CoinDesk retracts stories about sponsors, makes implausible excuses

  • By Amy Castor and David Gerard
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On two successive days this month, CoinDesk retracted anonymous opinion pieces with weird and spurious explanations. Both stories just happened to be about companies who sponsor CoinDesk. The crypto world noticed, and it’s not happy.

Justin Sun

On August 27, CoinDesk pulled an article detailing Justin Sun’s concerning and questionable practices in the crypto space two days after it was published. The story was titled: “Justin Sun: The Next Do Kwon or Sam Bankman-Fried? The TRON founder has built a crypto empire that would cause collateral damage if it collapsed.” [CoinDesk, article archive of August 26, retraction archive of August 27]

CoinDesk editor-in-chief Kevin Reynolds claims the story was pulled because it didn’t meet CoinDesk standards. He even said that the story “never should have been published.”

This statement is simply not credible. The story was on a topic that was clearly in the public interest. It was extensively cited and backed with data.

The article was written by “awbvious awbvious,” the pseudonym of a “DeFi user and internet artist” — but it was also edited and reviewed before publication by two experienced CoinDesk editors: Ben Schiller (managing editor for features and opinion) and Daniel Kuhn (deputy managing editor for CoinDesk’s Consensus Magazine).

So how does a story that was reviewed by two competent editors suddenly not meet standards?

Reynolds says the story was a personal attack:

… we allow the use of anonymous sources and, from time to time, publish articles written under pseudonymous bylines, but with one very important caveat: we cannot grant the cloak of that identity protection to a writer who launches an outright personal attack against an individual.

The article is built around data-based claims. There are no personal attacks in the story. Reynolds is making statements about the story and its author that are clearly false if you read the actual article text — now safely available on an archive site out of CoinDesk’s control. [archive]

Reynolds claims he was invoking, and links to, CoinDesk’s little-used policy on not outing pseudonymous article subjects. We call this the Scammer Identity Protection Rule, because functionally it is. Marc Hochstein, former CoinDesk editor in chief and current Consensus executive editor, put the rule into place in 2020. [CoinDesk, 2020, revised 2023; archive, 2021]

This rule is mostly ignored in practice at CoinDesk — because it’s obviously stupid. Crypto is an area of finance that’s saturated with fraudsters. Knowing the players’ names is clearly in the public interest. Are you doing journalism or are you doing PR?

But the Scammer Identity Protection Rule doesn’t say a word about articles with anonymous bylines. Reynolds is citing and linking to a rule that doesn’t apply to what he’s just done: retracting an article.

So why did CoinDesk pull the story? The simpler explanation is that the WhiteBIT crypto exchange, controlled by Justin Sun, is one of the few remaining banner ad buyers on CoinDesk — and CoinDesk can’t afford to lose sponsors

CoinDesk may have been concerned that Sun was being compared to two people under criminal indictments. This is a reasonable objection — but the article easily could have been edited to the data-based claims, or to make it clearer that the comparison was in terms of systemic risk.

This would also have avoided a retraction that didn’t make coherent sense — a retraction that made absolutely sure that everyone in crypto read the article.

Chainalysis

The day before the Sun story was pulled, CoinDesk also retracted a pseudonymous op-ed about Chainalysis by crypto Twitter regular L0la L33tz: “Chainalysis Investigations Lead Is ‘Unaware’ of Scientific Evidence the Surveillance Software Works.” [Twitter, archive; CoinDesk, article archive of July 26, retraction, archive of August 26]

Here’s the article summary:

Elizabeth Bisbee, head of investigations at Chainalysis Government Solutions, testified she was “unaware” of scientific evidence for the accuracy of Chainalysis’ Reactor software used by law enforcement, an unreleased transcript of a June 23 hearing shared with CoinDesk shows.

… Bisbee said she was unable to provide the court with statistical error rates for Chainalysis’ Reactor software. She further denied being aware of any scientific peer-reviewed papers or “anything published anywhere” attesting to the accuracy of Chainalysis Reactor. Instead, Chainalysis reportedly judges its software’s accuracy using customer feedback, she said.

This is clearly newsworthy subject matter. It’s a story that makes factual claims about information that the news site saw concerning the administration of justice.

Bitcoin Magazine promptly reprinted the Chainalysis story when CoinDesk pulled it. Yahoo News still has the original CoinDesk version up. [Bitcoin Magazine; Yahoo] 

What’s really weird is that CoinDesk retracted the story a full month after it was published.

As with the Sun story, Kevin Reynolds’s retraction claimed that “we cannot grant the cloak of that identity protection to a writer who launches an outright personal attack against an individual.”

Reynolds also claimed: “Given that the very nature of the piece violates that standard — allowing us no way to merely correct the story and be done with it  — we are removing the story in its entirety.” [archive]

That’s curious — because when the retraction hit crypto Twitter and the article was reprinted in Bitcoin Magazine, CoinDesk suddenly found the ability to republish almost all of the article! [CoinDesk, archive of 29 August]

After his previous slander of L33tz, Reynolds realized people were watching his behavior and took care to note in his un-retraction: “It was not our intent to besmirch the reputation of the writer, who has for some time used the same pseudonym and built a reputation around it.” Wasn’t that nice of him.

Chainalysis just happens to be a portfolio company of Digital Currency Group, who (as of this moment) still own CoinDesk. Chainalysis also sponsors the 2023 Consensus conference and the CoinDesk GenC podcast. [CoinDesk, archive; CoinDesk]

“If you retract an article while you have such a huge conflict of interest, that’s just not okay,” L33tz told Gizmodo: [Gizmodo]

L0la L33tz told Gizmodo the article was received well by the editor she worked with and that she was encouraged to write more stories like it in the future.

L0la L33tz claims she only discovered the redaction after stumbling upon it online, saying that nobody at CoinDesk reached out to her to suggest corrections to alter the article or even to inform her that the story had been retracted.

There are no respectable media outlets in a crypto winter*

Leaving a story up for a month and then attempting to vanish it — without even contacting the author — is not competent behavior, individually or organizationally.

Reynolds’ retractions seem not only to slander the authors of these articles, but also to imply his fellow editors Ben Schiller and Daniel Kuhn were incompetent.

Whatever the true reasons for the retractions, they clearly weren’t anything to do with protecting pseudonymous article subjects or harsher rules on pseudonymous authors.

CoinDesk was building up a journalistic head of steam again — with amazing successes like taking down FTX, and the reputations of its best writers.

Whoever was responsible for this debacle has trashed the improvements to CoinDesk’s reputation in two days.

This all comes as CoinDesk is being sold to Peter Vessenes and Matthew Roszak’s consortium. (The sale is in the final stages, but hasn’t quite gone through as we write this.) Was this supposed to make the site more or less attractive to the buyers?

CoinDesk has always been a money-loser. The conference business is the only part of the site that makes any money. (DCG is keeping this bit and selling the rest of the site.) This is a precarious position to be in, especially in a crypto winter.

As we lamented about The Block’s troubles, you can’t make money in crypto news without becoming just another cog in the crypto PR machine.

People will always wonder who your funders are and what you’re doing for them — and they’ll be absolutely correct to do so.

We advise that you treat crypto media as ephemeral and subject to the whims of publishers who suddenly realize they’ve said too much. Always keep copies.

The first rule is still: archive everything.

——-

* except us, of course

Posted on by Amy Castor 2

Crypto collapse: Tornado Cash arrests, Federal Reserve shuts down Farmington Bank, Prime Trust played Terra-Luna

Our latest post on the crypto collapse is on David’s site. [David Gerard]

In this edition:

  • The US charges Tornado Cash co-founders with laundering over $1 billion in criminal proceeds.
  • Federal and State regulators shut down FTX-affiliated Farmington State Bank 
  • Prime Trust files its first-day motion — they had been gambling on Terra-Luna!
  • Everybody still hates Binance
  • Sam Bankman-Fried says his lawyers told him to do it.
Posted on by Amy Castor 0

Crypto collapse: Sam Bankman-Fried goes to jail, SEC appeals Ripple ruling, Prime Trust bankrupt, the tangled tale of TrueUSD and Tron

  • By Amy Castor and David Gerard
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“i cant wait until we get julain assange out of jail using Crypto. itll make all the pedophile money laundering worth it”

— dril

Go directly to jail

Sam Bankman-Fried’s bail has been revoked for witness tampering — specifically, that he shared ex-girlfriend Caroline Ellison’s private diary with a New York Times reporter. This was the last straw for Judge Lewis Kaplan, who said the documents were “something that someone who has been in a relationship would be unlikely to share with anyone except to hurt and frighten the subject.”

Previously, Sam tried to get in touch via Signal with another witness, former FTX US lawyer Ryne Miller, about getting their stories straight — which nearly saw Sam’s bail revoked that time.

Our hero is currently at MDC Brooklyn — notoriously one of the worst jails in the federal system — but the government has asked that he be remanded at Putnam, where he’ll be allowed more computer access to prepare for his upcoming trial on October 2.

Inner City Press live-tweeted the entire hearing. Sam’s lawyer Mark Cohen immediately filed an appeal. [Twitter, archive; Doc 198, PDF; Notice of Appeal, PDF; Order; PDF] 

Prosecutors filed a superseding indictment against Sam on August 14. The new indictment contains seven of the thirteen original charges, removing anything that wasn’t explicitly in the Bahamas extradition agreement. Sam’s $100 million of political contributions are now listed as just another way he misspent customer money. The government also filed its motions in limine — pretrial motions on what evidence is admissible and so on. [Indictment, PDF; in limine, PDF; Doc 165, PDF]

Mathew Russell Lee of Inner City Press has been the man on the scene at the SDNY courthouse for Sam’s hearings. As well as live-tweeting hearings, he collects his writeups as Kindle books. His collection on Sam is just out, recounting the saga as he saw it happen from December 2022 to last week. [Amazon UK; Amazon US]

SEC appeals Ripple

The SEC has asked SDNY District Judge Analisa Torres to pause their case against Ripple so they can appeal her questionable decision on XRP sales to the 2nd US Circuit Court of Appeals. The SEC’s grounds for appeal is that there’s now a genuine intra-district judicial dispute over the issue. [Doc 887, PDF]

On July 13, Torres ruled that XRP is a security when it’s sold to sophisticated investors, but it’s not a security when sold to retail investors on exchanges – which is precisely backward from the past ninety years of US securities jurisprudence.

In the same courthouse, District Judge Jed Rakoff, who is overseeing the SEC lawsuit against Terraform Labs and its cofounder Do Kwon, flatly rejected Torres’ decision and ruled that Terraform’s LUNA and MIR coins may have been securities when sold to retail investors.

John Reed Stark notes: “For SEC lawyers like myself, Judge Jed Rakoff is arguably considered the most respected and experienced securities law jurist not only in the SDNY but perhaps in the entire U.S. federal court system.” [Twitter, archive]

The SEC proposes to file its opening brief on August 18. Ripple would have until September 1 to respond, and the SEC’s reply would be due a week later on September 8. This is quite soon, but Coinbase and Binance are both using the Ripple decision to support their defenses against their own SEC suits.

Prime Trust goes Chapter 11. You had one job!

Crypto custodian Prime Trust filed for bankruptcy protection in Delaware on August 14. Prime halted withdrawals in late June after Nevada regulators put the company into receivership as insolvent.

How did Prime fall insolvent? They lost the keys to a pile of the crypto they were supposed to be keeping safe. This happened in December 2021. You had one job, guys!

From December 2021 until March 2022, Nevada says that Prime used customer funds to buy additional crypto. But for a year and a half, Prime just lied and told everyone they still had their crypto.

Prime has between 25,000 and 50,000 creditors and liabilities of up to $500 million. The firm’s top fifty creditors have claims of $145 million — including the largest claim of $55 million. [Business Wire; Stretto] 

Knives out at TrueUSD

Archblock, formerly TrustLabs trading as TrustToken, created TUSD, a supposedly asset-backed $3 billion stablecoin. It then sold TrueUSD to Justin Sun’s Tron in late 2020 — but the connection to Tron has always been a bit murky, and TrustLabs has never been upfront about who the coin’s actual owner was.

TrustLabs said the new owner was Techteryx, “an Asia-based consortium” — though TrustLabs/Archblock still managed TUSD until July 2023. [Medium, 2020, archive; Twitter, archive]

Alameda Research was the largest redeemer of TUSD. FTX listed TUSD when they knew that TrustLabs was misrepresenting who owned it. 

TrueUSD’s main custodian was Prime Trust — and Prime was also its main fiat on-and-off ramp for the US banking system. Prime Trust was thus Justin Sun’s main link to US banking. At least until Signature, Prime’s main banking partner, collapsed in March.

We wrote previously about how the TUSD coin seems pretty clearly unbacked and was being used by someone in the vicinity of Binance to pump the price of bitcoin earlier this year.

Archblock is now doing a merger to move the company’s domicile from the US to Switzerland, for unclear reasons. [Blockhead]

Daniel Jaiyong (“Jai”) An, co-founder of TrustLabs/Archblock, is not happy with this merger and move. An is suing Archblock and its executives: Rafael Cosman, co-founder and board member; Alex De Lorraine, COO and former board member; and Tom Shields, former chairman of the board. 

The complaint was filed pro se on July 14 in Delaware, meaning An did not hire an attorney. He wrote the 58-page complaint himself — and it shows. [DLNews; complaint, PDF] 

An was in the midst of negotiating the sale of TrueUSD to Techteryx, whose contact was Justin Sun of Tron. In fact, An describes the sale as being to Tron.

So, yes — TrueUSD is run by Justin Sun, if you ever doubted it.

TrustLabs got $32 million from investors in a 2018 accredited investor ICO under SEC Regulation D for a token called TRU. Investors included Andreessen Horowitz, BlockTower Capital, Danhua Capital, Jump Capital,* ZhenFund, Distributed Global, Slow Ventures, GGV Capital, and Stanford-StartX.

*Update: Although An mentions Jump Capital in his complaint, Jump Crypto wrote us to say it wasn’t Jump Capital, but Jump Crypto, a division of Jump Trading Group, who made the investment. 

An says that by January 2020, it was clear that the plan in the TRU white paper would never pass SEC muster. He wanted to pay the investors back, as the SEC would surely require – but he says that his cofounder Cosman blocked this. The other shareholders voted An out in July 2020.

TrustLabs finally issued the TRU token in November 2020, repurposed as the native token of their TrueFi lending protocol. An alleges the other executives enriched themselves with TRU tokens — but not him.

An says the company threatened him with legal action if he informed investors what the company was doing. An then filed as a whistleblower with the SEC. He claims the company has retaliated against him for doing so.

Several paragraphs claim past criminal actions by Cosman.

An remains a shareholder in Archblock. He wants the merger blocked and $94.32 million in damages.

Data Finnovation notes that if An’s allegations are true, then FTX knew since 2020 that TrueUSD was owned by Tron — because Tron’s lawyer Can Sun was working on the deal and Can Sun later ended up working for FTX under Daniel Friedberg. Remember that FTX minted nearly all the tethers on Tron in the same time period. [Twitter, archive; Medium, 2022]

Worldcoin wants your eyeballs

Sam Altman is the founder and CEO of OpenAI, the company behind ChatGPT. Worldcoin is Altman’s proof-of-eyeball cryptocurrency.

Altman promotes Worldcoin as a way to end poverty — and not just a way for him to collect huge amounts of biometric data. In exchange for giving up your iris scan, you’ll get 25 free Worldcoins (WLD). [CoinDesk] 

Worldcoin operators use “orbs” to scan eyeballs. The operators get paid in tethers. [MIT Technology Review, 2022]

Since the Worldcoin project launched on July 24, throngs of people in Kenya have been queuing up to get their eyeballs scanned — lured by free Worldcoin tokens. 

The problem is converting WLD into actual spendable money. The Worldcoin app has no direct withdrawal option — so the Kenyan users have to trade their WLD for USDT on Binance or put their trust in random over-the-counter buyers. So Worldcoin has become a honeypot for scammers: [Rest of World] 

“There’s no regulation in the space, and the people receiving the free tokens don’t have enough information. What do you expect?” Evrard Otieno, a Nairobi-based crypto trader and software developer, told Rest of World. “It’s just another opportunity for traders to make some money in the market.”

Days after the Worldcoin launch, the Communications Authority of Kenya and the Office of the Data Protection Commission ordered Worldcoin to suspend operations while they reviewed the project’s privacy protections. [Twitter, archive]

Kenyan police then raided the Worldcoin Nairobi warehouse on August 5 and seized the orbs. [KahawaTungu]. 

Data watchdogs in Britain, France, and Germany are also investigating Worldcoin for similar reasons. [ICO; Reuters]

The WLD token launched at $3.58 but had crashed to a low of $1.76 by August 14. WLD trades only against USDT and mostly on Binance. [CoinDesk; CoinGecko] 

Worldcoin’s investors, who have collectively put in $125 million, include the usual suspects — Andreessen Horowitz, Coinbase Ventures, Digital Currency Group, Sam Bankman-Fried, and Reid Hoffman, the co-founder of LinkedIn. [Crunchbase]

Hex enduction hour

Hex is an ERC-20 token that doesn’t do anything. Hex was promoted widely, even internationally on billboards, by a fellow called Richard Heart (or Richard Schueler to the tax man).

Hex promised stupendous yield rates. You bought Hex with ETH, then you staked the Hex, then you got paid interest in Hex. The website called Hex the “first high-interest blockchain certificate of deposit” that “was built to be the highest appreciating asset that has ever existed in the history of man.”

To “stake” your Hex, you would send it to … the Ethereum genesis address, 0x0. That is, you would throw your Hex into a black hole from which it could never be recovered. The Hex smart contract would then pay you Hex tokens in the future, apparently.

