Category: Blogging

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

  • By Amy Castor and David Gerard

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

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

How sanctions work

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

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

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

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

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

Use case for Tether: North Korea, Hamas, Russia

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

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

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

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

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

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

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

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

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

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

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

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

Liberty Reserve

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

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

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

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

Liberty Reserve Junior

Tether is Liberty Reserve but on the blockchain.

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

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

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

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

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

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

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

Why hasn’t Tether been shut down yet?

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

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

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

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

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

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

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

A bigger hammer

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

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

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

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

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

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

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

Seriously, stop it

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

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

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

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

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

He gave this speech just after the Binance settlement dropped.

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

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

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

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

What happens next?

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

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

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

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

___________________

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Posted on by Amy Castor 0

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

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

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

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

But those numbers are considerably juiced in important ways.

Numbers go up! When you change how you count them

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

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

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

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

This did wonders for Coinbase’s next quarter!

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

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

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

Trading volume up — a bit

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

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

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

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

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

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

Custody — spot ETFs

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

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

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

Interest

Coinbase makes money on the reserves backing the USDC stablecoin.

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

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

Long-term debt

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

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

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

The searing light of regulatory clarity

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

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

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

EBITDA, the bodybuilding supplement for your numbers

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

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

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

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

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

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

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

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

What all this means

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

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

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

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

Posted on by Amy Castor 0

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

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

In this issue:

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

Consensys gets a Wells notice over MetaMask Swaps and Staking

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

Consensys is the center of the Ethereum ecosystem. Its founder, Joe Lubin, is the man who’s made more money from Ethereum than anyone.

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

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

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

Consensys wants a ruling that:

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

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

The complaint

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

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

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

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

MetaMask

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

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

MetaMask Swaps

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

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

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

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

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

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

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

MetaMask Staking

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Is ETH a security?

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

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

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

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

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

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

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

What happens next?

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

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

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

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

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

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

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

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

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

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

Posted on by Amy Castor 1

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

  • By Amy Castor and David Gerard

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

— more falafel please, SA

What are you gonna do, convict me?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Esto no puede ser tan estúpido, debes estar explicándolo mal

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

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

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

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

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

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

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

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

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

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

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

Uniswap: the searing light of regulatory clarity

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

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

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

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

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

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

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

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

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

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

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

Miners dumping

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

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

Central banking, not very on the blockchain

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

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

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

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

Good news for bitcoin

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

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

Media stardom

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

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Posted on by Amy Castor 4

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

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

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

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

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

Posted on by Amy Castor 0

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

  • By Amy Castor and David Gerard

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

Sound and fury, signifying nothing

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

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

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

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

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

Flash boys

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

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

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

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

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

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

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

ETFs will save bitcoin!

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

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

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

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

The hot air crypto bubble

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

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

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

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

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

Fake dollars going up, real dollars going down.

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

What do I do with my holdings?

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

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

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

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

Back in the snake pit

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

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

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

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

The way crypto works is:

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

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

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

Trade carefully.

Media stardom

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

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Posted on by Amy Castor 1

Tether, FTX, and Deltec Bank: MONEY TIME

  • By Amy Castor and David Gerard

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

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

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

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

The amended complaint

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

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

FTX/Alameda: MONEY PARTY THE BEST PARTY

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

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

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

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

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

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

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

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

MOOONNNEEEYYY TTTIIIIMMMMEEEE

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

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

MONEY PARTY THE BEST PARTY

it is MONEY TIME INDEEDE

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

Moonstone Bank

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

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

North Dimension: Ipad 11 “ich Cell Phone

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

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

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

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

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

Tether and Deltec

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

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

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

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

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

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

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

FTX’s alleged Tether scam

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

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

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

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

Attachments to the complaint

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

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

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

Harborne corrects the record by lawsuit

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

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

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

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

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

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

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

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

Squeal!

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

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

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

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

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

Just in case

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

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

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

Heading for the trillion

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

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

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

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

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

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

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

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Posted on by Amy Castor 3

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

  • By Amy Castor and David Gerard

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

Extreme noise terror

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

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

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

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

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

Bitcoin is a battery of unspecified size

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

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

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

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

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

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

A history of flawless repute 

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

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

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

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

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

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

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

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

RIOT 2023 10-K: Extreme accounting

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

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

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

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

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

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

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

Adding water to soup

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

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

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

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

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

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

Risk factors

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

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

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

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

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

From the extreme bingo hall

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

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

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

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

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

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

Bingo masters break out

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

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

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

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

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

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

Posted on by Amy Castor 3

Crypto collapse: Genesis vs. DCG, Celsius payouts failing, Terra-Luna extraditions, what 3AC did next, Craig Wright

Our latest is just out! This one is on David’s site. [David Gerard]

  • DCG objects to its own subsidiary’s actions in bankruptcy to sell off its GBTC and settle with New York
  • Celsius Network glitches paying out creditors
  • Zhu Su and Kyle Davies from Three Arrows Capital are at it again
  • Terra-Luna extraditions to South Korea and the US
  • Bakkt is broke
  • Coinbase’s 10-K shows the crypto retail trade is still dead
  • Craig Wright, we’re sorry to say

We also have half-cooked standalones on Tether and the state of bitcoin mining. Coming soonish!

