Sam Altman rebrands Worldcoin to ‘World’, still wants your eyeballs

You might think that, come the artificial general intelligence, humanity will enjoy a world of unlimited abundance and prosperity for all, beyond money, under the watchful sensors of the superintelligent AI.

But Silicon Valley bros talking up the Singularity still want to win at capitalism. So alongside OpenAI, Sam Altman’s other big project is a cryptocurrency called Worldcoin — which just rebranded to World Network, or World for short, to slightly reduce the coiner stench.

Altman gives away worldcoins free! He’s just nice like that, see. He makes sure coins only go to individuals by … collecting scans of their eyeballs.

Now, you might think Worldcoin was some sort of crypto pump-and-dump with a sideline in exploitable personal data.

This one’s written for the AI haters in particular — though it’s a crypto post at heart — so it’s over at Pivot to AI.

Posted on by Amy Castor 0

Patron Q+A for August 2024 is now public!

We did a video Q+A for our $5-and-up patrons on August 8. It’s been a month, so we’ve put it up publicly. Now the whole world can see us answer your questions across crypto and AI! [YouTube]

It’s a Zoom recording — but fortunately, 360p is very flattering.

There’s also some nice discussion from our patrons, who are brilliant, erudite, expert, and very handsome.

Things are a bit busy for us both at present, but we should probably do another of these, eh? You should sign up for our Patreons to encourage us. You have so many questions. [Amy; David]

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Tether and Northern Data. Part III: the whistleblowers

We finally finished the last in a three-part series on Tether and Northern Data. This one is over on David’s blog. [David Gerard]

Just as Northern Data was putting together its artificial intelligence IPO get-rich scheme, two former executives of its US subsidiary, CEO Joshua Porter and CFO Gulsen Kama, filed a wrongful termination lawsuit. They allege that the company has been lying to its investors and auditors, evading taxes, and is “borderline insolvent.”

Don’t forget, we have a live Q&A coming up for five-dollar-and-up patrons. If you want to talk more about Tether, join us!

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Video Q&A for patrons — Thursday, August 8, 16:00 UTC!

We’ve decided to do something nice for the lovely people who send us money every month just to write good.

If you’re a $5-or-more monthly subscriber on Amy’s or David’s Patreon, we invite you to join our video Q&A!

We’ll be doing this via Zoom on Thursday, August 8, at 16:00 UTC — that’s 9 am PST 12 pm EST, or 5 pm BST.

Questions can be about cryptocurrency, AI or anything else we write about.

We realize not everyone can show up for the live session — so as well as taking questions live, we’ll be taking questions from patrons beforehand.

But you have to be a $5-and-up patron to be in it. Here’s Amy’s Patreon and here’s David’s. Sign up today!

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Tether and Northern Data. Part II: the partnership

  • By Amy Castor and David Gerard
  • If you like this post, please tell one other person. It really helps!
  • To encourage more posts, here’s Amy’s Patreon, and here’s David’s. For casual tips, here’s Amy’s Ko-Fi, and here’s David’s.

AI is the hottest thing in 2024. Nvidia GPU chips are in high demand and shortages are common, so many AI startups rent computation from cloud providers instead of buying their own chips. 

If you’re an AI cloud provider, you could stand to make a lot of money.

CoreWeave, once a little-known bitcoin miner, is now a $19 billion purported value unicorn that provides GPU access to AI startups. Other crypto miners, Hut8, Core Scientific, Hive, and Riot, are trying to tap into the AI gold rush by converting their data centers to AI. [FT, archive]

Northern Data also wants to get in on the gold rush, so it devised a cunning plan: pivot to AI and get rich in an IPO. 

But Nvidia won’t take diluted shares of company stock for its cards. So Northern Data needed a partner with lots of cash. They found one in Tether, everyone’s favorite stablecoin issuer.

And in Northern Data, Tether found … a banker of sorts.

We talked about the history of Northern Data in part I of our series. Here, we’ll discuss their partnership with Tether and plans to strike it rich in an IPO. In part III, we’ll dig into the lawsuit against Northern Data by its former directors. 

A perfect backer

Northern Data had a plan: pivot to “AI” and IPO for billions.  

But first, they needed Nvidia cards to grow their cloud computing business — and convince investors that their money-losing operation had profit potential if they spun it off.

If you believe their unaudited claims, Tether is sitting on piles of cash. They’ve been boasting about huge profits from interest earned on US Treasury holdings and market gains on bitcoin and gold. They claim to be so loaded up now that they’re looking for investments.

In June 2024, Tether said they planned to put $1 billion into investments over the next twelve months. In the last two years, they’ve invested $2 billion, with Northern Data as their single largest beneficiary. [Bloomberg, archive]

What is Tether getting in return? Northern Data wants to combine its cloud business and its data center business. If they can IPO the new entity, the stock could be worth multiples of the current value of the two divisions.

Tether also has the prospect of gaining access to the bank accounts of a publicly traded company with businesses in Europe and the US.  (Northern Data AG is listed on the Munich Stock Exchange.) 

Tether’s banking dilemma

Tether has 112 billion tethers (USDT) sloshing around in the crypto markets, allegedly backed 1:1 with US dollars and also with squirrels and confetti. But quite a bit is Treasury bills and things very close to actual cash.

US banks really, really hate Tether — they’re not happy with all the crime, money laundering, and sanctions evasion. Even if Tether has the cash they claim, they still have the problem of moving money to and from customers without banks freezing their accounts.

Tether was cut off from the US banking system in 2017. This has left Tether resorting to clown banks like Deltec and playing cat-and-mouse games to keep banking access. If Tether wants to stay afloat, they need to find ways to move large sums of money from parts of the world where they don’t need it to low money laundering risk countries, like the US, where they can more easily wire funds to other jurisdictions.

After a few years of problems (that lost them $850 million), Tether made very good friends with Sam Bankman-Fried, who founded crypto exchange FTX and its trading arm Alameda Research. Bankman-Fried and Tether formed a partnership that fueled a new bitcoin bubble. In 2021 alone, Tether printed $60 billion worth of tethers, pushing bitcoin to new all-time highs. FTX grew to become the third-largest crypto exchange in the world. 

Before it collapsed like a clown car, FTX  served as Tether’s main financial launderette. Alameda Research was one of Tether’s largest non-exchange customers. Between 2020 and 2022, Alameda received almost 40 billion tethers directly from Tether. [Bloomberg, archive]

“These guys were running a one-way USD to USDT bureau de change,” Jonathan Reiter (Data Finnovation) of ChainArgos told Bloomberg. 

FTX and Tether used the same money launderers and they all worked together to prop each other up. Their shared bank, Deltec, is also alleged to have falsified invoices on behalf of FTX and Alameda to other banks. 

FTX was functionally Tether’s banker. But in November 2022, FTX blew up. Tether needed something new.

Tether pivots to AI

Tether announced a “strategic investment” in Northern Data in September 2023 — in what turned out to be a convoluted capital raise. (Tether swears they didn’t dip into the alleged reserves for Tether, which would have been abusing customer money.) [Tether, archive]

In June 2023, Tether set up a subsidiary in Ireland, Damoon Designated Activity Company, and funded it with “the equivalent of 10,000 Nvidia H100 GPUs,” worth 400 million euros. The key word here is “equivalent,” so potentially neither GPUs nor actual money.

A few weeks later, Tether and Northern Data announced they had entered a formal agreement. Northern Data would buy Damoon and Tether would get Northern Data stock — valued at 400 million euros. Before the sale closed, Damoon would acquire the “equivalent” in Nvidia chips: [Press release]

The valuation of EUR 400 million for 100% of Damoon is equivalent to the purchase value of the associated hardware without any up-writing. In essence, on completion of the transaction, Northern Data will have acquired latest-generation GPU hardware for a value of EUR 400 million.

In November, Northern Data also secured a 575 million euros ($610 million) debt-financing facility from Tether — a line of credit — “to drive further investments across its three business lines.” The debt facility is unsecured and has a term until January 1, 2030, meaning Northern Data had six years to draw on the funds. [Press release]

We know little else about the terms of the loan. Does Northern Data even have to pay interest on this?

Northern Data completed its stock-for-stock acquisition of Damoon in January 2024, bringing Tether’s total exposure to Northern Data to 1.1 billion euros — or the “equivalent” of that. [Press release, archive, Bloomberg, archive]

In an interview with Benzinga, Northern Data CEO Aroosh Thillainathan explained the transaction: [Benzinga, 2023]

Through our acquisition of a company called Damoon, a special-purpose investment vehicle owned by crypto giant Tether, we have acquired 20 NVIDIA Pods, each with 512 H100 GPUs. The transaction has been done as a contribution in kind, in return for issuing new shares, at exactly the valuation that these pods would have cost us if we had bought them directly from NVIDIA. 

That is: yet again, Northern Data spun up the stock printer to buy a company.

Tether now owns 51% of Northern Data’s stock. So they now have majority control of a German-listed public company.

How the money, if any, flows 

We can’t find third-party evidence that Northern Data has acquired or installed the 10,240 GPUs that it says Damoon purchased. Press releases state that Northern Data now have the GPUs — but it’s utterly unclear how Tether, of all the companies, could have even paid for them.

We wondered how Tether got banking in Ireland when most banks hate Tether, and realized: well, maybe they didn’t. 

Let’s run a pure hypothetical on how you might buy GPUs without moving money.

Tether could have placed an order for Nvidia chips — without paying for them. Companies do this all of the time.

They would have just needed to show that Damoon was creditworthy. Tether would then negotiate the purchase, issue a purchase order to get in the queue for delivery, and then, before Nvidia delivered the chips, sell Damoon for diluted Northern Data stock. This would release Tether from needing to underwrite the purchase or take delivery.

In this scheme, no money has flowed from Tether or Northern Data to any account in Ireland or to Nvidia, but now Tether has $400 million in clean receivables in Ireland.

That is: Northern Data bought a company with no assets or operations other than an incoming Nvidia delivery. 

This is a scenario that could have happened. Certainly, third-party evidence could exist to the contrary.

Northern Data said in January that they now “own” 18,000 Nvidia H100 GPUs and had started deploying them in December. The move “strengthens Taiga Cloud’s position as Europe’s first and largest dedicated Generative AI Cloud Service Provider.” [Press release, archive]

It’s possible Northern Data actually do own 18,000 Nvidia GPUs! From somewhere. It would be a big deal for a public company to flat-out lie in a press release, especially a company that’s already had run-ins with BaFin.

But there’s good reason to doubt the GPUs were paid for using dollars from Tether.

Get rich quick

Now that Northern Data has acquired its AI chips — or at least the “equivalent” as part of a Tether subsidiary — they can move to the next phase of their plan. 

Northern Data wants to combine two of its divisions — its Taiga cloud computing division and its Ardent data center division — and list the resulting company on the Nasdaq in the first half of 2025. (A third business division, Peak, still focuses on bitcoin mining.) [Bloomberg, archive]

The hope is that an IPO in the current AI bubble will lure in enough suckers to pull in a massive pile of cash. The new company wants to IPO for $10 billion to $16 billion — even though Northern Data’s entire market cap is only $1.4 billion. 

The immediate beneficiaries will be Northern Data CEO Aroosh Thillainathan, the largest employee shareholder, and Tether, who now owns 51% of Northern Data.

Reuters columnist Yawen Chen says the IPO “sounds more like valuation voodoo than financial reality.” [Breaking Views, paywalled, archive]

I’m totally good for it, bro

It also could be that Tether really do need the cash — if there were some sort of issues with the heaps of money they claim to have.

If Tether have $112 billion backing their USDT, they could make literally billions in the current high interest rate environment just from Treasury notes and similar. They don’t need to make risky investments.

So why is Tether even making these investments?

In “Lying for Money,” Dan Davies describes how financial frauds tend to grow exponentially over time as the gap between real dollars and fake dollars in the system widens. That’s because compound interest is the enemy of fraud.

In a legitimate business, money increases, gets invested back into the business, and grows over time. In a fraudulent business, that process works in reverse:

The reason for this is that unlike a genuine business, a fraud does not generate enough real returns to support itself, particularly as money is extracted by the criminal. Because of this, at every date when repayment is expected, the fraudster has to make the choice whether to shut the fraud down and try to make an escape, or to increase its size; more and more money has to be defrauded in order to keep the scheme going as time progresses.

Riding a spiral of fraud is a tempting explanation for Tether’s rapid growth, especially since 2020 when Tether put the tether printer into overdrive. 

Fraudsters also often turn to get-rich-quick schemes in the hope that they can miraculously dig themselves out of their ever-deepening money pit.

So we suspect Tether is short on actual cash dollars. They think they can turn $1 billion into $10 billion by entering a deal with cash-strapped Northern Data.

And when Tether needs to move dollars around, despite their limited access to proper banking, they’ll have their very good friends at Northern Data to help them.

We see an interesting future for Northern Data and its CEO Aroosh Thillainathan. We’re just not sure what that will look like.

Image: “A rendering provided Wednesday, March 9, 2022, by technology company Northern Data, MidAmerica Industrial Park, Grand River Dam Authority and the Oklahoma Commerce Department shows plans for Northern Data’s planned data center and North American operations headquarters at the industrial park in Pryor, Okla.” [KTUL]

Read more:
Tether and Northern Data. Part III: the whistleblowers

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Smear campaigns and false narratives: how the crypto lobby seeks to influence US politics — by Jake Donoghue

  • Guest post by Jake Donoghue

As campaign efforts ramp up ahead of November’s Presidential election, cryptocurrency firms have been deploying an arsenal of dirty tricks, funded by a nine-figure war chest, to stack Congress with candidates willing to toe the line and to ensure crypto gets as much airtime as possible in the public square.

