claims she never actually met Patryn and had no notion of his shady past — or that Cotten and Patryn went way back

“Even though they were business partners at Quadriga, for instance, I never met Michael Patryn face to face, or anyone else connected to the company that was at the centre of Gerry’s work life,” she writes.

The entire book is like this — Robertson presenting shocking facts about Cotten and Quadriga and her putting a spit and shine on it to polish up her reputation. Essentially, she denies knowing anything about the inner workings of the business. The book title should have been: “I Know Nothing!”

Cotten and Robertson lived together starting in May 2015. They already had their pet name, calling each other “Booboo.” Up until that time, she made her living mainly as a bartender and waiting tables. She worked full-time in human resources for Porter Airlines but quit when she met Cotten, returning to waitressing and bartending on the side.

Quadriga could not get banking — banks don’t like dealing with crypto companies due to the high risk of money laundering. To get around that, Robertson describes how Cotten hired freelancers and had them set up bank accounts, so they could process funds on behalf of Quadriga. 

She herself set up Robertson Consulting Nova to process money for Cotten. “Gerry would deposit money destined for clients into my corporate account and then send me lists of their names and email addresses and the amount I was to send each of them. I’d either send the funds by wire or e-transfer.”

Robertson earned an extra $1,000 (Canadian) a month this way — but oddly, it didn’t seem to trigger any alarm bells for her. She stopped processing payments, she said, after they moved from Toronto to Halifax, where they bought their first home together in 2016.

By then Quadriga was using “commercial payment processors” — her term for shadow banks that basically set up a network of bank accounts to funnel money to and from Quadriga customers. She said she knew nothing of Quadriga’s clients beyond what she needed to know to send them money. 

Cash is another way to get around banks and Cotten dealt with lots of it. “Gerry continued to deal in cash over all the time we were together, but the piles grew bigger and bigger,” Robertson said. Cotten was doing business with Adam O’Brien who ran a Bitcoin ATM company in Canada. Cotten supplied O’Brien with crypto, and O’Brien, in turn, brought Cotten suitcases full of bills from the sale of bitcoin — $20 million (Canadian) in total, enough to raise most people’s eyebrows, but not Robertson’s.

“I understood from Gerry that cryptocurrency was still new, so old-school, conventional bankers were often suspicious of it. That was one reason why Gerry said he worked so hard to verify the bona fides of his customers,” she wrote.

The bona fides of his customers? Bitcoin ATMs are essentially nothing more than street-corner money laundering machines. They charge high transaction fees, which criminals don’t mind paying for the simple reason that bitcoin ATMs generally don’t require identity checks up to certain amounts, particularly in Canada, up until recently. 

When Robertson was searching for new employment, Gerry suggested they take up their newfound wealth and invest in real estate. Robertson set up Robertson Nova, her residential property management company (not to be confused with her payment processing business), and started buying up real estate. Eventually, the pair owned 16 rental properties to the tune of $7.5 million (Canadian). Robertson brought in her stepfather Tom Beazley to help manage the properties and got herself a personal assistant named Tanya Reid, who would drink beer with her and listen to her woes when needed.

Beazley and Reid were doing most of the heavy lifting for Robertson’s company — which she called a “financial success.” Reid also became the couple’s errand girl. “In the end, Tanya became a primary personal assistant for Gerry, picking up laundry and running errands, while Gerry continued to run the business as he always had — alone, from inside his laptop,” Robertson wrote in her book.

She tells us she didn’t care about the money. However, she clearly didn’t mind spending it either. The book details countless vacations she took with Cotten — a cruise around South America, a wedding celebration in a castle in Scotland for the extended family, a mini-honeymoon in Amsterdam, another cruise around the Baltic Sea, another one to the Galapagos, and so on. The couple bought a yacht, a small island, a vacation home, and even chartered a private plane. The entire relationship was one big vacation.

It’s a wonder that Cotten, who ran Quadriga as a one-man show from his laptop after 2016 when Patryn supposedly stepped away, got any real work done at all. Actually, we now know he wasn’t actually working so much as spending and gambling away other people’s money.

It is also a wonder that Robertson, who talks at length about her curiosity for the world, had no curiosity whatsoever about Cotten’s business or the piles of cash coming in and going out of their home. At one point, she describes delivering “multiple thousands of dollars of cash” to Cotten, so that he could mail the money to his customers.

After Cotten died, Robertson’s fantasy world came apart at the seams, and she was hounded by journalists. She was shocked and offended by the innuendo and suspicions. I’m the only journalist she specifically calls out in the book by name: “Amy Castor, a freelance journalist, who ‘focuses on cryptocurrencies and financial fraud,’ would later add more fuel to this fire when she described me as ‘moving aggressively to protect her newly acquired assets.’” 

That statement was absolutely true, by the way. Even before the accountants, judges, and lawyers moved in to clean up the mess that was Quadriga, Robertson was moving property into her own name to protect it from creditors. In the end, she had to hand over nearly everything to Ernst and Young, the court-appointed monitor and bankruptcy trustee. Initially, she proposed to keep $5 million (Canadian) — money that never would have ended up in her name had Cotten not stolen millions from his customers. 

She also wanted to keep her engagement band, worth $80,000 (Canadian). Here is her reasoning for finally opting to give it up without a fight: “In practical terms, selling it would put the smallest of dents in the huge losses [Quadriga investors] already suffered. But symbolically, taking that ring off my finger offered a small measure of vengeance for all that Gerry had done to harm them.” 

What Robertson doesn’t seem to understand is that none of that money was hers, to begin with. In the end, she was allowed to keep her wedding band, $90,000 (Canadian) in cash, her $20,000 (Canadian) retirement fund, her Jeep Cherokee, and some other personal belongings.  

She mourned dead Gerry by writing to him: “Oh, sweetheart, I only now understand just how much stress you were under . . . I am so sorry. This must have been awful for you.”

It’s a shame she never wrote any such heartfelt letters to Quadriga customers. One of them even lost his entire life savings. Did she understand how much stress he was under?

At one point, during the court proceedings that followed Quadriga’s shuttering, Robertson went to Aruba to escape the pressure and tried to commit suicide by swallowing too many Ativan. She managed to save herself by calling an ambulance. This is the first I’ve heard of her suicide attempt.

Robertson is now moving on with her life. She moved into a cabin owned by her family, taught English online for a bit, and went back to school. She had two relationships after Cotten, and neither of them ended well because she “still had feelings for Gerry.” I’ve heard from a source that she is now in yet another relationship and is heavily pregnant. Cotten has been dead for three years now.

If you have been following the Quadriga saga, you won’t find much new in “Bitcoin Widow.” Robertson is a hard person to feel sympathy for. She is getting on with her life, sure, but there are still 76,000 Quadriga customers waiting for the bankruptcy courts to return a fraction of their losses. They are struggling to get on with their lives too.

After chatting with David Gerard online, what we both can’t seem to figure out is why Robertson wrote this book, to begin with. She is not being sued, the money is long gone, and all of this is old news. David posted his own review of the book here.

March 9, 2022: This article has been updated to correct a few inaccuracies noted by Jennifer Roberton. Cotten went into cardiac arrest three times, not two times. Cotten and Robertson took a cruise around South America, not South Africa. Also, they never took a cruise to Australia. They booked a cruise to Australia but never made it because Cotten died in India. Robertson wants us to know that she did not work “mainly” as a bartender and waitress. She was an “HR professional.” (While it is true she had a few HR jobs, she was always happy to leave those jobs when the opportunity for travel and leisure presented itself. She quit her full-time post in the HR department of Porter Airlines when she met Cotten, saying in the book, she returned to bartending and waitressing on the side.) Finally, Robertson did not at one time deliver cash directly to Quadriga customers, as I misstated earlier. She delivered cash to Cotten, who then mailed it to Quadriga customers.

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News: Craig Wright loses $100M, Kickstarter goes blockchain, Neo-Nazis get rich on Bitcoin

The price of Bitcoin is now around $49,000, down from an all-time-high of nearly $69,000 a month ago. So much for “store of value.”

As for the top stablecoins, which have become the lifeblood of the crypto industry, there are now 77 billion tethers in circulation and 41 billion USDC in circulation. To offer some perspective, at the beginning of 2021, there were only 21 billion tethers and 4 billion USDC in existence. It’s understandable why regulators are getting nervous. 

I apologize to my followers. I haven’t been writing as much in recent months, mainly due to goings-on in my personal life and not having a permanent residence since COVID struck. All that is changing. I’m hoping to find the time and the focus to get back into it again, so this newsletter is as much an effort to bring myself up to speed — as you. 

Here’s what happened in the past week. 

Another crypto hearing

Crypto execs went to Capitol Hill to defend crypto on Dec. 8. The House Financial Services Committee, led by Rep. Maxine Waters (D. Calif.), called the hearing — titled “Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States”— to explore how the government should reign in the industry.  

Crypto doesn’t want to be reigned in, so throughout the hearing, six crypto bigwigs pushed the same, tired propaganda: the world needs stablecoins, W3 (the new pump term for crypto as a way to make it look innovative and avoid regulations) is a real thing, and crypto will bank the unbanked. You can listen to the hearing here and on Youtube. The NYT did a nice job covering the highlights. 

During the hearing, Brian Brooks, a former top banking regulator under Trump who now heads bitcoin miner Bitfury, basically gave it away that the market is controlled by a few big actors — not nebulous market forces. (Financial Times)

Craig Wright loses $100 million

Despite claims that he is the inventor of bitcoin, Craig Wright (who critics call “Fake Satoshi”) has never been able to prove it. Since 2018, Wright has been entangled in a lawsuit with the brother of his ex-friend over 1.1 million bitcoin mined in the early days of bitcoin by the real Satoshi. That trial, which should really be part of a Netflix series, has finally come to an end. 

A Florida federal jury ruled that Wright does not owe half of 1.1 million bitcoins to the family of David Kleiman. Wright says he feels “completely vindicated.” However, the jury did find Wright liable for conversion (the illegal taking of property, in this case intellectual property), and ordered him to pay $100 million in compensatory damages to the joint venture between the two men. Since Wright has bragged that his family is one of the richest in the world, this should be no problem for him. (Gizmodo)

Kickstarter goes blockchain

Crowdfunding platform Kickstarter is switching to the blockchain, much to the horror of its user base. 

Kickstarter, which launched in 2009, never realized the kind of big money its investors fantasized about, and the company has been treading water in recent years. In 2020, during the economic downturn, Kickstarter laid off 40% of its workforce. (Bloomberg)

Gizmodo writes: “How this will actually work, beyond Kickstarter being able to yell ‘blockchain’ like a spell to summon investors or maybe getting a cut of every project that runs on the resulting protocol, is unclear.” 

Neo-Nazis win big on bitcoin

Bitcoin’s surge was a boon for white supremacists. The Southern Poverty Law Center identified 600 crypto addresses used by white supremacists and far-right extremists, including many high-profile personalities, who profited by soliciting donations in bitcoin. (NBC News)

Credit cards and payment platforms, such PayPal and Stripe, have cracked down on right-wing extremists, making crypto an easier route for fundraising.

“The estimated tens of millions of dollars’ worth of value extreme far-right figures generated represents a sum that would almost certainly be unavailable to them without cryptocurrency, and it gave them a chance to live comfortable lives while promoting hate and authoritarianism,” SPLC said in its report.

Gerald Cotten’s widow wrote a book

Jennifer Robertson, the widow of Gerald Cotten, the deceased CEO of failed Canadian crypto exchange Quadriga, has a book coming out. “Bitcoin Widow: Love, Betrayal and the Missing Millions,” tells the story of a young woman who simply fell in love with the wrong guy.

Robertson has claimed in court documents that she knew nothing of her husband’s illicit activities, despite the fact that Cotten was funneling Quadriga customers’ money into her real estate business, so she could buy millions of dollars worth of property. She also waited a month to tell unsuspecting Quadriga customers, who kept sending their funds to Quadriga, that Cotten was dead.

Published by HarperCollins, the book comes out in mid-January. You can pre-order it on Amazon.

AWS outage

How decentralized is decentralized finance? Answer: Not very. An outage at Amazon Web Services’ key US-East-1 cloud region illustrated the point when it knocked out customers globally, including Alexa, Ring, Disney Plus, and countless others, on Dec. 6. (Data Center Dynamics; Vice)

The outage also brought hours-long operational disruptions to decentralized exchange dYdX and centralized exchanges Binance US and Coinbase. Dydx, which runs on smart contracts on the Ethereum blockchain, is the fourth largest DeFi exchange by volume, according to Coinmarketcap.

“Unfortunately, there are still some parts of the exchange that rely on centralized services (AWS in this case). We are deeply committed to fully decentralizing and this remains one of our top priorities as we continue to iterate on the protocol. We apologize for this outage,” dydx tweeted.

WhatsApp enables Novi

Messaging service WhatsApp is piloting Novi in the US, allowing a select group of individuals to send and receive money within a WhatsApp chat without paying fees.

Novi is Facebook’s (now Meta’s) digital wallet. The Novi wallet can only handle stablecoins, so it won’t be sending actual dollars. And it won’t be sending Diem, formerly Libra, Facebook’s long-planned cryptocurrency, either. Instead, it will be sending the Pax dollar stablecoin (USDP). (Novi announcement; Techcrunch)

A few other things . . .

