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.)

If you like my work, please subscribe to my Patreon for as little as $5 a month. Your support keeps me going.

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.

If you like my work, please subscribe to my Patreon for as little as $5 a month. Your support really does mean a lot.

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

If you like my work, please support my writing. Subscribe to my Patreon account for as little as $5 a month. 

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.)

If you like my work, please subscribe to my Patreon account for as little as $5 a month. 

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?

If you like my work, please subscribe to my Patreon account for as little as $5 a month. 

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

If you like my work, please subscribe to my Patreon account for as little as $5 a month. 

Notes on NFTs, the high-art trade, and money laundering

Last month, I wrote a story for Artnet (paywalled) describing how NFTs create new opportunities for bad guys to move money without attribution. Read the full story if you can. Otherwise, here are some of the points I touch on along with additional notes.

  • The physical art world has a money-laundering problem — it is a secret world where expensive pieces are often bought and sold anonymously.  
  • Art is subjective, so it’s easy to justify spending millions of dollars on a piece. “This is a beautiful painting. I paid what I thought it was worth!”
  • The art trade is not subject to the Bank Secrecy Act. In other words, the BSA does not consider art dealers, advisers, and auction houses to be financial institutions.
  • Many collectors keep their art in freeports — ultra-secure storage facilities in tax-free zones near airports. They can sell their art to anonymous buyers, and the art itself never even needs to leave the warehouse. Thanks to middlemen and shell companies, the buyers often don’t know who the seller is either.
  • A US Senate Permanent Subcommittee on Investigations report in July 2020 highlighted the extent of the problem. The report was devastating to the art world and pointed out the need to regulate the space.
  • The art trade is already regulated in the EU, under the Anti-Money Laundering directives. 
  • I like to compare buying an NFT to buying high-art in a freeport. You become the prestigious new owner, and you don’t even have to bother hanging the piece on your wall.
  • Disclaimer: I know of no conviction yet so I can’t name anyone, but if you look through a pile of NFT transactions, you’ll see stuff that looks very odd and worthy of investigation.
  • A lot of NFTs are bought and sold for crazy amounts of money — generally in the form of crypto — and often, we have no idea who the buyers or the sellers are. It’s not clear whether the platforms facilitating these trades know either.
  • Earlier this year, two CryptoPunk NFTs sold separately for $7.5 million each in crypto — Punk #7804 and Punk #3100. In both cases, the buyers were known only by their crypto wallet addresses.
  • In February, an NFT of Nyan Cat, a cat cartoon with a Pop-tart body, sold for $600,000 — in crypto. Again, the buyer was only known by their wallet address.
  • Those are just a few examples. There are many, many others.
  • The most practical way to launder money with NFTs would be via what is called “trade-based money laundering” — deals that appear legit on the face but are meant to hide the flow of ill-gotten gains. All you need are two parties to make that happen.
  • Let’s say, I need to receive $3 million worth of dirty crypto. I mint an NFT, establish its value by wash-trading (selling back and forth to myself a few times) and then sell it to my colleague. I then cash out at a banked exchange. If anyone asks where the money came from, I simply tell them, “I sold an NFT!”
  • Because regulations haven’t caught up with NFTs, some of the NFT platforms are more laissez faire in their anti-money-laundering and know-your-customer (AML/KYC) practices.
  • Nifty Gateway, the NFT marketplace owned by Gemini, is centralized. All of its NFT trades are handled off-chain. Gemini is registered with FinCEN, and it’s widely thought of as one of the more regulated platforms.
  • Also, it makes sense that Gemini would want to minimize risk and remain in good standing with the banks. (You can link directly to your bank account via Gemini. And you can purchase NFTs on Nifty Gateway with USD via your credit card.)
  • However, other NFT marketplaces, such as OpenSea, Rarible, and Foundation, tend to be more relaxed in their AML/KYC.
  • These exchanges are decentralized, meaning the backend code runs on the blockchain. Unlike Nifty Gateway, these platforms are non-custodial, meaning you always hold the keys to your own crypto. This is sometimes used as an excuse not to have a rigorous AML program in place. 
  • “KYC is only required when you buy crypto using OpenSea,” cofounder Alex Atallah told me. In that case, KYC is handled through Moonpay, a fiat onramp that lets you buy crypto with your credit card to spend on OpenSea.
  • If you transfer your own crypto onto the platform and buy an NFT with it, OpenSea doesn’t ask who you are. Nor does the platform ask who you are if you sell your NFT for crypto and move your funds off the platform.
  • All this will likely change. 
  • Regulators have their eyes on the art market — and the NFT market.
  • On Jan. 1, 2021, Congress passed the Anti-Money Laundering Act of 2020, as part of the National Defense Authorization Act, with the biggest changes to the BSA in two decades.
  • Among the changes, the AML Act extends the BSA to antiquities dealers.
  • Antiquity dealers are now considered financial institutions with the same record-keeping and reporting requirements. It is up to FinCEN to spell out exactly how this will be implemented. FinCEN has until Jan. 1, 2022, to do so.
  • The AML Act also commissions FinCEN to study the art market. If FinCEN finds significant links between money laundering and high art, it will likely recommend Congress extend the BSA to the wider art market, too.* 
  • Experts believe this is very likely to happen. (As I mentioned above, it’s already happened in the EU.)
  • The good news: There is still time for art dealers and auction houses to review and update their AML programs. (Christie’s and Sotheby’s, who have been auctioning NFTs, have likely already updated their AML programs in response to the Senate PSI report.)
  • The AML Act also formally extends the scope of the BSA to crypto exchanges, in keeping with FinCEN’s earlier guidance that virtual currency businesses are money services businesses, and therefore, subject to BSA requirements.
  • NFTs, on the other hand, aren’t mentioned in the new AML law. But they are not being overlooked either!
  • In March, the Financial Action Task Force, a Paris-based AML watchdog, issued a draft updated virtual asset guidance, which could have implications for NFTs.
  • In its draft, the FATF doesn’t specifically call out NFTs, but it replaces an earlier phrasing of “assets that are fungible” with “assets that are convertible and interchangeable” in describing the kinds of virtual assets that need regulation. (NFTs are convertible when you sell them for other forms of crypto.)
  • This subtle change in language directly targets NFTs (and DeFi as well).
  • If the US adopts the final guidance — which it most likely will — those subtle changes in wording give FinCEN the authority to regulate not only existing virtual currencies but also emerging asset classes such as NFTs.
  • Additionally, NFTs could be considered art and NFT marketplaces could be considered art auction houses and get included in new BSA laws.
  • Like high-art, NFTs hit all the right targets for money laundering.

* On Feb. 4, 2022, the U.S. Treasury released “Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art.” The report says NFTs are particularly 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.”

It also says that NFT platforms, such as Dapper Labs, SuperRare, and OpenSea, could be considered VASPs by FATF and may come under FinCEN regulations. 

Michael Peterson, El Salvador, and Bitcoin Beach

On June 8, El Salvador passed a law to make bitcoin legal tender, alongside the dollar. Salvadorans were blindsided by the decision. Overnight, their president, Nayib Bukele, had turned into a bitcoiner, even adopting the bitcoin laser eyes in his Twitter profile — he and members of his cabinet, too.  

Who sold Bukele on the plan? Many believe it was Michael Peterson, a 47-year-old white evangelical from San Diego. 

Peterson is behind the Bitcoin Beach project, ground zero for bitcoin in El Salvador. As recently as a few months ago, his voice found its way to Bukele’s ears. Although, to be fair, Bukele has been kicking around the bitcoin idea for several years now. 

“We’re trying to push on the president here to actually make El Salvador the first country that adopts bitcoin as an official currency. We haven’t succeeded yet, but I think we have pretty good odds to make that happen,” a baseball-cap-wearing Peterson said in a What Bitcoin Did podcast that aired on April 23.  

Peterson has spent the last 18 months aggressively promoting bitcoin to 3,000 residents in the seaside village of El Zonte, where he lives with his family part of the year, and the 500 residents of nearby Punta Mango.

A surfer, Peterson first came to El Zonte in 2006 to check out the waves. The town has long been a draw for surfers. He was so enamored by it, he bought a home there. The home has a guest house you can rent for $160 per night. In 2014, he opened another “mission guest house” in Punta Mango with three bungalows, each currently available for $200 per night.  

That same year, Peterson also set up MissionSake, formerly El Salvador Missionary Fellowship, a US nonprofit that focuses on community outreach and support for missionaries.

MissionSake, which Peterson operates with his wife Brittney, offers a range of services, including counseling, life coaching, financial planning — and an annual retreat called “The Gathering.” 

The last Gathering was in 2019. There was no Gathering in 2020, and there appears to be no Gathering in the works for this year either, probably because Peterson is preoccupied with his bitcoin experiment.

Peterson and his wife live in El Zonte with their two kids nine months of the year. In the summers, they travel back to San Diego to run their Bacon-A-Fair booth, where they sell bacon-wrapped food items to fairgoers at the San Diego and Orange County Fairs. Both of these fairs were canceled last year.

I suspect life got challenging for Peterson in 2020. El Salvador closed its borders from March 21 to June 14, which meant no visitors to rent out his bungalows to. He left the country in May on an evacuation flight. “We’ve been waiting for it to open back up,” he told Go Full Crypto in a podcast that aired September 22. (I’m not sure when it was recorded.) 

When Peterson returned to El Salvador, he set to work on his next project — a “bitcoin circular economy.” The goal was to get all the locals in El Zonte and Punta Mango transacting in bitcoin using a mobile payments app. Bitcoin would “bring people out of poverty,” he promised. It would “change the world.”  

Bitcoin has failed as a payment system since day one. It’s too volatile, too slow, and fat-finger mistakes mean your money is gone forever. The only people who use it for payments are criminals and ransomware hackers. Even hard-core bitcoiners now say bitcoin’s main use case is “store of value.” (As we’ll see later, no, the Lightning Network does not solve this.)

‘A labor of love’

Peterson has a B.A. in business from Westmont College, a Christian college in California. He graduated in 1997, according to his LinkedIn profile. He has been following bitcoin since 2012 and started investing in bitcoin in 2017, he said on the Anita Posch podcast

He assured Posch he is not making any money from the Bitcoin Beach project. “I have a business in the US and that is how I pay my bills. The Bitcoin Beach project is more just a labor of love.” 

After El Salvador passed its bitcoin legislation — the law goes into effect 90 days hence — Peterson tweeted: “Laughing as I sit In my RV trailer behind the carnival with my Fair Food stand with my AOL era email account and [social justice warriors] violently insist I am a rich TechoBro that foisted worlds 1st #BTC economy on #ElSalvador instead of crediting Salvadorans who did the work. They must be Racist”

[Update, since I published this story, Peterson changed the Bitcoin Beach Twitter account to “Chivo Beach,” showing his support of the new government wallet, and then back to Bitcoin Beach again.]

Peterson also claims to keep his ministry work separate from the Bitcoin Beach project. In an update to an article on Bitcoin Beach, Forbes wrote

“Upon further investigation, Bitcoin Beach initiatives have been separated from MissionSake, although the organizations remain closely aligned through their Founder.”

Just how “closely aligned” is a matter of question.

Hope House is linked to MissionSake’s Community Build project. It shares a new building in El Zonte with the Bitcoin Beach project and Strike — a Chicago-based payments startup. 

According to Hope House’s website, the charity teaches El Zonte youths computers and “life values.” Apparently, it also teaches classes on bitcoin, and how to use the mobile app for making bitcoin purchases, I’m told by people on the ground. 

The Hope House website lists Bitcoin Beach as its “main supporter.” You can also donate money to Hope House directly from the MissionSake website. 

As far as monetary policy goes, Peterson follows the Austrian school of economics. “As an economics major, I’m always drawn to the Austrian models. The world concept that most governments and central banks have gone with of just printing more money, that always perplexed me,” he told Go Full Crypto. 

Austrian economics supports the claim that a rigid gold standard is the only way to have “sound money” and that central banks and fractional reserve banking will inexorably lead to a collapse in the dollar. Thus, you need to hoard gold — or bitcoin, in this instance — because of its limited supply. 

Hoarding bitcoin runs counter to using it for everyday transactions. If a currency goes up in value, people won’t want to spend it. If the price crashes, you’re screwed.

So, who exactly is Peterson pitching bitcoin to in El Zonte?

El Salvador’s most vulnerable

El Salvador has a problem with violence. The country is plagued by gangs, such as MS-13, who make most of their money from extortion. Bukele’s 90% approval rating is partly due to having reduced homicides in the country by 60 percent. He allegedly negotiated with gang leaders, according to El Faro

Most young people get involved in gangs around the age of 14, said Jose Miguel Cruz, a researcher at Florida International University who has studied street gangs in El Salvador. That’s when young people are most open — or most vulnerable — to new ideas. 

Many of the gang members in El Salvador embrace evangelical Christianity as a way to escape violence. “In El Salvador, you join the gang, you join the evangelical church, or you leave El Salvador,” Cruz told NPR. Half of all gang members in El Salvador identify with the evangelical church. 

When I spoke with Cruz, he explained that evangelical churches have been sprouting up all over El Salvador, a traditionally Catholic country, for the last three decades. Every time he returns to visit, he sees more of them.

Likely, that is because evangelicals are militant in their recruitment efforts. “They see young people who have problems as a target to convert,” said Cruz. “Let’s say I am a gang member and I am touched by God. Supposedly, I have to recruit other people to join the church.”

Evangelical churches have become so entangled with gang communities in El Salvador that Bukele has been reaching out to pastors for help in negotiating with the gangs, Cruz said.

It is no surprise then that MissionSake’s efforts focus on young people. “Let’s walk with them, believing that they are called to fulfill the purpose that God has for them in the Kingdom. Let’s walk with them to help them change their world. This can be done through discipleship and education,” Peterson says on his website.  

Over time, Peterson has established relationships with young Salvadorans, including Jorge Valenzuela. According to MissionSakes’ website, Peterson prayed for Valenzuela until he “accepted Jesus as his Lord and Savior.” Valenzuela went on to become a disciple, converting other Salvadorans to Christianity. 

Today, instead of reaching out to youths and getting them to embrace Jesus, the 32-year-old El Zonte local plays an active role in promoting the miracles of bitcoin. “It changed my town,” Valenzuela told Bloomberg.

There are worrying signs that Peterson is employing the same militant tactics to promote bitcoin as he does Christianity. 

“The promoters are pleasant but they get angry if you do not join the project,” a source in El Salvador told me. None of the sources I spoke with wanted to reveal their true identities. It’s too dangerous, they say. “This is a place where people disappear,” one told me. 

Peterson insists that local Salvadorans run the Bitcoin Beach experiment. However, when reporters from El Faro showed up to meet with Valenzuela at Hope House, they were unable to get anyone there to speak to them. 

They were greeted by Hope House’s head of communications, who would not even give them his name. “Man, you are the head of communications and you can’t even tell us your name?,” the reporter said. 

“Luis Morales,” the man finally answered. “And that was the strongest information he gave us. Then the gates of Hope House were closed,” El Faro wrote.

Mystery donor

Peterson began devoting himself to his Bitcoin Beach project sometime in 2019 after a pile of bitcoin fell in his lap by way of a mysterious donor — or at least, that is what he says. He described how it happened in an interview with Forbes contributor Tatiana Koffman, who wrote:

“Sometime in early 2019, an anonymous donor with a fondness for El Zonte discovered a forgotten thumb drive loaded with Bitcoin. He had originally purchased the asset when it was priced at around 5-10 cents, and put it aside for several years. Upon realizing what his holdings were now worth, the donor spent several days attempting to unlock his wallet. After many futile attempts, the donor was finally able to remember his passphrase and retrieve the funds. A believer in using blockchain technology to boost inclusion for the unbanked, he decided to seize this stroke of luck and put the funds to good use by allocating a multi-year six figure donation to El Zonte.”  

As Peterson tells the story in Go Full Crypto, the donor first gave bitcoin to an organization he is connected with. (He doesn’t say what organization this is.) A few months later, the organization asked if he wanted to meet the donor. He told them, yes. But instead of speaking with the donor directly, he ended up speaking to a “manager” the donor had hired. As it turned out, the donor was a fellow libertarian. 

“I could tell from the description of his manager that he probably leaned libertarian, which was in line with my own philosophies and beliefs,” said Peterson. “And some of his concerns about government involvement were in line with some of my own leanings.” 

After the meeting, Peterson scribbled out a three-year proposal for “bitcoinizing” El Zonte, which the donor promptly approved. Bitcoin was priced at around $5,000 or $6,000 at the time, he said, which would have been in April or May 2019. 

‘A circular economy’

Getting people in El Zonte to actually use bitcoin was another story. Ultimately, it called for giving away free bitcoin. 

There are about 500 families in El Zonte. Bitcoin Beach gave each family $50 worth of bitcoin. The project also started paying teens in bitcoin for odd jobs, like picking up trash, lifeguarding, or doing well in their studies. Half of the bitcoiners in El Zonte are youths, according to Bitcoin Magazine. 

Bitcoin Beach is also funding El Salvador’s surf team. The surfers get a monthly stipend in bitcoin. On March 19, the day the surf team signed the contract, Katherine Diaz, one of the surfers, was killed in a freak accident. 

To raise money, Bitcoin Beach began asking for bitcoin donations on Diaz’s behalf to go toward a surf training center. The biggest donor is Square’s Jack Dorsey, who gave 3 BTC. The bitcoin donation wallet has so far received a total of 4.2 BTC, worth about $160,000.  

Peterson wants bitcoiners to see the Salvadoran surf team as theirs. “We don’t have our own country, we don’t have our own borders,” he told Anita Posch. “But we can have a surf team.” 