Earlier this month, crypto skeptic Molly White launched a website – followthecrypto.org – providing real-time data of crypto election campaign financing. It shows that, to date, the cryptocurrency sector has raised more than $187 million for the ironically named “Fairshake” super PAC and its affiliates. 

These committees have wasted no time putting these funds to use, with their notable outgoings including a successful $10 million smear campaign against progressive Democrat Katie Porter to keep her out of the Senate. 

Coinbase, the largest US crypto exchange, is the biggest contributor to Fairshake’s war chest, with $46.5 million in donations. They’re also leading the lobbying charge on another front: In 2023, the industry behemoth hired market research firm Morning Consult to find out how many Americans own cryptocurrencies. As soon as the results came in, Coinbase sprang into action, launching a major campaign to “mobilize 52 million crypto owners into an army of one million advocates for change.” 

This spurious and misleading figure – which equates to 20% of the nation’s entire adult population – is at stark variance with data from the US Federal Reserve. Specifically, the Fed’s Economic Well-Being of US Households survey. 

Published in May, the Fed’s report not only showed the percentage of US crypto holders to be far lower than that cited by Coinbase – 7% of the population, nearly two-thirds less than Morning Consult’s findings – but also that the number of holders is actually in decline, having fallen by 5% from 2021.

The inconsistency in these results was stark enough to elicit one of the world’s leading statisticians to wade into the debate – the first expert in the field of statistics to do so – and delve into Coinbase’s methodologies more closely. 

David Marker is a fellow of the American Statistical Association and American Academy for the Advancement of Science, and an elected member of the International Statistical Institute. Throughout a career spanning four decades, he has established his own consulting firm – Marker Consulting LLC – and has advised over half a dozen governments on improving the quality of their data collection and statistics. 

In a Zoom interview, Marker shared his opinion on Coinbase’s survey: 

This survey has not provided enough information to refute claims of it being low quality and spurious. [Morning Consult] hasn’t presented evidence to make you feel comfortable… with a survey which was funded by an organization which would like and benefit from these results.

Online surveys into crypto ownership can skew or misrepresent true figures, and they’re inherently limited, as they don’t factor in the digitally excluded on a topic that is directly related to digital comfort.

Morning Consult absolutely should have included a section in their report outlining the limitations of their survey and its methodologies.

Marker then went on to highlight a potentially nullifying aspect of the survey: its sampling. 

To obtain the headline-grabbing results of its survey, Morning Consult sampled 2,202 U.S. adults and also included an oversample of 500 people already known to hold crypto. 

Marker explained the problem with this: “It was not clear whether the oversample of known crypto holders was included in the general population sample. Being generous I read them as separate samples, but it wasn’t clear.”

He further explained that if the oversample was not separate, the entire survey would be invalidated, as the sample would not be random or representative of the population. 

I emailed Morning Consult asking if the samples were mixed. They never responded.

Morning Consult’s crypto survey doesn’t exist in isolation. It’s just one source among many that crypto proponents have been citing in discussions around the upcoming election to highlight the supposed significance of their industry. And, compared to the figures thrown up by other crypto-backed polls, its results seem modest. 

In June, Security.org, a site that reviews property and cybersecurity products, released the findings of a poll it conducted, which claimed to show as much as 40% of the American population owns crypto. In absolute terms, this equates to no less than 93 million people.  

Marker’s outlook on Security.org’s poll is even more scathing than his indignation towards the Morning Consult survey: 

It states that it’s been weighted for age, gender and ethnic background. That means that things like income, or anything about internet usage, were not controlled for. This is particularly problematic when we’re talking about something like crypto or investments.

He continued: 

This survey shows a 10% jump [in crypto ownership] in one year. You’d better have some good ways to make people feel comfortable that that really happened, and that it’s really worth believing. And based on the limited documentation they’ve provided, I don’t feel that assurance.

In a June interview with crypto media outlet The Block, the founder of asset management firm SkyBridge Capital Anthony Scaramucci – who became an international figure of ridicule in 2017 after serving as Trump’s director of communications for 11 days before being fired – cited Security.org’ polling figure (albeit erroneously attributing its origin to Coinbase): 

If there are 93 million crypto owners, and don’t go by me. We can Google that number. Coinbase has that number. Let’s say 1 % of them are ardent one-issue voters. That’s 930,000 votes…and if several hundred thousand of those are in the three or four [swing] states, Georgia, Arizona, and they could influence, impact, or change the election, then think it’s something people should be focused on.

Despite these surveys not being worth the server space they’re hosted on, that hasn’t stopped them being cited by politicians at the highest levels. 

Election hopefuls, keen to keep crypto funds flowing into their campaign coffers, have proven remarkably willing to spout the lines given to them by the crypto lobby, even if that means backtracking on previously staunch crypto skepticism. And the most high-profile of these stooges is none other than former President Trump himself. 

Throughout his presidency Trump railed against digital assets, describing himself as “not a fan of bitcoin and other cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air,” and asserting that bitcoin “just seems like a scam.” However, in a speech delivered at a Libertarian Party convention in May this year, his change of tune was unequivocal: 

And I will also stop Joe Biden’s crusade to crush crypto. We’re gonna stop it. I will ensure that the future of bitcoin and the future of crypto will be made in the USA, not driven overseas. I will support the right to self-custody. To the nation’s 50 million crypto holders I say this: with your vote, I will keep Elizabeth Warren and her goons away from your bitcoin.

Since then, Trump has spent a lot of time rubbing shoulders with crypto luminaries. In June he hosted a working group of top industry executives and bitcoin miners at Mar-a-Lago, with one of the roundtable’s organizers, Bitcoin Magazine CEO David Bailey, who told CNBC: “As an industry we are committed to raising over $100 million and turning out more than 5,000,000 voters for the Trump re-election effort.” 

Trump’s love-in with the crypto industry shows no signs of cooling. Earlier this month, he was announced as keynote speaker at the industry’s flagship bitcoin conference in Nashville on July 25. An appointment he reportedly plans to keep, which will make it one of his first public appearances following his assassination attempt on July 13 – such is his newfound commitment to the crypto cause, and the big money behind it. 

As significant as this all is, the influence which Fairshake and its donors have bought for themselves has started to extend beyond the realm of mere discourse. Last week, in a seminal moment for the reputationally beleaguered crypto industry, the Republican National Committee officially adopted a policy platform championing digital assets and the rights of crypto holders. With wording that echoes Trump’s recent speech, the GOP’s platform promises they will “end Democrats’ unlawful and unAmerican crypto crackdown,” and “defend the right to mine Bitcoin, and ensure every American has the right to self-custody of their digital assets.”

For a crypto lobby composed of firms keen to couch their political meddling as altruism undertaken for the benefit of the whole industry, and not just the oligarchy at its helm, this policy pledge was a major coup. It just goes to show what a $187 million super PAC can buy. 

As for the surveys, like so much in the crypto industry, a space in which illicit practices like wash trading and market manipulation are rife, they present nothing more than a facade of adoption and popularity. However, in an election as fiercely contested as this one, in which every dollar counts, these surveys give politicians all the justification they need to take the crypto bros’ money, in exchange for letting the scandal-plagued industry off its leash. 

It is a situation that risks deteriorating into a race to the bottom, with the end result being an industry that spawned the likes of FTX founder Sam Bankman-Fried and Terraform Labs cofounder Do Kwon, both now in jail, being given excessive room to run. It is corruption at its finest, whereby fraudsters and scammers are buying political influence in the hope that their scams and frauds will be legitimized and potentially even legalized further down the line. 

The fact that an industry such as crypto, built on ponzi schemes and useless tech, is allowed to wield any political influence is a major cause for concern, and something that should not go unchecked and unchallenged. 

Jake Donoghue is the author of “Crypto Confidential: An Insider’s Account from the Frontlines of Fraud.” [Amazon, UK; History Press, UK] 

Posted on by Amy Castor 1

Tether and Northern Data. Part 1: the miner’s tale 

We’ve been down a rabbit hole the last week trying to learn more about Tether’s relationship with Northern Data. We decided to break up the story and just published part one — a look into Northern Data. This one’s over on David’s site. [David Gerard]

This is the epic tale of Tether’s new very good friend for dealing in actual money! We haven’t even mentioned Tether yet.

If you have any interesting Tether/ND tales, please do let us know 😉

Posted on by Amy Castor 0

Silvergate settles with SEC, DFPI, and Federal Reserve over FTX money laundering

  • By Amy Castor and David Gerard

Life as a crypto firm can be divided up into before Silvergate and after Silvergate — it’s hard to overstate how much it revolutionized banking for blockchain companies. — Sam Bankman-Fried

Silvergate Bank, of La Jolla, California, was the main US dollar bank for crypto exchanges from 2017 to 2022. The Silvergate Exchange Network (SEN) operated 24/7 — not just during normal banking hours — and was essential to US dollar crypto and inter-exchange liquidity. By 2021, 58% of Silvergate deposits were from crypto firms.

After crypto crashed in May 2022, Silvergate got broker and broker. FTX crashed in November 2022, and panicked Silvergate customers withdrew $8.1 billion. The bank had to unload assets, realizing ghastly losses. In March 2023, Silvergate finally announced it would be unwinding.

The assorted regulators promptly dived in to work out what on earth had happened here. They’re finally applying penalties. Also, they’re all still extremely annoyed about FTX.

The SEC rap sheet

The SEC is suing Silvergate for making false or misleading claims to investors — the bank’s holding company, Silvergate Capital Corporation, was publicly traded (NYSE:SI) — about Silvergate’s anti-money-laundering compliance on the SEN. [Press release; Complaint, PDF; Docket]

The complaint also names former CEO Alan Lane, former COO Kathleen Fraher, and former CFO Antonio Martino as defendants.

Silvergate has agreed to pay the SEC $50 million in civil penalties for misleading investors post-FTX.

Lane and Fraher also agreed to settlements — $1 million and $250,000 respectively — and a five-year ban on serving as officers or directors of a public company. 

Martino was accused of lying to investors about the bank’s solvency. He maintains his innocence. He has not agreed to settlements and plans to challenge the SEC in court. [Bloomberg, archive]

The Fed and DFPI rap sheet

The Federal Reserve and California’s Department of Financial Protection and Innovation (DFPI) have also brought state and federal charges against Silvergate. [DFPI; Consent order, PDF]

The only detail in the consent order of the Fed and DFPI’s concern is regarding Silvergate’s SEN:

An investigation by the Department identified deficiencies with respect to Silvergate’s monitoring of internal transactions.

Silvergate has agreed to pay $63 million to settle — $20 million to the DFPI and $43 million to the Federal Reserve Board. The $50 million SEC fine will be offset by this settlement — if Silvergate pays these penalties, it won’t have to pay the SEC as well.

What happens in the SEN stays in the SEN

Crypto firms flocked to Silvergate for its Silvergate Exchange Network. Unlike bank wires, SEN let crypto exchanges move dollars between exchanges at all hours of the day, including nights and weekends.

From 2017 to 2021, deposits from crypto customers grew from $770 million to $14.1 billion. Between April 2021 and September 2022, SEN processed more than $1 trillion of transactions.

Silvergate claimed in its original 2019 S-1 filing that it had “proprietary compliance capabilities,” which constituted “policies, procedures and controls designed to specifically address the digital currency industry.”

Before April 2021, Silvergate had an automated monitoring system (ATMS-A) that was part manual. The system would trigger an alert for suspicious activity, and the bank’s compliance staff would review and track transactions on a spreadsheet.

But in April 2021, the bank switched to a new system, ATMS-B, that was fully automated. ATMS-B just … didn’t bother checking transactions on the SEN!

The coverage assessment concluded that ATMS-B had not been monitoring SEN transactions “as expected because [ATMS-B] does not consider internal transfers as risky activity within any financial crime typologies.”

SEN was a speakeasy, a money laundromat. Just what FTX and the wider crypto bubble needed!

Silvergate’s previous BSA compliance officer warned Fraher repeatedly that the Federal Reserve Board would likely be unsatisfied with the bank’s AML monitoring system, or lack thereof. The Fed and the DFPI told Lane and Fraher that Silvergate’s AML monitoring was indeed inadequate.

In its 2021 SEC 10-K filing, the bank touted “the enhanced procedures” of its compliance program. The same statements were repeated in its 2022 10-Q — even though Silvergate’s SEN hadn’t had automated monitoring in 15 months. 

Silvergate and FTX

FTX declared bankruptcy on November 11, 2022. Rumor had it that FTX had been laundering customer money via Silvergate — which it indeed had — and a bank run ensued.

Just after FTX collapsed, a Silvergate compliance staff analysis found 300 suspicious transactions by FTX-related entities from January 2022 until November 2022:

Most troubling to the BSA staff was the trend of funds that flowed from FTX’s custodial accounts — which held FTX customer funds — to a series of non-custodial FTX-related entities’ accounts, followed by transfers of these funds to other third parties — either through the SEN or to accounts external to the Bank. 

Despite knowing that FTX alone had run up $9 billion in suspicious transfers, Lane continued to assure the public that everything was just fine and Silvergate had a robust AML system. On November 30, 2022, he told CNBC Squawk on the Street:

Again, we built this business compliance first. We satisfy all the regulatory requirements. And we have also, in the past, we have offboarded customers if we see activity that is inconsistent and if they can’t correct it or can’t explain it, then we offboard those customers. 