Crypto has a giant PR machine that comes in the form of several media outlets — owned and paid for by actual crypto companies — who spin out continual propaganda. In the case of Coindesk, it is owned by Digital Currency Group, a seed investor in over a hundred crypto firms.

Anyway, Coindesk finally said the quiet bit aloud on Twitter: “Yes, it’s a Ponzi scheme but who cares?”

Keanu Reeve’s laugh in response to NFTs on the Verge is priceless.

Poloniex gets busted by SEC for $10M, and Circle pays — again

Sometimes you make a bad business decision, and you keep paying for it. And for Circle — the company behind the USDC stablecoin — that bad decision was Poloniex, the crypto exchange it bought in February 2018 for $400 million.  

The Securities and Exchange Commission announced in a press release on Monday that Poloniex agreed to pay $10 million to settle charges that it operated an unregistered securities exchange. Poloniex neither admits or denies the claims by agreeing to the settlement. 

Circle, which plans to go public via a special-purpose acquisition company merger, will cover the cost of the settlement, adding to the $156.8 million it already lost when it sold Poloniex in October 2019 — only 18 months after buying the troubled exchange. 

According to the SEC, Poloniex allowed users to trade digital assets that were unregistered securities from July 2017 through November 2019, though it didn’t specify exactly which tokens were securities. 

Exchanges that sell securities have to register with the SEC or apply for an exemption, according to Section 5 of the Security and Exchange Act of 1934. 

Although Circle had plans to turn Poloniex into a regulated exchange, those plans never materialized. Instead, Circle ended up paying for Poloniex’s mistakes.

History of Polo

Poloniex launched in January 2014. In its early days, it operated out of Somerville, Massachusetts, not far from Circle headquarters in Boston. 

The exchange started off allowing users to trade bitcoin for a number of “promising” altcoins — such as Namecoin, Memorycoin, Klondikecoin, Earthcoin, and the like — as you can see from this 2014 web archive. 

In March 2014, Poloniex lost 12.3% of its bitcoin supply (97 BTC), worth around $48,000 at the time, when it was hacked, leaving the company insolvent.  

“I take full responsibility; I will be donating some of my own money, and I will not be taking profit before the debt is paid,” Poloniex then-owner Tristan D’Agosta said on BitcoinTalk, writing under the username Busoni.

By July 2014, D’Agosta said he had paid back the debt, thanks to the popularity of Monero, a privacy coin known for its use in money laundering, darknet markets, ransomware, and cryptojacking. 

Later, the exchange allowed users to trade altcoins against Ether and increasingly Tether — a stablecoin with dubious backing. 

Since Poloniex was never able to get proper banking, it remained a crypto-to-crypto exchange. If you wanted to exit into fiat, you had to move your BTC or ETH to a banked crypto exchange, such as Kraken or Coinbase.

All through the initial coin offering craze and bitcoin bull market of 2017, Poloniex cashed in, listing a slew of ICO tokens in the same manner that it had previously listed all those altcoins. 

Circle knew the SEC was breathing down Polo’s neck when it opted to purchase the exchange.

According to Circle’s consolidated December 31, 2020, and 2019, financial statements, which were part of its SPAC filing, the SEC had filed a complaint against Poloniex in December 2017 related to “the trading of cryptocurrencies that may be characterized as securities.” Circle set aside $10.4 million to pay for the settlement. 

In July 2017, the SEC released its infamous DAO Report, effectively saying that most ICOs were investment contracts. The report also warned crypto exchanges that they needed to register with the SEC as a national exchange or apply for an exemption — if they were going to list these tokens. 

At that time, Poloniex should have delisted every single one of its ICO tokens. Instead, the exchange put profits ahead of common sense. 

“Poloniex chose increased profits over compliance with the federal securities laws by including digital asset securities on its unregistered exchange,” Kristina Littman, chief of the SEC enforcement cyber unit, said in a statement.  

Big plans

Circle purchased Polo with pie-in-the-sky plans. A few months after the purchase, Circle would get $110 million in funding led by Bitmain, a Chinese crypto mining company, to launch USDC. Eventually, the stablecoin business would become more attractive. 

Jeremy Allaire and Sean Neville, Circle’s co-founders, described turning Poloniex into a marketplace for “tokens which represent everything of value,” including physical goods, real estate and even creative productions. 

The timing of the purchase was terrible. In February 2018, Bitcoin had lost half of its value since reaching nearly $20,000 in December 2017. Retailers were selling their bitcoin and getting out of the crypto markets. And Poloniex was left with a backlog of 140,000 open customer tickets to deal with.

Circle figured that if it could transform Poloniex into a respectable alternative trading system — a type of exchange that would qualify for an exemption — the SEC would not push charges. 

According to a leaked slide from a Circle presentation, the SEC told Circle that it would “not pursue any enforcement action for prior activity” at Poloniex as long as Circle turns it into a regulated exchange. 

Only the ATS never happened. Instead, Circle moved most of Poloniex’s international operations offshore to Bermuda in July 2019, so that it could sidestep US regulations. 

Around the same time, Poloniex announced a partnership with payment processor Simplex in mid-2019 that allowed users in 80 countries to fund their accounts with cash and have their money automatically “tokenized” into USDC.  

Meanwhile, throughout 2019, Poloniex’s problems kept adding up.

Circle received subpoenas from the US Treasury Department’s Office of Foreign Assets Control (OFAC) and an Iranian government agency looking into Poloniex registered accounts and transactions that may have violated sanctions. According to its SPAC filings, Circle estimated the penalty would be between $1.1 million to $2.8 million.

Several Poloniex investors lost money in May 2019 when CLAM token suffered a flash crash, causing substantial numbers of margin loans to default. The exchange had to socialize $14 million in losses, opening itself up to class-action lawsuits. 

Circle estimated it would have to pay $1.3 million for two settlements, according to its filings. The company says “the remaining prospective claims are not probable of being successful at the current time and will continue to monitor developments around these claims and other claims made by affected lenders.”

Enough is enough

In October 2019, Circle decided to spin off Poloniex to a new entity — Seychelles-based Polo Digital Assets Ltd — backed by an Asian investment group. Tron CEO Justin Sun led the consortium with plans to invest $100 million into the exchange. 

Why did Circle sell Polo? It is likely the crypto downturn of 2018 made operating the exchange too costly. And I’m guessing it was a lot more work to turn Polo into a regulated exchange than Circle anticipated, given all Polo’s previous mishaps. 

Neville stepped down from Circle after the sale. He didn’t give an explicit reason why, but he told Coindesk that the company’s recent sale of Polo was one of several factors that made “the time appropriate for me to transition.” 

After that, Circle decided to put all of its energy into its USDC stablecoin, of which there are now 26.7 billion in circulation. 

Fluffy Pony and the irresistible cookie jar

What a shock. You step off a plane on a quick stopover on your way to Mexico and you are greeted by US Marshals. There you are, packed and ready for the beach, sunshine, and cocktails, and instead you are hauled off to jail for evading justice. Surely a misunderstanding!

Riccardo Spagni — aka @fluffypony — was arrested in Nashville on July 21, when a private charter plane he was flying from New York to Los Cabos stopped to refuel. US Marshals brought him in on extradition charges on behalf of South Africa, where he was living up until March 21. Here is the executed warrant.

“​​I have been held in contempt of court and [am] currently awaiting extradition. I am hoping to resolve this misunderstanding within a short while. In the meantime my business affairs will continue under the leadership of my partners,” Spagni communicated through his wife’s Twitter account Monday.

At issue — Spagni, who is 38, apparently did not show up for court appearances in South Africa on May 24 and April 19. After the second missed court appearance, a warrant was issued for his arrest, and the wheels of hunting him down sprung into motion. As it turns out, the US signed an extradition treaty with South Africa in 1999. 

Spagni, who enjoys the good life, is best known as the former lead maintainer of Monero (XMR) — a privacy coin that’s a favorite among ransomware hackers and money launderers. He stepped away from that job in late 2019 to co-found Tari, a Monero sidechain for “privacy-focused open source projects.”

Spagni is charged with invoice fraud. Between October 2009 to June 2011, when he worked as an IT manager at Cape Cookies — a cookie company with about 150 employees — he submitted fake invoices to the firm to the tune of nearly $100,000, according to documents filed with a Tennessee district court. He could face up to 15 years.*

US attorneys argue that Spagni should be detained without bail because he is a flight risk. After all, he already pulled a no-show for two court appearances in South Africa.

“Now that he is aware that South Africa seeks his extradition from the United States, he has strong incentive to disappear, whether to a third country or to an underground location within the United States,” the government said. 

On top of that, Spagni has the means to run off in style. He holds a lot of crypto, and his other assets include two homes in upstate New York and a ridiculously expensive watch, prosecutors argue. A photo of him wearing that watch has been floating around Twitter. 

Someone using a ProtonMail account tipped off Magistrate Judge Alistair Newbern about Spagni’s activities and assets. The judge obviously felt the information was pertinent, because she included the email as evidence on Aug. 3, the same day she received it.

The sender points out that Spagni attended the crowded Bitcoin Miami conference on June 4-5, 2021. A photo in Decrypt shows him standing unmasked alongside Paris Hilton and Dan Held, marketing director at crypto exchange Kraken, at Story nightclub in Miami.  

The conference was a COVID hotspot. Bitcoiners are famous for being anti-vaxxers and several attendees reported coming down with symptoms of the disease soon after. 

As we see later, Spagni uses his fear of catching COVID as an excuse for not showing up to things, like court appearances, but somehow it didn’t deter him from going to a virus laden bitcoin conference.

In addition to the $800,000 Richard Mille watch he owns, the email notes that Spagni owns another $750,000 watch and has a car collection that includes a 458 Ferrari Spider, valued at $260,000, as well as a Lamborghini.

The original email contained links — likely some sort of proof that Spagni owns these objects — but the links don’t come through in the court filing. (If I find them, I’ll add them later.)

Spagni’s defense team

Spagni has hired notable crypto lawyer Brian Klein — the same lawyer hired by former Ethereum developer Virgil Griffith, who was recently taken back into custody for violating his bail restrictions. Klein works out of Los Angeles for his firm Waymaker. Spagni is also represented by Bone McAllester Norton in Nashville. 

His defense team — four attorneys total — submitted a 20-page response to the government’s motion for detention ahead of Spagni’s extradition hearing. A video hearing on Spagni’s pre-trial detention will be held on Aug. 5. 

So, what was Spagni thinking when he left South Africa on March 21? He knew he had a court appearance coming up. He had already rescheduled the appearance several times. At first, the court hearing was set for June 18, 2020. His counsel then delayed it to October 7, 2020, and then again to March 24, 2021, using Spagni’s fear of catching COVID as an excuse, according to court docs.

Spagni, as his current defense team points out, is grossly overweight and has asthma, factors that put him at greater risk of becoming seriously ill if he catches the virus.

Meanwhile, in the midst of rescheduling his court appearances, he was preparing to emigrate to the US under an O-1 Visa for Individuals with Extraordinary Ability or Achievement, which he obtained in October 2020. 

These visas generally go to people who show huge talent in business or the arts with some sort of national or international notoriety. Apparently, developing a crypto used for money laundering counts as an “extraordinary achievement.” I had no idea.

In any event, Spagni and his wife were in Bermuda on March 30 with plans to head to the US when Spagni got notice of his April 19 court appointment in South Africa. So what did he do? Instead of turning around and going back to his home country, he continued onward, entering the US on April 14.  

For some reason — and it is not clear how he came to this conclusion — Spagni presumed he could attend the proceedings in South Africa remotely, making it okay, in his mind, for him to leave the country.

Spagni and his wife were “deathly afraid of making an immediate return trip that would have doubled their exposure to COVID-19 and potentially jeopardized their emigration to the United States,” his defense team writes.

His lawyers go on to say that the courts in South Africa had Spagni’s telephone number, email, and his secretary’s telephone number, yet none of these avenues of contact were tried before the April 19, 2021, warrant was issued.

In contrast, federal prosecutors claim that “South African authorities attempted to locate SPAGNI at his home address and through contacts with his friends and family, but to no avail. Further investigation revealed that SPAGNI had fled South Africa.”

Did he forget to inform the courts he was leaving the country? Once they saw his house was empty, where they obliged to politely call him to see if there was perhaps a … misunderstanding?

Special circumstances

Spagni’s defense team lists three “special circumstances” for why Spagni should be let out on bail.

Special circumstance #1: his health. Currently, Spagni is being detained in Kentucky. “Every day Spagni is detained, he is in life-threatening danger,” his counsel said.

They continue:

“Because of Spagni’s very real concerns about COVID-19, he is permitted to stay in solitary confinement for 24 hours of the day in order to lower the risk of COVID-19 transmission to himself. This is no easy choice for Spagni, given that it means he is in constant isolation and has not even seen sunlight in over a week.” 

I must admit, it is truly impressive that Spagni was able to overcome this level of abject terror to make it to Bitcoin Miami. I don’t think I could have done it. 

Special circumstance #2, defense argues, is that Spagni has a high probability of defeating his extradition because the case is old and the bank records needed to prove his guilt were lost in a fire in 2009. 

“In other words, South African authorities have no means to prove that Spagni was the recipient or beneficiary of the allegedly fraudulent proceeds. Beyond that, the case is severely dated and any witness testimony at this juncture, especially given the lack of corroborating paper records, is likely to be unreliable.”