Mobile apps

Initially, Bitcoin Beach used the Wallet of Satoshi for on-chain transactions. Transaction fees were too high, so the project shifted to its own Bitcoin Beach Wallet developed by Galoy Money. The wallet uses a private version of the Lightning Network, a second layer solution that works on top of the bitcoin protocol. 

Lightning allows for faster payments and lower fees, but it has its own host of issues, including nobody has yet figured out how to make it scale — literally, the whole point of Lightning Network was to scale bitcoin — which is worrisome, given that this is supposed to work for all of El Salvador. 

Strike, a second mobile payment app that also uses a private version of Lightning Network, joined the project in January. Strike’s focus is on remittances, allowing Salvadorans living abroad — mostly in the US — to send money back home to their families. In 2019, remittances in El Salvador totaled $5.6 billion, around a fifth of GDP.

How it works: a sender deposits USD in their Strike account. Those dollars are instantly converted into bitcoin, whooshed across the border, and your mom in El Salvador gets not dollars, but tethers, a stablecoin with dubious backing. That changed when the company’s CEO, 27-year-old Jack Mallers abruptly announced the app was no longer going to be using tethers. 

Details are scant. Nobody is quite sure how Strike makes any of this possible — probably not even Mallers, I suspect. Add to that, Decrypt just reported that Zap, the parent company of Strike, doesn’t have proper licenses to operate in most US states.

“This is amateur hour, these people have never done a currency reform, they don’t know much about currencies,” Steve Hanke, an economist at Johns Hopkins University, told Decrypt.

There’s another option for Strike users receiving remittances in El Salvador. Peterson told Go Full Crypto, they can opt to receive bitcoin from Strike directly in the Bitcoin Beach Wallet, the Wallet of Satoshi, Blue Wallet, or “a number of the great Lightning wallets out there.”  

To be clear, Strike is using a “functionally private” version of the Lightning Network. Per its FAQ, the Strike network only passes transactions for approved entities — not the public Lightning mesh network. In practice, receiving bitcoin from wallets outside the system isn’t working anywhere near as smoothly as Peterson describes.  

As for the Bitcoin Beach app, Peterson reports things are going gangbusters. About 40 businesses in El Zonte are using the app, he told the Posch podcast. “It’s definitely the majority of the businesses now in El Zonte that are using bitcoin. [For] some of them, it makes up the majority of their revenue.”  

Reports from on the ground tell a different story. 

Zulma Rivas started accepting bitcoin for the fruit she sells in El Zonte. She rarely uses bitcoin because her smartphone can barely manage the payments app. When Reuters visited, her phone was broken. She often runs out of data on her cell plan anyway. 

Many of the residents in El Zonte downloaded the mobile app just long enough to grab their free bitcoin and cash out, one of the people I spoke with from El Salvador told me. 

The project is also suffering from serious problems of perception. Some El Zonte residents see bitcoin as the sign of the beast — a cryptic mark in Revelation that indicates allegiance to Satan —because the word “criptomoneda” (Spanish for cryptocurrency) sounds like it is mocking Christ. “They say that El Zonte has become the place where the beast was born,” the source said. “And some think the ‘999’ on images of the bitcoin coin is actually ‘666,’ the number of the beast.

Cashing out of your bitcoin in El Zonte is easy, the promoters of Bitcoin Beach say. You just need to track down a bitcoin ATM. Up until now, there were only two in the entire country — one in El Zonte and one in nearby El Sunzal. El Salvador ordered 1,000 more and just installed its third at La Gran Vía shopping center.

It turns out bitcoin ATM fees are high, however. 

One user got $13 when he tried to cash out $20 worth of bitcoin. In addition to a $5 fee, the Bitcoin ATM added 10.5% to the BTC price. 

Peterson admits the system sucks right now but says it will be great in the future. “The [ATM] in El Zonte I believe charges 8% if you want to buy Bitcoin and 3% to sell for cash,” he said via the Bitcoin Beach Twitter account. “This will change under broader rollout.”  

In response to an onslaught of criticism, he continued: “Everyone is missing the point — these fees all go to 1% once it gets up to speed and even the 1% not relevant because you don’t need to cash in or out because you use it and get paid in it.”

This is the eternal promise of bitcoin — things will always be better in the future. Meanwhile, many Salvadorans survive on less than $500 a month. They can’t afford to watch their money get siphoned away in transaction fees. 

A new bitcoin colony

Peterson’s M.O. is to promote bitcoin while brushing over the facts, such as bitcoin does not work for payments, Lightning Network does not scale, and El Salvador doesn’t have the infrastructure to pull any of this off by Sept. 7, when the new law goes into effect. 

The World Bank has already rejected El Salvador’s request for help in setting up bitcoin as legal tender. The irony here is that bitcoin was originally designed to circumvent the traditional banking system.

Almost everything in bitcoin boils down to “number go up.” Since early June, bitcoiners have swarmed El Zonte, buying pupusas with bitcoin and setting up camp. This isn’t the first time bitcoin bros have colonized a poor area and used it as a PR machine. They’ve done the same in Puerto Rico

Peterson’s master plan? He wants to see bitcoin adopted by El Salvador’s 6.5 million citizens, with El Zonte becoming the hub. Like a cherry on the top, Peterson’s vision, he told Go Full Crypto, includes erecting a bitcoin monument, a big “B” symbol, on El Zonte’s beach. “We want it to be a landmark where people can come and take selfies.” 

He’ll just have to remind the locals the “B” stands for bitcoin, not “el bestia.”

If you enjoy my work, please support my writing by becoming a patron.

El Salvador’s bitcoin plan: take your USD and turn them into worthless tethers

Last week, Nayib Bukele, the President of El Salvador, announced a plan to make bitcoin legal tender. The big announcement came via video on the second day of the Bitcoin 2021 conference in Miami. 

Leading up to the big reveal, Jack Mallers, the founder of crypto payments company Strike, strode back and forth across the stage at the conference, wearing a baseball cap and hoodie. While flashing what looked like a diamond studded ring on his finger, he spoke of the woes of the unbanked and the tyranny of central banks. He then went on to play Bukele’s video to a crowd of thousands of bitcoiners.   

Days later, Bukele pushed through his legislation, and on June 8, the tiny Central American country adopted bitcoin as legal tender. Alongside the US dollar, which the country transitioned to in 2001, businesses now must accept bitcoin as payment — unless they don’t have the technology.

El Salvador has partnered with Strike, a mobile app launched in March, to make payments in bitcoin possible. Strike claims it will allow Salvadorans living abroad to send money home instantaneously, without fees. Remittances, a lifeline to the country, surpassed $5.6 billion in 2019. 

While the concept sounds ideal, a closer look reveals worrisome details: Bukele’s plan, it appears, is to confiscate US dollars from remittances and force people to accept a worthless dollar substitute through the Strike app. 

In a Medium post written in January, Mallers claims that with Strike, “El Salvador users not only get access to free and instant international transfers anywhere in the world, but they also get access to a synthetic digital dollar on their smartphone.” 

Those “synthetic dollars” Mallers is talking about? Those are tethers.

Tether, for the uninitiated, is the dubiously backed stablecoin recently ousted from New York after the New York attorney generally brought up allegations of fraud. There are currently 63 billion tethers in existence, with billions more being minted each month. Each tether is supposed to be worth $1, but nobody knows for sure what, if anything, is backing the dollar-pegged cryptocurrency. Tether, by its own admission, is only backed by 3% cash. 

Strike uses a proprietary version of the Lightning Network, a second layer bitcoin solution for payments. The Lightning Network has never lived up to promises, and is not suitable for payments on a grand scale. Brazilian computer scientist Jorge Stolfi details its shortcomings in a Reddit post.

Here’s how Strike works: Say you want to send $1,000 from Los Angeles to your mom back home in El Salvador. You deposit your hard-earned cash into your Strike account. Strike debits your account and converts your $1,000 into bitcoins. It then sends the bitcoin to El Salvador where “it arrives in less than a second” on the wings of the Lightning Network. 

Once your bitcoin crosses the border, Strike converts it into tethers and plunks those into your mom’s Strike account. Now, instead of sending your mom real dollars, which she needs to pay bills and buy food, you have just sent her a bundle of tethers. What can she do with them?

She can use them to buy bitcoin and then she can sell the bitcoin for cash. If that sounds like a lot of extra layers, well, yes. Mallers explains how it’s done. Your mom can “simply go to a Bitcoin ATM or local Bitcoin teller and receive their local fiat currency” — in other words, actual US dollars. 

Let’s ignore for now the fact that there are only two bitcoin ATMs in the entire country of El Salvador — one in El Sunzal and the other in El Zonte — according to CoinATMRadar. 

Anyhow, Mallers lays out the details:

  • An El Salvador user requests to sell $100 worth of Bitcoin from Bitcoin ATM.
  • El Salvador user scans the Bitcoin ATM QR code with their Strike app.
  • Strike debits their Tether balance and converts it to bitcoin.
  • Strike then sends the bitcoin to the desired Bitcoin ATM address.
  • The ATM receives the bitcoin and issues the user their local fiat currency.

Essentially, you are converting back and forth to bitcoin twice. Here is the problem with that: Bitcoin is extremely volatile. The price can go up one day and down the next. On April 14, bitcoin hit a record of $64,829 but has since lost nearly half its value. How’s that for remittances?

“The FX risk in this system is massive,” Frances Coppola, a UK-based writer, who spent 17 years in banking, said in a tweet. “It’s not transaction fees people should be worrying about, it is the potential for massive USD losses because of the BTC conversion.”

FX, or foreign exchange, is the cost of converting from one currency to another. With bitcoin, that cost includes transaction fees — which were as high as $58 in April, according to YCharts — and the cost of bitcoin’s potential drop in value. (Conversely, if bitcoin goes up in value, Strike users won’t benefit because their money is converted dollar for dollar into tethers.)  

Bukele has set aside a reserve fund of $150 million at the country’s development bank BANDESAL to guarantee these currency exchanges — so merchants using Strike for bitcoin payments will not have to suffer any loss in value.* The trust has been set up in partnership with Strike.

In a Twitter Spaces call with several bitcoiners, Bukele explained that the cash in the reserve fund will eventually be replaced with bitcoin. “We are going to provide those US dollars, but we are going to get bitcoin in exchange.”

As bitcoin skeptic David Gerard points out in a more elaborate story, this is an excellent way to launder filthy bitcoin.

“There is absolutely no way to run Know-Your-Customer to international standards on Bitcoin transactions, and also have Bitcoin treated like legal tender. So they’re setting up a gateway for questionable bitcoins,” he said.

What’s to come of all this? My guess is that the $150 million fund will be sucked dry in no time by bad actors. The actual acceptance of bitcoin for payments of any sort in the country will be negligible.

Tether will see some level of adoption as “synthetic dollars” in Strike accounts, but Salvadorans will soon learn it’s worthless when they can’t convert tethers to actual spendable dollars. 

I would not be surprised if the Strike app suffers some major hack within six months. Also, I suspect international banks will severe ties with the local economy, meaning El Salvador’s economy will sink even further as a result. 

Bukele, who was elected in 2019 from the center-right Grand Alliance for National Unity party, has joined Mallers and a host of other bitcoiners in adding laser eyes to his Twitter profile. He is now tweeting about his next big idea: a project to mine bitcoin using energy from one of El Salvador’s volcanoes.

*Update June 12: it appears the $150 million reserve fund is only there to protect merchants from the volatility of bitcoin, not regular users. I also added a link to the Twitter Spaces call where El Salvador’s president says the fund will ultimately be replaced by Bitcoin. (Sounds a bit like Tether’s reserves!)

Feature Image: Twitter

Related articles:
The curious case of Tether: a complete timeline of events

If you enjoy my work, please support my writing by becoming a patron.

Rehost: A day in the life of Stuart Hoegner, General Counsel for Tether

One of my favorite Tether skeptics, Trolly McTrollface, had to take down a parody post about Stuart Hoegner today.

Trolly received an email from his hosting service this morning warning him that he had committed some kind of copyright infringement. (It’s not clear that he did, but Trolly doesn’t have oodles of time on his hands to fight this, and it was easier to simply take down the post.)

According to the actual complaint, Trolly was abusing the image of Hoegner. (Trolly included Hoegner’s picture in his blog post with the laser eyes, taken exactly as it is from Hoegner’s Twitter profile.)

Whoever sent the complaint wrote: “This user systematically harasses executives and employees of the company Tether and Bitfinex. You guys should do something about this. It’s your hosting service.”

Trolly published an earlier post titled “An Interview With Paolino Ardoino, the CTO of Tetherino,” lampooning Tether and its CTO Paolo Ardoino. That post was followed by “Emergency Interview With Paolino Ardoino, CTO of Tetherino.” Both of these posts remain up.

Trolly explained in a Twitter thread why he decided to take down the Hoegner post, adding: “The most efficient way to expose Tether, is not by analysing the forex reserves of the Bahamas or NYAG’s filings. It’s to make people realise how stupid they look, by using their own tools.”

David Gerard has also rehosted this story, and here is another rehost. You are encouraged to do the same.

A day in the life of Stuart Hoegner, General Counsel for Tether

[By Trolly McTrollface]

In light of an anonymous Medium post titled “Tether is Setting a New Standard for Transparency — And Responding to Criticism That is Untethered From Facts”, written by someone posturing as Stuart Hoegner, the GC for Tether, in a something that looks like pointless attempt to make Tether look like a legitimate business, the truth needed to be told. So here it is, in all its unvarnished glory. A tale of how it all happened.

The morning sun was gently piercing through the mist glowing around the harbour. Suart Hoegner was standing by the window, his empty stare aimlessly fixated on the horizon.

The coffee cup was sitting on the window sill, untouched, its contents getting cold. Stu was feeling much like that cup, isolated, forgotten, the fire inside of him running out.

What had happened to his dreams? Where was his ambition gone? How did he ever end up in this dead end of a situation, catering to small time Italian crooks, lending them his name, his expertise, his reputation, his life?

The people at Deltec would be at the office an hour from now. The Bahamas was in the exact same time zone as Prince Edward County, but what looked like a huge convenience in 2017, when Stu had started working out the relationship, felt like the shackles of a prison four years later. At least Paolo Ardoino was commuting between Monaco and London, leaving five hours of alone time to Stu in the evening when he could try and recollect. Giancarlo Devasini, the international man of mystery and Stu’s boss, was popping up here and there sporadically around the world, mostly leaving Stuart alone. But Deltec! These guys were non-stop. Amateurish, overzealous, excited and afraid at the same time, they’d call him a dozen times over the span of a single hour for utterly mundane shit like a weekend wire. “We can’t do this, we can’t do it like that, the ISIN code you provided for the bond you say you have on your books doesn’t exist, this commercial paper isn’t rated…”

Stuart closed his eyes, and let out a deep sigh.

He kind of knew what he was signing up for, when he shook hands with Giancarlo and Paolo, that fateful evening at a gaming conference in Toronto.

When you’re a regulated financial institution, you’re dealing with the cream of the crop, you have to prove that you’re trustworthy and beyond reproach to the most sophisticated players. You’re in the limelight, you brush elbows with legends, you dine with intellectuals and people who will leave a mark in this world.

But Stu knew he was never going to be up to that level. Stuck in a tiny practice catering to the gaming industry, he was doomed to a life of absolute insignificance and quiet desperation. So he jumped ship, to the gutter.

When you’re an unregulated bucket shop scalping muppets, posturing as a revolutionary blockchain fintech something, you never see the limelight. Your job isn’t to compete with the top 0.01%, it’s to baffle and bamboozle the bottom 50%. Instead of having fifty accounts worth $100,000,000 each, you’ll have to deal with a hundred million accounts worth $50 each. You’ll become a joke among your former colleagues, nobody will write to you for a recommendation, your own mom will stop asking how the job’s going.

A tear rolled down Stuart’s cheek.

He was stuck playing Laurel and Hardy with Paolo, to keep the appearance of legitimacy and technological innovation for Tether, in the eyes of a million suckers who were bagholding their shittoken, USDT. Stu’s job was to make sure Tether’s employees and accomplices would never say or write something that might incriminate his employer, always keeping a veneer of plausible deniability in the eyes of the law, all the while appearing strong and legitimate in the eyes of the illiterate cannon fodder.

Twitter was a perfect tool. At the head of an army of anonymous bots, Stu could post bullshit memes and retweet crazy-ass conspiracy theories that made Tether look good. Unable to provide a real audit or any report that would make sense in the real world, he would come up with one worthless attestation after another, drafting legally non-binding opinion letters to be signed by obscure accounting shops.

Cope. Cope. Cope.

And then one day, his boss came up with this “Tether leaks” idea, to discredit Tether critics, who could see through the nail-polish-thin Potemkin façade that Stu had set up, and deemed it worth their time to warn others. Giancarlo instructed Stuart and Paolo to write a series of supposedly leaked emails from Deltec that would be revealing of Tether’s fraud, and post them on Twitter, for critics to bite on. They could then reveal that the emails were fake, and that anyone who believed in them was an idiot unworthy of being attention to.

This was the straw that broke the camel’s back. Stu was stuck forging documents, setting up fake Twitter accounts, and fishing for journalists to take the bait. This was one step too far off his idea of what a legal counsel was supposed to be doing. And to be exposed by an anonymous account going by the name of Trolly McTrollface!

Something broke inside him that night. The light went out.

Suddenly, a sunbeam broke through the mist, and hit Stuart’s face. Even with his eyes closed, he could feel the warmth on his face, and let himself bask in this uplifting feeling. A wave of rage and inspiration suddenly crashed up on him. His hands started shaking, as a supernatural force was taking control of his thoughts and movements.

Stuart rushed to his laptop, and started typing. He typed like never before, like he never could. For a moment in time, Stu was transported in a parallel universe, one where he was an actual big boy lawyer, working for a legitimate business, where he could say and write words that had real meanings. A world where his own existence had a meaning.

Established and recognized procedures.

