Crypto collapse: Signature Bank blows up, US crypto frantically looks for banking

  • By Amy Castor and David Gerard

“In five years a number of banks will not be around because of blockchain technology.”

~ Joseph DiPaolo, CEO, Signature Bank, 2018

All my banks gone

Crypto gets its wish — freedom from the corrupt and filthy fiat currency system! Silvergate and Signature, the two main crypto banks in the US, are gone.

After Silicon Valley Bank collapsed on Friday, March 10, US regulators worried about Signature’s concentration of large deposits that exceeded the FDIC insurance limit. Signature’s customers noticed too. They pulled billions of dollars in deposits from Signature later that same day. 

(Morning Brew has a good video explaining the process.) [Twitter, video]

New York regulators shut down Signature on Sunday, March 12. Shareholders are wiped out — but all depositors, even those with deposits above the FDIC $250,000 threshold, will be made whole. [Federal Reserve; NYDFS; FDIC]

The New York Department of Financial Services took control of Signature Bank pursuant to Section 606 of the New York Banking Law. Frances Coppola suspects the NYDFS acted under clauses (b), (c), and (d): the bank was conducting its business in an unauthorized or unsafe manner, it was in an unsound or unsafe condition to transact its business, and it could not with safety and expediency continue business. [FindLaw; Twitter]

Signature had 40 branches, total assets of $110.36 billion, and total deposits of $88.59 billion as of the end of 2022 — making this the third-largest bank collapse in US history.

Leading up to the announcement, President Biden met on Sunday afternoon with Treasury Secretary Janet Yellen, Federal Reserve Vice Chair Lael Brainard, and White House economist Jared Bernstein. Biden directed them to act, and the measures were announced just after 6 pm. [FT]

The closure came as a surprise even to the bank’s management — who only found out just before the public announcement. They were all fired. [Bloomberg] 

USDC can buy that for a dollar

After a weekend pause, Coinbase began allowing USDC redemptions again on Monday, and USDC has recovered its dollar peg. [Twitter]

Circle says no USDC reserves were held at Signature — but the company was dependent on Signature’s real-time payment rail, Signet. This left Circle scrambling at the last moment to set up new banking. Now Circle will be relying on BNY Mellon and a new partner: Cross River Bank. [Twitter, archive; Twitter, archive]

Cross River, based in Fort Lee, NJ, is another “crypto first” bank. We’re sure this will work out great. [Techcrunch, 2022]

Both Silvergate and Signature ran inter-exchange settlement systems specifically for crypto exchanges — SEN at Silvergate and Signet at Signature. These allowed exchanges to move money between each other at any time of day or night.

One guy told CoinDesk that Signet was still up and running in some capacity on Monday. Though Circle tried it and couldn’t use it. [CoinDesk]

Coinbase had about $240 million in corporate cash in Signature, but it expects to recover the funds fully. [Twitter, archive]

Paxos said it held $250 million of its stablecoin backing reserves at Silvergate, and that it “holds private deposit insurance well in excess of our cash balance and FDIC per-account limits.”[Twitter]

Freed from the lead weight of the legacy bankster system

With the closure of Silvergate and now Signature, crypto has been effectively shut out of the US banking system.

Exchanges, stablecoin issuers, and crypto hedge funds are all frantically hunting around for new banking — even looking outside the US. [Bloomberg]

Crypto companies are eyeing up other banks and payment processors, including Mercury, Brex, MVB, Western Alliance, Synapse, and Customers Bank — the last of which presently holds some of the reserves for the USDC and Paxos stablecoins. Or maybe JPMorgan Chase will take their calls. [The Block]

What happens next

These FDIC interventions are a warning cannonball shot to every other bank in the US. Straighten up your books and don’t specialize in bad customer bases — or the FDIC will swoop in, shoot you through the head, and sell your organs.

Crypto is one such customer base. Crypto customers were already strongly correlated with money laundering and crime — and now crypto correlates with hot money that flows in and out by billions a day. That’s a hazardous kind of customer for any bank to specialize in.

This is terrible news for crypto. Losing your banking rails is the worst thing that can happen to a crypto firm. Unless the crypto industry can find reliable US dollar payment rails that regulators will put up with, crypto in the US is dead as a financial product.

A few small banks will step in to pick up where Silvergate and Signature left off. But we greatly doubt the US is going to let these banks replace Silvergate and Signature.

Good thing crypto is uncensorable and unstoppable and doesn’t need banking.

More good news for bitcoin

It isn’t just a liquidity problem — Coinbase has removed all Binance USD trading pairs. The only place you can turn BUSD into dollars is now Paxos itself, BUSD’s issuer. This requires you to pass KYC and AML to US standards. Quite a lot of Binance traders can’t do that — so they’re buying BTC on Binance and moving that off instead. This makes number go up, so it’s definitely good news for bitcoin. [CoinDesk]

Paysafe, Binance’s UK payments processor, has cut them off, effective May 22 this year. “We have concluded that the UK regulatory environment in relation to crypto is too challenging to offer this service at this time and so this is a prudent decision on our part taken in an abundance of caution.” Ya don’t say. [Bloomberg]

HMRC in the UK has required Coinbase to provide information on all users who received a payout of more than £5,000 in the 2021 tax year. HMRC required the same of Coinbase in 2020. If you made money on Coinbase in the UK in the bubble, you may want to double-check if you need to correct your 2021–2022 tax return. These statist jackboots aren’t going to pay for themselves. [circumstances.run; Twitter, 2020]

The US Department of Justice is probing the collapse of Terra-Luna. [WSJ]

Kyle Davies from Three Arrows Capital has a very particular understanding of 3AC’s part in the crypto collapse. “If you think about, why are people angry? It has nothing to do with me actually. They’re angry that the market went down. In terms of us, we have no regulatory action anywhere, no lawsuits at all. There’s just nothing, so I know they’re clearly not mad at anything. They’re mad because the supercycle didn’t happen maybe, I don’t know. Something like that,” Davies said from his new desk in a non-extradition country. [CoinDesk]

Posted on by Amy Castor 0

Crypto collapse: Silicon Valley Bank falls and takes out USDC, New York calls ETH a security

Silicon Valley Bank fell on Friday, following the collapse of Silvergate Bank on Wednesday and Signature Bank’s close call.

SVB made the same mistake as Silvergate: they focused on boom-and-bust customers and piled their deposits into long-term securities.

Circle had $3.3 billion in SVB — everything over $250,000 is uninsured.

USDC lost its peg over the weekend, falling below $1.

Like Silvergate and SVB, Circle grew fast in the pandemic years and piled deposits into bonds.

Large uninsured depositors tend to panic easy and yank their deposits.

Anything that grows fast, needs to be checked out in a way it hasn’t been checked out before, said Dan Davies, author of Lying for Money.

Read our full post — this one is on David’s blog. [David Gerard]

Posted on by Amy Castor 0

Crypto collapse: Good night Silvergate Bank, unbanking crypto exchanges, Voyager sale to Binance proceeding

  • By Amy Castor and David Gerard

“And it seems to me, you lived your life like a candle in the wind. You’ve abruptly toppled over and you’re burning things. Now there’s one less fiat onramp, for those who’ve been orange pilled. And there is no liquidity, for all the crypto shills.”

— Rycochet on Silvergate Bank

Silvergate Bank: Time wounds all heels

Silvergate was the easiest crypto death pool call this week. The bank has announced it is voluntarily unwinding and liquidating, “in light of recent industry and regulatory developments” — its customers kept treating deposits as their own money or something, and regulators and legislators hated it a whole lot. All deposits will be returned in full. [Press release] 

“The Company is also considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets.” We’re not sure which proprietary technology this means — Silvergate wrote off its investment in Diem, formerly Facebook’s Libra, in its preliminary Q4 2022 accounts, and it just shut down the Silvergate Exchange Network.

FDIC examiners went into Silvergate last week — as we predicted — and have been reviewing Silvergate’s books since. [Bloomberg]

The FDIC was discussing how to keep Silvergate alive — even suggesting a rescue by crypto-related investors. Yeah, right. We suspect they already asked every other bank in the US, none of whom would offer a dollar for this thing.

The big question is: what happens to the loans secured by bitcoins that Silvergate made to MicroStrategy and various bitcoin miners?

Silvergate’s total loan book, bitcoin and otherwise, was $1.4 billion as of September 30, 2022, including the infamous $205 million loan to MicroStrategy. The bitcoin loans are not “bad loans” — they’re not in default, as yet. But they were clearly stupid loans — some idiot thought that lending money to weird companies with insane business models, against an asset that was only up because of a bubble, was a good idea.

So, if Silvergate’s cut up for parts, who takes on these loans?

Loans collateralized with crypto will be a nuisance to transfer because you also need to transfer rights to the collateral (which is sitting in Coinbase Custody, the MSTR loan at least). The MSTR crypto was pledged rather than transferred — there’s a custody account for this specific deal — which is a bit less fiddly. And the bitcoin price is, of course, incredibly volatile, so the collateral itself is risky.

No sane bank is going to want to take on these loans at anywhere near face value. But we expect there will be some buyer who’s interested, at a suitable discount.

If no bank is willing to buy a loan from an insolvent bank, the FDIC tries to close the loan by negotiating with the borrower about possible early repayment. But we don’t expect these loans to end up in that position.

Silvergate Capital stock (NYSE:SI) is a dead cat bouncing between $3.00 and $3.50 today. It was $219 in November 2021. We hope the short sellers have managed to cash out. [Yahoo!]

Frances Coppola on Silvergate: “This is the story of a bank that put all its eggs into an emerging digital basket, believing that providing non-interest-bearing deposit and payment services to crypto exchanges and platforms would be a nice little earner, while completely failing to understand the extraordinary risks involved with such a venture.” [Coppola Comment; Coppola Comment]

Unbanking, on the blockchain

Marco Santori, chief legal officer at Kraken crypto exchange, tells The Block that Kraken is going to start its own crypto bank any day now. With “pens with the little ball chains.” [The Block]

Kraken got itself a Wyoming SPDI charter in 2020 — that’s the same charter as Caitlin Long’s Custodia Bank, which was recently refused an account at the Federal Reserve.

Kraken Bank originally told Decrypt it was aiming to launch in the first quarter of 2021. It’s currently “planning a phased launch” in, er, 2022, apparently. [Kraken, 2020; Decrypt, 2020; Kraken, 2023, archive]

Kraken recently lost US dollar access via Signature Bank for non-corporate customers. In the meantime, Kraken has various other dollar options. The dollar channel for ordinary schlubs is via SynapseFi, “The Launchpad for Financial Innovation” — a payment processor marketing itself hard to crypto companies, though stressing that it never touches crypto itself — or MVB Bank of West Virginia, which thinks there’s a market in “Web3.” [Kraken, archive; SynapseFi; MVB Bank]

UK payments processor BCB Group is angling to take over from Silvergate as the fiat rails to the crypto industry. BCB actually has an FCA license, so the FCA considered they could pass basic money laundering muster at least. BCB launched its BLINC network in 2020; BCB’s recent publicity push is marketing for that. [Coindesk; Coindesk, 2020]

Crypto.com has lost its onramps for actual money, except euros in the European Economic Area and a GBP onramp via BCB — but no US dollar access. [CoinDesk]

Michel de Cryptadamus writes up crypto.com: “At the end of the day we will probably discover that the entire cryptocurrency industry is 5,000 shell companies run by 20 dudes in a foul smelling room in some non-extradition country.” [Cryptadamus]  

Outdoor miners

Crypto miners operating on public land haven’t been paying their taxes. Federal mineral lease operators have been using natural gas to power crypto mining without paying their gas royalties. The miners have been using mobile data centers in containers to evade oversight. [Office of Inspector General, PDF; Gizmodo]

Bitcoin miner Riot Platforms, née Riot Blockchain, has now filed its delayed 10-K for 2022 after the SEC told Riot to restate its accounts. There isn’t a lot that’s exciting here. The bitcoin mining business is knife-edge, bitcoin prices are down, and governments and the general public increasingly loathe bitcoin miners. Riot is branching out into selling its expertise in data center power distribution. Risks to Riot’s business include a pile of lawsuits against executives and directors concerning “allegedly false and misleading statements made in prior securities filings.” [SEC]

Voyager Digital

At the March 7 hearing in the bankruptcy of Voyager Digital, Judge Michael Wiles approved the purchase of Voyager assets by Binance US — assuming Binance US can pass various regulatory hurdles. (LOL.) [Doc 1159, PDF]

SEC staff think Binance US is likely an unregistered securities broker, but their objections weren’t specific enough to convince Judge Wiles to stop the sale. [WSJ]

In the hearing, Binance stressed that it really wants personal information, such as social security numbers, for all Voyager customers. Not just the ones moving to Binance US, but all of them: “Data is at the heart of the deal.” Judge Wiles was not impressed and said that SSNs from the Voyager customers who didn’t go to Binance would definitely not be a thing that Binance got. [Twitter]

More good news for bitcoin

The Financial Conduct Authority is hitting more UK crypto ATMs, this time in east London. No crypto ATM operator in the UK is registered with the FCA for anti-money laundering purposes, so all of them are illegal. [FCA]  

In India, the Financial Intelligence Unit of the Ministry of Finance is now requiring crypto-asset businesses to register with the FIU as reporting entities under AML laws. They also have to do basic know-your-customer — which they weren’t obliged to do before. Local crypto companies are actually positive about this move. [Gazette of India, PDF; CoinDesk]

In the US, the Public Company Accounting Oversight Board warns that crypto exchange “proof of reserves” statements are meaningless garbage. [PCAOB]

FTX in bankruptcy wants to redeem Alameda’s GBTC shares for the bitcoins backing them. Grayscale said no, so FTX is suing for redemption. Remember that Grayscale could now redeem GBTC any time they like — they just choose not to. [Press release]

Easy Money by Ben McKenzie and Jacob Silverman is available for preorder! The release date is July 27. [Amazon US; Amazon UK]

Image: With apologies to Alex Shaeffer.

Posted on by Amy Castor 0

Crypto collapse: Binance hits reserves, FTX’s Singh sings, miners’ creative accounting, bitcoin markets are thin

This is our second post this weekend! You’ll find our latest on the crypto collapse on David’s blog. [David Gerard]

Also, please support our work via Patreon, if you haven’t already. Our stories are free to read for everyone, but if you want to help us get the word out, become subscribers. Links in post!

In this episode:

  • More documents have come out on Binance’s “Tai Chi” plan to subvert US regulation.
  • Binance appears to have been channeling bridged USDC reserves to Cumberland/DRW.
  • Senators write a scathing letter to Binance, asking for a slew of documents.
  • We told you bitcoin miners were fiddling accounts!
  • Nishad Singh, another member of SBF’s inner circle, turns against Sam.
  • Also, lawyers propose tighter bail restrictions for Sam — a flip phone and virtually no internet access.

Posted on by Amy Castor 0

Crypto collapse: Silvergate implosion continues, Signature Bank, Tether lied to banks, Voyager, Celsius

  • By Amy Castor and David Gerard

“I like the Bernie Madoff test: does this have a higher return than Bernie Madoff promised? If so, it’s probably a scam!”