While all that may be true, Spagni is not on trial in the US. When it comes to his extradition hearing, the Secretary of the State determines whether to surrender a fugitive. There only needs to be enough evidence to sustain the charge under the provisions of the treaty.

The third and final special circumstance they give is that the nature of the case and how it has been handled favor bail.

“The prosecution against Spagni has stopped, started, and meandered for over a decade and the decision to issue a warrant for Spagni’s arrest is vexing considering that the government has delayed the matter for a period of years because it was not prepared to proceed forward with trial as scheduled, but Spagni’s failure to attend a court session in person during a pandemic when he was unvaccinated and located in a different part of the world was considered grounds for an arrest warrant (and extradition).”

While Spagni’s defense team will zero in on Spagni’s COVID angst, prosecutors are going to focus on the fact that he is a flight risk. He knew he had unfinished business in South Africa. Yet, he delayed his court appearances several times, all the while making plans to leave the country and relocate to the US. 

Getting arrested while you’re en route to Mexico doesn’t look good either. And the fact that Spagni recently attended a packed bitcoin conference where nobody was wearing a mask will not help his cause. But who knows? Maybe with Klein’s support, he’ll see the sunshine again — albeit while wearing an ankle bracelet.

*He could face up to 15 years, not 20, as stated earlier.

(Updated Aug. 4 to clarify that Spagni missed two court dates, May 24 and April 19, 2021, and that he left South Africa, bound for Bermuda and then the US, on March 21.

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News: EU to make BTC traceable, Circle’s stab at transparency, DoJ probes Tether for bank fraud

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Regulation

It’s time for Bitcoin to put on its big-boy pants. If you want to be real money, it turns out, you have to follow real money rules.

In light of that, the European Commission, the EU’s executive body, wants to apply FATF’s travel rule to crypto to make transactions more traceable. The rule, which already applies to real money transfers, will require all transfers of crypto assets to be accompanied by full details of both the sender and the receiver. 

“Crypto assets are increasingly used for money laundering and other criminal purposes,” the European Commission VP said in a press conference. “We’ll now bring crypto assets fully in scope of EU AML rules. (Press release; BBC)

In my last newsletter, I touched on a new stablecoin academic paper — “Taming Wildcat Stablecoins.” I’m bringing it up again because of the paper’s political importance, which is getting overlooked right now.  

The paper describes Tether as an equity instrument akin to a money-market fund and all other stablecoins as debt instruments. This appears to be an intentful regulatory distinction. I’m guessing it will come up again when the hammer falls on stablecoins — particularly Tether. Read the paper!

A bipartisan infrastructure bill agreed on by Senators and President Biden proposes to raise $28 billion from crypto investors by applying stricter IRS reporting requirements to exchanges and other parties. (Bloomberg)

CFTC Commissioner Dan Berkowitz spoke about decentralized finance at DACOM DeFI 2021. He has talked about DeFi platforms in the past. But this time, he said the contracts themselves are illegal. (Youtube)

“If you have a system where you take out the intermediary and you just have a bunch of people trading contracts, those contracts are still in violation of the Commodity and Exchange Act,” he said. “It’s not just the intermediaries that are regulated — it’s the instruments themselves and the people that are using them.”

On June 27, the Senate Banking Committee held a hearing called “Cryptocurrencies: What are they good for?” If you don’t have time to listen to the whole thing, Alexis Goldstein, senior policy analyst at nonprofit coalition Americans for Financial Reform, recaps the important bits in a Twitter thread.

Sen. Elizabeth Warren is concerned about the risk crypto poses to the financial system. In a letter to Treasury Secretary Janet Yellen, she suggested Yellen tap the Financial Stability Oversight Council — a panel of top regulators that the Treasury secretary chairs — to “act with urgency.” Warren cited stablecoins, DeFi, exposure to hedge funds, and risk to banks. (Politico)

Tether’s criminal probe

The big news: The US Justice Department is investigating Tether for bank fraud. It looks like the DoJ may have leaked a target letter to Bloomberg. (If you’re not sure what that is, here is a sample target letter.)

I wrote a blog post explaining Tether’s banking history. David Gerard and I also did a podcast on the topic for “When the Music Stops.” 

Why would the DoJ leak a target letter? Because they are giving the public a heads up on what is to come. Fifty percent of all bitcoin is still traded against tethers and this could have a potentially big impact on the market. In other words: Get your funds off Tether exchanges now. 

The Tether printer is still paused, as it has been since the end of May/early June. There are currently 62 billion USDT in circulation, with Tether having burned another 200 million USDT in the last week. 

We don’t know why Tether stopped printing. But the timing corresponds with China’s crackdown on crypto and all the stuff going on with Binance. It’s also possible Tether knew the DoJ was onto them.

Tether says that its reserves consist mostly of commercial paper, which would make it one of the largest commercial paper holders in the world. Is it Chinese commercial paper? Tether won’t say, but if it is, that could pose a problem for Tether as Chinese regulators want real estate developers — major issuers of CP — to start disclosing more details of CP issuance on a monthly basis. (CNBC)

In their infinite wisdom, Tether execs — CTO Paolo Ardoino and General Counsel Stuart Hoegner — decided it would be a good idea to go on CNBC to be interviewed by Deirdre Bosa. (Youtube)

Naturally, Bosa asked them about their commercial paper. 

“We don’t disclose our commercial partners, so that is quite important,” Ardoino said. “Given our portfolio composition in commercial paper, we believe that it is quite important to respect the privacy of the banking partners that we work with.” 

Privacy of banking partners? Just about every money-market fund out there lists all of its holdings by size and issuer and CUSIP — a unique code assigned to most financial instruments.  

“Everything in this interview melted my brain,” says Bloomberg’s Matt Levine. 

Circle releases a new attestation

Circle released its May attestation with additional transparency around its USDC stablecoin. The Boston firm is trying to go public via a SPAC. 

In the past, Circle’s attestations pointed vaguely to “approved investments.” Now it has released a full breakdown of its investments, sort of. (Doomberg)

Sure, it’s a step toward greater transparency, but why doesn’t Circle just go ahead and release its Q1 financials? If everything is on the up and up, that would seem like the simplest way to remove any doubt about USDC’s backing. 

Frances Coppola, who worked in banking for over a dozen years, thinks Circle is commingling funds. (Twitter thread)

Binance loses another wheel

The wheels keep falling off the Binance bus. UK bank NatWest has joined Santander and Barclays in cutting off payments to the crypto exchange. (Coindesk)

The bad news follows the UK’s Financial Conduct Authority issuing a consumer warning about Binance on June 26, which Binance played down as no big deal.  

In the UK, crypto businesses are required to register with the FCA. Binance Markets Ltd., the company’s UK arm, applied but withdrew its application on May 17 after intensive engagements with the FCA who had concerns with the exchange’s AML safeguards and lack of a headquarters. 

Hedge funds are also backing away from the ticking time bomb that is Binance. Tyr Capital has significantly reduced its exposure, along with ARK36. (FT)

Binance changed its withdrawal limit from 2 BTC to just 0.06 BTC for all users without KYC. The change goes into effect for new users right away and existing users on Aug. 4. (Binance website; archive)

Either Binance is making a greater effort to comply with AML rules — or they are insolvent. I’m going to go with #2. 

Meanwhile, CZ is pretending everything is fine, so people don’t move all their funds off the exchange in a panic, causing the entire house of cards to collapse, like Mt Gox in 2014. 

CZ talks a big game about making Binance compliant, but that is all it is and all that it’s ever been — talk. Along those lines, he is now discussing taking Binance US public via an IPO. (Cointelegraph)

He also says he wants to hire a new CEO as the exchange tries to comply with regulations.(Coindesk)

If you still have money on Binance, get it off now. Otherwise, #SFYL.

A world of hell for BlockFi

New Jersey-based crypto lending firm BlockFi is getting into all sorts of trouble over its high-yield BlockFi Interest Accounts, or BIAs, which look a lot like unregistered securities.

You send crypto to BlockFi and they issue you BIAs, which earn 7.5% interest. You get paid monthly, and the incentive is to just keep rolling the funds back into BIAs, because look how rich you are — on paper!

The New Jersey Bureau of Securities issued a summary cease and desist order to BlockFi ordering the company to stop offering BIAs to customers in NJ. Originally, the order was set to hit on July 22, but it has been delayed to Sept. 2, according to BlockFi. 

In a press release on July 21, the Alabama Securities Commission said it has issued a show of cause to the firm. The order gives BlockFi 28 days to explain why they should not be directed to cease and desist from selling unregistered securities in Alabama. 

Following that, the Texas State Securities Board said in a notice of hearing on July 22 that the BIA is a security under state law. A hearing is set for Oct. 13. Texas also claims BlockFi violated the state laws by selling securities without being registered as a dealer or agent. 

Vermont also issued a show of cause order on July 22.

Meanwhile, BlockFi CEO Zac Prince has spun this like a bunch of good news. “We’ve said time and again that the key to our industry’s success is appropriate regulation. Ultimately, we see this as an opportunity for BlockFi to help define the regulatory environment for our ecosystem,” he said in a blog post.

Virgil Griffith taken into custody

Virgil Griffith, the former Ethereum developer who got himself into hot water by going to DPRK and giving a talk on crypto, has got himself into more hot water. 

Griffith, who has been living with his parents since his indictment, violated his bail conditions by trying to access his crypto on Coinbase. The judge thinks he is a flight risk, so he’s put Griffith behind bars to await trial in September. 

Since his arrest in November 2019, Griffith’s $100,000 in ETH has grown to $1 million in ETH. He had his mother reach out to Coinbase on his behalf. Griffith is a smart guy, who apparently does dumb things. 

“Though the defendant is a bright well-educated man, his method of circumvention of the Order was neither clever nor effective,” the judge said. (Court filing)

Other newsworthy bits

MicroStrategy just posted a $299 million loss for Q2 after betting the house on Bitcoin. But like any crazed degenerate gambler, Michael Saylor plans to keep buying more bitcoin. (Press release; Forbes)

El Salvador’s President Nayib Bukele is pioneering hustle bro populism. Bukele distracted from his self-coup when he announced bitcoin soon after. (FP)

El Faro got a copy of the presentation Cardano gave to the El Salvador government. This is somewhere between hilarious and tragic. Bukele and his regime want to implement their colón-dollar stablecoin by Sept. 7, yet they literally have no plan for how to make it happen, so they are fishing for anything. (Leaked presentation)

Coinbase is the target of a class-action. The lead plaintiff, Brandon Leidel, claims he lost money investing in COIN when the price of the shares fell right after all the VCs cashed out. (Complaint; Law360, paywalled)

Dfinity has been hit with a class-action claiming the company sold its Internet Computer Project (ICP) tokens as an unregistered security. The suit targets Olaf Carlson-Wee’s crypto hedge fund Polychain Capital, venture capital firm Andreessen Horowitz, and Dfinity’s founder Dominic Williams as the “controlling defendants.” (Complaint; Decrypt)

DeFi exchange Uniswap is blocking 100 tokens from its website — including tokenized stocks and some derivatives. The move came right after the CFTC commissioner said contracts were illegal on DeFi. (Alexis Goldstein)

Paxos’ General Counsel takes aim at Tether and USDC, claiming that the two stablecoins it issues — Paxos Standard and BUSD — are both regulated, while Tether and USDC are not. It also claims Paxos Standard and BUSD are are backed by 96% cash or cash equivalents. (Paxos blog post; The Block)

Multilevel-marketing schemes are a predatory wealth transfer from low-information people recruited into the scheme directly to the company upper ranks’ pockets. Stephen Dhiel writes about unintentional scams. (Blog post) 

Bitcoin’s gold rush was always an illusion. Millions of people have bought into the idea that crypto could make them rich, fast. But these booms are fake. Really good story in the New Statesmen.

Podcast: ‘Target Letter, Tether’ (Amy Castor and David Gerard)

I did a podcast for “When the Music Stops” with fellow crypto skeptic David Gerard, where we discuss the Justice Department’s criminal probe into Tether. You can also listen to the podcast on Spotify and Apple Podcasts.

David and I talk about what the DoJ probe means, why they may have leaked the info to Bloomberg, and take a guess as to when Tether may have gotten a “target letter” from federal prosecutors. (Hint: probably about the time that Tether stopped printing.)

Aviv Milner is the host. He has been doing a number of interviews with crypto skeptics, and I highly recommend perusing his other podcasts as well.

If you want more details on Tether’s banking history, read my blog post — “The DoJ’s probe into Tether — what we know” — which relates to much of what we talk about in the podcast.

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The DOJ’s criminal probe into Tether — What we know

Early this morning, Bloomberg reported that Tether executives are under a criminal investigation by the US Department of Justice.  

The DOJ doesn’t normally discuss ongoing investigations with the media. However, three unnamed sources leaked the info to Bloomberg. The investigation is focused on Tether misleading banks about the true nature of its business, the sources said.

The DoJ has been circling Tether and Bitfinex for years now. In November 2018, “three sources” — maybe even the same three sources — told Bloomberg the DOJ was looking into the companies for bitcoin price manipulation. 

Tether responded to the latest bit of news in typical fashion — with a blog post accusing Bloomberg of spreading FUD and trying to “generate clicks.” 

“This article follows a pattern of repackaging stale claims as ‘news,” Tether said. “The continued efforts to discredit Tether will not change our determination to remain leaders in the community.”

But nowhere in its post did Tether deny the claims. 

