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

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

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

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

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

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

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

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

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

BTC keeps falling

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

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

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

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

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

Another exchange hack

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

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

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

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

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

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

Everybody still despises Binance.

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

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

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

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

Regulations

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

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

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

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

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

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

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

Bitcoin miners running out of places to go

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

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

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

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

NFTs and more NFTs

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Other interesting bits

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

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

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

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

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

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

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

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

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

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

Cryptocurrency is a giant Ponzi scheme. (Jacobin

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

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

If you like my work, consider supporting my writing by subscribing to my Patreon account for as little as $5 a month. If you are feeling generous, you can always subscribe for more.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Day trading is hard

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

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

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

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

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

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

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

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

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

NFTs collectors, the IRS wants your money

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

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

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

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

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

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

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

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

CZ wants to give it all away

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

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

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

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

Elsewhere in the news

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Kazakhstan switched off the Internet

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

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

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

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

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

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

Volcano bonds

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

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

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

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

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

Binance up to its old tricks 

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

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

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

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

Binance blamed its actions on a “miscommunication.”  

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Six-hour rug pull

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

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

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

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

Matt Damon is making everyone ill

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

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

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

Tim Draper still supports Elizabeth Holmes

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

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

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

Also in the news

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Changing tides

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

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

Stablecoins

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

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

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

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

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

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

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

NFTs — another regulatory loophole to be closed

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

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

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

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

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

I’m back! And I’m blogging again. If you like my work, please consider supporting my writing by subscribing to my Patreon account for as little as $5 a month. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cotten and Robertson lived together starting in May 2015. They already had their pet name, calling each other “Booboo.” Up until that time, she made her living mainly as a bartender and waiting tables.  

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

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

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

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

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

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

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

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

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

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

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

It is also a wonder that Robertson, who talks at length about her curiosity for the world, had no curiosity whatsoever about Cotten’s business or the piles of cash coming in and going out of their home. At one point, she describes delivering an envelope of cash to one of Quadriga’s customers herself. 

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

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

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

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

She mourned dead Gerry by writing to him: “Oh, sweetheart, I only now understand just how much stress you were under . . . I am so sorry. This must have been awful for you.” It’s a shame she never wrote any such heartfelt letters to Quadriga customers. At least one of whom lost his entire life savings.

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

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

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

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

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

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

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

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

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

Here’s what happened in the past week. 

Another crypto hearing

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

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

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

Craig Wright loses $100 million

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

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

Kickstarter goes blockchain

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

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

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

Neo-Nazis win big on bitcoin

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

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

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

Gerald Cotten’s widow wrote a book

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

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

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

AWS outage

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

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

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

WhatsApp enables Novi

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

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

A few other things . . .

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

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

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

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

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

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

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

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

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

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

History of Polo

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

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

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

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

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

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

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

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

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

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

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

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

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

Big plans

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

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

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

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

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

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

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

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

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

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

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

Enough is enough

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

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

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

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

Fluffy Pony and the irresistible cookie jar

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Spagni’s defense team

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

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

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

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

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

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

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

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

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

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

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

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

Special circumstances

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

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

They continue:

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

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

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

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

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

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

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

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

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

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

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

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

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

If you are not signed up for my blog already, sign up! To do this, click the three little lines on the top left of my website, scroll down and enter your email. This way, you’ll be sure to get all my blog posts hot off the press. 

If you want to contribute to my work, please subscribe to my Patreon. I’ve got 86 wonderful patrons at the moment for a total of $866 a month. It’s not a living (yet), but it pays for the extras. I’d love to get that over $1,000 soon!

Regulation

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

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

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

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

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

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

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

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

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

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

Tether’s criminal probe

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

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

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

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

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

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

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

Naturally, Bosa asked them about their commercial paper. 

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

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

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

Circle releases a new attestation

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

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

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

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

Binance loses another wheel

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

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

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

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

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

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

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

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

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

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

A world of hell for BlockFi

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

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

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

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

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

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

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

Virgil Griffith taken into custody

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

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

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

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

Other newsworthy bits

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But nowhere in its post did Tether deny the claims. 

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

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

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

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

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

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

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

Banking history

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

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

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

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

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

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

Crypto Capital

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

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

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

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

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

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

Tether stops printing

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

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

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

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

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

The DOJ and Tether

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

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

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

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

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

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

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

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

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

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

My Patreon account saw seven new subscribers this month, so far. Thank you! Your support is a big deal. It helps me keep doing what I’m doing.

If you like my writing enough to buy me a cup of coffee now and then, you can sponsor this blog for $5 a month — or $20, $50, or $100 a month, if you want to help out with more than just coffee. Every little bit makes a difference.

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

Regulations 

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

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

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

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

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

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

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

El Salvador and bitcoin

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Circle’s sly plan to go public

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

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

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

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

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

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

Here’s the text:

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

Binance CEO: This is fine. Everything is fine

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

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

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

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

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

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

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

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

Tether printer still on pause

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

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

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

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

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

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

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

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

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

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

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

Other newsworthy stuff

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A short-lived bad idea

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

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

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

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

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

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

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

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

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

FTX and Bittrex

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

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

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

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

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

Binance Brazil director resigns

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

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

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

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

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

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

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

~ Eagles

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

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

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

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

“Clear Junction can confirm that it will no longer be facilitating payments related to Binance. The decision has been made following the Financial Conduct Authority’s recent announcement that Binance is not permitted to undertake any regulated activity in the UK. 

We have decided to suspend both GBP and EUR payments and will no longer be facilitating deposits or withdrawals in favor of or on behalf of the crypto trading platform. Clear Junction acts in full compliance with FCA regulations and guidance in regards to handling payments of Binance.” 

The Financial Conduct Authority, or FCA, ruled on June 26 that Binance cannot conduct any “regulated activity” in the UK. Binance downplayed the ruling at the time, telling everyone the FCA notice related to Binance Markets Ltd and had “no direct impact on the services provided on Binance.com.”

Binance waited a day after learning it was cut off by Clear Junction before emailing its customers and telling them that the suspension of payments was temporary. 