The SEC has finally sued Heart over Hex, PulseChain (a fork of Ethereum), and PulseX (a fork of UniSwap). They allege that Heart raised over $1 billion from these three unregistered securities offerings beginning in 2019. [SEC press release; Complaint, PDF]

The SEC says that Heart misappropriated investor funds to buy luxury sports cars, Rolex watches, and a 555-carat diamond, known as “The Enigma,” which he purchased in February 2022 in a Sotheby’s auction. Sotheby’s accepted ETH for the purchase. Heart was famous for promoting Hex with photos of himself showing off his wealth.

Heart has an unfortunate past of selling email spam software in the 2000s. He even called himself the Spam King. Bennett Haselton of peacefire.org successfully sued Heart in 2002 under Washington anti-spam laws for sending junk emails with deceptive headers. [ZDNet, 2002, archive; Panama Guide, 2007, archive]

David went on Richard Heart’s livestream in early 2020. David talked about books a bit, then Richard went into his sales pitch for Hex. Richard is a very charming and likable fellow, but in that particular way that cautions you not to let a penny of your cash within a mile of him. [YouTube, 2020]

This bank failure is fine, nothing to see here

A fourth US bank fell over this year — Heartland Tri-State Bank of Elkhart in Kansas, a small bank with just $139 million in assets. David Herndon, the Kansas banking commissioner, closed Heartland on July 28 after it became insolvent because it was “apparently the victim of a huge scam.”

Herndon said he didn’t know what the scam was — but he said other banks in the state were not affected. Our psychic powers tell us he has an extremely good idea what happened. The FBI is on the case.

The FDIC had to pay $54 million out of its deposit insurance fund – more than Heartland’s entire $48 million loan portfolio. [FT, free with login]

An employee of the bank said all workers at the bank are still employed, but Shan Hanes, the president and CEO, is no longer there. The bank was handed over to Dream First Bank as a growing concern. 

Everyone has been careful to note that the bank fell due to a “huge scam” and definitely not the sort of thing that took out Silvergate Bank, Silicon Valley Bank, and Signature Bank. The “scam” was first mentioned in an August 4 story in American Banker. [Kansas Reflector; FDIC; American Banker]

Still only good news for bitcoin

The SEC is suing Binance. BAM (Binance US) wants to block further discovery and depositions, because they’ve given the SEC so much information toward the consent order they had to be beaten into. BAM demands only four depositions of BAM employees, no depositions of BAM’s CEO or CFO, and no matters outside the consent order. We suspect that Binance doesn’t have some of the perfectly reasonable stuff the SEC has asked for, such as non-existent financial accounts — so Binance is resorting to the Tether defense. John Reed Stark thinks the SEC will largely prevail. [Doc 95, PDF; Twitter, archive]

The SEC sued Bittrex in April for listing securities without registering as an exchange. Bittrex has now settled with the SEC. They will pay $14.4 million disgorgement, $4 million prejudgment interest, and a $5.6 million civil penalty. [Press release] 

CoinDesk is laying off 20 people from editorial — 45% of the editorial staff, or 16% of all staff – to prepare for its sale to the Peter Vessenes and Matt Roszak consortium. We’re pretty sure everyone at CoinDesk is furiously updating their resumes right now. [The Block; TechCrunch]

Wyoming Senator Cynthia Lummis, several lobbyists and academics, and venture capital firms a16z and Paradigm have filed amicus briefs urging the SEC to drop its lawsuit against Coinbase. These mostly repeat Coinbase’s arguments. [Doc 48, PDF; Doc 50, PDF; Doc 53, PDF; Doc 55, PDF; Doc 59, PDF; Doc 60, PDF; Doc 62, PDF]

Kai Lentit of “Programmers Are Also Human” on YouTube goes to Web3 Berlin. “Where people without jobs ask people without companies for jobs.” [YouTube]

Posted on by Amy Castor 1

Crypto collapse: Terra judge repudiates Ripple finding, Razzlekhan cops a plea, Binance’s FDUSD stablecoin, CoinDesk sold, smart contracts still stupid

  • By Amy Castor and David Gerard

“EXCLUSIVE: IT’S RUMORED THAT GARY GENSLER HAD A BLT FOR LUNCH TODAY. EXPERTS BELIVE THIS IS BULLISH FOR A POSSIBLE SPOT BITCOIN ETF APPROVAL”

— Sean Tuffy

IMPORTANT: Patreon sponsors, please check your pledges!

Patreon changed its billing for this month from California to Dublin. So a lot of banks rejected the transactions as possible fraud.

This would easily be reversible … except that Patreon’s systems automatically wiped all patron relationships where a transaction bounced! [Twitter thread, archive]

If you sponsor anyone on Patreon, not just us: please check your transactions for August, re-send them if they bounced, and rejoin as a patron if you need to. The “retry” link should be located in your billing history. Your creators will be most grateful!

We also have Ko-Fi links where you can send us casual tips — here’s Amy’s and here’s David’s.

Razzlekhan cops a plea

Bitcoin rapper Heather “Razzlekhan” Morgan and her husband Ilya Lichtenstein were arrested in February 2022 for hacking Bitfinex in 2016. They agreed to a plea deal a couple of weeks ago. [DOJ press release; Reuters]

The plea hearings were today, Thursday, August 3. Morgan pleaded guilty to money-laundering conspiracy and conspiracy to defraud the United States. The BBC says that “Morgan masqueraded as a rapper.” [BBC]

Lichtenstein pleaded guilty to money-laundering conspiracy. He also admitted to being the original perpetrator of the Bitfinex hack!

Lichtenstein stashed some of the hacked funds as buried gold coins. Arrr. [Bloomberg, archive; CNBC]

Curve: smart contracts, stupid humans

“Smart contracts” are small programs that run right there inside a blockchain. In enterprise computing, these would be called “database triggers” or “stored procedures.”

You never use triggers or stored procedures unless you absolutely have to, because they’re very easy to get wrong and a pain in the backside to debug. In the real world, you keep your financial data and the programs working on it separate.

So, of course, crypto uses programs embedded in the database for everything and touts the difficulty in working with them as a feature and not evidence of the idea’s incredible stupidity.

A smart contract full of crypto can reasonably be treated as a piñata, just waiting for you to whack it in the right spot and get the candy.

Today’s piñata is Curve Finance, a DeFi exchange used for trading stablecoins and other tokens. Curve was hacked on July 30 due to a bug in the Vyper language compiler. Smart contracts that were using Vyper versions 0.2.15, 0.2.16, and 0.3.0 were vulnerable. About $70 million in funds was drained from liquidity pools whose smart contracts used these versions. [Twitter, archive; Twitter, archive]

Vyper, which is inspired by Python, was supposed to have been an improvement over the hilariously awful Solidity — a.k.a. “JavaScript with a concussion” — that most Ethereum Virtual Machine smart contracts are written in. Unfortunately, the Vyper compiler had a bug that meant compiled code was exploitable. So you could mathematically prove your smart contract program was correct … and the compiled version could still be exploited. This could hit any Vyper smart contract using vulnerable versions. [Twitter, archive]

Some have suggested that the Vyper exploit and subsequent Curve hack were “state-sponsored” — which is quite possible, given that we already know that North Korea actively seeks to launder money using crypto.

If North Korea is caught cashing out from the Curve hack, then we suspect large DeFi protocols may get a call from OFAC soon for the same reasons that Tornado Cash did.

David wrote an entire book chapter on all the ways that smart contracts were stupid back in 2017. He foolishly thought that this would knock the idea firmly on the head.

CoinDesk on the block

The bankruptcy of Genesis left Genesis owner Digital Currency Group scrambling to sell off the silverware. DCG’s news site CoinDesk was rumored in January to be up for sale. CoinDesk is now being bought for $125 million by an investor group led by Matthew Roszak (Tally Capital) and Peter Vessenes (Capital6). [WSJ]

DCG bought the failing media outlet in 2016 for $500,000. It’s been shoveling money into CoinDesk ever since. DCG wants to keep the CoinDesk conference business, which is the only part of the site that makes any money.

Bitcoin old-timers will remember Vessenes from the Bitcoin Foundation of the early 2010s. He was the CEO of CoinLab, which was functionally a US agent for the Mt Gox exchange. CoinLab and Mt Gox sued each other repeatedly over alleged contractual breaches. After Mt Gox went bankrupt, CoinLab escalated its claims against the dead exchange from $75 million to an amazing and implausible $16 billion. [Bitcoin Magazine, 2013; Cointelegraph, 2019]

We don’t know what Vessenes wants with a media outlet that only loses money, even from a commercial propaganda perspective. We suppose he could alienate the site’s expensive hires of the past couple of years.

A Ripple in the war on Terra

Terraform Labs issued the TerraUSD and Luna coins, which triggered the crypto crash of May 2022, which popped the 2021 bubble.

We were surprised to hear that Terraform is not dead! It has a new CEO, Chris Amani, who was previously the firm’s COO and CFO. Amani’s hot plan is to revive the Terra blockchain. Amani says that Terraform won’t be launching a new stablecoin. Founder Do Kwon, who is in jail in Montenegro, is still Terraform’s majority shareholder. [WSJ]

The SEC’s case against Terraform proceeds. Terraform filed in May to dismiss the SEC’s complaint, using similar arguments as Coinbase and Ripple. Terraform recently filed that the bizarre July finding in the Ripple case supports dismissing the SEC complaint.

The SEC responded to Terraform and confirmed that it’s appealing the Ripple ruling because it’s nuts: “Ripple’s reasoning is impossible to reconcile with all of these fundamental securities laws principles … SEC staff is considering the various available avenues for further review and intends to recommend that the SEC seek such review.” So we can look forward to that appeal in Ripple. [Doc 29, PDF; Doc 47, PDF; Doc 49, PDF; case docket]

Judge Rakoff concurred with the SEC and got quite pointed about the very dumb and bad ruling in Ripple: [Doc 51, PDF]

Howey makes no such distinction between purchasers. And it makes good sense that it did not. That a purchaser bought the coins directly from the defendants or, instead, in a secondary re-sale transaction has no impact on whether a reasonable individual would objectively view the defendants’ actions and statements as evincing a promise of profits based on their efforts.

… Simply put, secondary-market purchasers had every bit as good a reason to believe that the defendants would take their capital contributions and use it to generate profits on their behalf.

We don’t expect the Ripple ruling to stand.

4

Crypto trading is illegal in China — technically, anyway. The Wall Street Journal says that Binance users coming in from China still trade $90 billion a month — it’s “Binance’s biggest market by far,” with over 900,000 users. [WSJ]

The importance of China is “openly discussed internally.” In fact, “the exchange’s investigations team works closely with Chinese law enforcement to detect potential criminal activity.”

Binance denies the reports, with the very specific wording: “The Binance.com website is blocked in China and is not accessible to China-based users.” Good thing nobody in China uses a VPN, hey. The WSJ says that Binance directs its Chinese users to “visit different websites with Chinese domain names before rerouting them to the global exchange.” [Cointelegraph]

Binance CEO Changpeng “CZ” Zhao responded “4” — meaning that it’s all FUD. [Twitter, archive]

Fore!

The US Department of Justice is considering charges against Binance, but worries about causing a run on the exchange — or so says Semafor, which says the DoJ is considering fines or a deferred prosecution agreement instead. We think that any Binance user who hasn’t already priced in yet more US government action against Binance, particularly an indictment, just doesn’t want to be told. [Semafor]

Binance is cutting employee benefits, citing a decline in its profits — which suggests its customers are running away screaming. The non-US employees laid off in June were offered severance of two months’ salary paid in BNB tokens. [WSJ]

If Binance has a drop in profits, it’s likely the large institutional traders — Binance’s “VIPs” — jumping ship while they can. Where can they be going? Is there a good casino left for the VIPs with an ample supply of suckers to milk? Or was Binance the end of the line?

CZ has filed a motion to dismiss the CFTC complaint against him. He holds that Binance just doesn’t do business in the US, so the CFTC doesn’t have jurisdiction. Also, the securities aren’t securities, apparently. [Doc 59, PDF] 

CZ wanted to just shut Binance US earlier this year because of the regulatory heat, two people told The Information. The BAM board voted, but the lone holdout was Binance US CEO Brian Shroder. CZ also considered selling Binance US to Gemini or a sovereign wealth fund. Binance told Cointelegraph that it was “not commenting” on this issue. [The Information, paywalled; Cointelegraph]

In June, the SEC Nigeria ruled that Binance Nigeria had to stop operating in the country. Binance claimed that “Binance Nigeria” had nothing to do with them. SEC Nigeria has now reiterated that they really do mean binance.com. Nigeria has also told all other crypto platforms to desist: “all platform providers, making such solicitations, are hereby directed to immediately stop soliciting Nigerian investors in any form whatsoever.” [SEC Nigeria]

Everybody gets a stablecoin!

On July 26, Binance listed a new coin, FDUSD — a “1:1 USD-backed stablecoin issued by First Digital Labs. Reserves of FDUSD are held by First Digital Trust Limited.” Its trading pairs are BNB, USDT, and BUSD — with zero fees. [Twitter, archive; Binance]

Binance has been going through the stablecoins lately. Binance’s own BUSD has shut down, Binance doesn’t seem to be on such solid terms with Tether, and it tried pumping out a few billion questionably backed TrueUSD after that coin’s main custodian, Prime Trust, had collapsed. First Digital — previously known as Legacy Trust — just happens to be the remaining custodian for TrueUSD.

FDUSD was launched on June 1. Data Finnovation wonders why millions of dollars of deposits to and minting of FDUSD started a week before its supposed launch. “If you believe these are strongly linked to real usd you deserve what you’re gonna get.” [press release; Twitter, archive]

Vincent Chok, CEO of First Digital, has a storied history in business. Before Chok’s move to Hong Kong, he was selling real estate in Canada with Platinum Equities in 2014 — a company that was sanctioned by the Alberta Securities Commission for fraud (though Chok wasn’t named). Chok’s previous company was Intreo Wealth Alliance in Calgary. [press release]

None more stable

Wyoming is trying to do a stablecoin again with their Stable Token Commission! The total budget for the initiative: $500,000. We wrote before about Caitlin Long’s crypto bank Custodia and what a disaster that was. Custodia also hoped to launch a national stablecoin backed by the Fed, but the Fed was having none of it. So good luck, guys. [Wyoming Truth]

Michel de Cryptadamus notices that Tether’s attestations show its actual cash on hand is getting quite low. On December 31, 2022, they claimed to have $5.31 billion in cash. On March 31, 2023, they claimed $481 million. On June 30, 2023, they claimed just $90 million. This is as the issuance of tethers keeps going up. But we’re sure it’s all fine. [Twitter, archive]

The New York Fed wrote about “Runs on Stablecoins” — concerning the Terra-Luna collapse of May 2022. David Rosenthal contextualizes the New York Fed paper: “Note in particular that traders don’t actually believe that USDT is safe, it is just that its size makes it convenient for traders to use USDT unless, like Wile E. Coyote, they look down at it as they did last May.” [NY Fed; blog post]

The White House has told Rep. Patrick McHenry’s stablecoin bill to go away, at least according to McHenry. [The Block] 

Coinbase: not so keen on regulatory clarity

Coinbase wants regulatory clarity. The SEC was happy to give it to them. Brian Armstrong of Coinbase told the Financial Times that prior to the SEC suing Coinbase in June, the commission told them to delist all cryptocurrencies other than bitcoin. [FT, archive]

The SEC told CoinDesk that “SEC staff does not ask companies to delist crypto assets. In the course of an investigation, the staff may share its own view as to what conduct may raise questions for the Commission under the securities laws.” [CoinDesk]

Coinbase told CoinDesk that the FT report “lacks critical context” but was somehow unable to also say what the context was.

This is pretty rich given that it was literally Armstrong who told this to the FT, presumably hoping to gin up the crypto crowd — which he certainly did.

Coinbase concurred that the SEC did not, in fact, formally tell the exchange to delist everything except bitcoin.

We strongly suspect the actual conversation was Coinbase asking “Well how can we absolutely avoid breaking any laws then, smart guy?” and then the SEC fellow suggesting the very safest possible option.

Good news for bitcoin

Kyle Davies from Three Arrows Capital (3AC) has gone sovereign citizen. Davies holds that renouncing his US citizenship in October 2020 means that he can’t be held in contempt of court for not responding to 3AC liquidators Teneo in their US action. Davies’ lawyers also claimed that he hadn’t been properly served, as if he could claim not to know about the proceeding while arguing it in court. [Doc 106, PDF; Doc 107, PDF; case docket]

The SEC suggests that crypto “attestations” that aren’t audits might be a worry … for the accountants. Subheadings in the SEC’s statement on “The Potential Pitfalls of Purported Crypto ‘Assurance’ Work” include “The Accounting Firm’s Potential Liability for Antifraud Violations.” The footnotes mention that “liability for fraud may extend to “attorneys, engineers, and other professionals or experts.” This means that the SEC will look at what the developers were doing. [SEC]

Swift is running a pilot program that lets you make instant payments across different currency zones! So what backend do you need to use for instant remittances across currency zones? It turns out the answer is: a database. [FinExtra]

Kuwait has banned cryptocurrency for payments or investments. The National Committee for Combating Money Laundering and Terrorism Financing says it’s doing this to implement FATF requirements. Crypto mining is also banned. Securities under the Central Bank of Kuwait or Capital Markets Authority regulation are exempt. [Arabian Business; Al Jarida, in Arabic] 

FedNow, the Federal Reserve’s real-time retail settlement system, has gone live, dragging US retail banking kicking and screaming into the 2000s. This puts a Fed CBDC into the trash can, as the White House had already noted. The hard part is getting thousands of banks to sign up. But the Fed has its ways of asking for things. [Federal Reserve]

Media stardom

David told the Moscow Times — who are not fans of Mr. Putin and who are currently banned in Russia — that a CBDC ruble wouldn’t do anything new to help evade sanctions that Russia can’t already do with rubles: “The problem is that nobody wants rubles.” [Moscow Times]

Posted on by Amy Castor 1

John Jay Ray sues FTX inner circle for $1 billion, prosecutors want Sam Bankman-Fried’s bail revoked

We just posted an update on the latest happenings with FTX. This one is on David’s blog. [David Gerard]

In recent months, John Jay Ray III and his team have filed a pile of more actions to claw back funds for FTX creditors.