Last night, before the news broke, bitcoin was pumping like crazy. The price climbed nearly 17%, topping $40,000. On Coinbase, the price of BTC/USD went up $4,000 in three minutes, a bit after 01:00 UTC. 

After a user placed a large number of buy orders for bitcoin perpetual futures denominated in tethers (USDT) on Binance — an unregulated exchange struggling with its own banking issues — The BTC/USDT perpetual contract hit a high of $48,168 at around 01:00 UTC on the exchange.

Bitcoin pumps are a good way to get everyone to ignore the impact of bad news and focus on number go up. “Hey, this isn’t so bad. Bitcoin is going up in price. I’m rich!”

So what is this DoJ investigation about? It is likely a follow-up to the New York attorney general’s probe into Tether — and its sister company crypto exchange Bitfinex — which started in 2018. 

Tether and Bitfinex, which operate under the same parent company iFinex, settled fraud charges with the NY AG for $18.5 million in February. They were also banned from doing any further business in New York.

“Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” the NY AG said.

The companies’ woes started with a loss of banking more than a year before the NY AG initiated its probe. 

Banking history

Tether and Bitfinex, both registered in the British Virgin Islands, were banking with four Taiwanese banks in 2017. Those banks used Wells Fargo as a correspondent bank to process US dollar wire transfers. 

In other words, the companies would deposit money in their Taiwanese banks, and those banks would send money through Wells Fargo out to the rest of the world. 

However, in March 2017, Wells Fargo abruptly cut off the Taiwanese banks, refusing to process any more transfers from Tether and Bitfinex. 

About a month later — I would guess, after Wells Fargo told them they were on thin ice — the Taiwanese banks gave Tether and Bitfinex the boot.  

Since then, Tether and Bitfinex have had to rely increasingly on shadow banks — such as Crypto Capital, a payment processor in Panama — to shuffle funds around the globe for them. 

They also started furiously printing tethers. In early 2017, there were only 10 million tethers in circulation. Today, there are 62 billion tethers in circulation with a big question as to how much actual cash is behind those tethers.  

Crypto Capital

Partnering with Crypto Capital turned out to be an epic fail for Bitfinex and Tether.

The payment processor was operated by principals Ivan Manuel Molina Lee and Oz Yosef with the help of Arizona businessman Reggie Fowler and Israeli woman Ravid Yosef — Oz’s sister, who was living in Los Angeles at the time.

In April 2019, Fowler and Ravid were indicted in the US for allegedly lying to banks to set up accounts on behalf of Crypto Capital. Fowler is currently awaiting trial, and Ravid Yosef is still at large. 

Starting in early 2018, the pair set up dozens of bank accounts as part of a shadow banking network for Crypto Capital. Some of those banks — Bank of America, Wells Fargo, HSBC, and JP Morgan Chase — were either based in the US, or in the case of HSBC, had branches in the US, and therefore, fell under the DOJ’s jurisdiction. 

In total, Fowler’s bank accounts held some $371 million and were at the center of his failed plea negotiation in January 2020. Those accounts, along with more frozen Crypto Capital accounts in Poland, meant that Tether and Bitfinex had lost access to some $850 million in funds in 2018.

Things spiraled downhill from there. Molina Lee was arrested by Polish authorities in October 2019. He was accused of being part of an international drug cartel and laundering funds through Bitfinex. And Oz Yosef was indicted by US authorities around the same time for bank fraud charges.

Tether stops printing

At the beginning of 2020, there were only 4.5 billion tethers in circulation. All through the year and into the next, Tether kept issuing tethers at greater and greater rates. Then, at the end of May 2021, it stopped — and nobody is quite sure of why. Pressure from authorities? A cease and desist order? 

Usually, cease and desist orders are made public. And it is hard to imagine that there would be an order that has been kept non-public since May.

One could argue, you don’t want to keep printing dubiously backed stablecoins when you’re under a criminal investigation by the DOJ. But as I’ve explained in prior posts, other factors could also be at play. 

For instance, since Binance, one of Tether’s biggest customers, is having its own banking problems, it may be difficult for Binance users to wire funds to the exchange. And since Binance uses USDT in place of dollars, there’s no need for it to acquire an additional stash of tethers at this time.

Also, other stablecoins, like USDC and BUSD, have been stepping in to fill in the gap.

The DOJ and Tether

You can be sure that any info pulled up by the NY AG in its investigation of Tether and Bitfinex has been passed along to the DoJ and the Commodities and Futures Trading Commission — who, by the way, subpoenaed Tether in late 2017. 

Coincidentally — or not — bitcoin saw a price pump at that time, too. It went from around $14,000 on Dec. 5, 2017, the day before the subpoena was issued, to nearly $18,000 on Dec. 6, 2017 — another attempt to show that the bad news barely had any impact on the bitcoin price. 

Tether relies on confidence in the markets. As long as people believe that Tether is fully backed, or that Tether and Bitfinex probes won’t impact the price of bitcoin, the game can continue. But if too many people start dumping bitcoin in a panic and rushing toward the fiat exits, the truth — that there isn’t enough cash left in the system to support a tsunami of withdrawals — will be revealed, and that would be especially bad news for Tether execs. 

Will Tether’s operators be charged with criminal actions any time soon? And which execs is the DoJ even investigating? The original operators of Bitfinex and Tether — aka “the triad” — are Chief Strategy Officer Phil Potter, CEO Jan Ludovicus van der Velde and CFO Giancarlo Devasini.

Phil Potter supposedly pulled away from the operation in mid-2018. And nobody has heard from van der Velde or Devasini in a long, long time. Now, the two main spokespersons for the companies are General Counsel Stuart Hoegner and CTO Paolo Ardoino, who give lots of interviews defending Tether and accusing salty nocoiners like me of FUD.  

Tracking down bad actors takes a lot of coordination. Recall that the DoJ had to work with authorities in 17 different countries to finally arrest the operators of Liberty Reserve, a Costa Rica-based centralized digital currency service that was used for money laundering. Similar to Liberty Reserve, Tether is a global operation and all of the front persons associated with Tether — except for Potter who lives in New York — currently reside outside of the US. 

It may still take a long while to completely shut down Tether and give it the Liberty Reserve treatment. But if the DoJ files criminal charges against Tether execs, that is at least a step in the right direction.

Read more: 
The curious case of Tether — a complete timeline
Nocoiner predictions: 2021 will be a year of comedy gold 

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News: Regulators zero in on stablecoins, El Salvador’s colón-dollar, Tether printer remains paused

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Here’s what’s happening in the land of crypto. 

Regulations 

A new academic paper on stablecoins is up on the Social Science Research Network. It’s called “Taming Wildcat Stablecoins.” The 49-page paper was co-authored by Gary Gorton, a finance professor at Yale, and Jeffery Zhang, an attorney at the Federal Reserve.

The pair say that Tether is an equity contract, similar to a money market fund, while other stablecoins, such as USDC, Paxos Standard, and the Gemini Dollar, are more like debt. Liberty Reserve isn’t mentioned anywhere in the paper but the authors draw parallels between stablecoins and 19th Century wildcat banks — which is saying a lot because wildcat banks needed corralling. 

Frances Coppola, a UK freelance writer who spent 17 years in banking, tweeted some harsh criticisms of the report. Overall, I think it is worth a read. FT Alphaville has their own take on the paper.

Secretary of the Treasury Janet Yellen met with the President’s Working Group on Financial Markets — aka “The Plunge Protection Team” or the “holy shit guys” — to discuss stablecoins. The group includes the heads of the Federal Reserve, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. (Treasury Press Release; WSJ, paywalled)

Their discussion builds on a document the PWG published in December outlining regulatory issues regarding stablecoins — back from when former Treasury Secretary Steven Mnuchin brought them all together to discuss Facebook’s Libra, now Diem. That paper, in turn, grew out of the Financial Stability Board’s final report on the regulation of stablecoins in October.

SEC Chair Gary Gensler spoke about crypto exchanges at the Piper Sandler Global Exchange and FinTech conference. “When you go into one of these exchanges, you don’t know whether the order book is accurately reporting the bids and the offers,” he said. “You don’t really know if there is front-running. You don’t know whether some of the trading that is reported is real or fake.” (WSJ, paywalled)

Elizabeth Warren, a Senator from Massachusetts — so famous, she gets into international news slightly more than most senators — sent a letter to Gensler about crypto exchanges telling him that “the lack of common-sense regulations has left ordinary investors at the mercy of manipulators and fraudsters.” She wants the SEC to use its “full authority” to address these risks.

El Salvador and bitcoin

Bitcoin will officially become legal tender in El Salvador on Sept. 7. The fast-approaching deadline has left the country’s President Nayib Bukele and his team scrambling to figure out a way to pull this off without landing on their collective rear ends. 

“So far, it looks like Bukele will be getting everyone onto the government’s official Chivo custodial wallet, using that as an officially-supported payment system, and saying that’s ‘Bitcoin.’” David Gerard wrote in a recent blog post spelling out how Chivo is coming along. Hint: not very well.

In a normal world, you would create the payment system first and then add in the crypto later once you made sure everything was working properly. El Salvador is going about it ass backwards — taking bitcoin, and trying to build a payment system around that. 

The challenge is that bitcoin doesn’t really function as a payment system — and the Lightning Network, a second layer solution that was meant to scale bitcoin, can’t handle a small country with 6.5 million users. 

The Chivo wallet is the one thing that Bukele and his buds can’t afford to screw up on. It’s their wallet, so they’ve hired someone named “Lorenzo” to get the job done right. I assume that Bukele and co’s first instinct was to find someone they could trust to do their bidding — not necessarily someone competent. 

The weird thing is you don’t really need to build a payment system. You can literally hire a white label payment gateway and use it under your name while the processing is done by a third party.

Anyhow, it looks like “Lorenzo” is Lorenzo Rey, the Venezuelan developer from Dash — a crypto that started off as a fork of bitcoin. I’m sure the bitcoin maxis will love that.

El Faro reports that the Bukele regime is now planning to launch a national stablecoin called “colón-dollar.” Colón (Columbus) was the name of El Salvador’s currency before it was replaced by the dollar. It’s technically still legal tender in the country, but nobody uses it. 

According to the plan, the colón-dollar will be issued by El Salvador’s Central Reserve Bank, backed by a reserve of US dollars, and integrated with the Chivo wallet. “The move would restore a key element of monetary policy, which the country lost when it adopted the US Dollar in 2001: the ability to issue national currency,” says El Faro.

A stablecoin makes sense given that Bukele needs greenbacks to pay for the national debt, finance his new party’s campaigns, and pay back owed favors to shadowy figures like José Luis Merino, a high-ranking government official in El Salvador. 

You’ll find Morino’s name — along with several others associated with the Bukele regime — on the US Corrupt and Undemocratic Actors report.

Bukele doesn’t like El Faro — which translates to “The Lighthouse” — a publication that for two decades has dug into corruption, human-rights abuses, and gang violence. 

His government recently expelled an El Faro editor who was Mexican, saying it could not verify his work credentials. (Washington Post, paywalled)

El Faro is co-owned by Jose Simán, Bukele’s rival, so of course, Bukele hates them. The paper has fought a tough battle, but its toughest battle yet may be against the Bukele regime. (Global Investigative Journalism Network)

Circle’s sly plan to go public

I wrote about Jeremy Allaire’s Circle, how it plans to go public via a special purpose acquisition company, and why SPACs are bad. (My blog) 

Circle hasn’t been transparent about what is backing its now 26.4 billion USDC. They haven’t released their Q1 financials to the public, so now we are waiting for the SPAC to file an S-4 sometime in Q4. The S-4 will be the real test of transparency. 

[Update, moments after I published this newsletter, Circle came out with its May attestation. It’s a step toward greater transparency, but we still have questions. Why no full audit? Why the delay in making this info public?]

In his recent article, “A Stablecoin Applies to Become a Stonk,” Doomberg says he thinks SEC chair Gary Gensler is unlikely to let Circle pull off its terrible SPAC. “Under [former SEC chair] Clayton’s watch, the SPAC boom soared to historic heights. But from the early signs, Gary Gensler is no Jay Clayton.”

Here’s something I missed earlier: On page 52 of Circle’s Q4 2020 financials, there is a vague mention of a dispute with a “financial advisor” who claims they are entitled to “9% of any value issued to the Company’s shareholders in connection with the proposed business combination.”

Circle hasn’t disclosed who this financial advisor is, although there is some speculation as to whether Circle tried to go public with a different SPAC company earlier, and that didn’t work out. 

Here’s the text:

“The Company is currently in a dispute with a financial advisor regarding advisory fees in connection with the potential consummation of a proposed business combination. The advisor believes it would be entitled to a fee of approximately nine percent (9%) of any value issued to the Company’s shareholders in connection with the proposed business combination based on the advisor’s interpretation of its engagement letter with the Company. The Company disputes this and maintains that the advisor would receive, at most, a reasonable fee reflecting the custom and practice among investment bankers in similar size and type of transactions. At this time, no business combination has been entered into, and there is no fee owing. However, if any such transaction is completed, and a fee becomes payable to the advisor, we cannot determine the ultimate outcome of this dispute.”

Binance CEO: This is fine. Everything is fine

Binance is fast becoming a train wreck. Regulators around the world have been issuing warnings about the exchange, fiat off-ramps keep shutting, and users are complaining they can’t get their funds out. I wrote about it here and here.