“We are working to resume this service as soon as we can,” Binance said. It reassured customers they can still buy crypto with British Pounds via credit and debit cards on the platform.   

This is the second time in recent weeks that Binance customers have been frozen out of Faster Payments. They were also frozen out at the end of June. A few days later, the service was restored — presumably when Binance started putting payments through Clear Junction.

I am guessing that Clear Bank’s banking partners warned them that Binance was too risky and that if they wanted to maintain their banking relationships, they’d better drop them as a customer asap, so they did. 

Binance talks like all of these issues are temporary snafus that it’s going to fix in due time. In fact, the exchange’s struggle to secure banking in many parts of the world is likely to intensify. 

Despite numerous claims in the past about taking its legal obligations seriously, Binance has been loosey-goosey with its anti-money laundering and know-your-customer rules, opening up loopholes for dirty money to flow through the exchange. Now that the word is out, no bank is going to want to touch them. 

Other developments

I wrote about Binance’s global pariah status earlier this month. Since I published that story, UK high-street banks have moved to ban Binance, all following the FCA ban.

On July 5, Barclays said it is blocking its customers from using their debit and credit cards to make payments to Binance “to help keep your money safe.” Barclays customers can still withdraw funds from the exchange, however. (Since Clear Junction cut Binance off, credit cards remain the only means for UK customers to get fiat off the exchange at this point.)

Two days later, Binance told its users that it will temporarily disable deposits via Single Euro Payments Area (SEPA) bank transfers — the most used wire method in the EU. Binance blamed the move on “events beyond our control” and indicated users could still make withdrawals via SEPA.

On July 8, Santander, another high-street bank, told its customers it was also stopping payments to Binance.

“In recent months we have seen a large increase in UK customers becoming the victims of cryptocurrency fraud. Keeping our customers safe is a top priority, so we have decided to prevent payments to Binance following the FCA’s warning to consumers,” Santander UK’s support page tweeted.

As I detailed in my earlier story, regulators around the world have been putting out warnings about Binance. Poland doesn’t regulate crypto markets, but the Polish Financial Supervisory Authority also issued a caution about the exchange. Its notice included links to all the other regulatory responses.

Amidst the firestorm, Binance has been whistling Dixie. On July 6, the exchange sent a letter to its customers, saying “compliance is a journey” and drawing odd parallels between developments in crypto and the introduction of the automobile. 

“When the car was first invented, there weren’t any traffic laws, traffic lights or even safety belts,” said Binance. “Laws and guidelines were developed along the way as the cars were running on the road.” 

Frozen funds, lawsuits, and other red flags

There’s a lot of unhappy people on r/BinanceUS right now complaining their withdrawals are frozen or suspended — and they can’t seem to get a response from customer support either.

Binance.US is a subsidiary of Binance Holdings Ltd. Unlike its parent company, Binance.US, does not allow highly leveraged crypto-derivatives trading, which is regulated in the US.

A quick look at the subreddit’s weekly support thread reveals even more troubling posts about lost access to funds. 

This mirrors Gizmodo’s recent findings. The media outlet submitted a Freedom of Information Act request with the Federal Trade Commission asking for any customer issues filed with the FTC about Binance. The agency located 760 complaints filed since June of 2020 — presumably mainly from Binance.US customers.  

In an article titled “32 Angry Complaints to the FTC About Binance,” Gizmodo uncovered some startling patterns. “The first, and arguably most alarming pattern, appears to be people who put large amounts of money into Binance but say they can’t get their money out.”

Also, Binance is known for having “maintenance issues” during periods of heavy market volatility. As a result, margin traders, unable to exit their positions, are left to watch in horror while the exchange seizes their margin collateral and liquidates their holdings.  

Hundreds of traders around the world are now working with a lawyer in France to recoup their losses. In a recent front-page piece, the Wall Street Journal said it suspected that the collective complaints may be the reason why Binance has received continuous warnings from many countries.

If you still have funds on Binance, I would urge you to get them off the exchange now — while you still can. When hoards of people start complaining about lost and frozen funds, it’s usually a sign of liquidity problems.  

We saw a similar pattern leading up to February 2014 when Tokyo Bitcoin exchange Mt Gox bit the dust. And also just before Canadian crypto exchange QuadrigaCX went belly up in early 2019. In both instances, users of those defunct exchanges are still waiting to recoup a portion of their lost funds. Bankruptcy cases take a long, long time, and you are lucky to get back pennies on the dollar. 

Finally, where is Catherine Coley?

In another bizarre development, folks on Twitter are wondering what happened to Catherine Coley, the previous CEO of Binance.US. She stepped down in May when Brian Brooks, the former Acting Comptroller of the Currency, took over. Nobody has heard from her since. Where did she disappear off to?  

Coley’s last tweet was on April 19. And both her LinkedIn Profile and Twitter account indicate she is still the CEO of Binance.US. 

She hasn’t been in any interviews or podcasts. She doesn’t respond to DMs, and there are no reports of anyone being able to contact her. 

A Forbes article from last year says that Binance.US may have been set up as a smokescreen — the “Tai Chi entity” — to divert US regulators from looking too closely at Binance, the parent company. 

Binance.US maintains that it is a separate entity. However, Forbes 40 under 40 reported that Coley was “chosen” by CZ, the CEO of Binance, which suggests that Binance is more involved with Binance.US than it claims. 

Has CZ told her to stop talking? What does she know? Catherine, if you are reading this, send us a message!

(Updated July 13 to clarify that Barclays still allows customers to withdraw funds via credit card and to note that Binance.US is the Tai Chi entity.)

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

What’s backing Circle’s 25B USDC? We may never know

Jeremy Allaire is taking his Boston-based company Circle public via a SPAC. Circle is best known for its stablecoin USDC, which now has a market cap of $25.5 billion. 

In all his press interviews talking up the future potential of stablecoins — “Circle sits at the center of the next major transformation that the internet is bringing to the world,” he said in an investor website video  — there is one question Allaire consistently avoids giving a straight answer to: 

What is backing USDC? 

Based on his current scheme to take his company public, he may not have to come up with an answer anytime soon. 