Posted on by Amy Castor 0

The ‘halvening’ is coming — what this means for bitcoin

Bitcoin mining earns you half as many bitcoins every four years. The reward for mining a block of transactions started at 50 bitcoins in 2009. It dropped to 25 bitcoins in 2012, 12.5 in 2016, and 6.25 in 2020. Sometime in May 2024, the block reward will drop to 3.125 BTC.

“Halvening” is a silly bitcoin neologism for when the block reward — the amount of newly minted bitcoin a miner receives every time they mine a new block — halves.

To understand the “halvening,” you need to know about two things:

  1. The practical problems for bitcoin miners when half their income suddenly vanishes;
  2. A whole mythology of inane gibberish.

Mining on half the income

The halving is a serious problem for bitcoin miners.  

We expect an apocalypse of miners. They will try to sell any bitcoins they’ve been holding in reserve just to survive.

The cost of the electricity to guess enough random numbers to mine one bitcoin is currently around $26,000. After May, the price of bitcoin will need to be at least double this ($52,000) for mining to break even. There’s also the costs of mining computers (“rigs”), facilities, and paying executives huge salaries.

If the price of bitcoin falls below $50,000, expect miners to just shut down their hardware. Some may keep mining if their electricity is super-cheap — such as the now-illegal bitcoin mines that still exist in China. Miners around the world will switch off and throw away older inefficient mining rigs.

As well as a reward of fresh new bitcoins, the successful miner of a block also gets all the transaction fees. We calculate that the transaction fee per block was around $4,000 on February 20. Miners can also make money from questionable deals for not mining bitcoins.

The price of bitcoin may be pumpable with judiciously applied tethers — if the miners are on sufficiently good terms with the rest of the broader crypto casino. Previous halvings have been preceded by price pumps and lots of talk of bitcoin going to the moon. Expect to see “finance experts” making inane and baseless price predictions.

The real problem is that bitcoin mining is a terrible business to be in and gets worse every four years — which is why the actual businesses tend to structure themselves in ways that look more like a stock market scam.

There can only ever be 21 million bitcoin memes

Bitcoin discussion is promotional memes all the way down, and it always has been.

One big promotional meme is that there will only ever be 21 million bitcoins. That’s if the bitcoin software never changes. We don’t hear this meme so much anymore.

Satoshi Nakamoto wanted to issue new bitcoins but limit the total amount to 21 million to make it “scarce.” So instead of each block granting 50 BTC forever, the number would halve every four years. By 2140, the issuance would be zero and bitcoin miners would have to rely on transaction fees for their income.

Why would you want the total issuance of a general currency to be limited to a particular quantity? That comes from the political ideas behind bitcoin — a variant of Austrian economics that wants a rigid gold standard where the currency is firmly pegged to gold in a vault. 

The world went off the gold standard in the 1930s, with the last vestiges disappearing in 1971, because it just didn’t work anymore. But there’s no bad or obsolete idea that someone won’t decide “What if that was actually a good idea?”

So the pre-bitcoin cypherpunks got high on completely incorrect conspiracy theories and spent a couple of decades trying to do a “gold” standard digitally.

Quite a lot of the deep weirdness of bitcoin is because it starts from this wrong economic premise and extrapolates from it in the face of all real-world evidence. 

Pumping the market

The bitcoin market is incredibly thin and easy to manipulate. We’re seeing $2,000 swings in the price over a single day. That’s not a stable market.

This is tremendous fun for Wall Street traders, who love volatility —  and now they have cash-create ETFs and cash-settled derivatives of the alleged price of bitcoin, all using actual money under proper regulation. Plus, they don’t ever have to do anything so gauche as to touch a bitcoin.

Traders will create a complex thicket of derivative financial products on two flies crawling up a wall, and in bitcoin they have particularly demented flies to bet on.

The real dollars headed into the bitcoin system are interested in gambling on things that have less and less to do with actual bitcoins and the parameters of the blockchain.