Meanwhile, amidst the smoke and fire, Binance CEO Changpeng Zhao — aka “CZ” — continues to behave like everything is going swimmingly.

“A new chapter awaits us, as we embrace compliance and regulations,” he tweeted — after his Brazil director abruptly quit, and Italy, Lithuania, and Hong Kong issued notices about its questionable stock tokens.

CZ talks a big game when it comes to compliance, but that’s all it is — talk. In a June press release, the exchange bragged about helping to take down a Ukrainian crypto money laundering group.

If Binance was following proper KYC/AML procedures, it likely wouldn’t be a target for money laundering groups to begin with. 

Binance routinely reaches out to law-enforcement agencies to request thank-you notes after it cooperates with criminal probes as a way to show how law-abiding it is. The habit has become so disingenuous that the US Department of Justice straight out told federal agencies to stop signing the letters. (Bloomberg)

A bit of trivia — six years ago, CZ was the head of OKCoin’s Singapore branch, registered as a separate company during the infamous Roger Ver vs OKCoin dispute over the bitcoin.com domain. CZ was the go-between who transmitted — or fabricated — the version of the contract with a grossly forged digital signature. The saga was comedy gold on r/buttcoin in 2015.

Oh, and in case you’ve ever wondered about those “maintenance shutdowns” on leveraged exchanges, this Youtube video by Francis Kim, an investor and founder of 80bots, is a must see. “The biggest mistake I made that night was trusting Binance — that my open position would be safe with them.”

Tether printer still on pause

Tether hasn’t printed a darn thing in 50 days. They are stuck at 62.3 billion tethers. Actually, it looks like they even burned 400 million tethers since two weeks ago.

Bitcoin has lost more than half its value since April 14. Down from nearly $68,000, it’s now below $30,000. The concern is that the price of BTC will continue to drop if the Tether printer does not start up again soon.

Keep in mind, there are still a lot of tethers out there moving around between unknown wallets. And we have two other popular stablecoins — USDC and BUSD — to pick up some of the slack. 

In my last newsletter, I offered three theories on why Tether had stopped printing. Now, I am beginning to suspect some regulator may have sent them a cease-and-desist notice.  

There’s also Binance, one of Tether’s biggest customers. Binance is holding 17 billion tethers — about 30% of all the USDT out there. California-based Silvergate Bank terminated their relationship with the exchange in June. (Coindesk)

This means users can no longer transfer US dollars from their US bank to Binance, likely often used to fund purchases of USDT.

Faisal Khan, a banking and payments consultant, thinks that USDT demand probably came from leveraged traders (aka degenerate gamblers) who needed more chips for the Binance casino. (Startups and Econ)

The FT did a profile on Giancarlo Devasini, the 57-year-old CFO of Bitfinex and Tether. A former plastic surgeon, at one point, Devasini got into trouble for “unwittingly” loading unlicensed Microsoft software onto computers he was selling. He goes by the handle “Merlin.”

In communication logs from April 2018 to early 2019 shared with the New York attorney general, Merlin pleaded with “Oz” at Crypto Capital to return funds. Bitfinex had lost access to hundreds of millions of dollars of customer money entrusted to the shadow bank. The exchange had to eventually dip into Tether’s reserves to fund user withdrawals.

“Please understand, all this could be extremely dangerous for everybody, the entire crypto community. BTC could tank to below $1K if we don’t act quickly,” said Merlin. (Court document)

So, to all those who think Tether has nothing to do with the price of bitcoin, Devasini would argue differently. 

Other newsworthy stuff

BlockFi just got hit with a cease and desist from the New Jersey attorney general. The high-yield crypto lender has to stop accepting new clients in NJ as of July 22. (Order)

BlockFi has been funding its lending through the sale of BlockFi Interest Accounts, or BIAs. You put your crypto in and get BIAs in return that earn interest. The NJ AG claims these interest earning accounts are unregistered securities.*

High-yields come with high risks. Still, BlockFi CEO Zack Prince says customer funds are safe. The question is, how safe will your funds be now that BlockFi is not getting as much new money coming in?

Dogecoin dropped below $0.2, so Elon Musk stepped in to do his part. He changed his Twitter profile pic to doge eyes, which helped lift the price back up to $0.19. (Decrypt)

Dogecoin creator Jackson Palmer returned to Twitter briefly to post a scathing thread on why he left crypto. According to him, crypto is an “inherently right-wing, hyper-capitalistic technology built primarily to amplify the wealth of its proponents through a combination of tax avoidance, diminished regulatory oversight and artificially enforced scarcity.” He is 110% correct, of course. (Twitter)

Remember Virgil Griffith, the former Ethereum developer who went to the DPRK against all better judgment to speak at a conference? Virgil doesn’t really listen when people tell him not to do something. He got himself into trouble again, this time for trying to access his crypto — a violation of his bail conditions. (Court filing)  

Reggie Fowler — the person linked to $371 million in missing Bitfinex and Tether funds — has ditched plans for renegotiating a plea deal that he got very, very close to in January 2020. He’s headed to trial with his new defense team early next year. Hopefully, his new lawyer demanded payment in advance. (My blog post)

Trading volumes at the largest crypto exchanges, including Coinbase, Kraken, Binance, and Bitstamp, fell more than 40% in June, according to CryptoCompare. The cause? Bitcoin’s dropping price and China’s renewed crackdown on crypto. (CNBC)

As an article in WSJ points out, China arrested more than 1,100 people suspected of using crypto to launder dirty money in the month of June. That’s enough to put a damper on any exchange volume.

David Golumbia, a professor of digital studies at Virginia Commonwealth University and the author of Politics of Bitcoin, has a new podcast out where he talks about the right-wing politics of crypto. (Tech Won’t Save Us)

The Beijing Civil Affairs Bureau has banned an organization called China Blockchain Application Research Center. The founder is OKEx founder Star Xu, and its members include Huobi founder Lilin, Bibox founder and other giant whales of Chinese crypto. (Wu blockchain)

Hong Kong authorities have arrested four men allegedly tied to a money-laundering racket that used tethers to move $155 million through shell companies. (South China Morning Post, paywalled.)

Image: A one colón note. The colón was the currency of El Salvador between 1892 and 2001, until it was replaced by the US dollar. It is still legal tender, however.

*(July 20, 2021 — Updated to clarify that the NJ AG claims that BlockFi’s BIAs — interest earning accounts — are illegal securities. It doesn’t matter what type of crypto you buy those BIAs with, be it bitcoin, ether, or assets tied to Chainlink or UniSwap. It’s the BIAs. Also added link to the order.)

Related stories:
Binance: Italy, Lithuania, Hong Kong, all issue warnings; Brazil director quits
The curious case of Tether: a complete timeline of events
Tether’s first breakdown of reserves consists of two silly pie charts
NYAG/Tether, Bitfinex settlement reveals commingling of funds, years of shenanigans
Michael Peterson, El Salvador, and Bitcoin Beach

Binance: Italy, Lithuania, Hong Kong, all issue warnings; Brazil director quits

Ever since Germany’s BaFin and the UK’s FCA issued warnings against Binance, the dominoes have continued to topple. Global regulators are fed up with the world’s biggest crypto exchange.

This last week, three more jurisdictions issued warnings about Binance’s tokenized stocks, joining several others in voicing their concerns about the exchange.

In a press release on Thursday, Italy’s market watchdog Consob warned investors that Binance and its subsidiaries “are not authorized to provide investment services and activities in Italy.” The notice specifically points to Binance’s “stock token.” 

Lithuania’s central bank issued a warning on Friday about Binance UAB, a Binance affiliate, providing “unlicensed investment services.”

“Companies that are registered in Lithuania as virtual currency exchange operators are not supervised as financial service providers. They also have no right to provide any financial services, including investment services,” the Bank of Lithuania said.

Also on Friday, Hong Kong’s Securities and Futures Commission announced that Binance is not licensed to trade stock tokens in the territory. 

In a statement, Thomas Atkinson, the SFC’s executive director of enforcement, had stern words for the exchange: “The SFC does not tolerate any violations of the securities laws and will not hesitate to take enforcement action against unlicensed platform operators where appropriate.”

Binance responded to the mounting pressure by announcing on its website that it would cease offering stock tokens. Effective immediately, you can no longer buy stock tokens on Binance, and the exchange will stop supporting them on October 14.

As for the unlucky ones who are still holding Binance stock tokens, you apparently have 90 days to try and offload them onto someone else.

The exchange also deleted mentions of stock tokens on its website. If you click on a link to Introduction to Stock Tokens” on the site, you get a “404 error.” You can still visit the page here, however.

A short-lived bad idea

Binance introduced its tokenized stocks idea on April 12, starting with Tesla, followed by Coinbase, and later MicroStrategy, Microsoft and Apple. (Links are to archives on Wayback machine.)

“Unlike traditional stocks, users can purchase fractional shares of the listed companies with stock tokens. For instance, for a Tesla share that trades at over $700 per share, stock tokens enable investors to buy a piece of the underlying share (e.g., 0.01) instead of the entire unit,” Binance explained on its website.

Prices were settled in BUSD — a stablecoin Binance created in partnership with Paxos, a NY-based company. Binance claims its stock tokens are fully backed by shares held by CM-Equity AG, a regulated asset management firm in Germany.

The exchange also said Friday that users in the EEA and Switzerland will be able to transition their stock token balances to CM-Equity AG once the brokerage creates a special portal for that purpose, sometime in September or early October. However, the transition will require additional KYC.

Binance, whose modus operandi has always been to ignore the laws and do whatever, launched its stock token service two days before US crypto exchange Coinbase went public on the Nasdaq and bitcoin reached an all-time high of nearly $65,000. The price of bitcoin is now less than half of that.

In April, Germany’s financial regulator BaFin warned that Binance risked being fined for offering its securities-tracking tokens without publishing an investor prospectus. Binance went back and forth with BaFin on the issue, trying to persuade them to take the notice down, according to the FT, but to no avail. The warning stayed up.

In June, the UK followed with its own consumer warning, and then one by one, a host of other global regulators issued their own cautions about Binance, and banks began cutting off services to the exchange — essentially a form of slow strangulation.  

Binance clearly wasn’t thinking when it introduced those stock tokens. The move appears to have been driven by the hubris of its CEO CZ, who is now realizing that actions have repercussions. Or maybe not, since his recent tweets and a blog post celebrating Binance’s fourth birthday seem to reflect an ongoing detachment from reality.

“Together, we can increase the freedom of money for people around the world, in safe and compliant ways,” he wrote. By freedom, I assume he means, freedom to operate outside the law, or freedom to freeze withdrawals on his exchanges — a frequent user complaint, according to Gizmodo.

FTX and Bittrex

Binance isn’t the only crypto exchange to offer stock tokens. Sam Bankman-Fried’s FTX exchange also offers tokenized stocks (archive) — a service that it added in June. I suspect that a lot of Binance’s business will flow over to FTX, and we’ll soon see similar regulatory crackdowns on FTX. 

Like Binance, FTX has a US version of its exchange and a main site.

FTX is registered in Antigua and Barbuda with headquarters in Hong Kong. It offers stock tokens for Tesla, GameStock, Beyond Meat, PayPal, Twitter, Google, Amazon, and a host of others. 

Bittrex Global — another exchange that has a regulated US-based arm — also offers an impressive array of stock tokens. The Liechtenstein-based firm added the service in December 2020, according to a press release at the time, noting that “these tokenized stocks are available even in countries where accessing US stocks through traditional financial instruments is not possible.” 

FTX and Bittrex also claim their stock tokens are backed by actual stocks held by CM-Equity AG.

Binance Brazil director resigns

Banks are not the only ones distancing themselves from Binance these days.

Amidst the recent drama, Ricardo Da Ros, Binance’s director of Brazil announced his departure on LinkedIn. He had only been with the company for six months.  

“There was a misalignment of expectations about my role and I made the decision according to my personal values,” he said.

Other employees have also exited stage left in recent months. Wei Zhou, the chief finance officer at Binance, quit abruptly in June, and Catherine Coley, the CEO of Binance.US stepped down in May — though nobody has heard from her since.

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Binance: Fiat off-ramps keep closing, reports of frozen funds, what happened to Catherine Coley?

Last thing I remember,
I was running for the door.
I had to find the passage back
To the place I was before.
Relax,” said the night man.
“We are programmed to receive.
You can check out any time you like,
But you can never leave.”

~ Eagles

Binance customers are becoming trapped inside of Binance — or at least their funds are — as the fiat exits to the world’s largest crypto exchange close around them. You can almost hear the echoes of doors slamming, one by one, down a long empty corridor leading to nowhere. 

In the latest bit of unfolding drama, Binance told its customers today that it had disabled withdrawals in British Pounds after its key payment partner, Clear Junction, ended its business relationship with the exchange.

Clear Junction provides access to Faster Payments through a UK lender called Clear Bank. Faster Payments is a major UK payments network that offers near real-time transfers between the country’s banks — the thing the US Federal Reserve hopes to get with FedNow.

In a statement on its website on Monday, Clear Junction said:

“Clear Junction can confirm that it will no longer be facilitating payments related to Binance. The decision has been made following the Financial Conduct Authority’s recent announcement that Binance is not permitted to undertake any regulated activity in the UK. 

We have decided to suspend both GBP and EUR payments and will no longer be facilitating deposits or withdrawals in favor of or on behalf of the crypto trading platform. Clear Junction acts in full compliance with FCA regulations and guidance in regards to handling payments of Binance.” 