In accordance with the International Auditing and Assurance Standards Board (IAASB).

The vast majority of the commercial paper we hold is in A-2 and above rated issuers.

The commercial paper we hold is purchased through recognized issuance programmes.

The lion’s share of our bond portfolio is investment grade as rated by S&P, Moody’s, or Fitch.

Stuart typed, and typed, and typed. For the first time in years, he felt alive. He was proud of himself, albeit in an imaginary way.

When he was done, the sun was high in the sky, and his phone showed fifty seven missed calls. It was like a hole in the continuum of time had engulfed him, chewed him, and spat him out. He was shaking, drenched in sweat, heart racing, his vision blurry.

He tried to read what he had written.

It was beautiful. A vision of a world that wasn’t bullshit, scams, and shame. A world that would never exist anywhere else, but on those two pages of his own creation.

Stu needed to put it out, put in somewhere others could read it. He couldn’t post it on his own Twitter account. He couldn’t even admit or deny that it was real or fake. Plausible deniability, all that stuff.

He created a new account on Medium, and copy-pasted it there, in all its glory. Then he dropped a link to Paolo.

Smoke and mirrors, bitch.

News: Tether—now 3% backed, Binance under investigation, Bitfinex shareholder charged, fickle Elon Musk

I’ve been inconsistent with my newsletters lately because I’m struggling to write this dang NFT book. It is slow going, and I keep falling down these rabbit holes. I feel like if I don’t hurry, the entire crypto market will collapse and NFTs will become a distant memory. Nevertheless, next week, I’ll begin publishing drafts of chapters on Patreon. You can subscribe here. 

Tether has so far issued 58.5 billion tethers—8 billion in the first two weeks of the month. You will notice that it keeps printing tethers at a faster and faster rate. That’s to make up for all the real money that isn’t in the system. When will Tether blow up? When regulators and law enforcement step in or it crumbles in on itself. Remember, Madoff’s Ponzi fell apart on its own.

Currently, the price of bitcoin is $45,000, down after Elon dissed it (more below) and Jack Dorsey’s Square said it is no longer buying bitcoin after suffering $20 million in losses on its $220 million investment in the last quarter.

Tether’s muddy pies

You asked for transparency, and Tether finally delivered in the form of two, uh, pie charts. I wrote about it here. David Gerard covered it here. And there’s also a story in the FT. 

There’s been endless chatter on Twitter about “commercial paper,” because apparently, it accounts for half of all the assets backing tethers. What’s CP?

In the case of Tether, it’s likely another way to disguise IOUs—i.e., handing out free tethers to their buds at Binance, FTX, and elsewhere. The real story here is that less than 3% of Tether’s reserves now consist of cash. What is the NYAG going to do about it? A FOIL request sent to the prosecutor recently yielded this response.

Folks are asking why Tether hasn’t collapsed yet, given that everyone knows it’s a farce and they are just printing money out of thin air. The answer is because Tether has no obligation to redeem tethers, to begin with—that’s written into its terms of service. The reckoning will come when people try to cash out of bitcoin, and it dawns on them there is no real money in the system to support withdrawals, because the markets were based on funny money.

Binance under investigation

Binance, the world’s biggest crypto exchange, is under investigation by the DoJ, the IRS, and the CFTC, according to Bloomberg. Binance is unregulated, registered in the Caymans, and likes moving around a lot.

“Wherever I sit is going to be the Binance office. Wherever I need somebody, is going to be the Binance office,” CZ, the company’s founder, told a podcaster last year.

The investigations come right after a report by Chainalysis that traced $2.8 billion worth of illicit bitcoin on exchange and trading platforms. Of that, $756 million went through Binance.

They also follow Germany’s financial regulator BaFin warning that Binance may have violated securities rules when it issued tokenized shares of Tesla, MicroStrategy, and Coinbase Global.

IRS agents are concerned traders are evading taxes. The CFTC is looking into whether Binance allowed US citizens to illegally trade derivatives on the platform. And the DoJ has reportedly assigned the investigation to its bank integrity unit, which handles particularly complex cases. (Arstechnica)

If you are a US citizen, and you want to trade on Binance, all you need is a VPN to disguise your whereabouts. And once you rack up a substantial winning, you can move your earnings to Coinbase for cashing out. (That’s one of the reasons this story upset so many bitcoiners earlier this year.)

Gensler: crypto exchanges need more regulation

During a public hearing on May 6, newly appointed SEC Chair Gary Gensler said he wants Congress to write new regulations for crypto exchanges to better protect investors.

“Right now these exchanges do not have a regulatory framework at the SEC or at our sister agency, the Commodity Futures Trading Commission,” he said. “Right now there’s not a market regulator around these crypto exchanges and thus there’s really no protection around fraud or manipulation.” (Coindesk)

Bitfinex shareholder formally charged

Zhao Dong has reportedly pled guilty to the Chinese equivalent of money laundering. He is looking at three years behind bars.

In addition to being a Tether/Bitfinex shareholder, Zhao is the ousted founder of RenrenBit, a popular OTC desk in China. (People in China rely on OTC desks as a way to buy and sell tether and bitcoin with yuan, after the country banned centralized cryptocurrency exchanges in 2017.)

Zhao was the guy pushing the LEO token in 2019. He also helped create Tether’s yuan-pegged stablecoin in 2019.

Last year, RenrenBit denied reports that its leader had been arrested and detained.

China has been cracking down on illegal gambling in the country, which is where Zhao ran aground. He was connected to a company called Tian Tian—a platform for exchanging crypto into fiat currency. He also ran an app called “Everyday Up,” which settled crypto for overseas gambling sites. 

It was through Tian Tian and Everyday Up that Zhao allegedly washed 3.1 billion RMB ($480 million) for online casinos. (Protos)

Elon Karen Musk, your new manager

Elon Musk hinted on Twitter Sunday night in a reply to @CryptoWhale that Tesla had either dumped or was about to dump its bitcoin. His off-cuff remarks sent BTC sliding 9% to under $43,000, before recovering to ~$45,000. 

Prices stabilized later in the evening when Musk clarified: “Tesla has not sold any bitcoin.” (That’s not entirely accurate. Tesla sold 10% of its $1.5 billion BTC holdings in Q1, shortly after buying them.)

All this came days after Musk announced that Tesla reversed its policy on accepting bitcoin for payment, citing environmental concerns. (NYT)

Naturally, bitcoiners are irate—their general response to anyone who tries to leave the cult. They’ve been lashing out at Musk, which is probably not a great idea. (FT)

He’s not the alone one they’re lashing out at. After Musk replied to his tweet, @CryptoWhale was besieged by angry bitcoiners, sending him death threats and spreading rumors that he is a scammer.

Meanwhile, Musk has shifted his alliances to dogecoin.

Dogecoin has been pumping ever since Musk started tweeting about it in December. At the beginning of the year, it started off at a penny. Now it’s around 50 cents. At one point, it was up over 70 cents. Thanks to Musk, this degenerate gambler invested his entire life savings and is now a dogecoin millionaire, on paper.

Musk’s insatiable need for attention led him to SNL, where he hosted the show on May 8. Dogecoin investors were waiting for him to pump their favorite coin. DOGE dropped 30% during the show. Later, it went back up again. (FT) 

Turns out, Musk, who refers to himself as “dogefather,” has been working with dogecoin developers since 2019, all the while tweeting about DOGE to pump up the price. He says he wants to create a cheaper, greener alternative to bitcoin. Sure you do, Elon. (Decrypt)

Jackson Palmer, who created dogecoin in 2013 along with Billy Markus, but left in 2015, returned to Twitter briefly to call Musk a “self-absorbed grifter,” before he deleted his tweet and vanished again.

Other dogecoin news

Rumor has it Ryan Kennedy, the convicted rapist who ruined dogecoin in 2014 and drove the founders out, is out of jail on parole and apparently getting back into crypto. Watch out for this guy. David Gerard wrote about him here.

@idleoctoput did some sleuthing on the mysterious “DH5” dogecoin address, which hold 30% of all DOGE. He also thinks it’s controlled by Robinhood Crypto—not Elon, as some folks were thinking. This backs up Redditor AndreiFromAlbera’s findings as well. (Twitter thread)

Colonial Pipeline hit by ransomware attack

Russia-based cybercrime group DarkSide attacked the Colonial Pipeline, leading to a six-day shutdown that ended May 12. Colonial, which supplies fuel to the East Coast of the US, paid the hackers 75 bitcoin, worth $5 million.

Blockchain analytics firm Elliptic tracked down the DarkSide wallet and says the funds arrived on May 8. The same wallet has received $17 million in BTC since March, so they’ve clearly been running a profitable business. (Elliptic)

A day after President Biden said the US would go after the group, unknown actors took control of the ransomware gang’s servers and ransom payment funds, which the DarkSide gang was supposed to divvy up between itself and affiliates. DarkSide also said they were releasing decryption tools for all of the companies that have been ransomed but which haven’t yet paid. (Brian Krebs)

Bitcoin is the lifeblood of ransomware, and this is the sort of event to spur regulators into taking action against crypto exchanges, especially those that enable hackers to cash out of their crypto. The US government knows it can’t have hackers going after critical infrastructure. 

Stephen Deihl wrote a post about the oncoming ransomware storm—what will happen if regulators don’t take strong action. “Cryptocurrency exchanges are the channel by which all the illicit funds in this epidemic flow. And it is the one channel that the US government has complete power to rein in and regulate. The free flow of money from US banks to cryptocurrency exchanges is the root cause of this pandemic and needs to halt.(Stephen Diehl)

Other newsworthy stuff

Between January and April, $156 million was stolen from DeFi-related hacks—more than was stolen from DeFi protocols in all of 2020. And that doesn’t include an additional $83.4 million stolen via “DeFi-related fraud,” mainly the infamous “rug pull,” which involves token holders making off with investors’ money. (Decrypt)

Brian Armstrong, the CEO of Coinbase, went to Washington, D.C., to lobby. He posted a lengthy Twitter thread on the entire event along with “fun photos.” He says he hopes to get more “regulatory clarity” for crypto in the US. After the Colonial Pipeline ransomware incident, I’m sure we’ll be seeing plenty more “regulatory clarity” (Decrypt)

In addition to his ransomware post, Stephen Deihl also wrote up a thread explaining the Tether scandal. “Every Tether is backed by a giant pile of IOUs to strangers. And that’s worth exactly what you think it is.” (Twitter)

Caitlin Long is warning of a doomsday for bitcoin heralded by fraudulent Tethers. She claims she has long suspected it is coming. Then why bring it up now? The laws she spearheaded for Wyoming helped Tether exchanges like Kraken. If the doomsday is on its way, it is using the roads that Long built. (Her lengthy tweet thread)

The DoJ have a wallet holding 69,000 BTC, originating from the Silk Road. Nicolas Weaver suggests they dump it on the market at 1% per day, mess up the price of bitcoin, and reveal the Ponzi scheme for what it is. (Tweet)

Christie’s sold a lot of nine CryptoPunk NFTs for $17 million—we still don’t know who the buyer is, and whether they paid in crypto, which I’m sure they did. (I wrote to Christie’s but no response.) (Coindesk)

I visited the CryptoPunks Discord group recently and asked them why there were more male CryptoPunks than female CryptoPunks, only to get attacked. No misogyny in that group.

Me, in the news

I wrote a story about CryptPunks for Artnet titled “12 Questions the Art Market Should Have About CryptoPunks, the NFT Avatars Set to Sell for Millions at Christie’s, Answered by an Actual Expert.” (Artnet, paywalled)

“Dead Man’s Switch,” a documentary on QuadrigaCX, will soon be available to watch for free in Canada. (CBC)

“Exit Scam,” is an 8-part podcast series on QuadrigaCX by Aaron Lammer and Lane Brown. Episode 1 is now available.

“Death in Cryptoland” is a CBC podcast on QuadrigaCX debuting on March 25. (CBC press release)

Update: Ryan Kennedy is a convicted rapist—not a convicted scammer. I updated this post to make the correction. Also, the DOJ control a wallet with 69,000 BTC, not 69 BTC, as I wrote earlier. (Had to add some more zeros.)

If you enjoy my work, please support my writing by becoming a patron.

Tether’s first breakdown of reserves consists of two silly pie charts

Tether, the world’s most popular stablecoin issuer, released a breakdown of the composition of its reserves backing tethers on May 13. 

The breakdown is no surprise to Tether followers: Two lame pie charts showing, at best, only a fraction of assets are in cash, and the rest are in risky assets.

Specifically, this is a breakdown of the composition of Tether’s reserves on March 31, 2021, when Tether had roughly 41.7 billion tethers in circulation. (As of this writing, Tether now has nearly 58 billion tethers in circulation.) 

According to its settlement agreement with the NY AG, Tether must issue these breakdowns quarterly for two years—though it may have to provide more detail to the NY AG, in addition to what it has made public today. 

Let’s take a closer look at the two pie charts. (This information may be updated, as I get more feedback.)

The blue pie chart

According to the first pie chart—the blue one—the majority of Tether’s assets (nearly 76%) are socked away in cash and cash equivalents. (Tether breaks all this down in a second chart, which I’ll get to in a moment. Hint: these can barely be considered cash equivalents.)

But first, let’s look at what else is here:

12.55% is in secured loans — Loans to who, secured by what? We have no idea. These could well be loans to large tether customers backed by shitcoins, other worthless assets, or promissory notes.

9.96% is in corporate bonds, funds, and precious metals — A corporate bond is a bond issued by a corporation in order to raise financing. The question is, who is issuing these bonds? If it is a blue chip company, great. But if it’s some dodgy crypto start-up, these are likely worthless.

1.64% is in other investments, including digital currency — Tether wants us to believe that only a fraction of Tether’s reserves are in bitcoin. (Tether/Bitfinex general counsel Stuart Hoegner told The Block that “digital tokens” refers exclusively to bitcoin.) I have a funny feeling Tether will get into a great deal of trouble if it admits to using tethers to purchase bitcoin en masse. (Recall this interview, where Hoegner completely avoids the question pertaining to, are you using tethers to buy bitcoin?”)

The orange pie chart

Tether further breaks down the largest slice of its blue pie chart—which shows that more than three-quarters of its reserves are in cash and cash equivalents. Just a tiny bit is in cash and there’s a big question as to whether any of the non-cash items are cash equivalents at all. 

Here’s how Tether divvies it up: 

65.39% is commercial paper — Commercial paper refers to a short-term loan for up to 12 months. It is similar to a bond in that you have the ability to transfer and trade it. The problem is we don’t know who the issuer of the commercial paper is. If it’s IBM or Amazon, that’s as good as cash. But if Tether is giving tethers away to their largest customers (FTX, Binance) and counting that as loans, this is meaningless rubbish.

Frances Coppola, an economist and bitcoin skeptic, suggests Tether’s commercial paper is probably unsecured. “In which case it is NOT a ‘cash equivalent’ as the analysis says. It’s a current asset with significant credit risk.”   

25.2% is fiduciary deposits — These are deposits placed by a customer with a third bank (recipient bank) through an agent bank. Who are the holders of these fiduciary deposits? We have no idea. 

3.87% is cash — This is such a tiny bit of cash. What happened to all the cash backing tethers? Recall that up until a few years ago, Tether maintained tethers were fully backed by cash. 

3.6% is reverse repo notes — This appears to be a made-up term. Martin Walker, a director for banking and finance at the Center for Evidence-Based Management, isn’t familiar with the term either. “I’ve never heard of a Reverse Repo Note before, and I am the product manager for a couple of repo trading systems and used to run repo technology at an investment bank,” he said in a private chat.

2.94% is treasury bills — T-bills are a short-term financial instrument issued by the U.S. Treasury with maturity periods from a few days up to 52 weeks. These are as good as cash. In fact, this is the only slice of pie, other than cash, that can be considered cash.

If we do the math, we can see what percentage of the total each asset represents. Commercial paper is nearly half. Image courtesy of @MelchettsBeard

The bottom line 

For a company with nearly $60 billion in assets, these pie charts are pathetic. I’m sure the folks at the Office of the NY AG are rolling their eyes. The only thing backing tethers is once again, smoke and mirrors. 

To be clear, Tether has no obligation to redeem any money in the Tether bank accounts. Per its terms of service:

“Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves. Tether makes no representations or warranties about whether Tether Tokens that may be traded on the Site may be traded on the Site at any point in the future, if at all.” 

With that in mind, we may as well consider these pie charts a window into the personal bank accounts of the Tether/Bitfinex triad. The crumbs of remaining cash? It is just their “bonus” money that they haven’t withdrawn yet.   

Jorge Stolfi, a computer scientist from Brazil, quoted privately: “If someday [Tether/Bitfinex] get tired of making real money with their sucker mining machine, they can just close Tether Inc and divide its assets among them. They won’t even have to leave the traditional crypto good-bye word on their website.”

David Gerard offers further analysis of Tether’s pie charts.

Related stories:
The curious case of Tether—a complete timeline of events

Updates on March 13— Added quote from Martin C. Walker on Reverse repo notes, as even he is not familiar with the term. Defined treasury bills, and noted they are the only cash equivalent in the mix, and added Trolly’s brilliant tweet. Also, added a link to Gerard’s post and later, the graph.

If you enjoy my work, please support my writing by becoming a patron.

News: Tether surpasses 50B, Coinbase lists USDT, reported $2B crypto scam in Turkey

Bitcoin is sitting at around $54,000, and Tether has hit a new milestone: 50 billion tethers in circulation, something it’s quite proud of. “Will we reach $100B before 2022?”

So far, in April, Tether has issued 9 billion tethers—and the month isn’t even over yet. Tether has been minting 2 billion tethers at a time—the largest single batches we’ve seen to date.

Per the NY AG settlement agreement, Tether is supposed to provide a breakdown of its reserves in May. And they are already whining about how unfair and unjust this is.  