On December 5, 2022, Lane posted a letter, which Fraher approved, on Twitter and LinkedIn, stating:

Silvergate conducted significant due diligence on FTX and its related entities including Alameda Research, both during the onboarding process and through ongoing monitoring, in accordance with our risk management policies and procedures and the requirements outlined above.

All of these claims were false. What’s more, the SEC says Lane and Fraher knew the claims were false.

Senators Elizabeth Warren, John Kennedy, and Roger Marshall issued a public letter demanding a better explanation of Silvergate’s role in FTX. 

Silvergate’s CEO Alan Lane replied that the bank monitored transactions for every account and had “conducted significant due diligence on FTX and its related entities, including Alameda Research, both during the on-boarding process and through ongoing monitoring, in accordance with our risk management policies and procedures.” 

All of these claims were false too.

Whoops, liquidity!

On September 30, 2022, Silvergate had approximately $12 billion in deposits. By December 31, 2022, deposits had dropped to $3.9 billion.

By the end of 2022, the regulators told Silvergate it needed sufficient cash to cover its crypto asset customers’ deposits. Silvergate borrowed $4.3 billion from the Federal Home Loan Bank of San Francisco (FHLB).

Silvergate also issued brokered certificates of deposit (BCDs). By December 31, 2022, Silvergate reported $2.4 billion in BCD liabilities.

But interest rates were going up. This pushed many of Silvergate’s securities into an unrealized loss position. From September 30 to December 31, Silvergate’s securities holdings plummeted from $11.4 billion to just $5.7 billion. 

Borrowing to cover debts

We wrote before about how Silvergate was unable to file its 2022 10-K on time and that its auditor had refused to sign off on the Q4 2022 accounts. This complaint fills in some of the gaps.

The SEC says that Martino understated Silvergate’s losses and misrepresented that the bank remained well-capitalized at the end of 2022. According to the complaint, he “engaged in a fraudulent scheme to mislead investors about the bank’s dire financial condition.” 

Martino knew that the bank had borrowed billions of dollars in 2022 via BCDs, which were due in January and February 2023.

Martino approved a January 17, 2023, earnings release stating that Silvergate expected to sell $1.7 billion of securities in Q1 2023 — of which it had already sold $1.5 billion. This would leave just $200 million more to sell by March 31. But Silvergate sold another $1 billion in that quarter — because there was no other viable source of funding to cover the previous quarter’s BCDs.

The SEC alleges that the earnings release “falsely reported” how the $1.7 billion was calculated, understated losses on the sales, and overstated a leverage metric. It also alleges that Martino made “false or misleading” statements on Silvergate’s Q4 2022 earnings call, falsified financial statements, and failed to maintain accounting controls.

What does this mean?

The SEC suit is about lying to investors. The Federal Reserve and the California DFPI action is about money laundering. But it’s all really about FTX.

The message for other banks is: don’t pull any more SEN-like arrangements without close monitoring. Don’t set up a money laundromat for your high rollers. Don’t let in customers like FTX. Beware of crypto.

You might have thought Silvergate was already scorched earth — but with a sufficiently awful public disaster, there’s always room for more scorching.

Also, don’t lie to your investors. Remember: everything is securities fraud.

Posted on by Amy Castor 1

SEC sues Consensys over MetaMask Swaps and Staking

The SEC has followed through on a recent Wells notice and is charging Consensys for unauthorized sales of securities through Metamask Staking and for failure to register as a broker and a dealer while offering crypto trades and staking services through Metamask Staking and Swaps.

Consensys has reacted to the SEC complaint in the usual crypto fashion — by pounding the table, again. What does this mean for Consensys’s main money maker?

The full story is on David’s blog.

Posted on by Amy Castor 0

Crypto is going: Coinbase sues FDIC and SEC under FOIA, Epoch Times crypto money laundering, Consumers’ Research vs Tether, FTX/Salame, Terra settles with SEC

  • By Amy Castor and David Gerard

A ‘use case’ is a fix for a problem you wish people had — Stephen Farrugia

Amy and David have a new project: Pivot to AI. The elevator pitch is “Web 3 Is Going Great, but it’s AI.” (“oh good, maybe now people will stop asking me to do it lol” — Molly White.) Sign up to subscribe via email on the site!

Coinbase gets out the conspiracy board

Coinbase strikes a blow against “Operation Chokepoint 2.0.” They will crack this conspiracy by … suing the Federal Deposit Insurance Corporation under the Freedom of Information Act. [Complaint, PDF, archive]

The FDIC sent letters to various banks asking them to stop dealing in crypto. History Associates, representing Coinbase, filed FOIA requests for the letters. The FDIC rejected the requests. History Associates is now appealing the rejection.

The FDIC rejected History Associates’ FOIA claim based on Exemption 4 — trade secrets and confidential commercial information — and Exemption 8 — “contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions.”

Exemption 8 is very broad but has consistently been upheld. Courts have ruled that Congress wrote a broad exemption because they meant it as a broad exemption. [Justice Department]

The complaint contains some facts and a lot of conspiracy theorizing and table pounding: “The Pause Letters are part of a deliberate and concerted effort by the FDIC and other financial regulators to pressure financial institutions into cutting off digital-asset firms from the banking system.”

Given that all four US bank failures in 2023 were crypto-involved, we think: well done, FDIC.

Coinbase and History Associates are also suing the SEC under the FOIA for details of its internal deliberations on whether ETH is a security, which the SEC rejected under Exemption 8. They also want more information on the SEC’s 2018 settlement with the EtherDelta decentralized exchange. [Bloomberg Law, archive]

Bill’s beautiful launderette

Bill Guan, the CFO of the Epoch Times, ran a crypto money laundering operation through the paper’s companies. This apparently supplied over three-quarters of the paper’s revenue in 2020. If you ever wondered how they could afford all those billboards … [Press release; indictment, PDF]

Guan ran the paper’s “Make Money Online” team. The MMO team would buy dirty money from crimes on prepaid debit cards from an unnamed crypto platform for 70 to 80 cents on the dollar. The MMO team would move the money through layered transactions and fraudulent bank accounts into Epoch Times accounts.

Guan lied to banks and crypto exchanges that the money was from subscriptions or even donations from Epoch Times supporters.

The Justice Department has gone out of its way to not name the Epoch Times and stresses that this action has nothing to do with the paper’s “news-gathering” operations — they’re nailing this all on Guan. The indictment notes that other parts of the company even asked Guan what was going on with all the debit card purchases.

Paolo’s beautiful launderette

Consumers’ Research is running a very loud and well-funded advertising and lobbying campaign against our good friends at Tether, saying they’re money launderers and sanctions busters and their backing is questionable. There’s billboards and seven-figure TV ad spend. The ad voiceover speaks of “preece manipulation.” [Tethered To Corruption; press release; YouTube]

It’s not clear who is behind this campaign. Consumers’ Research is a conservative propaganda nonprofit whose funding is laundered through a donor-advised fund — a way for rich people to make controversial donations without having their names attached.

We’ve asked other public critics of Tether and Consumers’ Research doesn’t seem to have contacted any of us at all. The consensus is that it looks like a single guy who is extremely personally pissed off at Tether for unclear reasons. A deal gone very bad, maybe? Bennett Tomlin summarizes what’s known. [Mailchimp]

Consumers’ Research is not wrong about Tether, though. The use case for tethers is still crime and sanctions evasion — in the latest case, Russian commodities firms settling with their Chinese counterparts. Russia’s invasion of Ukraine seems to depend on Tether supplying liquidity. OFAC should probably get onto that. [Bloomberg, archive]

FTX: Salame sliced

When FTX went down, it was incredibly obvious that this was a crime scene. All the FTX executive suite — except Sam Bankman-Fried — pleaded guilty and offered to cooperate with prosecutors in the hope of a lighter sentence.

Ryan Salame was too cool for that. He confessed to a smaller selection of crimes but didn’t agree to cooperate. Salame has now been sentenced to 90 months (seven and a half years) behind bars. After the sentence, Salame gets three years of supervised release. Judge Lewis Kaplan has ordered him to pay $6 million in forfeiture and $5 million in restitution. [Justice Department; Sentencing memorandum, PDF]

Prosecutors had recommended five to seven years. The Probation Office had recommended the maximum sentence of 120 months imprisonment, and evidently, Judge Kaplan was convinced.

The defense asked for no more than 18 months. LOL. [Sentencing memorandum, PDF]

FTX’s ripped-off customers are outraged at getting back only 100% of their stolen assets plus interest. So they’re suing for even more than that. They claim that because they had crypto supposedly on the exchange before the collapse — though in fact they did not, because Sam Bankman-Fried had stolen it — any cryptos recovered by John Jay Ray’s team must surely belong to them personally. [CoinDesk]

LessWrong and Effective Altruism web hosting company Lightcone hosted a “prediction markets” convention that just happened to be filled to the brim with race scientists from the Rationalist sphere and also failed to return donations from FTX to the bankruptcy. Whoops. The effective altruists are now falling over themselves to argue that it’s all okay, race-and-IQ theorists aren’t really racists, and kicking the racists out is bad. Also that Lightcone should probably have answered FTX’s letters about the money. [Guardian, archive; SFGate; Effective Altruism forum; Effective Altruism forum; Twitter, thread, archive]

The war on Terra

Do Kwon and Terraform have agreed on a settlement with the SEC for $4.5 billion and Judge Jed Rakoff has approved it. [Doc 271, PDF; letter, PDF; press release]

Total remedies — disgorgement, interest, and penalties — come to $4,473,828,306, which will become just another claim in Terraform’s Chapter 11 bankruptcy. Do Kwon must pay $204,320,196 out of his own pocket, which will go to investors.

Do Kwon is still in jail in Montenegro awaiting extradition. We already know that Milojko Spajic, the libertarian-leaning prime minister of Montenegro, was a crypto fan — photo opportunity with Vitalik Buterin and all — but It turns out that he personally bought $75,000 of LUNA in April 2018 and may well be the person keeping Kwon out of the clutches of the US or South Korea. [Bloomberg, archive]

Kwon said in 2023 how crypto “friends” of his had financially supported Spajic’s Europe Now Party. Kwon called it “a very successful investment relationship.”

Regulatory clarity

NYDFS guidance: virtual currency firms licensed in New York (that’s you, Coinbase) need to keep the Department of Financial Services updated on their responsiveness to customer complaints (that’s you, Coinbase). [DFS]

The US Treasury reports on the use of NFTs for “illicit finance.” The uses are not so much sanctions evasion, but more mundane criminal money laundering for frauds and scams. [Press release; Report, PDF]

Kanav Kariya has stepped down as President of Jump Crypto — “the end of an incredible personal journey.” By pure coincidence, this came four days after the CFTC was reported to be probing Jump Crypto’s trading. Jump was one of the heaviest US-based VIP users of Binance, served as a market maker for Terra and FTX, filled crypto orders for Robinhood, and seems to be a part-owner of TrueUSD. [Twitter, archive; Fortune, archive]

85 years old and still running Ponzis? Now that’s a work ethic. [Justice Department]

Still good news for bitcoin

The Gemini crypto exchange has been told by New York to pay back $50 million to Gemini Earn customers. Gemini is also now barred from lending crypto in the state. New York previously got $2 billion back from Genesis, who lost Earn customers’ money in the first place. The two settlements should leave Earn customers made whole! [Press release]

Robinhood is buying the European crypto exchange Bitstamp. [Bloomberg, archive]

Congressman Tom Emmer doesn’t think he can get US crypto legislation through this year. Oh well. [CoinDesk]

Bitcoin ETFs and ETPs have existed outside the US for many years, so the coiner insistence there was massive pent-up demand for a US-based ETF wasn’t such a plausible claim. And so ETPs in Europe have had net outflows every month this year. [FT, archive]

David Rosenthal writes on the bitcoin halving and how it actually worked out. [DSHR]

Watch Jackie Sawicky’s new Proof-Of-Waste Podcast! The first one features Peter Howson, author of Let Them Eat Crypto. [YouTube]

Daniel Kuhn, CoinDesk: well, the world has rejected crypto. But maybe we don’t want the world using crypto! Have you considered that, huh? Anyway, “adoption means following the law (which is often at odds with crypto’s values).” Well, yes. This opinion piece also looks to the philosophical wisdom of Roko Mijic, the creator of the mind-numbingly stupid Roko’s Basilisk thought experiment. [CoinDesk]

Posted on by Amy Castor 3

Crypto is going back: Ethereum front-runner charged, Coinbase looking to re-enact 2022 crash, Uniswap responds to SEC, the not-Telegram Open Network, Wyoming

I’ve been quite busy of late but David has finished a newsletter. A lot of David jokes in here — as well as an explanation of the charges against the two brothers who front-ran the front-runners on the Ethereum blockchain.

The DoJ will have to explain to a jury how Ethereum validation works, that you can order transactions in a block, that you can exploit that to front-run people, and that some front-running is officially part of the system, but only because they couldn’t work out how to stop it. And that this front-running is bad, for reasons.

Read more on David’s website.

Posted on by Amy Castor 0

Tether and sanctions: what’s coming for Paolo’s beautiful launderette

  • By Amy Castor and David Gerard

Tether has long played financial shell games to keep its dollar stablecoin USDT up and running. It’s also been happy to ignore money laundering laws for most of its existence.

But we think Tether’s day of reckoning is on the horizon due to USDT’s latest use case: sanctions evasion.