Number go up

The dumbest promotional myth about the “halvening” is that the halvings cause the bitcoin price to go up! Because there’s less bitcoins now. With less bitcoins to fill the demand, there will be a shortage!

But there have always been large bitcoin holders with more than enough coins to flood the market, if only there were buyers. The supply of available bitcoins does not depend on mining output.

In the previous halving in 2020, the world was going nuts from COVID lockdown. Any supposed effects of the halving were just lost in the noise.

The current supply is a fresh 900 BTC per day in the form of block rewards. When 450 BTC of that disappears starting in May, existing whales already have a lot more coins they don’t want to just dump and risk crashing the price.

Miners were already holding coins while the price was going down through early 2022.

An even wilder myth is that the halving will come as a shock to the market, which can’t possibly have priced it in already.

While bitcoin is pretty solid evidence against strong versions of the efficient market hypothesis — that markets of any sort automatically incorporate all new information as soon as it exists — the crypto market isn’t so information-inefficient that it’ll be surprised by something that’s been scheduled since 2009.

All kinds of things can and do send the bitcoin price up and down. Most of them are shenanigans.

The various myths exist solely to convince fresh retail suckers — the most valuable bitcoin users — to get in quick while they can. The real price of bitcoin is what the next sucker will pay for it. 

What if bitcoin did change, though?

The bitcoin code will never change!

Unless enough stakeholders want it to. 

The last serious attempts to change the parameters of bitcoin were SegWit, which would allow a few more transactions in a block, and Bitcoin Cash, which would make blocks much larger and perhaps make the bitcoin blockchain a bit less hopelessly clogged. SegWit was eventually adopted, but Bitcoin Cash failed because they couldn’t talk the exchanges into giving them the “BTC” ticker.

None of these disputes were technical — it was all the politics of who got to make money.

As the bitcoin reward decreases, practical behind-the-scenes discussions of changing the code are becoming more prominent. 

Miners need real dollars to pay their outrageous electricity bills. Power companies won’t accept tethers. The miners would very much like the issuance of bitcoin to change so that it no longer halves. 

The reward per block is defined by two lines of code. A simple change and the reward could just as easily be thirty, sixty, or a hundred bitcoins per block.

Coiners will tell you that the code won’t change because it’s against the miner’s self-interest or the community would reject such a change. There are indeed those who would reject it — but their hold has been weakening since bitcoin finally failed hard as currency around 2017.

Bitcoin started in libertarianism. But approximately 100% of current crypto users are in it for the money. Crypto market participants subscribe to the bitcoin ideology only as long as it works for marketing.

Like conservatives and reactionaries in the wider world who don’t understand markets and condemn doing things that get you customers as “woke capitalism,” ideological bitcoiners will loudly decry as corrupt and unacceptable the actions of the actual existing crypto markets full of people who are in it for the money. Because they’re doing capitalism wrong, apparently.

So the biggest threat to the bitcoin ideology is a sufficient threat to the flow of cash.

Nobody cares about the blockchain

The point of cryptocurrency is to create financial instruments that are obscured from regulators. The crypto markets are happy to trade centrally controlled tokens like XRP or most defi tokens on this basis.

When the bitcoin blockchain lost a lot of hashpower in the Bitcoin Cash wars in late 2017, the time between blocks could be over an hour. The crypto world barely noticed — because all the action was market traders on the exchanges in a bubble.

We would like to wish the bitcoin miners a very pleasant go broke and vanish. But we expect there will still be enough mining to keep the blockchain moving, even if very slowly.

The “halvening” only matters as a publicity stunt for bitcoin — a reason to get bitcoin into the headlines that isn’t Sam Bankman-Fried going to jail. 

Posted on by Amy Castor 4

Crypto collapse: FTX is liquidating and getting an examiner, Tether’s Q4 attestation, more ETFs coming

Our latest crypto collapse update is on David’s blog.

In this issue, FTX creditors will be getting back 100% of what they had as of the precise moment they lost it. Tether claims its “loans” — issuing money out of thin air — are no longer a problem as they’re making tons of interest from the thin air. Larry David feels silly after doing that FTX advertisement, especially after he took a salary in crypto, and ETFs may not be the holy grail crypto hoped for, but they’re a great way to dump your GBTC.

If you like this, share this, and also, please take a moment to support our work, and become a patron at the $5, $10, or even the very generous $100 level — links in story!

Posted on by Amy Castor 0

Amy and David answer your questions — bitcoin mining, ETH staking, FTX, Tether, and more! 

  • By Amy Castor and David Gerard

We asked readers what they were curious about in crypto. We posted part one of our answers earlier this month. Now here’s part two! [Twitter; Bluesky] 

Sending us money will definitely help — here’s Amy’s Patreon, and here’s David’s.