Stuart Hoegner, Tether’s general counsel, complained on Twitter: “The second-biggest stablecoin issuer [USDC] doesn’t give a breakdown of their reserves, either. Observers should ask why our detractors are pushing one rule for them and another for us.”

Oh, I don’t know, Maybe because USDC wasn’t caught hiding the fact it lost access to $850 million?

(USDC—a stablecoin bootstrapped by Coinbase and Circle—has issued 13.5 billion USDC to date, not quite the level of Tether, but it’s working its way up there.)

Coinbase debuts on Wall Street, then lists USDT

Coinbase, the largest crypto exchange in the U.S., debuted on Wall Street on April 14. Trading opened at $381 a share—a 52% increase over a $250 reference price set by Nasdaq. COIN swung as high as $429 that first day. (Though, now it is at $291.)

It was the moment Coinbase execs and its VC backers had all been waiting for. They didn’t waste any time dumping their shares on retailers, according to data from Capital Market Laboratories. 

Insiders sold off $4.6 billion in COIN on the first day of trading, and Coinbase CEO Brian Armstrong sold shares worth $292 million. (SEC filing) (Cointelegraph)

Less than two weeks later, Coinbase—being the respected operation that it is—dropped the bomb that it is listing tether on Coinbase Pro.

Ecstatic bitcoiners claim the move legitimizes Tether. Actually, the move delegitimizes Coinbase.

Listing tether makes Coinbase look shady, like they’ll do anything to boost profits and keep share prices up so insiders can continue their sell-off. (My blog post)

Tether is a wildcat bank, operating with no oversight. It has been largely responsible for boosting the price of bitcoin because it allows unregulated crypto exchanges to thrive and funnels them a steady stream of dubiously backed tethers.

Thanks to Tether, Coinbase had a hugely profitable Q1. And thanks to Tether, Brian Armstrong is a wealthy man indeed. 

Was it a coincidence that BTC tapped a new all-time high of $63,275 the day before Coinbase went public? Or was that simply irrational exuberance?

When Tether gets taken down, liquidity will evaporate and crypto markets will crash. Those who get hurt will be naive retailers, who didn’t understand the system was rigged from the get-go. 

Bernie—gone but not forgotten

Bernie Madoff died in jail on the same day that Coinbase went public. He ran the biggest Ponzi scheme in history, and it went on for 25 years. Paper losses totaled $64.8 billion. Madoff took billions from investors and simply stole the money instead of investing. 

Why didn’t the SEC catch Madoff sooner? Why didn’t they step in and do something to protect investors? They were tipped off eight years before, and yet they failed to act.

Here we are watching a similar drama unfold with Tether. All the red flags are waving. And no regulator or authority has stepped in to take strong action. 

If you are wondering how fraudsters live with themselves—they rationalize and minimize. 

David Sheehan, a trustee who worked to recover money stolen from investors, met with Madoff a dozen times. He told WSJ: “[Madoff] didn’t think he was harming anybody. He actually thought his scheme would work, that it just got out of hand and he couldn’t control it.”

$2 billion crypto scam in Turkey?

When Thodex, one of the largest crypto exchanges in Turkey, suspended trading on April 18 for five days of “maintenance,” users began to complain they couldn’t access their funds. 

Now a manhunt is underway for the exchange’s 27-year-old founder, Faruk Fatih Özer, who has reportedly fled to the capital of Albania with $2 billion in investors’ money. 

Turk authorities have detained 62 people and issued detention warrants for 16 more.

Meanwhile, Özer is claiming that Thodex is the target of a “smear campaign.” He says he was on a jaunt to meet with foreign investors, nothing more.

We’ve seen this film before. It’s called “Crypto exchange operates as a Ponzi scheme.” Last time, the protagonist was Gerald Cotten, the founder of Canada’s QuadrigaCX. And instead of going to meet with “foreign investors,” he went to India and died under suspicious circumstances. 

Now another Turkish crypto exchange—Vebitcoin—has shut down amid accusations of fraud. Turkish authorities have blocked its bank accounts and detained four people. (Reuters)

These stories come at a rotten time for crypto users in Turkey. Starting April 30, the country’s central bank will ban the use of crypto for payments and prevent payment providers from providing fiat onramps to crypto exchanges. (CBRT press release)

Bitcoin promotes green energy!

Bitcoin mining is destroying the planet. Lately, the world’s most popular cryptocurrency is getting a lot of bad press on its massive carbon footprint—like this article in the New Yorker

Yet, despite hard evidence to the contrary, people with big bets on bitcoin will stare you right in the face and tell you it ain’t so. Bitcoin is green!

Jack Dorsey’s Square and Cathie Wood’s ARK Invest published a delusional white paper titled “Bitcoin is Key to an Abundant Clean Energy Future.” They want you to believe bitcoin mining encourages the use of wind farms, solar energy, and other such nonsense. (Bloomberg)

ARK has investments in Square and Coinbase shares. And Square invested $50 million in bitcoin last year. Square’s Cash App also lets users buy and sell bitcoin. Dorsey is a bitcoin bro at heart.

Companies who care about the planet, don’t invest in bitcoin.

FT Alphaville countered Dorsey and Wood’s claims in a post titled: “The destructive green fantasy of the bitcoin fanatics.” 

Bitcoin skeptic Kyle Gibson responded with a satirical “Bitcoin Is Green Energy” commercial, where we learn that “solar panels can’t work without bitcoin,” and “this baby penguin’s first word was ‘bitcoin’.” 

Other newsworthy stuff

On April 22, the negative premium of GBTC reached -18.92%, a record low. It’s since rebounded to -10%, according to Ycharts, but the arbitrage opp for big investors is a distant memory.

No doubt many funds who entered the “risk-free” trade are feeling the squeeze. Despite that, Grayscale has added $283 million in assets to GBTC. (The Block)

Tougher AML laws in South Korea are forcing crypto exchanges to shutter. Turns out, several were using shell bank accounts. “…they are having difficulties to get real-name accounts from local banks.” Sounds like the Bitfinex/Tether model. (Korean Herald)

The NFT bubble is bursting. Trading volume on OpenSea is down 22% in the past month. CryptoPunks volume is down 26%, NBA Top Shot is down 61%. (Decrypt)

Edward Snowden can’t make money on books and speeches anymore, so he sold an NFT for $5.4 million. He is donating the funds to the Freedom of the Press Foundation. (He sits on the nonprofit’s board of directors.) (Coindesk)

Artists and celebrities continue to pile into NFTs, because it’s the thing to do. Eminem partnered with Gemini’s Nifty Gateway to launch his first series of NFTs. (Decrypt)

A hacker-artist figured out how to make “crypto-verified” fakes of most art-connected NFTs. It’s called “sleepminting” and he used Beeple’s “Everydays” as a test case. (Artnet) 

Quote from “Black Swan” author Nassim Taleb: “If you want a hedge against inflation, buy a piece of land, grow—I don’t know—olives on it. You’ll have olive oil if the price collapses. With bitcoin, there’s no connection.” (Decrypt) 

The SEC is officially reviewing a bitcoin ETF application from Kryptoin Investment Advisors. It’s one of three bitcoin exchange-traded fund proposals now under review—WisdomTree and VanEck are the other two. (SEC filing notice) (Decrypt)

The overlap between the bitcoin bros and Musk fanboys is strong. Nicholas Weaver wrote up a Twitter thread on why Musk sucks—i.e., his environmental credentials are bullshit; “Go to mars because we are going to destroy the earth” is lunacy; His cars are crap, etc.

The IRS knows you’re out there. It’s launched “Operation Hidden Treasure” to find taxpayers with unreported income from bitcoin transactions. (Accounting Today)

Stablecoins are reminiscent of the dollar substitutes that triggered the 2008 crisis. Déjà vu? (New Money Review)

If you enjoy my work, please support my writing by becoming a patron.

Coinbase lists tether, the world’s dodgiest stablecoin

Coinbase, the largest crypto exchange in the U.S., just announced it is listing tether (USDT), the world’s dodgiest stablecoin. 

Tethers, for the uninitiated, are a stand-in for real dollars, used mainly on offshore crypto exchanges that can’t get proper banking. Now tethers can be found on Coinbase, a banked exchange—overseen by the SEC.

The timing of this is incredible, only a week after Coinbase debuted on Wall Street. 

Nobody knows for sure what is backing the nearly 50 billion tethers sloshing around in the bitcoin markets—maybe cash, maybe third-party loans, maybe hot air. But the price of Coinbase shares (COIN) is slipping, and so is the price of bitcoin. Desperate times call for desperate measures, so what can Coinbase do?

Why not list tether? That way, Tether (the company that issues tethers) looks legit, and more people can pile into bitcoin without worry. When BTC goes up, demand for $COIN follows. Problem solved!

Starting immediately, you can now send your dubiously backed tethers to Coinbase Pro—Coinbase’s online platform for professional traders. (Coinbase has a separate platform for casual traders called simply “Coinbase,” but tether is limited to Coinbase Pro for now.)

You will be allowed to trade tethers in every jurisdiction that Coinbase supports except for New York state, which Tether was recently hoisted out of by the NY attorney general.  

Coinbase only supports ERC-20 USDT, a reference to the nearly 24 billion tethers that live on the Ethereum blockchain. (Another 26 billion are on Tron, with a smattering on Omni, Algorand, EOS, Liquid, SLP, and Solana.)

Trading begins on April 26 at 6 p.m. Pacific Time—if liquidity conditions are met, meaning if someone is on-hand and willing to sell their bitcoin or ether to you for tethers, as opposed to real money. [Update: Coinbase has delayed USDT trading twice, first to April 27, now to May 3.]

Coinbase Pro will list the following trading pairs: 

  • BTC/USDT
  • ETH/USDT
  • USDT/EUR
  • USDT/GBP
  • USDT/USD
  • USDT/USDC

At the moment, you can only transfer USDT onto Coinbase Pro; you cannot move tethers off the exchange—although there is some expectation that could change once trading is established. 

What does this mean?

This is a terrible, dumb, bad move for Coinbase. 

The exchange clearly wants to rake in as much business as possible before the regulators step in and throttle its trading. (Regulatory ambiguity is written into the company’s S1 risk factors.) And right now, business is slipping.

Coinbase started selling its shares on Nasdaq on April 14. Its stock has since taken a dip, going from $381 at opening (and as high as $429 in the first few minutes of trading) to $293 when markets closed on April 22. 

At the same time, BTC has also taken a hit. Just ahead of Coinbase’s direct listing, BTC reached an all-time high of $63,700. Now it’s below $50,000. 

Tether has been trying to lift up the price of BTC with larger and larger issuances of tethers—prints of 2 billion at a time, bigger than anything we’ve seen before—but nothing seems to be working.  

At some point, it won’t matter how much USDT Tether prints. It won’t be enough to make up for all the real money that is exiting the bitcoin ecosystem on a daily basis. (The real money that investors put into the system, goes to pay the bitcoin miners who are selling 900 newly minted BTC per day for cash.)

Legitimizing Tether?

Bitcoiners are ecstatic over Coinbase’s listing of USDT. They say the move legitimizes Tether.

This is absolute madness. How do you legitimize a company that has been full of shenanigans since day one? The reverse is true: Tether is delegitimizing Coinbase.

Here is the irony: Coinbase—an exchange that has a BitLicense (issued by the New York Department of Financial Services) to operate in the state of New York—is listing a token sanctioned by the New York attorney general. 

The NYAG began investigating Tether for fraud in late 2018, claiming that Tether and its sister company Bitfinex, a crypto exchange, lied to customers in saying that tethers were fully backed, when in fact, they were not. 

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

The companies settled with the NYAG in February. Under the terms of the settlement, starting in May, Tether has to publish the categories of assets backing tethers. It also has to specify the percentages of each category, and spell out whether a category constitutes a loan or receivable.

This is a level of transparency that Tether has never lived up to before, and it could spell disaster for the BVI-registered company, if it’s revealed that Tether is simply printing money out of thin air.

If the Department of Justice decides to shut down Tether like it did Liberty Reserve in May 2013—which is what several nocoiner luminaries predicted will happen this year—what does that say about Coinbase listing this coin?

Three other U.S. crypto exchanges—Kraken, Binance.US, and Bittrex*—also list tether, but Coinbase’s public listing means the SEC is watching a lot more closely. Coinbase CEO Brian Armstrong is well aware of this.

“We’re going to increasingly be having scrutiny about what we’re doing,” he told CNBC. 

Based on that reasoning alone, Coinbase’s listing of tether seems shortsighted at best, but maybe that’s the plan? If COIN crashes, Armstrong—along with Coinbase backers like Andreessen Horowitz, Union Square, and Ribbit Capital—will have made their riches, while retailers will be stuck holding the bag.

(*Updated to include Bittrex as another US exchange that lists USDT.)

If you enjoy my writing, please support my work by becoming a patron for as little as $5 per month.

News: Coinbase Q1 earnings, Signal integrates MobileCoin, GBTC premium in the toilet, Reggie Fowler’s new lawyer  

Bitcoin rose above $60,000 again. It only took 6 billion tethers to make that happen since the last time it hit $60,000 in March—less than a month ago. We now have 44.5 billion tethers in circulation. 

Coinbase set to debut on Nasdaq

Everything looks rosy for Coinbase’s debut on Nasdaq on April 14. The company is worth $91.5 billion, securities filings show. It reached that valuation even before releasing Q1 results of $1.8 billion—9x that of a year ago. (WSJ)

All that glitters is not gold, however. If Coinbase’s regulatory status were to change (and regulatory ambiguity is clocked in the company’s S1 risk factors), the company could be forced to drop many of its hugely profitable activities or be forced to operate at a much higher capital cost. (FT)

Signal, a good thing going bad

Signal is one of the best apps we’ve got for secure communication. But that could all change, as the encrypted app moves into payments with the integration of MobileCoin.

Techies are upset because they associate cryptocurrency with frauds and scams. They don’t want to see Signal become a sketchy money transmitter business. 

A beta version of Signal Payments is now available to UK customers. It’s not available in the U.S., probably because MOB looks like an unregistered security. MobileCoin says it hasn’t worked out all the regulatory stuff yet.  

Turns out, Signal’s creator Moxie Marlinspike has deep ties to MobileCoin. I wrote about the money flows, and David Gerard followed with a story explaining the tech. (My blog) (David Gerard) 

In a blog post titled “Et tu, Signal?,” Stephen Diehl reminds us that we’ve seen this film a few times before.

Telegram tried the same thing in an ICO that imploded when the SEC shut them down. Facebook tried and failed to monetize WhatsApp. And when encryption app Keybase did an airdrop of Stellar lumens, crypto spammers invaded the app, ruining the user experience.

“This association weakens the entire core value proposition of the Signal app for no reason other than making a few insiders richer,” he said.

Grayscale wants to convert GBTC into an ETF

GBTC once enjoyed a healthy premium but is now trading at 9.72% below NAV. Virtually nobody is buying GBTC on secondary markets. 

Can shareholders redeem their GBTC for bitcoin? No, they cannot. Once bitcoin gets locked up in the trust, it is in there for good. (GBTC has ~649,130 BTC locked up to date, roughly 3% of all BTC.) 

In March, Grayscale announced it was going to shore up the discount to GBTC’s NAV with a $250 million buyback. Now, it plans to convert GBTC into an ETF. The conversion would mean GBTC shareholders no longer have to pay a hefty 2% annual management fee. 

For some reason, Grayscale is confident the SEC will approve an ETF, even though the regulator had rejected every single Bitcoin ETF proposal put before it to date. I’m not sure why Grayscale is any different. (Coindesk) (GBTC announcement)

Currently, the SEC is reviewing two active bitcoin ETF applications: the VanEck bitcoin ETF and WisdomTree’s bitcoin ETF.

Fowler has a new lawyer

Reggie Fowler has finally found himself a new lawyer after his previous defense team withdrew from the case because he failed to pay them. His new lawyer is Ed Sapone of Sapone & Petrillo in New York.

Fowler is the Arizona businessman tied to hundreds of millions of dollars in missing Tether/Bitfinex money. He was indicted in April 2019, along with Israeli woman Ravid Yosef, who is still at large. 

Judge Andrew Carter has yet to set a new trial date. He is giving Sapone three months to get up to speed on the case first. And he warned Sapone: “You are going into this with your eyes wide open.” Meaning if Fowler doesn’t pay him, Sapone will not be allowed to withdraw from the case.

Other newsworthy items

Christie’s is grabbing the NFT bull by the horns. The prestigious auction house is selling NFTs of nine rare CryptoPunks by Larva Labs alongside work by Andy Warhol and Jean-Michel Basquiat in a marquee auction.

The single lot—estimated to fetch between $7 million to $9 million—will be sold at Christie’s 21st Century Evening Sale on May 13 in New York. (Artnet) (Christie’s)

Former BitMEX CEO Arthur Hayes has surrendered to authorities. He flew to Honolulu to appear before a judge on April 6. Pursuant to an earlier agreement, he was released on a $10 million bond, secured by $1.5 million in cash, pending future proceedings in New York. 

Six months ago federal prosecutors in New York accused Hayes and his BitMEX co-founders of violating anti-money laundering rules. Hayes is a US resident. Previously, he was living in Hong Kong, but he has been living in Singapore with his Singaporean wife since January 2020. (Bloomberg) (Lawyers’ proposal) (Bail conditions)

The New York Excelsior Pass is a COVID-19 vaccine passport system. It proudly proclaims its use of secure technologies, like blockchain and encryption but it’s doing the wrong thing and badly. (David Gerard)

If you are tracking central bank digital currencies, John Kiff updated his CBDC “explorers” table with new developments out of Russia, Sweden and Trinidad & Tobago. (John Kiff)

Who needs a bitcoin ETF anyway? MicroStrategy just purchased another 253 BTC for $15 million in cash at an average price of $59,339. Saylor’s firm now holds 91,579 bitcoins acquired for $2.2 billion at an average price of $24,311 per bitcoin. (Press release)

HSBC will no longer allow customers to buy Microstrategy stock due to its newly changed policy on virtual currencies. (Tweet)

The rising tide of bitcoin is good for everyone. Following in the footsteps of Coinbase, Kraken is considering going public in 2022, after record trading volumes in the first quarter (CNBC)

BitClout, the decentralized social network that tokenizes Twitter accounts, uploads your keys to their server on every API request. Any employee with access to that server can steal all the money on the platform at any time. Like I said earlier, this project appears to be one bad idea piled on top of another. (Tweet)

Phillips, another London auction house, smaller and slightly younger than Christie’s, is getting into NFTs with the sale of an artwork called REPLICATOR.