— HappyHippo

Media stardom

Amy wrote about why Bitcoin would rather continue contributing to the destruction of the planet than switch to proof of stake. [MIT Technology Review]

Amy was also quoted in Cointelegraph talking about stablecoins, mostly BUSD. [Cointelegraph]

David did a fun podcast with C. Edward Kelso back in November, about FTX exploding and the ongoing forest fires in the world of pretend nerd money. He also did a video in November with El Podcast. [Anchor.fm; YouTube]

Silvergate’s goose continues cooking

What’s next for crypto’s favorite bank? Will a team of FDIC agents storm Silvergate? The market is expecting an unfriendly resolution. The bank’s stock (NYSE:SI) is 95% down on its one-year price and is still being heavily shorted.

We wrote up Silvergate’s current problems on Thursday. One of the many ways that Silvergate screwed itself over was by putting cash deposits into long-term treasuries. When their panicky crypto customers needed their money, Silvergate had to sell bonds at a loss of $1 billion in Q4 2022. If they had just bought one-month T-bills, they would have been better off — but those don’t pay as much interest. 

Silvergate has paid back its $4.3 billion loan from FHLB-SF, though. [American Banker]

What we still don’t know is who pressured Silvergate to pay back the loan immediately. It’s utterly unclear why they had to liquidate a chunk of mildly underwater securities to pay off FHLB-SF instead of rolling over the advances.

How did Silvergate end up in this situation in the first place? Greed. A banking charter is a literal license to print money. But that wasn’t enough for them. So Silvergate CEO Alan Lane, who joined the bank in 2008, got into cryptocurrency because crypto was an under-served customer base. But Silvergate didn’t stop to ask themselves why it was under-served. Anyway, look at all this free money!

Worse than that, Silvergate de-diversified — they got rid of those tawdry and tedious retail deposits and mortgages that the bank had focused on since the 1980s. This left them at the mercy of the sector crashing, or one large customer collapsing.

Frances Coppola said: “The problem is not the business model, it’s the customers. If your customers are volatile, you’re at risk of runs. And if your customers are fraudsters, you’re at risk of lawsuits.” [Twitter]

On Friday afternoon, Silvergate made a “risk-based decision” to shut down its inter-crypto-exchange payments network, the Silvergate Exchange Network (SEN). [Silvergate website, archive]

This was a major part of Silvergate’s business. The SEN allowed real-time transfers of real money, any time of day or night, which crypto companies loved. It helped Silvergate attract billions of dollars in deposits from crypto exchanges and stablecoin issuers.

Signature Bank’s similar Signet platform is still up and running, for some reason. 

Moody’s just downgraded Silvergate’s credit rating for borrowing from B3 to Ca. This is Moody’s second-lowest grade: “highly speculative and are likely in, or very near, default, with some prospect of recovery in principal and interest.” [Bloomberg; Moody’s, PDF]

MicroStrategy has a loan to pay off to Silvergate — or its successor — by Q1 2025. “For anyone wondering, the loan wouldn’t accelerate b/c of SI insolvency or bankruptcy,” says MicroStrategy. [Twitter]

The MicroStrategy loan is not delinquent — and it has nothing to do with Silvergate’s present crisis. But this loan, and similar loans to bitcoin miners, are part of the thinking that got Silvergate here. If you’re making loans secured by bitcoins at bubble prices, then you’re an idiot.

Signature Bank, crypto’s tiny lifeboat 

There were two banks critical to US crypto. Silvergate on the West Coast and Signature Bank in New York. With the potential collapse of Silvergate, that means $750 billion per year in USD transfers between crypto exchanges is gone. Now it’s all on Signature.

Signature Bank’s 10-K for 2022 is out. [Business Wire; 10-K, PDF] 

Crypto was one-quarter of deposits to Signature in Q3 2022. When FTX crashed in November, crypto companies were caught short and had to withdraw their dollars in a hurry.

Signature could weather this rush because they were diversified, unlike Silvergate. They then claimed in December, and later in their 10-K, that they were totally trying to get out of crypto anyway. The January letter from the Fed, the FDIC, and the OCC warning banks to stay away from crypto probably helped push this opinion along.

(We wonder slightly where all these crypto exchanges are going to get US dollar banking now. If you have any thoughts, let us know!) 

In 2022, Signature’s deposits declined $17.54 billion or 16.5% to 88.59 billion. Most of that ($12.39 billion) was crypto deposits leaving the bank. At the end of last year, the bank’s crypto asset deposits totaled $17.79 billion, or 20% of its deposits. 

Unlike Silvergate, Signature doesn’t lend money to the crypto industry, nor do they have loans secured with crypto. Their relationship with crypto clients is only US dollar deposits and their Signet platform.

But Signature’s stock price (NASDAQ:SBNY) is being dragged down with Silvergate’s. SBNY is 64% down on its one-year price. 

Tether (again)

The Wall Street Journal got hold of some Tether emails. Tether “intermediaries” used faked companies and shell accounts in 2018 to skirt the Bank Secrecy Act and move money for terrorists. Oops. [WSJ]

One of those intermediaries was a major USDT trader in China. On a list of several accounts created for use by Tether and Bitfinex, another account was in Turkey and was allegedly used to launder money raised by Hamas. 

Elsewhere, the sentencing of Tether/Bitfinex US money mule Reggie Fowler has been adjourned again. It’s now scheduled for April 20 at 3:30 p.m. ET. [Twitter]

Voyager Digital: a terminally stupid loan to the cool kids at 3AC

Voyager Digital went broke because a single unsecured loan to Three Arrows Capital was over a quarter of their loan book, and then 3AC went bust. The Unsecured Creditors’ Committee has prepared a report on Voyager’s loan practices in general, but especially that one fatally stupid loan. [Committee Report, PDF] 

Voyager’s rewards program was run at a substantial loss — it was “primarily implemented as a marketing tool.” So Voyager implemented the lending program to fund its rewards program.

Evan Psarapoulos, Voyager’s chief commercial offer, told Ryan Whooley, the company’s treasury director “we have to beef up the team and onboard/lend to riskier borrowers.”

So Voyager ran a super risky lending program. Just in 2022, 3AC, Celsius, and Alameda Research each borrowed more than 25% of Voyager’s total assets at various times. If 3AC hadn’t taken down Voyager, it would have been someone else.

Voyager’s risk committee met through 2022, though Voyager executives didn’t believe the committee had the power to overturn decisions by Psarapoulos or CEO Steve Ehrlich.

Various borrowers sent varying amounts of information to be able to borrow from Voyager. Genesis sent audited financials. Galaxy sent unaudited financials. Celsus and BitGo sent balance sheets. Wintermute sent income statements.

But 3AC sent only a single-sentence statement of their net asset value and had a half-hour phone call with Voyager. Here is the complete text of the letter from 3AC that let them borrow a quarter of Voyager’s assets:

AUM Letter PRIVATE & CONFIDENTIAL

Three Arrows Capital Ltd. (the “Company”)

1-January-2022

To Whom It May Concern,

We confirm the following for Three Arrows Capital Ltd as at 1-January-2022 in millions of USD.

NAV 3,729
On behalf of Three Arrows Capital Ltd.

[signed]

Kyle Davies

Director

Voyager sought out a relationship with 3AC in particular because of “the prestige that 3AC had at the time in the industry.” So 3AC could set its terms. It only wanted to borrow without providing collateral, and, incredibly, it refused to provide audited financial statements.

Psarapoulos figured 3AC was safe because Genesis had lent to 3AC and Voyager thought Genesis’ diligence process was robust. Ehrlich said refusing to provide financials was “not uncommon for hedge funds.”

Voyager’s first loan to 3AC was on March 8, 2022. Two months later, Terra-Luna collapsed.

Tim Lo from 3AC told Voyager in May that 3AC had lost only $100 million in the Terra-Luna collapse. But on June 14, 2022, Lo told Psarapoulos that 3AC directors Zhu Su and Kyle Davies had disappeared, and things were “in bad shape.”

Voyager recalled all its loans. 3AC returned no assets. On June 24, 2022, Voyager issued a notice of default. 3AC entered liquidation on June 27. Voyager filed for Chapter 11 on July 6.

In other Voyager bankruptcy news, Judge Michael Wiles said the SEC had asked him to “stop everybody in their tracks” with its claims that Voyager’s internal VGX token may have been a security. The SEC needs to explain its claim and how to address its concerns. [Reuters]

The Department of Justice, the FTC, New Jersey, and Texas object to wording in Voyager’s latest proposed confirmation order that might purport to restrict government action against Voyager. [Doc 1134, PDF; Doc 1135, PDF; Doc 1136, PDF]

Celsius Network

NovaWulf put in a bid to start a new Celsius company with actual lines of business and issue shares to Celsius creditors. This is now the official Stalking Horse bid. NovaWulf hopes to get the new company up and running by June 2023. We think the plan is a hope-fueled bet on crypto bubbling again, but it’s this or liquidation. [Doc 2150, PDF; Doc 2151, PDF]

Celsius, the UCC, and the Custody ad-hoc group want the court to let them put to creditors a settlement that would get Custody holders “72.5% of their eligible Custody Assets on the effective date of the Debtors’ Plan.” [Doc 2148, PDF]

A 60-day stay, with further discovery, has been agreed upon in the KeyFi v. Celsius suit and countersuit. [Stay order, PDF]

Celsius is moving to compensate cooperating witnesses for their time and effort — both their past help to the examiner and further help Celsius may need going forward — in the cause of recovering money for creditors. [Doc 2147, PDF]

Posted on by Amy Castor 0

Silvergate, banker to the crypto world, is going down

Things have been going downhill for Silvergate ever since FTX blew up in November. The latest red flag: Sivergate missed the deadline for its annual 10-K filing.

Silvergate’s crypto customers withdrew $8.1 billion in November when FTX collapsed. The bank was technically solvent — it had loans as assets on its books, such as its bitcoin-secured loans — but it didn’t have the cash to give the customers their money back.

So Silvergate started rapidly selling assets, taking a big hit in the process. It also borrowed in the wholesale market as well, including a $4.3 billion advance from the Federal Home Loan Bank of San Francisco.

Now it has to pay that money back.

Bank failures in the US are rare. But when a bank does fail, the FDIC moves quickly to protect depositors. We would be unsurprised if a team of FDIC agents was to quietly descend on the La Jolla bank in the near future.

Our full write-up is over on David’s blog. [David Gerard]

Posted on by Amy Castor 0

MIT Tech Review: Ethereum moved to proof of stake. Why can’t Bitcoin? 

I just got a story published in MIT Technology Review on why Bitcoin will likely never move to proof of stake. [MIT Tech Review]

Since Ethereum migrated to proof of stake, that’s got more people asking, “Why is it necessary for Bitcoin to consume an entire country’s worth of energy?”

Bitcoin is decentralized in theory only and the folks who control the code are fiercely tied to keeping Bitcoin in its original form for completely irrational reasons.

Bitcoin Cash in 2017 was the last attempt to make any reasonable update to the Bitcoin reference code — and BCH ended up just another altcoin.

Bitcoin purists still refer to Bitcoin Cash as a “rebellion” and a “corporate takeover” as opposed to a sincere effort to reduce congestion on the network.

Now that lawmakers and regulators are getting more fed up with crypto, the pressure for Bitcoin to reduce its CO2 footprint will only increase.

Posted on by Amy Castor 0

Crypto collapse: New Sam Bankman-Fried charges, New York targets CoinEx, Coinbase losses, Voyager, Celsius

  • By Amy Castor and David Gerard

“Sam Bankman-Fried walks into the courtroom. his pants split with a sound like thunder and guns and cocaine spill out all over the floor. he spins around and punches a security officer hard in the face sending him flying. he turns, sits down calmly on his chair and says, to thunderous applause from the fans gathered to hear his famous catchphrase, ‘OK your honour, here’s what I think happened’”

— Hammerite

Mycrimes.txt (2) (FINAL) (USE THIS ONE).docx.pdf

The criminal indictment against Sam Bankman-Fried has been updated, with a superseding indictment on February 23. [Superseding indictment, PDF]

The new charges are clearly informed by the cooperation of Sam’s former co-conspirators — and by his crime confession tours in the press and on Twitter.

The Federal Election Commission is now listed as a victim of Sam’s fraud, with allegations that SBF tried to buy influence over crypto regulation in Washington. 

The indictment details all the tricks that Sam (allegedly) pulled to influence both Democrats and Republicans, in concert with other FTX executives — and how he tried to conceal his influence.

Other new allegations include bank fraud. The act of misleading a bank in the course of business is a crime all by itself — such as when you accept money in the name of one entity (Alameda) for another entity (FTX), or when you set up a shell corporation (North Dimension) and lie to your bank (Silvergate) about what that shell does.

Sam also used Alameda to fill a $45 million hole in FTX US. He gave Alameda a $65 billion credit line, which allowed it unlimited access to customer funds on FTX. Customer and company funds were thoroughly commingled. 

The indictment doesn’t specify the cause of the hole in FTX US, but Sam has repeatedly claimed that FTX US was solvent. 

Sam ultimately controlled both FTX and Alameda, even after claiming to have stepped away from Alameda.

The indictment also lists billions of dollars worth of assets that have been forfeited, including multiple SBF accounts at Binance.

FTX and its subsidiaries was never a legitimate business. It was Sam’s piggy bank. 

New York goes after CoinEx

The New York Attorney General’s office is suing the CoinEx crypto exchange. The NYAG alleges that CoinEx sold securities and/or commodities, did not register with the CFTC or SEC, and misrepresented itself as registered. [Press release; Complaint, PDF; Affidavit of OAG Detective Brian Metz, PDF]

CoinEx, which is based in Hong Kong, has responded by barring all US citizens. You have until April 24 to get your cryptos off the exchange. [Twitter]

New York alleges that CoinEx offered to New York customers various cryptos that are securities — AMP, LUNA, RLY, and LBC  — while the exchange was not registered to deal in securities.

AMP is the token of Flexa, who want to use it to sell burritos. LBC is the token of video site LBRY, which the SEC recently had a slam-dunk win against in court, finding that it was absolutely the security it clearly was. Luna is the twin coin of TerraUSD, which crashed all of crypto last May.

New York says these tokens are all securities under New York’s Waldstein test: “any form of instrument used for the purpose of financing and promoting enterprises, and which is designed for investment, is a security.” They say the tokens are also securities under the federal Howey test — as LBC was recently shown to be.

It happens to be a violation of New York commercial law to call yourself an “exchange” if you offer trading in securities or commodities and you’re not registered with the CFTC or SEC.

CoinEx also failed to respond in any way to a previous NYAG subpoena — and, per General Business Law §353(1), failure to comply with a subpoena is prima facie proof that the subpoenaed entity “is or has been engaged in fraudulent practice.” 

New York wants CoinEx to block New York from its website, pay restitution, disgorgement, and costs, “and provide New York investors with the option to rescind their transactions.”

New York is bringing a “special proceeding” — it wants the court to rule on its filing. “A special proceeding goes right to the merits. The Court is required to make a summary determination upon all the pleadings, papers, and admissions to the extent that no triable issues of fact are raised.”