The Financial Conduct Authority, or FCA, ruled on June 26 that Binance cannot conduct any “regulated activity” in the UK. Binance downplayed the ruling at the time, telling everyone the FCA notice related to Binance Markets Ltd and had “no direct impact on the services provided on Binance.com.”

Binance waited a day after learning it was cut off by Clear Junction before emailing its customers and telling them that the suspension of payments was temporary. 

“We are working to resume this service as soon as we can,” Binance said. It reassured customers they can still buy crypto with British Pounds via credit and debit cards on the platform.   

This is the second time in recent weeks that Binance customers have been frozen out of Faster Payments. They were also frozen out at the end of June. A few days later, the service was restored — presumably when Binance started putting payments through Clear Junction.

I am guessing that Clear Bank’s banking partners warned them that Binance was too risky and that if they wanted to maintain their banking relationships, they’d better drop them as a customer asap, so they did. 

Binance talks like all of these issues are temporary snafus that it’s going to fix in due time. In fact, the exchange’s struggle to secure banking in many parts of the world is likely to intensify. 

Despite numerous claims in the past about taking its legal obligations seriously, Binance has been loosey-goosey with its anti-money laundering and know-your-customer rules, opening up loopholes for dirty money to flow through the exchange. Now that the word is out, no bank is going to want to touch them. 

Other developments

I wrote about Binance’s global pariah status earlier this month. Since I published that story, UK high-street banks have moved to ban Binance, all following the FCA ban.

On July 5, Barclays said it is blocking its customers from using their debit and credit cards to make payments to Binance “to help keep your money safe.” Barclays customers can still withdraw funds from the exchange, however. (Since Clear Junction cut Binance off, credit cards remain the only means for UK customers to get fiat off the exchange at this point.)

Two days later, Binance told its users that it will temporarily disable deposits via Single Euro Payments Area (SEPA) bank transfers — the most used wire method in the EU. Binance blamed the move on “events beyond our control” and indicated users could still make withdrawals via SEPA.

On July 8, Santander, another high-street bank, told its customers it was also stopping payments to Binance.

“In recent months we have seen a large increase in UK customers becoming the victims of cryptocurrency fraud. Keeping our customers safe is a top priority, so we have decided to prevent payments to Binance following the FCA’s warning to consumers,” Santander UK’s support page tweeted.

As I detailed in my earlier story, regulators around the world have been putting out warnings about Binance. Poland doesn’t regulate crypto markets, but the Polish Financial Supervisory Authority also issued a caution about the exchange. Its notice included links to all the other regulatory responses.

Amidst the firestorm, Binance has been whistling Dixie. On July 6, the exchange sent a letter to its customers, saying “compliance is a journey” and drawing odd parallels between developments in crypto and the introduction of the automobile. 

“When the car was first invented, there weren’t any traffic laws, traffic lights or even safety belts,” said Binance. “Laws and guidelines were developed along the way as the cars were running on the road.” 

Frozen funds, lawsuits, and other red flags

There’s a lot of unhappy people on r/BinanceUS right now complaining their withdrawals are frozen or suspended — and they can’t seem to get a response from customer support either.

Binance.US is a subsidiary of Binance Holdings Ltd. Unlike its parent company, Binance.US, does not allow highly leveraged crypto-derivatives trading, which is regulated in the US.

A quick look at the subreddit’s weekly support thread reveals even more troubling posts about lost access to funds. 

This mirrors Gizmodo’s recent findings. The media outlet submitted a Freedom of Information Act request with the Federal Trade Commission asking for any customer issues filed with the FTC about Binance. The agency located 760 complaints filed since June of 2020 — presumably mainly from Binance.US customers.  

In an article titled “32 Angry Complaints to the FTC About Binance,” Gizmodo uncovered some startling patterns. “The first, and arguably most alarming pattern, appears to be people who put large amounts of money into Binance but say they can’t get their money out.”

Also, Binance is known for having “maintenance issues” during periods of heavy market volatility. As a result, margin traders, unable to exit their positions, are left to watch in horror while the exchange seizes their margin collateral and liquidates their holdings.  

Hundreds of traders around the world are now working with a lawyer in France to recoup their losses. In a recent front-page piece, the Wall Street Journal said it suspected that the collective complaints may be the reason why Binance has received continuous warnings from many countries.

If you still have funds on Binance, I would urge you to get them off the exchange now — while you still can. When hoards of people start complaining about lost and frozen funds, it’s usually a sign of liquidity problems.  

We saw a similar pattern leading up to February 2014 when Tokyo Bitcoin exchange Mt Gox bit the dust. And also just before Canadian crypto exchange QuadrigaCX went belly up in early 2019. In both instances, users of those defunct exchanges are still waiting to recoup a portion of their lost funds. Bankruptcy cases take a long, long time, and you are lucky to get back pennies on the dollar. 

Finally, where is Catherine Coley?

In another bizarre development, folks on Twitter are wondering what happened to Catherine Coley, the previous CEO of Binance.US. She stepped down in May when Brian Brooks, the former Acting Comptroller of the Currency, took over. Nobody has heard from her since. Where did she disappear off to?  

Coley’s last tweet was on April 19. And both her LinkedIn Profile and Twitter account indicate she is still the CEO of Binance.US. 

She hasn’t been in any interviews or podcasts. She doesn’t respond to DMs, and there are no reports of anyone being able to contact her. 

A Forbes article from last year says that Binance.US may have been set up as a smokescreen — the “Tai Chi entity” — to divert US regulators from looking too closely at Binance, the parent company. 

Binance.US maintains that it is a separate entity. However, Forbes 40 under 40 reported that Coley was “chosen” by CZ, the CEO of Binance, which suggests that Binance is more involved with Binance.US than it claims. 

Has CZ told her to stop talking? What does she know? Catherine, if you are reading this, send us a message!

(Updated July 13 to clarify that Barclays still allows customers to withdraw funds via credit card and to note that Binance.US is the Tai Chi entity.)

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What’s backing Circle’s 25B USDC? We may never know

Jeremy Allaire is taking his Boston-based company Circle public via a SPAC. Circle is best known for its stablecoin USDC, which now has a market cap of $25.5 billion. 

In all his press interviews talking up the future potential of stablecoins — “Circle sits at the center of the next major transformation that the internet is bringing to the world,” he said in an investor website video  — there is one question Allaire consistently avoids giving a straight answer to: 

What is backing USDC? 

Based on his current scheme to take his company public, he may not have to come up with an answer anytime soon. 

What’s a SPAC?

SPAC stands for special acquisition company. 

Otherwise known as a “blank check” company, a SPAC is basically a shell set up by investors with the sole purpose of raising money through an initial public offering to eventually acquire another company  — “a company for carrying on an undertaking of great advantage, but nobody to know what it is.”*

Going public through an IPO is a rigorous process. It requires you to file a Form S-1 with the US Securities and Exchange Commission. An S-1 is a full-body exam, a cavity search, where you lay out all of the material weaknesses of your company. There is really nowhere to hide in an S-1. 

When you take your company public through a SPAC, however, the SPAC goes through the IPO process — not the company it ends up buying. And since a SPAC is just a room full of investment banks and private equity dudes, its S-1 is simple and straightforward. A SPAC has no skeletons in the closet. 

Once the SPAC submits its S-1 and raises money via an IPO, it goes out and finds a private company to buy and then merges with the company. In the merger, the private company gets the money and the SPAC holders get shares in the new combined entity.

The merging process requires considerably less due diligence than a traditional IPO, which is why the space is full of frauds and get-rich-quick schemes. Not all SPACs are frauds, of course, but it’s a clever way to lever up and then sell the debt to the public via shares. 

Because many of the companies taken public this way have little to show in terms of a business plan, SPACs have resulted in a slew of shareholder lawsuits. The most glaring example is electric truck startup Nikola. Three months after the company went public with a $3.3 billion valuation via a SPAC, short-seller Hindenburg Research revealed it was an intricate fraud. (The truck was rolling downhill!) Nikola’s stock collapsed, its CEO ended up stepping down, and a series of class actions followed.

“SPACs are oven-ready deals you should leave on the shelf,” an FT headline read in December. Then-SEC Chairman Jay Clayton voiced similar concerns last year. 

“I’m still keeping my mind open to the fact that there could be a good SPAC out there,” Hindenburg founder Nate Anderson told the FT. “I just haven’t seen it yet.”

Details of Circle’s SPAC

Circle is merging with Concord Acquisition Group (NYSE: CND), a SPAC sponsored by investment firm Atlas Merchant Capital. The transaction is expected to close in the fourth quarter, according to the press release.

When the transaction closes, a new company will acquire both Concord and Circle and become publicly traded on the NYSE under the ticker symbol “CRCL” — and CND will disappear. 

Concord raised $276 million in its December IPO. Here’s Concord’s S-1. It’s short, only a few pages. Compare that to the 200-page S-1 of Coinbase, the US crypto exchange that went public via direct listing in April — quite a difference.

Investors have committed another $415 million in PIPE financing to sweeten the Circle deal. PIPE, or private investment in a public equity deal, is a way to raise capital from a select group of investors who receive shares at a discount to the public market price.

Circle also raised $440 million in a May funding round. That leaves Allaire’s company — valued at $4.5 billion in this deal — with $1.1 billion in gross proceeds upon the close of the transaction. 

Circle’s finances

What do we know about Circle’s finances? Specifically, the assets behind its stablecoin? Not a lot, really.

Concord Acquisition filed an 8-K with the SEC announcing the upcoming merger. The form links to several documents. Of those, the only financial information on Circle is an investor presentation and Circle’s financial statements from December 31, 2020 and 2019. 

Here’s the thing — six months ago, Circle was in an entirely different situation than it is now. In December 2020, USDC had a $4 billion market cap. Its market cap grew to six times that in the first half of this year. Six times! Yet somehow, Circle appears to be going public without submitting its financials for Q1.

This is curious given that Q1 was a prosperous period for most crypto companies. Between January and March, $6 billion USDC were created. In that same timeframe, the price of bitcoin climbed from $29,000 to 59,000. So why would Circle leave out its March 31, 2021, financials?

This doesn’t mean that we’ll never see them. Circle could post its Q1 financials before the merger goes through.

Also, Concord still needs to file a Form S-4. An S-4 is required in a de-SPAC transaction (closing of the SPAC merger) where the SPAC’s shares are exchanged for the target’s shares.  

I wrote to Concord and Circle asking them these three questions:

  • When do you plan to file your S-4 in regard to your Circle transaction?
  • Do you plan to file the breakdown of the collateral backing the Circle stablecoin?
  • Do you have a target for your SPAC combination? If so, what is the date?

Circle and Concord answered none of the questions. Instead, they sent me back a list of 2020 and 2021 press quotes from Allaire and a link to their press release. You can see their response here.

What we know

Circle, founded in October 2013, first announced USDC in September 2018. The stablecoin is managed by a consortium called Centre — here’s their original white paper. Circle was the first member of the consortium. Coinbase joined in October 2018, and so far, there are no other members. 

Circle bought crypto exchange Poloniex in February 2018 for about $400 million with big plans to turn it into a regulated exchange. The experiment failed, and Circle ended up selling Polo less than 18 months later at a $156 million loss. 

Sean Neville, Circle’s co-founder, stepped down shortly after, without giving any clear reason for his departure. 

In December 2019, right about the time Neville left, Circle spun off its Circle Trade over-the-counter desk to focus exclusively on stablecoins. USDC issuance was slow and steady at first and then took off like a rocket in late 2020. 

Stablecoins issuers have the reputation of being like wildcat banks — a reference to banks in the 19th century that flaunted regulation and issued bank notes with abandon and often without any intention of redeeming them. 

Under the gold standard in operation at the time, these state banks could issue notes backed by gold and silver coins — though the quality of these reserves was often a question. State regulations did exist but wildcat banks, generally located in remote, hard to reach areas, were known for their creative workarounds.

Stablecoin companies issue virtual dollars that act a bit like real dollars, only they’re on a blockchain. USDC, which began life as an ERC-20 token on Ethereum, is currently on four blockchains with plans to expand to several more. 

USDC reached its first $1 billion market cap in July 2020. In the following 12 months, it literally created $24.5 billion worth of stablecoins — and we have no idea what is backing those.  

According to Centre’s website, USDC “is issued by regulated and licensed financial institutions that maintain full reserves of the equivalent fiat currency.” Every USDC is supposedly redeemable on a 1:1 basis for US dollars. 

USDC receives monthly attestations provided by accounting firm Grant Thornton LLC. These are not full audits — they are more like snapshots in time. 

The most recent snapshot is for April 30, 2021, when there were 14.7 billion USDC in circulation. The report doesn’t say much other than “US Dollars held in custody accounts are at least equal or greater than the USDC tokens outstanding at the Report Date and Time.”

However, another note on the report states that “US Dollars held in custody accounts are the total balances in accounts held by the Company at federally insured US depository institutions and in approved investments on behalf of the USDC holders at the Report Date.” (Emphasis mine.) 

Apparently, Circle’s boilerplate USDC reserves investment disclosure changed between Feb 28 and March 31, 2020, to add the phrase “and in approved investments.”

So, what are those approved investments? Who approves them? What percentage of assets are in that category? We don’t know, because Allaire won’t say. In an interview with Coindesk on June 30, he completely avoided the question, instead, rambling on about fiduciary responsibility, electronic stored money transmission, etc. (Doomberg transcribed the interview.)