Ray is suing the FTX inner circle for $1 billion in fraudulent transfers. Among their bizarre plans, SBF and the gang wanted to turn the Island of Nauru into a doomsday bunker for effective altruists.

In other news, FTX and Genesis are settling, several media outlets are still battling to keep the court from permanently sealing FTX’s creditor list, and it’s looking like Sam is about to have his bail revoked. The prosecution is fed up with his efforts to “taint the jury pool.” Leaking Caroline’s diary to NYT reporters was the last straw for them. 

Image: Caroline Ellison, Sam Bankman–Fried, Nishad Singh, and Gary Wang

Posted on by Amy Castor 0

Stalking a charity: Why the FBI raided Kraken founder Jesse Powell’s home

  • By Amy Castor and David Gerard
  • If you like our work, become a patron! Here’s Amy’s Patreon, and here’s David’s. Sign up today!

Jesse Powell, who launched the Kraken crypto exchange in 2013, got a surprise knock on the door in March when the FBI showed up at his $11 million Los Angeles home for an unannounced search — and left with some of his electronics.

Powell’s house was searched because of allegations that he was hacking and cyber-stalking Verge Center for the Arts, a Sacramento non-profit that he founded in 2007 and bankrolled for several years.

In the wake of the FBI search, Powell is now suing Verge for booting him off the board in 2022. [New York Times, archive]

After the crypto bubble popped in May 2022, Powell became notably more vocal in his crank political views. We’re guessing the Verge board was fed up with his antics, and it wasn’t helpful to them in dealing with more normal art supporters.

Powell feels deeply hurt by getting ousted from the board of Verge. He responded by suing Verge to return his donations to the charity and to reinstate him to the board. We’re not sure those two things go together.

How Verge happened

Powell got his start trading Magic: the Gathering game cards as a teenager in the 1990s. That’s how he met his school friend Roger Ver, who later became a huge bitcoin investor and promoter. 

Like a lot of other early bitcoiners, Powell was into video gaming. Many games have their own in-game currencies — often called “gold” — that gamers use to buy and sell digital items, like characters and weapons.  

In 2001, Powell co-founded Lewt, an online company that sold virtual items and currencies related to games like Blizzard Entertainment’s Diablo II and World of Warcraft.

How did Lewt work? When Diablo III came out in 2012, Powell wrote on his personal blog that he was “Offering $1,000,000+/yr for reliable, unlimited and exclusive Diablo 3 item and gold supply.” [Forthewin, 2012, archive]

Powell didn’t ask how or where you obtained that supply: “Please take measures to anonymize yourself when contacting me.” 

It’s difficult to overstate how much the majority of gamers hate guys like this. GameFAQs user FindKenshi wrote in May 2012: “The man made hundreds of millions of dollars off of ‘black market’ item sales, and his massive supply came from a never ending stop of exploits, hacks, insiders from Blizzard, and other sources … No wonder hundreds of accounts are getting stolen every day.” [GameFAQs, 2012, archive]

In 2007, Powell took some of the money he earned from selling virtual game items and leased a long-empty former Napa Auto Parts warehouse in Sacramento on the corner of 19th and V. Streets. He invited area artists to apply for free studio space. And so, Verge was born, initially as a commercial enterprise.

In 2010, Verge Center for the Arts was incorporated as a nonprofit. The space moved to a new location at 625 S. Street on the corner of 7th and S. Streets. Verge bought this building in 2014 when it merged with the Center for Contemporary Art Sacramento. [Baartquake, 2009; Verge]

Verge executive director Liv Moe claims responsibility for growing the arts group into a commercial gallery. Today, Verge houses three to four exhibitions per year, offers classes, labs, and workshops for artists, and has over 40 resident artists. [LinkedIn, archive]

Powell’s erratic behavior

Jesse Powell holds many bizarre opinions, which he’s been happy to express for years. A lot of these opinions are quite prevalent in the bitcoin world. 

Powell fully subscribes to the conspiracy-originated “sound money” theories of bitcoin — though at least he doesn’t believe the US is headed for hyperinflation. He is, however, a committed bitcoin moon boy: “when you measure it in terms of dollars, you have to think it’s going to infinity.” [Fortune, 2020; Bloomberg, 2021, video]

Powell also a COVID conspiracy theorist and vaccine denialist. He believes in “natural immunity,” claims there exists an “anti-science Cult of Vaxx eugenics program,” and warns of a “China COVID psyop.” He is outraged at the lack of respect for “alternative treatments,” such as ivermectin — which, to be clear, doesn’t do anything for COVID, and only cranks think so. But Powell assures us that he respects “vaxxed people, some of whom are statists with compromised immune systems.” [Twitter, archive; Twitter, archive; Twitter, archive; Twitter, archive; Twitter, archive; Twitter, archive; Twitter, archive]

So Powell is nuts — or “eccentric,” since he’s rich. That’s not a major problem as long as he’s not acting-out nuts where people outside the bitcoin world can hear him. But after the crypto market crashed in May 2022, Powell started acting out.

In June 2022, the New York Times — or “Satan,” if you’re a Silicon Valley tech CEO — wrote about workplace issues at Kraken after it got hold of a “culture document” that Powell had written up and distributed to staff. [New York Times, archive]

A later version of the guide was posted publicly — one that, among other changes, no longer explicitly listed the rights to COVID denial and bearing arms that were in the version the New York Times saw. [Kraken, archive]

Powell was doing things at Kraken that would have been disciplinary offenses in any reasonable workplace — particularly in California — if he were not the CEO. As Jesse described the issues he was having with employees: [Twitter, archive]

5/ What are they upset about?

  • * DEI (Silicon Valley’s version)
  • * pronouns, whether someone can identify as a different race and be allowed to use the N-word
  • * whether differences in human sex exist at all
  • * being respected and unoffended
  • * being “harmed” by “violent” words

In a company Slack channel labeled “and you thought 4chan was full of trolls,” the person asking if he could identify as a different race to say slurs in the workplace and who led discussions of whether women were just naturally stupider than men and whether “most American ladies have been brainwashed in modern times” was, of course, Powell himself.

After the New York Times story, Powell tweeted: “Back to dictatorship.” [Twitter, archive]

Three months later, in September 2022, Powell stepped down from his role as CEO of Kraken. Powell was still Kraken’s largest shareholder and became chairman of the board. [Kraken, archive; New York Times, archive]

Nobody had the power to fire Powell, so he would have stepped down voluntarily — likely under pressure. We suspect that someone convinced him that his HR attitude was not going to be good for a business that dealt with highly regulated financial services and was already under investigation for sanctions violations.

Guiding principles: Powell sues Verge

After the FBI raid, Powell sued Verge and Verge’s treasurer and counsel Phil Cunningham in June 2023. Powell alleged that Verge directors conspired against him while continuing to take his money, then pushed him out. His PR company kindly sent us a copy of the complaint, as written up by his attorney, Brandon Fox. [Complaint, PDF]

Powell says that he had provided Verge with years of financial and technical support — and the Verge board turned on him last summer. On June 20, 2022 — shortly after the New York Times story — the board held a secret meeting where they declared Powell’s seat vacant as of October 2019. 

Since Powell didn’t attend board meetings at all — he says he didn’t have to as a founding member — he didn’t learn that he was out until October 2022, when he discovered he had been removed from the board’s distribution list and his name had been wiped from Verge’s public-facing platforms.

Powell put $1.5 million into Verge, according to the complaint. He registered vergeart.com — the domain name Verge used up until June 2022 — and paid for the domain and its hosting fees. He also paid for Verge’s G Suite and Slack accounts.

Verge asked for the domains and accounts back so that “no one individual owns anything important to the org” — which is reasonable and normal, and Verge really should have insisted on this in 2010 when it became a non-profit.

(That said, we fully understand that it can take charities ages to get around to basic things.)

​​After Powell was kicked off the board, Verge set up a new domain, vergecontemporaryart.org, and redirected the vergeart.com domain. Powell said that the vergeart.com was his domain and he objects to Verge putting the redirect in place “without Mr. Powell’s permission or awareness.”

Powell says that Verge founding director Liv Moe, Verge president Gwenna Howard, and Cunningham wanted him gone because “they disagreed with what they believed to be his views on certain social, cultural, and political issues.” Well, yes.

Howard wrote to Powell: “The Board finds your views to be completely contrary to Verge’s Guiding Principles.” These would have been the views revealed in the June 2022 New York Times story. [Guiding principles, archive]

Verge’s guiding principles state that “Verge is committed to becoming a more open and welcoming organization” and seeks to embrace “different ethnicities, skin colors, gender identities and body types, religious beliefs, physical or cognitive challenges, or socio-economic standing.”

Powell says his views do align with Verge’s guiding principles, and that it was actually Moe who violated the principles. His evidence is two tweets from several years back mentioning white people.

Cunningham’s cease and desist to Powell

Powell’s behavior led to Cunningham writing to Powell and Kraken on November 2, 2022 — two months after Powell stepped down as CEO. Powell claims in his suit that Cunningham “defamed him with falsehoods”:

In telling Mr. Powell’s employer that, among other things, Mr. Powell effectively hacked Verge’s domain and accounts, blocked Verge’s access to its accounts and domain, and refused to relinquish control over Verge’s domain and accounts, Mr. Cunningham, individually, and Verge, acting through Mr. Cunningham as its agent, expressed false statements about Mr. Powell and implied that Mr. Powell was unprofessional and dangerous, and that he had committed a crime.

This letter wasn’t some casual personal communication — it was Cunningham writing “in my official capacity as counsel for VERGE Center for the Arts, a California not for profit corporation.” [Letter, PDF]

This was a legal demand to cease and desist hampering the operations of the charity.

Cunningham complains that Powell has blocked Verge from its usual email accounts and interfered with its technology services. He complains of the “substantial cost and delay” that Powell has incurred for Verge.

Jesse didn’t take his ouster lying down — he used the old vergeart.com domain that he still controlled to and put up a website saying that he was still on the board!

VERGE believes you have used its old domain to create an internet copy of the VERGE website and then changed that website to reflect that you are still a member of the board of directors.

Unsurprisingly, Verge considers this behavior may cause them reputational damage — whether Powell owns the registration to vergeart.com or not.

Cunningham cites California precedent that “your control of the domain names is like owning a storage locker and you refuse to give VERGE the key to the locker so it can retrieve its property.”

Cunningham’s key point is:

The business records and email communications associated with VERGE are the personal property of VERGE.

Powell fails to realize this. He paid the bills for the accounts — but the contents belong to the charity, which is its own entity.

What happens now?

Powell wants Verge to pay damages determined by trial and disgorge the money he gave them after he was covertly booted. He also demands to be put back onto the board.

Those two things aren’t going to go together. Powell put his heart and soul into Verge for years — but Verge is a separate corporation from its founder, and its founder’s views have diverged from the charity’s. Powell’s suit repeatedly fails to understand that the charity is not his personal property.

This suit is not sane and balanced behavior. It’s completely sincere, and Powell’s hurt and pain are real — he feels betrayed. But that’s not enough to make a lawsuit a good or viable idea.

At the very least, Jesse should have contacted his lawyer before he held Verge’s daily office work accounts hostage and edited its website.

We would expect the equitable outcome to end up being something like, Powell giving back the domain and email accounts and Verge returning some of his donations. But that may be too reasonable for Powell.

Verge has until August 7 to respond to Powell’s complaint. We look forward to hearing Verge’s side of the story. 

Posted on by Amy Castor 0

Crypto collapse: Alex Mashinsky of Celsius arrested, Ripple’s bizarre XRP win, Gemini sues Genesis, Gisele Bündchen knew nothing!

The latest episode of the crypto collapse is out. This edition is on David’s blog. [David Gerard]

In this episode, we cover:

  • The Mashinsky Method: mycrimes.epub
  • Good, if bizarre, news for XRP
  • Binance hates Binance
  • Coinbase, the battle continues
  • A spot of regulatory clarity
  • Gisele Bündchen: Crypto? What’s a crypto?

Image: Alex Mashinsky shows up for his arraignment after an early morning arrest.

Posted on by Amy Castor 0

Crypto collapse: Venture capital goes home, Coinbase, Tether backing, FTX sues Hollywood VCs, 3AC on the beach

  • By Amy Castor and David Gerard

“My survey of three card monte tables suggests they’ve always got at least one patron but you won’t see anyone playing at the big casinos which just shows the system is rigged.”

— crossestman

Crypto’s not dead! Look, it’s still twitching

Crypto venture capital investments have gone full crypto collapse, from $21.6 billion in 2022 to just $0.5 billion so far in 2023. This Fortune article includes the funniest graph of the week: [Fortune, archive]

Investors are leaving the crypto sector without any plans to return. [Bloomberg] 

Crypto trading is at its lowest level since October 2020. The Block puts the volume for May 2023 at $424 billion. For comparison, May 2021 was $4.25 trillion and May 2022 was $1.4 trillion. [The Block]

Volume numbers are considerably less if you take into account that unregulated crypto exchanges are known for faking their volumes. Crypto trading is all but dead. We know this because exchanges run by normal finance guys don’t see any trading. [Bloomberg]

Traditional finance groups want to start their own crypto exchanges run in a non-clown-shoes manner. A nice ambition — but that was Gemini’s pitch and even they still had to resort to risky garbage. [FT] 

The Winklevoss twins marketed Gemini as an exchange that played by the rules — one that serious money people could trust. But after the failure of FTX and the Genesis bankruptcy — in which Gemini is the largest creditor — they lost that trust. Maybe they could pivot to AI? [Bloomberg] 

Crypto.com halted services for institutional traders in the US on June 21. The exchange cited “limited demand” as the reason. [news.bitcoin.com]

The rest of crypto is also desperate. Reddit founder Alexis Ohanian is still pushing play-to-earn games and touts Axie Infinity as a huge success. Gamers hate play-to-earn and think it’s vacuous horse hockey. [Twitter, archive]

Universe.xyz is the latest NFT market to shut down, taking all the images on the site with it. As more NFT markets shut down, your apes are in danger of going blank forever. [Twitter, archive]

TechMonitor asks: “Is crypto finally dead?” We should be so lucky. With quotes from David. [TechMonitor] 

Coinbase: We didn’t do it, nobody saw us, and it wasn’t even a thing

Coinbase has responded to the SEC’s complaint with 177 pages of chaff. [Doc 22, PDF]

Paragraph 2 makes the claim that in approving Coinbase’s original S-1, the SEC approved Coinbase’s business. Let’s quote again this line from the S-1, signed off by Brian Armstrong: [SEC]

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

Coinbase argues that Congress is looking into cryptos, therefore existing laws don’t matter. Paul Grewal, Coinbase’s general counsel, has told Bloomberg how Coinbase’s big hope is that new laws will save their backsides. This is correct — Rep McHenry’s new crypto markets bill is indeed Coinbase’s only hope. [Bloomberg]

Coinbase claims that with this complaint, the SEC is working well outside its remit and that its ideas about whether crypto tokens are securities are entirely novel. Never mind the SEC’s repeated wins in court whenever a crypto issuer is dumb enough to take the matter that far. [Doc 23, PDF; CoinDesk]

Earlier, Coinbase filed a writ of mandamus demanding that the SEC consider its proposal for new crypto regulations. The SEC says it’ll have something to report within 120 days. Judge Cheryl Ann Krause expects a decision on Coinbase’s proposal from the regulator by October 11. [Doc 30, PDF; Doc 32, PDF]  

Tether: Yes! We have no Chinese commercial paper

CoinDesk finally got access to documents from the New York Attorney General related to Tether’s reserves from March 31, 2021. [CoinDesk; CoinDesk, PDF; CoinDesk, PDF; CoinDesk, PDF; CoinDesk, PDF; Bloomberg]  

The NYAG claimed that Tether had been lying about its reserves — which it had been. Tether and Bitfinex settled with New York for $18.5 million in February 2021.

The settlement required Tether to publish a breakdown of its reserves quarterly for two years. But what the public got to see in May 2021 were two skimpy pie charts, showing where Tether had parked its alleged $41 billion in backing reserves at the time. [Tether, archive]

CoinDesk then filed a Freedom of Information request for the fully detailed version of Tether’s report to the NYAG on its reserves.

Tether fought the release of the documents for two years. In February, they lost in court and decided not to go ahead with an appeal. So the NYAG sent Coindesk the documents on June 15. New York also sent the same documents to Bloomberg and Decrypt.