Why did New York go after CoinEx in particular? This complaint is detailed, but it also looks like a template. We suspect this may be the first of many such complaints against crypto platforms. CoinEx ignoring the subpoena probably annoyed New York a lot too.

The SEC previously called out each of the tokens on CoinEx that the NYAG names as securities:

  • In a July 2022 insider trading complaint against Coinbase, the SEC said AMP and RLY were securities. [Complaint, pdf] 
  • In Feb 2023, the SEC said LUNA was a security [Complaint, pdf]
  • In November 2022, the SEC won in court against LBRY on whether its LBC token was an unregistered security offering. [SEC]

Binance US has delisted AMP. But Coinbase still lists AMP and RLY. Gary Gensler has been saying for a while that he thinks nearly all crypto tokens are securities and that Coinbase should register with the SEC.

Coinbase posts another loss

Coinbase’s Q4 earnings report is out, as part of its 10-K annual report for the year ending December 31, 2022. Trading volumes are down even further, and they’re still losing money. [10-K]

As a public company, Coinbase has to put on a happy face for investors — but they’ve been bleeding money for a year now. Net loss for 2022 was $2.625 billion, per GAAP. The COIN stock price has gone down 70% in the past 12 months.

Coinbase would prefer you to look at non-GAAP “adjusted EBITDA,” which comes out to a loss of only $371.4 million. Their “adjusted EBITDA” excludes stock-based compensation expenses in particular. Yes, we’re sure your numbers look better if you exclude the bit where you have to pay your employees.

Coinbase makes its money from (1) BTC and ETH trading, and (2) their share of the interest on the USDC reserve. Also, the majority of their volume comes from a few large customers. So Coinbase would extremely much like to diversify.

CFO Alesia Haas said in the investor earnings call: “Our fourth quarter net revenue increased 5% quarter-over-quarter to $605 million. This was driven by strong growth in our subscription and services revenue.” She means that Q4 revenue was only up because of interest on USDC. [Coinbase, PDF]

Coinbase wants to list every token going — even as many of the hottest tokens are blitheringly obviously securities under the Howey test. Coinbase has spent the past several years helping their very good venture capital friends such as a16z dump their bags on retail.

Coinbase goes on at length about the amazing ambiguity in what constitutes a security under US law. Who can even know what might be deemed a security tomorrow? It is a mystery.

Sure, the Howey test is simple and broad, and sure the SEC has won every case it’s ever brought where it claimed a given crypto was a security. But do you feel lucky?

The 10-K even includes a list of tokens Coinbase trades that the SEC has already said are securities! Coinbase questions whether these tokens are really securities, and confidently asserts that “Despite the SEC being the principal federal securities law regulator in the United States, whether or not an asset is a security under federal securities laws is ultimately determined by a federal court.”

This is true. But it’s also true that the SEC has won every single time. And the consent orders in these cases — because almost nobody was stupid enough to take their case to trial — note that the tokens in question were always offerings of securities. It wasn’t a court finding that made the token a security.

But Coinbase is desperate to diversify and makes it clear that they really want to risk their backsides on this business line of maybe-securities that don’t even make them a lot of money.

The SEC shut down Coinbase’s Earn staking product in 2022 before it could be launched. Haas explained in the analyst call why Coinbase thinks its staking product isn’t a security: “we are passing on rewards directly from the protocol. We are not establishing an APY, we are not establishing the reward rate. That is established at the protocol level. And then we are passing that through and collecting a fixed commission on that amount.” We guess we’ll see if the SEC concurs. [Coinbase, PDF]

Coinbase literally lists Satoshi Nakamoto as a risk factor for its business:

“the identification of Satoshi Nakamoto, the pseudonymous person or persons who developed Bitcoin, or the transfer of Satoshi’s Bitcoins”

The FTX fallout continues

FTX Japan K.K. users are getting back 100% of their cryptos. Users in other jurisdictions are likely to get cents on the dollar, if that. This is because the US crypto lobby viciously fought any sensible regulation for years — but Japan locked crypto down hard after Mt. Gox exploded in 2014. Taste the freedom! [Bloomberg]

Galois Capital, a real-money hedge fund that thought they’d get into some crypto, shuts its doors after losing $40 million, half its assets, in the collapse of FTX. Whoops! [Twitter, FT, archive]

The Bank for International Settlements — the central bank for central banks — reports that the fall of FTX didn’t have much impact on the rest of the financial world: [BIS bulletin, PDF, Coindesk] 

“Nevertheless, despite crypto’s large user base and the substantial losses to many investors, the market turmoil in 2022 had little discernible impact on broader financial conditions outside the crypto universe, underlining the largely self-referential nature of crypto as an asset class.”

Regulatory clarity

Caitlin Long’s Custodia Bank was refused an account at the Kansas Fed. Custodia appealed the decision. The Federal Reserve Board has looked at Custodia’s appeal and told them to go away. [Federal Reserve]

We’ve mentioned previously that the Canadian Securities Administrators (CSA) is introducing new rules for crypto exchange registration in the wake of the collapse of FTX. The new regulations, which will apply in all provinces, have been released:

  • Customer cryptos will need to be segregated into an address per customer.
  • Exchanges cannot pledge or rehypothecate customer cryptos. Margin trading is forbidden.
  • Proprietary tokens — in-house supermarket loyalty card points, in the manner of FTT or BNB — require prior written consent and can’t be counted as an asset in your accounts.
  • No stablecoin dealing without prior written consent.

These apply to any exchange with Canadian customers, including non-Canadian exchanges. [Press release; OSC, PDF]

The Financial Action Task Force, the multi-country advisory group set up to combat money laundering, is not happy that its rules on crypto traceability, such as the travel rule, have not been implemented sufficiently widely. At the FATF Plenary on February 22-24, “delegates further agreed on an action plan to drive timely global implementation of FATF standards relating to virtual assets.” [FATF]

The International Monetary Fund has put out a paper, “Elements of Effective Policies for Crypto Assets,” with guidelines that any country that ever might want to hit up the IMF for a loan would be well advised to follow — “amid the failure of various exchanges and other actors within the crypto ecosystem, as well as the collapse of certain crypto assets. Doing nothing is untenable as crypto assets may continue to evolve despite the current downturn.” [Press release; paper, PDF]

Hong Kong’s Securities and Futures Commission is consulting on licensing requirements for crypto exchanges to be allowed to sell to retail customers. Hong Kong wants safe custody of customer cryptos — they’re not demanding third-party custodians, an arms-length subsidiary will be sufficient — KYC, cybersecurity, accounting and auditing, risk management, AML, and prevention of market misconduct. So, the very basic requirements of being a financial institution. Responses should be in by March 31. [SFC; SFC, PDF]

In the US, the SEC got a lot of stick for not going after crypto harder in the bubble. Then it came out that the Blockchain Eight group of representatives had written to Gary Gensler telling him to back off. Now the legislature has demanded action, and Gensler is delivering. Here’s how the Blockchain Eight got the opposite of what they wanted. [The American Prospect]

“Gensler also made clear that he has been grappling with the same question as many of the rest of us: What, exactly, is the point of crypto?” [Intelligencer]

John Naughton on the latest UK Treasury crypto consultation paper. “The second lesson is that permissionless blockchains can never be allowed within the financial services sector.” [Guardian]

Voyager Digital

97% of Voyager creditors have voted for Binance to buy Voyager Digital! We think it’s unlikely that regulators will let the deal go through, and Binance US doesn’t have the money to cover all those liabilities to Voyager customers — but hey, who knows? [CoinDesk]

FTX in Chapter 11 is suing Voyager Digital in Chapter 11 for the return of a loan that Alameda paid back to Voyager just before it went into bankruptcy protection. FTX, Voyager and both companies’ Unsecured Creditors’ Committees have come to a settlement! An ad-hoc group of Voyager creditors objects to the deal. [Doc 1048, PDF; Doc 1084, PDF]

The Voyager UCC has subpoenaed the ex-top brass of FTX for depositions — Caroline Ellison, Gary Wang, Sam Bankman-Fried, Sam Trabucco, and Daniel Friedberg. The notices to the court don’t detail what the UCC wants to ask — just that they are asking. Voyager’s link to FTX is the huge pile of FTT that the company counted as part of its assets. [e.g., Doc 1018, PDF]

SBF’s lawyers have already moved that the subpoena was deficient because it was handed to Sam’s mom Barbara Fried and not into Sam’s own hands personally. [Doc, PDF]

Celsius Network and your pension

Caisse de Dépôt et Placement du Québec (CDPQ) was the pension fund that invested USD$150 million into equity in Celsius Network. Executive vice-president and CTO Alexandre Synnett, who was the executive involved in the Celsius investment, “left the organization on his own volition about two weeks ago,” said CEO Charles Emond in the 2022 earnings call. CDPQ will not be touching crypto going forward. [BetaKit; The Logic, paywalled]

Other good news for bitcoin

Bitcoin miners are diversifying because mining is sucking as a business. Riot Blockchain has changed its name to Riot Platforms. [Coindesk]

Crypto firm Phoenix Community Capital and its founder Luke Sullivan, with links to various UK parliamentary groups, appears to have vanished. Some of the firm’s assets and its name appear to have been sold to a new company run by an individual called “Dan,” who has told investors it has no obligation towards them. [Guardian]

Data Finnovation, who took out BUSD, now looks into weird bridging on Tether. [Medium] 

Image: Coinbase CEO Brian Armstrong is being patted down with a makeup sponge as a big green screen looms behind him. Fortune

Posted on by Amy Castor 0

Crypto collapse: SEC tightening crypto custody rules, why you can’t cash out your BUSD, Binance and Catherine Coley, SEC charges Terra-Luna

Stuff keeps happening. Make it stop happening. In today’s selection: [David Gerard]

  • The SEC’s proposed new custody rule is another vicious attempt to destroy crypto by suggesting it follow the rules everyone else has to.
  • Whatever happened to Catherine Coley at Binance US?
  • Why you can’t cash your BUSD out
  • SEC charges against Terra-Luna
  • Voyager, FTX, other Good News for bitcoin

Image: Groundskeeper Gensler

Posted on by Amy Castor 0

Crypto collapse: Binance USD shut down, Celsius insiders sued, Paxos, Voyager, FTX

  • By Amy Castor and David Gerard

“somethings are better left unsaid. Recommend no more news like these, for the sake of the people, our industry (and your business)”

— Changpeng Zhao, Binance

Binance USD shuts down — party like it’s 2008

Binance USD (BUSD) is a $16 billion stablecoin — an Ethereum ERC20 token — issued by New York-based Paxos. It’s backed by actual dollars in bank accounts.

There’s also a version of BUSD on the Binance BNB Blockchain, bridged from Ethereum. Sometimes the Binance-peg BUSD is fully backed by Paxos BUSD! Other times, it isn’t.

Both the SEC and the New York Department of Financial Services have acted against Paxos and its issuance of BUSD.

The NYDFS has told Paxos to cease issuing BUSD — so there will be no new BUSD after February 21. Paxos has told customers it will proceed with orderly redemptions, as long as they have proper KYC. In its consumer alert, the NYDFS wrote: [WSJ, paywalled; NYDFS; Paxos; PR Newswire]

DFS has ordered Paxos to cease minting Paxos-issued BUSD as a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD.

… It is important to note that the Department authorized Paxos to issue BUSD on the Ethereum blockchain. The Department has not authorized Binance-Peg BUSD on any blockchain, and Binance-Peg BUSD is not issued by Paxos.

The SEC has sent Paxos a Wells Notice alleging that BUSD is an unregistered security. Paxos issued a statement saying it disagrees and is prepared to “vigorously litigate if necessary.” Of course, Paxos is already stopping issuing new BUSD. [WSJ, paywalled; Paxos]

A Wells Notice is a heads-up that an enforcement action is very close to coming your way. Paxos can respond with a Wells Submission — where they try to convince the SEC not to sue them — but we doubt they will because any response would be public. More likely, Paxos will negotiate a settlement.

We don’t know the SEC’s precise issue with BUSD because Paxos hasn’t released the Wells Notice, and the SEC hasn’t filed a complaint yet. But we can make a few educated guesses:

  • Paxos-issued BUSD is not an “investment contract,” per the Howey test, because there is no expectation of profit. But an investment contract is only a subset of securities. Paxos BUSD is more akin to a “note” — a promise to pay a specified sum — which is presumptively a security, especially since it can be traded. The correct test for a note is the Reves Test. [Justia]
  • Dollar-backed stablecoins resemble unregistered money market funds. MMFs are also regulated by the SEC.
  • The SEC may not like Paxos’ relationship with Binance, who do all manner of security-like things with BUSD.  
  • The process of creating a liquid tradeable instrument from a less liquid one is called “securitization.” So Binance peg BUSD, as a more liquid form of Paxos BUSD, is likely a security.
  • The SEC may also be taking aim at Binance through Paxos. Binance auto-converts all other stablecoins  — and incoming actual dollars — to BUSD. So if you have 1 USDC on the Binance exchange, Binance will automatically convert that to 1 BUSD. This makes the BUSD more liquid.

Now that Paxos has stopped issuing BUSD, Binance will have to find another stablecoin to auto-convert to, probably Tether. Coincidentally, Tether just minted another billion USDT. [Twitter]

The BUSD price is still very close to $1. But the Binance exchange has had a surge in withdrawals — $831 million net outflows in 24 hours — and the price of Binance’s free-floating BNB token has crashed. [Coindesk; Twitter]

What does all this mean for Binance? The US has already cut off Binance’s banking by forcing Silvergate and Signature to cut ties with the exchange. Europe and other jurisdictions have done the same. Binance can’t get access to actual dollars, and now it can’t get access to dollars via BUSD either.

Frances Coppola and Dirty Bubble have excellent posts on Binance and its stablecoins. [Coppola Comment; Dirty Bubble]

Fox News reporter Eleanor Terrett posted a rumor on February 14 that the SEC had issued Wells notices to other US stablecoin companies including Circle — ordering them to cease and desist sales of unregistered securities. This turns out not to have been the case! As yet, anyway. [Twitter, archive; Twitter, Twitter]

Celsius and creditors sue the insiders

Based on the jaw-dropping criminality revealed in the examiner’s report, Celsius Network and the Unsecured Creditors’ Committee have filed suit against past executives of Celsius to recover as much money from them as possible. [Doc 2054, PDF]

Celsius and the UCC are suing co-founders Alex Mashinsky, Daniel Leon, and Hanoch “Nuke” Goldstein; former CFO Harumi Urata-Thompson; former general counsel Jeremie Beaudry; former head of trading Johannes Treutler; former vice-president of lending Aliza Landes, who is also Daniel Leon’s wife; and Kristine Mashinsky, wife of Alex.

The suit itself starts on page 25 of the PDF. Most of the complaint reiterates the events detailed in the examiner’s report. The claims are:

  • breach of fiduciary duty (Celsius was insolvent);
  • breach of fiduciary duty of loyalty (CEL price manipulations, KeyFi purchase, not avoiding conflicts of interest);
  • breach of the director’s duties to exercise independent judgment (multiple failures to act);
  • preferential and fraudulent transfers from July 2021 to May 2022 (insider withdrawals — full list in Exhibit A, PDF page 149).