What’s a SPAC?

SPAC stands for special acquisition company. 

Otherwise known as a “blank check” company, a SPAC is basically a shell set up by investors with the sole purpose of raising money through an initial public offering to eventually acquire another company  — “a company for carrying on an undertaking of great advantage, but nobody to know what it is.”*

Going public through an IPO is a rigorous process. It requires you to file a Form S-1 with the US Securities and Exchange Commission. An S-1 is a full-body exam, a cavity search, where you lay out all of the material weaknesses of your company. There is really nowhere to hide in an S-1. 

When you take your company public through a SPAC, however, the SPAC goes through the IPO process — not the company it ends up buying. And since a SPAC is just a room full of investment banks and private equity dudes, its S-1 is simple and straightforward. A SPAC has no skeletons in the closet. 

Once the SPAC submits its S-1 and raises money via an IPO, it goes out and finds a private company to buy and then merges with the company. In the merger, the private company gets the money and the SPAC holders get shares in the new combined entity.

The merging process requires considerably less due diligence than a traditional IPO, which is why the space is full of frauds and get-rich-quick schemes. Not all SPACs are frauds, of course, but it’s a clever way to lever up and then sell the debt to the public via shares. 

Because many of the companies taken public this way have little to show in terms of a business plan, SPACs have resulted in a slew of shareholder lawsuits. The most glaring example is electric truck startup Nikola. Three months after the company went public with a $3.3 billion valuation via a SPAC, short-seller Hindenburg Research revealed it was an intricate fraud. (The truck was rolling downhill!) Nikola’s stock collapsed, its CEO ended up stepping down, and a series of class actions followed.

“SPACs are oven-ready deals you should leave on the shelf,” an FT headline read in December. Then-SEC Chairman Jay Clayton voiced similar concerns last year. 

“I’m still keeping my mind open to the fact that there could be a good SPAC out there,” Hindenburg founder Nate Anderson told the FT. “I just haven’t seen it yet.”

Details of Circle’s SPAC

Circle is merging with Concord Acquisition Group (NYSE: CND), a SPAC sponsored by investment firm Atlas Merchant Capital. The transaction is expected to close in the fourth quarter, according to the press release.

When the transaction closes, a new company will acquire both Concord and Circle and become publicly traded on the NYSE under the ticker symbol “CRCL” — and CND will disappear. 

Concord raised $276 million in its December IPO. Here’s Concord’s S-1. It’s short, only a few pages. Compare that to the 200-page S-1 of Coinbase, the US crypto exchange that went public via direct listing in April — quite a difference.

Investors have committed another $415 million in PIPE financing to sweeten the Circle deal. PIPE, or private investment in a public equity deal, is a way to raise capital from a select group of investors who receive shares at a discount to the public market price.

Circle also raised $440 million in a May funding round. That leaves Allaire’s company — valued at $4.5 billion in this deal — with $1.1 billion in gross proceeds upon the close of the transaction. 

Circle’s finances

What do we know about Circle’s finances? Specifically, the assets behind its stablecoin? Not a lot, really.

Concord Acquisition filed an 8-K with the SEC announcing the upcoming merger. The form links to several documents. Of those, the only financial information on Circle is an investor presentation and Circle’s financial statements from December 31, 2020 and 2019. 

Here’s the thing — six months ago, Circle was in an entirely different situation than it is now. In December 2020, USDC had a $4 billion market cap. Its market cap grew to six times that in the first half of this year. Six times! Yet somehow, Circle appears to be going public without submitting its financials for Q1.

This is curious given that Q1 was a prosperous period for most crypto companies. Between January and March, $6 billion USDC were created. In that same timeframe, the price of bitcoin climbed from $29,000 to 59,000. So why would Circle leave out its March 31, 2021, financials?

This doesn’t mean that we’ll never see them. Circle could post its Q1 financials before the merger goes through.

Also, Concord still needs to file a Form S-4. An S-4 is required in a de-SPAC transaction (closing of the SPAC merger) where the SPAC’s shares are exchanged for the target’s shares.  

I wrote to Concord and Circle asking them these three questions:

  • When do you plan to file your S-4 in regard to your Circle transaction?
  • Do you plan to file the breakdown of the collateral backing the Circle stablecoin?
  • Do you have a target for your SPAC combination? If so, what is the date?

Circle and Concord answered none of the questions. Instead, they sent me back a list of 2020 and 2021 press quotes from Allaire and a link to their press release. You can see their response here.

What we know

Circle, founded in October 2013, first announced USDC in September 2018. The stablecoin is managed by a consortium called Centre — here’s their original white paper. Circle was the first member of the consortium. Coinbase joined in October 2018, and so far, there are no other members. 

Circle bought crypto exchange Poloniex in February 2018 for about $400 million with big plans to turn it into a regulated exchange. The experiment failed, and Circle ended up selling Polo less than 18 months later at a $156 million loss. 

Sean Neville, Circle’s co-founder, stepped down shortly after, without giving any clear reason for his departure. 

In December 2019, right about the time Neville left, Circle spun off its Circle Trade over-the-counter desk to focus exclusively on stablecoins. USDC issuance was slow and steady at first and then took off like a rocket in late 2020. 

Stablecoins issuers have the reputation of being like wildcat banks — a reference to banks in the 19th century that flaunted regulation and issued bank notes with abandon and often without any intention of redeeming them. 

Under the gold standard in operation at the time, these state banks could issue notes backed by gold and silver coins — though the quality of these reserves was often a question. State regulations did exist but wildcat banks, generally located in remote, hard to reach areas, were known for their creative workarounds.

Stablecoin companies issue virtual dollars that act a bit like real dollars, only they’re on a blockchain. USDC, which began life as an ERC-20 token on Ethereum, is currently on four blockchains with plans to expand to several more. 

USDC reached its first $1 billion market cap in July 2020. In the following 12 months, it literally created $24.5 billion worth of stablecoins — and we have no idea what is backing those.  

According to Centre’s website, USDC “is issued by regulated and licensed financial institutions that maintain full reserves of the equivalent fiat currency.” Every USDC is supposedly redeemable on a 1:1 basis for US dollars. 