The NFT market has been a bust for Mike Winkelmann in so many ways. Now he is coming out with a book on Amazon.

Sleep with Kate. Drive with Kate. Walk with Kate. Model Kate Moss is featuring her own series of NFTs on Foundation. Proceeds go to charity. (Vogue)

Super Bowl champion Tom Brady is launching his own NFT platform called Autograph. (CNBC)

This tweet of a nothing sandwich from the Fyre Festival will be sold as an NFT. The original tweeter will use the money to help pay for a kidney transplant. The sale on OpenSeas ends on April 24. If any NFT deserves your money, this one does. (Verge) (GoFundMe)

Feature image: Beeple everyday posted on Twitter

Like my work? Support my writing by becoming a patron for as little as $5 once a month. Think of it as buying me a cup of coffee to say thank you.

Signal adopts MobileCoin, a crypto project linked to its own creator Moxie Marlinspike

Many technologists today were disappointed to learn that Signal, an encrypted messaging service, is adopting MobileCoin (MOB), a new cryptocurrency that went live in December, for payments. 

Signal is hugely popular in the tech world. I use it, and many of the people I correspond with use it as a safe and secure way of communicating. And many prefer it over WhatsApp and Telegram.

Now, the non-profit wants to take the next step into becoming a payments service—so you can send money, and nobody will know who you are sending it to, or why. Here’s the blog post announcing the beta build.

Andy Greenberg wrote up a story in Wired covering the main points of the announcement yesterday. The idea is to have a cryptocurrency designed to work efficiently on mobile devices while protecting users’ privacy—and anonymity. For now, Signal’s payment feature will be available only to users in the UK, and only on iOS and Android—not the desktop. 

What is worth underscoring is that Moxie Marlinspike, the creator of Signal and CEO of the nonprofit that runs it, was a paid advisor to MobileCoin. In fact, he was the original CTO of the company, according to an early MobileCoin white paper.

Insider trading?

The price of MOB surged from $7 to $68 in the last week, according to Coinmarketcap—possibly because word of the announcement had leaked—before taking a dump overnight, dropping to $39. (MOB trades mainly on FTX, an Antigua and Barbuda-based cryptocurrency exchange.)

The price movements look a little like insider trading—just a little.

Interestingly, Signal kept their server code closed-source for a year to hide the integration. It only just recently re-open-sourced it, so who could have possibly known this big announcement was forthcoming?

Marlinspike told Wired he does not hold any MOB, which is hard to believe, given he was involved with the coin’s early development. (It is common practice in crypto for advisers and developers to get paid with the crypto of the projects they are involved in.) But who knows? Maybe he can’t hold any coins right now for regulatory reasons.

Most technologists, except for a vocal few, don’t like cryptocurrency, and for good reason. The space is rife with fraud and scams. So you can start to understand why they are unhappy.

“Signal users are overwhelmingly tech savvy consumers and we’re not idiots, Stephen Diehl, a UK-based software engineer, wrote in a blog post. “Do they think we don’t see through the thinly veiled pump and dump scheme that’s proposed? It’s an old scam with a new face.”

“Signal isn’t integrating just any random shitcoin, it is integrating Moxie Marlinspike’s random shitcoin,” Nicholas Weaver, an infosec specialist and researcher at the International Computer Science Institute in Berkeley, tweeted. “Gee, what a coinkidink. I wonder how much he’s unloaded on suckers already as a result of this pump & dump?”

Funding

One item the Wired article failed to mention: In April 2018, MobileCoin took $30 million in BTC and ETH from Binance Labs, the blockchain incubator of Binance—another popular offshore crypto exchange.

(Both FTX and Binance are huge Tether customers, by the way.)

The money is flowing in from elsewhere, too.

Last month, the project got an additional $11.35 million from venture capitalists Future Ventures and General Catalyst.

MobileCoin is a pre-mined coin. It has a total fixed supply of 250 million MOB. The project sold 35.7 million coins to private investors for $0.80 per coin in order to raise $30 million, according to its 2017 white paper. 

So who is holding the rest of the coins?

Joshua Goldbard, the project’s founder, recently said on Hacker News that half the coins have now been sold, leaving MobileCoin in control of at least half the supply.

“MobileCoin has made over 50% of the coins available for purchase. We are currently figuring out how to give away coins while remaining regulatory compliant,” he said.

A centralized payment system

If Signal is trying to create a private payments system, is MobileCoin even the best choice? There are serious questions about how secure and decentralized it is. 

Mobile is based on the Stellar code, originally derived from Ripple. Stellar is centralized, and has some major security issues. The platform is unproven, even if it’s still resilient.

MobileCoin took the Stellar codebase and added some stuff, including using Intel SGX—a chip that acts as a digital vault for securing users’ sensitive information. That means that users have to put 100% of their trust in Intel chips rather than software-based cryptography.

Also, MobileCoin is running on centralized powerhouse Azure, a cloud computing service created by Microsoft.

Further, if you look at MobileCoin’s “Trusted Nodes,” you’ll see that three entities are handling all of the consensus—and “MobileCoin Worldwide” is one of them. It’s hardly decentralized.

Signal’s non-profit status?

Signal Foundation was founded in April 2018 by Marlinspike and Brian Acton. It is registered as an independent 501(c)(3) nonprofit, meaning it has been approved by the IRS as a tax-exempt, charitable organization.

The firm’s non-profit status is now being called into question, after it became clear it will be getting handouts from MobileCoin.

Goldbard flat-out admitted on Hacker News: “I started MobileCoin to fund Signal. That’s it.” 

Many Signal users are concerned that this represents a conflict of interest. Here you have a non-profit (in this case Signal Foundation) directly integrating MobileCoin in their app as a quid pro quo.

MobileCoin Radio

Just to add another slice of weirdness: MobileCoin has a MobileCoin Radio because “creation” needs privacy. I have no idea how this fits in with anything Signal or MobileCoin is doing. I’m not sure MobileCoin does either.

Here is how they explain it:

“MobileCoin Radio is a place for artists to share their creations with the world, in hopes that our shared struggle with the human condition inspires a heightened exploration of our cultural landscape and of ourselves.”

Anyway, Signal is probably going to lose some fans as a result of its foray into crypto. Why use MobileCoin in the first place when there are a host of battle-tested privacy coins to choose from? It makes no sense.

Security expert Bruce Schneier thinks it’s an incredibly bad idea that “muddies the morality of the product, and invites all sorts of government investigative and regulatory meddling: by the IRS, the SEC, FinCEN, and probably the FBI.” He thinks the two apps—crypto and secure communications—should remain separate. In his mind, this is going to ruin Signal for everyone.

And let’s not forget the disaster that ensued when Facebook tried to create Libra (now Diem). Regulators shot that idea down pretty quickly. Why does Signal think it will fare any better?

(Update April 7: An earlier version of this story incorrectly stated that the Wired article failed to mention that Marlinspike was a paid advisor to MobileCoin. Actually, it does mention that he is.)

If you enjoy my work, please support my writing by becoming a patron. 

News: Coinbase set to go public, Tether releases meaningless attestation, are NFT sales slipping? 

Happy Easter! NFTs of this disturbing Easter bunny series are available on OpenSea. I was looking for more NFT bunnies but couldn’t find too many. Maybe I wasn’t looking hard enough.

In any case, Bitcoin is now at $58,000 and Tether has more than 42 billion tethers in circulation. Here’s the news:

Coinbase set to go public

Coinbase, the largest crypto exchange in the U.S., will start selling shares on Nasdaq on April 14. The company will trade under the ticker symbol “COIN” and offer 114.9 million shares as part of its direct listing. Share price will be determined by orders coming into the stock exchange. 

Currently valued at $100 billion, Coinbase is going public during the biggest Bitcoin bubble yet. The event will make Coinbase CEO Brian Armstrong—who owns 39.6 million of the company’s shares—a very wealthy man indeed. And the VCs backing the company will realize huge profits, as they all dump their shares on retailers.

On April 6, the exchange is expected to reveal its first quarter financial results and full year outlook. (CNBC) (Coinbase statement)

Tether’s meaningless attestation

In its latest PR move, Tether published an attestation verifying that it had $35 billion in assets backing a similar amount of tether for a blink in time on Feb. 28. The attestation was produced by accounting firm Moore Cayman, based in the Cayman Islands.

Bitcoiners are head over heels about this, but the report is meaningless. The document explicitly states that this does not mean tethers were fully backed at any other time—or are now. And the report doesn’t fit what the NYAG required Tether to publish by mid-May, because it doesn’t break out each category of backing asset by percentage. What’s backing tethers could be mainly bitcoin and toxic assets, for all we know. (David Gerard)

Days after Tether produced the attestation, it printed 1.2 billion tethers—one of its largest issuances ever. What’s a few billion more when bitcoiners think you are legit?

The wonderful world of NFTs

Are NFT sales slipping? Average prices for NFTs have fallen almost 70% from a peak in February to about $1,400, according to Nonfungilble.com, which tracks NFT marketplaces.

The NFT bubble hit its all-time high around the time Metakovan bought Beeple’s “Everydays—The first 5000 days” for $63.9 million on Christie’s. (Bloomberg) 

Cointelegraph also reports that the NFT market is experiencing a silent crash. While we can always see what the price of bitcoin is up to, tracking the movements of illiquid markets is trickier. When it comes to NFTs, buyers simply evaporate and sellers fail to move their wares. 

What is causing the drop in prices? “I suspect it is because the secondary sales have evaporated, so the dream of ‘greater sucker’ has gone away in about the same timeframe as the Crypto Kitties NFT bubble,” Nicholas Weaver said.

Meanwhile, Shares of Funko, a toymaker in Washington, are rising after the company acquired a majority stake in TokenWave, a developer of TokenHead, a mobile app for showing NFT holdings. Funko plans to launch its own NFT offerings this summer. (CNBC)

Other companies are jumping into the space. NFT platform Recur announced a $5 million seed round led by the DeFi Alliance, Delphi Digital, Ethereum co-founder Joe Lubin, and Gemini, among others. (Cointelegraph)

Justin Sun, the CEO of Tron, is now buying serious high art. He bought a Picasso for $20 million at Christie’s in London on March 23, where he also picked up an Andy Warhol for $2 million.

Sun, if you recall, was the second highest bidder for the Beeple “Everydays—the first 5,000 days” piece, driving up the price for Metakovan. Apparently, the Christie’s team in Asia reached out to Sun after the NFT sale to talk him into buying real physical art with all his spare change. (ArtNews)

How does OpenSea, an online market for NFTs, deal with copyright violations? They pocket the buyer’s money and tell them they should have done their own research. Buyer beware! (Vice)

John Cleese’s auction for an NFT of a speedily drawn Brooklyn Bridge ended on April fools’ day. The proud owner is now JeffBezosForeskin who paid $35,000 in ETH for it on Mintable.  

SNL is selling an NFT to their NFT skit an OpenSea. The top bidder gets two tickets to a live taping of the show. This gimmick just does more to promote NFTs, imho. (Decrypt)

Other newsy bits

A DOJ investigation into Representative Matt Gaetz and Joel Greenberg—the former tax collector in Seminole County, Florida—is focused on the pair recruiting women for sex. Greenberg is a bitcoiner. At one time, he wanted to start his own blockchain company, but was accused of dipping into public funds to do so. (The Daily Beast)

Greenberg has made a lot of headlines in recent years.

Terror-linked groups in Syria’s war-torn Idlib are changing their crypto tactics to avoid detection by Western law enforcement. (Wired)

Me, quoted in the news

After I wrote my story revealing the mystery Beeple art buyer, I got a lot of calls from the media asking me for comments about NFTs. 

I am featured in Voice of America: “Cryptocurrency Fuels Digital Art-Buying Frenzy”

Ben Munster quoted me in an article for The Art Newspaper: “NFT art bubble? 2017 crypto bust could spell out the future of current boom”

Kenny Schachter quoted me in an opinion piece for Artnet: “Professor Kenny Schachter Is Here to Teach You More About NFTs (and Put the Crypto Critics in Detention).” David Gerard is quoted in the same story. Kenny refers to us as “curmudgeons.” 

I was also interviewed by the Verge: “NFT mania is here, and so are the scammers.”

(Updated April 4 to add info about Recur.)

Feature image: Scary bunny on OpenSea

If you enjoy my work, please support my writing by becoming a patron. I need all the support I can get!

News: I’m writing a book, people are minting NFTs for the lulz, Chuck Tingle calls NFTs a ‘scoundrel plot’

I’m working on a book on NFTs and how they became the tulip mania of crypto. As of now, the plan is to self-publish on Amazon, hopefully before the bubble explodes like this dead whale.

I’ve finished the outline—which I’ll continue to update in coming weeks—and I’m playing with ideas for a catchy title. 

If you have thoughts for a title, send them to me! I need as many ideas as possible. Only one rule: it has to be SEO-friendly, so we need the words “NFT” and “art” in there somewhere. Also, I can add a long subtitle stuffed with keywords, too. Here are a few thoughts:

NFTs: The art of the steal

NFTs: When crypto bros entered the world of high art

Since I’m working on a book about NFTs, I won’t be talking about much else for the next few months. Hence, this newsletter is mostly about NFTs. (I promise I’ll return to talking about Tether when this book is finished.)

My goal: 500 high-quality book words a day, starting today. 

Here the news:

BitClout’s content creator tokens are NFTish

I was going to write a big section here on BitClout, the social-media-on-a-blockchain experiment, because I initially thought the project’s creator coins were NFTs, but they’re not really. They are similar to NFTs due to their artificial scarcity and being a way to trade influence. But they are fungible tokens, and it turns out they are HYIPish.

If you want more details on BitClout, I wrote everything up in a separate blog post. Also, note that at least one BitClout investor, Social Capital CEO Chamath Palihapitiya, is building a big portfolio of NFTs.

NFTs don’t convey ownership, case in point

NFTs don’t convey ownership of a digital art piece in any form, shape or fashion. You can create an NFT of a piece of art even if you are not the creator. You can also create multiple NFTs of the same digital art. 

Where this really becomes a problem is when you mint an NFT, auction it off for an absurd amount of money, and then someone claiming to be the rightful owner of the underlying art steps forward. 

This is what happened when an NFT for a virtual house sold on SuperRare for $500,000 worth of ETH. Now the artist and the visualizer—who worked together on the Mars House—have locked horns over the copyright.

Mateo Sanz Pedemonte, a 3D modeler who created the virtual abode for artist Krista Kim, calls the project “a fraud.”

“Krista Kim never owned this project fully,” he said. “I have created the project with my own hands, combined with her direction. I do possess the full intellectual property.” (Dezeen)

People are minting NFTs for the lulz

People are minting NFTs and selling them as a joke. 

A New York Times writer minted a column as an NFT and sold it on Foundation to demonstrate the insane amounts of money people are willing to pay for these things. A bidder going by @3fmusic bought the piece for 350 ETH, worth $560,000. (NYT)

Recently, John Cleese put up an NFT of a drawing of the Brooklyn Bridge on OpenSea. The highest bid is now $35,000 by JeffBezosForeskin.

“The world has gone terminally insane,” Cleese told VanityFair, adding that “This all reminds me of Henry David Thoreau, when he said, ‘Our inventions are wont to be pretty toys, which distract our attention from serious things. They are but improved means to an unimproved end.’”

Author Chuck Tingle put off by NFTs

Chuck Tingle, a self-published writer whose focus is satirical gay porn, looked at the NFT phenomenon and was appalled. He proposed doing a “tingler” as a single reproduction with an NFT, but when he read up on NFTs, he summed up his horrified thoughts in an ebook the same day—now available on Amazon for $2.99.

The title of the book is: “Not Pounded By My Book ‘Pounded In The Butt By My Non-Fungible Tingler That Is Literally This NFT’ Because Of The Current Catastrophic Environmental And Ethical Impact.”

David Gerard wrote up a review of the book. Of course, he had to explain who Tingle is first, because not everybody knows. I sure didn’t, but Tingle is apparently quite popular.

As for Tingle, he thinks NFTs are a “scoundrel plot,” where promoters are “taking money from buds of less means.”

In a separate tweet, he suggested, “instead of trying to support art by buying digital plaques with your name on it that has no meaning or actual connection to the art JUST SUPPORT ARTISTS BY BUYING THEIR ART. NFTs are good example of trying to fix problem that already has had very easy solution for 1000s of years.”

Other newsworthy bits

NFTs are so big and bubblish they’re even featured in an SNL skit. This is a funny skit but sadly it only serves to promote more of the NFT nonsense.

Edmund Schuster, an associate professor of corporate law at the London School of Economics, debated Andrew Steinhold, partner of NFT fund Sfermion. The motion for the debate: “NFTs are dumb.” (The Blockchain Debate)

In a separate debate, David Gerard took on Josh Petty, CEO of startup Twetch. Petty has been experimenting with NFTs for limited edition Twetch hats, which you can buy with BSV tokens. “A crypto token has no intrinsic value,” Gerard argued. “It is a race to the bottom for these things.” (Coingeek)

As I’ve stated, NFTs are simply pointers. And if the thing it points to moves, there’s always a chance down the line that your NFT could point to “ERROR 404!” for the rest of its life.