How sanctions work

The international financial sanctions system, led by the US and Europe, aims to cut off cash flows to serious bad actors — terrorists, enemy countries, major criminals, and so on.

As Congressman Juan Vargas told Mark Zuckerberg of Facebook in the Libra hearings: “The dollar is very important to us as a tool of American power and also a tool of American values. So we would much prefer to put sanctions on a country than send our soldiers there.”

The US regards the power of the dollar and the sanctions system as part of the national defense. Sanctions are taken very seriously. 

The Office of Foreign Assets Control at the US Treasury keeps a list of sanctioned individuals, countries, and companies. [OFAC]

Doing business with an OFAC-sanctioned entity is a strict liability offense that can result in massive fines. That hasn’t stopped Tether.

Use case for Tether: North Korea, Hamas, Russia

Tether’s sanction violations started hitting the papers two years ago. 

In August 2022, the US sanctioned Tornado Cash — the favorite crypto mixer of North Korea’s Lazarus Group for laundering stolen ETH to help the country get hard currency. OFAC posted a list of sanctioned Ethereum blockchain addresses for the Tornado Cash smart contract.

Tether flat-out ignored the sanctions. The  company posted that it “does not operate in the United States or onboard U.S. persons as customers,” so is not obliged to comply with US sanctions. [Tether, archive]

(This theory doesn’t quite hold, as we detail later.)

The Palestinian Islamic Jihad received $93 million in crypto between August 2021 and June 2023, according to Elliptic. Wallets connected to Hamas received $41 million over a similar period, almost all in USDT, according to Israeli blockchain firm Bitok. [WSJ, archive]

Chainalysis found that stablecoins like Tether were used in the vast majority of crypto-based scam transactions and sanctions evasion in 2023. [Wired, archive; Chainalysis]

TRM Labs concurred, saying that Tether was the most used stablecoin in illicit crypto flows in 2023. Tether on the Tron blockchain in particular had “cemented its position as the currency of choice for use by terrorist financing entities.” [TRM; Bloomberg, archive]

In April 2024, Reuters reported that PDVSA, Venezuela’s state-run oil company, was steering users to USDT and asking for half of each payment upfront in tethers to avoid having their money frozen in foreign bank accounts. US President Biden lifted sanctions in October — but said he would be reimposing them as Venezuelan President Nicolas Maduro had failed to uphold his commitment to free and fair elections. [Reuters, archive; CoinDesk]

Also in April, the Wall Street Journal reported that tethers had become “indispensable” to fund the Russian invasion of Ukraine. Russian middlemen used USDT to skirt US sanctions and procure parts for drones and other equipment. [WSJ, archive]

Bloomberg reported that the US and the UK were investigating $20 billion in tethers that passed through Garantax, a Russian-based crypto exchange that both the US and the UK have sanctioned. [Bloomberg, archive] 

Russians were using tethers to skirt sanctions quite soon after the invasion of Ukraine in February 2022. You would buy tethers in Russia with rubles and sell them in London for pounds. [CoinDesk]

The Counter ISIS Finance Group is a group of countries aiming to cut off funding to the Islamic State of Iraq and Syria. Most of ISIS’s funding is in cash — but the US Treasury fact sheet on the CIFG’s January 2024 meeting has a whole section on their fondness for tethers, particularly in Western Africa. [Press release; fact sheet, PDF]

Liberty Reserve

Liberty Reserve was a digital currency service run out of Costa Rica, active from 2006 to 2013. It issued dollar-backed liabilities called “LR.” These were just entries in a ledger at Liberty Reserve — everything was centralized. But otherwise, LR worked very like a stablecoin.

Customers purchased LR through middlemen — such as Gerry Cotten and Michael Patryn, who ran Midas Gold before starting the now-collapsed Quadriga crypto exchange. These “exchangers” bought LR in bulk directly from Liberty Reserve and sold them to secondary users. This helped obscure the money trails.

LR and its ilk ushered in a new era of cyber money laundering. Gone were the days of crossing borders with suitcases full of cash. You could simply set up an LR account and send dollar equivalents digitally!

Liberty Reserve was a bustling laundromat for seven years — until the DOJ seized its website and arrested its merry band of founders in Spain and New York. The US charged them under the Patriot Act with money laundering and running an unlicensed money transmitter. Liberty Reserve’s founder, Arthur Budovsky, is currently serving a twenty-year sentence. [DoJ; DoJ] 

Liberty Reserve Junior

Tether is Liberty Reserve but on the blockchain.

Tether has large clients who purchase USDT in bulk — or maybe borrow it, the tethers being created out of thin air with the loan being the “backing reserve.”

Secondary users buy the tethers on offshore crypto exchanges, such as Bitfinex, Binance, and Huobi.

Tether disclaims any responsibility for what these secondary users do with their tethers — even as Tether has complete control over all USDT and can freeze or destroy individual tethers at any time.

Tether is an improvement over Liberty Reserve because it runs on a blockchain — 15 different blockchains, in fact, with Tron being its main blockchain.

As well as DeFi shenanigans local to each chain, this also facilitates chain hopping — where you take a pile of tethers from multiple customers, mix them up, and move them to a new chain, making the funds harder to trace. 

Tether routinely creates hundreds of thousands of tethers at a time on one chain, so they can “swap” them from another chain. Sometimes they actually burn the old tethers on the original chain! [Tether]

While Liberty Reserve was mainly used by fraudsters, hackers, and traffickers, it never grew to the scale that Tether has — and it never became popular as a tool for sanctions evasion, not just crime. 

Why hasn’t Tether been shut down yet?

Shutting down Liberty Reserve was a huge job — it took a multi-year investigation spanning 17 countries. Tether is even more complex.

Tether is not very linked to the US. None of its principals are US citizens. The company is registered in the British Virgin Islands. The CEO, Paolo Ardoino, lives in El Salvador. Tether’s main bank is Deltec in the Bahamas. A major owner is based in Thailand. 

Tether has a long and sketchy history, back to its launch in 2015. They operated under the radar for years. By 2017, federal enforcement agencies were too busy tackling the ICO boom to take notice. So Tether grew unchecked.

In 2018, the New York Attorney General charged Tether and its crypto exchange sibling Bitfinex with fraud when they tried to cover up $850 million in missing reserves. The companies settled in February 2021 for $18.5 million, a small slap on the wrist. 

In the process of investigating Tether and Bitfinex, the NYAG accumulated quite a lot of dirt on the companies. You might think they would have passed this pile of evidence to the Feds with a bow on top — and they did try.

In his book Number Go Up, Zeke Faux writes how New York reached out to the SEC, the DOJ, and the CFTC about Tether in early 2021 — but the Feds just weren’t interested?! The CFTC did eventually act against Tether later in 2021.

It wasn’t until 2022 that the Feds finally started to pay attention — when they noticed Tether’s role in sanctions evasion.

A bigger hammer

Despite Tether’s claims to have no links to the US, the company has more than a little US exposure — they have substantial backing reserves held in the US in dollars, such as their Treasury notes at Cantor Fitzgerald. This makes them at least slightly subject to US law.

In any case, non-US entities who work around US sanctions risk being sanctioned themselves. This may be applied to individuals as well as companies. [OFAC, PDF]

An entity may be cut off from the US dollar system altogether — and from any entity elsewhere in the world that wants to keep its access to US dollars. This is a financial death penalty. It’s a big stick.

If Tether remains noncompliant, this could put their banking and reserve relations at risk. Having Tether as a client could become too risky even for Cantor. 

By 2023, Tether had wised up a bit. They froze 32 wallets that were linked to terrorism and warfare in Ukraine and Israel in October 2023. In December, Tether froze 41 wallets tied to sanctions as a “precautionary” measure. [Tether; Tether]

By this time, the Feds were keeping a close eye on Tether. 

Ardoino wrote public letters to US senators in November and December proclaiming Tether was now in “alignment” with OFAC, and they were fine with freezing secondary addresses. Also, Tether had “onboarded” the Secret Service onto their platform — though it’s not clear just what that meant — and they were working with the FBI and the DOJ. [Yahoo; Tether; Letter, PDF; Letter, PDF]

Seriously, stop it

While Tether was blocking addresses and trying to convince the world it was in full compliance, the US government was making its annoyance more explicit.

Treasury Secretary Wally Adeyemo gave a speech at the November 2023 Blockchain Association Summit. This was the earliest example we could find of the government using the words “national security” about cryptocurrency: [Treasury]

While some have heeded our calls and taken steps to prevent illicit activity, the lack of action by too many firms—both large and small—represents a clear and present risk to our national security.

Adeyemo doesn’t name Tether in the speech, but it’s clear who he’s talking about:

We cannot allow dollar-backed stable coin providers outside the United States to have the privilege of using our currency without the responsibility of putting in place procedures to prevent terrorists from abusing their platform.

He gave this speech just after the Binance settlement dropped.

Senators Elizabeth Warren (D-MA) and Roger Marshall (R-KS) sent a letter to the Treasury, the Department of Defense, and the White House in April 2024 saying that they were concerned about Russia, Iran, and North Korea using Tether to evade sanctions: [Letter, PDF; WSJ]

The national security threat posed by cryptocurrency requires a commensurate response by our country’s defense community. We seek information on the additional authorities you may need in order to neutralize this threat.

The US has decades-old laws in place for dealing with sanction violators. The Bank Secrecy Act, the Patriot Act, and the International Emergency Economic Powers Act give the US sweeping powers. 

The government is also working on new stablecoin regulations — and any effective regulation on US dollar stablecoins would likely be fatal to Tether. 

What happens next?

Binance already learned this lesson after supplying services to Iran. They had to settle fines of more than $4 billion for violating the BSA, money transmitter laws, and the IEEPA. Former Binance CEO Changpeng Zhao was sentenced to four months in prison. Binance is getting a monitor.

We expect something similar to happen to Tether — large fines, compliance requirements, and the possibility of jail time for Tether principals.

If the heat gets too much, Tether might try to unwind the entire fund and shut down. The tricky parts will be how to do this while keeping as much of the money as possible and how to realize and return the dollar value of what reserves actually exist in any tangible sense.

But most importantly, they have to not unduly upset any of the more demanding sort of Tether customer who knows where they live.

___________________

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Posted on by Amy Castor 3

Coinbase Q1 2024 earnings: number go up, with a bit of juicing

  • By Amy Castor and David Gerard
  • Help our work: if you liked this post, please tell just one other person. It really helps!
  • You can also send money to our one-way ETFs! Here’s Amy’s Patreon and here’s David’s. For casual tips, here’s Amy’s Ko-Fi and here’s David’s.

Coinbase, the largest crypto exchange that deals in actual US dollars, has published its earnings for the first quarter of 2024 — when the bitcoin price reached its previous peak again. [Shareholder letter, PDF; Earnings call webcast; Earnings call transcript, PDF; Analyst call transcript, PDF; 10-Q]

The numbers look great! “We generated $1.6 billion of total revenue and $1.2 billion of net income. Adjusted EBITDA was $1.0 billion – more than we generated in all of 2023,” said CEO Brian Armstrong in the earnings call on May 2.

But those numbers are considerably juiced in important ways.

Numbers go up! When you change how you count them

Coinbase reported $1.6 billion in total revenue and $1.2 billion in net income in Q1 2024.

Those numbers are better than Q4 2023 — the first quarter Coinbase reported a profit in eight quarters. In that quarter, Coinbase reported $954 million in total revenue and $273 million net income.  

But this quarter’s numbers are up because Coinbase holds crypto as an investment — and when the bitcoin price went from $42,000 to $71,000 in the first three months of the year, Coinbase claimed considerable one-time paper gains. 

This is because GAAP accounting for crypto changed. Previously, you could only list the value of crypto you held at what you paid for it or less. You couldn’t account for the number going up as profits. But starting December 13, 2023, you suddenly could, under new FASB rule ASU 2023-08. [FASB, 2023; ASU 2023-08, PDF]

This did wonders for Coinbase’s next quarter!

Coinbase lists $737 million in mark-to-market crypto gains in Q1 — imaginary dollar gains on way more bitcoins than they could ever sell in those quantities — of which $86 million came from gains on digital assets held for operations and $650 million from unrealized investment gains. All this is only listable because of ASU 2023-08.

The crypto gains are listed on the balance sheet as cash coming in. But these aren’t real dollars until Coinbase sells the bitcoins and pays taxes on the capital gains.

“When a company counts bitcoin as revenue — that’s not cash. You can’t pay people with it, you can’t keep the lights on with it. It’s what we call an ‘accounting treatment’ but it is not cash,” Ted Gavin, managing partner and founder of corporate restructuring firm Gavin/Solmonese, told us in a recent phone conversation.  

Trading volume up — a bit

Trading is the lifeblood of any crypto exchange. It’s where Coinbase has traditionally made their money — on trading fees.

Coinbase was profitable in Q4 2021 when they did $547 billion in trading volume. After that, the company was unprofitable for eight straight quarters and trading volume plummeted.

Retail trade volume is three times what it was last quarter! But it’s still a fraction of what it was in the last bull run. Retail volume was $56 billion in Q1 2024 — compared to $177 billion in Q4 2021.

Retail trading is particularly important — it’s where the scarce actually-existing dollars (not just accounting fictions) find their way into the crypto ecosystem.

Institutional trading was the bulk of Coinbase trading — $256 billion volume in Q1 2024 compared to $371 billion in Q4 2021, the last bull run. That’s not terrible — but institutional fees are lower. 

What does this tell us? It means that when number went up, some retail investors came back to try their luck — but many more remain leery of crypto after the collapses of Terra-Luna and then FTX.