Q: An update on the carbon footprint of the crypto industry for 2023, if this hasn’t been done by someone else already? Thanks [Thomas Endgame on Twitter]

The news is still dismal. The bitcoin network’s annual carbon footprint is a shocking 76.79 million tons of carbon dioxide, comparable to the entire country of Oman, according to Digiconomist. [Digiconomist, archive]

In terms of energy, bitcoin uses as much electricity as the country of Ukraine — 137.68 terawatt-hours annually. Energy consumption was highest in the first half of 2022 — 204 terawatt-hours per year — but started to go down in July, after the crypto collapse. 

The network currently produces 23.75 kilotons of e-waste per year, comparable to the entire Netherlands, and every bitcoin transaction uses enough water to fill a swimming pool.

This is why some of the good citizens of Texas are fighting back against the crypto mines there. 

Q: Who’ll be left holding bags when Tether collapses? [Julius Cobbett on Twitter]

Tethers (USDT) function as substitute dollars on offshore crypto exchanges that have no access to US dollar banking.

The biggest holders of tethers are arbitrageurs, such as Cumberland, who pass tethers along to secondary users in exchange for bitcoins and other crypto. [CoinTelegraph, 2020; Protos]

If all tethers were suddenly switched off tomorrow, that would be nearly 100 billion “dollars” in liquidity instantly sucked out of the market.  

Any secondary users stuck holding tether would find their virtual dollars suddenly worthless. Arbitrageurs would have nothing to buy and sell bitcoin with on offshore exchanges — they would have to switch over to a different stablecoin — and the price of bitcoin would likely take a serious hit.

We would expect to see a large number of bitcoin holders trying to dump their holdings on actual-dollar exchanges like Coinbase in a mad rush to get out of the market. It might look like a bunch of mice trying to squeeze out of a tiny hole. 

Q. We all know crypto is garbage, why does YAHOO finance continue to have the BTC ticker and other crypto related garbage up? I’d have thought by now it would be gone. [Barsoapguy on Twitter]

Sadly, with bitcoin ETFs and so on still all over the finance press, it’s a relevant number to put up. Even if they just pull the number from whatever CoinMarketCap says.

Q. In the bankruptcy of FTX, about 7B of the $8.7B said to be “lost” has been found, and with Crypto making a comeback all creditors may become whole or better. But SBF rots in prison for decades? And BK firms make over a billion in fees? [Bill Hochberg on Twitter]

There are two misconceptions here — one is that John Jay Ray and his team have found all the money and everything will be fine. The other is that Ray and his lawyers are gouging the creditors and nobody can stop them.

FTX got itself into trouble because it had stolen the customer assets, then inflated its balance sheets with worthless FTT tokens — its own illiquid supermarket loyalty card points. The FTT made up a third of its balance sheet. When FTX filed for bankruptcy in November 2022, it had a shortfall of $8.7 billion.

As we wrote at the time, FTX’s debts were real, but its assets were fake. The FTT was unsaleable garbage, not something that Ray and his team could turn into cash.

In August 2023, Ray estimated his team had recovered $7 billion — but that included spurious dollar values for trash crypto assets. A lot of it will be FTT and other worthless tokens that aren’t realistically convertible to cash in those quantities. 

In October 2023, FTX said it would refund up to 90% of “distributable assets” to creditors. That’s 90% of the amount of funds that FTX was able to recover — not 90% of the amount owed to creditors. [FTX]

Bitcoin has gone up in price since FTX fell over. The price of bitcoin was $17,000 when FTX filed for bankruptcy. Now it’s over $40,000. If FTX held onto its crypto holdings, instead of converting them into cash as soon as possible, they might have made some money. But bankruptcy lawyers typically don’t gamble on volatile markets. 

Bankruptcy professionals are super expensive. Ray’s team has so far cost about $200 million. That’s a lot of money, and many people questioned this — but even the independent fee examiner said, yep, that looked about right for the ridiculous mess Ray had to sort out here.

An appeals court has ordered the appointment of an independent examiner reporting to the US Trustee, paid for out of the bankruptcy estate, which will likely cost another $100 million or so.

Q: Eth staking and destaking? It was not possible to unstake at launch, does it work now? Are stakers happy? How scammy is the whole thing? There was some stuff about OFAC compliance for stakers too? I don’t know? I might use an explainer? [Laventeot on Twitter]

Ethereum proof of stake uses validators rather than miners like bitcoin does. Every validator has a chance at winning this moment’s ETH. If your block is the winner, you get the block reward, transaction fees, and all the MEV you can steal.