In June and July 2022, Tether vigorously denied that it held money in Chinese commercial paper — loans to Chinese companies which most money market funds avoid. It also said in September 2021 that it had no debt or securities linked to Evergrande, a cash-strapped Chinese real estate company. [Tether, 2022; Tether, 2022; CoinDesk, 2021]

Bloomberg called out Tether’s wider claims of no involvement in Chinese commercial paper as nonsense. [Bloomberg, 2021]

It turns out that Tether did hold Chinese commercial paper in 2021, and quite a lot of it. It held securities issued from banks around the world — but mainly China, including debt issued by the Industrial & Commercial Bank of China, China Construction Bank, and Agricultural Bank of China. ChainArgos took a close look at the funds and put together a spreadsheet. [Google Docs]

The Tether press releases on the FOIed docs are a hoot. Lots of table pounding. [Tether, archive; Tether, archive]

We give CoinDesk a bit of stick from time to time. But we also read the site every day and follow the livewire feed. They get all the credit for doggedly pursuing this one.

FTX versus the venture capitalists to the stars

John Jay Ray’s team at FTX seems to have found some more truly fascinating documents. FTX is suing venture capital firm K5 Global, its managers, Michael Kives and Bryan Baum, and various related entities to recover the $700 million that Sam Bankman-Fried put into the firm.

Kives worked at Creative Artists Agency from 2003 to 2018 as a Hollywood talent agent. He left in 2018 to found K5.

In February 2022, SBF attended a dinner party at Kives’ house, with A-list celebrities, billionaires, and politicians. He was deeply impressed with Kives’ “infinite connections” and even contemplated that Kives could work with FTX on “electoral politics.”

Less than three weeks later, SBF signed a “term sheet” agreeing to give Kives and Baum $125 million each personally and to invest billions of dollars into K5 over three years: 

The Term Sheet was little more than a cursory list of investment ideas, and repeatedly stated that the actual “mechanics” of these very substantial investments would be later worked out “in the long form documents.” 

SBF wired $300 million to K5 the next day. No due diligence was done on any of the deals — including $214.5 million for a 38% stake in MBK Capital LP Series T, whose gross asset value was just $2.94 million as of March 2022.

K5 were very close advisors. Kives and Baum joined FTX’s internal Slack chat. SBF reserved a room for them in his Bahamas luxury apartment. In May, Alameda transferred another $200 million to K5.

Sam didn’t worry too much about the fine details. In an August 2022 internal document, he wrote that “Bryan is ~100% aligned with FTX,” that “FTX is aligned with Bryan too,” and that “if there are significant artificial up-downs between FTX and K5 as entities, I’m happy to just true it up with cash estimates.”

SBF wrote that he was:

… aligned with Bryan and K5, and treats $1 to it as $1 to FTX even though we only own 33%, because whatever, we can always true up cash if needed, but also, who cares … There are logistical, PR, regulatory, etc reasons to not just merge K5 100% into FTX but I and Bryan will both act how we would if they were merged.

… Is Bryan an FTX employee, or a random 3rd party? The answer, really, is neither. The answer is that it’s sorta complicated and liminal and unclear. Bryan lives in the uncanny valley.

FTX and Alameda employees flagged K5’s “pretty bizarre” expenses at the time, such as “over $777k in design expenses” that had been billed to Alameda.

FTX wants the $700 million back as having been avoidable transfers. It may want even more money, as Ray’s team suspects that more interesting details will come out in discovery. FTX also wants K5’s claims in the bankruptcy disallowed until this matter is resolved. [Adversary Case, PDF]

More news from Chapter 11

Cameron Winklevoss tweeted yet another open letter to Barry Silbert of Digital Currency Group on July 4, demanding back Gemini Earn customers’ money. Winklevoss accuses DCG of “fraudulent behavior” and wants them to do the “right thing” and hand over $1.465 billion of dollars, bitcoin, and ether. If Silbert doesn’t pay up, Winklevoss threatens to sue on Friday, July 7. CoinDesk, which is owned by DCG, couldn’t get a comment from their own proprietor on the story. [Twitter, archive; CoinDesk]

After the deal for Binance.US to buy Voyager Digital fell through, Voyager gave up trying to sell itself and is liquidating. Here’s the liquidation notice. [Doc 1459, PDF]  

Celsius is finally converting its altcoins to BTC and ETH as it pursues its plan to relaunch with the auction-winning consortium Fahrenheit. [CoinDesk]  

If you have vastly too much time on your hands, here’s the full Celsius Network auction transcript — all 256 pages of it. [Doc 2748, PDF]

Customers of the bankrupt US branch of the Bittrex crypto exchange — which is being sued by the SEC — can withdraw those holdings that are clearly theirs … whatever that means. [CoinDesk]  

Three Arrows Capital: What Su and Kyle did next

Crypto was taken out in 2022 by a one-two punch of Terra-Luna collapsing in May and then crypto hedge fund Three Arrows Capital collapsing in June.

Other crypto firms had invested in Terra-Luna and 3AC because they paid the highest interest rates! Now, you might think that investment firms would know that high interest means high risk.

3AC’s two founders, Su Zhu and Kyle Davies, just shut their office door in Singapore in late May 2022 and skipped the country, leaving their staff to tell investors the bad news.

What did Zhu and Davies do next? They spent the summer traveling around Asia, went surfing, and played video games. Davies is currently in Dubai and Zhu is back living in Singapore. [NYT]

Zhu and Davies insist they must have done nothing wrong because no government has filed charges yet. Uh huh.

3AC’s creditors think Zhu and Davies have done one or two things wrong. Teneo, the liquidator trying to clean up the 3AC mess, wants the pair fined $10,000 a day for contempt, saying that Davies has failed to respond to a subpoena. [CoinDesk]

The pair are suing Mike Dudas, the original founder of crypto media outlet The Block, for defamation. In the US, LOL. They allege Dudas said nasty things about their new crypto venture OPNX, though the suit doesn’t say what allegedly defamatory claims Dudas made. We expect the 3AC boys to have some trouble demonstrating they have a reputation to malign. Stephen Palley is representing Dudas. [CoinDesk]

Regulatory clarity

In the UK, the Financial Services and Markets Bill has passed. One part of this gives the Treasury greater powers to regulate crypto, likely via the Financial Conduct Authority. We should expect more detailed regulations within a year. [CoinDesk]

This comes not before time. UK losses to crypto fraud increased more than 40% to surpass £300 million (USD$373 million), according to Action Fraud, the national reporting center for fraud and cybercrime. [FT] 

Europe’s MiCA is now law from the end of June 2023. It goes into application in one year for stablecoins and in 18 months for general crypto assets and virtual asset service providers. [EUR-Lex]  

The European Central Bank keeps talking about doing a CBDC. This is good news for crypto! Or maybe it isn’t: [ECB]

Policymakers should be wary of supporting an industry that has so far produced no societal benefits and is increasingly trying to integrate into the traditional financial system, both to acquire legitimacy as part of that system and to piggyback on it.

The CFTC Division of Clearing and Risk sent out a staff advisory to registered derivatives clearing organizations on May 30, reminding them of the risks associated with expanding the scope of their activities. It specifically addressed crypto. [CFTC]

When the CFTC points out that market shenanigans are illegal in crypto just like they are in regular commodities, keep in mind that Avi Eisenberg is finally going to trial for allegedly committing those precise market shenanigans in DeFi. These are real go-to-jail crimes. [Bloomberg; Schedule, PDF; Case docket]  

The Thailand SEC has banned crypto lending that pays returns to investors. It now also requires crypto trading firms to post the following warning: “Cryptocurrencies are high risk. Please study and understand the risks of cryptocurrencies thoroughly. because you may lose the entire amount invested.” [SEC Thailand, in Thai]

New York has settled with CoinEx after suing them in February for failing to register as a securities exchange. The company has to stop operating in the US — not just New York — return $1.1 million to investors, and pay $600,000 in penalties. [NYAG; Stipulation and consent, PDF]

The ETF trick will surely work this time

Guys, guys, the Blackrock and Fidelity bitcoin ETFs will change everything! They’re going to get surveillance of trading and market data from somewhere! This will surely answer all of the SEC’s previous objections to bitcoin ETFs! The market will be delighted!

… oh. The SEC has found these applications inadequate. [WSJ]  

Blackrock and Fidelity are going to try again with Coinbase as the exchange supplying market surveillance. [CoinDesk]  

But the trouble with monitoring at Coinbase is that Coinbase isn’t where the market is — the bitcoin market is at Binance. That’s where price discovery happens.

We expect these ETF applications to go no further than all the previous bitcoin ETF applications.

The good news for bitcoin continues its monotonous patter

Binance senior staff have been jumping ship. General counsel Han Ng, chief strategy officer Patrick Hillmann, and SVP for compliance Steven Christie all resigned this week. They specifically left over CZ’s response to the ongoing Department of Justice investigation. [Fortune]

Binance.US’s market share has dropped to 1%, down from a record 27% in April. Is Binance giving up on its US exchange? The market share nose-dived after the SEC sued Binance in June. [WSJ]  

Fortune favors the internal trading desk: Crypto.com has been caught trading directly against its own customers. Dirty Bubble spotted the job ads for a proprietary trading desk at the firm in November 2022, of course. [FT, archive; Twitter, archive]  

Russia is giving up on the idea of a unified state-run crypto exchange. Instead, it’s focusing on regulation for multiple exchanges. Russia is continuing to promote crypto as a way to evade sanctions for making international payments. When you’ve devastated your economy by embarking upon a very stupid war, that’s … a strategy? [Izvestia, Russian]

In crypto collapse news from the distant past, something’s happened in Quadriga! The government of British Columbia is seeking forfeiture of $600,000 in cash, gold bars, and Rolex watches that QuadrigaCX cofounder Michael Patryn has in a safe deposit box. The RCMP alleges the items are the proceeds of unlawful activity. [Vancouver Sun]

Posted on by Amy Castor 0

Crypto collapse: TrueUSD in trouble, Prime Trust and Banq go down, Europe hates Binance, BlockFi, Terra-Luna, Twitter is just resting

We’ve been catching up on the latest crypto collapse news. It’s David’s turn to post, so you’ll find the writeup on his blog. [David Gerard]

In this episode:

  • Twitter is becoming unusable! Archive everything!
  • Prime Trust takes out TUSD.
  • Banq, Prime Trust, Jon Jiles, and NFTs.
  • Europe really hates Binance.
  • Everybody hates Binance.
  • BlockFi creditors get spicy.

Also, if you haven’t already, please support us on Patreon!

Posted on by Amy Castor 0

FTX: John Jay Ray files second interim report, sues Daniel Friedberg

  • By Amy Castor and David Gerard

Me: [turning to guy at gas station] so the polycule was mostly in the dark about the fraud. SBF had back door access
Guy: [pulling out taser from under seat] is that right

— Ed Zitron

“Attorney-1” was a bad boy

John Jay Ray III, the CEO of FTX in bankruptcy, has released a second interim report detailing how FTX skirted bank secrecy laws and commingled funds — and how an FTX lawyer, “Attorney-1,” served as Sam Bankman-Fried’s fix-it and hatchet man. [Report, PDF]

(We covered the first interim report, which came out in April, here.)  

“Attorney-1” is very obviously Daniel Friedberg, who was FTX’s compliance officer and Alameda’s general counsel. A day after Ray released the interim report, FTX filed suit against Friedberg, alleging malfeasance in the course of his duties. The complaint details many of the same incidents in the report. [WSJ; redacted complaint, PDF]

In 2008, Friedberg was a colleague of Stuart Hoegner at Ultimate Bet, where the pair helped cover up a multi-million-dollar scandal in which the site cheated its players. Hoegner now works for Tether, a dubious stablecoin issuer. 

SBF hiring Friedberg should have been the first clue that FTX.com was a massive fraud. 

Friedberg resigned around the time the FTX Group filed for bankruptcy. Weeks later, he met with the FBI, the DOJ, and the SEC and told them he wanted to cooperate with any investigations.

There’s an interesting line in the interim report:

The Debtors have identified on Attorney-1’s hard drive a final copy of the false written testimony that Bankman-Fried provided to Congress.

FTX has access to the hard drive from Friedberg’s computer. Did Friedberg just leave the evidence behind when he quit FTX? Or did he willingly hand over his laptop to FBI agents? This hard drive seems to have had all sorts of interesting documents on it.

Friedberg hasn’t been charged with any crimes as yet — but based on Ray’s report and the ensuing lawsuit, we wouldn’t be surprised if there’s a sealed indictment out there waiting for him.

Following the money

FTX owes $8.7 billion in customer funds — over $6.4 billion of which is cash and stablecoins. According to Ray, Friedberg lent a helping hand when FTX executives “used commingled customer and corporate funds for speculative trading, venture investments, and the purchase of luxury properties, as well as for political and other donations designed to enhance their own power and influence.”

Ray details what he found about various FTX accounts and the flows of cash in and out of them. Tracking money flows was “extraordinarily challenging”:

… from the inception of the FTX.com exchange, the FTX Group commingled customer deposits and corporate funds, and misused them with abandon … Commingling and misuse occurred at their direction, and by their design.

Ray and his team have recovered $7 billion in “liquid assets” so far, which is astounding — though we’re not sure how liquid the crypto component of that will be in practice, or how much is unsaleable FTT tokens.

The report does not include FTX in Japan, Cyprus, or Singapore — areas where funds were properly segregated by law. It also does not address FTX.US, which Ray says is still under investigation. 

No, no, it’s research 

FTX lied to banks — a lot. Alameda Research had “research” in its name so that it could get bank accounts without immediately being flagged for enhanced due diligence as a money services business. FTX couldn’t get banking, so they used Alameda bank accounts to receive customer cash, right from the start. 

But banks started asking inconvenient questions. When “Bank-1” — likely either Signature or Silvergate — asked why FTX was sending money to Alameda, an Alameda employee told them that “customers occasionally confuse FTX and Alameda” but that all wires through the account were to settle trades with Alameda.

This was false. In just 2020, one of Alameda’s accounts received more than $250 million in deposits from FTX customers and more than $4 billion from other Alameda accounts that were funded in part by customer deposits, says the report.

When banks started rejecting wires to Alameda accounts, FTX set up North Dimension so it could continue to funnel money to FTX. Friedberg and SBF told “Bank-1” that North Dimension was a crypto trading firm with substantial operations. In fact, it was an empty shell with no employees or operations.

Friedberg also engaged his old law firm to create a fake corporate register for North Dimension for the bank: “Specifically, after Bank-1 asked for a copy of the register, Attorney-1 directed a law firm to create a register.”

Time travel by document

In 2021, FTX Trading Ltd was planning to go public. As part of the paperwork for that, it needed an audited financial statement.

The problem was that from April 2019 when FTX.com first launched until the end of August 2020, FTX.com customers had been sending cash deposits to Alameda bank accounts. FTX needed to cover up the fact that they were just using Alameda to move customer and company funds around without any agreement to do so.

So in January 2021, Friedberg had his old law firm draft a “cash management agreement” to explain why Alameda held FTX cash. Friedberg created from this a fake “Payment Agent Agreement.”

FTX usually signed documents with DocuSign to provide an electronic record. In this case, to avoid a DocuSign timestamp, SBF wet-signed the document on behalf of Alameda and FTX on April 16, 2021 — backdated to 2019 “for the sole purpose of providing it to an external auditor.”

How did Ray’s team know the document was backdated? They found the original document file on Friedberg’s hard drive:

While metadata reflects that Attorney-1 created the Payment Agent Agreement on April 12, 2021, and that the executed version was last modified on April 16, 2021, the agreement purports to have an “Effective Date” of June 1, 2019 —nearly two years earlier.

The IPO never happened — but the fake document did help the FTX companies get more funding from “potential investors in connection with its $400 million Series C financing that closed in January 2022.”

Sam the philanthropist

SBF was famous for his Effective Altruism. He used FTX funds by preference:

The Debtors have been able to identify certain transactions that appear clearly to have been funded in part with commingled customer deposits. These include political and “charitable” donations, venture investments and acquisitions, and the purchase of luxury real estate for senior FTX Group employees in the Bahamas.

Sam’s charitable donations got a bit esoteric. The FTX Foundation gave one guy $300,000 to “Write a book about how to figure out what humans’ utility function is” — a question that LessWrong rationalist philosophy needs to answer so as to construct the perfect superintelligence to rule over us all. And that hopefully won’t turn out to be Roko’s basilisk. [LessWrong, PDF, 2004]

The Foundation gave someone else $400,000 to make YouTube videos to promote LessWrong rationalism and Effective Altruism.

Closer to home, the Foundation gave $20 million to the Guarding Against Pandemics PAC, which was run by Sam’s younger brother Gabe Bankman-Fried.

FTX sues Friedberg

Friedberg’s malfeasance was egregious enough that FTX  is suing him for “damages caused by breaches of fiduciary duties, legal malpractice, and other wrongdoing, and to recover fraudulent transfers.” 

The suit also alleges Friedberg paid off whistleblowers rather than deal with the compliance issues they raised.

Friedberg worked at FTX from 2017 until its collapse in 2022, the last 22 months of that as general counsel at Alameda and chief compliance officer at FTX. Joe Bankman, SBF’s father, pushed Sam to hire Friedberg and keep him “in the loop … so we have one person on top of everything.”

FTX paid Friedberg millions of dollars in salary and bonuses, and tens of millions in crypto — a $300,000 salary at FTX.US, a $1.4 million signing bonus, an 8% equity stake in FTX.US, and a $3 million payment from Alameda. 

Plaintiffs want compensatory damages to be determined at trial, disgorgement of all of Friedberg’s compensation including the cryptos, punitive damages, and attorney’s fees.

Chief noncompliance officer

Friedberg’s putative job as chief compliance officer was to make sure the proper checks and balances were in place to prevent fraud, commingling of funds, and other wrongdoings. Per the complaint, he didn’t do any of that. Instead, “Friedberg actively participated in and facilitated such misconduct.”