Verge reporter Jacob Kastrenakes makes a similar point: “NFTs are fundamentally built on trust—trust that a seller won’t screw you over, trust that these tokens magically have value—and that holds true even at the deepest level of the system.”

Is FinCEN aiming for NFTs? FinCEN issued a blue box notice to let art and antiquities traders know they will be held to the same reporting standards as financial institutions. This means that they will have to submit suspicious activity reports, or SARs, for antiquities trade. The question is: Will NFTs be categorized as art? (FinCEN notice, OCCRP)

Do NFT buyers even care about art? Computer scientist Jorge Stolfi thinks not. “If you make an NFT out of your work, its market will be restricted to a few million crypto believers worldwide. And they are mostly not the type of person who appreciates art. The billions who do not care for crypto will not be able to buy it.”

Finally, if you are tired of watching NFTs sell for millions of dollars in crypto and want to see some real art, here’s your chance. The Louvre just put its entire collection online for free.

If you enjoy my work, please support my writing by becoming a patron. I need all the support I can get!

BitClout’s social media experiment is one bad idea on top of another

BitClout, a social-media-on-the-blockchain project, is selling a type of token (called “creator coins”) tied to influential Twitter accounts—without account holders’ permission.

And folks are getting understandably pissed off. 

At first, I thought these creator coins were NFTish due to their artificial scarcity and being a way to trade influence. But it turns out they are more HYIPish.

Creator coins are fungible, similar to ERC-20 tokens on Ethereum. And each BitClout creator coin has its own supply. Elon Musk’s creator coin is worth $84,000, for instance, and there are currently 434 of them in circulation.

The BitClout “one-pager” tells us a little bit more about how these creator coins work:

“Creator coins are naturally scarce, with fewer than 100 to 1,500 coins in existence for each profile. This is because as more people buy a profile’s creator coin, the price of the coin goes up automatically at a faster and faster rate. This means that, eventually, it could take billions of dollars to mint even one more coin.”

According to the paper, if you want to buy new coins associated with a creator, the profile will “happily mint them out of thin air” and sell them to you according to a price curve.

Like a lot of things in this project, the formula for calculating the price of creator coins is complicated and hard to follow:

Price in BitClout = .003 * creator_coins_in_circulation^2
Price in USD = .003 * creator_coins_in_circulation^2 * bitclout_price_in_usd

Essentially, what you need to know is, the price of the creator coins goes up exponentially based on demand, thus, you are encouraged to buy early and hold on to your coins for as long as possible. However, the only value in the coins comes from new investors. The coins themselves are intrinsically worthless.

It all sounds very much like a Ponzi scheme, where folks who get in at the ground level are able to cash out, but the news is not so good for late investors. (Eventually, you run out of suckers, and someone gets stuck holding the bag.)

BitClout token

BitClout also has its own blockchain and its own BitClout token (BTCLT). The project actually did a premine of 2 million BTCLT for founders and investors.

If there is an expectation of profits from an investment in a common enterprise based on the efforts of others, that’s generally a good sign something is a security, according to our friend Howey.

The project mints creator coins of Twitter profiles and assigns them dollar values, but you can only buy creator coins with BTCLT. And if you want BTCLT, you have to buy it with bitcoin via the BitClout website.

Your money goes in, but how does it get back out again? The BitClout token so far is not listed on any major exchange. But there is good reason to believe that could change soon, based on the influencers behind the project.

Big-name investors

BitClout controls a wallet containing nearly $190 million worth of bitcoin, most of it raised from notable VCs, including Andreessen Horowitz (a16z), Coinbase Ventures, Digital Currency Group, and the Winklevoss twins.

Social Capital CEO Chamath Palihapitiya was recently on a podcast discussing how BitClout is funded by him and others.  

Aside from Coinbase Ventures itself backing the project, a16z is one of the major investors behind Coinbase, so I’m sure there is a plan here somewhere to get that token listed pronto. And it’s not like Coinbase isn’t already listing a slew of coins that resemble securities.

Diamondhands

BitClout’s pseudonymous founder, who refers to himself as “Diamondhands”—meaning someone who is willing to take risks and hold on to an asset to the bitter end—is allegedly Nadar Al-Naji, the former Basis founder. And we all know how well that project went. 

Basis was a “price-stable cryptocurrency with an algorithmic central bank,” according to its white paper. After raising $133 million, Al-Naji eventually shut Basis down blaming regulatory constraints. He ended up returning 90% of the money. (Andressen Horowitz was also an investor in Basis, by the way.)

Basis and BitClout share a lot in common. Both projects are totally confusing. And they both appear to have the same founding team and the same investors. “We are investors. Same team behind Basis [from] a few years back,” Tyler Winklevoss of Gemini Capital told Decrypt.

You could be forgiven for thinking this is just grifters jumping between grifts.

Robert Stevens wrote up a great report in Decrypt describing how BitClout works and where the funds are getting shuffled off to. Brady Dale also penned a good story in Coindesk.

By the way, I love how Diamondhands told Coindesk that BitClout is not a company, it’s a blockchain. As if that will spare it from an SEC enforcement action. Everything about this project is dumb and bad.

Anyhow, last week crypto law firm Anderson Kill sent a warning letter to Nadar Al-Naji on behalf of Brandon Curtis, the product lead for decentralized token exchange Radar Relay, for using Curtis’ private information without his consent. I have no idea why VCs are pumping money into this project.

Updated on March 29 to add Tyler Winklevoss’ quote from Decrypt.

If you like my writing, please support my work on Patreon!

News: Metakovan unmasks himself, FATF goes after DeFi and NFTs, Coinbase pays CFTC $6.5M over wash trades

I’ve been traveling around the U.S., visiting friends on the East and West Coasts and in between, and this is my first newsletter since the end of February.

This week has been a busy one, full of interviews and talking to reporters about nonfungible tokens. Who knew NFTs would become the next tulip mania? I’ve gained nearly a thousand more Twitter followers and several more patrons, which is wonderful because I can certainly use the support.

Peanut exploring a stream in Texas

As I write, Bitcoin is above $57,700, after reaching an all-time-high of $61,742 on March 13. Meanwhile, there are now 39.6 billion tethers in circulation—that’s 4.5 billion new tethers in the last three weeks, all helping to prop up the BTC price.

In my last newsletter, I said I didn’t think BTC would ever see $57,000 again. I was wrong, but I also didn’t expect Tether to keep blatantly printing billions more tethers—each one representing a dollar on an offshore exchange—after the NYAG settlement. It just shows this nonsense can go on a lot longer than any of us imagined.

Some quick updates—at the end of February, I did an all-day film interview for another QuadrigaCX documentary. I can’t tell you any more than this, unfortunately, but yes, more documentaries. (Still waiting for someone to do a Tether documentary and an NFT documentary, but we know those are coming.)

Also, fellow nocoiner David Gerard and I got a full viewing of the upcoming CBC Quadriga documentary. It was over a year ago that we met in Vancouver to film this. However, it feels like the Quadriga story is still unfinished, and will be until we know for certain that’s Gerald Cotten’s body buried in Halifax.

Here is the news. 

Metakovan reveals himself

The art world was beside itself on March 11 when a person going by “Metakovan” bought an NFT by Beeple for $69.3 million in ETH—making it the third most expensive* ever sold by a living artist, behind Jeff Koons’s “Rabbit” and David Hockney’s “Portrait of an Artist (Pool with Two Figures)”—if you can get past the fact that it was paid for with magic beans.

In a blog post that went viral, I revealed that Metakovan was Vignesh Sundaresan, an Indian crypto entrepreneur who ran Coins-e, a shady, now-defunct Canadian crypto exchange. My post got 20,000 hits the first day. 

Four days later, Sundaresan admitted he was Metakovan in a blog post on the Metapurse website. Metapurse is his crypto investment fund.

We already know who you are. The question is, why were you using a pseudonym in the first place?

He claims that it wasn’t a pseudonym, just an “exosuit.” He did it, he says, because he wanted to prove to the world that people of color can buy high-art, too. He then delved into a rags-to-riches story about how he made it big in crypto. (This is a common bitcoiner fairytale: buy crypto, and you, too, can become fabulously wealthy.)

In an online auction, I’m not sure a pseudonym proves anything. But it does look like maybe you were trying to hide or distract from something, like the questionable past projects you’ve been involved with?

Also, if Metakovan wanted to make a point about social justice, why did he buy an NFT representing a collage full of angry, racist, misogynistic images? That makes no sense.

Art critic Ben Davis spent an entire day digging through Beeple’s magnum opus—a collection of 5,000 images. His findings, written up in an article for Artnet News, aren’t pretty. In one example, Hilary Clinton with a set of gold teeth and the caption: “Senator Clinton’s last-ditch effort to reach black voters.”

That just tells me Metakovan could care less about the art. He only cares that he gets publicity and can make money off the NFT by packaging and reselling it—in the form of B20 tokens—to retail suckers.

If you are wondering where Metakovan got all that ETH to buy the Beeple NFT—he claims he was an early investor in the Ethereum ICO. Anyone who bought into that ICO and hodled, could easily be a millionaire today.

But remember, Metakovan and business partner Twobadour (aka Anand Venkateswaran) also raised 50,000 ETH in an early 2018 ICO for their Lendroid project. LST (stands for Lendroid Support Token) is a dead shitcoin that never got listed on any exchange.

NFTs are garbage

Since I wrote my Metakovan blog post, I’ve been getting pushback from artists who want to believe that NFTs bring value to the art world. They don’t want to hear that NFTs are a scam. It’s sad to see artists getting sucked into the crypto cesspool. 

I wrote another post last week where I explain why NFTs are worthless—and how they have opened the door to fraud and money laundering. The only real value of NFTs is speculative—i.e., what the next sucker is willing to pay you for them. 

Artists want to believe that NFTs are an avenue for them to get paid for their work, but in truth, NFTs are simply pointers, expensive URLs on the blockchain. And if the object they point to moves or disappears, those URLs will forever point to nothing.

Some NFTs contain a hash of the artwork they represent. But as computer scientist Jorge Stolfi explains: Copies of a physical work of art are clearly distinct from the original. They are not the same atoms that the artist himself put on the canvas. In contrast, copies of a digital file are exactly the same bits. There is no ‘original’ of a digital file.

In other words, any copy of a digital artwork will have exactly the same hash, so putting the hash on the blockchain is useless.

FATF takes aim at DeFi/NFTs

The Financial Action Task Force, a global anti-money laundering watchdog, released an update of its Draft Guidance on a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers.

Decentralized exchanges, the platforms behind decentralized finance (DeFi) apps, are now considered virtual asset service providers—or VASPs.

The DeFi app, or smart contract, is not a VASP, but the owners and operators of the DEX are, which means they are obligated to ensure these platforms meet the same anti-money laundering requirements as other financial institutions.

This is a clear aim at DeFi founders, investors and VC firms. 

The FATF adds that NFTs that can be converted or exchanged for fiat currency or other virtual assets remain in scope.

In their analysis of the new guidance, blockchain analytics firm CipherTrace said that NFTs that can facilitate money laundering and terrorism financing are “virtual assets” as viewed by the FATF.

As I wrote in my NFT explainer piece, NFTs open the door to money laundering—big money coming from mysterious people to buy outrageously overpriced NFTs with cryptocurrency—so its no surprise that the FATF has NFTs on its radar.

Charlie Lee, the mystery Coinbase wash trader?

Coinbase settled with the CFTC for $6.5 million over claims that between January 2015 and September 2018 the exchange “recklessly delivered false, misleading, or inaccurate reports concerning transactions in digital assets.” 

The CFTC also claims a former Coinbase employee was wash trading LTC/BTC pairs on Coinbase’s GDAX platform between August and September 2016. (GDAX, meant for professional traders, was later renamed Coinbase Pro.) Wash trades are illegal because they make it look like there’s a lot of trade volume when there’s not. (Verge, CFTC press release and order)

The order doesn’t mention who the employee is but we know that Charlie Lee, the founder of litecoin, was working as an engineer at Coinbase at the time—and it looks very much like he got caught with his hand in the cookie jar. 

LTC wasn’t worth more than a few dollars even after it got listed on GDAX in August 2016. The price really took off when litecoin was listed on Coinbase’s retail exchange—called simply “Coinbase”—in May 2017.

Lee left a month later to focus on his litecoin project and then dumped his LTC at the top of the market in December 2017, when LTC saw highs of $360. That was during that last crypto bubble.

Lee got a lot of flak for that. Ironically, he later claimed that he sold because “holding LTC made it a situation where I may do something to pump the value short term. but is bad for the long term success of Litecoin.”

Bizarrely, LTC has never seen the highs in the 2021 bubble that it did in 2017. It’s only at $200 now.

Whistleblower Bitfinexed suspected Lee of wash trading all along. He wrote up his suspicions in a blog post in 2018, which is well worth the read now.

If Coinbase—the leading crypto exchange in the U.S.—allowed a former employee to wash trade up to 99% of the daily volume of a shitcoin, you can bet this is standard practice on all crypto exchanges. 

Coinbase has delayed its public listing to April, according to Bloomberg. Its latest valuation is $68 billion.

Other newsworthy bits

Photographer/writer Andy Day says NFTs are a pyramid scheme. “To many, it’s a means of overthrowing the existing regime; when you look a little closer, you realize that it’s just an extreme manifestation of neoliberalism.” (Fstoppers)

If you still think NFTs are the greatest thing since sliced bread, Monty Python’s John Cleese has a bridge to sell you, specifically a drawing of the Brooklyn Bridge as an NFT. You can buy it on OpenSea. The highest bid so far is for $35,671. (Previously the top bid was $50,000.) (Decrypt)

Not a month goes by where we don’t hear of another DeFi rug pull. TurtleDex, a DeFi app running on the Binance Smart Chain, drained $2.5 million in crypto from liquidity pools on Ape Swap and Pancake Swap. (Who comes up with these names?) The owners immediately deleted TurtleDex’s telegram, the official website, and the Twitter page. (Decrypt)

USDC, the stablecoin issued by CENTRE, a project backed by Circle and Coinbase, has surpassed 10 billion. (The Block)

BofA published a report called “Bitcoin’s Dirty Little Secrets,” wherein analysts said there is no good reason to own bitcoin “unless you see prices going up.” David Gerard reviews the report in full on his blog.

First Trust Advisors and hedge fund SkyBridge Capital, led by former White House communications director Anthony Scaramucci, are pushing for a bitcoin ETF in the U.S. The prospectus for the “First Trust SkyBridge Bitcoin ETF Trust” was published on Friday. While a bitcoin ETF opened in February in Canada, U.S. regulators have repeatedly rejected attempts to introduce them, citing concerns about market manipulation.  (The Block)

Want to flush all your money away? Toilet paper company Charmin has an NFT.

*Update on March 22 — Third most expensive, not first.

WTF is an NFT? Here’s a rundown of the basics

NFTs are all over the news lately.

Recently, I was having drinks with a friend, who knows zip about crypto, and out of the blue, she started asking me about “non-fungible tokens.” 

The next day, a musician friend posted an amateurish drawing of a guitar on Facebook, proudly announcing, “This will soon be available as an NFT.”

If initial coin offerings were the crypto grift of 2017 and decentralized finance (aka “DeFi”) was the grift of 2020, then “nifties” are the grift of 2021, and they do just what crypto grifters need them to do: lure more dumb money into crypto.

How do they do this? By convincing artists that by “tokenizing” their digital art, they can prove ownership and make oodles of money for their work. They just need to buy crypto first, and then sway their friends into believing that crypto and NFTs are the wave of the future. Also, by convincing investors that NFTs are the hottest new thing.

If you are trying to get up to speed on this nonsense, you’ll find answers to your most basic questions below.

What’s an NFT?

NFT stands for non-fungible token. Fungible means interchangeable. It’s the idea that one asset can be swapped out for another and nothing is lost.

Bitcoin and ether, the two most popular cryptocurrencies, are examples of fungible tokens. One bitcoin works like every other bitcoin; likewise with ether.

A non-fungible token is different because only one ever exists. Each NFT contains unique data, so NFTs are not interchangeable with each other. They are not divisible either, whereas fungible tokens are.

This is a wonderful play on bitcoiners’ idea of scarcity. There will only ever be 21 million bitcoin—and there will only be one NFT! Scarcity clearly means something is valuable. Grab it while you can.

Most of the ICO tokens in the 2017 crypto bubble ran on Ethereum and were based on the ERC-20 token standard, so exchanges and wallets would know how to integrate them. NFTs on Ethereum also have their own standard: ERC-721. 

Other blockchains, like Tron, Binance Chain, EOS, and Polkadot, support NFTs but Ethereum is by far the most popular and widely used.

Because NFTs are unique, they are hyped as “collectibles,” rare one-of-a-kinds that will only go up in value over time. 

What are you actually buying?

An NFT is only a pointer to something else on the web. It could be an image, a music or video file, or even a tweet. The object itself does not live on the blockchain.

In fact, the server holding the object could go away or it could change what is displayed at that location—and then your NFT would point to nothing or something totally different, like a rug.

Really, an NFT is simply proof that an object exists.

It doesn’t convey copyright, or for that matter, any legal rights at all. If anything, it is akin to a “certificate of authenticity,” which says this is where this thing is located. Unless you have a contract that specifically spells out you own the rights to this object, you literally just bought the pointer.

In addition to a slew of hitherto unknown auction houses where NFTs are sold, big-name auction houses are getting in on the game. Sotheby’s recently announced it will be selling its first-ever NFT on behalf of digital artist Pak in April.

And last week, Christie’s auctioned an NFT of Beeple’s “Everyday: The First 5000 days” for $69.3 million in ETH. Christie’s even made the unusual decision of accepting its premium in magic beans.