High-interest ‘yield product’

On December 31, 2020, USDC was backed 100% by cash per its financial statements. Now Circle is promoting a high-interest “yield product.” The idea seems to be that you can lend Circle your USDC, and they will in turn lend them to degenerate gamblers who want leverage for crypto margin trading.

“Our Yield services provide a compelling and powerful way for institutions and corporations to access the yields that are coming from stablecoin and USDC-based borrowing and lending markets,” Allaire said in a conference call to investors.

These yield products offer 3% to 7% interest paid monthly, Circle claims — well above a risk-free rate of return. Yet, even Circle doesn’t appear to know how its yield services make money.  

“Our yield product service is an innovative product which is difficult to analyze vis-a-vis existing financial service laws and regulations around the world,” the firm says in its investor presentation. (Emphasis mine.)

Even more concerning, Circle’s business model appears to rest on bitcoin never collapsing in price: “Our yield product is collateralized predominantly by bitcoin and the value of that collateral is directly exposed to the high volatility of Bitcoin.” 

Allaire promotes USDC as the complete antithesis of Tether — the dubiously backed stablecoin that claims to have 50% of its $62 billion market cap in “commercial paper,” but doesn’t say anything about what that commercial paper consists of or where it is held. 

Despite efforts to distance itself from Tether, Circle is starting to look more and more like a similar scheme, only with a different critter on the wildcat banknotes. 

Will we ever get a straight answer from Allaire in regards to what’s behind USDC? Looks like we’ll have to wait till the S-4 comes out — that will be the real measure of transparency. 

In the meantime, I’m reminded of Dan Davies’ Golden Rule from his book “Lying for Money,” which includes a series of case studies on frauds.

“Anything which is growing unusually quickly needs to be checked out, and it needs to be checked out in a way that it hasn’t been checked before,” Davies writes. “Nearly all of the frauds in this book could have been stopped a lot earlier if people had been a bit more cynical about growth.”

* Charles Mackay, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, Chapter 2. “The South-Sea Bubble.”

Feature image: Bank of Brest five dollar bill. The Bank of Brest in Michigan was one of the most infamous wildcat banks that sprang up in the freewheeling economic environment in the US during the 19th Century.

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Reggie Fowler, man at the center of Tether’s missing funds, ready for trial

It looks like Reginald Fowler, the man tied to hundreds of millions of dollars of missing Tether and Bitfinex money, has ditched plans for renegotiating a plea deal. Instead, he is planning to head to trial. 

In a letter filed with the New York Southern District Court on July 7 on behalf of both parties, the government stated: “The parties are not currently engaged in plea negotiations and do not anticipate resuming negotiations.”

Prosecutors are requesting a trial date in early February with pretrial motions beginning in October. The trial is expected to last two weeks. 

[Update Aug. 4: Fowler’s trial is set for Feb. 14, 2022. Here is the order.]

Fowler was indicted in April 2019, along with Israeli woman Ravid Yosef, who is still at large. The pair allegedly lied to banks, telling them they were in the real estate business so they could illegally open up accounts to store funds for cryptocurrency exchanges on behalf of Crypto Capital, a shadow banking operation. 

Fowler is currently represented by Ed Sapone of Sapone & Petrillo. He hired Sapone in April after his previous legal team withdrew from the case due to nonpayment. They claimed to be out over $600,000.

At the time, Judge Andrew Carter gave Sapone three months to get up to speed on the case and warned: “You are going into this with your eyes wide open.”

Preparing for trial means a lot more work for Sapone, so it is a surprise he wasn’t able to work out something with prosecutors. 

Fowler came very close to a plea deal on January 17, 2020. 

On that day, the former football player stood before the judge in a Manhattan courtroom ready to plead guilty to count four of his indictment — charges of operating an unlicensed money transmitter business — pursuant to negotiating with the government. 

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

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

James McGovern, Fowler’s defense attorney at the time, told the judge:

“The issue with respect to the forfeiture that became an issue for us today stems from the fact that none of the parties seem to have an idea of how much money is at play here in the forfeiture order because these accounts that have all been frozen by one entity or another have an amount of money that nobody seems to know how much is in there. So our issue is how much actual exposure under the forfeiture order after the accounts are liquidated is Mr. Fowler looking at. That’s kind of the heart of the issue.”

On Feb. 20, 2020, the government filed a superseding indictment against Fowler, adding wire fraud to existing charges of bank fraud, illegal money transfer, and conspiracy. Wire fraud alone is punishable with up to 20 years in prison, so Fowler, 61, could be looking at spending the rest of his life behind bars.

There was speculation that Fowler’s defense team would try again to work out something with the government. He could still negotiate a deal, but by the tone of the prosecutor’s letter today, it sounds unlikely. 

Related stories:
Reginald Fowler, man tied to missing Bitfinex funds, out on $5M bail

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News: Tether printer on hold, China’s crypto crackdown, the world hates Binance, El Salvador’s Chivo wallet

In case you missed my tweet, I ended up sick at the end of June. I was chatting with a friend over Zoom when he noticed that I was tilting over in my chair. Was I drunk? No. Should he call an ambulance? I’m fine.

I ended up in the ER the next day on IV fluids and hooked to monitors. Turns out I had Anaplasmosis from a tick bite. Doxycycline did the trick, and I was on my feet again within 48 hours. 

Apparently, this is the price you pay for walking blissfully unaware through grassy fields and woodsy trails. 

I mentioned earlier I was writing a book on NFTs. While I did a lot of research on the subject, I’m putting the book on hold for now. My concern is, who would read it? NFTs seem to have been a fad, slipping out of fashion. 

If you are interested in the topic, check out my recent notes on NFTs and money laundering. I also wrote for Business Insider on how Metakovan was pumping Beeple NFTs months before he bought Beeple’s $69.3 million NFT at Christie’s. 

I think we can all admit that the art behind almost every NFT is absolute garbage, which the author of this blog post does a fine job of pointing out. 

China’s crackdown on crypto

The People’s Bank of China has hated crypto since 2017, when it initially kicked the crypto exchanges out. 

In recent months, the country has gone after crypto with a renewed vengeance, banning FIs from providing services to crypto firms and forcing bitcoin miners in the country to take their hardware offline. 

Up until recently, most of the world’s bitcoin mining (~ 65% to 75%) took place in China. The country’s crackdown on mining caused more than 50% of the bitcoin hashrate to drop since May.

The hashrate dropped faster than bitcoin’s difficulty algorithm could keep up. Every 2,016 blocks, the difficulty adjusts to account for how many miners are on the network. 

On July 3, bitcoin experienced a record 27.94% drop in mining difficulty, according to BTC.com, meaning now, bitcoin miners will have an easier time finding blocks. (CNBC)

Beijing even told companies they are no longer allowed to provide venues, commercial displays, or even ads for crypto-related businesses. On Tuesday, the PBoC said it had ordered the shutdown of Beijing Qudao Cultural Development, a company that makes software for crypto exchanges. (Reuters)

Why does China loathe crypto? Some people say the PBoC is trying to make way for China’s CBDC, but I doubt that has anything to do with it. The most likely reason is the country wants to stem capital outflows. According to a Chainalysis report last August, $50 billion in crypto assets moved from China to other regions in a 12-month period. 

Why has Tether stopped printing?

Tether is currently at 62.7 billion tethers, and it’s been stuck there for more than a month. Tether had several big prints at the end of May and now, crickets all through June and into July. The printer has totally stopped. 

Nobody is really clear on why Tether has put its printing presses on hold, but the timing seems to correlate with China’s crackdown on crypto.  

We have three theories for why Tether stopped printing

Theory #1 — Less demand

The China crackdown has created a reduced demand for tethers. When bitcoin’s hash rate dropped precipitously, so did the number of newly minted BTC per day — at one point it was down to 350 new BTC per day, as opposed to the 900 BTC per day the network should be producing.

Binance and OKex have mining pools, so bitcoin miners can mint bitcoin directly to their own exchange accounts. Since there is no way to cash out directly, miners convert BTC to tethers (USDT). And then convert USDT to RMB on unregulated over-the-counter platforms, such as Huobi and CoinCola.

With the exodus of miners from China, there was less demand for tethers. 

Theory #2 — Chinese junk debt

Another theory floating around is that Tether may have been getting Chinese junk debt to issue tethers, and now that is no longer possible due to the risks. 

Tether’s latest composition report showed that 50% of the assets backing USDT were unspecified commercial paper. In the US commercial paper market, that would place Tether among the likes of fund managers like Vanguard and BlackRock, which seems unlikely. (FT)

So maybe it’s holding Chinese paper?

“If Tether is holding Chinese commercial paper, the issuer can default on those debts with impunity. What is Tether going to do? Sue in Chinese courts?,” Tether whistleblower Bitfinexed said in a tweet.

He revealed in a DM that the info comes from a “reliable source.”

Theory #3 — USDC is picking up the slack

While the tether printer stopped, the USDC printer appears to have picked up speed, issuing 10 million USDC since May 8. 

As of July 5, there are 25.5 billion USDC stablecoins in circulation, so maybe USDC is stepping into Tether’s shoes?

In other news, Tether is working hard to shine up its tarnished image. The company is hiring a Reputation Manager, to “advocate for the company in social media spaces, engaging in dialogues and answering questions where appropriate.” 

If you want to fight the FUD spread by salty nocoiners like myself, this job could be for you. (Teether, archive)

Binance vs the world

The UK, Singapore, Japan, Germany, Canada and now the Cayman Islands are all moving against Binance, the world’s largest crypto exchange. I wrote a blog post detailing Binance’s pariah status. 

The bad news keeps getting worse. Following the FCA banning Binance in the UK on June 26, Barclays says it is blocking customers from using their debit and credit cards to make payments to Binance. (They will let you take money out, but they won’t let you put money in.)

Binance “talks a big game on anti-money laundering and know-your-customer” rules, but was “resistant to throwing human resources at compliance issues,” an executive at a payments company that helped connect Binance to the broader financial market before cutting ties with the group, told the (FT)

And worse still — on Tuesday, Binance told its customers that it will temporarily disable deposits via SEPA bank transfers. Binance said the move was due to “events beyond our control.” (FT)

Binance founder CZ says it’s all FUD.

Binance’s organizational structure

Binance has a lot secrets. The company refuses to say where its headquarters is located. And it’s tight-lipped about its organizational structure, too. 

On May 1, Brian Brooks, former Coinbase chief legal officer and former acting head of the Comptroller of the Currency, took over as CEO of Binance.US, replacing Catherine Coley. (WSJ)

In a Coindesk interview in April, he said he reports to the board of directors, yet he wouldn’t name who was on the board. 

Coindesk: “Brian, what is the reporting structure with Binance US. Who do you report to?”

Brooks: “I have a board of directors, which I will be a member of, and I will report to that board.” 

Coindesk: “Who else is on the board?”

Brooks: “The board is obviously the founder of the company and another person. It’s a private company, so we don’t necessarily go into the governance structure…”

Later when Coindesk asks him where Binance.com is located, Brooks dances around that question as well. He did say, however, that Binance keeps its US customer data separate from Binance.com. 

Binance.US also just brought onboard Manuel Alvarez, a former commissioner at the California Department of Financial Protection and Innovation, as its new chief administrative officer. (Coindesk)

FATF releases 12-month review 

The Financial Action Task Force, a Paris-based global anti-money laundering watchdog, published its second 12-month review of its revised standards for virtual assets and virtual asset service providers, or VASPs

VASPs include crypto exchanges, bitcoin ATM operators, wallet custodians, and hedge funds. 

When the FATF published its guidance in 2019, it recommended full AML data collection by VASPs — and Rule 16, also known as the “travel rule.” 

The travel rule requires VASPs to disclose certain customer data and include that data with a funds transfer, so that the info “travels” down the funds transfer chain.  

Of FATF’s 128 reporting jurisdictions, 58 have implemented the revised FATF standards. The other 70 have not. And the majority of jurisdictions have yet to implement the travel rule.

“These gaps in implementation mean that there is not yet a global regime to prevent the misuse of virtual assets and VASPs for money laundering or terrorist financing,” the FATF said. 

The FAFT plans to publish its revised guidance by November 2021 with a focus on accelerating the implementation of the travel rule as a priority. (Forkfast)

Kaseya ransomware  

The REvil ransomware operation is behind a massive attack centering on Kaseya, a company that develops software for managed service providers. MSPs provide outsourced IT services to small and medium-sized businesses that can’t afford their own IT department. 

Between 800 and 1,500 businesses have been compromised by the global ransomware attack, including schools in New Zealand and supermarkets in Sweden. 

The REvil gang has offered to decrypt all victims for $70 million in Monero (XMR), a cryptocurrency that is harder to track than bitcoin. The immediate ransom demand is $45,000 worth of XMR, rising to $90,000 after a week.

Nicholas Weaver, a researcher at the International Computer Science Institute in Berkeley, wrote a story for Lawfare breaking down the Kaseya ransomware attack. 

He also wrote an earlier story for Lawfare titled “The Ransomware Problem Is a Bitcoin Problem,” where he explains why getting rid of crypto is a great idea. “The ransomware gangs can’t use normal banking. Even the most blatantly corrupt bank would consider processing ransomware payments as an existential risk.”