Money was funneled to FTX insiders and booked as “personal loans” — which were never repaid, and which there was never any serious discussion of paying — “despite Friedberg’s false statement to the outside accountants that interest was paid quarterly on the loans.”  Friedberg was involved in more than $2 billion in such “loans.”

Friedberg also encouraged the use of Signal for corporate messaging, preferably set to make messages disappear.

Ray is still appalled at how bad FTX’s accounting was:

Those entities that did produce financial statements used QuickBooks, Google documents, Slack communications, Excel spreadsheets, and other inadequate means for measuring the level of assets and liabilities held by the FTX Group. Entries in QuickBooks were often made months after transactions occurred, rendering real-time financial reporting and risk management impossible.

Hush money

Friedberg served as SBF’s fixer. He paid off whistleblowers and “retained” whistleblowers’ attorneys — that is, he paid them off too. 

In November 2019, FTX and Alameda were hit with a class action lawsuit that accused the companies and their executives of racketeering and market manipulation. [Docket; Decrypt, 2019]

The lawsuit doesn’t name “Plaintiff’s Attorney-1” — but this is clearly Pavel Pogodin, who set up Bitcoin Manipulation Abatement for the sole purpose of filing crypto class actions.

Alameda said at the time: “The troll has no evidence of any wrongdoing, and will not further discover any — because there was no wrongdoing to discover evidence of.” [Medium, 2019]

Nevertheless, Friedberg took the suit seriously enough that he paid Pogodin off. (The details are redacted.) The suit was dismissed in December 2019.

As a California Bar member of flawless repute, Pogodin is happy to be paid not to do anything. He sent a letter in January 2022 threatening further possible action against FTX. Friedberg offered him “$1.6 million and $50,000 paid on a monthly basis.”

In sum, Friedberg arranged for the FTX Group to pay Plaintiffs’ Attorney-1 $3,320,000 through July 2022. Upon information and belief, Plaintiffs’ Attorney-1 provided no actual legal services to the FTX Group after signing the engagement letter.

An FTX.US employee on a $200,000 salary was fired after less than two months. She sent a demand letter in December 2021 claiming that “Alameda [was] nothing more than an extension of FTX, used to bolster investor confidence in FTX projects, and in turn drive up the prices of projects FTX had developed or invested in itself” and let employees insider-trade.

Friedberg gave this employee an “extraordinary settlement” (redacted in the filing) — and made a $12 million deal to retain Whistleblower-1’s attorney. Their only work for FTX was a three-page memo.

In early 2022, an attorney working at FTX for less than three months discovered that Alameda owned North Dimension. He flagged to Friedberg that North Dimension accounts were being used to fund FTX customer withdrawals and that Alameda didn’t have the proper money transmitter licenses.

Friedberg promptly fired him. The complaint details how the attorney was paid a large (redacted) severance package.

Other FTX news

John Ray’s team has so far racked up $200 million in fees — and the fee examiner thinks this is quite reasonable. Gotta pay the undertaker: [Bloomberg; summary report, PDF] 

Without question, the fees incurred to date are remarkable, but so is the professionals’ performance. The Fee Examiner has been struck by the creativity, professionalism, and personal sacrifice of the Retained Professionals who sprung into action in November to begin transforming a smoldering heap of wreckage into a functioning Chapter 11 debtor-in-possession.

Over in the criminal case, SBF moved to dismiss 10 of the 13 charges against him. Judge Lewis Kaplan has told SBF to get knotted: “The Court has considered all of the arguments of the parties. To the extent not addressed herein, the arguments are either moot or without merit.” [Doc 136, PDF; Doc 148, PDF; Doc 149, PDF; NYT; Doc 167, PDF] 

Sam wants to blame his troubles on Fenwick & West, the law firm used by FTX and Alameda, who apparently told him that all the hamfistedly obvious crimes he did were all totally legal. The DoJ and FTX objected, and Judge Kaplan has again told Sam to get knotted: “Neither Fenwick nor the FTX Debtors are part of the ‘prosecution team,’ and the government has no obligation to produce materials that are not within its possession, custody, or control.” [Bloomberg; Doc 150, PDF; Doc 151, PDF; Doc 151-1, PDF; Doc 156, PDF; Doc 159, PDF; Doc 166, PDF]

Over at Lightcone, who build and run LessWrong and the Effective Altruism Forum: “Funding is quite tight since the collapse of FTX.” They’re asking the users for $3 million to $6 million over the next year. [LessWrong]

Posted on by Amy Castor 5

SEC sues Binance, part 2: asset freeze, securities, Coley and Brooks, Gensler’s alleged COI

Part 2 of SEC sues Binance is over on David’s blog.

In this episode:

  • Binance responds to the SEC’s proposed Temporary Restraining Order
  • Catherine Coley and Brian Brooks: What we did on our holidays
  • A review of the alleged securities listed on Binance.US
  • BNB, BUSD, BNB Vault, and Simple Earn — securities promoted by Binance
  • Gensler and the alleged conflict of interest.

Posted on by Amy Castor 0

SEC sues Binance, part 1: the complaint, Binance US asset freeze, Tai Chi plan, sock puppet CEOs, weird cash flows

  • By Amy Castor and David Gerard

“Every single one of these news updates from the slow motion implosion of the great fake tech money pyramid scheme is like reading headlines that say: ‘Man confused as to why his clothing caught fire after dousing self with kerosene.’ Every one.”

— A Shiny Blue Thing

CZ: “4”
SEC: “Fore!”

A day before the SEC sued Coinbase, the agency also filed a suit against Binance, the world’s largest offshore crypto casino, and its affiliate Binance.US. Binance founder Changpeng Zhao, better known as “CZ,” was also named in the suit. 

CZ tweeted “4,” which means he is dismissing the complaint as “FUD, fake news, attacks, etc.” If you have a single-digit shorthand for this sort of thing, you may already be in trouble. [Twitter, archive; Twitter, archive]

The 136-page complaint, filed in the District of Columbia on June 5, outlines 13 charges. Unlike the Coinbase suit, this one alleges fraud. The complaint comes with nearly 100 exhibits, some of which are incendiary. [Press release, Complaint, PDF; Docket]

CZ has his hands full these days. The US Department of Justice is currently investigating Binance over money laundering. In March, the CFTC filed its own enforcement action against Binance and CZ — which Binance has until July 27 to respond to. [CFTC docket]

The SEC complaint covers some of what’s in the CFTC complaint. But there’s a pile of new stuff. This is a huge amount to cover, so we’ll be doing it over a few posts.

The SEC complaint

The lawsuit is against Binance Holdings Limited, BAM Trading Services Inc., BAM Management US Holdings Inc., and Changpeng Zhao. (BAM Trading runs Binance.US; BAM Management is a holding company that owns BAM Trading.) Summons were served to listed company addresses and to an address for CZ in Malta. [defendant list, PDF]

The SEC comes out of the gate loud:

This case arises from Defendants’ blatant disregard of the federal securities laws and the investor and market protections these laws provide.

Among the accusations:

  • Binance and BAM Trading both operated as unregistered securities exchanges, broker-dealers, and clearing agencies, while raking in $11.6 billion in revenue. 
  • Binance’s own BNB and BUSD tokens are securities, as are 10 other tokens listed for trading on Binance.US.
  • Binance lending products (Simple Earn and BNB Vault) and Binance.US staking products are also securities.
  • CZ claimed BAM operated separately from its offshore parent and had its own leadership. In practice, he firmly controlled BAM and the US platform’s customer assets.
  • Binance secretly enabled US-based high-value “VIP” customers to trade on its non-US platform. 
  • BAM defrauded company investors of $200 million by lying to them about non-existent controls against abusive trading on the platform.
  • CZ funneled customer funds to Sigma Chain, a trading entity that he owned.
  • Sigma Chain inflated the trading volume on the US site through wash trading — because the Binance trading engine let anyone trade with themselves.
  • Binance and CZ commingled billions in customer funds on Binance.US and sent them to market maker Merit Peak, also owned by CZ.

The SEC wants Binance and BAM permanently enjoined from doing any of this ever again, disgorgement of ill-gotten gains with interest, civil money penalties, and equitable relief.

The SEC has also sought to freeze customer assets on Binance.US — specifically to protect US customers from CZ and Binance.com. 

Tai Chi: A plan to evade regulation

CZ launched Binance in July 2017 to rapid popularity. He evaded accountability from the start, moving his headquarters from China to Japan to Malta.

Per the complaint, CZ denies that Binance has an office at all: “Wherever I sit is the Binance office. Wherever I meet somebody is going to be the Binance office.”

A month after launching in China, Binance revealed that the US and China together made up nearly half of its customer base. [Binance, archive]

But how to keep the ball rolling? Crypto trading was banned in China in 2019. It continued online through foreign exchanges until September 2021, when China declared all cryptocurrency transactions illegal.

CZ needed US customers — especially “VIP” ones — but not US regulation. So, starting in 2018, he worked on how to surreptitiously evade US securities laws. As his chief compliance officer Samuel Lim admitted: “we do not want [Binance].com to be regulated ever.” [Doc 17-5, PDF]

The trouble was, as Lim put it to fellow Binance employee Alvin Bro: “we are operating as a fking unlicensed securities exchange in the USA bro.”

Lim was keenly aware of the hazards of US law enforcement:

there is no fking way in hell i am signing off as the cco for the ofac shit

theres a certain point where money is totally useless, and that is making a declaration to the USA that you are clean

when shanghai is totally cowboy

there is no fking way we are clean

i have zero visibility on our VIP clients

ZERO

the strategy of bnb is to survive for 2 years and f off

and in this 2 yrs try ur bestest to not land in jail

An unnamed “consultant” who ran “a crypto asset trading firm in the United States” suggested options to CZ and his team. One option was low-risk: settle the regulators’ concerns in an orderly manner. But if they went that route, they might be shut out of the US market entirely for months or years. The second option was risker, but more profitable: create a separate US entity that would head off the regulators.

The consultant suggested engaging with the SEC on how to comply but “with no expectation of success and solely to pause potential enforcement actions.” The new entity would “become the target of all built-up enforcement tensions” and “reveal, retard, and resolve built-up enforcement tensions.”

The new entity would also give Binance better access to US dollars without Binance.com needing its own banking relationships.

Binance would still need to insulate the new entity from US enforcement: “Key Binance personnel continue to operate from non-US locations to avoid enforcement risk” and “Cryptocurrency wallets and key servers continue to be hosted at non-US locations to avoid asset forfeiture.”

This was the “Tai Chi plan,” first reported in Forbes in October 2020. Binance filed a defamation suit against Forbes for this report, though they withdrew it a few months later. Binance then tried to buy equity in Forbes in a SPAC deal that later fell through — though this didn’t hold Forbes back from going in hard against Binance. The SEC complaint includes the original Tai Chi documents. [Forbes, 2020; Doc 17-2, PDF; Doc 17-3, PDF]

CZ opted to go ahead with the Tai Chi plan. Binance.US launched in July 2019, run by a separate entity, BAM Trading. Binance announced it would begin restricting US customers from transacting on Binance.com and they should use the US site instead.

CZ’s sockpuppets

Binance.US was a supposedly independent US affiliate of Binance.com, run by BAM Trading, incorporated in Delaware. In practice, CZ reportedly ran BAM himself with an iron hand.

Catherine Coley and Brian Books — “BAM CEO A” and “BAM CEO B” in the complaint — sang like birds to the SEC. Brooks detailed to the SEC how CZ was not merely the chairman of BAM, but exercised CEO-level close control.

Even BAM’s accountants cautioned their client that the lack of information around money movements “makes it very difficult to ensure the Company is fully collateralized at specific points in time.”

Only two people — CZ and another person, Guangying Chen, who nobody seems to admit much about — controlled all of the flows of cash and cryptos.

Coley and her team were extremely unhappy after reading the Forbes article on the Tai Chi plan:

As BAM CEO A [Coley] explained to the Binance CFO shortly after the article was released, BAM Trading employees “lost a lot of trust with the article” and “the entire team feels like they’ve been duped into being a puppet.”

The SEC wants to freeze Binance.US funds

The SEC was very concerned about the status of Binance.US customer funds all through early 2023 and couldn’t get straight answers out of BAM or Binance.com as to where the funds were held and who controlled the purse strings.

On June 6, the SEC filed a motion seeking an emergency temporary restraining order and preliminary injunction against Binance and BAM. Customer assets at Binance.US are largely controlled by non-US entities, and Binance has allegedly siphoned a pile of cash out of BAM. Motions like this are what the SEC does when it suspects huge fraud.

The SEC specifically wants to let Binance.US customers withdraw their funds, but not allow Binance to transfer money outside the US. [SEC press release; Doc 4, PDF; Memorandum of law, PDF]

A hearing on the matter is set for Tuesday, June 13 at 2:00pm. It’s expected that Judge Amy Berman will rule on the day as to whether to put the TRO into place.

Where’s the US money?

The SEC’s investigation into Binance and Binance.US started on August 17, 2020 — before Forbes told the world about the Tai Chi plan. [Doc 12, PDF]

The first SEC contact with BAM was a December 17, 2020, subpoena for documentation of BAM’s control of Binance.US crypto assets.

The SEC requested more information in September 2022. BAM finally answered in February 2023, but “its answers were not reassuring.”

BAM had a “wallet custody agreement” such that Binance would custody Binance.US crypto — the part of the Tai Chi plan where the crypto would be held outside the US. BAM told the SEC that the wallet custody agreement “was never operationalized.”

The SEC sent Binance Holdings Limited (Binance.com) a Wells notice, indicating that an enforcement action was imminent, on February 21. BHL responded on March 15 that “BHL does not, and has not, served as the custodian of the digital assets on Binance.US.” [Doc 19-13, PDF]

But the SEC already knew this was not true — based on information it had gotten from Signature Bank, conversations with former BHL and BAM employees, and reports to BAM from BAM’s auditor Armanino. 

In the two weeks leading up to filing the June 5 complaint, the SEC was still trying to resolve the custody issue — with “numerous written and oral exchanges concerning custody of Binance.US Platform customers’ assets and, more importantly, who is in ultimate control of those assets.” [Doc 19-15, PDF; Doc 19-16, PDF]

BAM now “disputes its own auditor’s conclusion of past Binance custody over customer assets” (emphasis SEC’s) and “admits that Zhao and Binance continue to possess substantial control over at least some of BAM Trading’s crypto assets.”

BHL and CZ have not been helpful:

Zhao’s attorneys have continued to maintain that Zhao is not subject to the jurisdiction of the United States — despite setting up a crypto trading platform in the United States that has made hundreds of millions from trading with U.S. customers, and despite his beneficial ownership of accounts held at banks in the United States through which billions of dollars flowed to some of his foreign domiciled companies like Merit Peak and Sigma Chain.

As recently as June 4, BHL was begging the SEC not to freeze BAM assets. [Doc 19-14, PDF]

The Binance money funnel

Binance is a network of shell companies. These entities hypothetically have different roles, but in practice, money flows between them in vast amounts — mostly via transfers between the entities’ accounts at Silvergate Bank, and some at Signature. We know this because Silvergate, Signature, and FedWire told the SEC all about it. [Doc 21, PDF]

How much money are we talking about? Sachin Verma, an SEC forensic accountant, says:

At times the amounts being credited and debited during a single month amounts to movement of more than a billion dollars.

… On January 1, 2023, eight Binance/Zhao-owned companies had $58.7 million on deposit. During that same time frame, $840 million was deposited into, and $899 million was withdrawn, from those accounts

Binance could and did transfer funds without BAM’s knowledge. At one point, while she was CEO, Coley had to ask where $1.5 billion in daily transfers was coming from — neither she nor her team had the access needed to verify them. 

Coley also had to ask why on earth $17 million in BUSD was moving from Merit Peak (Binance) to Sigma Chain (Binance) via BAM, and where Merit Peak got the money from. [Doc 19-2, PDF]

The billions of dollars flowed in from Binance.US customers, through the various Binance companies’ checking accounts, into a Merit Peak account, to Paxos Singapore (for $21.6 billion of BUSD between 2019 and 2021), and out to … somewhere:

Binance Holdings Limited and Binance Capital Management show large deposits and withdrawals from and to Signature accounts for some Zhao-owned companies, and hundreds of millions of dollars have been transferred.

Per the SEC’s request to freeze Binance.US assets:

During 2022, a U.S. bank account for Swipewallet (beneficially owned by Zhao) sent $1.5 billion offshore in foreign exchange, or “FX,” wires … Between January and March 2023, multiple Binance accounts wired more than $162 million offshore for further credit of a foreign account belonging to the company beneficially owned by the Binance Back Office Manager.

That manager was Guangying Chen.

CZ ran billions of dollars through Silvergate every month. None of it ever stayed in one place for long — all the accounts were just checking accounts where money sat for a moment before being shuffled under another shell.

Unlike Sam Bankman-Fried, CZ seems from all this to have had the good sense to stash away billions of dollars in actual money. He also purchased a home in Dubai in 2021 — a coincidentally non-extradition jurisdiction. 

Where did the money end up? Where’s CZ keeping the dollars? Following the money trail is confusing — which appears to be the point.

It’s not clear whether Silvergate filed suspicious activity reports on all these dubious transfers. They certainly should have.

__________________

Also read:

SEC sues Binance, part 2

SEC sues Binance, part 3

Posted on by Amy Castor 0

The SEC sues Coinbase. It’s on.

Coinbase’s entire business model has been built around avoiding regulation and lobbying Congress for special rules. Well, those days are over. After a year of warning them repeatedly, the SEC has finally taken action against the largest crypto exchange in the US.

It’s David’s turn, so this one is over on his blog.