In its conditions of sale, Christie’s carefully points out that NFTs carry no rights:

“You acknowledge that ownership of an NFT carries no rights, express or implied, other than property rights for the lot (specifically, digital artwork tokenized by the NFT). You understand and accept that NFTs are issued by third parties, and not by Christie’s itself.”

Even if you own an NFT, that doesn’t mean you can restrict other people from seeing the object it points to. 

Jack Dorsey, Twitter’s billionaire CEO, is selling an NFT to his first tweet. The bidding is now up to $2.5 million. But you don’t need an NFT to see the tweet. (It’s worth mentioning that Dorsey is a big fan of crypto. His company Square invested $50 million into bitcoin last year, so it’s no wonder that he is shilling NFTs.)

When you buy an NFT, what you are buying is the private key to a crypto-token. The value is mainly speculative. You will only get for it what someone else is willing to pay—if you can find a buyer, and there is no guarantee that you will, when the time comes to cash out.

The problem is that people’s perceptions of what they are buying when it comes to NFTs don’t always mesh with the legal realities. And marketplaces involved in these sales are not always transparent about what they are selling. In fact, the more questions you ask about the real underlying value of an NFT, the vaguer the responses become.

How to create an NFT

If you are an artist who wants to create an NFT to auction, first you want to download a digital wallet that supports the ERC-721 token standard, such as MetaMask, Trust Wallet, or Coinbase Wallet, and put a little ETH in it to pay for “gas.” Plan on spending $50 to $100 worth of ETH to cover the costs of creating your token. 

After that, there are plenty of sites, including OpenSea, Mintbase, and Rarible, that will take your money and step you through the process of “minting” your NFT.

Connect your wallet to one of those sites. Write up a description of your artwork, upload your image, and voila, you’ve created your first NFT.  

Unfortunately, many struggling artists find their NFTs simply languish on these auction sites, and they’ve sunk $100 into nothing when they could have gone out and bought groceries instead.

A short history of NFTs

Where did NFTs spring from? Although the technology for NFTs has been around almost as long as bitcoin, NFTs hit the mainstream in 2017 with CryptoKitties, a game that allowed people to buy and “breed” limited-edition virtual cats with crypto. CryptoKitties was the first NFT to use the ERC-721 standard.

Last summer, game developers got into NFTs in a big way. NFTs enabled gamers to win in-game items (e.g., a digital shield, a digital sword, or digital skins), transfer their assets from one game to another, and then sell their in-game NFTs in blockchain marketplaces—sometimes for impressive sums.

Soon after, NFTs found their way into the art world, hyped by celebrities who weren’t always up to speed on crypto. Lindsay Lohan minted her own token on Rarible, based on an image of her face.

Hours after she put her NFT up for sale, she tweeted, “Bitcoin is the future, happening now,” even though her NFT lived on Ethereum. Lohan sold the image for over $17,000. It was quickly resold for $57,000.

Here are some NFTs making the news in the last two months:

Keep in mind, most of these NFTs don’t sell for real money, they sell for ETH, and the trick is then converting your ETH into fiat, so you can spend it in the real world.  

What are the risks?

NFTs open the door to fraud and general funny business. This is because 1) money is involved, usually in the form of crypto; and 2) regulators haven’t caught up with grift. 

Crypto bros promote NFTs as the ultimate stamp of authenticity, yet for many artists, the NFT market has done the opposite: it’s opened the door for swindlers. Here’s what can happen:

You can create an NFT of someone else’s work. There are no protections in place to ensure that an NFT you are buying was created by the actual artist. Digital artists, ranging from 3D renderers to pixel painters, have all discovered their art on online marketplaces. 

There are literally dozens of bots on Twitter that will allow you to create an NFT of a tweet simply by tagging it, and Twitter has thus far made no moves to block these accounts.

The problem got so bad that Corbin Rainolt, who designs detailed paleo art, had take down all of his dinosaurs and repost them with watermarks. 

“I tried to block all NFT accounts but it seems I can’t block everyone of these accs,” he said on Twitter.

Illustrator Chris Moschler doesn’t get the buzz around NFTs.

“Art theft has never been this aggressive and rampant ever before,” he tweeted, after blocking dozens of Twitter accounts trying to mint NFTs based on his tweets. “I cannot understand how this is still being called a revolutionary movement in the art world.”

It is also possible to create an NFT of a piece of work on one auction site, and then create NFTs on the same piece of work on a plethora of other auction sites. What’s to stop you?

Some NFT marketplaces do better due diligence than others, but they take a cut of anything sold and can easily wash their hands of it afterward.  

Your NFTs can also be stolen. Not your keys, not your crypto, as the saying goes, and when you leave your NFT on an auction site, they have control of the keys.

Recently, several Nifty Gateway customers reported a hacker breaking into their accounts and stealing their NFTs. Some of the victims also said their credit cards on file were used to purchase additional NFTs, which were then transferred to a hacker’s account. (Nifty said those users did not have 2FA turned on.)

Also, NFTs open up big-time opportunities for money laundering. Art is an attractive vehicle to launder money, to begin with. Transactions are often private, and valuations of art can vary widely for unexplained reasons. Art prices can also be extremely high, so there is no reason not to expect that NFTs will be used for the same purpose.

Right now, the NFT bubble is a big one. Crypto grifters promote NFTs because it’s a new avenue to bring fiat money into the world of crypto and to pump up their bags. The problem is, all bubbles eventually pop, and when this one does, retailers will be left holding the bag. 

Feature image: Beeple’s artwork from “Everydays: The First 5000 days.” Courtesy, Christie’s

If you enjoy my writing, please consider supporting my work by subscribing to my Patreon account for as little as $5 a month. 

Metakovan, the mystery Beeple art buyer, and his NFT/DeFi scheme

Last week, a crypto whale going by the moniker “Metakovan” bought a Beeple artwork via Christie’s auction for $69 million—$60 million in ETH and $9 million in fees, also in ETH*—outbidding a surprised Justin Sun, founder of the Tron blockchain, in the last minute.

After the barest amount of digging, I am going to hazard a guess that the mystery Beeple buyer is Vignesh Sundaresan, a crypto entrepreneur who has been in the crypto landscape for about seven years.  

It’s pretty obvious, really. Metakovan has given a few audio interviews. And if you compare those to previous Sundaresan interviews, like this one, it’s the same voice—and the same crypto origin story.

In a recent interview with the Good Time Show, for instance, Metakovan says he got into crypto in 2013, lived in Canada for several years, and then left for Singapore in 2017 because crypto regulations in North America were too “unclear.” That’s basically Sundaresan’s background as well.

Putting aside the matter of why Sundaresan would want to keep his real identity cloaked in the first place, the next question is the grift—how is he spinning a profit off of non-fungible tokens, or NFTs?

I’ll get to that in a moment, but first… 

Who is Sundaresan? 

According to the bio on his website, Vignesh Sundaresan is behind several crypto startups. 

He co-founded BitAccess, an early bitcoin ATM company in Canada. BitAccess was accepted into the Y Combinator startup accelerator in June 2014, according to Coindesk.  

And then, in January 2017, he founded the Singapore-based Lendroid Foundation. The firm raised $47.5 million (50,000 ETH) in a two-day initial coin offering in February 2018, according to CryptoRank. 

He also founded consulting firm Portkey Technologies and claims to have backed several popular crypto projects, including Ethereum, Polkadot, Dfinity, Omisego and Decentraland.

Going back further, Sundaresan launched crypto exchange Coins-e in Ontario in 2013. (Coincidentally, the same year that Gerald Cotten and Michael Patryn launched their failed Canadian crypto exchange QuadrigaCX.)

Coins-e, a defunct Canadian exchange

Several Coins-e users have taken to social media to complain about losing money on Coins-e, calling it a scam and warning others to watch out. (See Reddit—here and here—and BitcoinTalk.)  

The posts on r/dogecoin are the most alarming. Coins-e clients report having their dogecoin disappear. Wireguysny described watching 1.3 million DOGE evaporate and the frustration of being unable to reach tech support to get to the bottom of the matter.

Xclusive2 wrote: “I’ve had just about enough of of Coins-e millions of coins missing, no reply from support ever! the reason is because it’s a one man operation. the problem is this joker is stealing and trading everyone’s coins when and how he feels to make himself rich he knows that Doge is worth a lot of BTC in large volumes.”

Sundaresan denies being the guy who allegedly ripped people off. According to him, Coins-e was sold to a company called Casa Crypto in Waterloo. The transfer was overseen by law firm LaBarge Weinstein, he claims.

“Since it was sold, I have not been associated with Coins-E. Allegations of a scam are FUD,” he told me.

I am so far unable to confirm that sale. I can’t find any announcement or press release on the sale. The Coins-e website no longer exists, and an archive of the site’s “About” page from 2016 doesn’t reveal who is behind the operation. I can’t find a company called “Casa Crypto” in Waterloo either.

Sundaresan offered to show me proof of the sale via a video call. I told him I was open to that, but he hasn’t gotten back to me to set up a time. He did not comment on whether he was Metakovan.

Meanwhile, I’ve looked up the domain registration for Coins-e.com. The site was registered in May 2013 and the only update was in May 2020—after customers complained about their coins vanishing.

The site was originally registered to Ramesh Vinayagam—the name of a famous Indian composer, per Reddit user xclusive2. Another alias perhaps? And, according to a Paste from January 2014, the site was registered to the man himself shortly before the registration was made private and Sundaresan entered the Y Combinator program.

The NFT connection

NFTs are the big thing now. They took over as the latest grift when decentralized finance, or DeFi, ran out of steam last year. Fellow nocoiner David Gerard wrote a blog post explaining how NFTs work and why digital ownership of art is utter nonsense.

“NFTs are entirely for the benefit of the crypto grifters,” he said. “The only purpose the artists serve is as aspiring suckers to pump the concept of crypto — and, of course, to buy cryptocurrency to pay for ‘minting’ NFTs.”

Stepping back, we first see the connection between Sundaresan’s startup Lendroid and NFTs in a blog post titled “Why DeFi Needs NFTs.” The post, written by his business partner Anand Venkateswaran, describes how NFTs solve the problems of DeFi, such as flash crashes, volatility, and governance. (Venkateswaran, a comms person, also has a pseudonym—he goes by Twobadour Pannar.)

Lendroid powers WhaleStreet, an Ethereum-based platform for swapping ERC20 tokens—that’s the standard for fungible Ethereum tokens. WhaleStreet has its own native “yield-farming token” called Shrimp.

Metakovan is also behind Singapore-based Metapurse, a crypto-based investment firm. Metapurse’s mission, according to its website, is to “democratize access and ownership to artwork.” The firm has been acquiring NFTs. It purchased Beeple’s “Everdays: 20 Collection” artworks for $2.2 million in December.

Metapurse has taken Beeple’s multiple artworks, or NFTs, along with three virtual museums, and combined everything into a “massive bundle.” Would you like to invest in this wonderful package? You can. All you have to do is stock up on Metapurse’s new B20 token.*

This blog post on the Metapurse substack lays out the grand plan:

“We believe we truly achieved this with B.20 — the name of a massive NFT bundle we are fractionalizing so that everyone can have ownership over the first large scale public art project within the metaverse. It is important to note that we’re fractionalizing ownership, not the assets themselves. These fractions will be available as 10 million B.20 tokens, and can be referred to as the “keys” to this digital vault.”

Number go up

The name of this game is “number go up.” This is about pumping B20, so holders and Metapurse can benefit when they go to sell the token—i.e., get more ETH, buy more NFTs, rinse, repeat.

The token distribution is something to pay attention to. Metakovan has 59% of all the B20 tokens. Why does he own the majority of tokens? As he explains it, that is to prevent any single person from owning more than half of B20 tokens—and snatching up all this wonderful artwork for themselves. The idea is to decentralize and democratize art, only Metakovan controls the token supply.

What’s interesting is that Beeple, the creator of the artwork, is actually a business partner of Metakovan’s. He owns 2% of all the B20 tokens. I’m sure there is no conflict of interest here.

WhaleStreet hosted the B20 sale on Jan. 23. Apparently, 1.6 million B20 tokens were sold to the public for $0.36 per token. After the Christie’s auction, B20 shot up to $23. It’s now down to around $16, according to Coinmarketcap. That’s a nice profit for anyone who got in early—and worth over $3 million for Beeple, if he dumps his coins quickly and there’s enough liquidity to actually sell them.

At the end of the day, this is a straight-up initial coin offering-style index fund to speculate on NFTs, with a twist: Metakovan owns most of the tokens—and he has an existing business relationship with the artist.

I wonder if Metakovan anticipated having to pay this much ETH to Beeple for his “Everydays: The First 5000 Days”? Metakovan knew he needed the artwork for his index fund. But did he expect Sun to keep bidding the price up to the very last second?

Also, in an earlier version of this post, I questioned why we can’t see the blockchain transaction—which was supposed to be 42,329.453 ETH. If we can’t see the transaction, how do we know that Beeple actually got paid for the sale and is not in cahoots with Metakovan to make number go up?

I now have a theory.

As Christie’s spells out in its conditions of sale, the transaction needs to come directly from a digital wallet maintained with Coinbase Custody Trust, Coinbase, Fidelity Digital Assets Services, Gemini Trust Company or Paxos Trust Company. And it sounds like the funds may even have gone into Christie’s escrow wallet.

Anyhow, if both parties had Coinbase accounts, the exchange could just change the database records off-chain to flip account balances. In this way, Coinbase acts like a second layer, and you wouldn’t see the ETH transaction.

When all was said and done, the Christie’s auction turned out to be a sweet deal for Beeple who now has a reason to shill crypto to his 2 million Instagram followers. And Metakovan gets publicity for his ICO project, so his own personal B20 holdings rise in value.


Since I published this article, Sundaresan has written to me and asked me to take it down. I refused, but agreed to make edits if he could point to anything specific that was wrong—so far, he hasn’t.

I’m posting Sundaresan’s full comment on the matter below:

Hello Amy, I am replying to address your concern about coins-e as relating to me. Definitely there are several factual inaccuracies in your blog post and your tweets. I would appreciate if you would temporarily pull down the posts until you have the facts right, as such a post causes unnecessary FUD and obviously it is your choice to not take it down. But if you do it will show that your intentions are in the right place and that you are looking to have a conversation. Regarding coins-e, it dates back to days when the crypto industry was very unorganized and the service itself was quite small and did not warrant a press release when the sale was done. The service was not even big enough to attract the crypto media attention, the service started growing bigger as the Casa crypto was taking over. The transfer happened through a well documented process with assistance from lawyers on both sides. Post the sale I had moved on to build Bitaccess, backed by YCombinator and I have had no link to Casa Crypto after the sale and I have repeatedly addressed this issue via newsletters and Q&As. For the other parts of your question, I believe it shall be better answered by contacting @metapurse and @twobadour directly.

————-

*Beeple’s “Everydays: The first 5000 days” is not part of the B.20 collection. Metakovan and Twobadour told the NYT, they have no plans to monetize the 5,000-image collage “yet.” The B20 collection is anchored by a different set of 20 Beeple artworks that Metapurse acquired in December for roughly $2.2 million on Nifty Gateway.

(March 14, 2021—This article has been updated to add comments from Sundaresan and more detail about Coins-e. Additional updates made later in the day to theorize on why the transaction did not show up on the blockchain, add some Gerard quotes and spruce of the ending a bit.)

(*March 15, 2021—Christie’s accepted its fees in ether—the native crypto of the Ethereum network. When Christie’s originally announced the sale, the auction house said it would accept crypto as payment, but the buyer’s premium had to be in real money. Later it changed its policy to accept ETH, according to Bloomberg.)

Related articles:

WTF is an NFT? Here’s a rundown on the basics

News: Metakovan unmasks himself, FATF goes after DeFi and NFTs, Coinbase pays CFTC $6.5M over wash trades

If you enjoy my work, please support me by subscribing to my Patreon.

NYAG to crypto companies: ‘Play by the rules or we will shut you down’

The New York attorney general issued a stern warning to crypto companies and crypto investors on Monday. Crypto firms doing business in the state must play by the rules or face consequences, she said. And to investors, she underscored the hazards of dabbling in the crypto markets.

The two-part warning from NY attorney general Letitia James comes on the heels of a settlement agreement with Bitfinex and Tether, wherein the two closely related companies agreed to pay an $18.5 million penalty. And an effort to shut down Coinseed, a crypto-trading app that prosecutors allege ignored securities laws and defrauded thousands of investors. 

An unstable market

In a warning to investors, the NY attorney general underscored the numerous risks of investing in bitcoin. Namely, volatility, difficulty in cashing out, conflicts of interest, market manipulation and limited protection from fraud.

“I’m warning New Yorkers and investors across the country that investing in this unstable market is not prudent and could cause devastating losses,” she said in a tweet.

“Many operators of virtual currency trading platforms are themselves heavily invested in virtual currencies, and trade on their own platforms without oversight. The financial interests of these operators may conflict with your interests,” she said.

She went on to add that “even if you purchase a well-established virtual currency from a more reputable trading platform, the price could crash in an instant.”

In effect she appeared to be saying that even if you are buying bitcoin on a regulated exchange, such as Coinbase in the U.S., your money could be here today, gone tomorrow.

Heed the law

In the second part of her warning, an industry alert, the NY attorney general warned crypto firms that deviation from the law will not be tolerated.

“If you don’t play by the rules, we will not hesitate to shut down your operations,” Attorney General James in a tweet.

Commodity broker-dealers, salespersons, and investment advisors in New York need to register with the Office of the Attorney General. And under the law, virtual currencies qualify as commodities—or securities. New York crypto firms that don’t register with the OAG, are in violation of the Martin Act.

Penalties include “permanent injunction from selling, offering to sell, or acting as a broker or investment advisor concerning securities or commodities in New York, as well as disgorgement of profits and restitution to victims.”