USDC receives monthly attestations provided by accounting firm Grant Thornton LLC. These are not full audits — they are more like snapshots in time. 

The most recent snapshot is for April 30, 2021, when there were 14.7 billion USDC in circulation. The report doesn’t say much other than “US Dollars held in custody accounts are at least equal or greater than the USDC tokens outstanding at the Report Date and Time.”

However, another note on the report states that “US Dollars held in custody accounts are the total balances in accounts held by the Company at federally insured US depository institutions and in approved investments on behalf of the USDC holders at the Report Date.” (Emphasis mine.) 

Apparently, Circle’s boilerplate USDC reserves investment disclosure changed between Feb 28 and March 31, 2020, to add the phrase “and in approved investments.”

So, what are those approved investments? Who approves them? What percentage of assets are in that category? We don’t know, because Allaire won’t say. In an interview with Coindesk on June 30, he completely avoided the question, instead, rambling on about fiduciary responsibility, electronic stored money transmission, etc. (Doomberg transcribed the interview.)

High-interest ‘yield product’

On December 31, 2020, USDC was backed 100% by cash per its financial statements. Now Circle is promoting a high-interest “yield product.” The idea seems to be that you can lend Circle your USDC, and they will in turn lend them to degenerate gamblers who want leverage for crypto margin trading.

“Our Yield services provide a compelling and powerful way for institutions and corporations to access the yields that are coming from stablecoin and USDC-based borrowing and lending markets,” Allaire said in a conference call to investors.

These yield products offer 3% to 7% interest paid monthly, Circle claims — well above a risk-free rate of return. Yet, even Circle doesn’t appear to know how its yield services make money.  

“Our yield product service is an innovative product which is difficult to analyze vis-a-vis existing financial service laws and regulations around the world,” the firm says in its investor presentation. (Emphasis mine.)

Even more concerning, Circle’s business model appears to rest on bitcoin never collapsing in price: “Our yield product is collateralized predominantly by bitcoin and the value of that collateral is directly exposed to the high volatility of Bitcoin.” 

Allaire promotes USDC as the complete antithesis of Tether — the dubiously backed stablecoin that claims to have 50% of its $62 billion market cap in “commercial paper,” but doesn’t say anything about what that commercial paper consists of or where it is held. 

Despite efforts to distance itself from Tether, Circle is starting to look more and more like a similar scheme, only with a different critter on the wildcat banknotes. 

Will we ever get a straight answer from Allaire in regards to what’s behind USDC? Looks like we’ll have to wait till the S-4 comes out — that will be the real measure of transparency. 

In the meantime, I’m reminded of Dan Davies’ Golden Rule from his book “Lying for Money,” which includes a series of case studies on frauds.

“Anything which is growing unusually quickly needs to be checked out, and it needs to be checked out in a way that it hasn’t been checked before,” Davies writes. “Nearly all of the frauds in this book could have been stopped a lot earlier if people had been a bit more cynical about growth.”

* Charles Mackay, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, Chapter 2. “The South-Sea Bubble.”

Feature image: Bank of Brest five dollar bill. The Bank of Brest in Michigan was one of the most infamous wildcat banks that sprang up in the freewheeling economic environment in the US during the 19th Century.

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

Reggie Fowler, man at the center of Tether’s missing funds, ready for trial

It looks like Reginald Fowler, the man tied to hundreds of millions of dollars of missing Tether and Bitfinex money, has ditched plans for renegotiating a plea deal. Instead, he is planning to head to trial. 

In a letter filed with the New York Southern District Court on July 7 on behalf of both parties, the government stated: “The parties are not currently engaged in plea negotiations and do not anticipate resuming negotiations.”

Prosecutors are requesting a trial date in early February with pretrial motions beginning in October. The trial is expected to last two weeks. 

[Update Aug. 4: Fowler’s trial is set for Feb. 14, 2022. Here is the order.]

Fowler was indicted in April 2019, along with Israeli woman Ravid Yosef, who is still at large. The pair allegedly lied to banks, telling them they were in the real estate business so they could illegally open up accounts to store funds for cryptocurrency exchanges on behalf of Crypto Capital, a shadow banking operation. 

Fowler is currently represented by Ed Sapone of Sapone & Petrillo. He hired Sapone in April after his previous legal team withdrew from the case due to nonpayment. They claimed to be out over $600,000.

At the time, Judge Andrew Carter gave Sapone three months to get up to speed on the case and warned: “You are going into this with your eyes wide open.”

Preparing for trial means a lot more work for Sapone, so it is a surprise he wasn’t able to work out something with prosecutors. 

Fowler came very close to a plea deal on January 17, 2020. 

On that day, the former football player stood before the judge in a Manhattan courtroom ready to plead guilty to count four of his indictment — charges of operating an unlicensed money transmitter business — pursuant to negotiating with the government. 

Had he accepted the deal, Fowler would have likely spent five years in prison with three years of supervised release, and paid a fine of up to $250,000.

But the deal, which required Fowler to forfeit $371 million held in some 50-odd bank accounts, fell apart at the last minute. Why? Because nobody was sure of the exact amount in the bank accounts and Fowler would have been on the hook for the difference.

James McGovern, Fowler’s defense attorney at the time, told the judge:

“The issue with respect to the forfeiture that became an issue for us today stems from the fact that none of the parties seem to have an idea of how much money is at play here in the forfeiture order because these accounts that have all been frozen by one entity or another have an amount of money that nobody seems to know how much is in there. So our issue is how much actual exposure under the forfeiture order after the accounts are liquidated is Mr. Fowler looking at. That’s kind of the heart of the issue.”

On Feb. 20, 2020, the government filed a superseding indictment against Fowler, adding wire fraud to existing charges of bank fraud, illegal money transfer, and conspiracy. Wire fraud alone is punishable with up to 20 years in prison, so Fowler, 61, could be looking at spending the rest of his life behind bars.

There was speculation that Fowler’s defense team would try again to work out something with the government. He could still negotiate a deal, but by the tone of the prosecutor’s letter today, it sounds unlikely. 