The plaintiffs ask for actual and punitive damages.

Celsius: Hang on lads, I’ve got a great idea!

Meanwhile, Celsius has a recovery plan! We outlined the various recovery proposals previously. Celsius and the UCC have picked the NovaWulf plan — transfer substantially all assets and businesses to a NewCo, 100% owned by the creditors, and issue SEC-compliant “revenue share tokens.” NovaWulf will contribute $45 million to $55 million in actual cash and manage the company. [Doc 2066, PDF]

The shares will be tokens, but the share issuance has to pass SEC registration. It’s just an ordinary equity stock. But it’ll run on a blockchain, apparently.

“Earn” creditors with claims below $5,000 get liquid crypto (BTC, ETH, and USDC) up to about 70% of their claim.

Other Earn creditors will get liquid crypto and equity in NewCo, which will own illiquid crypto, mining, retail and institutional loans, and other assets. The NewCo will actively seek out new business.

The large Earn creditors will also get an interest in a “well-funded litigation trust” to “vigorously pursue designated litigation claims against certain former insiders of Celsius and other third parties.” (See above.)

Insider CEL claims get zero; outsider CEL claims get $0.20 per CEL.

NovaWulf Digital Management has previously provided services for bitcoin mining (TeraWulf and Marathon). For their $45 million, NovaWulf get … to manage NewCo? There are some Management Share Tokens in the plan.

We think this looks a bit speculative and hopeful. It’s not clear that it’s better than just liquidating. But at least it’s a plan? Celsius creditors large and small seem to be very receptive to hope right now.

FTX examiner denied; Sam’s sportsball shenanigans

In the FTX bankruptcy, Judge Michael Dorsey has denied the US Trustee’s motion to appoint an examiner. It would cost too much time and money: “I have no doubt that the appointment of an examiner would not be in the best interest of the creditors,” he said. “Every dollar spent in these cases on administrative expenses is one dollar less to the creditors.” He thinks John Jay Ray III is sufficiently independent of the previous management’s malfeasance to investigate what happened here just fine. [The Block]

In the FTX criminal case, Judge Lewis Kaplan has ordered the names of Sam Bankman-Fried’s two additional bail bond co-signers to be unsealed. Both are from Stanford. The signer for $200,000 is Andreas Paepcke, a senior research scientist at Stanford University. The signer for $500,000 is Larry Kramer, the former dean of Stanford Law School, and a close friend of Sam’s parents. Neither has had to put in any actual cash as yet. [Bloomberg]

Prosecutors are not happy that Sam has been using a VPN to access the internet. Sam’s lawyers say he used the VPN to access his NFL Game Pass subscription to watch the AFC and NFC championship games, as well as the Super Bowl. We flatly don’t believe that Sam has the faintest interest in any variety of sportsball. [Doc 66, PDF, Coindesk; Bloomberg]

FTX gave $400 million to obscure hedge fund Modulo Capital. The money is currently sitting in a JPMorgan account. JPMorgan was Modulo’s prime broker, handling its stocks and stock futures. In November, the holdings were converted to cash. It’s unclear why federal prosecutors haven’t seized the funds yet. [NYT]

Daniel Friedberg, the former FTX chief regulatory officer, was also a George Santos donor. Truly a fitting donor. [Seattle Times]

Patrick McHenry (R-NC) and Bill Huizenga (R-MI) from the House Financial Services Committee have questions for the SEC about the arrest of SBF. He was arrested the night before he was supposed to testify before the Committee, on charges that the SEC had a part in authorizing. “The timing of the charges and his arrest raise serious questions about the SEC’s process and cooperation with the Department of Justice.” Was the SEC conspiring to get Sam arrested? Huge if true. [Financial Services, PDF]

Voyager Special Committee [redacted]

In Voyager, the Special Committee of the Board of Directors of Voyager LLC has produced an Investigation Report, conducted by Quinn Emanuel Urquhart & Sullivan, which has been filed in redacted form. [Doc 1000, PDF]

Judge Michael Wiles let the company redact the document for privileged information and attorney-client work product, and the Voyager UCC was okay with this. So the executive summary states the report’s conclusion as:

Upon consideration of the factual record developed over the course of the Investigation and research and analysis of relevant legal theories, Quinn Emanuel has concluded [rest of paragraph redacted]

In summary: Voyager, and crypto itself, were both just too good and pretty for such fragile beauty to survive macroeconomic factors and “severe industry headwinds.” Also, a quarter of Voyager’s loan book was an entirely unsecured loan to 3AC. Blame them, they screwed everyone! It is not our fault that we were making blitheringly stupid loans while number was going up — our Risk Committee was only “kind of” formalized. It’s definitely not worth suing the directors or officers, okay?

The report’s entire “CONCLUSIONS AND RECOMMENDATIONS” section is redacted.

Furthermore, [redacted] [redacted] [redacted]

More good news for bitcoin

The trouble with an 18% interest rate is that anything offering those sort of returns in the real world is a Ponzi scheme, and the company offering 18% will go broke and you’ll lose all your money. Celsius and Voyager investors are discovering the other problem — you have to pay tax on that 18% interest, even if the company is in chapter 11 and you can’t get your money out. [Bloomberg]

The Bank of Lithuania has shut down another payment processor, Payrnet UAB — which used to issue credit cards for various crypto companies, including Crypto.com. [Twitter]

Paul Grewal, chief legal officer at Coinbase, argues that none of the prongs of the Howey test of whether a financial product is a security apply to Coinbase’s staking product, which takes money from customers and gives them a return on it. Oookay. [Coinbase, archive]

Every crypto ATM in the UK has been illegal since the FCA refused to license any of the operators in March 2022 and told them to shut down or else. Police, working with the FCA, are finally raiding the operators. [Guardian]

Image: Paxos hosted a party with synchronized swimmers at the Versace Mansion at Bitcoin 2022 in Miami. James Jackman for WSJ.

Posted on by Amy Castor 0

Crypto collapse: Crypto.com’s shadow bank Transactive, US banks and crypto, Binance not so good with actual money

  • By Amy Castor and David Gerard

“funds are safe. we’ve done a risk assessment and found that 100% of hacks happen when someone has access to their coins, so we’re revoking that access to make them even safer”

— Boxturret

Transactive: Lithuania shuts down a money laundromat 

Crypto exchanges have trouble finding stable gateways for actual money. Proper banks won’t talk to them, so they turn to shadow banks, which cater to high-risk clients and use lots of tricks to skirt the traditional banking system.

Sometimes the exchanges just lose their gateway — and your money.

We wrote earlier about how Crypto.com customers’ euro deposits were seized by the Lithuanian government as part of an anti-money laundering enforcement action against the exchange’s payment provider, Transactive Systems UAB. Cryptadamus has a great post explaining what happened. [Substack]

If you had EUR on Crypto.com before this, it’s gone. The “EUR” you see in your account is unbacked. Work out what you can do to extract value from your outstanding balance, while Crypto.com gives you the runaround.

Transactive was also the payment channel for crypto lender Nexo, whose Bulgarian offices were recently raided by authorities. Transactive has an office in the UK as well — Transactive Systems Ltd. [Transactive]

After getting authorization from the UK Financial Conduct Authority and the Bank of Lithuania to act as an electronic money institution (EMI), Transactive grew astonishingly quickly in just five years — thanks to its clientele in crypto, gambling, and forex, and whoever else they were processing money for. [Bloomberg, archive]

Given Transactive’s sordid history, it’s amazing that the FCA authorized them at all.

Transactive emerged from the rubble of PacNet Services, an international payments company that started in Vancouver. PacNet was forced to wind down after the US Treasury sanctioned it as a “transnational criminal organization” — specifically, being the middleman for mail-fraud scam artists. Several PacNet executives were charged with fraud and money laundering. [US Treasury, 2016; DOJ, 2019] 

A CNN investigative report from 2016 details how PacNet employees moved large piles of money around the world. PacNet set up bank accounts in the names of shell companies, they sent packages of cash labeled “legal documents,” they bribed Russian banking officials, and they even used a private plane to ferry cash to customers. [CNN, 2016]

So the money launderers left PacNet and moved over to a totally legitimate new business —Transactive, co-founded by convicted healthcare scammer Scott Roix.

In February 2022, the Bank of Lithuania fined Transactive 20,000 EUR for commingling customer and company funds. Transactive had also misreported its customer balances and its equity capital. [Lieutvos Bankas, in Lithuanian]

In January 2023, the Bank of Lithuania accused Transactive of massive money laundering and froze the company’s funds. It ordered Transactive to stop servicing clients in finance, forex, and crypto, pending a review. [Lietuvos Bankas, in Lithuanian]

Transactive notified clients about this trivial hiccup and said their funds were being “safeguarded” — a word meaning “you’ll never see your money again.” If an investigation discovers any of the money was dirty (if!), the government will seize the funds. [Reddit]

Crypto.com has told its euro-using customers that their SEPA (Single Euro Payments Area) transfers are being migrated to a new provider. Now the exchange has to find a new provider.

Here are Crypto.com customers screaming into the void to get their funds back. Crypto.com has yet to tell them what actually happened to their money. [Twitter, Twitter]

Unless Crypto.com had euros stored somewhere other than Transactive Systems UAB, they are likely insolvent in EUR and will have to start from scratch, paying withdrawals with new deposits until they can somehow fill the gap — or not.

US crypto banks are out of favor

In the US, Crypto.com still banks with Silvergate, which allows their institutional clients to transfer USD from their bank accounts to the exchange. This channel may have problems in the near future, due to Silvergate’s dealings with FTX.

The US Federal Reserve really, really hates banks touching crypto and is not putting up with it even a bit — especially after Silvergate needed a $4.3 billion bailout. The Fed issued a policy statement on January 27: [Federal Reserve; Federal Reserve, PDF]

“The statement makes clear that uninsured and insured banks supervised by the Board will be subject to the same limitations on activities, including novel banking activities, such as crypto-asset-related activities.

In particular, the preamble would provide that the Board would presumptively prohibit SMBs from holding most crypto-assets as principal, and also would provide that any SMB seeking to issue a dollar token would need to demonstrate, to the satisfaction of Federal Reserve supervisors, that the bank has controls in place to conduct the activity in a safe and sound manner, and to receive a Federal Reserve supervisory nonobjection before commencing such activity.”

That second paragraph directly addresses Silvergate’s plan to revive Diem (née Facebook’s Libra) and do their own private stablecoin for retail customers. Yeah, no. Silvergate says it’s written off its Diem investment after previous regulator refusals to let them print private money, but the Fed evidently thought it was still worth emphasizing their “no.”

The US Department of Justice is investigating Silvergate over its FTX and Alameda Research dealings. FTX customers were wiring money to Alameda and to Alameda’s dubious subsidiary North Dimension via the bank, thinking that money was going directly to FTX. The DOJ wants to know what Silvergate knew, and when they knew it. [Bloomberg]

Binance: increasingly freed from the chains of filthy fiat

In the UK, the Binance crypto exchange should have no access to pounds, ever. After the Financial Conduct Authority warned in March 2022 that “in the FCA’s view, Binance Markets is not capable of being effectively supervised,” UK banks cut off direct deposit to Binance immediately. [FCA, 2022]

But Binance knows you can’t keep a dedicated gambling addict down, so they keep trying to weasel their way back into the UK’s Faster Payments network, most recently through payments processor Paysafe. Sometimes this works. Binance recommends UK customers send money in and out via Visa — but even that’s being cut off by the banks. [Twitter; CoinDesk]

Cryptadamus traces Binance’s Visa connection — Binance owns crypto debit card issuer Swipe, which it bought in 2021! Swipe also issued a crypto debit card for FTX. [Twitter; Binance; FX Empire]

Australian users also report payment issues with Binance — even via Visa. [Twitter]

In the US, Binance users say they can’t withdraw funds in amounts of less than $100,000 from American banks. Binance says that’s fake news and everything is fine. Cryptadamus has been documenting the difference between Binance’s official statements and what customers report. [Reddit]

When Bitfinex was cut off from banking in 2017, users would buy bitcoins just to get their funds out of the exchange. This drove the price of bitcoin up and may have helped trigger the 2017 crypto bubble. So all of this is good news for bitcoin!

FTX in bankruptcy

At the next FTX bankruptcy hearing on February 6, Judge John Dorsey will hear arguments for and against appointing an examiner. FTX and the Unsecured Creditors’ Committee are against hiring an examiner, but the US Trustee and various state regulators want one. John Reed Stark thinks it’s absolutely necessary. [Agenda, PDF; LinkedIn]

Brian Glueckstein of Sullivan & Cromwell for FTX filed a declaration in support of FTX’s objection to an examiner. It’s 3,855 pages of mainly exhibits. But the US Trustee wants it stricken from the record because the deadline to file was January 25, and Glueckstein filed on February 3, one business day before the hearing. Oops. [Declaration, PDF; Doc 617, PDF]

FTX is suing Voyager for repayment of $446 million of loans. After Voyager filed for bankruptcy in July, it demanded repayment of all outstanding loans to FTX and Alameda. FTX paid the money back for Alameda — but because they paid it back so close to FTX’s bankruptcy filing, FTX wants to claw it back again. [Complaint, PDF; Reuters]

In the legal case against Sam Bankman-Fried, Judge Lewis Kaplan has barred Sam from using Signal or Slack and from contacting any former FTX employees without lawyers present until February 9, when he’ll hear arguments. He wasn’t impressed when Sam reached out to a key witness, who we assume is FTX US counsel Ryne Miller, to “vet” things on the phone. [Order, PDF]

SBF’s bail conditions required two more sureties. These are now in, with their names redacted: $200,000 and $500,000. Judge Kaplan has agreed to unseal the names, but they’ll remain redacted pending possible appeals. [Bond, PDF; Bond; PDF, Memorandum Opinion, PDF]

Digital Currency Group

The second day hearing in the Genesis bankruptcy is February 22. No agenda yet. We wonder if anyone will attempt to go after Genesis’ owners, DCG. [Notice, PDF]

The Gemini crypto exchange implied to its Gemini Earn customers in 2022 that their deposits were protected by FDIC insurance, and customers took Gemini’s statements to mean they were protected by the FDIC from Genesis failing. But Gemini didn’t technically say that! So it must be fine, right? [Axios]

DCG’s crypto news site CoinDesk claimed to have prospective buyers approaching them unsolicited and offering hundreds of millions of dollars for the site. The new rumor is that the prospective buyers are looking at buying only parts of the site — the conference business or the media outlet — and certainly not at paying hundreds of millions of dollars. [Twitter]

Other good news for bitcoin

Coinbase was fined 3.3 million EUR (USD$3.6 million) by De Nederlandsche Bank for not registering as a money transmitter in the Netherlands. [Reuters] 

Coinbase bragged about having proper registration in September 2022. But the violation occurred in the years prior when they weren’t properly registered. [Coinbase, 2022]

MicroStrategy posts another loss. This is its eighth straight quarterly loss in a row. Before former CEO Michael Saylor started to amass bitcoin in 2020, the company had $531 million in cash. Now it’s down to $43.8 million in cash. [Bloomberg] 

MicroStrategy is one of the loans that Silvergate is particularly worried about. In March 2022, MicroStrategy borrowed $205 million in a three-year loan from Silvergate. The loan was collateralized with bitcoin — and Silvergate will need to worry about that too. 