Custody — spot ETFs

The SEC approved 11 bitcoin spot ETFs in January — and eight of those, including the largest, Grayscale’s GBTC, use Coinbase as a custodian. 

Coinbase had hoped to make more money as a custodian to supplement its ailing trading business — but the bitcoin ETFs have not pumped up their revenue. 

Despite nearly $11 billion in ETF inflows in the first quarter, Coinbase custodial fees were only $32 million — or 0.2% of their total revenue — up from $19.7 million in Q4 2023. 

Interest

Coinbase makes money on the reserves backing the USDC stablecoin.

It turns out there’s a lot of money in dollar liabilities that you pay zero interest on but which give you 5% interest on the backing reserves. So Coinbase’s income from USDC interest was $197 million in Q1 2024.

There was also $66.7 million from lending out USDC and crypto for trading.

Long-term debt

Coinbase has $4.2 billion in debt. In the first quarter, they added $1.1 billion in long-term debt in convertible senior notes. The money was to pay off existing debt and for general corporate purposes. The notes mature in 2030. [Axios]

Convertible notes are a popular way for startups to raise capital. The primary purpose is that they convert into equity at some point. The notes are usually senior to common stock — if Coinbase went belly up, the holders of senior convertible notes would have priority over common shareholders

While Coinbase purports to have a lot of cash on hand, they also have a lot of debt. They are still spending a lot of money. 

The searing light of regulatory clarity

“We’re driving regulatory clarity,” said Armstrong in the earnings call.

In practice, regulatory clarity is driving Coinbase. One of the biggest challenges that Coinbase faces is a regulatory crackdown on crypto exchanges.

The SEC and 10 states sued Coinbase in June 2023 for operating an unregistered exchange and selling unregistered securities to retail. If the SEC prevails, there goes Coinbase’s entire business model.

EBITDA, the bodybuilding supplement for your numbers

Coinbase really likes its EBITDA numbers. They even started the earnings and analyst calls directly stating they’d hammer on these non-GAAP numbers. “We generated more Adjusted EBITDA than we did all of last year!” Armstrong proudly announced.

EBITDA (earnings before interest, taxes, depreciation, and amortization) is a measure of profitability that many companies put into their quarterly filings.

EBITDA will often look much better than those tawdry old-fashioned standardized GAAP numbers — because it sweeps the real costs of doing business under the rug.

Berkshire Hathaway’s Charlie Munger famously said that every time you see EBITDA, you should substitute “bullsh-t earnings.” [YouTube]

EBITDA isn’t even calculated consistently across different companies. And then there’s “Adjusted EBITDA,” which is a BS number of a BS number. Coinbase is even fonder of this one.

Coinbase’s “adjusted EBITDA” excludes stock-based compensation, because the numbers look way better if you leave out the bit where you have to pay your employees.

“While Coinbase may be reporting $1.2 billion in adjusted EBITDA, that is not what would be left for creditors. It is going to be some number grossly smaller than that,” Ted Gavin told us.

Coinbase’s 10-Q has a whole section excusing their use of these BS numbers. Don’t spend too much time on EBITDA — treat it as a distraction.

What all this means

The bitcoin price recovered — but the market didn’t really recover. The price going up was mostly driven by trading in dubiously-backed stablecoins on unregulated exchanges — not by people liking bitcoins more.

The price rise did seem to get a bit of volume going this quarter. But bitcoin spot ETFs turned out not to be Coinbase’s or the crypto market’s savior. In the last few weeks, we’ve even been seeing more net outflow from the ETFs.

The COIN stock price is up 42% in the year to date — but that’s mainly because the price of bitcoin has gone up this year. 

Coinbase’s numbers in  Q1 2024 are heavily juiced by unrealized gains on the face value of their crypto holdings. The company is not at all out of the woods. ETFs weren’t the magic trick — they’ll need some new Hail Mary.

Posted on by Amy Castor 0

Regulatory clarity: Roger Ver tax charges, CZ sentenced, Avi Eisenberg convicted and charged again, crypto mixers go down

Our latest newsletter is on David’s blog. [David Gerard]

In this issue:

  • Roger Ver got a little fancy with his tax reporting.
  • CZ gets a light sentence. How’s his singing voice?
  • Avi Eisenberg sentenced, then hit with child porn charges.
  • Samourai Wallet founders busted.
  • Whistleblowing employee: Block has been very sloppy with collecting KYC.
Posted on by Amy Castor 0

Consensys gets a Wells notice over MetaMask Swaps and Staking

  • By Amy Castor and David Gerard
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Consensys is the center of the Ethereum ecosystem. Its founder, Joe Lubin, is the man who’s made more money from Ethereum than anyone.

Consensys makes the immensely popular MetaMask crypto wallet. They offer a swaps service and a staking service through MetaMask.

Anyway, Consensys got a Wells notice of impending enforcement action from the SEC on April 10. The SEC thinks Consensys is operating as an unregistered broker-dealer by making money on the MetaMask Swaps and MetaMask Staking products.

To head this off, Consensys is preemptively suing the SEC first! [Blog post; complaint, PDF; docket]

Consensys wants a ruling that:

  • MetaMask Swaps does not make Consensys a broker-dealer;
  • MetaMask Staking is not an offering of securities;
  • Ether (ETH), the native token of the Ethereum blockchain, is not a security.

It also wants an injunction against the SEC even investigating MetaMask Swaps or Staking, and against investigating the company’s sales of ETH in terms of ether being a security. And a pony would be nice too.

The complaint

The SEC has been investigating Consensys for two years. The agency first sent Consensys a letter in April 2022 advising them that they were investigating MetaMask. Then in September 2022, Consensys got another letter that the SEC was investigating staking protocols on the Ethereum network.

Consensys complains that it “did not have fair notice” of only two years.

The complaint was filed in the Northern District of Texas — Consensys used to be in Brooklyn, New York, but moved to Fort Worth sometime last year. 

Consensys has hired Wachtell, Lipton, Rosen & Katz, one of the best-known law firms on Wall Street. It’s the same firm Coinbase is using to fight back against the SEC. 

MetaMask

MetaMask is a self-custody crypto wallet that Consensys distributes free as a web browser extension. You can move ETH or tokens running on top of Ethereum, such as altcoins or NFTs, between blockchain addresses.

Two services that Consensys sells via MetaMask are MetaMask Swaps and MetaMask Staking. It even calls these “core features” — though Swaps was introduced in 2020 and Staking in 2023. 

MetaMask Swaps

Swaps lets you “communicate with third-party decentralized exchanges.” Consensys charges a 0.875% fee for use of the service. What does Swaps do?

MetaMask Swaps software itself does not execute transactions and never comes into possession of users’ digital assets. It simply displays pricing information collected from third-party aggregators and sends user commands to DEXs, which execute the transactions. 

Now, you might think this closely resembles a stockbroker buying and selling stocks for you and taking a fee for doing so.

In the world of conventional securities, facilitating trade in beneficial ownership rights in stocks whose owner of record is the Depository Trust and Clearing Corporation (DTCC) is also non-custodial. We still call this job being a “broker.”

But this only matters if any of the tokens are securities. Are they? Well … yes. Almost all of the tokens you can use on MetaMask would be considered securities under the Howey test. They were created as schemes to profit from the efforts of others. The SEC’s 2017 DAO Report and 2019 framework for investment contract analysis bludgeon this point home.

The SEC has settled or won in court in previous cases arguing that many tokens of this sort are securities — such as its actions against Bittrex, Terraform, and ShapeShift — so we expect that a complaint will name various tokens traded in Swaps and detail why they are securities.

Consensys admits that it’s helping customers buy and sell these tokens and it’s taking a fee for doing so. The SEC just has to show that some of the tokens are securities.

MetaMask Staking

MetaMask Staking lets you “stake” ETH to earn more ETH.

Ethereum doesn’t use proof-of-work mining like bitcoin — instead, it uses proof-of-stake. You put up a validator node with 32 ETH locked in it and you have a certain chance to generate a block that goes into the blockchain. If you do, you win the block reward.

Ethereum staking hits all of the elements of the Howey test of whether something is a security:

  • “an investment of money” — your 32 ETH stake
  • “in a common enterprise” — Ethereum
  • “with a reasonable expectation of profits” — the validator specification document literally says “verify and attest to the validity of blocks to seek financial returns” [GitHub]
  • “derived from the efforts of others” — promotion and management of the scheme by the Ethereum Foundation and money from the retail suckers who buy your ETH winnings.

The Ethereum Foundation, which determines how Ethereum works, is based in Switzerland. However, staking that involves a US entity would be under SEC jurisdiction.

Various companies have offered staking as an investment to institutional and accredited investors. That’s fine — but it’s not so fine when they offer it to ordinary mom-and-pop retail investors.

In June 2023, the SEC and ten state securities regulators came down on Coinbase for offering its staking product to retail investors. The SEC fined Kraken $30 million in February 2023 over its staking offerings. Kraken had to remove its staking product from the US market. 

Consensys offers its ordinary retail customers using MetaMask access to the Lido and Rocket staking pools. Consensys doesn’t mention it in the complaint, but they take a 10% fee for staking via MetaMask. [Consensys]

The complaint hammers again on the non-custodial nature of the staking service:

Like the rest of the MetaMask wallet software, the MetaMask Staking feature is entirely non-custodial; at no point does Consensys come into possession, custody, or control of a user’s tokens, nor can it alter in any way the user’s transaction instructions to the protocol. 

But that doesn’t matter — because they’re blatantly offering an investment scheme to retail investors and taking a 10% fee.

In fact, Consensys admits that it put a lot of work into the new staking mechanism, and the SEC subpoenaed information on this work:

They also seek detailed information concerning the role of Consensys, including its software developers, in a host of Ethereum Improvement Proposals related to the Ethereum Merge, the transition from a proof-of-work to a proof-of-stake validation mechanism. 

That is, Consensys themselves helped move the Ethereum network to its current very security-like operating mode, which is entirely different from the 2018 mechanism that wasn’t considered an investment contract.

Is ETH a security?

The complaint rants at length about whether ETH is a security, and even says that “the SEC now claims that ETH is a security subject to SEC regulation.”

This isn’t something the SEC has actually declared yet. What SEC chair Gary Gensler has done is suggest that ETH might possibly be a security now — particularly after Ethereum’s move to proof-of-stake in September 2022.

Consensys is outraged by this. The complaint cites lengthy historical evidence of the SEC and its commissioners telling the world that ETH is not a security. However, most of this dates back to 2018.

In 2018, Ethereum was running on a proof-of-work network, where crypto miners got rewards for spending electricity to guess a number and not for putting in funds.

Consensys notes the switch — but not how the payment model changed.

The crypto world is very good at going “la la la I can’t hear you” when obvious concerns such as this are raised early, then acting surprised when they suddenly become relevant. But crypto people were already talking in 2019 about the then-planned Ethereum staking really obviously being a security in the US, and both the SEC and the CFTC started looking into the question in that year. [Grant Gulovsen, 2019; CoinDesk, 2022]

If ETH is determined to have changed its operating model to now run as an offering of securities, that takes out Consensys’ entire business. It also undermines Lubin’s massive wealth. We’re surprised Consensys was dumb enough to even raise the question.

What happens next?

We’re not lawyers ourselves, but the expensive lawyers who wrote this complaint seem only to have been able to find the crayons that day.

Consensys admits upfront to most of what the SEC would need to nail them on MetaMask Swaps and Staking. The SEC would just need a ruling that tokens on Swaps were securities. On Staking, it looks like Consensys doesn’t have a case.

The extended table-pounding on the history of ETH leaves out how present-day staking works — that is, just like an investment contract. The SEC just needs to note the fact.

After that incredibly stupid Ripple ruling, we won’t say that Consensys can’t prevail here. We do think their chances of winning are incredibly thin, and the complaint leaves itself wide open to the SEC’s obvious responses.

Update 1: One possible reason for Consensys filing this bizarre complaint in the Northern District of Texas is that it’s likely to go to Judge Reed O’Connor, a George W. Bush appointee known for his history of such bizarre rulings that even the present Supreme Court has consistently knocked them back. O’Connor might plausibly go for the complaint’s good ol’ boy hollering about the evils of fed overreach.

Consensys is weirdly vague about precisely when they moved to Texas. There wasn’t a press release. CoinDesk says Consensys’ office is in a WeWork, though WeWork only has the fourth floor of 5049 Edwards Ranch Road, Fort Worth, TX 76109, and there are other companies in the building. Various sources give their move date to Fort Worth as December 2023, though they were sending out press releases datelined Fort Worth as early as June 2023. [CoinDesk]

Did Consensys move to Fort Worth specifically to try to win a bizarre ruling from O’Connor with this weird filing as their judicial lottery ticket? This is almost too crypto an idea to seriously posit, but it’s less nonsensical than any other interpretation we have. Ideas welcome!

Update 2: Nevermind! Consensys straight up admits they moved to Ft. Worth for the courts.

Laura Brookover, Consensys head of litigation, tells Unchained: “For us, we moved to Texas because it’s a wonderful laboratory for innovation. Texas celebrates individual freedom, celebrates technology, and it’s a great opportunity for us being headquartered here to call on the courts and to say, please help us, because what the SEC is doing is unlawful.” [Unchained]

Feature image: Joe Lubin of Consensys and the Ethereum team in 2014.