Related stories:
Reginald Fowler, man tied to missing Bitfinex funds, out on $5M bail

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

News: Tether printer on hold, China’s crypto crackdown, the world hates Binance, El Salvador’s Chivo wallet

In case you missed my tweet, I ended up sick at the end of June. I was chatting with a friend over Zoom when he noticed that I was tilting over in my chair. Was I drunk? No. Should he call an ambulance? I’m fine.

I ended up in the ER the next day on IV fluids and hooked to monitors. Turns out I had Anaplasmosis from a tick bite. Doxycycline did the trick, and I was on my feet again within 48 hours. 

Apparently, this is the price you pay for walking blissfully unaware through grassy fields and woodsy trails. 

I mentioned earlier I was writing a book on NFTs. While I did a lot of research on the subject, I’m putting the book on hold for now. My concern is, who would read it? NFTs seem to have been a fad, slipping out of fashion. 

If you are interested in the topic, check out my recent notes on NFTs and money laundering. I also wrote for Business Insider on how Metakovan was pumping Beeple NFTs months before he bought Beeple’s $69.3 million NFT at Christie’s. 

I think we can all admit that the art behind almost every NFT is absolute garbage, which the author of this blog post does a fine job of pointing out. 

China’s crackdown on crypto

The People’s Bank of China has hated crypto since 2017, when it initially kicked the crypto exchanges out. 

In recent months, the country has gone after crypto with a renewed vengeance, banning FIs from providing services to crypto firms and forcing bitcoin miners in the country to take their hardware offline. 

Up until recently, most of the world’s bitcoin mining (~ 65% to 75%) took place in China. The country’s crackdown on mining caused more than 50% of the bitcoin hashrate to drop since May.

The hashrate dropped faster than bitcoin’s difficulty algorithm could keep up. Every 2,016 blocks, the difficulty adjusts to account for how many miners are on the network. 

On July 3, bitcoin experienced a record 27.94% drop in mining difficulty, according to BTC.com, meaning now, bitcoin miners will have an easier time finding blocks. (CNBC)

Beijing even told companies they are no longer allowed to provide venues, commercial displays, or even ads for crypto-related businesses. On Tuesday, the PBoC said it had ordered the shutdown of Beijing Qudao Cultural Development, a company that makes software for crypto exchanges. (Reuters)

Why does China loathe crypto? Some people say the PBoC is trying to make way for China’s CBDC, but I doubt that has anything to do with it. The most likely reason is the country wants to stem capital outflows. According to a Chainalysis report last August, $50 billion in crypto assets moved from China to other regions in a 12-month period. 

Why has Tether stopped printing?

Tether is currently at 62.7 billion tethers, and it’s been stuck there for more than a month. Tether had several big prints at the end of May and now, crickets all through June and into July. The printer has totally stopped. 

Nobody is really clear on why Tether has put its printing presses on hold, but the timing seems to correlate with China’s crackdown on crypto.  

We have three theories for why Tether stopped printing

Theory #1 — Less demand

The China crackdown has created a reduced demand for tethers. When bitcoin’s hash rate dropped precipitously, so did the number of newly minted BTC per day — at one point it was down to 350 new BTC per day, as opposed to the 900 BTC per day the network should be producing.

Binance and OKex have mining pools, so bitcoin miners can mint bitcoin directly to their own exchange accounts. Since there is no way to cash out directly, miners convert BTC to tethers (USDT). And then convert USDT to RMB on unregulated over-the-counter platforms, such as Huobi and CoinCola.

With the exodus of miners from China, there was less demand for tethers. 

Theory #2 — Chinese junk debt

Another theory floating around is that Tether may have been getting Chinese junk debt to issue tethers, and now that is no longer possible due to the risks. 

Tether’s latest composition report showed that 50% of the assets backing USDT were unspecified commercial paper. In the US commercial paper market, that would place Tether among the likes of fund managers like Vanguard and BlackRock, which seems unlikely. (FT)

So maybe it’s holding Chinese paper?

“If Tether is holding Chinese commercial paper, the issuer can default on those debts with impunity. What is Tether going to do? Sue in Chinese courts?,” Tether whistleblower Bitfinexed said in a tweet.

He revealed in a DM that the info comes from a “reliable source.”

Theory #3 — USDC is picking up the slack

While the tether printer stopped, the USDC printer appears to have picked up speed, issuing 10 million USDC since May 8. 

As of July 5, there are 25.5 billion USDC stablecoins in circulation, so maybe USDC is stepping into Tether’s shoes?

In other news, Tether is working hard to shine up its tarnished image. The company is hiring a Reputation Manager, to “advocate for the company in social media spaces, engaging in dialogues and answering questions where appropriate.” 

If you want to fight the FUD spread by salty nocoiners like myself, this job could be for you. (Teether, archive)

Binance vs the world

The UK, Singapore, Japan, Germany, Canada and now the Cayman Islands are all moving against Binance, the world’s largest crypto exchange. I wrote a blog post detailing Binance’s pariah status. 

The bad news keeps getting worse. Following the FCA banning Binance in the UK on June 26, Barclays says it is blocking customers from using their debit and credit cards to make payments to Binance. (They will let you take money out, but they won’t let you put money in.)

Binance “talks a big game on anti-money laundering and know-your-customer” rules, but was “resistant to throwing human resources at compliance issues,” an executive at a payments company that helped connect Binance to the broader financial market before cutting ties with the group, told the (FT)

And worse still — on Tuesday, Binance told its customers that it will temporarily disable deposits via SEPA bank transfers. Binance said the move was due to “events beyond our control.” (FT)

Binance founder CZ says it’s all FUD.

Binance’s organizational structure

Binance has a lot secrets. The company refuses to say where its headquarters is located. And it’s tight-lipped about its organizational structure, too. 

On May 1, Brian Brooks, former Coinbase chief legal officer and former acting head of the Comptroller of the Currency, took over as CEO of Binance.US, replacing Catherine Coley. (WSJ)

In a Coindesk interview in April, he said he reports to the board of directors, yet he wouldn’t name who was on the board. 