Image: PacNet’s part owner Don Davis (on the left) posted on LinkedIn. Airplanes are great for moving piles of cash.

Posted on by Amy Castor 0

Celsius Network: Final report from the examiner — lies, incompetence and Ponzi schemes

We just wrote up the final examiner report for Celsius. This ended up being a 3,000-word post, mainly because the report was loaded with comedy gold. You can read our full analysis on David’s blog. [David Gerard]

Celsius was not just fraudulent. It was an utterly incompetent investment business. Here’s what we cover:

  • History of a scam, how Celsius started.
  • CEL and the flywheel — Celsius’s main business was pumping CEL.
  • Mashinsky knowingly and repeatedly lied to customers.
  • The examiner doesn’t outright say that Celsius operated as a Ponzi, but she demonstrates that it did.  
  • Mashinsky was a horrible investor. Celsius invested 30% of its assets in GBTC just a few months before GBTC started trading at a permanent discount to NAV. He totally missed the boat on that one. 
  • Celsius used Quickbooks for its accounting, just like FTX.
  • We fully expect Mashinsky to be indicted soon. 

Posted on by Amy Castor 2

Crypto collapse: FTX family subpoenas, SBF witness tampering, Celsius bids revealed, more crypto banking woes

  • By Amy Castor and David Gerard

FTX: It’s a family affair

FTX’s lawyers have questions. Specifically, they have questions for Sam Bankman-Fried’s brother Gabriel and his parents, Joseph Bankman and Barbara Fried.

Joseph advised FTX. He recruited its first lawyers and joined FTX staff in meetings on Capitol Hill. When visiting the FTX offices in the Bahamas, he and Barbara stayed in a $16.4 million house with its title in their names. Barbara founded a political action committee called Mind the Gap, which received donations from FTX.

Gabriel launched Guarding Against Pandemics, an organization funded by Sam. Gabriel purchased a multimillion-dollar property in Washington D.C., which John Jay Ray III’s current FTX team believe was purchased using FTX customer funds.

Every member of Sam’s family had some involvement in FTX — and they aren’t responding to requests for documents. So Ray’s team and the Unsecured Creditors’ Committee (UCC) want to subpoena Joseph, Barbara and Gabriel under rule 2004. [Doc 579, PDF; Bloomberg]

We’ve detailed rule 2004 previously. Federal Rule of Bankruptcy 2004 allows tremendously broad discovery and deposition. A witness is not always entitled to attorney representation or cross-examination and has only a limited right to object to questions. 2004 exams are sometimes referred to as “fishing expeditions” — because they need to be.

Included in the same 2004 motion, Ray is also asking the court’s permission to subpoena Sam and several other FTX insiders, including FTX cofounders Gary Wang and Nishad Singh, former Alameda CEO Caroline Ellison, and former FTX COO Constance Wang. Along with SBF’s family, they have not been very responsive:

“Mr. Wang and Ms. Ellison expressly declined to provide the requested information, and Ms. Fried has ignored the Requests altogether. The Debtors have not received meaningful engagement or any response from Mr. Singh or Mr. Gabriel Bankman-Fried.”

Ray’s team are investigating the FTX hack on November 11-12, which saw $300 million in crypto siphoned off the exchange while crypto Twitter watched in horror. They’ve requested an order pursuant to Rule 2004 here too — under seal, because the information in the motion could “reveal or lead to evidence that will reveal the identity and activities of the perpetrator(s).” It sounds like they already have a very good idea who was behind the hack. [Doc 581, PDF]  

A mostly-unredacted list of FTX creditors is now available. It includes investment banks, such as Goldman Sachs and JPMorgan; media companies, such as the New York Times and Wall Street Journal; commercial airliners, including American, United, Southwest, and Spirit; as well as several large tech players, including Netflix, Apple, and Meta. Individual customers’ names remain withheld. [Doc 574, PDF] 

FTX objects to the US Trustee’s request to appoint an independent examiner. They argue an examiner would duplicate work that’s already underway by FTX, the UCC, law enforcement, and regulators. “Indeed, if history is a guide, the cost could near or exceed $100 million.” They point out that “it is difficult to imagine an examiner candidate whose qualifications exceed those of Mr. Ray.” Which is a good point. The UCC concurs. [Doc 573, PDF; Doc 571, PDF]

What’s a little witness tampering between friends?

SBF is playing fast and loose with potential witnesses in his criminal trial. He contacted “Witness-1,” the “current General Counsel of FTX US” (Ryne Miller) to work out a story with. We doubt Miller would want anything to do with such a scheme. But this was enough for the government to ask Judge Lewis Kaplan to modify Sam’s bail: [DOJ letter to judge, PDF]

“Specifically, the Government respectfully requests that the Court impose the following conditions: (1) the defendant shall not contact or communicate with current or former employees of FTX or Alameda (other than immediate family members) except in the presence of counsel, unless the Government or Court exempts an individual from this no-contact rule; and (2) the defendant shall not use any encrypted or ephemeral call or messaging application, including but not limited to Signal.”

SBF’s lawyers responded by pounding the table. Judge Kaplan has told both sides to chill. The government should get its reply in, with substantiation of its claims, by February 2. [letter, PDF; order, PDF]

Dirty Bubble has found another link between FTX and the fraud-riddled binary options industry. In September 2021, FTX purchased the ZUBR derivatives exchange for $11 million. The exchange was registered in Gibraltar. By the time Gibraltar rescinded ZUBR’s license, the exchange had no active customers. The exchange was a collaboration between Belarusian binary options and crypto “billionaire” Viktor Prokopenya and his former business partner Said Gutseriev, the son of one of Russia’s wealthiest oligarchs. [Dirty Bubble]  

(Update, March 15, 2023: Viktor Prokopenya tells us he “never had any commercial interest or other involvement in ZUBR.” Dirty Bubble has updated his story to note that FTX purchased ZUBR directly from Prokopenya’s business partner Said Gutseriev. Dirty also notes interesting connections between ZUBR and Prokopenya’s other entities in his story.) 

Would it surprise you to learn that FTX made political donations to George Santos? [SFGate]

Celsius Network: Let’s make more magic beans!

Celsius has rejected the Binance US bid for Celsius assets, and four other bids. In the January 23 hearing, Ross Kwasteniet of Kirkland & Ellis, speaking for Celsius, said the bids “have not been compelling.”

Instead, Celsius have concocted a plan to reorganize into a publicly traded company and issue a new “Asset Share Token” to creditors. Those following the Celsius disaster will recognise this as Alex Mashinsky’s very dumb and bad Kelvin Plan from September 2022.

Creditors weren’t told about the other bids. As it happened, Tiffany Fong — Celsius creditor and YouTuber — got all the bids in a leak in December. Bidders included Binance US, Bank To The Future (Simon Dixon), Galaxy Digital, Cumberland DRW, and NovaWulf. Fong posted full text of the leaked bids. [Substack; Youtube] 

  • Binance US: buy just the crypto, assume liabilities (with a haircut); excludes FTT, CEL, and other illiquid trash tokens. Pay $15 million cash.
  • Bank to the Future: crypto returned to customers pro rata. Other Celsius assets to special-purpose vehicles, customers get an ownership share. Cash to be raised through rights offering to creditors.
  • Galaxy Digital: Acquire illiquid assets and staked ETH. Pay $66.8 million cash.
  • Cumberland DRW: Purchase certain tokens and portfolio of alternative investments, excluding CEL. $1.8 billion total payment, includes various haircuts.
  • NovaWulf: Transfer substantially all assets and businesses to SEC-compliant NewCo, 100% owned by the creditors. Issue revenue share tokens. NovaWulf to pay $60-120 million, mostly in tokens. This is also a version of the Kelvin plan.

Many ad hoc creditors were disappointed that the Binance bid was rejected — but it shouldn’t be surprising, given the issues that Binance is already having with its bid for Voyager.

Frankly, we don’t think the other bids look all that great either — they’re fanciful coiner dreams that first assume the crypto market is healthy, which it isn’t.

We think Celsius should have just liquidated in July rather than taking several months and handing millions of dollars to bankruptcy professionals to get to the same place.

Banks

Silvergate is short on cash, so it’s suspended dividend payments on its preferred stock. [Business Wire] 

The stock in question (NYSE:SI) is going down the toilet. It’s crashed from $220 in November 2021 to below $14 in January 2023. Signature Bank (NASDAQ: SBNY) has gone from $365 to $127 over the past year.

Moonstone Bank says that “recent events” — FTX tried to use them as a financial laundromat — and “the changing regulatory environment around crypto businesses” — the regulators are on the warpath — have prompted it to ditch the “innovation-driven business model” it adopted in recent years. [WSJ, paywall] 

Federal bank regulators are not keen on dodgy crypto banks authorized by captured Wyoming state regulators. Custodia Bank can’t get a Fed account: [Federal Reserve]

“The Board has concluded that the firm’s application as submitted is inconsistent with the required factors under the law. Custodia is a special purpose depository institution, chartered by the state of Wyoming, which does not have federal deposit insurance. The firm proposed to engage in novel and untested crypto activities that include issuing a crypto asset on open, public and/or decentralized networks.”

Crypto.com’s old gateway for GBP and EUR was Transactive Systems of Lithuania. Transactive has been cut off by the Bank of Lithuania, after it found “significant violations and shortcomings of the Law on the Prevention of Money Laundering and Terrorist Financing.” Transactive had apparently been giving accounts to a long list of low-quality institutions in low-quality jurisdictions. Transactive can no longer serve financial institutions, forex, or crypto clients. They also got cut off from the UK Faster Payments system. Your EUR and GBP sent to Crypto.com via Transactive are probably now stuck. [Twitter; Offshore CorpTalk; Bank of Lithuania, in Lithuanian]  

Before Crypto.com got kicked off Silvergate, it used to get US dollar deposits via an oddly roundabout method: customers would send USD to Circle’s account at Silvergate, and Circle would mint that much USDC and send the USDC to Crypto.com. It is possible this was not in full compliance with KYC and AML regulations. [Twitter; crypto.com, archive]

Other happy little accidents

London-based crypto exchange Luno, a subsidiary of DCG, is laying off 35% of its staff. About 330 employees will be let go from the firm, which has offices in Africa, Asia, and Europe. [WSJ, paywall; archive] 

DeFi volumes are right down. The amount of money (or “money”) involved has been flat for months, and — most importantly — you can’t get the ridiculous yields you could in the bubble. Oh no! Anyway. [Bloomberg]

Happy Penis Day, to those who celebrate

It was five years ago today, January 28, 2018, that the Prodeum initial coin offering took everyone’s money and disappeared, leaving behind only a new jargon term for “exit scam” or “rugpull.” You get a penis! And you get a penis! And you get a penis! Everybody gets a penis! [The Next Web, 2018]

Image: Sam Bankman-Sopranino and family.

Posted on by Amy Castor 2

Crypto collapse: Genesis bankrupt, CoinDesk for sale, Bankman-Fried attacks FTX lawyers, Bitzlato busted

  • By Amy Castor and David Gerard

I think we made some tremendous progress in the six months before I left.

— Jeffrey Skilling, Enron

Media stardom

Amy’s first piece for Foreign Policy is out now! “The Crypto Dominoes Are Still Falling: The bankruptcy of Genesis shows the need for regulators to have teeth.” She advises that regulators be given the power to act much more quickly against obvious nonsense. [Foreign Policy, paywalled]

Genesis goes down — DCG is fine, fine

The lending arm of Genesis finally filed for chapter 11 in the Southern District of New York on January 19. This has been expected for months, as they froze withdrawals in November. [Amended Petition, PDF; docket on Kroll; press release; Bloomberg; Michael Lito declaration, PDF]

The corporate entities that filed were Global Holdco and its lending subsidiaries Genesis Global Capital and Genesis Asia Pacific, which managed Genesis lending for Three Arrows Capital. Genesis’ derivatives, spot trading, broker-dealer, and custody businesses were not part of the bankruptcy.

Genesis owes its top 50 creditors — mostly unnamed on the petition — over $3.4 billion. Gemini Earn clients are collectively owed $765.9 million. Other big claims include a $78 million loan payable from Donut (a “high-yield” DeFi platform — “high yield” is a euphemism for “Ponzi”) and a VanEck fund with a $53.1 million loan payable. [Reuters]

But fear not! Genesis has a plan to exit the bankruptcy by May 19. It will try to sell its assets at auction within three months. [Chapter 11 Plan, PDF]

The settlement proposal is written in a confusing and opaque manner — but DCG controls the bankrupt entities utterly. DCG is trying to declare its left hand solvent and its right hand bankrupt, and stick the creditors with the losses.

Page 50 of the chapter 11 plan (page 54 of the PDF) sets out the street corner shell game. Claims are shuffled between the bankrupt Genesis entities and the non-bankrupt DCG entities such that heads DCG wins, and tails the creditors lose. Any Gemini Earn creditor who accepts this settlement relinquishes all claims against DCG, Gemini, and the Winklevoss twins personally.

We think DCG screwed up by covering for Genesis in July 2022, when it took on the claim to 3AC and issued Genesis a $1.1 billion promissory note in return. It’s clear that nobody at Genesis could refuse the offer — that this was entirely in the control of DCG. Also, the 3AC loan was secured in part by shares of GBTC, as issued by DCG’s Grayscale. Genesis should have declared bankruptcy then.

In addition to the $1.1 billion note, DCG owes Genesis another $575 million, in cash and cryptos. The Genesis bankruptcy is all about shielding DCG from liability.

“This SHOULD be criminal,” Nicholas Weaver said. “You sell a billion dollars worth of unregistered investments (it is called ‘securities fraud’), they go sour, your victims should be able to go after you. But this is all designed to basically be a perfect crime: a billion dollar theft, in plain sight, and with legal protection.” He advises the unsecured creditors’ committee to reject the offer. [Mastodon]

Gemini Earn claims against Genesis are part of the bankruptcy. It’s unlikely the customers will get all their money back in chapter 11. The question is: will Gemini make Earn depositors whole, or will the Winklevosses argue that Earn depositors are creditors of Genesis?

Cameron Winklevoss is still fighting to get Genesis to pay up. He threatened to sue DCG over the bankruptcy: “Unless Barry and DCG come to their senses and make a fair offer to creditors, we will be filing a lawsuit against Barry and DCG imminently.” [Twitter]

As we noted previously, the SEC case against Gemini Earn makes Gemini and Genesis jointly and severally liable to pay back customers in full, should the SEC win or the defendants settle. And Gemini has the funds and isn’t bankrupt. So Cameron really wants DCG to pay.

Who wants to buy CoinDesk?