Posted on by Amy Castor 1

Crypto is going sideways: Avi Eisenberg trial begins, Uniswap gets a Wells notice, Bitfinex Securities in El Salvador

  • By Amy Castor and David Gerard

“this ape is a message
we considered ourselves to be a powerful yacht club
this ape is not an ape of honor
no highly esteemed juice is slurped here”

— more falafel please, SA

What are you gonna do, convict me?

Avi Eisenberg’s criminal commodities fraud trial started on April 9 and continues for two weeks. Eisenberg is the DeFi trader who drained Mango Markets of $110 million in October 2022 by manipulating the price of MNGO, the exchange’s native token. [CoinDesk]

Eisenberg used various anonymous accounts to take a long position on MNGO, drive up the price of MNGO ridiculously high, use the inflated value of MNGO to “borrow” all of the crypto on Mango Markets, and then default. He cashed out and flew to Israel that day. He bragged about his brilliant trade on Discord. He even tweeted: “What are you gonna do, arrest me?”

Eisenberg returned to the US and was arrested in Puerto Rico in December 2022. He’s been held in New Jersey ever since. 

Extensive and detailed laws exist on commodity market manipulation. Merely trading with intent to manipulate is a crime.

Almost all of what goes on in DeFi was always just straight-up illegal by the letter of US law. The CFTC first warned that it was unhappy about the highly manipulated state of crypto markets as far back as 2017.

This will be a tough one for Eisenberg to win. The defense does not dispute the sequence of events. They argue that Eisenberg was simply using the protocol as designed — code is law. The DOJ is arguing that just because you can do something doesn’t mean you should.

The defense has tried to impeach a government expert witness by … sandbagging him with documents saying he owes back taxes? If that’s the best they have, then Eisenberg is in trouble. [Twitter, thread]

Inner City Press has been covering the Eisenberg trial. [Twitter, thread; Twitter, thread; Twitter, thread; Twitter, thread]  

No, “fun markets” are a dumb and bad idea

In discussing Mango, Matt Levine of Bloomberg, who we usually regard highly, floats an old libertarian dream idea: what if we just … throw out regulation for a large chunk of the crypto market? [Bloomberg, archive]

I am just saying that you could resolve those disagreements by letting everyone go their separate ways. Have Nice Crypto — probably the bulk of it? — where manipulation is disfavored and government intervention is, at least in theory, welcomed. And have Fun Crypto for the applied game theorists to play their games against each other. Have a market that makes it explicit, in advance, on the web page, “Anything that you can do on our platform is allowed, and if the results are absurd then that is fun for you and bad for someone else, you’re on notice!”

This is an amazing thing to write when the crypto collapse of 2022 was precisely how that approach worked out in practice. But the answer to most libertarian dreams of deregulation is “on the other hand, history.”

It’s true that if it’s your money, you have the God-given right to set it on fire. If you really want to get into investments forbidden to retail, you can probably find a way to send your money down a hole.

But when we let companies promote that sort of investment to ordinary people, what happens in practice is that the investors go all-in on the highest-interest bet, and then they lose the lot. This is extremely well understood from the historical record!

DeFi is a dumpster fire. Everything collapses weekly in flames and screaming. Our dear friends the crypto degens like it that way. It’s a warm and cozy dumpster fire they have there.

In zero-interest times, people couldn’t make a sufficient return from sane investments — so they got into insane investments. They put their money into Celsius, Voyager, and Terra-Luna.

Celsius took money from retail customers and put it into DeFi. In fact, Celsius was the third biggest single player in the DeFi markets. It literally hired a DeFi trader, Jason Stone of KeyFi, to manage its investments and give retail investors huge exposure to the dumpster fire.

Levine assumes that if the dumpster fire is set up as a “fun market” that somehow the fire won’t spread. But we know from Celsius that market dumpster fires do spread.

In the fraud trial of former Celsius CEO Alex Mashinsky, the DOJ is currently collecting victim impact statements. We don’t expect Mashinsky’s victims had a lot of “fun.” Mashinsky probably did, though. That’s what “fun markets” mean in practice. [Twitter]

Market contagion is one of the US Treasury’s greatest fears about crypto — because they know all about dumpster fires too.

What we have for a “fun market” in the US are markets for accredited and institutional investors — where you can buy all the dubious magic beans you like. But even there, laws against misrepresentation and market manipulation still apply. There might be historical reasons for this.

Levine talks a whole lot about the interesting and intricate financial engineering possibilities of crypto and hardly ever about its real life victims. We realize the first is his ambit, but the second sort of come with the deal.

Esto no puede ser tan estúpido, debes estar explicándolo mal

Bitfinex Securities is an exciting new crypto securities platform run by the fine people who brought you the Bitfinex crypto exchange and the Tether stablecoin. They also wrote themselves special new laws in El Salvador to let them set up Bitfinex Securities.

There have been a couple of tokens on Bitfinex Securities, but they haven’t had any trades for months at a time. [Protos]

A new token, HILSV, hopes to raise $6.25 million to build a hotel near the Aeropuerto Internacional de El Salvador: “The Hampton by Hilton.” HILSV has been seeking out rather more publicity. [Bitfinex, archive; Bitfinex, archive; La Prensa Gráfica, in Spanish]

HILSV will trade on Bitfinex Securities against tethers and US dollars. The tokens are medium-term corporate bonds, priced at $1,000 each. Buyers are promised a remarkable 10% annual interest, paid semi-annually, for five years and then they get their principal back. The raise is scheduled to begin May 13.

The developer, Inversiones Laguardia (Laguardia Investments), is a real developer. They’re also good friends of the current El Salvador government and have had close and fruitful relations with past administrations.

Founder Ricardo Laguardia said in the press release that it would be impossible to raise the funds without access to new capital markets.

This seems an implausible claim. Hotels are a well-understood business, Laguardia is an experienced developer, and $6.25 million is a plausible sort of price for a new hotel complex. If your business plan was sane, why wouldn’t you just take out a loan? And why would you offer to pay 10% interest when you could get a loan for less?

We suspect that Inversiones Laguardia is doing this hotel project with an offering that will obviously be filled just so Bitfinex can get its new stock market up and running. We expect they have actual investors (and likely friends of the Salvadoran government) already lined up.

Of course, someone might have $6.25 million in dirty tethers that need shining up. But we’re sure Inversiones Laguardia would never be a party to such activities.

Every crypto real estate project in El Salvador since 2021 has been a rugpull or a nothing burger. This is the fourth attempt at a crypto-backed real estate project — after the Astro Babies NFT-backed casino and the Bitcoin Towers and Fusso NFT projects.

Laguardia does have a history of surprisingly sweet deals, such as the lease for a development at the same airport in 2018 for a remarkably low rent. We’re sure it’s all fine, though. [Portal de Transparencia, PDF, in Spanish, 2018] 

Uniswap: the searing light of regulatory clarity

Uniswap is the largest decentralized exchange in DeFi. The idea is that they run an exchange trading tokens that are almost all unregistered penny stocks. Then they claim that somehow they don’t actually run the exchange — except the bit where they get paid for not-running the exchange.

But if you make money from running an exchange for unregistered securities, the SEC may knock on your door. So Uniswap got a Wells notice letting them know of forthcoming enforcement action — reportedly for operating as an unregistered securities broker and an unregistered securities exchange. [CoinDesk; blog post, archive]

This is no surprise. The SEC announced it was investigating Uniswap in 2021. Enforcement lawyers told the WSJ they were looking into how investors used the exchange and how the exchange was marketed. [WSJ, 2021, archive]

Uniswap runs on the Ethereum blockchain. It has its own native token, UNI, that allows traders and investors to vote in its DAO. The exchange is extensively US-linked.

Hayden Adams founded Uniswap in 2018. He got an initial $11 million investment round in 2019 and another $165 million in 2022. Top investors — and holders of the UNI token — include Paradigm, a16z, and Union Square Ventures. [Form D; Techcrunch, 2022] 

Because Uniswap is “decentralized and there are no listing fees,” anyone can list a token on the exchange and create an alleged price in dollars for their token. Coincidentally, nearly all tokens on Uniswap turn out to be rugpulls. [arXiv, 2022, PDF]

Uniswap trader Nessa Risley led a class action against Uniswap in 2022. She claimed that the investors were “intimately involved” in overseeing its operations and were therefore responsible for the fraud on the exchange. She also said Uniswap had been operating as an illegal exchange and brokerage. 

Judge Katherine Polk Failla dismissed Risley’s suit in August 2023, saying that the individuals behind the scam tokens were in the wrong, not the platform itself. (Faillia is also overseeing the SEC lawsuit against Coinbase.) Risley is appealing. [Opinion and order, PDF; case docket]

Adams says he’s “ready to fight” the SEC all the way to the Supreme Court if necessary. [Twitter]

The SEC filed enforcement actions against Coinbase, Bittrex, and Kraken for dealing in securities without a license. We strongly suspect they’ll call out a bunch of tokens on Uniswap that are securities, including UNI.

We wouldn’t be surprised if Uniswap was forced to shut down. But they probably have the resources to fight for a while. 

Miners dumping

The bitcoin price has been all over the place. One reason is that miners have been dumping their holdings while number is up. We suspect that’s what’s causing quite a few of the recent crashes. [CoinDesk]

Miners are now competing with AI for cheap power in the US. These are the AI guys who make the same bad excuses for their ghastly power consumption as the crypto miners. [Bloomberg, archive]

Central banking, not very on the blockchain

Central bank digital currencies aren’t getting a lot of consumer takeup. Franklin Knoll, a payment specialist at the Federal Reserve Bank of Kansas, writes about three retail CBDCs issued in the Caribbean over the last four years and how they’ve fallen flat. [Kansas City Fed]

Knoll looked at the Bahamas Sand Dollar, DCash from the Eastern Caribbean Currency Union (ECCU), and the Jamaican JAM-DEX.

Each launched with great fanfare — but “the new payment methods have thus far seemed to fall flat with consumers, merchants, and, in some cases, the financial institutions meant to operate the payment platforms.”

As David wrote when the Bahamian Sand Dollar and DCash launched, money is a social construct. You can’t just build a system and think people will come to it.

Good news for bitcoin

Christopher Harborne’s lawyers are at it again. Following their defamation lawsuit against the Wall Street Journal, they sent another letter to Dirty Bubble (James Block) regarding his story “Tether’s Secret Agent.” Last time, Block edited bits out of his story. This time, he took the entire story down. He says he’s contemplating “next steps.” [Twitter]

The SEC is pivoting to AI too. They busted a couple of investment advisors for saying they used AI when they didn’t. [SEC]

Media stardom

Amy is in a documentary on NFTs called “NFT:WTF?” It will be on Netflix in the UK starting April 10. You can also watch it on YouTube. [Youtube]

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Posted on by Amy Castor 4

Tether shareholder Christopher Harborne’s suit against the Wall Street Journal and threats to blogs

We set out to write a few paragraph’s about Christopher Harborne’s suit against the Wall Street Journal and ended up with 3,700 words!

Harborne is deeply upset at the WSJ for a story naming him in connection with Tether and their banks.

Mr. Harborne’s upset is genuine. But by publicly filing a defamation claim and then getting news stories and even personal blog posts deleted with letters from his lawyers, his lawsuit and the actions surrounding it have themselves become serious and newsworthy matters warranting public discussion.

This one is on David’s blog. [David Gerard]

Posted on by Amy Castor 0

Bitcoin goes up, so it must come down. What goes into the price of BTC?

  • By Amy Castor and David Gerard

Bitcoin has set yet another new all-time high — $73,835 on Coinbase BTC-USD on March 14. This means bitcoin is good now! All our past objections are resolved. Going forward, we only deal in Finances U Desire.

Sound and fury, signifying nothing

What’s interesting is that while the price is back up, the bitcoin trading market has not recovered. If anyone says “the market is back!” that’s an incorrect claim.

Market volume is one-eighth of what it was in November 2021, the last time the price was this high.

We get that number from Coinbase retail trading fee income, which is 2% of the volume. Coinbase is the largest actual-dollar exchange and it’s not allowed to lie in SEC filings — so for once in crypto, we have numbers we can trust a bit.

The retail trade volume against actual dollars on Coinbase went down in seven of the past eight quarters. Here’s a table from Q4 2021 to Q3 2023. Q4 2023 didn’t show any improvement.

Even as the price went up through 2023, every day people wanted bitcoins less and less. Coinbase gives us the numbers showing this.

Flash boys

Without trading volume, the bitcoin markets are painfully thin. It doesn’t help that market liquidity is horribly fragmented.

(This is why we prefer to just quote the Coinbase price — the skew between exchanges can be hundreds of dollars when anything interesting is happening.)

BTC-USDT on BitMEX flash-crashed from $66,000 to just $8,900 on Monday, March 18. Starting at around 22:40 UTC, someone dumped 1,000 BTC as fast as possible at whatever the market would pay for it. [CoinDesk; Twitter, archive]

By the time the flash crash flowed through to Coinbase, it was a mere $2,000 drop.

BitMEX has much less bitcoin liquidity than Coinbase BTC-USD or Binance BTC-USDT — so we suspect this was a very urgent seller who felt that FinCEN didn’t need his details.

Remember that after Binance got hit with the compliance hammer, traders’ details are no longer safe from US anti-money-laundering agencies.

We’re not sure why our trader didn’t use OKX, HTX (formerly Huobi), or Bitfinex, which would have had more liquidity and thus less price slippage — hence our impression that they were really in a hurry. And now they have to put all that USDT somewhere.

ETFs will save bitcoin!