Coindesk: “Brian, what is the reporting structure with Binance US. Who do you report to?”

Brooks: “I have a board of directors, which I will be a member of, and I will report to that board.” 

Coindesk: “Who else is on the board?”

Brooks: “The board is obviously the founder of the company and another person. It’s a private company, so we don’t necessarily go into the governance structure…”

Later when Coindesk asks him where Binance.com is located, Brooks dances around that question as well. He did say, however, that Binance keeps its US customer data separate from Binance.com. 

Binance.US also just brought onboard Manuel Alvarez, a former commissioner at the California Department of Financial Protection and Innovation, as its new chief administrative officer. (Coindesk)

FATF releases 12-month review 

The Financial Action Task Force, a Paris-based global anti-money laundering watchdog, published its second 12-month review of its revised standards for virtual assets and virtual asset service providers, or VASPs

VASPs include crypto exchanges, bitcoin ATM operators, wallet custodians, and hedge funds. 

When the FATF published its guidance in 2019, it recommended full AML data collection by VASPs — and Rule 16, also known as the “travel rule.” 

The travel rule requires VASPs to disclose certain customer data and include that data with a funds transfer, so that the info “travels” down the funds transfer chain.  

Of FATF’s 128 reporting jurisdictions, 58 have implemented the revised FATF standards. The other 70 have not. And the majority of jurisdictions have yet to implement the travel rule.

“These gaps in implementation mean that there is not yet a global regime to prevent the misuse of virtual assets and VASPs for money laundering or terrorist financing,” the FATF said. 

The FAFT plans to publish its revised guidance by November 2021 with a focus on accelerating the implementation of the travel rule as a priority. (Forkfast)

Kaseya ransomware  

The REvil ransomware operation is behind a massive attack centering on Kaseya, a company that develops software for managed service providers. MSPs provide outsourced IT services to small and medium-sized businesses that can’t afford their own IT department. 

Between 800 and 1,500 businesses have been compromised by the global ransomware attack, including schools in New Zealand and supermarkets in Sweden. 

The REvil gang has offered to decrypt all victims for $70 million in Monero (XMR), a cryptocurrency that is harder to track than bitcoin. The immediate ransom demand is $45,000 worth of XMR, rising to $90,000 after a week.

Nicholas Weaver, a researcher at the International Computer Science Institute in Berkeley, wrote a story for Lawfare breaking down the Kaseya ransomware attack. 

He also wrote an earlier story for Lawfare titled “The Ransomware Problem Is a Bitcoin Problem,” where he explains why getting rid of crypto is a great idea. “The ransomware gangs can’t use normal banking. Even the most blatantly corrupt bank would consider processing ransomware payments as an existential risk.”

El Salvador, bitcoin and Bitcoin Beach

Who is the San Diego surfer who brought bitcoin to El Zonte? A white evangelist named Michael Peterson. I wrote about him and his Bitcoin Beach project at length in a recent blog post. 

Peterson read my story. He says it’s full of “glaring inaccuracies” and “plagiarized pieces of other bad reporting.” When asked to substantiate his defamatory accusations, he never replied back. 

Does he use these same bully tactics to get people in El Zonte to use bitcoin? 

David Gerard wrote up a detailed blog post explaining the latest developments on bitcoin and El Salvador. 

Here are some notes, if you want to catch up quick:

  • Nayib Bukele, El Salvador’s president, has announced a government wallet — the Chivo wallet — that will be available for download in September. (Youtube)
  • The Chivo (slang for “cool”) wallet will hold both USD and bitcoin balances. 
  • Salvadorans who sign up for the mobile app will get $30 in bitcoin, but they have to spend it. They can’t sell their BTC for cash — which makes you wonder if Bukele is simply planning to issue new dollars under the guise of bitcoin. (I also recommend you read Gerard’s piece in Foreign Policy on this topic)
  • The technical details of the Chivo wallet are totally unclear. Is Jack Mallers, the CEO of Zap and the remittance app Strike, going to develop the wallet? We don’t know.  
  • Originally, Mallers said Strike was using tether for remittances. (My blog post.) Now, he says Strike is no longer using tethers, and the folks in El Salvador receiving remittances on his app will receive actual dollars. (What Bitcoin Did)
  • How will this happen? Mallers said in his What Bitcoin Did interview that his company has local banking relationships in ES, but we don’t know what banks, where. 
  • Here is a direct quote from the transcript of the interview: “So, I was like, ‘Well, fuck, I don’t know then how I’m going to pull this off!’ So, what I did is, we built Tether into Strike, which was the equivalent of the Chase bank account in America, and it at least gave us some MBP basic functionality, where I can go and just observe and listen and see how people used it and see if it was helpful. But now, we’re already integrating with the top five banks in the country.”
  • Mallers tends to be long on plans and short on details. When the media reaches out to him with questions — like Decrypt did when they learned Zap is not licensed to operate in most US states — he generally just ignores them. 
  • Despite what Mallers keeps claiming, sending remittances via Western Union from the US  to El Salvador isn’t really that costly, to begin with. Steve Hanke, Nicholas Hanlon, and Mihir Chakravarthi point this out in their paper: “Bukele’s bitcoin blunder.”
  • Jack Maller’s company Zap (the parent company of Strike) got $14.9 million in fresh funding in March from “Venture Series – unknown,” on top of a $3.5 million seed round a year prior. Nobody seems to know who is behind the funding. (Crunchbase)
  • Athena, the company that Bukele ordered 1,000 new bitcoin ATMs from, installed a new bitcoin ATM machine — the country’s third installed machine! — in La Gran Vía shopping center. They had a ribbon-cutting ceremony and everything.
  • Unfortunately, the machine was located in front of an upscale department store owned by the Simán family, Bukele’s arch enemy. Worried that the ATM would draw foot traffic to his rival’s business, Bukele had the machine relocated next to the toilets, where it sits unplugged. (Twitter) 
  • The US State Department named 14 El Salvadorans, many associated with the Bukele regime, as corrupt or undemocratic actors. (US State report)

Robinhood’s planned listing

Robinhood had plans to go public in June, but the SEC has some questions about its cryptocurrency business, according to Bloomberg.