What does this mean?

Before the hammer comes down on Tether, which could cause a crash in the price of bitcoin and other cryptocurrencies, we can expect to see more warnings from regulators and prosecutors about the perils of investing in crypto.

If Tether is shut down and the price of bitcoin collapses as a result—regulators want to make sure that investors are well aware of the risks they face in buying bitcoin or any other cryptocurrency.

The NY attorney general isn’t the one done playing around. Treasury Security Janet Yellen issued a warning about bitcoin last week, saying it is inefficient for transactions and often used for “illicit finance.”

And if Gary Gensler is confirmed as the new chair of the SEC,* we may see a slap down on coins that fail the Howey test—including some of those listed on Coinbase, a firm that is planning to go public soon.

Updated March 2, 2021, to clarify that Gensler is Biden’s pick for chair. He still needs to be confirmed.

If you enjoy my work, please support me by subscribing to my Patreon.

News: NY gives Tether the boot, Tether leaks, Coinbase financials, MoneyGram dumps Ripple

February is coming to an end. I’m waiting to get vaccinated, so I can travel without worry again. Maybe I’ll go to some crypto conferences later this year? I still have fond memories of Coindesk’s Consensus in May 2018—when you could hear the rumble of lambos coming through midtown Manhattan—and sitting in a coatroom with scant Wifi and a broken water cooler. (It was a big coatroom, but a coatroom nonetheless, and that’s where non-Coindesk journalists were put.)

If you appreciate my writing, consider supporting my work by subscribing to my Patreon at the $5, $20, or $50 level. At times, I’ve even had folks donate $100. I don’t publish these articles in mainstream media, so my patrons are important!

So, what’s new? Tether now has close to 35 billion tethers in circulation—the last print was on Feb. 21 and nothing since. Also, the price of bitcoin is $46,300. That’s down 18% from last week. I’m not sure we will ever see bitcoin reach $57,000 again. The nonsense could ebb and flow for a while, but I do think the end is nigh for Tether.

NY shuns Bitfinex/Tether

Last week I said likely nothing earthmoving would happen in the NY attorney general’s probe of Bitfinex and Tether this month, other than maybe a status update, according to what Bitfinex said in its January letter to the court. I was wrong.

In an unexpected turn of events, Tether and Bitfinex reached a settlement with the NY AG.

According to the terms of the settlement, the sister companies agreed to a penalty of $18.5 million—without admitting guilt. They are also banned from doing business in New York, and they have agreed to an impossible level of transparency.

I wrote two stories on this—an overall story covering the details of the agreement and deeper observations. You should read both and also the settlement agreement, which is very readable. 

The bitcoiners are jumping for joy over the settlement because they interpret this to mean that Tether is liberated and we’re back to business as usual. This could not be further from the truth.  

The NY AG has given Tether enough rope to hang itself—with Tether agreeing to publish quarterly updates on what’s backing tethers. I mean, how crazy is this: Bitfinex and Tether are also supposed to reveal who their payment processors are. These payment processors are called shadow banks for a reason.

But the real punishment is not the fine imposed on Tether. The real punishment is that Tether and Bitfinex are banned from doing business in New York—the beating heart of finance and banking in the U.S.

They are prohibited from serving any person or entity in the state—defined as “any person known or believed to reside in or regularly conduct trading activity from New York,” and any business “that is incorporated in, has its headquarters in, regularly conducts trading activity in, or is directed or controlled from, New York.”

If the CFTC and the DoJ follow up—and you can bet they will—then Tether could soon be banned from the entire U.S.—a penalty much more significant than an $18.5 million fine.

In the meantime, the Tether printer has mysteriously paused. The settlement agreement was signed on Feb. 18, and the last Tether print was on Feb. 21 for 800 million USDT.

Why has Tether stopped printing? It may be that providing the transparency reports is proving more onerous than they expected. If they pop out another billion tethers, they have to show what is behind those—cash, a loan, crypto, or whatnot. 

But this is a problem. Tethers are the main source of liquidity on unbanked exchanges where the price of BTC is largely determined. If Tether stops printing tethers—or otherwise ceases to function—the price of bitcoin could take a serious dive.

Tether Leaks

Recently, a Twitter profile called @deltecleaks emerged and posted what looked like evidence of a database dump from Deltec, the Bahamian bank that Bitfinex and Tether have been using since 2018. That Twitter account was quickly suspended.

Then @LeaksTether appeared and posted several presumably leaked emails—conversations between Deltec and Tether execs.

These leaks are unverified. I am not completely convinced they are real, but I am also not convinced they are fake either.

Some of the alleged emails look interesting. Trolly wrote up a thread on one—in an email (archive) from Tether to Deltec, dated May 28, 2020, Tether asks for help in “presenting their reserves in the best possible light.” Their reserves, according to the email, are crypto and stakes in other crypto companies. Trolly calls this email a “crucial piece of the puzzle.”

Around the same time that the email was sent, crypto exchange Binance—one of Tether’s biggest customers—switched from BTC to USDT as collateral for leveraged trading. In return, Trolly believes Tether got a stake in Binance.

This could explain why USDT’s 1:1 peg never falters. Tether is in cahoots with the exchanges, who are in charge of maintaining the peg, Trolly believes.

In another allegedly leaked email, Tether talked about allowing the exchanges to “ignore the peg and move the price upwards.” If this is real, it means Tether is getting ever desperate to find ways to make money out of thin air.

Oddly, Deltec has removed the bios from their About Us page. (This is silly, because we have the archive.) And Tether has released its official word on the leaks, calling the leaks “bogus” and implying it is an extortion attempt.

Tether adds that “those seeking to harm Tether are getting increasingly desperate.” This is typical of Tether and Bitfinex. They blame “Tether FUDers” for all their problems—as opposed to being upfront and honest about their dealings.

David Gerard wrote a blog post, going into detail on the alleged leaks.

Coinbase releases financials

Coinbase is going public via a direct listing on Nasdaq under the symbol COIN. The San Francisco-based company published its  S-1 filing on Thursday, after confidentially submitting the filing to the SEC in December.

The filing lays out Coinbase’s finances, including a profitable 2020 driven by a huge surge in the price of bitcoin. Coinbase brought in $1.2 billion in revenue in FY2020 for a profit of $322 million—the first time it has turned an annual profit.

In 2019, Coinbase incurred a net loss of $30 million.  

Brian Armstrong, Coinbase CEO, also did well last year, taking home $60 million in salary, stock options and “all other compensation.” He also received $1.78 million to cover “costs related to personal security measures.”

There is no doubt that the skyrocketing price of bitcoin—boosted by 17 billion tethers issued in 2020 alone—helped Coinbase’s profits. But there are many unknowns ahead.

If the price of BTC continues to drop, if Tether gets taken out by the DoJ, or if the SEC cracks down on some of the coins Coinbase lists—many of which appear like they may not pass the Howey test—Coinbase profits could take a hit.

No doubt, Coinbase is timing its listing carefully. The exchange has received more than $500 million in funding, with backers including Andreessen Horowitz, Y Combinator and Greylock Partners. And the VCs will want to dump their Coinbase shares on retail suckers before the bitcoin market collapses.

MoneyGram dumps Ripple

MoneyGram was supposed to have been a big success story for Ripple. Now, it’s just another sign of Ripple’s failures.

Ripple agreed to invest up to $50 million in the money transfers business. In return, MoneyGram was shilling Ripple by saying it would use the startup’s XRP currency and platform in its back office for moving funds across borders.

MoneyGram was essential because it gave XRP a supposed use case, so Ripple execs could argue their business was legit and not simply a way for them to line their own personal pockets with $600 million.

Last year, MoneyGram received $38 million from Ripple, representing about 15% of its adjusted earnings. But after the SEC announced it was suing Ripple, charging that XRP was an unlawful securities offering, MoneyGram stepped back, saying it faced logistical challenges in using the platform—as well as legal risks.

Now MoneyGram is putting its Ripple partnership on hold. That means MoneyGram, which saw declining revenues from 2015 to 2018, is losing a key income stream. (WSJ, MoneyGram PR)

Other newsy bits

After stiffing his previous defense team, Reginald Fowler still appears to have no defense team. He was given until Feb. 25 to line up a new law firm, but so far, no attorney has filed a notice of appearance with the court. (Court filing)

A rumor is afoot that the SEC is investigating Elon Musk for his dogecoin tweets that helped pump the market. Musk says a probe would be “awesome.” More lulz for Musk. (Teslarati)

Fedwire, the system that allows banks to send money back and forth, went down for several hours on Wednesday. Bitcoiners thought this was marvelous, because bitcoin is decentralized, see? How quickly they forget bitcoin is valued in USD. (CNBC)

Grayscale’s GBTC premium went negative for the first time in years. (It was close to 40% at one point in December.) When the premium is down, the arbitrage opportunity for institutions in buying bitcoin dries up—and that means less real money flowing into the system. (Hedge funder Harris Kupperman wrote a blog post last year explaining how the arb works.) (Decrypt)

FT poked fun of Anthony Pompliano, cofounder of Morgan Creek. Pomp is forever shilling bitcoin but his tweets have been inconsistent. At one time he called Tether “the biggest racket ever.” Now he has changed his tune. Apparently, he’ll say whatever to make “number go up.” (FT)

Treasury Secretary Janet Yellen is warning people about bitcoin. She doesn’t think it’s used widely as a payment system. “To the extent it is used, I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.” (CNBC)

Jack Dorsey’s Square purchased another 3,318 bitcoins for $170 million. This adds to Square’s October purchase of 4,709 bitcoins. The company has already lost $10 million on its latest investment. (Coindesk, Square press release)

The Securities and Exchange Board of India tells company owners: before you IPO, sell your crypto. (Economic Times India)

Kraken is reportedly in talks to raise new capital. (Coindesk)

NYAG/Tether, Bitfinex settlement reveals commingling of funds, years of shenanigans

I wrote a quick article this morning about the New York attorney general settlement, wherein Bitfinex and Tether agreed to pay $18.5 million in penalties, stop servicing New York customers, and submit quarterly transparency reports. 

But there are more details to highlight. Namely, the settlement agreement reveals the games Bitfinex and Tether have played over the years—games they will keep on playing until someone puts an end to their shenanigans. 

It also reveals how the firms have long misled the public about Tether’s reserves. From 2014 until late February 2019, Tether advertised that tethers were fully backed 1:1 by cash in some bank accounts somewhere—but that was not true. 

Tether now has 34 billion tethers in circulation—a number that is growing by leaps and bounds every day.

Here are my random thoughts and notes from the 17-page agreement.

Phil Potter

In the agreement, the office of the NY attorney general writes: “During the time period relevant to the OAG’s investigation, and as late as early-to-mid 2018, one of Bitfinex and Tether’s senior executives lived in, and conducted his work from, New York.”   

I’m assuming this is Phil Potter, Bitfinex and Tether’s chief strategy officer, and one of its three top execs. Potter allegedly stepped away from the company in mid-2018, about the time the NY attorney general started its investigation. Though the public did not learn of the investigation until April 2019.

The fact that Bitfinex and Tether had one executive and large customers in the state—and no BitLicense—opened the door to the NY attorney general’s probe. Per the terms of the settlement, Bitfinex and Tether can no longer do any business in the state, which means New York crypto firms can no longer use tethers. 

Previously, although Bitfinex and Tether claim to have barred New York residents (retail investors) in January 2017, they still served eligible contract participants, meaning individuals or trading firms with assets in the millions.

Commingled funds

Tether and Bitfinex lost their banking in March 2017 when they were cut off by Wells Fargo, a correspondent bank. Subsequently, their banks in Taiwan also dumped them.  

Two months later, when Tether had 108 million tethers in circulation, Bitfinex opened an account at Noble Bank in Puerto Rico. (Noble Bank, by the way, was co-founded by Brock Pierce, the child star who also created Tether.)

Tether, however, did not open an account at Noble—or at any bank—until September 2017, according to the office of the NY attorney general’s findings.

Instead, Tether deposited the “vast majority” of its cash into a trust account held by its general counsel, Stuart Hoegner, at the Bank of Montreal in Canada. The account never held more than $61.5 million dollars.

The rest of Tether’s money was mixed in with Bitfinex customer money at Bitfinex accounts at Noble Bank. Between June 1 and September 2017—Bitfinex held hundreds of millions of dollars in Tether’s funds in its accounts, the prosecutor said.

Commingling of funds is a terrible idea—legally and logistically. (Failed crypto exchange QuadrigaCX also commingled funds. And its now-allegedly-deceased CEO used customer money like his own personal slush fund.) 

Mystery NY trading firm

Because Tether had no bank account between March and September 2017, it could not directly take money for tethers. At the same time, according to the NY attorney general, “neither the Tether website or Bitfinex allowed for the direct purchase or exchange of tethers in exchange for any other virtual currency, including the two most popular virtual currencies, bitcoin and ether.”

Between June and September 2017, “Bitfinex’s Noble Bank account received USD deposits from only two institutional trading firms, one of which was located in New York. Neither of those firms purchased tethers directly from Bitfinex or Tether during this time period.”

This part of the NY attorney general’s findings puzzles. Why were these trading firms sending money to Bitfinex if they were not getting tethers in exchange? What were they getting instead? And who was the New York firm?

Mike Novogratz’s Galaxy Digital is based in New York. And we know it was onboarding as a Bitfinex customer in October 2018, based on court documents that point to letters Galaxy sent to Bitfinex. But it is not clear if Galaxy was a customer of Bitfinex or Tether in 2017. (In April 2019, Novogratz claimed Galaxy had “zero exposure” to Bitfinex and Tether.)

Staging the Friedman audit

According to the office of the NY attorney general, until September 15, 2017, the only U.S. dollars held by Tether backing 442 million tethers in circulation was $61 million at the Bank of Montreal. 

Whatever other money Tether had was held in Bitfinex accounts.

In the summer of 2017, rumors were afoot that tethers were not fully backed. To quash those rumors, Tether and Bitfinex arranged for accounting firm Friedman LLP to perform an attestation on September 15, 2017.

They had to move quickly to set things up though.

On that morning, Tether opened an account at Noble Bank. And Bitfinex transferred $382 million from Bitfinex’s account at Noble Bank into Tether’s account at Noble Bank. Friedman conducted its verification of Tether’s assets that evening.

“No one reviewing Tether’s representations would have reasonably understood that the $382,064,782 listed as cash reserves for tethers had only been placed in Tether’s account as of the very morning that Friedman verified the bank balance,” the NY attorney general wrote. The attestation included the money at the Bank of Montreal as well. 

Friedman’s relationship with Bitfinex ended a few months later. 

It’s never a good sign when your auditor quits. Worse, there was no official announcement—Friedman simply deleted all mention of Bitfinex from its website, including past press releases.

Massive loss of funds

In 2017 and 2018, Bitfinex began to increasingly rely on Crypto Capital to handle its customer deposits and withdrawals. Oz Yosef, was Bitfinex’s contact at the Panamanian payment processor.

By 2018, Crypto Capital held over $1 billion of Bitfinex funds. That’s when the real trouble started.

In April 2018, the government of Poland froze a Crypto Capital bank account holding $340 million. Adding to that, Oz told Bitfinex that a Crypto Capital account in Portugal containing $150 million of Bitfinex client funds also had been frozen. 

These events threw Bitfinex into a liquidity crisis. And in the summer of 2018, Bitfinex began dipping into Tether’s cash reserves to fund customer withdrawals. Bitfinex told customers that rumors of its insolvency were false, but behind the scenes, the crypto exchange was pleading with Oz to release the money. 

(Later we learn that another $350 million in missing Crypto Capital funds were linked to 60 accounts held by Arizona businessman Reginald Fowler, who was indicted in April 2019 for bank fraud. Some of these accounts were frozen in 2018. Oz’s sister, Ravid Yosef, was also indicted for her role in assisting Fowler set up those accounts. She is still at large.)

(And in October 2019, Crypto Capital President Molina Lee was arrested by Polish authorities in connection with laundering money for Columbian drug cartels via Bitfinex.)

Deltec Bank & Trust

In October 2018, Bitfinex and Tether ended their relationship with Noble bank. Soon after, they announced they were banking with Deltec in the Bahamas. 

In a letter dated Nov. 1, 2018, Deltec said Tether’s account held $1.8 billion, enough to back the tethers in circulation at the time. The letter was signed but had no name under the signature. The signature itself was illegible.

The following day, Tether began moving hundreds of millions of dollars out of its bank account at Deltec to Bitfinex’s bank account at Deltec. And as part of a “loan arrangement,” between the two closely related firms, Tether assumed Bitfinex’s losses on its own balance sheet. (We can’t be sure of the total loan amount, but an estimate is $750 million.) 

Tether’s misrepresentation that tethers were fully backed continued to Feb. 2019 when it updated its terms of service to say that tethers are backed by “traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”

Bitfinex says it paid off the loan to Tether in January, and the firms now claim tethers are fully backed—but the question is, backed by what? Loans? Bitcoins? We’ll find out in 90 days when Tether and Bitfinex publish their first transparency report. Per the terms of the settlement agreement, the firms will need to publish these reports quarterly for two years.

Also, $18.5 million—the amount of the settlement—is no small number. We have no idea how much cash Tether and Bitfinex actually have on hand.

The bitcoin community is calling the settlement a win for Tether and Bitfinex. They say the fine is nothing but a slap on the wrist. In reality, it’s another way for Tether and Bitfinex to buy time. The NY attorney general has set its trap; now we wait.

Updated Feb. 24 to note that Novogratz claimed zero exposure to Bitfinex and Tether in 2019.

Also read: NYAG to crypto companies: ‘Play by the rules or we will shut you down’

If you benefit from my writing, and my research helps you do your job, please consider supporting my work by subscribing to my Patreon account for as little as $5 a month.