Image: Brian Armstrong and Paul Grewal on YouTube awkwardly responding to the SEC’s warning in late March that an enforcement action was in the works.

Posted on by Amy Castor 0

Reggie Fowler, Bitfinex/Tether money mule, sentenced to 6 years in prison 

  • By Amy Castor and David Gerard
  • If you like our work, become a patron! Here’s Amy’s Patreon, and here’s David’s. Sign up today! 

Arizona businessman and sports investor Reggie Fowler spent decades talking himself out of sticky situations. But in a Manhattan courtroom on June 5, reality finally caught up to him.

US District Judge Andrew Carter sentenced Fowler, who is 64 years old, to 6 years and 3 months in prison for his role in hiding cryptocurrency transactions on behalf of shadow banking operation Crypto Capital and the disappearance of hundreds of millions of dollars. Fowler will surrender in Phoenix at 10 a.m. on June 30, giving him three weeks to get his affairs in order and rehome his dog.

Inner City Press attended the sentencing. [Twitter; Inner City Press; SDNY press release]

Fowler has agreed to pay $53 million in restitution to the defunct Alliance of American Football (AAF), an alternative football league that he defrauded as one of its investors. Inner City Press tells us that the judge also ordered Fowler to forfeit the full $740 million prosecutors had asked for, dismissing Fowler’s argument that this was so high as to violate the 8th Amendment. [Order of restitution, PDF; Order of forfeiture of property, PDF]

Fowler’s crypto frauds were the beginning of the more recent frauds in the crypto space, and the failures of the Silvergate and Signature banks, prosecutors said in court.

“I have harmed the people of the AAF and my family,” sobbed Fowler. “I am embarrassed and ashamed.” Poor fellow.

Just a little off the top

Crypto Capital was a Panama-incorporated money transmitter that served as a shadow bank for many US and Canadian crypto exchanges, including Bitfinex and the failed QuadrigaCX — because they had enormous trouble getting proper banks to talk to them.

Throughout 2018, Fowler was Crypto Capital’s US contact. He set up a network of bank accounts in the US and abroad so that Crypto Capital could process payments for its customers without worrying about all those tedious anti-money-laundering laws. 

Fowler lied to the banks, telling them that the accounts were for his real estate business. His scheme ran internationally and received over $740 million just in 2018. Most of this was Bitfinex customer money. A “Master US Workbook” listed more than 60 bank accounts around the world, which totaled over $345 million by January 2019. [Decrypt]

Fowler didn’t worry too much about separating Crypto Capital or Bitfinex money from his own funds. He and his co-conspirators set up a “10% Fund,” skimming from client deposits for themselves.

In the original indictment, and again at today’s sentencing, prosecutors detailed “additional criminal conduct” Fowler seemed to be involved in — though he wasn’t charged on these.

Fowler allegedly tried many times to get bank loans using fraudulent bond certificates, valued in the billions, as collateral. He tried to use funds from the Crypto Capital scheme as collateral for loans. He was caught with $14,000 in sheets of counterfeit $100 notes right there in his office.

Fowler was arrested in Chandler, Arizona, on April 19, 2019.

Prosecutors piled on more charges in a superseding indictment in February 2020 after they discovered Fowler had been using Crypto Capital money to fund the AAF. That funding fell through after the Department of Justice seized $68 million from Fowler’s bank accounts at HSBC in late 2018.

Fowler, who had fumbled an opportunity for a plea deal in January 2020, pleaded guilty to all five counts against him in April 2022, throwing himself at the mercy of the court. He has remained out of jail since his initial arrest on $5 million bail. 

A respectable businessman of flawless repute

Fowler’s lawyer Ed Sapone wrote a letter to the judge on April 10 asking for clemency for his client — that is, no jail time at all.

Sapone argued that Fowler had lived a hard life, growing up in the South without parental support, and had never broken the law before. At least not in any way that landed him behind bars. [Doc 124, PDF]

Never mind that Fowler was a fully-grown 59-year-old man at the time of his crimes with a long career as a (cough) sharp businessman behind him.

Sapone also neglected to mention that Fowler had been sued 36 times in the past, mainly for just not paying people — and had even stiffed his previous lawyers in this very case for $600,000. [ESPN, 2005] 

In a sentencing submission, prosecutors said that they didn’t appreciate that Fowler had blown $200,000 gambling in casinos since his guilty plea, rather than using those funds to pay back his victims. [Doc 125, PDF]

Prosecutors also noted that in December 2016, Fowler was stopped at the Canadian border with items associated with a “black money scam” — a scheme where a con artist claims to have stacks of US bills dyed black to avoid detection. The bills will come clean if you just purchase this expensive “special chemical.”

Hard work and perseverance

Fowler’s story reads like an episode of American Greed — where money seduces and power corrupts.

Before his path crossed that of Crypto Capital, Fowler’s main business was Spiral Inc. — a holding company for about a hundred different businesses, including ice rinks, car washes, and a foam food tray manufacturer company. Most of the businesses were located between Arizona and Colorado.   

Fowler was also a pilot and owned two jets — a Cessna Citation CJ2 and a CJ3, which he flew for business and loaned out.

He touched many lives including friends in the sports world and those who depended on him for their livelihood. Because Amy wrote about Fowler regularly, people who knew him contacted her. Sources described Fowler as well-read, charming, and a “fantastic salesperson, overbearing and confident.” He was not a gambler, at least not before his indictment, said a source. He never drank and worked out at the gym religiously.

What Fowler was not good at, however, was shedding businesses that were dogs — like his “Shammy Man” carwashes in Arizona, which he co-owned with a partner who served time in federal prison — or putting money into the ones that were doing well.

His firm Styro-Tech in Denver was making money hand over fist, but Fowler couldn’t seem to invest in better equipment and he was always hiring illegal immigrants cheap. “He could never pay anybody what they were worth,” said one source. “I don’t know how many times he got caught hiring illegals.”

Football obsessed

Fowler was a football player in his youth and remained an obsessive fan. His obsession with the game played no small part in his downfall.

He kept a Cincinnati Bengals helmet in his office and gave people the impression that he had played professionally for the Bengals — though he had only attended training camp.

In 2005, Fowler tried to purchase the Minnesota Vikings from Red McCombs in a $600 million deal. “He was 100 percent committed to getting it done,” McCombs said. “He was very straightforward. He said, ‘I am going to buy your football team.’” Fowler would have been the NFL’s first Black owner. [LA Times, 2005]

But the deal led to financial scrutiny, and the Star Tribune uncovered several outright lies in Fowler’s resume, so Fowler pursued a limited partnership instead. The cash he put up for the 3% ownership in the Vikings got him into financial trouble. [Minnesota Public Radio, 2005]

Things went from bad to worse, and Fowler went deeper into debt. He refinanced Spiral in 2006, landing him $65 million in debt. The credit crisis followed in 2008, and Spiral never recovered. By 2013, the company was in receivership, and Fowler lost control of all his businesses. By October 2014, Fowler no longer had a stake in the Vikings. [Resolute, 2022; Star Tribune, 2014]

At some point over the following years, a debt-saddled Fowler crossed paths with the people at Crypto Capital — Oz Yosef and his sister Ravid. The Yosefs were both later indicted for their part in Fowler’s fraud, but remain at large.

Crypto had an interesting year in 2017. Bitfinex, the largest crypto exchange at the time, lost its ties to the traditional banking system when its Taiwanese banks were cut off from correspondent banking by Wells Fargo. Short of real dollars, and trying to recover from a $72 million hack in 2016, Bitfinex and its sister company, stablecoin issuer Tether, began pumping out tethers at a pace unlike anything before — frequently with no dollars backing them at all. (Just like the salty nocoiners told you at the time.)

Fueled by these unbacked fake dollars pouring into the crypto markets, the price of bitcoin climbed to new highs. A year later, Fowler found himself in control of bank accounts with hundreds of millions of dollars flowing through them. And then football called to him again. 

AAF: the Fyre Festival of football

Alternative football leagues have a long history of dismal failure. In 2017, TV producer Charles Ebersol came up with an idea for a springtime football league that would be a feeder for the National Football League.

Somehow “millions” of fans would have an interest in watching football after the Super Bowl. The Alliance of American Football would even come with a killer app that promised to change sports gambling as we know it.

Ebersol and AAF co-founder Bill Polian, an NFL executive, attracted some seed capital. In June 2018, Willie Lanier, a former Super Bowl champion, introduced Ebersol to Fowler. Fowler offered to be a lead investor, committing $170 million — a $50 million line of equity and a $120 million line of credit. Prosecutors wrote in their letter to the court:

During a June 2018 meeting with AAF executives, including AAF co-founder Charlie Ebersol, Fowler showed the AAF corporate team printouts of bank account information purporting to show that Fowler had hundreds of millions of dollars in foreign bank accounts. Fowler would not let anyone take the printouts after the meeting. Fowler told Ebersol that Fowler’s wealth, which he said was largely in cash, came from real estate holdings and an aviation business that built drones in Germany for U.S. Government contracts. During an October 2018 meeting, one of Ebersol’s associates took a picture of a bank account printout that Fowler presented. That printout showed roughly $60 million in an HSBC account. 

That HSBC account would be one of the accounts that was frozen by the Department of Justice in that very month.

Ebersol claims in an affidavit that he did his due diligence on Fowler — though clearly he did not. All Eberson would have had to do was look up all the multiple lawsuits against Fowler. Peter Thiel also invested in AAF through his Founders Fund.

The league kicked off in February 2019 — with eight teams and more than 400 players — but after eight weeks of play, the dream unraveled when Fowler missed a $28 million payment  because all his money had been frozen. [Affidavit, PDF; CNBC, 2018]

The AAF disintegrated into the football version of the Fyre Festival. They missed payroll in the first week one, blaming it on a computer glitch. Players had been booted out of their hotels and had to pay cash for their flights back home.

Another investor, Tom Dundon, took over the league, but he soon gave up throwing money into the pit as well. The AAF declared bankruptcy on April 17, 2019 — and multiple lawsuits against its founders ensued. [Twitter, archive; Twitter, archive; Sports Illustrated]

End of the linebacker

What can we learn from Reggie Fowler? Mostly that pigs get fat, but hogs get slaughtered.

Fowler spent decades doing sharp business that didn’t quite get him in trouble with the law. Then he got in a bind and let his hubris do the thinking for him. Like so many in crypto, he found out that this works until it doesn’t.

By the time he gets out of jail, Fowler will be 70. In the four years between his arrest and today’s sentencing, he spent his time just going to work every day. We predict he’ll get out of jail and just get back into running businesses until the day he drops. Hopefully less flagrantly illegal ones.

Posted on by Amy Castor 1

Crypto collapse? Get in loser, we’re pivoting to AI

Let’s do a quick pivot to AI for an LOL, one of us said. Should be easy, not much work. Here we are — three thousand words later. Turns out AI grifters are remarkably similar to crypto grifters, and they are often the same guys.

If this is a huge hit — and particularly if the patrons like it — we may touch on AI again if there’s something worth saying. We do have a pile of crypto here for next time as well!

Posted on by Amy Castor 0

Crypto collapse: Fahrenheit buys Celsius, DCG may be broke, Hong Kong cracks down, Binance commingling, how Bitfinex was hacked

  • By Amy Castor and David Gerard

Temperature drop

Fahrenheit has officially won the bid for the bankrupt Celsius Network’s assets —  pending approval by the court, which is near-certain, and by regulators, which is less so. A $10 million deposit is due by Monday. [Doc 2713, PDF]

Fahrenheit is a consortium that includes VC firm Arrington Capital, miner US Bitcoin, investment firm Proof Group, former Algorand CEO Steven Kokinos, and Seasons Capital CEO Ravi Kaza.

The new deal is an adaptation of the previous NovaWulf proposal. A “NewCo” will be created to take ownership of Celsius’ remaining DeFi tokens, its loan portfolio, its venture capital investments, its bitcoin mining operation, and $500 million in “liquid cryptocurrency” (not specified, but presumably Celsius’ remaining BTC and ETH). US Bitcoin will manage Celsius’ bitcoin mining operation.

Holders of Earn claims, some holders of Convenience claims, Withhold claims, and Borrow claims will receive equity in NewCo, pro rata. NewCo will endeavor to get a public stock exchange listing for the equity. Earn claimants will also get a distribution of the liquid cryptocurrency and any proceeds from litigation.

If you’re a Celsius creditor, the plan contains lots of important details. Read it and discuss this with your fellow creditors.

As with the original NovaWulf proposal, we think this is a Hail Mary pass that can only work if number goes up. On the other hand, it’s doing something and not just liquidating what little remains. Also, Alex Mashinsky won’t be involved.

DCG: When your left pocket can’t pay your right pocket

In the Genesis bankruptcy, Genesis’ parent company Digital Currency Group missed a $630 million payment to Genesis due earlier this month. Note that that’s a payment from themselves to themselves, and they still failed to make it.

This failure to pay was noted by Gemini, which has a tremendous interest in getting that money so Gemini Earn investors can be paid back. Gemini Earn’s retail customers are the largest creditor of Genesis. [Gemini, archive of May 25, 2023]

Gemini Earn was an investment product where Gemini customers put their money into Genesis to earn unlikely interest rates. Gemini’s customers were not so happy at the prospect of their money being stuck in the Genesis bankruptcy for months or years.

So in February, the creditors worked out an “agreement in principle” — not, you’ll note, an actual deal — whereby they would get money back from DCG, as the owners of Genesis. [press release]

In April, the creditors got sick of DCG messing about and upped their demands. This led to a bizarre statement from DCG on May 9 that they were “in discussions with capital providers for growth capital and to refinance its outstanding intercompany obligations with Genesis.” They didn’t have the money to pay themselves. [CoinTelegraph]

Gemini also plans to file a reorganization plan of its own. This is likely why Genesis has filed asking for its exclusive right to make reorganization proposals to be extended to August 27. The court will hear this motion on June 5. [Doc 329, PDF]

Either DCG is trying extremely hard to screw over Genesis customers … or, despite all the millions and billions with dollar signs in front in their accounts, and “$200 million” a year in Grayscale management fees, DCG is broke — at least in actual money — and has been pretending not to be broke. And we’re pretty sure Gemini is pushing this point this hard because they can’t cover their customers either. Imaginary assets are great — until you have to pay up.

Binance is outraged at Reuters catching them out again

Reuters has caught Binance at it again. This time, Binance was commingling customer funds and company revenue on the order of billions of (actual) dollars in their Silvergate accounts in 2020 and 2021. Controls? What are controls? [Reuters]

Binance told Reuters that this was money being used to buy BUSD and this was “exactly the same thing as buying a product from Amazon,” per Brad Jaffe, Binance’s VP of communications since August 2022.

This explanation is at odds with Binance’s previous claims to customers that dollars they sent to Silvergate were “deposits” that they could “withdraw” as dollars. Jaffe said that “the term ‘deposit’ is a communication term, it’s not an indication of the technical treatment of the funds.” Oh, a communication term — you mean like when words mean things in a context?

Reuters didn’t find any misappropriation of customer funds in the documents they saw. But commingling is a massive red flag for incompetence (as it turned out to be with FTX) and fraud — such as moving money around to evade regulatory scrutiny. Reuters includes a complex diagram of the international flows of Binance’s cash in the report.

Binance PR person Patrick Hillmann dismissed the story as “1000 words of conspiracy theories” and said that Reuters was “making stuff up.” Though Hillmann never stated at any point that Binance hadn’t commingled funds at Silvergate. Hillmann also decried “the xenophobia behind consistently mentioning @cz_binance’s ethnicity without noting that he’s been Canadian since the age of 12” … which the Reuters story didn’t do at all. [Twitter, archive]

Hong Kong brings some regulatory clarity

The Hong Kong Securities And Futures Commission (SFC) has finished its consultation on virtual asset trading platforms opening to retail investors. The rules allow licensed exchanges to offer trading to the public in tokens that are highly liquid and are not securities.

The rules are strict — no securities, no lending, no earn programs, no staking, no pro trading, and no custody. Unlicensed crypto exchanges are not allowed to advertise. Hong Kong very much wants to avoid the sort of embarrassment that comes with a large exchange like FTX failing. 

Exchanges will be required to assess the failure risk of all tokens they offer trading in. Tokens are required to have a 12-month track record. Exchanges will need to get smart contract audits where appropriate. 98% of client assets must be in cold wallets (offline); hot wallets must not hold more than 2%.

Margin trading is not yet allowed even for professional investors, but the SFC will issue guidance on derivatives in the future.

The guidelines take effect June 1, which is when exchanges can begin to apply for a license. [SFC; Consultation Conclusions, PDF]

Regulatory clarity around the world

Japan will be enforcing FATF rules on crypto from June. This went through with no objections because Japan learned its lesson from Mt. Gox and regulated crypto exchanges early. [Japan Today]

FATF tells CoinDesk that it didn’t actually demand that Pakistan not legalize crypto. “Countries are permitted, but not required, to prohibit virtual assets and virtual asset service providers.” [CoinDesk]

The International Organization of Securities Commissions is putting together recommendations on crypto. Service providers need to address conflicts of interest, separation of functions, and accounting client assets, and this has to work across borders. Get your comments in by July 31. [IOSCO, PDF; recommendations, PDF]

Huobi gets kicked out of Malaysia for failure to register. Not registering is a violation of Malaysia’s Capital Markets and Services Act of 2007. The Securities Commission Malaysia said Huobi has to disable its website and mobile apps on platforms including the Apple Store and Google Play.  [Securities Commission Malaysia]  

The CFTC is talking about all the fraud in crypto, says it’s on good working terms with the SEC on these matters, and warns the crypto industry that it’s not going to be a soft touch. [Reuters] 

The SEC has changed the disclaimer that commissioners say before speeches — probably in response to William Hinman’s comments saying ether wasn’t a security being cited in the Ripple case. [blog post]

Molly White put up Rep. Sean Casten (D-IL) questions at May 18, 2023, stablecoin hearing, and it’s a lovely five minutes. This guy understands precisely how Web3 was fundamentally a venture capital-funded securities fraud. [YouTube]

Bitfinex: whoops, apocalypse

The Organized Crime and Corruption Reporting Project obtained an internal report on the August 2016 hack of the Bitfinex crypto exchange — the hack that led to the Tether printer going wild and the 2017 crypto bubble.