You can set up a validator at the cost of staking 32 ETH. When Ethereum moved to proof of stake in September 2022, this 32 ETH couldn’t be unstaked. But since Ethereum’s Shanghai upgrade in April 2023, it is now possible to unstake your staked ETH.

Unstaking has a queueing mechanism to avoid there being too much churn. So when there’s a big dump — such as when Celsius Network destaked 30,000 ETH recently to hand back to their bankruptcy creditors — it can take days or even weeks to process. [Nansen]

The staking process seems to work as advertised and the stakers are pleased with it.

The process closely resembles an unregistered security in the US — the Ethereum Foundation (incorporated in Switzerland) promotes that you put in your ETH and you get a return on it from the efforts of others.

Some exchanges offer staking as a service — this is probably okay if the customers are accredited or institutional, and an excellent way to accumulate cease and desist letters from the SEC and state securities regulators if the customers are retail.

Anyone moving money — or, in FinCEN’s terms, “value that substitutes for currency,” including “convertible virtual currencies” — as a business in the US is required to comply with sanctions law. This is usually assumed to mean not validating transactions for sanctioned blockchain addresses listed by OFAC. US-based validators would be very foolish to flout this.

OFAC compliance in transaction processing doesn’t directly relate to the economics of staking in itself — US bitcoin miners would similarly be liable under law for processing transactions for sanctioned entities, even if OFAC hasn’t called them up yet.

Q: maybe a check-in on the enterprise blockchain pitch decks? is the same dead horse still being beaten? [Stephen Farrugia on Twitter]

Enterprise blockchain has gone back into hibernation. Corporate interest in non-cryptocurrency blockchain goes up and down with the price of bitcoin — lots of interest in 2017 and 2018, almost none in 2019 and 2020, and a sudden burst of interest in 2021 as the number went up.

The problem with enterprise blockchain is that it’s a completely useless idea. A blockchain doesn’t actually work any better than using a conventional database in any situation where you have a trusted entity who’s responsible for the system. If you’re a business, that’ll be yourself. Just use Postgres.

The main remaining interest in enterprise blockchain is inside banks. We’ve had many reports of bank fintech research units infested with coiners trying to do something — anything — that they can say is “blockchain.” Société Générale’s completely useless euro stablecoin is one recent example.

Q. Something on the way that Bitcoin Magazine and BitMEX bought commercial places on the Peregrine Mission One so they could say they’d “gone to the moon” … and the spacecraft is going to miss the moon. [BiFuriosa on Bluesky]

Private companies have of late been offering to send personal items — cremated remains, time capsules, and even crypto — to the moon. Astrobotic, which owns Peregrin-1, is one of them. 

In May, BitMEX and Bitcoin Magazine announced they were going to send a physical bitcoin to the moon via Astrobotic — that is, a metal medallion with a bitcoin private key engraved onto it. They declared that this would mark a “defining moment for bitcoin as we explore the possibilities of Bitcoin beyond planet Earth.” [BitMEX, archive]

Peregrin-1 made it into space earlier this month — but it never managed to land on the moon. So when it burned up on re-entry to Earth’s atmosphere, everything onboard burned up with it, including the time capsules, the ashes of more than 200 people, and the bitcoin. [Gizmodo]

Dogecoin fans had earlier funded a similar effort to send a physical dogecoin to the moon in 2015, also via Astrobotic. As of 2023, they were still trying to get it sent up. If the physical dogecoin had been onboard, it would have met the same fate. [Twitter, archive]

Sadly, even the moon hates crypto. 

Q. Why are people still falling for this nonsense? [Peter Nimmo on Mastodon]

Dude, they can get rich for free! Maybe.

Thankfully, fewer people are falling for the nonsense. Retail trade is one-eighth of what it was in the 2021 bubble. Most of the dollars boosting the price of bitcoin since 2017 have been fake. 

By the end of 2017, a billion USDT was sloshing around in the crypto markets; today in 2024, we’re coming up to 100 billion USDT. Bitcoin’s price is largely manipulated.

Crypto media — CoinDesk, The Block, Decrypt, and others — play a major role in promoting the nonsense. These outlets, owned and/or financed by crypto companies, are the public relations machines for the crypto industry. The finance press treats these sites as specialist trade press rather than fundamentally a promotional mechanism.

Crypto has also put big money into lobbying efforts, so we see senators like Cynthia Lummis, Kirsten Gillibrand, and Rand Paul shamefully repeating the propaganda. 

Crypto skeptics are a smaller group who try to warn people of the dangers of investing in crypto. So it’s important to send money to us. Instead of bitcoins, we spend it on useful things like wine to get through all this guff.