The company also agreed to pay FINRA $70 million to settle allegations that the brokerage caused customers “widespread and significant” harm on multiple different fronts over the past few years.

Specifically, FINRA’s investigation found that millions of customers received false or misleading information from Robinhood on a variety of issues, including how much money customers had in their accounts, whether they could place trades on margin and more.

In its SEC S-1 filing, which dropped on July 1,  Robinhood notes that a “substantial portion of the recent growth in our net revenues earned from cryptocurrency transactions is attributable to transactions in Dogecoin. If demand for transactions in Dogecoin declines and is not replaced by new demand for other cryptocurrencies available for trading on our platform, our business, financial condition and results of operations could be adversely affected.”

Robinhood currently supports seven different cryptos. When you trade crypto on Robinhood, you don’t ever hold the keys to your own crypto. Robinhood itself buys the actual crypto and maintains custody, so you can’t move your coins onto or off the platform. You’re stuck in there.

Bitcoin mining turns NY lake into a hot tub

The Greenidge Generation Bitcoin mining plant, owned by private equity firm Atlas Holdings, sits on the shores of beautiful Seneca Lake in New York. 

The tagline on its website reads, “Green Power for Generations to Come.”  

The firm uses lake water to cool its 8,000 computers used to mine bitcoin within the gas-fired plant. Greenidge’s current permit allows it to take in 139 million gallons of water and discharge 135 million gallons daily, at temperatures as high as 108 degrees Fahrenheit in the summer and 86 degrees in winter.  

Locals want the mining facility gone. They have been staging protests. They claim the plant is polluting the air and heating the lake, thanks to its use of fossil fuels.

“The lake is so warm you feel like you’re in a hot tub,” said one nearby resident. (NBC) (Arstechnica)

RSA Conference’s blockchain moment

Over the weekend, the RSA Conference gave infosec and computer science Twitter a bit of a shock when it suggested replacing the entire internet with — a blockchain. 

The tweet quickly disappeared, but not before being archived. The blockchain is immutable! I wrote about the event in a blog post.

(Updated on July 8 to note that Brian Brooks replaced Catherine Coley as CEO of Binance.US.)

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

RSA Conference goes full blockchain, for a moment

RSA Conference, arguably the world’s largest gathering of computer security experts, surprised everyone Saturday night when it suggested replacing the entire internet with — a blockchain. 

“The Internet has a serious fundamental flaw: the transmission control protocol/internet protocol (TCP/IP) — the primary engine underpinning the Internet — is less secure. Is #blockchain the solution we need to eliminate this flaw?” RSA Conference tweeted at 8 p.m. EST.

RSA holds an annual conference in San Francisco in late spring. This year’s May event was virtual, but the year prior saw more than 42,000 attendees.

TCP/IP, or transmission control protocol and internet protocol, forms the backbone of the entire internet. The notion of replacing it with a decentralized database is like a bad joke to those in the security world.

The organization deleted the embarrassing tweet minutes later after the entire information security and computer science Twitter dunked on them — but not before the tweet was archived.  

“[D]id you know?? a property of content on a blockchain is immutability, so you can’t go and delete prior embarrassing content,” Canadian software engineer Nathan Taylor said on Twitter.

Speaking of immutable — a Google cache of the article also remains. 

“RSA Conference, how could you let this moronic tweet get through? Is this year’s Conference Chair a Tarot specialist? Do you also have a session on ‘Network Connectvity on a Flat Earth?’ Jorge Stolfi, a computer scientist in Brazil, tweeted.

“There’s no question that Blockchain is the answer to TCP/IP security: by making TCP unusable, nobody will be able to exploit it!” tweeted cybersecurity researcher Jake Williams, president of Rendition Infosec.

“The stupidity, it burns. I challenge anybody anywhere to find a more epically vacuous take than this,” said Tim Bray, former vice president of Amazon Web Services and one of the co-authors of the original XML specification.

The vacuous tweet was accompanied by an even more vacuous blog post titled “Understanding Blockchain Security” posted on July 1 by Rohan Hall, the CTO of RocketFuel, a blockchain-based payments firm.

Hall is a “30-year veteran in the blockchain and DeFi space who has built and implemented technology solutions for multiple Fortune 500 companies,” according to his bio.

The claim raised more than a few eyebrows given blockchain has only been around for 12 years — and decentralized finance, about five years. In fact, Hall’s LinkedIn profile reflects less than three years of blockchain experience.

Hall’s blog post is chock full of the usual blockchain nonsense and never even attempts to make a case for how blockchain is even relevant to TCP/IP. 

After deleting the tweet and blog post, RSA Conference tried to recover from the faux pas with the following:

“Earlier today we shared a recently published RSAC blog to our social channels that caused warranted concern. The content of the blog, and thus the subsequent promotion on our channels did not meet our editorial standards for neutrality. We have removed the blog, and as there is no content to support the social post, we have removed that, too. We will do better. We are not blaming an intern.” 

The bit about the intern is funny, but seriously, RSA Conference, what were you even thinking? Never mind your editorial standards for neutrality, what about your editorial standards for connecting to reality?

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

Binance: A crypto exchange running out of places to hide

Binance, the world’s largest dark crypto slush fund, is struggling to find corners of the world that will tolerate its lax anti-money laundering policies and flagrant disregard for securities laws. 

On Thursday, the Cayman Islands Monetary Authority issued a statement that Binance, the Binance Group and Binance Holdings Limited are not registered, licensed, regulated, or otherwise authorized to operate a crypto exchange in the Cayman Islands.

“Following recent press reports that have referred to Binance, the Binance Group and Binance Holdings Limited as being a crypto-currency company operating an exchange based in the Cayman Islands, the Authority reiterates that Binance, the Binance Group or Binance Holdings Limited are not subject to any regulatory oversight by the Authority,” the statement said.

This is clearly CIMA reacting to everyone else blaming Binance on the Caymans, where it’s been incorporated since 2018. 

On Friday, Thailand’s Security and Exchange Commission filed a criminal complaint against the crypto exchange for operating a digital asset business without a license within its borders. 