DCG’s crypto news site CoinDesk is exploring a partial or full sale. CEO Kevin Worth says that CoinDesk has received multiple unsolicited offers of over $200 million. We raised an eyebrow at this claim, but hey. We doubt the offers were in actual cash dollars, though. [WSJ] 

CoinDesk claims it received $50 million in revenue in 2022. It’s unclear where from. Its main income source was events — which are not so huge in the crypto winter. There are a few ads on the site. Staff expansions in the past year, particularly at CoinDesk TV, won’t have been cheap.

CoinDesk has been propped up by DCG since 2016 when Barry Silbert bought the site for $500,000. We understand that CoinDesk was about to go broke when Silbert dived in and rescued it. CoinDesk was still a small crypto blog then, but Silbert took it into the big time just in time for the 2017 bubble.

CoinDesk’s job is to be a PR machine for Silbert’s empire — often quite explicitly. [CoinDesk memo, archive] The only reason to buy CoinDesk would be to make it your PR machine.

3AC and CoinFLEX — a remarkable team

Three Arrows Capital founders Zhu Su and Kyle Davies are looking to raise $25 million for a new crypto claims exchange. That is, an exchange for claims against bankrupt crypto companies. 3AC are, of course, experts in going bankrupt in a really big way.

Zhu and Davies were going to name their new thing GTX — a take on FTX because G comes after F. They claimed this was just a temporary name after everyone made fun of them.

The pair are working alongside CoinFLEX founders Mark Lamb and Sudhu Arumugam. CoinFLEX filed for restructuring in the Seychelles in June after it suffered $84 million in losses from a large individual customer — Roger Ver. 

GTX will run on CoinFLEX’s software and a legal team will oversee the onboarding of claims for all the recent crypto bankruptcies —including Celsius, Voyager, FTX, and Mt. Gox. Creditors who transfer their claims to GTX will receive credit in a token called USDG. [The Block]  

In its pitch deck, GTX estimated there was a $20 billion market for crypto claims, based on the notional value of those claims. “We can dominate the crypto claims market within 2-3 months of go-live.” [WSJ, paywalled; FT, paywalled; pitch deck, archive, PDF]

The pitch deck ends with a splash detailing 3AC and CoinFLEX’s extensive crypto market successes. This fails to mention that both companies went broke — and that 3AC went broke so hard they took out much of crypto all by themselves.

GTX gets full points for audacity, and here’s to Zhu and Davies going to jail.

FTX: Judge says Sullivan & Cromwell can stay

Amy and Molly White live-tweeted the FTX hearing on Friday, January 20. It was about FTX’s applications to retain various bankruptcy professionals, mainly Sullivan & Cromwell. [Twitter; Twitter, Agenda, PDF]

Judge John Dorsey ruled FTX could continue using Sullivan & Cromwell, despite claims the law firm was too conflicted. [Order, PDF; Motion, PDF]

The US Trustee and the UCC had originally objected to S&C on the grounds the firm failed to make relevant disclosures regarding its prior dealings with FTX. But leading up to the hearing, the parties worked things out, and now the UST and UCC are on board. The only remaining objections came from FTX creditor Warren Winter, with a joinder from FTX creditor Richard Brummond. [Objection, PDF; Joinder, PDF]

In support of Winter’s objection, former FTX (and Ultimate Poker!) lawyer Daniel Friedberg filed a hilariously terrible declaration. Friedberg describes how shocked he was to learn that $8 billion of FTX customer money was missing. After reviewing his “ethical obligations” — a bodily organ hitherto unknown to Mr. Friedberg — he resigned. He tries to imply that S&C took FTX into bankruptcy so they could loot the corpse, helped from the inside by S&C’s former law partner, Ryne Miller. [Declaration, PDF]

Because Friedman filed his declaration late, White followed with an emergency motion to adjourn the hearing, so the court would have more time to chew on it. [Motion, PDF]

S&C’s James Bromely said Sam Bankman-Fried was behind all of this troublemaking. Friedberg’s declaration came hot on the heels of social media posts by SBF attacking the law firm. SBF is living in his parent’s home with an ankle bracelet and Friedberg has been questioned by the FBI. The pair were part of the inner circle that brought down FTX, said Bromely:

“If you are Mr. Bankman Fried or Mr. Friedberg, there is a concern about what is going on and what could happen to them. They can’t throw stones at the US attorney’s office. But they can throw stones at the Debtor’s counsel who are providing information to the prosecutors and the regulators, which is exactly what is happening.” 

As far as Friedberg goes, Bromely added: “He’s got a checkered past. It takes a lot of guts for him to put something in writing that says, ‘I was the chief compliance officer at FTX.’”  

Judge Dorsey dismissed everything in the Friedberg declaration saying, “It’s full of hearsay, innuendo, speculation, and rumor… certainly not something I would allow to be introduced into evidence in any event.”

FTX CEO John Jay Ray III said in his declaration S&C are not the villains. The villains are being pursued by criminal authorities. [Ray declaration, PDF]

We concur that S&C may be conflicted. But they’re competent to do the job, they’ve already spent 70 days on the case, which new counsel would have to do over, and it’s not like someone else would be cheaper.

The Trustee also wants to appoint an examiner in the case. The examiner motion will be heard on February 6. 

FTX: mycrimes.blog

A new mycrimes.blog just dropped, with more drafts from Sam’s forthcoming book* If Caroline and CZ and John Ray and Sullivan & Cromwell Did It. SBF claims that FTX US was solvent when he passed it off to the lawyers, Sullivan & Cromwell. John Jay Ray III responds: “This is the problem, he thinks everything is one big honey pot.” [Substack; WSJ]  

FTX secretly channeled a $50 million loan to Deltec Bank in the Bahamas, in a deal struck with Deltec chair Jean Chalopin. “Deltec is emerging as a central figure in the scrum of lawyers, banks and unwitting associates FTX pulled into its orbit.” Our regular readers will recognize Deltec as the known banker for Tether, who have occasionally claimed to hold more dollars for Tether than are documented in the entire Bahamas banking system. [Forbes, paywall]

It was obvious to executives and software developers at FTX that financial arrangements between FTX and Alameda were somewhat odd as early as 2020. FTX employees have been leaking documents to the New York Times. [NYT]

CFTC commissioner Christy Goldsmith Romero gave a speech on FTX’s failure and the nature of public trust in crypto firms. She goes in hard, particularly after the professional gatekeepers: “lawyers, accountants, auditors, compliance professionals and other gatekeepers for crypto firms failed customers in their essential duties.” Venture capitalists and pension funds too. She wants Congress to give the CFTC more power over crypto exchanges. [CFTC]

Romero also went after FTX’s venture capital backers on Bloomberg TV: “What kind of due diligence did they conduct? Why did they turn a blind eye to what should have been really flashing red lights?” [Bloomberg]

* c’mon, you know he will

Bitzlato: Ladies and gentlemen, we got ’em

Everyone heard about the huge Fed announcement of an international cryptocurrency bust and went … who the hell is Bitzlato? Some tiny Hong Kong exchange run by some Russian living in Shenzhen? [Press release; order, PDF; affidavit, PDF]

Bitzlato, formerly called ChangeBot, was a small exchange with a peer-to-peer service, similar to LocalBitcoins. Its user base was Russian crooks doing crooked things with fake accounts. Users with valid Know-Your-Customer info would create “drop” accounts which they would then sell to crooks. So Bitzlato could say it had KYC, even if it didn’t do anything.

Bitzlato was not systemic to the crypto economy. But it was important to the Russia-based ransomware economy, and it was the exchange of choice for users of the Hydra darknet market that was busted in April 2022.

The Feds basically enacted Nicholas Weaver and Bruce Schneier’s 2021 plan to take out ransomware: hit the very few exchanges willing to touch such tainted coins. [Slate, 2021]

The fun part of the FBI affidavit is the tales of Bitzlato’s criminal customer service, page 10 onwards:

•‌ On or about December 27, 2017, a user with the username “Dude Weed” wrote to Bitzlato’s customer service portal, stating: “I have a bitcoin wallet in my account on the Hydra site. I also have a wallet here … How do I recharge a Hydra wallet”? The user also provided transaction details. Based on my training and experience, this query reflects the user’s desire to send funds from Bitzlato to Hydra. A Bitzlato representative responded: “Hello dude weed,” apologized for the delay in the transaction, and stated that “The transaction successfully went online.” The Bitzlato representative provided a link to an online blockchain explorer, reflecting a completed Bitcoin transaction whose total amount was then equivalent to approximately $14,600.

•‌ On December 17, 2020, a Bitzlato representative asked a user to provide his identity documents. The user protested, writing, “I don’t quite understand why you need a photo of this card? It’s not mine[.]” In further conversations, the user clarified that “everyone on the site trades with other people’s cards … they often discuss so-called ‘drops.’” The user commented that he had been told to create an account using credentials supplied by an online cryptocurrency training course that he had found on Instagram. The Bitzlato representative asked the user to provide his true identity documents and, rather than terminate that user, said the user could keep trading on Bitzlato.

Image: Cameron Winklevoss on Instagram

Posted on by Amy Castor 1

Foreign Policy: The Crypto Dominos Are Still Falling

I just wrote my first story for Foreign Policy. [Foreign Policy]

After the highs of 2021, cryptocurrency crashed to the ground in 2022. One by one, multiple large crypto firms toppled, dragging many minor firms down along with them in a small-scale replay of the 2008 financial crisis. 

Now, another large domino, Barry Silbert’s Digital Currency Group, may be about to topple. The crypto conglomerate had managed to survive a remarkably long time with a relatively clean legal record. But on January 19, Genesis, a major part of DCG, filed for bankruptcy. 

The fall of the once-acclaimed DCG could be the final nail in the coffin of crypto’s credibility. It could also lead to a systemic collapse in crypto, as DCG is one of the biggest investors in the space.  

Posted on by Amy Castor 0

Crypto collapse: Bitcoin goes up, Nexo charged, GBTC still wants to be an ETF, crypto exchanges struggle, FTX, Voyager

A new crypto collapse update is out. This one is on David’s blog. [David Gerard]

Here’s what we cover in this episode:

  • Bitcoin is pushing $21,000. Bitcoin generally pumps when there’s bad news coming down the pipes — and there’s been plenty.
  • Nexo founders and two others have been charged in Bulgaria.
  • DCG is still pushing for GBTC to become a two-way ETF. It’s a hopeless pursuit, but they’ll do anything to avoid liquidating their cash cow.
  • The Trustee objects to FTX wanting to retain Sullivan & Cromwell as lead counsel in the bankruptcy. They say S&C haven’t disclosed their full pre-collapse relations with FTX.
  • The judge has given the go-ahead for Voyager to move forward on the Binance US asset purchase agreement. But does Binance really have the funds to make good on its promise? The numbers don’t add up.
  • Crypto exchanges are having a rough time.
Posted on by Amy Castor 0

SEC sues Genesis and Gemini, Genesis owes $3 billion to creditors

  • By Amy Castor and David Gerard

Kids, kids, you’re both ugly

There’s a huge conflict between the Gemini crypto exchange and the Genesis crypto investment firm over the Gemini Earn product — and what happened to the money.

Fortunately, the SEC has stepped in to clear things up — they’re suing both of them! [Press release; Complaint, PDF; Docket]

The charge is that the Gemini Earn program, which offered retail investors up to 8% return on crypto they lent to Genesis, was an unregistered securities offering. This is because it was really obviously an unregistered securities offering.

Genesis had hitherto only dealt with accredited and institutional investors, which is fine. But starting in February 2021, Gemini Earn gave Genesis access to money from ordinary retail investors. Somehow, this didn’t set off the “Howey test” alarms for anyone at either company.

(Coincidentally, February 2021 is when the GBTC premium dried up. Did someone need money quickly?)

The SEC says: “Both Defendants were integral to the operation and success of the Gemini Earn program.”

Retail customers suffered hugely — they are out $900 million — as Gemini froze withdrawals without warning in November, after Three Arrows Capital (3AC) collapsed in July, then FTX collapsed in November. The SEC has actual harm it can point at.

Gemini terminated the Earn program on January 8, when it pulled the plug on its Master Loan Agreement between Genesis and Gemini.

The SEC is getting out there and just busting unregistered crypto securities now that the government and public are onside.

Here’s Gary Gensler, explaining in a video what the SEC just did in very small words. [Twitter, video] 

The SEC complaint

The SEC’s complaint outlines how Gemini Earn worked.

Genesis was founded in 2018. It marketed its services to institutional and accredited investors — and that was more or less fine.

With Gemini Earn, however, Genesis got into soliciting retail investors, via Gemini — and selling to retail requires companies to file paperwork with the SEC and make important financial disclosures, so the public can make an informed decision about what they are investing in. Of course, neither company bothered with that part.

Earn investors agreed they were sending their cryptos to Genesis. Gemini acted as the agent in the offer. In the first three months of 2022, Gemini received about $2.7 million in agent fees from the Gemini Earn program, according to the complaint.

Gemini Earn took in billions of dollars worth of cryptos — mostly from US retail investors. Both companies widely marketed Gemini Earn by promoting its high interest rates.

By November 16, 2022, when Genesis froze withdrawals, it was holding $900 million in Gemini Earn investors’ cryptos, from 340,000 customers, mostly in the US.

The SEC holds that Gemini Earn is an investment contract, per the Howey Test:

  1. Gemini Earn involved the investment of money;
  2. in a common enterprise;
  3. and investors reasonably expected to profit from the efforts of the defendants.

If you want to sell such an offering to retail investors, you have to file the paperwork. Or the SEC can bust you.

Prayer for relief

The SEC asks that the defendants don’t offer unregistered securities ever again, that they be enjoined from offering Gemini Earn and any similar offering in the future, and they disgorge all ill-gotten gains — that includes interest and all profits associated with Earn — and pay civil penalties.

Most SEC suits never go to trial, they just end in a settlement. There is no settlement as yet.

By the way, investors will likely be able to claim the right of rescission — if you buy something that’s found to be an unregistered security, you can just demand all your money back. Section 12(a)(1) of the Securities Act says “Any person who — (1) offers or sells a security in violation of section 5, … shall be liable, subject to subsection (b), to the person purchasing such security from him”

If the SEC prevails, investors will be able to demand their money back from Gemini as well as from Genesis — the SEC considers both companies were offering Gemini Earn, even as their internal agreement said Gemini was just acting as Genesis’ agent. After all, one of these two companies appears to be solvent.

Former SEC chief of Internet Enforcement John Reed Stark tells us:

An SEC victory would take disgorgement and penalties and perhaps deposit it all in a FAIR fund for investors. The sole priority of the SEC staff filing the action will be to give those investors their money back who hold the $900M of Earn that is now worth nothing. Any remedial steps would typically entail hiring a law firm to create and manage a distribution plan, working feverishly towards that goal of helping investors who incurred losses.

That the SEC seeks disgorgement of profits and penalties to make investors whole is good news for Gemini’s Earn investors. Given that Gemini has the assets to satisfy a judgment, there is cause for some optimism, as opposed to other situations involving bankrupt entities where angry customers are more likely stuck last in line as unsecured creditors.

It’s an outrage!