Q. Once Crypto blows over what will we salt our popcorn with? [EamonnMR on Mastodon]

We don’t expect crypto to ever disappear completely. We do expect the number to eventually go down to the point where fewer people pay attention.

Meme stocks blew out even harder than crypto did. The remaining devotees are like QAnon for finance, posting to Reddit with their theories of how much they’ll surely get for their deactivated BBBY shares when the Mother Of All Short Squeezes finally descends.

Now that the well of dumb crypto money has dried up, venture capitalists are pivoting to AI as the next big thing. The tech is running out of steam, though. But the power consumption is likely to be even worse than bitcoin mining by 2027, and the AI grifters are using the same excuses for it as the bitcoin grifters. [Digiconomist]

Suckers are eternal. As long as money exists, fraud and get-rich schemes will be with us. And we’ll have something to write about.

Image: Hans at Pixabay, CC-0 

Posted on by Amy Castor 4

Crypto collapse: SEC takes on Terraform and Coinbase, ETF fallout continues, Tether is for crime

Our latest roundup of everything that’s falling over is on David’s site. [David Gerard]

In this edition:

  • SEC wins a lot of their claims against Terraform
  • Coinbase motion to dismiss hearing, with yet more Beanie Babies. (“funding my new startup by selling Stock Babies which are an asset  just like a parcel of land, the value of which may reasonably  fluctuate.” — Andrew Molitor)
  • ETF nonsense: Collateralized Rugpull Obligations
  • Tether is for crime
Posted on by Amy Castor 0

You won’t believe the 21 million reasons bitcoin ETFs are dumb as heck and super-risky! Oh wait, of course you will

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

Boy, those ETFs were the juice bitcoin really needed, eh? 

The SEC approved 11 bitcoin spot ETFs on Wednesday, January 10, with media widely reporting what a boon this would be for the coiners. Surely this would lure piles of fresh dollars into bitcoin!

Not quite. The bitcoin price held around $46,000 — but just for long enough for the whales to start cashing out.

What the crypto world needs to understand is that bitcoin ETFs are not bitcoins. They’re a traditional finance product with bitcoin flavoring.

Except for the risk — that bit is completely bitcoin.

Number go down

The first big post-ETF price drop came on Friday, January 12. Bitcoin slipped from $46,000 to $43,500 in two hours — only one hour after the day’s printing of a billion tethers was released. A few hours after that, another dump took the price from $43,500 to $41,000.

The bitcoin market is fake and in tethers. The retail securities market is real and in actual dollars. You can’t pump bitcoin ETFs with tethers.

After years of being severely discounted from the price of the bitcoins in the fund, Grayscale GBTC finally reached net asset value. This turned out to be not so great — it looks like long-frustrated GBTC holders are finally dumping now that they can. [CoinDesk; Bloomberg, archive]

Coinbase (Nasdaq: COIN) stock went down as well. It was up as high as $186 at the end of December. It dropped to $130.78 on January 12.

ETFs have put bitcoin on steroids! Asthmatic and with shrunken balls.

Bitcoins: not so great

Bitcoins are still an awful investment for ordinary people who aren’t true believers in Satoshi and just want to grow their dollars.

The ETF S-1 filings go into considerable detail on the risks — none of which should be news to anyone here.

The main risk the ETF trusts see is that the base asset is still a completely terrible investment. Crypto is insanely volatile. A pile of crypto companies went broke from being run by crooks — the filings go into some detail on this. Everyone hates bitcoin miners. The regulators, from the White House down, increasingly just despise everything about crypto. And very few people like bitcoin anyway.

Securities broker Vanguard thinks the bitcoin ETFs are such trash that they’re not only not offering these spot bitcoin ETFs — they’re withdrawing the crypto futures ETFs they presently offer. [Axios]

What happens if the ETF bitcoins are stolen?

Unlike a bitcoin futures ETF, a spot ETF is based on actual bitcoins — and these have to be stored somewhere.

Most of it, including $29 billion face value of GBTC bitcoin, is stored by Coinbase Custody. VanEck is storing their ETF coins at Gemini. Fidelity is storing their ETF coins at their own custody subsidiary.

So what happens if a hacker gets into the digital fortress and takes all the bitcoins?

In short: too bad. Sorry, your money is gone!

Coinbase Custody advised BlackRock that it has insurance covering up to $320 million losses of custodied crypto — but that’s for all its customers’ $144 billion (face value) of cryptos in custody. That’s a whole 0.2% coverage. [SEC]

The ETF trusts themselves do not have FDIC or Securities Investor Protection Corporation (SIPC) insurance.