Last week, Binance opted to close up shop In Ontario rather than meet the fate of other cryptocurrency exchanges that have had actions filed against them for allegedly failing to comply with Ontario securities laws.

Singapore’s central bank, the Monetary Authority of Singapore, said Thursday that it would look into Binance Asia Services Pte., the local unit of Binance Holdings, Bloomberg reported. 

The Binance subsidiary applied for a license to operate in Singapore. While it awaits a review of its license application, Binance Asia Services has a grace period that allows it to continue to operate in the city-state. 

“We are aware of the actions taken by other regulatory authorities against Binance and will follow up as appropriate,” the MAS said in a statement.

On June 26, the UK’s Financial Conduct Authority issued a consumer warning that Binance’s UK entity, Binance Markets Limited, was prohibited from doing business in the country. 

“Due to the imposition of requirements by the FCA, Binance Markets Limited is not currently permitted to undertake any regulated activities without the prior written consent of the FCA,” the regulator said.

It continued: “No other entity in the Binance Group holds any form of UK authorisation, registration or licence to conduct regulated activity in the UK.” 

Following the UK’s financial watchdog crackdown, Binance customers were temporarily frozen out of Faster Payments, a major UK interbank payments platform. Withdrawals were reinstated a few days later.

Only a few days before, Japan’s Financial Services Agency issued a warning that Binance was operating in the country without a license. (As I explain below, this is the second time the FSA has issued such a warning.)

Last summer, Malaysia’s Securities Commission also added Binance to its list of unauthorised entities, indicating Binance was operating without a license in the Malaysian market.

A history of bouncing around

Binance offers a wide range of services, from crypto spot and derivatives trading to tokenized versions of corporate stocks. It also runs a major crypto exchange and has its own cryptocurrency, Binance Coin (BNB), currently the fifth largest crypto by market cap, according to Coinmarketcap. 

The company was founded in Hong Kong in the summer of 2017 by Changpeng Zhao, more commonly known as “CZ.” 

China banned bitcoin exchanges a few months later, and ever since, Binance has been bouncing about in search of a more tolerant jurisdiction to host its offices and servers.  

Its first stop after Hong Kong was Japan, but Japan was quick to put up the “You’re not welcome here” sign. The country’s Financial Services Agency sent Binance its first warning in March 2018. 

“The exchange has irked the FSA by failing to verify the identification of Japanese investors at the time accounts are opened. The Japanese officials suspect Binance does not have effective measures to prevent money laundering; the exchange handles a number of virtual currencies that are traded anonymously,” Nikkei wrote. 

Binance responded by moving its corporate registration to the Cayman Islands and opening a branch office in Malta, the FT reported in March 2018.

In February 2020, however, Maltese authorities announced Binance was not licensed to do business in the island country. 

“Following a report in a section of the media referring to Binance as a ‘Malta-based cryptocurrency’ company, the Malta Financial Services Authority (MFSA) reiterates that Binance is not authorised by the MFSA to operate in the crypto currency sphere and is therefore not subject to regulatory oversight by the MFSA.”

The ‘decentralized’ excuse

CZ lives in Singapore but has continually refused to say where his company is headquartered, insisting over and over again that Binance is decentralized. This is absolute nonsense, of course. The company is run by real people and its software runs on real servers. The problem is, CZ, whose net worth Forbes estimated to be $2 billion in 2018, doesn’t want to abide by real laws. 

As a result, his company faces a slew of other problems. 

Binance is currently under investigation by the US Department of Justice and the Internal Revenue Service, Bloomberg reported in May. It’s also being probed by the Commodity Futures Trading Commission over whether it allowed US residents to place wagers on the exchange, according to another Bloomberg report. 

Also in May, Germany’s financial regulator BaFin warned that Binance risked being fined for offering its securities-tracking tokens without publishing an investor prospectus. Binance offers “stock tokens” representing MicroStrategy, Microsoft, Apple, Tesla, and Coinbase Global.  

Binance has for five years done whatever it pleases, all the while using the excuse of “decentralization” to ignore laws and regulations. Regulators are finally putting their collective foot down. Enough is enough.

Image: Changpeng Zhao, YouTube

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

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

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

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

Michael Peterson, El Salvador, and Bitcoin Beach

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

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

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

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

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

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

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

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

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

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

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

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

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

‘A labor of love’

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

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

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

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

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

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

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

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

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

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

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

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

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

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

El Salvador’s most vulnerable

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mystery donor

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

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

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

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

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

‘A circular economy’

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

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

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

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

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

Mobile apps

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

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

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

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

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

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

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

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

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

Reports from on the ground tell a different story. 

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

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

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

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

It turns out bitcoin ATM fees are high, however. 

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

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

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

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

A new bitcoin colony

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Anyhow, Mallers lays out the details:

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

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

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

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

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

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

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

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

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

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

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

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

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

Feature Image: Twitter

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

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

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

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

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

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

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

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

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

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

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

[By Trolly McTrollface]

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

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

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

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

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

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

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

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

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

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

A tear rolled down Stuart’s cheek.

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

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

Cope. Cope. Cope.

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

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

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

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

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

Established and recognized procedures.

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

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

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

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

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

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

He tried to read what he had written.

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

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

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

Smoke and mirrors, bitch.

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

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

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

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

Tether’s muddy pies

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

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

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

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

Binance under investigation

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

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

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

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

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

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

Gensler: crypto exchanges need more regulation

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

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

Bitfinex shareholder formally charged

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

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

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

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

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

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

Elon Karen Musk, your new manager

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

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

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

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

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

Meanwhile, Musk has shifted his alliances to dogecoin.

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

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

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

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

Other dogecoin news

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

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

Colonial Pipeline hit by ransomware attack

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

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

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

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

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

Other newsworthy stuff

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

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

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

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

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

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

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

Me, in the news

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

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

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

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

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

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

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

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

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

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

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

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

The blue pie chart

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

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

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

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

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

The orange pie chart

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

Here’s how Tether divvies it up: 

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

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

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

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

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

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

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

The bottom line 

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

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

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

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

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

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

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

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

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