El Salvador, bitcoin and Bitcoin Beach

Who is the San Diego surfer who brought bitcoin to El Zonte? A white evangelist named Michael Peterson. I wrote about him and his Bitcoin Beach project at length in a recent blog post. 

Peterson read my story. He says it’s full of “glaring inaccuracies” and “plagiarized pieces of other bad reporting.” When asked to substantiate his defamatory accusations, he never replied back. 

Does he use these same bully tactics to get people in El Zonte to use bitcoin? 

David Gerard wrote up a detailed blog post explaining the latest developments on bitcoin and El Salvador. 

Here are some notes, if you want to catch up quick:

  • Nayib Bukele, El Salvador’s president, has announced a government wallet — the Chivo wallet — that will be available for download in September. (Youtube)
  • The Chivo (slang for “cool”) wallet will hold both USD and bitcoin balances. 
  • Salvadorans who sign up for the mobile app will get $30 in bitcoin, but they have to spend it. They can’t sell their BTC for cash — which makes you wonder if Bukele is simply planning to issue new dollars under the guise of bitcoin. (I also recommend you read Gerard’s piece in Foreign Policy on this topic)
  • The technical details of the Chivo wallet are totally unclear. Is Jack Mallers, the CEO of Zap and the remittance app Strike, going to develop the wallet? We don’t know.  
  • Originally, Mallers said Strike was using tether for remittances. (My blog post.) Now, he says Strike is no longer using tethers, and the folks in El Salvador receiving remittances on his app will receive actual dollars. (What Bitcoin Did)
  • How will this happen? Mallers said in his What Bitcoin Did interview that his company has local banking relationships in ES, but we don’t know what banks, where. 
  • Here is a direct quote from the transcript of the interview: “So, I was like, ‘Well, fuck, I don’t know then how I’m going to pull this off!’ So, what I did is, we built Tether into Strike, which was the equivalent of the Chase bank account in America, and it at least gave us some MBP basic functionality, where I can go and just observe and listen and see how people used it and see if it was helpful. But now, we’re already integrating with the top five banks in the country.”
  • Mallers tends to be long on plans and short on details. When the media reaches out to him with questions — like Decrypt did when they learned Zap is not licensed to operate in most US states — he generally just ignores them. 
  • Despite what Mallers keeps claiming, sending remittances via Western Union from the US  to El Salvador isn’t really that costly, to begin with. Steve Hanke, Nicholas Hanlon, and Mihir Chakravarthi point this out in their paper: “Bukele’s bitcoin blunder.”
  • Jack Maller’s company Zap (the parent company of Strike) got $14.9 million in fresh funding in March from “Venture Series – unknown,” on top of a $3.5 million seed round a year prior. Nobody seems to know who is behind the funding. (Crunchbase)
  • Athena, the company that Bukele ordered 1,000 new bitcoin ATMs from, installed a new bitcoin ATM machine — the country’s third installed machine! — in La Gran Vía shopping center. They had a ribbon-cutting ceremony and everything.
  • Unfortunately, the machine was located in front of an upscale department store owned by the Simán family, Bukele’s arch enemy. Worried that the ATM would draw foot traffic to his rival’s business, Bukele had the machine relocated next to the toilets, where it sits unplugged. (Twitter) 
  • The US State Department named 14 El Salvadorans, many associated with the Bukele regime, as corrupt or undemocratic actors. (US State report)

Robinhood’s planned listing

Robinhood had plans to go public in June, but the SEC has some questions about its cryptocurrency business, according to Bloomberg.

The company also agreed to pay FINRA $70 million to settle allegations that the brokerage caused customers “widespread and significant” harm on multiple different fronts over the past few years.

Specifically, FINRA’s investigation found that millions of customers received false or misleading information from Robinhood on a variety of issues, including how much money customers had in their accounts, whether they could place trades on margin and more.

In its SEC S-1 filing, which dropped on July 1,  Robinhood notes that a “substantial portion of the recent growth in our net revenues earned from cryptocurrency transactions is attributable to transactions in Dogecoin. If demand for transactions in Dogecoin declines and is not replaced by new demand for other cryptocurrencies available for trading on our platform, our business, financial condition and results of operations could be adversely affected.”

Robinhood currently supports seven different cryptos. When you trade crypto on Robinhood, you don’t ever hold the keys to your own crypto. Robinhood itself buys the actual crypto and maintains custody, so you can’t move your coins onto or off the platform. You’re stuck in there.

Bitcoin mining turns NY lake into a hot tub

The Greenidge Generation Bitcoin mining plant, owned by private equity firm Atlas Holdings, sits on the shores of beautiful Seneca Lake in New York. 

The tagline on its website reads, “Green Power for Generations to Come.”  

The firm uses lake water to cool its 8,000 computers used to mine bitcoin within the gas-fired plant. Greenidge’s current permit allows it to take in 139 million gallons of water and discharge 135 million gallons daily, at temperatures as high as 108 degrees Fahrenheit in the summer and 86 degrees in winter.  

Locals want the mining facility gone. They have been staging protests. They claim the plant is polluting the air and heating the lake, thanks to its use of fossil fuels.

“The lake is so warm you feel like you’re in a hot tub,” said one nearby resident. (NBC) (Arstechnica)

RSA Conference’s blockchain moment

Over the weekend, the RSA Conference gave infosec and computer science Twitter a bit of a shock when it suggested replacing the entire internet with — a blockchain. 

The tweet quickly disappeared, but not before being archived. The blockchain is immutable! I wrote about the event in a blog post.

(Updated on July 8 to note that Brian Brooks replaced Catherine Coley as CEO of Binance.US.)

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RSA Conference goes full blockchain, for a moment

RSA Conference, arguably the world’s largest gathering of computer security experts, surprised everyone Saturday night when it suggested replacing the entire internet with — a blockchain. 

“The Internet has a serious fundamental flaw: the transmission control protocol/internet protocol (TCP/IP) — the primary engine underpinning the Internet — is less secure. Is #blockchain the solution we need to eliminate this flaw?” RSA Conference tweeted at 8 p.m. EST.

RSA holds an annual conference in San Francisco in late spring. This year’s May event was virtual, but the year prior saw more than 42,000 attendees.

TCP/IP, or transmission control protocol and internet protocol, forms the backbone of the entire internet. The notion of replacing it with a decentralized database is like a bad joke to those in the security world.

The organization deleted the embarrassing tweet minutes later after the entire information security and computer science Twitter dunked on them — but not before the tweet was archived.  

“[D]id you know?? a property of content on a blockchain is immutability, so you can’t go and delete prior embarrassing content,” Canadian software engineer Nathan Taylor said on Twitter.

Speaking of immutable — a Google cache of the article also remains. 

“RSA Conference, how could you let this moronic tweet get through? Is this year’s Conference Chair a Tarot specialist? Do you also have a session on ‘Network Connectvity on a Flat Earth?’ Jorge Stolfi, a computer scientist in Brazil, tweeted.

“There’s no question that Blockchain is the answer to TCP/IP security: by making TCP unusable, nobody will be able to exploit it!” tweeted cybersecurity researcher Jake Williams, president of Rendition Infosec.

“The stupidity, it burns. I challenge anybody anywhere to find a more epically vacuous take than this,” said Tim Bray, former vice president of Amazon Web Services and one of the co-authors of the original XML specification.

The vacuous tweet was accompanied by an even more vacuous blog post titled “Understanding Blockchain Security” posted on July 1 by Rohan Hall, the CTO of RocketFuel, a blockchain-based payments firm.

Hall is a “30-year veteran in the blockchain and DeFi space who has built and implemented technology solutions for multiple Fortune 500 companies,” according to his bio.

The claim raised more than a few eyebrows given blockchain has only been around for 12 years — and decentralized finance, about five years. In fact, Hall’s LinkedIn profile reflects less than three years of blockchain experience.

Hall’s blog post is chock full of the usual blockchain nonsense and never even attempts to make a case for how blockchain is even relevant to TCP/IP. 

After deleting the tweet and blog post, RSA Conference tried to recover from the faux pas with the following:

“Earlier today we shared a recently published RSAC blog to our social channels that caused warranted concern. The content of the blog, and thus the subsequent promotion on our channels did not meet our editorial standards for neutrality. We have removed the blog, and as there is no content to support the social post, we have removed that, too. We will do better. We are not blaming an intern.” 

The bit about the intern is funny, but seriously, RSA Conference, what were you even thinking? Never mind your editorial standards for neutrality, what about your editorial standards for connecting to reality?

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Binance: A crypto exchange running out of places to hide

Binance, the world’s largest dark crypto slush fund, is struggling to find corners of the world that will tolerate its lax anti-money laundering policies and flagrant disregard for securities laws. 

On Thursday, the Cayman Islands Monetary Authority issued a statement that Binance, the Binance Group and Binance Holdings Limited are not registered, licensed, regulated, or otherwise authorized to operate a crypto exchange in the Cayman Islands.

“Following recent press reports that have referred to Binance, the Binance Group and Binance Holdings Limited as being a crypto-currency company operating an exchange based in the Cayman Islands, the Authority reiterates that Binance, the Binance Group or Binance Holdings Limited are not subject to any regulatory oversight by the Authority,” the statement said.

This is clearly CIMA reacting to everyone else blaming Binance on the Caymans, where it’s been incorporated since 2018. 

On Friday, Thailand’s Security and Exchange Commission filed a criminal complaint against the crypto exchange for operating a digital asset business without a license within its borders. 

Last week, Binance opted to close up shop In Ontario rather than meet the fate of other cryptocurrency exchanges that have had actions filed against them for allegedly failing to comply with Ontario securities laws.

Singapore’s central bank, the Monetary Authority of Singapore, said Thursday that it would look into Binance Asia Services Pte., the local unit of Binance Holdings, Bloomberg reported. 

The Binance subsidiary applied for a license to operate in Singapore. While it awaits a review of its license application, Binance Asia Services has a grace period that allows it to continue to operate in the city-state. 

“We are aware of the actions taken by other regulatory authorities against Binance and will follow up as appropriate,” the MAS said in a statement.

On June 26, the UK’s Financial Conduct Authority issued a consumer warning that Binance’s UK entity, Binance Markets Limited, was prohibited from doing business in the country. 

“Due to the imposition of requirements by the FCA, Binance Markets Limited is not currently permitted to undertake any regulated activities without the prior written consent of the FCA,” the regulator said.

It continued: “No other entity in the Binance Group holds any form of UK authorisation, registration or licence to conduct regulated activity in the UK.” 

Following the UK’s financial watchdog crackdown, Binance customers were temporarily frozen out of Faster Payments, a major UK interbank payments platform. Withdrawals were reinstated a few days later.

Only a few days before, Japan’s Financial Services Agency issued a warning that Binance was operating in the country without a license. (As I explain below, this is the second time the FSA has issued such a warning.)

Last summer, Malaysia’s Securities Commission also added Binance to its list of unauthorised entities, indicating Binance was operating without a license in the Malaysian market.

A history of bouncing around

Binance offers a wide range of services, from crypto spot and derivatives trading to tokenized versions of corporate stocks. It also runs a major crypto exchange and has its own cryptocurrency, Binance Coin (BNB), currently the fifth largest crypto by market cap, according to Coinmarketcap. 

The company was founded in Hong Kong in the summer of 2017 by Changpeng Zhao, more commonly known as “CZ.” 

China banned bitcoin exchanges a few months later, and ever since, Binance has been bouncing about in search of a more tolerant jurisdiction to host its offices and servers.  

Its first stop after Hong Kong was Japan, but Japan was quick to put up the “You’re not welcome here” sign. The country’s Financial Services Agency sent Binance its first warning in March 2018. 

“The exchange has irked the FSA by failing to verify the identification of Japanese investors at the time accounts are opened. The Japanese officials suspect Binance does not have effective measures to prevent money laundering; the exchange handles a number of virtual currencies that are traded anonymously,” Nikkei wrote. 

Binance responded by moving its corporate registration to the Cayman Islands and opening a branch office in Malta, the FT reported in March 2018.

In February 2020, however, Maltese authorities announced Binance was not licensed to do business in the island country. 

“Following a report in a section of the media referring to Binance as a ‘Malta-based cryptocurrency’ company, the Malta Financial Services Authority (MFSA) reiterates that Binance is not authorised by the MFSA to operate in the crypto currency sphere and is therefore not subject to regulatory oversight by the MFSA.”

The ‘decentralized’ excuse

CZ lives in Singapore but has continually refused to say where his company is headquartered, insisting over and over again that Binance is decentralized. This is absolute nonsense, of course. The company is run by real people and its software runs on real servers. The problem is, CZ, whose net worth Forbes estimated to be $2 billion in 2018, doesn’t want to abide by real laws. 

As a result, his company faces a slew of other problems. 

Binance is currently under investigation by the US Department of Justice and the Internal Revenue Service, Bloomberg reported in May. It’s also being probed by the Commodity Futures Trading Commission over whether it allowed US residents to place wagers on the exchange, according to another Bloomberg report. 

Also in May, Germany’s financial regulator BaFin warned that Binance risked being fined for offering its securities-tracking tokens without publishing an investor prospectus. Binance offers “stock tokens” representing MicroStrategy, Microsoft, Apple, Tesla, and Coinbase Global.  

Binance has for five years done whatever it pleases, all the while using the excuse of “decentralization” to ignore laws and regulations. Regulators are finally putting their collective foot down. Enough is enough.

Image: Changpeng Zhao, YouTube

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