The report was commissioned by iFinex and prepared by Ledger Labs. It was never released, but OCCRP has obtained a draft.

Bitfinex kept transaction limits secured by three keys. It looks like someone made the mistake of putting two of the three keys on the same device. This is how the hacker was able to raise the global daily limit and drain the accounts.

One key was associated with a generic “admin” email address and another linked to “giancarlo,” which belonged to Bitfinex CFO Giancarlo Devasini. The report does not blame Devasini for the hack.

Ledger Labs thinks the hacker came in from an IP address in Poland. [OCCRP]

Tether’s issuance is up — but its usage is through the floor. The trading volume is at its lowest in four years. Most of the tether trading happens on Binance, which is where the majority of all trading volume happens, and where USDT is accepted as being worth a dollar. We mentioned last time that volume was down, but Kaiko has the numbers. [Kaiko]

More good news for bitcoin

Do Kwon’s bail has been scrapped. He’s back in jail in Montenegro, awaiting his local trial on charges of forging documents, specifically the ones he was using to try to get out of Montenegro to his next bolt-hole. [Reuters]  

Glassnode tells us that hodling has never been more popular! 68.1% of BTC hasn’t moved in the past year! Now, you might think that this is because most people who bought in during the bubble are still underwater. But “baghodler” isn’t yet a word. [Glassnode]

Shaquille O’Neal was finally served in the FTX class action suit against the exchange’s celebrity promoters — at the former FTX Arena. [Washington Post] 

Openfort is scraping up the very last of the Web3 gaming venture cash — they just got $3 million to do an online crypto wallet for blockchain games. You know, that gigantic current market that anyone has the slightest interest in. Openfort doesn’t appear to have a customer as yet. [VentureBeat]

Coinbase has a new TV ad! We know you lost all your money — but crypto is like the early Internet, really. [Youtube]

Solana is so thoroughly out of ideas that they’re adding a ChatGPT plugin. Presumably, it can write tweets for them. [The Block]

Crypto fans make up new justifications for the importance of their magic beans all the time. David Rosenthal takes us through a few. [DSHR Blog] 

Video: The problems with Crypto Currency. Max Silverman wanted to do an animation, so asked David for 90 seconds of audio. It came out great! [YouTube]

Posted on by Amy Castor 0

Crypto collapse: Tether makes up some numbers, UK MPs call crypto gambling, more regulatory clarity, news from Chapter 11


The latest from me and David:

* Tether releases another work of accounting fantasy fiction.

* UK Parliamentary Committee wants to regulate retail crypto like gambling.

* The US, China, the EU and Pakistan bring the searing light of regulatory clarity.

* Voyager, Celsius and FTX still shamble forth.

* It can’t be that stupid, I must be understanding it wrong.

Apologies for the posts only being weekly of late — we’re both very busy, particularly with family issues. We’re still here and doing this live!

Posted on by Amy Castor 0

Crypto collapse: Bittrex files chapter 11, Binance loses market makers, FTX gets a tax bill, bitcoin gets apes 

  • By Amy Castor and David Gerard

Bittrex takes a dive

Bittrex’s US entity, Desolation Holdings LLC, and Bittrex Malta filed for Chapter 11 bankruptcy in Delaware on May 8. The move came just weeks after Bittrex shut down its US operations, which was soon after they were sued by the SEC for trading securities without registering as a securities exchange. [Bloomberg; Bittrex; case docket] 

The bankruptcy is apparently the fault of the SEC. The first-day declaration cites several SEC actions against other firms — and harps on about a “lack of regulatory clarity.” [Doc 9, PDF; first day declaration, PDF]

Bittrex says the bankruptcy will totally not impact its non-US operations, and funds are safe! Surely Bittrex didn’t do any commingling of company and customer funds like every other crypto exchange in trouble keeps turning out to have done.

The debts are largely fines levied against Bittrex by US government agencies — who are the only named creditors. OFAC is the largest creditor, owed $24.2 million. FinCEN is also a top 50 creditor with a $3.5 million claim. The SEC is listed with an undetermined amount of claims. [Doc 1, PDF]

Bittrex wishes to avail itself of a debtor-in-possession loan of 700 BTC so as to wind down Desolation and Bittrex Malta in an orderly manner and return customers’ funds. The loan will be from themselves — Aquila Holdings Inc, Bittrex’s parent entity, which is not in bankruptcy. [Liquidation plan, PDF]

The precedence of creditors (who gets paid back first) would be: themselves, then the customers, then the US government. That’s novel.

Michel de Cryptadamus notes several other interesting wrinkles. Bittrex’s US gross (not net) revenue for 2022 was $17 million, against the $30 million in government fines. “Several states alleged that BUS was undercapitalized and demanded that BUS immediately surrender its money transmitter licenses in those states.” Bittrex’s complicated corporate structure is reminiscent of FTX. And Bittrex may also be trying to protect the salaries of Bittrex executives from being seized by the SEC. [Twitter, archive]

Michel thinks the whole filing is a massive troll. We concur. The idea seems to be for Bittrex to set up a sacrificial entity to pay back their customers but stiff the US government. We are unconvinced that the government agencies will be inclined to let this one slide.

Good news for Binance

Market makers are leaving Binance US. Jane Street Group in New York and Jump Trading in Chicago — two of the world’s top commodities market makers — are pulling back from crypto in the US as regulators crack down on the industry. Their business in normal commodities is much larger, and they could do without the regulatory heat. [Bloomberg]

The Department of Justice is investigating Binance for possible violations of US sanctions against Russia. There’s already plenty of evidence that Binance has committed sanctions violations. Binance was the final destination for millions in funds from Bitzlato, an exchange shut down for money laundering. Now Dirty Bubble writes that Binance partner Advcash may be facilitating transfers from Russian banks. [Dirty Bubble]

Binance is withdrawing from Canada, owing to a surfeit of regulatory clarity. [Twitter, archive; Reuters]

Bitcoin has been trading at a premium of up to $650 on Binance US. A premium like this is usually an indication that people can’t get their dollars out of the exchange, so they buy bitcoins and move those to another exchange to cash out. [CoinDesk] 

We also saw bitcoin trading at a premium on Mt. Gox just before that exchange collapsed in 2014, and the same with QuadrigaCX, which imploded in 2019. Naïve traders who don’t understand what’s happening will often move their BTC to the dying exchange, thinking it’s an arbitrage opportunity.

Trading at a premium is not a good sign, but a worse sign is when people complain they can’t get their crypto off an exchange. Binance US has long had a reputation for demanding arbitrary new KYC documentation when users try to withdraw.

Monkey laundering comes to bitcoin

Binance paused withdrawals twice on Sunday, May 7. The first time was due to a “congestion issue.” Later in the day, Binance paused withdrawals again due to a “large volume of pending transactions.” [Twitter, archive; Twitter, archive]

For once, Binance might have been on the level. On May 7, the bitcoin mempool was clogged with 400,000 transactions waiting to be processed, and transaction fees surged.  

In bitcoin, the mempool, or memory pool, is where pending transactions pile up before a miner selects the most profitable ones and puts them together as a proposed block. If your transaction stays in the mempool too long, it gets dropped.

The best way to break a blockchain is to try to use it for something. In this case, some idiot worked out how to do NFTs on bitcoin.

“Ordinals” are a new way to create NFTs on bitcoin by linking a JPEG, video, or another image type to a satoshi, the smallest denomination of a bitcoin. Ordinals came out in January, and bitcoin has been filled with monkey pictures since. Bitcoin maxis condemn ordinals as a conspiracy to destroy bitcoin by using the network for a purpose. [Decrypt]

Child genius, adult moron

Sam Bankman-Fried’s defense team is trying to strike 10 of the 13 criminal charges against their client. They argue that the Bahamas did not agree to several of the charges — including one claim that Sam hid millions of dollars in political donations — while other claims didn’t meet the legal requirements of the underlying criminal statutes. [Docket, see filings 137-147]

The facts against SBF are solid. There’s no reason to doubt that Sam did everything the US claims. So the defense seems to be going for unreasonable doubt and hoping they have a dumb enough jury member or two.

Former federal prosecutor Sean Shecter of Lewis Brisbois says SBF’s lawyers want to preserve an appeal, so they have to try everything they can think of, “even if it involves throwing spaghetti against the wall.” He thinks the defense is likely hoping that the government gives up “nuggets of information” in response to the motions. [Law360, paywall]

Prosecutors have until May 29 to respond. Judge Lewis Kaplan will hear oral arguments on June 15. 

The IRS has hit the FTX companies with a $44 billion tax bill, with the largest chunk being $20.4 billion for Alameda. It looks like the IRS reclassified all FTX employees from contractors to employees and charged for unpaid employment taxes. [Docket, see filings April 27, 28; IRS Alameda claim, PDF; CoinDesk]

The IRS has not released its calculations in detail, but we’d assume the bill is inflated by fraud (fictitious profits), penalties, and interest. John Jay Ray is sure to fight this. But even if Ray gets that amount substantially reduced, this is still sure to be a huge hit for FTX creditors.

The IRS claims are treated as unsecured — but they will receive priority status as ordinary and necessary business expenses of the bankruptcy estate. So the IRS will come before ordinary unsecured creditors.

The searing light of regulatory clarity

Ishan Wahi will spend two years in prison for insider trading as a former product manager at Coinbase. He previously admitted to passing on confidential information from Coinbase to his brother and friend, who profited from the tips. [WSJ, paywall; DOJ press release]

In Estonia, nearly 400 VASPs (“virtual asset service providers,” the FATF term for companies dealing in crypto) have shut down or had their licenses revoked after the government’s recently enhanced terrorist financing prevention and anti-money laundering laws came into effect in March. [Protos; Estonia Financial Intelligence Unit] 

Bakkt has delisted a bunch of tokens from the institutional crypto business they bought from Apex Crypto, including several that the SEC has indicated it considers securities. “Our review process ensures those interests are best served when we contemplate the most up-to-date regulatory guidance.” [CoinDesk]

John Reed Stark thinks an SEC action against Coinbase is imminent. He explains the regulations and how they work in detail and why Coinbase doesn’t stand a chance.

Stark notes also that Coinbase’s “regulatory estoppel” claim — that the SEC approving their S-1 public offering means the SEC must have approved the exchange dealing in securities — is directly contradicted by the mandatory “no approval clause” in the S-1: “Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.” Whoops. [LinkedIn]  

Unvaxxed bitcoin is the new bitcoin

QuadrigaCX bankruptcy claimants will get 13% on the dollar. They will be paid out the dollar value of their crypto at the time Quadriga filed for bankruptcy — April 15, 2019, when bitcoin was in the toilet.

It’s amazing that creditors will even get back that much. Most of the Quadriga money was gambled away by cofounder Gerald Cotten and filched by shady payment processors. We’re surprised no criminal charges were filed — but then, most of the money was stolen by a guy who is supposedly dead. [EY notice, PDF; CoinDesk]

Arthur Hayes of BitMEX has been tweeting at Three Arrows Capital co-founders Su Zhu and Kyle Davies because 3AC owes him $6 million following its collapse in June 2022. Rather than returning Hayes’ money, 3AC cofounder Su Zhu has filed a Singapore restraining order to prohibit Hayes from using “threatening, abusive or insulting words” and “making any threatening, abusive or insulting communication, that would cause the Applicant harassment, alarm or distress.” [Twitter, archive; Twitter, archive; CoinDesk]

BlockFi users discover that BlockFi owned their coins. Bankruptcy Judge Michael Kaplan ruled that BlockFi users who had money in BlockFi’s interest-bearing accounts gave up ownership of their bitcoins — all they owned was a liability from BlockFi — and all of the $300 million in crypto deposits is now the property of the bankruptcy estate, as is normal. [Bloomberg]   

P2P exchange Paxful has resumed operations after it shut down last month amidst a messy dispute between cofounders Ray Youssef and Artur Schaback. The entire operation has been comedy gold. Youssef and Schaback say the exchange is now owned by a custodian — who they never actually name — and the custodian, Schabeck, and Youseff all serve as directors. [Paxful, archive; CoinDesk]

In the crypto bubble, Miami crypto companies boomed with the enthusiastic support of Mayor Francis Suarez. Now there’s empty real estate and lawsuits. “Most of crypto was a pyramid scheme,” said local businessman Ryan Kirkley. Suarez is now trying to lure tech startups into Miami instead. [WSJ, paywalled]  

Robert F. Kennedy Jr., who is running for US President on the gibbering insane Twitter blue check conspiracy theorist ticket, will be making the first appearance of his campaign giving the keynote at Bitcoin 2023 in Miami later this month. So, on brand then. [Twitter; NBC]

A propaganda movie is in the works for bitcoin mining — because consuming a country’s worth of electricity is actually good news for bitcoin. Based on the trailer, the film is amazing, but not in a good way. [Dirty Coin the Movie]

Media stardom  

Amy spoke to Bloomberg about the growing ranks of crypto skeptics after the crypto collapse: “There were a handful of us before, screaming into the abyss. Now there’s a lot more.” We’ll just be over here, quietly being right. [Bloomberg]

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Crypto collapse: One year since Terra-Luna, New York goes after crypto, Coinbase launches offshore casino, Central African Republic abandons bitcoin

The latest from David and me! In this edition:

  • One year on from Terra-Luna
  • New York AG proposes new and tighter crypto regulation
  • Coinbase sets up its offshore exchange
  • Justice Department is looking into whether Binance broke sanctions against Russia
  • Vauld takes down CoinLoan
  • Central African Republic abandons bitcoin

David and I are both incredibly busy in our non-crypto lives, but we’re getting these out weekly at least! Also, they keep ending up huge …

Posted on by Amy Castor 0

Crypto collapse: Coinbase rattles sabres at the SEC, Voyager sale collapses, Terra-Luna, Binance

  • By Amy Castor and David Gerard

“All financial complexity is a footnote to ‘don’t hand all your money to some random guy promising high returns.’”

— Matt Levine on Celsius Network

Coinbase takes on the SEC

Crypto bitterly resents any possible regulation. It’s an industry of proud scofflaws. This presents some difficulties to regulators, who are used to financial firms that listen to them.

Coinbase keeps demanding “regulatory clarity.” What this means is that they want special permission to do things that are presently just illegal.

FTX blew up spectacularly in November, and its CEO and top execs were indicted for fraud. In the wake of FTX’s collapse, the SEC has the political backing it needs to get much more serious about making crypto exchanges comply with rules that have always been there.

In the meantime, the SEC’s lack of jackbooted statist enforcement over the last decade has allowed Coinbase to grow larger and larger — which means that Coinbase has bigger guns to challenge the regulator with.

In July 2022, Coinbase petitioned the SEC to make a clear framework for crypto asset trading. Coinbase handwaved that putting unregistered securities on a blockchain was “a paradigm shift from existing market practices, rendering many of the Commission rules that govern the offer, sale, trading, custody, and clearing of traditional assets both incomplete and unsuitable for securities in this market.” [Petition, 2022, PDF]

The SEC didn’t respond — because this claim is just stupid — and in the time since have stated repeatedly that they think the Howey test of what is a security in the US is just fine.

In March, the SEC sent Coinbase a Wells notice saying that they were going to file an enforcement action. Coinbase promptly filed a petition for a writ of mandamus to try to force the SEC to respond to their July 2022 letter. [CNBC; Writ of Mandamus, PDF]

The petition pounds on the table and cites an extensive range of blog posts as legal authorities. The introduction sets the tone:

“Contrary to the prior actions and statements of the Commission and its officials, the SEC Chair now claims that it is ‘clear’ the securities laws already apply to digital assets and platforms.”

Never mind the DAO Report from 2017, let alone the past century of judicial precedent that securities laws apply to what you do, not what you call the assets you are trading. A security is a security is a security.

And the SEC has been very clear — it’s saying that most crypto tokens are securities. There are rules for trading in those securities, and Coinbase needs to comply — or stop trading in them.

As Gary Gensler’s latest dad joke video puts it: “Many crypto platforms are just pretending that these investment contracts that they offer are more like goldfish … It’s not a lack of regulatory clarity.” [Twitter, video]

Coinbase pivots to video

Coinbase has also put up its response to the SEC’s Wells notice. [Response, PDF]

The exchange claims that the SEC approving the company’s S-1 filing to go public surely constitutes approval of all its possible business lines — a claim that crypto pumpers have been promoting heavily. This theory is, in legal jargon, on crack.

Coinbase also confidently asserts that none of what’s listed on the exchange is a security. None of it! Coinbase’s theory is that a given asset is a security only if and when it’s determined in court to be one — despite extensive legal precedent that something can be a security before it’s registered or has come to the SEC’s attention.

It’s just not possible to run a digital assets exchange trading in securities that follow SEC rules, Coinbase pleads. Apparently, this is a problem for the SEC, not for the violators.

Coinbase has threatened the SEC with a scorched earth legal battle: “if the Commission pursues this matter, it will face a well-resourced adversary that will necessarily be motivated to exhaust all avenues” — much as Ripple has been. We think this is unlikely to get the SEC to back down.