The ETF trusts specifically disclaim liability for lost backing assets. Valkyrie, for example, says: “Shareholders’ recourse against the Trust, Trustee, Custodian and Sponsor under New York law governing their custody operations is limited.” [SEC]

Investors would likely sue anyway. BlackRock and Fidelity could cover such a loss, though it would sting. Grayscale would be utterly unable to cover it.

If Coinbase were to go bankrupt, it’s not clear legally if crypto stored in Coinbase Custody would belong to the individual customers or would be thrown into the bankruptcy estate!

The custodian just losing all the bitcoins is not a trivial risk — two crypto custodians, Prime Trust and Fortress, went bankrupt in 2023 just from losing customer coins.

At least Coinbase Custody would be unlikely to do what Prime Trust did and gamble remaining customer assets on the crypto markets to cover the hole. Probably.

Ask an expert

We spoke to Frank Paiano, who teaches finance and investing at Southwestern Community College, about what would happen if a bitcoin ETF’s backing assets vanished. [Frank Paiano]

He thinks that customers “will be fooled into thinking” that the ETF assets are protected, even though they absolutely are not. “That is mostly why Fidelity has set up their own trustee. I would guess that companies such as BlackRock would do the same.” (BlackRock is so far just using Coinbase.)

Loss of ETF-backing assets happens quite a lot, said Paiano. “A simple Internet search for ‘gold investments stolen’ yields several examples. Then there are the age-old anecdotes of people being duped into buying lead painted or plated with gold.”

Paiano thinks bitcoin ETFs are profoundly unwise investments: “prudent, long-term oriented investors should stay far away from these abominations”— but they’ll find customers.

“If there are foolish, greedy individuals willing to part with their hard-earned money, there will be scoundrels happy to oblige them.”

Other bitcoin ETF fallout

The day before the SEC announced its approval of 11 spot bitcoin ETFs, the official @SECGov Twitter posted a fake notice saying a bitcoin ETF was approved. SEC Chair Gary Gensler issued a statement on the fake tweet, saying that an unauthorized party got hold of the phone number connected to the account but didn’t get access to any SEC internal systems. [SEC]

What happens next?

The new narrative we’ve seen is that the real bitcoin pump is in 90 days when financial advisors are finally ready to push bitcoin ETFs on their customers, for some reason. Probably the halvening, or sunspots maybe.

We don’t expect the number to go up just from bitcoin ETFs existing — anyone who wanted bitcoins could already buy them, and “anyone” numbers one-eighth of what it did in the recent bubble.

We do expect downward pressure on the bitcoin price to continue from the GBTC holders who can finally cash out near par.

Tether pumps only work if nobody tries to cash out into the pumped-up price. Unfortunately, that only works as long as nobody wants real dollars. It turns out they do.

With these ETFs, bitcoin is the dog that caught the parked car.

Media stardom

David was quoted by Cointelegraph on bitcoin ETFs. A bitcoin ETF is a terrible idea, but we don’t think the threat model includes the issuers stealing the bitcoins. [Cointelegraph; Cointelegraph; Cointelegraph]

David spoke to Davar about bitcoin ETFs and our friends at Tether. (“Basket fund” is the local term for “ETF.”) [Davar, in Hebrew, Google translate]

David went on Logan Moody’s podcast The Contrarian just before the ETFs were approved to talk about the state of crypto as of early 2024. [YouTube]

Image: Grayscale Bitcoin Trust, artist’s impression.

Posted on by Amy Castor 3

SEC approves bitcoin spot ETFs — what this means for crypto

As predicted, the SEC today approved several spot bitcoin ETFs — Grayscale GBTC, Bitwise, Hashdex, BlackRock iShares, Valkyrie, ARK 21Shares, Invesco Galaxy, VanEck, WisdomTree, Fidelity Wise Origin, and Franklin.

Fees are cut throat, some less than a quarter of a percent. These companies can run the ETFs as loss leaders for a while, but eventually they’ll have to raise the fees or quit.

Today’s post is over on David’s blog. [David Gerard]

Image: Scrooge McDuck’s money bin

Posted on by Amy Castor 0

Amy and David answer your questions on crypto! (Part 1)

  • By Amy Castor and David Gerard

Crypto is still hungover from New Year’s and there’s no news. So we asked readers what they were curious about in crypto. [Twitter; Bluesky]

Keep your questions coming for part 2, some time or other!

Sending us money will definitely help — here’s Amy’s Patreon, and here’s David’s.

Q: I keep wondering what’s keeping the circus alive, given that the retail dollars are practically gone, and the last remaining on/off-ramps are all but down the drain. [Tomalak on Bluesky]

The circus is fed by dollars — real and fake — and its product is hopium, the unfaltering belief that number will always go up. The hopium runs on narratives, such as the current story that a bitcoin ETF will result in a magical influx of fresh dollars.