BlackRock says its spot bitcoin ETF has reached $10 billion in assets. But Grayscale’s GBTC has seen over $11 billion in outflows because nobody wants to pay their 1.5% fee. (Everyone else is around 0.3%.)

Bitcoin ETFs aren’t hitting the institutions they were hoping for — pension funds and so on. (Thankfully.) For all of BlackRock’s helpful ETF marketing advice, financial advisors are being very careful about recommending these things. [WSJ, archive]  

The money flowing into the ETFs seems to be from individual investors. It’s not clear whether these are new investors or just existing holders dumping their bitcoin for ETFs because they’re tired of being their own bank.

This Financial Times article starts with BlackRock talking up its bitcoin ETF and the fabulous future of the blockchain … then details every way in which crypto is utterly incompatible with sane finance and doesn’t work. [FT, archive]  

The hot air crypto bubble

Meanwhile, Tether has printed 11 billion tethers just since the start of 2024. It’s at 103 billion tethers and counting. 

We very much doubt that most of these billions of tethers are being bought with real US dollars. Why would you send real dollars to an unregulated offshore wildcat bank to buy bitcoins when you could just put them into a US-regulated bitcoin ETF?

We suspect the tethers are being printed out of thin air and accounted as loans — the fresh USDT is “backed” by the loan itself.

This supports our theory that the present pump is not real money flooding into bitcoin. It’s stablecoins on Binance — tethers and FDUSD. The volume on Binance completely swamps the volumes on Coinbase or ETF trading.

The bitcoin price chart looks very like someone’s trying to pump the price. You’ll see the price slowly getting walked up, as if someone’s wash-trading it up … then it hits a round number of dollars, someone tries to cash out, and the price drops several thousand.

Fake dollars going up, real dollars going down.

So we’re not in a bubble. We’re in a balloon, one being pumped full of hot air. It’s fun going up — but the trip down can be very quick.  

What do I do with my holdings?

Back in November 2022, when exchanges were suffering urgent unplanned maintenance left, right, and center, we went so far as to say that if you insisted on investing in bitcoins, you should not risk storing your coins on an exchange. Holding private keys is ridiculously fraught and the tech is still unusable trash — but it’s still not as bad as trusting bitcoin exchanges.

If you must hold bitcoins in the hope of getting dollars for them one day, the least-worst option is to buy into an ETF. That way you’re in a regulated market and your only risk is Coinbase Custody getting hacked.

If you’ve bought into crypto, please at least cash out your principal — the cash basis that you paid to buy in. Then everything you make from then on is pure profit. When the price crashes, you won’t have lost anything.

Our real recommendation, of course, is not to touch this garbage.

Back in the snake pit

Bitcoin suffered a year of its media coverage being “Sam Bankman-Fried is a crook.” Crypto pumpers tried to make out that FTX, the second-largest exchange, being a massive fraud was a mere aberration on the part of Bankman-Fried, and everyone else in crypto was a good guy.

Then the first-largest exchange, Binance, got busted too. So price discovery for bitcoin — what determines where the number goes — happens on an exchange that literally admitted a few months ago to being a criminal conspiracy. Binance’s founder and former CEO, Changpeng “CZ” Zhao, is in the US awaiting sentencing. 

We find, over and over, that normal people keep assuming that crypto isn’t just a completely criminal snake pit. Because US dollars are able to touch it in any way, so surely it’s regulated. Right?

Finance and finance journalism seem to have collectively forgotten what a hellhole unregulated markets always were.

The way crypto works is:

  1. Actual dollars flow from retail suckers to a few rich guys;
  2. There’s lots of fancy bafflegab to obscure the very simple flow of actual dollars.

Crypto is an unregulated mob casino and the regulated exchanges are just the cashier’s desk.

You can absolutely make money in crypto — we would never say that you can’t. But you have to be a better shark than all the other sharks who built the shark pool.

Trade carefully.

Media stardom

Billy Bambrough wrote about the bitcoin price for the Sunday Times and spoke to David. In a rare moment for journalistic coverage of the number, Tether was mentioned! [Sunday Times, archive]

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Posted on by Amy Castor 1

Tether, FTX, and Deltec Bank: MONEY TIME

  • By Amy Castor and David Gerard

There’s a lot of class action lawsuits in crypto. We mostly don’t note these — they so rarely go anywhere — but a consolidated class action against FTX’s various enablers has turned up some interesting allegations concerning everyone’s favorite stablecoin, Tether, and its remaining US dollar banker, Deltec Bank of the Bahamas.

Tether has banked with Deltec since 2018. Deltec was one of the few banks in the world that would have anything to do with Tether after their deal with Crypto Capital led to $850 million of the Tether reserve being frozen.

We already knew that FTX/Alameda, also based in the Bahamas, was in it up to their necks with Tether. Alameda was Tether’s largest customer between 2020 and 2022 that wasn’t a crypto exchange.

The new allegations, filed in a Florida federal court, are that Deltec was an active and enthusiastic part of the FTX and Alameda business schemes that lost billions of customer dollars and for which Sam Bankman-Fried is now in jail.

The amended complaint

The new amendment to the complaint, filed on February 16, is based on 7,000 pages of direct text messages that were offered up in discovery. The full amended complaint is 158 pages. The Deltec shenanigans are paragraphs 133 to 260. [Motion, PDF; Complaint, PDF; Case docket] 

The complaint hammers on Deltec’s relationship with Tether, FTX, and Alameda. It states that Jean Chalopin, the head of Deltec, and Gregory Pepin, Deltec’s deputy CEO, played a key role in FTX’s money laundering.

FTX/Alameda: MONEY PARTY THE BEST PARTY

Bankman-Fried’s empire came crashing down in November 2022, when it was revealed the company had an $8 billion hole in its customer accounts. The complaint lists the various defendants in the case — Gary Wang, Nishad Singh, Caroline Ellison, Ryan Salame, and others. 

Deltec provided banking for FTX Trading, FTX US, and Alameda. Pepin manually allocated incoming customer funds to FTX accounts and moved the funds to Alameda. Deltec also extended a “secret line of credit” to Alameda of $1.8 billion.

Deltec was a money launderette for FTX. They would happily let all those annoying compliance requirements slide for their very good friends at FTX.

Deltec would pass compliance questions from intermediary banks to FTX or just make up fake invoices to account for otherwise unexplained transactions. Here’s Pepin:

[Ibanera] are asking info about [the foregoing FTX customer] do you have the agreement linked to this deposit? so i can get [the wire] release asap?

Idea 🙂 Send me a PDF of the term and condition + Invoice and I’ll send

… Now if you send me a XLS sample or whatever of invoice I can populate invoice myself later can do? 

Pepin would send ecstatic messages in the group chat when a batch of wires came in. The complaint has a whole page of Pepin posting like this:

MOOONNNEEEYYY TTTIIIIMMMMEEEE

I HEAR A MONEY TIME IS HAPPENING HERE I THINK I NEED TO BE A PART OF IT

doing my best to hold the wall but such money tsunami is hard to handle dude

MONEY PARTY THE BEST PARTY

it is MONEY TIME INDEEDE

Deltec Bank also moved FTX customer deposits directly to Alameda on request, in the billions. Deltec would even run out of cash to pay FTX customer withdrawals and have to ask Alameda to cover for them. Pepin: “Lena you send today the 300m? or later? As we won’t have liquidity”.

Moonstone Bank

Chalopin bought Farmington Bank in Washington in 2020 in a deal with FTX, turning a tiny local bank into a crypto service company — mostly for FTX and Alameda. The bank was then renamed Moonstone.

Moonstone joined the Federal Reserve without notifying the Fed of its change of business plan from a local farmers’ bank to a crypto money launderette. The Fed shut Moonstone down in August 2023.

North Dimension: Ipad 11 “ich Cell Phone

North Dimension was a fake electronics company that FTX/Alameda created so they could set up accounts at Silvergate Bank and Signature Bank in its name. FTX had customers wire money to North Dimension’s Silvergate and Signature accounts so that it would go directly to Alameda. This was part of the money laundering charge that Bankman-Fried was convicted on.

Pepin made sure that deposits from North Dimension came through to Deltec and were sent to FTX or Alameda as needed.

FTX put actual effort into the North Dimension bit of the fraud, if only the barest minimum. North Dimension even had a website!

The site didn’t actually work — all the product links went to the contact page. It was “rife with misspellings and bizarre product prices,” including “sale prices that were hundreds of dollars above a regular price” — such as the fabulously desirable “Ipad 11 “ich Cell Phone,” normally $410, but available at a sale price of just $899.

The North Dimension website is in the Internet Archive. The “About” page is a trip. The company logo comes from DesignEvo Free Logo Maker — it’s their “3D Orange Letter N” logo. You can see every penny of the twenty-five cents they spent on this. [North Dimension home page, archive; product page, archive; about page, archive; DesignEvo]

Tether and Deltec

When Tether became a Deltec customer in November 2018, it deposited about $1.8 billion — making up nearly half of Deltec’s total deposits at the time.

Alameda was the second-largest creator of tethers (USDT) — “about one-third of USDT minted at any time went to Alameda.”

The USDT was funded with FTX customer deposits which Deltec routed to Alameda. Remember that Alameda and FTX were claiming at this time to be completely separate operationally.

Alameda created and redeemed tethers directly via Alameda and Tether’s Deltec accounts. Alameda would first send a message to the Alameda/Tether/Deltec group chat. Transfers would often have to wait for Pepin to be awake.

Alameda pumping out new tethers seems to have been the engine for the billions of tethers printed in 2020, 100 million at a time: “In total, Alameda minted more than $40 billion USDT through this scheme, encompassing nearly half of USDT in circulation at the time.”

How solidly backed was USDT by the account at Deltec? About as solidly as it was in 2017 when Tether didn’t have a bank account at all for months at a time:

… in November 2018, Deltec Bank provided an assurance letter stating that USDTs were fully back by cash, one U.S. dollar for every USDT. However, the next day, Tether began to transfer hundreds of millions in funds out of its Deltec Bank account, such that within 24 hours, Deltec Bank’s assurance letter was no longer true.

FTX’s alleged Tether scam

The complaint postulates that Alameda was furiously printing tethers so that Alameda could make less than a tenth of a percent from arbitraging the price of USDT:

Upon information and belief, Alameda and Tether profited from the scheme as follows. Alameda would create USDT in amounts and at times that would inflate the market price of the stablecoin. Alameda would promptly sell the USDT in the market, at several basis points above the purchase price. Tether, in turn, would receive U.S. dollars for stablecoins it minted from nothing.

This sounds unlikely to us — there just isn’t the volume on any existing USD-USDT trading pair. To turn USDT into dollars in any quantity, you need to buy crypto then sell that at an actual-dollar exchange.

Deltec allowed Alameda a three-day grace period to pay for its freshly created USDT — that $1.8 billion line of credit. We think Alameda’s scam would have been to do some market-moving trades to make enough dollars to pay for the tethers they’d just bought.

Attachments to the complaint

Also attached to the complaint is a declaration from Caroline Ellison, former head of Alameda. Ellison apparently settled with this class action’s plaintiffs in January 2024 and offered to assist them. This declaration asserts the accuracy of the claims in the complaint as far as Ellison directly knows.

FTX former counsel Dan Friedberg adds a declaration. Friedberg has also settled with the plaintiffs of this class action. He only confirms the plaintiffs’ claim that Avinash Dabir managed FTX’s celebrity sponsorships out of FTX’s Miami office.

The last attachment on the amended complaint is a transcript of a podcast with Dabir talking to Joe Pompliano on the Joe Pomp Show about FTX’s celebrity sponsorships.

Harborne corrects the record by lawsuit

Christopher Harborne, shareholder of 12% of the Tether empire under his Thai name, Chakrit Sakunkrit, is suing the Wall Street Journal for an article it wrote in March 2023. The story was about Tether’s efforts to get banking after they were cut off by correspondent bank Wells Fargo in 2017. [Complaint, PDF, archive]

The WSJ story said that Harborne aided Tether’s efforts to skirt the traditional banking system by using his company AML Global to set up an account at Signature Bank: “The Sakunkrit name had earlier been added to a list of names the bank felt were trying to evade anti-money-laundering controls when the companies’ earlier accounts were closed, but Mr. Harborne’s hadn’t.”

Harborne states that “AML’s Signature Bank account was never used for Tether or Bitfinex whatsoever.” WSJ told him that the story didn’t imply that he had committed crimes, but he is suing over a claimed inference that he had.

WSJ edited the story on February 21 to remove the bits about Harborne. [WSJ; archive of March 3, 2023]

Harborne’s lawyers also reached out to Mike Burgersburg, a.k.a. Dirty Bubble Media, asking him to take down his article on Harborne. Mike kept the story up but made edits. [Dirty Bubble, archive of November 30, 2023]

Originally Mike had noted that the account Harborne set up at Signature was a back door for Bitfinex to access the US banking system. His source was the WSJ. “This was edited because WSJ removed those comments from their story. I am not making this claim, and there is no evidence at present for this assertion,” Mike said. 

Tether is run by a handful of people, some known and many unknown. Former CTO Paolo Ardoino is the named CEO and he acts like a social media intern. This reeks of Ardoino being the fall guy for whoever actually is running Tether.

Harborne doesn’t want to be thought to be that person. He says he “is not now and never has been in any management or executive role at Bitfinex or Tether; he is merely a minority shareholder.” A large chunk of his net worth is apparently in ether. His son, Will Harborne, has worked for various iFinex entities over the years.

Squeal!

Pig butchering scams, a.k.a. romance scams, have taken $75 billion from victims, according to a study by University of Texas finance professor John Griffin and his student Kevin Mei.