So confident is Coinbase in its legal position in the Wells notice that it’s making videos to reassure its user base that all is well. This just makes Coinbase look desperate and clownish — winners don’t make promotional videos for their legal filings. [YouTube]

Why is Coinbase so insistent on trading unregistered securities? Because Coinbase’s business is in deep trouble. Trading volume on the exchange is through the floor — it’s dropped to $26.8 billion so far in April. March was $49 billion in total. This is the lowest volume on the exchange since the crypto crash. [FT]

The Voyager sinks

Binance US pulled out of its $1 billion purchase of Voyager Digital. On Tuesday, April 25, Binance sent Voyager a letter canceling the sale. [Twitter; Doc 1345, PDF]

Voyager will now proceed to liquidation — as it probably should have when it first declared bankruptcy in July 2022 — and give the creditors whatever’s left.

Voyager’s lawyers said in a Wednesday hearing that they were surprised by the letter — Binance was still talking with them about the deal up to the previous Friday. Likely recoveries for Voyager creditors are in the range of 40% to 65%. [CoinDesk]

Imagine how much creditors’ money Voyager could have saved on expensive bankruptcy professionals if they’d just gone straight for liquidation nine months ago. Recoveries would have been on the order of 70%.

The ongoing good news for Terra-Luna

Terraform Labs has answered the SEC’s February suit, which claims that the collapsed UST stablecoin and its free-floating twin LUNA were offered as securities. The SEC’s case asserts that UST was part of Terraform’s Anchor Protocol investment scheme because you had to first buy UST to get into Anchor.

Terraform wants the suit dismissed on the grounds that digital assets can’t be securities — good luck with that one, guys! — and even if they can, UST was a stablecoin, and therefore can’t be a security. Terraform’s motion appears to be written in crayon. [Notice of motion, PDF; Memorandum, PDF] 

Crypto VC firm Paradigm submitted an amicus brief in support of Terraform’s very stupid theory. Paradigm argues that SEC’s premise for treating stablecoins as securities would “radically and impermissibly” expand the definition of a security. [Amicus, PDF; Docket] 

Terraform Labs co-founder Daniel Shin was finally indicted in South Korea along with nine others. Shin is facing charges that include violating capital markets laws. Do Kwon, the other co-founder of Terra, was arrested in Montenegro last month. [YNA; Bloomberg] 

All the good news for Binance

The legal net around Binance tightens. Last month the CFTC filed a civil suit against them. A long-running criminal investigation is being led by the Justice Department’s Money Laundering and Asset Recovery Section and prosecutors in the US attorney’s office in Seattle. The SEC is conducting a parallel investigation.

Binance and CZ have lawyered up and are in discussion with regulators and the Justice Department: [NYT, archive]

“In February, Patrick Hillmann, its chief strategy officer, revealed the exchange was in talks with regulators about a settlement to resolve the various legal investigations with a fine or some other penalty. He said the company was ‘highly confident and feeling really good’ about the discussions. A month later, the C.F.T.C. filed its lawsuit.”

David Silver thinks Binance is screwed: “The truth will come out,” he said. “And Binance will be held culpable.”

Binance has resumed its support for Russian-issued credit and debit cards after Russian cards were cut off for the past year. Payments go via Qiwi. The withdrawal limit is 200,000 RUB (about $2,486). [Meduza] 

Other good news for bitcoin

The FBI has searched the Washington, DC, home of former FTX executive Ryan Salame on the morning of Thursday, April 27. It’s not clear what they were looking for. Salame was the first FTX insider to turn on Sam Bankman-Fried. [NYT]

Gemini wants to set up a non-US crypto derivatives exchange. Their first product would be BTC-GUSD perpetual futures, with ETH-GUSD to follow. [Bloomberg; Gemini]

The US Justice Department has charged North Korean bank official Sim Hyon Sop for his role in two crypto laundering conspiracies. “The IT workers gained employment at U.S. crypto companies using fake identities and then laundered their ill-gotten gains.” [Press release; Sop indictment, PDF; Sop et al indictment, PDF]

Digital Currency Group subsidiary Genesis is bankrupt. Creditors have noticed that DCG is substantially cashed-up compared to Genesis and are insisting that DCG put more money toward the bankruptcy estate — particularly given how much control DCG clearly exercised over Genesis. So Genesis has filed for mediation over the amount that DCG will need to contribute to the reorganization. [CoinDesk]

Bloomberg writes about Celsius Network creditors and how they’re feeling. Their money is just gone, and it’s not coming back. Mashinsky et al. stole some of it and set the rest on fire through ineptitude. All the creditors have left is hope. Celsius really should have liquidated rather than declared Chapter 11. [Bloomberg]

David Rosenthal has written a marvelous summary of his decades in the world of blockchains: “Crypto: My Part In Its Downfall.” [blog post]

Image: Coinbase CEO Brian Armstrong. Photo by Steve Jennings (Getty Images for TechCrunch) enhanced for (regulatory) clarity.

Posted on by Amy Castor 1

Crypto collapse: Reggie Fowler sentencing delayed, SEC charges Bittrex, Coinbase looks to leave the US, Scaramucci and FTX, Bitfinex, Ripple

Our latest crypto collapse episode is out! It’s David’s turn this time. [David Gerard]

In this edition:

  • Reggie Fowler, Bitfinex/Tether money mule, gets another month of freedom.
  • Bitfinex says it’s a bigger victim than AAF in the Fowler case. They want money!
  • We learn the real reason why Bittrex is leaving the US. The SEC is suing them.
  • Coinbase found a potential new home in the Bahamas.
  • Anthony Scaramucci took SBF on a whirlwind fundraising tour of the middle east just before FTX collapsed.
  • How Ripple dumps XRP in 2023.
Posted on by Amy Castor 0

Crypto collapse: Treasury comes after DeFi, SEC comes after crypto exchanges, stablecoin bill, FTX first interim report

  • By Amy Castor and David Gerard

“Please god let FTX go back into business, take a lot of money from crypto rubes, then collapse and lose everything again. Please let there be people who lost money in two separate FTX collapses.”

– Ariong

The Treasury brings good news for DeFi

The US Treasury released its “Illicit Finance Risk Assessment of Decentralized Finance.” The 42-page report examines DeFi from the perspective of anti-money laundering and sanctions laws. [Press release; Report, PDF] 

This report is not about consumer protection — it’s about national security, sanctions busting, and terrorist financing. The Treasury is not happy:

“The assessment finds that illicit actors, including ransomware cybercriminals, thieves, scammers, and Democratic People’s Republic of Korea (DPRK) cyber actors, are using DeFi services in the process of transferring and laundering their illicit proceeds.

… In particular, this assessment finds that the most significant current illicit finance risk in this domain is from DeFi services that are not compliant with existing AML/CFT obligations.”

The report makes clear: blockchain analysis is not sufficient for KYC/AML. Calling something “decentralized” or a “DAO” doesn’t absolve you of responsibility. And almost everything in DeFi falls squarely in the ambit of existing regulation.

How’s regulatory clarity for crypto? Just fine, thank you:

“Through public statements, guidance, and enforcement actions, these agencies have made clear that the automation of certain functions through smart contracts or computer code does not affect the obligations of financial institutions offering covered services.”

The report recommends “strengthening U.S. AML/CFT supervision and, when relevant, enforcement of virtual asset activities, including DeFi services, to increase compliance by virtual asset firms with BSA obligations” and “enhancing the U.S. AML/CFT regulatory regime by closing any identified gaps in the BSA to the extent that they allow certain DeFi services to fall outside of the BSA’s definition of financial institution.”

Nicholas Weaver tells us the report “should be thought of as being as serious as a heart attack to the DeFi community, as this represents the US government regulation at its most serious. Indeed, the report can be summarized in a sentence: ‘If you want to continue to OFAC around, you are going to find out.’”

The SEC brings good news for Coinbase and DeFi

SEC chair Gary Gensler is fed up with Coinbase blatantly trading unregistered securities and not registering with the SEC as a proper securities exchange. So he’s going to update the rules.

The SEC has reopened the comment period for a proposal, initially issued in January 2022, that would update the definition of an “exchange” in Rule 3b-16 of the Exchange Act. [SEC press release; Fact sheet, PDF; Gensler statements]

Gensler’s comments are laser-targeted at Coinbase — and also DeFi:

“Make no mistake: many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws.”

He reiterates that “the vast majority of crypto tokens are securities” — the SEC’s position since 2017 — so “most crypto platforms today” meet the definition of a securities exchange. He adds:  

“Yet these platforms are acting as if they have a choice to comply with our laws. They don’t. Congress gave the Commission a mandate to protect investors, regardless of the labels or technology used. Investors in the crypto markets must receive the same time-tested protections that the securities laws provide in all other markets.”

A regulatory framework for casino chips

On Saturday, The US House Financial Services Committee published an as-yet-untitled discussion draft bill for regulating stablecoins a few days before a hearing on the topic on Wednesday, April 19. [Discussion draft, PDF; hearing agenda]

The bill refers to stablecoins as “payment stablecoins.” This is utterly hypothetical. Nobody uses stablecoins to buy things. They’re chips for gambling on speculative assets in the crypto casinos.

This bill was a sudden surprise for a lot of people — but it appears to be a version of a draft bill that Senate Banking Committee Ranking Member Pat Toomey (R-PA) was circulating last year. [Stablecoin TRUST Act, 2022]

The bill divides stablecoin issuers into banks and nonbanks. Credit unions and banks that want to issue stablecoins would need approval from the financial regulator they fall under‚ the National Credit Union Administration, the FDIC, or the OCC. Non-bank stablecoin issuers would fall under the Federal Reserve.

For this bill, USDC or Pax Dollars, under the Fed, might pass muster. But Tether would be kicked out of anything touching the US because they wouldn’t be able to meet the transparency or liquidity requirements.  

All stablecoins that circulate in the US would need to be backed by highly liquid assets — actual dollars and short-term treasuries — and redeemable within one day. That doesn’t leave much room for the issuers to turn a profit by putting the deposits in longer-term investments.

Custodia is not a bank under the Bank Holding Act, so for this bill, it would also be considered a non-bank. This bill would derail Custodia’s lawsuit against the Federal Reserve and the Federal Reserve Bank of Kansas City to try to force a Fed master account out of them.

The bill also calls for a moratorium on new algorithmic stablecoins until a study can be conducted.

Finally, the bill includes a request for federal regulators to study a central bank digital currency (CBDC) issued by the Fed. As we noted previously, FedNow would make a CBDC completely superfluous.

Hilary Allen, a professor of law at American University Washington College of Law, points out important shortcomings in the stablecoin bill. She argues that the bill is stacked in favor of stablecoins, and notes that the bill’s payment stablecoin definition could be a way of avoiding SEC jurisdiction. And while the bill calls for monthly attestations, it doesn’t say anything about full audits for stablecoin reserves. [Twitter]

FTX’s first interim report reads like Quadriga

John Jay Ray III, FTX’s CEO in bankruptcy, released his first interim report on the control failures at FTX and its businesses. Ray documents a shocking level of negligence, lack of record keeping, and complete disregard for cybersecurity at FTX. [Doc 1242, PDF]

The report confirms what we’ve been saying all along: all crypto exchanges behave as much like Quadriga as they can get away with. A few highlights:

  • FTX Group was managed almost exclusively by Sam Bankman-Fried, Nishad Singh, and Gary Wang. The trio had “no experience in risk management or running a business,” and SBF had final say in everything.
  • SBF openly joked about his company’s reckless accounting. In internal docs, he described Alameda as “hilariously beyond any threshold of any auditor being able to even get partially through an audit,” and how “we sometimes find $50m of assets lying around that we lost track of; such is life.”
  • FTX kept virtually all of its assets in hot wallets, live on the internet, as opposed to offline cold wallets, where they would be safe from hackers. 
  • FTX and Alameda also kept private keys to billions of dollars in crypto-assets sitting in AWS’s cloud computing platform.
  • SBF stifled dissent with an iron fist. Ex-FTX US president Brett Harrison quit after a “protracted argument” with Sam over how FTX US was run. Sam cut Harrison’s bonuses, and when “senior internal counsel instructed him to apologize to Bankman-Fried for raising the concerns,” Harrison refused.

Ray and his team have so far recovered $1.4 billion in digital assets and have identified an additional $1.7 billion they are in the process of recovering. (We’re still waiting for him to ask for money back from The Block, but maybe that’s coming.)

In other FTX news, Voyager and FTX and their respective Unsecured Creditors’ Committees have reached an agreement on the money FTX paid to Voyager before FTX filed bankruptcy that FTX wants to claw back now — $445 million in cash will go into escrow while things are sorted out. [Doc 1266, PDF]

Terraform Labs did nothing* wrong

South Korean prosecutors have seized 414.5 billion won ($312 million) in illegal assets linked to nine Terraform Labs execs. None of the assets tied to Do Kwon have been recovered. Kwon converted everything to BTC and moved the funds — worth an estimated 91.4 billion won ($69 million) — to offshore exchanges. [KBS, Korean]  

Who crashed UST in May 2022? Terraform Labs seems to have played no small part. In the three weeks leading up to the collapse, Terraform dumped over 450 million UST on the open market. [Cointelegraph]

Crypto mining: the free lunch is over

A bill limiting benefits and tax incentives for crypto miners in Texas unanimously passed a Senate committee vote and now it’s in the chamber. The bill was sponsored by three Republican state senators. Even they’re sick of the bitcoin miners. [SB 1751, PDF; CoinDesk; Fastdemocracy]

Bitcoin mining doesn’t create jobs — so Sweden has ended the 98% tax relief it gave data centers, including crypto miners. Crypto is outraged. [CoinDesk]

More good news for exchanges

The downfall of peer-to-peer bitcoin exchange Paxful is a comedy goldmine. Paxful cofounders Ray Youssef and Artur Schaback originally blamed Paxful’s closure on staff departures and regulatory challenges — but now they’re turning against each other in court.

As an example of their good judgment, in 2016, the pair drew police attention when they were spotted in Miami aiming an A15 rifle off their penthouse balcony for photo purposes. Former employees allege “favoritism, erratic dismissals, lavish spending on travel and reports of routine cannabis usage on the job by Youssef himself.”

Paxful’s business model was based on price-gouging fees on gift cards, according to one former employee. You want 10 euros worth of bitcoin? That’ll be 20 euros worth of gift cards. Coincidentally, money launderers are usually quite happy to pay fees on the order of 50%. Schaback thinks Paxful is still a viable enterprise. [CBS, 2016; CoinDesk]

As you might expect, OPNX, the new exchange for tokenized crypto debt run by the founders of the failed Three Arrows Capital and CoinFLEX, has gotten off to a feeble start. Trading volume in the first 24 hours was $13.64. [The Block]

The Winklevoss twins made a $100 million loan to Gemini. The move came after Gemini had informally sought funding from outside investors in recent months without coming to any agreements. We can’t find if the loan was in actual dollars or in crypto — or if it was just an IOU. [Bloomberg] 

Binance relinquished the financial services license for its Australian derivatives business, Oztures Trading, after the Australian Securities and Investments Commission said they were likely to suspend it. Customers have until April 21 to close their accounts. [ASIC] 

Who were the unnamed “VIP” traders on Binance mentioned in the CFTC suit? Jane Street, Tower, and Radix. [Bloomberg] 

The Mt. Gox payout window has opened! Slowly. [Mt Gox, PDF; The Block]

Cryptadamus thinks that Crypto.com’s Canadian bank accounts are frozen. [Mastodon]  

Good news for bitcoin

The Ethereum Shanghai upgrade went through on April 12. You can now withdraw your staked ether! As we predicted, there wasn’t a rush for the exits. [CoinDesk]

Bitfinex money mule Reggie Fowler will be sentenced on April 20. His lawyer wrote a lengthy letter to the judge asking for clemency — no jail time — because Fowler lived a hard life and never did anything wrong before. Nothing he was busted in court for, anyway. [Letter, PDF]

Michael Saylor’s MicroStrategy has bought yet more bitcoin, digging itself ever deeper. The company purchased an additional 1,045 BTC for $23.9 million, or an average price of $28,016, between March 23 and April 4. [8-K filing]

Tether got its tendrils into the US dollar system via Signet — former Signature Bank’s real-time payments system. Tether instructed crypto firms to send dollars to its Bahamas-based banking partner Capital Union Bank via Signet. We’re not clear on whether this violated the New York settlement — though if they lied about who they were, it broke banking law. [Bloomberg] 

Cross River Bank, the banking partner of Coinbase and Circle, built its business on buy-now-pay-later (BNPL) and pandemic loans. What could go wrong? [Dirty Bubble] 

With its firm commitment to quality cryptocurrency journalism, CoinDesk is hot on getting into generating its hopium space-filler using AI text generators. [CoinDesk] 

Media stardom

“Ukraine wants to fund its post-war future with crypto” — with quotes from David. [Techmonitor]

“A lot of ordinary people who got into crypto just lost everything in various ways or lost chunks of it,” Gerard said. “And this is a lot of  why I think retail investors should just keep the hell away from crypto.” [Business Insider]  

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So much for Wyoming blockchain regulatory capture — the Fed blocks Custodia Bank

Our latest blog post details our incredible clown car journey through Custodia’s attempt to get a Fed account by capture of the least populous state in the US (Wyoming), in the face of their own blithering incompetence.

This was supposed to be a 400-word summary of why Custodia’s application for a master account with the Fed got rejected. But something happened along the way, and here we are 3,000 words later.  

The full post is on David’s blog. [David Gerard]

Posted on by Amy Castor 0