Tyler Winklevoss of Gemini has responded to the SEC’s action: [Twitter]

It’s disappointing that the @SECGov chose to file an action today as @Gemini and other creditors are working hard together to recover funds. This action does nothing to further our efforts and help Earn users get their assets back. Their behavior is totally counterproductive.

Fortunately, there’s a remedy: the suit demands that Gemini and Genesis give everyone’s money back — $900 million — out of their own pockets, which the Winklevosses are entirely capable of doing because they still sit atop a mountain of bitcoins.

Tyler further pleads that “the Earn program was regulated by the NYDFS and we’ve been in discussions with the SEC about the Earn program for more than 17 months.”

That’s great! Were the SEC discussions along the lines of “you really need to register this stuff before we shut you down”? Perhaps Tyler could clarify.

Also, the SEC complaint notes specifically that New York didn’t regulate anything about how Gemini Earn operated. One of the points of the SEC complaint is that there was no other regulator.

The Daily Beast spoke to former Gemini employees about the Earn program. They had boggled at the terms and conditions — deposits were uninsured and crypto was lent out on an unsecured basis, meaning Genesis wasn’t putting up any collateral. “We were like, ‘Holy sh-t, are you f-ing kidding me?’” [Daily Beast]

The SEC had previously gone after BlockFi for failing to register its crypto-lending program, and they stopped Coinbase from launching its crypto-lending program, so they are getting serious about ending this sort of nonsense.

Current unconfirmed rumor: Gemini will get only this SEC charge and will settle with a fine — and disgorgement. But the Department of Justice and the US Attorney’s Office for the Eastern District of New York are coming quickly for Genesis and its parent company Digital Currency Group (DCG). [Twitter, archive]

Genesis is in hock for $3 billion

Genesis owes more than $3 billion to creditors, according to sources who spoke to the Financial Times. DCG is looking for silverware to sell to plug the gap. DCG has a huge venture portfolio it’s looking at dipping into. [FT, archive]

DCG had been trying to raise capital — about $1 billion — after 3AC blew up Genesis’ books. But it couldn’t get any takers. So now DCG’s only option is to try to sell what it’s got. 

DCG’s portfolio includes 200 crypto companies — and most of them are illiquid because crypto is a losing business right now.  

Some direct customers of Genesis — not Gemini Earn customers, but Genesis’ accredited and institutional customers — are claiming that Genesis lied to them to get them to reinvest after they pulled out: [Protos]

He says he was lured back in by reassuring emails from Genesis salespeople and the delivery of monthly balance sheets that seemed to show in late summer and early fall that the firm’s financial position was stable. The creditor now says those financial documents were inaccurate and hid the firm’s growing financial problems.

Media stardom

David went on Blind Spot Markets Live on Friday morning. The transcript is up now. Izabella Kaminska talked to David about FTX, Nexo, Genesis vs. Gemini, and US banking for crypto companies. This episode was sponsored by Big Nocoin, the Federal Reserve, and the Pentagon. [The Blind Spot]

Image: They fired 10% of their staff and went on tour. Instagram.

Posted on by Amy Castor 3

Crypto collapse: DCG’s check kiting comes home to roost, Nexo raided, Voyager sale to Binance progresses, unbanking the banked

We have a new post out. This one is on David’s blog. [David Gerard]

Cameron Winklevoss publishes another open letter — to DCG shareholders. Barry Silbert responds, sort of.

CeFi lending firm Nexo gets raided in Bulgaria. Voyager receives the go-ahead to sell $1 billion in customer assets to Binance US.

SBF is blogging now. He really needs a copy of Dan Lyon’s new book STFU. 

Metropolitan Bank jumps ship — they are out of the crypto business entirely — and Signature Bank is doing just fine.

David’s on Blind Spots Markets Live tomorrow, Friday January 13 at 11 a.m. UTC.  It’s basically a group text chat. He’ll be talking (typing) about the crypto markets trash fire. You need to login  to a website called Coodash. Sign up here. 

Posted on by Amy Castor 0

Crypto collapse: DCG’s problem is Grayscale, FTX Bahamas agreement, DeFi trading arrest, Silvergate Bank, Huobi, Binance

  • By Amy Castor and David Gerard

Oh, what a tangled web we weave, when first we practice to deceive!

— Sir Walter Scott, 1808

DCG: Congratulations, you played yourself

The Department of Justice’s Eastern District of New York and the SEC are looking into money flows between Barry Silbert’s Digital Currency Group and its lending subsidiary Genesis, and what investors were told about the transfers. [Bloomberg]

DCG has been playing all the same games as the rest of crypto — trying to create the illusion of money where there is no money, to keep the party going a little bit longer.

Genesis should have declared insolvency in June when Three Arrows Capital (3AC) blew a $2.4 billion hole in its accounts — but DCG purchased 3AC’s defaulted loan from Genesis and financed the purchase with a promissory note of $1.1 billion, to be paid back over 10 years.

That is: DCG and Genesis counted an internal IOU as money, to claim Genesis was still solvent.

The catch with the promissory note is that if the 10-year loan is “callable” — meaning DCG would have to pay Genesis the full amount immediately in the event of a liquidation or bankruptcy — then it could give Genesis creditors a claim on DCG itself, and take all of DCG down with it.

“The Promissory Note is like a noose wrapped tight around the neck of DCG. If Genesis goes over the cliff, it drags DCG with it,” said Ram Ahluwalia, the co-founder of Lumida, an investment advisory firm that focuses on crypto. [Twitter]

In a letter to shareholders in November, Silbert disclosed that DCG borrowed another $575 million from Genesis — due in May 2023. The funds were used for “investment opportunities” and buying back shares of DCG stock from outside investors. [Twitter]

A creditor committee that includes crypto exchange Gemini presented Genesis and DCG with a plan to recover the assets. Silbert had until January 8 to respond. Cameron Winklevoss threatened that “time is running out.” [Twitter; Twitter]

We think Gemini will try to force Genesis into involuntary chapter 11 — they just need three creditors to file a petition with the bankruptcy court. The judge then holds a hearing and decides if the matter will go through. [11 U.S. Code, section 303]

Gemini Earn, Genesis, GBTC, and 3AC

As is usual in crypto, DCG screwed itself by greed. DCG also owns Grayscale, which operates the Grayscale Bitcoin Trust (GBTC) — DCG’s cash cow. Grayscale collects a whopping 2% annual fee on its assets under management — currently, 633,000 BTC.

GBTC traded above the face value of the bitcoins in the fund up to early 2021 — then it dropped below net asset value (NAV).

Genesis took the crypto it got from Gemini Earn customers and lent those funds out to institutional investors and crypto hedge funds — such as Three Arrows Capital.

3AC was one of the biggest investors in GBTC, taking advantage of a lucrative arbitrage opportunity. They would borrow bitcoins from Genesis and swap those for GBTC shares at NAV from Grayscale. After a six-month lockup, 3AC could dump the shares on retail for a handsome profit. Rinse and repeat, and when GBTC was trading at 20% above NAV, they could make a 40% profit a year that way

This GBTC arb played a big role in keeping the price of bitcoin above water in 2020, setting the stage for the 2021 bitcoin bubble.

At the end of 2020, 3AC was the largest holder of GBTC with a position worth $1 billion at the time. After February 2021, the GBTC premium dried up, and GBTC began trading on secondary markets at a steep discount to NAV. 

3AC had hoped the discount would be reversed when the SEC approved Grayscale converting its bitcoin trust to an ETF. But the SEC rejected the application, and the GBTC discount continued to widen. [Bloomberg]

When 3AC defaulted on its $2.4 billion loan to Genesis, Genesis seized the collateral backing the loan, including 17.4 million shares of GBTC, and filed a $1.1 billion claim against 3AC — a claim that is now on DCG’s books. [Coindesk; Affidavit Russell Crumpler, PDF]

Class action against Gemini Earn

Gemini partnered with Genesis for their Earn program. After Genesis lost $175 million in FTX in November, it froze withdrawals. Gemini Earn froze withdrawals in turn. Now Gemini Earn customers are out $900 million.

In an effort to get those funds back, three Gemini Earn customers are seeking class arbitration against Genesis and DCG.  

Gemini and Genesis had a “master digital asset loan agreement,” which Gemini Earn customers entered into — when you became an Earn customer, you agreed you were lending money to Genesis.

The complaint alleges that Genesis breached this agreement by hiding its insolvency through a “sham transaction,” whereby DCG “bought” the right to collect a $2.3 billion debt owed to Genesis by 3AC with the aforementioned $1.1 billion promissory note. The plaintiffs also claim that the Genesis loan agreement created an unregistered sale of securities. [Press release; Complaint, PDF; Master Digital Asset Loan Agreement]

The master loan agreement states that: “Each Party represents and warrants that it is not insolvent and is not subject to any bankruptcy or insolvency proceedings under any applicable laws.”

This is why Silbert keeps insisting that Genesis has a liquidity issue and not a solvency issue — even as those are functionally identical in crypto. If Genesis was found to be insolvent and took customer funds in, it would be in violation of that contract. (As well as promptly calling that promissory note from DCG.)

Amidst all of this, Larry Summers, the former US Treasury Secretary and World Bank Chief Economist, has quietly left DCG — going so far as to remove all mention of DCG from his own website. Summers joined DCG as a senior advisor in 2016, a year after the company’s founding. [Protos]

Silvergate Bank

Moody’s has downgraded Silvergate Bank’s long-term deposit rating to Ba1 from Baa2 after the crypto bank announced that its customers — who are almost entirely crypto firms now — withdrew $8 billion in deposits in Q4 2022: [Moody’s] 

The negative outlook reflects Moody’s view that the bank’s profitability over the near term will be weak along with the risk of further declines in deposits from crypto currency centric firms further pressuring profitability. In addition, the negative outlook reflects the increasing regulatory and legal risks that the firm is currently facing.

Silvergate’s other customers are worried about the bank’s solvency and about the regulatory heat coming its way. Silvergate was key to FTX/Alameda having access to actual money — they helped funnel money to FTX from accounts in the name of Alameda and of Alameda’s dubious subsidiary, North Dimensions. 

If Silvergate are found to be complicit in FTX’s fraud, they will be fined. But if there was money laundering and sanctions busting, they could be shut down. They will at the very least be fined. We would guess some individuals will also get a bar from being bankers. Here’s a list of enforcement actions on Federal Reserve member banks. [Federal Reserve]

Silvergate’s 8-K SEC filings this year are full of bad news. We noted Silvergate’s layoffs and writing off its Diem investment last time. [SEC 8-K; SEC 8-K; SEC 10-Q]

FTX

After a series of knock-down-drag-out filings — and the hilarious revelations of how FTX Digital Markets (FTX DM) was functionally Sam Bankman-Fried’s Bahamas partying fund — the US and Bahamas bankruptcies are working together now. John Jay Ray III and his team met in Miami with the joint provisional liquidators (JPLs) handling the FTX DM liquidation, and they’ve reached an agreement. [press release; agreement, PDF]

The Bahamas JPLs will handle everything to do with FTX DM, and the US administrators will handle everything to do with all the other FTX companies. The JPLs will handle the Bahamas real estate and the cryptos being held by the Securities Commission of the Bahamas. (This doesn’t mean that the Bahamas will handle the disbursement of the crypto they have under their control — only that FTX is fine with them holding the funds for now.) The parties will share information. FTX DM’s chapter 15 foreign entity bankruptcy in the SDNY will continue.

We suspect it was clear the US side would win in court, and the Bahamas liquidators realized they weren’t being paid enough to damage their reputations this way. The agreement is subject to approval by the courts in the US and the Bahamas, but it would be surprising for them not to allow it.

The Department of Justice has put out a call for victims of “Samuel Bankman-Fried, a/k/a ‘SBF.’” That’s his rapper name now. [Justice]  

Huobi’s real-time meltdown

Huobi has always been a dodgy crypto exchange — even before it was run by Justin Sun from Tron. Huobi has $2.6 billion in reserves, and 40% of that is its own HT token. If you don’t count its own internal supermarket loyalty card points, Huobi is insolvent. [Twitter]

Huobi is desperately searching its pockets for spare change. On December 30, Wu Blockchain reported that Huobi was canceling year-end bonuses and planning to slash half its staff of 1,200 people and cut the salaries of senior employees. Sun denied the rumors. [Twitter; South China Morning Post; Twitter] 

Other unofficial reports from small accounts on Twitter said that Huobi was offering to pay its employees in stablecoins — USDC and tethers — instead of actual-money yuan. If they objected, they would lose their jobs. [Twitter] 

Employees revolted at being paid in magic beans — so Sun cut off internal communications. On January 4, Bitrun said that “all communication and feedback channels with employees” had been blocked. [Twitter] 

Here’s the unofficial details on how Huobi is treating its employees. Those who quit because they’re getting paid in tethers get no severance pay either. This is what a doomed company does. [Twitter]  

After initially denying Huobi was cutting staff, Sun finally admitted that Huobi was indeed laying off 20% of its employees in the first quarter of 2023 — after rumors swirled that half of all employees would be let go. [FT]

Huobi users rushed to get their funds off of the exchange. Blockchain analytics platform Nansen noted a wave of withdrawals on January 5 and 6. Following the withdrawals, Peckshield reported a wallet associated with Tron moved $100 million in stablecoins — USDC and tethers — into Huobi. [Twitter, Twitter]

In a lengthy Twitter thread, Sun assures you that your funds are totally safe. We fully expect the exchange to blow up at any moment. [Twitter]

Binance

US prosecutors for the Western District of Washington in Seattle are sending subpoenas to hedge funds for records of their dealings with Binance. John Ghose, formerly a Justice Department prosecutor who specialized in crypto and now a lawyer at compliance vendor VeraSafe, thinks this is about money laundering. [Washington Post]

We noted previously that “BUSD” on Binance is not the BUSD issued by Paxos, which claims to be backed by actual dollars in Silvergate Bank. Binance “BUSD” is a stablecoin-of-a stablecoin, maintained internally. This is the sort of arrangement that’s fine until it isn’t.

It turns out that Binance has been issuing uncollateralised “BUSD” on its own BNB blockchain. Data Finnovation looked at the Ethereum and BNB blockchains and saw that Binance has a history of minting fake “BUSD” internally on BNB. At some points in 2021, there were $500 million to $1 billion of fake dollars circulating on BNB. They’re caught up now, though — so that’s all fine, right? [Medium]

Dirty Bubble thinks Binance US isn’t meaningfully separate from Binance.com, if you look at how the cryptos flow. But that shouldn’t be news to anyone here. [Dirty Bubble]

Reuters is still on the Binance beat. Here’s a special report on Binance’s accounts, as far as can be told. Reuters calls Binance’s books a “black box.” Private companies don’t have to disclose their financials, especially if they’re operating outside all effective regulation — but even Binance’s former CFO, Wei Zhou, didn’t have full access to the company’s accounting records in the three years he was there. We’ve noted previously how regulators have a heck of a time getting the most basic information out of Binance. [Reuters] 

John Hyatt from Forbes notes how Binance is spending tens or hundreds of thousands of dollars sponsoring Politico’s Playbook newsletter to reach politicians and bureaucrats. Worked great for FTX! [Twitter thread]

DeFi: Go directly to jail

Discussions of crime on the blockchain hardly ever point out that almost all of what goes on in DeFi was always just straight-up illegal under US law.