Once scammers collect the funds, they most often convert them to tethers: “Funds exit the crypto network in large quantities, mostly in Tether, through less transparent but large exchanges—Binance, Huobi, and OKX.” [SSRN]

Zeke Faux researched Tether’s pig butchering use case in depth for his book Number Go Up. That chapter of the book was put up by Bloomberg as a teaser. [Bloomberg, 2023, archive]

Griffin has been following Tether for some years. He was behind another paper on Tether money flows, 2018’s “Is Bitcoin Really Un-Tethered.” That study showed how Tether was used to prop up the price of bitcoin for most of the 2017 crypto bubble. 

Tether shills on Twitter have been frantically congratulating Tether on its “deal” with the Department of Justice to combat romance scams. No such deal has been announced. [Twitter, archive]

Just in case

USDT tokens are currently available on 15 different blockchains. Most of the issuance is on Ethereum and Tron.

Tether has proudly announced a recovery tool in case any of these blockchains have problems and your USDT becomes inaccessible. [Tether, archive]

We doubt Tether would make an announcement like this without a gun to their heads. So this reads to us like Tether reassuring the crypto whales that their tethers will be protected if Tron goes down.

Heading for the trillion

Tether crossed 100 billion USDT in circulation on March 5. This is completely in line with Dan Davies’ theory from Lying for Money that frauds snowball over time: 

The reason for this is that unlike a genuine business, a fraud does not generate enough real returns to support itself, particularly as money is extracted by the criminal. Because of this, at every date when repayment is expected, the fraudster has to make the choice between whether to shut the fraud down and try to make an escape, or to increase its size; more and more money has to be defrauded in order to keep the scheme going as time progresses.

The news about crossing 100 billion made it into Reuters, which noted Tether’s remarkably non-transparent reserves and the risks Tether poses to crypto and the broader financial system. [Reuters; Reuters]

Tether needs to be shut down. We’ve been saying this since 2017. It’s a risk to anyone who holds crypto. It’s also helped to accelerate other scams, so they’ve grown to a whole new level. 

As we write this, Tether has just printed 2 billion USDT — its biggest issuance yet. Tether has printed 5 billion new USDT in just the past week. Gotta keep number going up. MOOONNNEEEYYY TTTIIIIMMMMEEEE!

Image: Gregory Pepin photographed on the ipad 11 “ich sell phone.

(Updated March 12 at 5PM ET to add a quote from Mike Burgersburg and clarify why he edited his story on Tether.)

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Posted on by Amy Castor 3

Bitcoin mining: Riot Platforms’ 10-K is full of tentacles

  • By Amy Castor and David Gerard

We were going to do a quick news update on the world of bitcoin mining —then we got hold of Riot’s 10-K filing for 2023. Hoo boy.

Extreme noise terror

Bitcoin mining in Arkansas is making everyone miserable. The 24/7 noise caused by cooling fans is keeping residents up at night, chasing away wildlife, and lowering property values. 

The Satoshi Action Fund, led by Dennis Porter, is making matters worse for homeowners. The advocacy group, founded by climate denier and former Trump EPA chief of staff Mandy Gunasekara, has been pushing policies that offer greater legal protections for bitcoin miners. [NYT]

In a world where scientists widely hold that the impact of climate change will range from bad to really bad, Gunasekara thinks the impact will be “mild and manageable.” She is unable to come up with any scientific evidence to support this claim. [NPR, 2023] 

In Hood County, Texas, homeowners living near a Marathon Digital mining facility are equally pissed about the noise and environmental damage wrought by crypto mines. “It’s like sitting on the runway of an airport where jets are taking off, one after another.” [Time; WFAA, archive] 

The Texas Coalition Against Crypto Mining, led by Jackie Sawicky, is now doing a weekly email newsletter: Proof Of Waste. We’ve been finding it super-useful already. [Issue 1; Issue 2; subscription form]

Bitcoin is a battery of unspecified size

Bitcoin miners really don’t want anyone to know how much power they use. February 23, was the deadline for 82 bitcoin mining companies to cough up details of their energy use to the Energy Information Administration, the statistical arm of the US Department of Energy. The results were to be made public later this year to better inform policymakers about the climate impacts of bitcoin mining.

At the last moment, Riot Platforms and their lobbying arm, Texas Blockchain Council, filed a complaint in Waco, Texas, to delay the deadline. They claimed that the survey was rushed through on an “emergency” basis without a public comment period. The court granted a temporary restraining order on the data collection until a preliminary injunction hearing could be held. [Doc 13, PDF; Semafor]

The EIA reached an agreement with Riot and the Texas Bitcoin Blockchain Council. It will publish a notice on its planned survey and begin collecting public comments over 60 days. The notice will replace the previous survey. [Agreement, PDF]

The Sierra Club filed an amicus brief. “An outcome in this proceeding that prevents EIA from collecting data for months will materially increase the risk of rolling blackouts in extreme weather events or — as in Texas during Winter Storm Uri — cost customers tens of millions of dollars in payments to cryptocurrency miners to keep their lights on.” [Press release; Amicus brief, PDF] 

As far as we presently know, bitcoin mining in the US consumes as much energy as the state of Utah.

Climate change is an emergency. In return for all the misery and destruction they bring, bitcoin miners contribute zero to their communities.   

A history of flawless repute 

Riot is the largest crypto mining company in the US with facilities in Rockdale and Corsicana, Texas. It trades publicly on the Nasdaq with the ticker symbol RIOT.

Riot used to be a failing biotech under various names — Aspen Biopharma, Venaxis, Bioptix — whose stock traded under $5. In October 2017, in the heat of a crypto bubble, CEO John O’Rourke and Florida businessman Barry Honig figured out a way to pump the stock: blockchain!

The company rebranded as Riot Blockchain and BIOP became RIOT. The stock shot up from $5 to $46 in a matter of months. Fortunately, O’Rourke and Honig were well-invested!

They picked a good time to divest, too. In December 2017, after Riot’s stock hit a high of $46.80 — coinciding with the peak of the 2017 bitcoin bubble — O’Rourke dumped 30,383 shares for over $800,000. Honig dumped 500,000 shares for an undisclosed amount. 

The SEC was not happy with companies adding “blockchain” to their names without any blockchain business. So Riot bought a two-week-old company called Karios, paying more than $11 million for mining equipment worth only $2 million. Honig just happened to be a shareholder of Karios as well.  

Riot also acquired a majority stake in a “blockchain development company” called Tess based in Ontario, Canada. Tess was a shell company associated with bitcoin phishing sites, including a fake Mt Gox website. 

O’Rourke’s stint as Riot CEO was short-lived. He stepped down in 2018, after he, Honig, and a fellow called Mark Groussman were named in a penny stock scam involving three companies. (Riot was not mentioned in the complaint.) Honig was the alleged “primary strategist.” 

In 2018, short-seller Hindenburg advised investors to steer clear of RIOT and said the company was “hurtling toward the abyss.” An investigative piece by CNBC in February 2018 saw RIOT shares drop 33%. The CNBC report is comedy gold. [Hindenburg; CNBC; YouTube]

RIOT 2023 10-K: Extreme accounting

Riot has filed its full-year financials for 2023. The company reported “all-time highs of $281 million in total revenues, 6,626 Bitcoin produced, and $71 million in power credits earned.” [Press release; 10-K]

The company had no analyst call. This is not at all usual. But it’s not illegal! 

As always, Riot made no profit. The company posted a net loss of $49.5 million in 2023. It’s hard to compare this to their net loss of $509.6 million in 2022 — a large part of that number was goodwill write-offs and bitcoin and mining rig value impairment. 

RIOT reduced its losses on the books by $184.7 million by booking the rise in bitcoin price — that is, capital gains on the bitcoins they are holding, and not any sort of actual income — as “cash on hand, earned.”

Their “selling, general and administrative expenses” — mostly payroll — for 2023 totaled $100.3 million. That’s up $32.9 million from 2022.

Riot’s entire bitcoin mining revenue in 2023 was $189 million — only 2% higher than in 2021. Of that mining revenue, $71 million is subsidies from Texas for not mining bitcoin. That’s ordinary citizens paying to keep this company afloat.

Riot changed its name from “Riot Blockchain” to “Riot Platforms” in January 2023,  hoping to diversify into anything that wasn’t bitcoin mining — such as using its supposed expertise in running large data centers. Nobody cared — almost all Riot’s revenue came from mining. Or from not mining.

Adding water to soup

Bitcoin miner accounting is very special, as we covered a couple of years ago.

The scheme is for the executives to leverage being a public company in a bubble to pay themselves money — e.g., as company shares that the C-suite prints and awards to themselves. The suckers are naïve institutional investors who want in on a bubble. The rug pull is when they go bankrupt.

Money comes into Riot from investors who should know better, and it goes out to insiders and operating expenses. This generates a small stream of income — which relies on past spending on mining rigs and the physical plant.

Riot pays its executives well beyond the company’s carrying capacity. Riot CEO Jason Les is getting $21.5 million a year, mainly in bonuses and stock. Executives awarded themselves another $213.6 million in stock and options as of January 2024 — but it’s performance-based! They’re really efficient at setting money on fire.

The company has a history of diluting stock. They’ve gone from 15 million shares in 2019 to 250 million shares in 2024. In 2023, the company netted $517.6 million from selling 45.8 million new shares. [Ycharts]

One of Riot’s big problems is that even the institutional investors who thought RIOT was a way to get bitcoin exposure have ETFs now instead.

Risk factors

Riot has been telling folks in Navarro County, where it’s building a massive one-gigawatt mining facility, that its servers will be immersion-cooled with oil to reduce noise pollution. A demonstration facility seriously impressed Navarro County commissioners with how quiet it was.

But in the 10-K, Riot admits they have no idea if immersion cooling will even work at scale: 

Immersion-cooling is an emerging technology in Bitcoin mining, which is not in widespread use, and has yet to be deployed at this scale. As such, there is a risk we may not succeed in deploying immersion cooling at such a large scale to achieve sufficient cooling performance. All Bitcoin mining infrastructure, including immersion-cooling and air-cooling, is an evolving study.

The company also admits they’re absolutely screwed without the power subsidies from the state of Texas:

… our plans and strategic initiatives for the Rockdale Facility and Corsicana Facility are based, in part, on our understanding of current environmental and energy regulations, policies, and initiatives enacted by federal and Texas regulators. If new regulations are imposed, or if existing regulations are modified, the assumptions we made underlying our plans and strategic initiatives may be inaccurate, and we may incur additional costs to adapt our planned business, if we are able to adapt at all, to such regulations.

From the extreme bingo hall

Denton in Texas used to have Core Scientific, who went bankrupt in late 2022 to the cheers of the townsfolk — but now the city is welcoming more of these bozos. The miner, whoever it is, appears to be pitching itself to the town as a “modular data center.”  [DRC, archive; DRC, archive]

This is the latest swindle we’re seeing from miners — they pitch themselves as “high-speed computing” or “modular data centers,” as if they could use their computing power for something other than mining. They can’t. ASICs are specialized and run for about eighteen months before becoming e-waste.

Jaime Leverton, the CEO of bitcoin miner Hut 8, has stepped down after that short-seller report from J Capital we mentioned previously. Her resignation sent the stock (Nasdaq: HUT) down 8%. Leverton is succeeded by President Asher Genoot. [CoinDesk] 

Analysts for the Bitfinex crypto exchange say that miners are dumping their bitcoins ahead of the halving. We think this means the miners are desperate for cash, they don’t think the current pump in price will hold, or they’re getting ready to exit the business. [Bitfinex, archive] 

Ethiopia is suffering a plague of crypto miners, lured by cheap energy. A wave of Chinese miners brought their container data centers to the country after they were kicked out of China in 2021. Several Chinese companies have now invested in a $4.8 billion dam, which the miners would draw power from. Ethiopia has signed a preliminary agreement to establish a $250 million bitcoin mining and AI (apparently) data center, led by the Russian bitcoin miner BitCluster. While all this is going on, about 40% of Ethiopia’s population of 120 million have no electricity. [South China Morning Post, archive; Bloomberg, archive] 

We hear tell that the bitcoin mining rigs in El Salvador, which President Bukele set up outside the LaGeo plant in Berlín, Usulután, are no longer running, which is unsurprising in a country where power is 15c-20c/kWh — the container mining rig data centers have been left rusting in the sun. There are rumors that much of the setup has been stripped for scrap metal. We look forward to the rest of bitcoin mining going the same way.

Bingo masters break out

Bitcoin miners in the US don’t run on the naïve model of making bitcoins and selling them — they’re creatures of fabulously questionable financial engineering in public markets. And with leverage comes weirdness.

These companies are in an unprofitable business. The only ones making money are the executives, who treat company stock like their personal ATM. 

We expect the US miners to finally admit they’re broke at some point soon — hopefully this year. Apart from mining income halving in a couple of months, the bitcoin price can’t be pumped with billions of tethers forever — ultimately, the retail dollars just aren’t there.

Bitcoin miners could be saved with another crypto bubble.  Any moment now! We don’t think a fresh bubble will kick off this year — it would require a fresh influx of retail dollars that just aren’t in evidence — but we don’t want to bet against human foolishness.

When the companies go bankrupt, the shareholders will end up holding the bag. It’s hard to feel that sorry for them — most of these were institutional investors who really should have known better.

States like Texas will be left figuring out what to do with the mountains of e-waste they leave behind.

Posted on by Amy Castor 5