Pretty much every token was always an unregistered security. The sort of market manipulations that are standard practice in the DeFi trash fire have been illegal under Dodd-Frank since 2010. And that’s before we get to the rugpulls, hacks, and “hacks.”

The authorities are finally moving in. Every DeFi trader should consider themselves on notice.

Hotshot DeFi trader Avraham “Avi” Eisenberg was arrested in Puerto Rico on December 27 on a Department of Justice (Southern District of New York) indictment for commodities fraud and commodities manipulation in the $110 million trade that took out Mango Markets. [indictment, PDF; case docket]

Mango Markets is a decentralized exchange that runs on Solana. Users can lend, borrow, swap, and trade on margin. The exchange is overseen by a DAO, made up of people who hold MNGO — the native token of the exchange.

On October 11, someone drained the project of $110 million by manipulating the platform’s price oracle. After others had traced it to him, Avi Eisenberg came forward and explained the trade.

Eisenberg sold MNGO perpetual futures from one account he controlled to another account also under his control. He then bought large amounts of MNGO, which had the effect of increasing the value of his large holding of MNGO perpetuals. He then borrowed against these holdings and withdrew $110 million in assorted cryptocurrencies. 

This also rendered the Mango platform insolvent. Eisenberg himself explained that the insurance fund in place was “insufficient to cover all liquidations.” He gave back some of his trading profits. [Twitter; Bloomberg]

Eisenberg tweeted: [Twitter, archive]

I believe all of our actions were legal open market actions, using the protocol as designed, even if the development team did not fully anticipate all the consequences of setting parameters the way they are.

Eisenberg’s lawyer will likely explain his client’s erroneous legal reasoning to him.

Eisenberg wasn’t just arrested, he was denied bail as a flight risk — he has significant ties outside the US, he already left the US for two months just after the alleged offense, he likely has crypto stashed away somewhere, the charge carries a heavy penalty, and his background could not be checked. (Compare Sam Bankman-Fried’s release on bail.) [Order of detention pending trial, PDF]

It’s not clear why prosecutors went after Eisenberg in particular. We’d guess the CFTC and DoJ were looking for someone to make an example of. The bit where Eisenberg tweeted a complete confession probably helped, much as SBF’s confession tour of the press helped get him indicted.

What Eisenberg did to Mango was not remarkable at all. DeFi traders pull this nonsense all the time. Perhaps you don’t think DeFi trading shenanigans should be crimes, and that’s nice for you that you think that.

As Avi tweeted on October 19: “What are you gonna do, arrest me?” [Twitter, archive]

Posted on by Amy Castor 1

Crypto collapse: Gemini vs DCG, New York charges Mashinsky in Celsius, Voyager sale troubles, Silvergate troubles, Wintermute

Barely a week into 2023, and we’ve already got another post for you. This one is on David’s blog. [David Gerard]

We’ve reached the stage in the crypto collapse where everyone is pointing at someone else. Gemini is pointing at Genesis and DCG. Three Arrows Capital is also pointing at DCG. 

Also in this update:

  • Teneo finally served Zhu and Davies via Twitter and email.
  • FTX’s lawyer Daniel Friedberg flips on SBF. 
  • The NY AG is suing Mashinsky for Celsius.
  • Voyager wants to accept a bid from Binance US, but everybody still hates Binance. 
  • Silvergate Bank is doing just great. 
  • Wintermute, the new FTX standing.

Image: We’re all trying to find the guy who did this, but in stereo.

Posted on by Amy Castor 0

FTX Bahamas vs. John Jay Ray, Bankman-Fried pleads not guilty, DoJ seizes FTX assets

  • By Amy Castor and David Gerard

i wonder how many times someone’s managed to hack in to a bitcoin exchange and found there wasn’t any money there and just left

— Boxturret, SomethingAwful

FTX vs the Bahamas

There’s a turf war going on between the FTX Digital Markets (FTX DM) liquidation in the Bahamas and the FTX Trading Ltd bankruptcy proceedings in the U.S. We wrote about it earlier, along with some of the fishy stuff going on in the Bahamas.  

The Securities Commission of the Bahamas (SCB) filed their liquidation for FTX DM, a small subsidiary of FTX Trading, just one day before John Jay Ray III filed for Chapter 11 on behalf of FTX. Sam Bankman-Fried helped the SCB get in before Ray by waiting until the wee hours of November 11 to hand control over to Ray. Now the SCB feels it is entitled to FTX assets so that the liquidators can distribute them to creditors of FTX DM — whoever those might eventually turn out to be. [PwC]

The Bahamas side seems to be working on the theory that FTX DM was the operating center of the FTX companies. But FTX DM wasn’t even incorporated until July 22, 2021. It lay dormant for nearly a year and didn’t start operating in any manner until May 13, 2022. Note that’s a few days after the Terra-Luna collapse — FTX and Alameda were already utterly screwed by the time FTX DM was used for anything, suggesting that that may have been part of SBF’s reason to activate it.

The SCB pissed off Ray even further when, on December 29, they valued the FTX funds they seized late in the night on November 11 — in violation of the Chapter 11 stay — at $3.5 billion. This is mostly a pile of FTT tokens, whose market value is way less than $3.5 billion. FTX says the assets were worth just $296 million — “assuming the entire amount of FTT could be sold at spot prices at the time.” [SCB press release, PDF; FTX press release]

Christina Rolle, SCB executive director, said the Commission sought control of the crypto held by FTX after SBF and FTX cofounder Gary Wang told them about “hacking attempts overnight” — a perfect justification to seize the assets. Her affidavit, filed with the Supreme Court of the Bahamas, confirmed that SBF and Wang were behind the transfers on November 11 and 12. [Affidavit of Christina R. Rolle, PDF]

U.S. Federal prosecutors are looking into the $370 million hack — or “hack.” [Bloomberg]

Rolle also said that Tether gave the SCB 46 million tethers (USDT). SCB had asked Tether to freeze some USDT held by FTX DM or FTX Trading Ltd (it’s not clear which entity), then create 46 million fresh USDT and send it to SCB: 

76. Additionally, the Commission sent instructions for the transfer of approximately US $46 million Tether tokens to a secured wallet under the control of the Commission. These Tether tokens were not transferred to the Commission’s wallet but, after a meeting with Tether representatives, the Commission agreed that Tether, in light of the Chapter 11 proceedings, would maintain a freeze over the Tether tokens until ownership of the tokens is resolved.

This sounded odd to us — a “meeting with Tether representatives”? Coincidentally, the Bahamas Attorney General, Ryan Pinder, used to work for Deltec Bank, the bank associated with Tether.

The SCB then put out a press release on January 3 accusing Ray of “material misstatements” and having a “cavalier attitude to the truth.” They claim Ray is “promoting mistrust of public institutions in the Bahamas.” Well, yes, he is. [LinkedIn]

The joint provisional liquidators (JPLs) handling the FTX DM liquidation in the Bahamas have been pushing for access to substantial amounts of FTX data. Ray and his lawyers are working to make sure that never happens. Ray’s team has submitted piles of evidence pointing to the Bahamas government acting in bad faith.

FTX has filed an incendiary objection to the JPLs’ motion to compel the turnover of electronic records. This is a 37-page must-read rant: [FTX objection, PDF]

10. Finally, the stunning press release issued late yesterday, on December 29, 2022, by the Commission, along with certain related materials, is a game changer. The press release (and the supporting affidavit of the Executive Director of the Commission) boldly admits that the Commission violated the automatic stay in taking certain of the Debtors’ digital assets and then recklessly values the assets taken at $3.5 billion. As described in more detail below, yesterday’s disclosures demonstrate conclusively that the JPLs and the Commission are cooperating closely to do an end run around this Court and chapter 11. In a situation where maximizing recoveries for creditors should be the primary goal of all concerned, one can only wonder why.

We expect Ray isn’t wondering at all. He believes that “an elaborate and intentional game is being played” by the JPLs, the SCB, and the Bahamas government. As FTX says in their objection: “The fact that the founders left the Debtors more closely resembling a crime scene than an operating business cannot be ignored.”

FTX lawyer James Bromely filed a 675-page declaration, presenting exhibits to support their case. FTX financial advisor Edgar Mosley at Alvarez & Marsal also filed a 185-page declaration loaded with exhibits. [Bromely declaration, PDF; Mosley declaration, PDF]

The Mosley declaration details what business FTX Digital Markets actually did. FTX DM seems to have been Sam’s local partying fund:

17. The Debtors’ records reflect that $15.4 million for “Hotels & Accommodation” was paid primarily to three hotels in The Bahamas: the Albany ($5.8 million), the Grand Hyatt ($3.6 million), and the Rosewood ($807,000). The $6.9 million for “Meals & Entertainment” was paid primarily to Hyatt Services Caribbean ($1.4 million), Six Stars Catering ($974,000), and to three other catering and delivery services ($2.3 million in total).

18. The Debtors’ records reflect that in the first three quarters of 2022, FTX DM had total operating expenses of approximately $73 million, including over $40 million labeled “other expenses.”

19. The Debtors’ records reflect that FTX DM’s 2022 income statements show that FTX DM made no disbursements in connection with transaction, engineering or product expenses.

The newly formed Unsecured Creditors’ Committee in the U.S. chapter 11 also objects to the Bahamas motion. “These requests are sweeping and appear to be based on the faulty theory advanced by the JPLs that FTX DM was actually the nerve center of the FTX enterprise.” [Committee objection, PDF]

Just seizing some assets, don’t mind us

There was a scheduling conference in the Delaware FTX bankruptcy hearing on January 4. This wasn’t expected to be interesting — but Department of Justice Attorney Seth Shapiro made a surprise appearance over Zoom to let Judge Michael Dorsey know that the DoJ has been seizing assets.

SBF held a 7.6% stake in day trading brokerage Robinhood. He admitted to borrowing from Alameda in April and May to purchase the shares, in an Antigua court affidavit shortly before his arrest. [CoinDesk; affidavit, PDF]

SBF pledged the Robinhood shares to multiple companies as loan collateral. Who was getting the shares in the bankruptcy was a point of some contention. Now the DoJ has seized the shares.

Various bank accounts connected to the FTX Digital Markets (Bahamas) case and the JPLs motions for provisional relief, and the money in them, have also been seized. “We didn’t just want the court to read that in the papers filed by Silvergate and Moonstone” (FTX’s banks), said Shapiro. The DoJ also seized some cryptocurrency, though Shapiro didn’t say who from — the banks? The DoJ is working things out with the parties.

Shapiro told Judge Dorsey that the bank accounts had been seized with a view to “a criminal or asset forfeiture proceeding at some point down the line, in the Southern District of New York, to which entities could file claims.”

Shapiro said: “We either believe that these assets are not the property of the bankruptcy estate or that they fall within the exceptions under sections 362(b)(1) and/or (b)(4) of the bankruptcy code.” 362(b) is about criminal proceedings. [LII]

The Bahamas JPLs, who were also hoping for the contents of these bank accounts, are in touch with the DoJ.

Sam did nothing* wrong

Sam Bankman-Fried stood before U.S. District Judge Lewis A. Kaplan on January 3 and pleaded not guilty to all eight counts against him. SBF actually flew to New York for his arraignment and had to squeeze through a mob of reporters to enter the courthouse. The judge set a tentative trial date of October 2. [Twitter; Twitter thread; NYT]

Sam thinks he’s too smart, rich, and pretty to go to jail. He just needs to explain things properly to the people in charge, and it’ll all be fine. 

SBF’s not-guilty plea doesn’t necessarily mean a trial will happen. SBF and his lawyer Mark Cohen are likely just buying time so they can negotiate a better deal with the prosecutors. We very much doubt the case will go to trial, or that Sam’s parents would be able to foot the legal bill if it did.

More funds mysteriously moved out of Alameda wallets on December 27, mainly illiquid altcoins being swapped for ETH and BTC. Over $1 million in funds were sent through crypto mixers, according to crypto intelligence firm Arkham. [Twitter; Decrypt]

This isn’t the work of a liquidator. Sam says it wasn’t him, even though Sam, FTX co-founder Gary Wang, and FTX director of engineering Nishad Singh were the only ones who had access to the keys. Reddit user Settless notes that SBF had previously claimed to own these addresses: “The pattern is similar — the wallet receives funds and swaps them via no-KYC exchange to launder the funds.” [Twitter; Reddit]

The U.S. isn’t happy about this movement of crypto. During SBF’s arraignment in Manhattan, the prosecutors asked the court to add a new condition to the bond: that Sam be prohibited from accessing or transferring any FTX or Alameda assets. Judge Kaplan agreed. 

Molly Crane-Newman from the NY Daily News said: “SBF became animated when prosecutors successfully requested that the judge prohibit him from accessing or transferring FTX assets — furiously writing notes to his attorneys on a legal pad and pointing to them with a biro.” [Twitter]

The judge also agreed to the redaction of names and addresses of Sam’s two additional bail signers — who he may not have actually found yet. The press has until January 12 to file any objections to this. Matthew Russell Lee of Inner City Press has already filed an application to unseal the names. [Motion, PDF; Twitter; Application to Unseal]

Two of SBF’s associates, Caroline Ellison and Gary Wang, have already pleaded guilty in the hopes of getting a lesser sentence. John Reed Stark ordered and posted their plea agreements and hearing transcripts. [LinkedIn; Ellison plea, PDF; Ellison agreement, PDF; Wang plea, PDF; Wang agreement, PDF]

* except all the things he may possibly, hypothetically, have done wrong

Other perfectly normal happenings in FTX

North Dimension, the company that FTX customers were unknowingly sending their actual U.S. dollars to, was a fake online electronics retailer. North Dimension has two accounts at Silvergate Bank. [archived website; NBC News]

The assorted shenanigans with FTX likely explain why Silvergate Bank (NASDAQ: SI) has 54% of its shares sold short. Smart investors know how this will end. [Fintel]

John Reed Stark discusses FTX investors getting hosed on CNBC Squawkbox. [YouTube]

“Beyond Blame: The philosophy of personal responsibility has ruined criminal justice and economic policy. It’s time to move past blame” — by Barbara H. Fried. Now, you might say that if Sam’s circumstances are to blame for his apparent crimes, then Barbara happens to be one of those circumstances. [Boston Review, 2013]

Someone made an NFT with actual artistic value. We’ve used it as the feature image for this article. [OpenSea]

Posted on by Amy Castor 0

Your 100%* reliable guide to the future of crypto in 2023!

It’s time to look into our crystal ball! David Gerard and I wrote up a prediction piece. This one is over on David’s blog. [David Gerard]

With all these gutted crypto buyers, there are plenty of convenient entrails for divination just lying around. So it’s time to channel our inner Maren Altman and see what the blockchain tells us will happen in 2023!

Our 2022 predictions were right about almost everything — except when we underestimated the power of human stupidity.

* within acceptable margins of error

Posted on by Amy Castor 0