In crypto, the retail dollars have largely gone home — but too many people have large piles of crypto accounted as dollars to let the number go down. So they deploy fake dollars to keep the crypto flowing.

There are currently 93 billion dubiously-backed tethers sloshing around the crypto markets. We expect that to go over 100 billion as we get closer to the bitcoin mining reward halving in April.

The circus is advertised by the crypto media, which functions as PR outlets for the space. The CoinDesk live-wire feed on any given day is about half hopium, for instance. There are no respectable media outlets in a crypto winter.

(Except us, of course. Subscribe today!) 

Q: Why can’t or wouldn’t the average investor make money in crypto? We criticize it, and rightfully so, but why should the person looking to make a profit care? [King Schultz on Twitter]

There is no source of dollars other than fresh retail investors. Old investors can only be paid out with money from new investors.

Crypto isn’t technically a Ponzi scheme — it just works like one. So investing in crypto will always be a slightly negative-sum game.

Functionally, crypto is a single unified casino, run by a very small number of people, with no regulation. Binance is the tables, Coinbase is the cashier window. The flow of cash is from retail suckers to very few rich guys at the top.

There are many, many complicated mechanisms in the middle, and they’re fascinating to look at and describe and watch in action. But the complex mechanisms don’t change what’s happening here — money flows from lots of suckers to a few scammers.

Some people make money in crypto, just like some people make money in Las Vegas — but gambling in Vegas isn’t an investment scheme either. And the house always wins.

You can make money in crypto if you’re a better shark than all the other sharks in the shark pool, who built the pool. It can be done! Good luck!

Q: be interested in reading about money laundering [Broseph on Bluesky]

Money laundering is when you try to turn the proceeds of crime into money that doesn’t appear to be the proceeds of crime. Laundering money is also a specific crime in itself.

With money going electronic, it’s harder to obscure the origins of ill-gotten gains and avoid unwanted attention from banks and the authorities. Many crooks have attempted to launder money by using crypto as the obfuscatory step.

Bitfinex money mule Reggie Fowler set up a global network of bank accounts. He told the banks the accounts were for real estate transactions. He was sentenced to six years in prison.

Heather “Razzlekhan” Morgan and Ilya Lichtenstein tried laundering the bitcoins from the Bitfinex hack through the Alphabay darknet market. This would have completely covered their trail! Except that the police had pwned Alphabay by then, and Lichtenstein’s transactions were all right there for the cops to track him. Whoops.

We also highly recommend Dan Davies’s fabulous book on fraud, Lying for Money.

Q: Not so much baffled but curious as to how law enforcement can and does identify people using blockchain. Also, do some coins not have a public blockchain? [Bob Morris on Twitter]

Cryptocurrencies run on publicly available blockchains. In theory, you can trace the history of every transaction on a blockchain right back to when it started.

The hard part for authorities is linking someone’s real-world identity to a specific blockchain address. Achieving this was the key to busting Heather Morgan and Ilya Lichtenstein, for instance. The hardest part for crooks is cashing out successfully without being busted.

The trail can be difficult to trace, especially if the crook has put effort into obfuscation — e.g., running transactions through a mixer such as Tornado Cash. But specialists can get good at tracing blockchain transactions and several companies sell this as a service.

Privacy coins like Monero and ZCash try to obfuscate the traceability of transactions on the blockchain itself. But users often give themselves away by other channels — e.g., transaction volumes elsewhere that coincidentally correspond to amounts of Monero sent to a darknet market.

Even if you can protect yourself cryptographically, one error can leave your backside hanging out — and crypto users are really bad at operational security.

Q: nfts aren’t really relevant these days but I’ve never been clear on what ‘mint events’ are and how they relate to the icos. Are users generating new nfts paid for by using the coins they previously bought? [Robert Kambic on Bluesky]

Initial coin offerings (ICOs) were huge in 2017 and 2018 — but the SEC came down hard on them because they were pretty much all unregistered offerings of penny stocks.

Since that time, crypto has tried to come up with other ideas for doing unregistered offerings while making them look at least a little less illegal. There were SAFTs, airdrops, and now NFT mint events. These are all about creating fresh tokens out of thin air and promoting them as an investment in a common enterprise that will make a profit from the efforts of others.

A “mint event” is when you buy into an NFT collection early — when it first mints — hoping the value will increase astronomically over time.

But these are not securities, no, no, no. Yuga Labs wasn’t selling you shares in a company — they were selling you ape cartoons! You weren’t getting dividends, you were getting Mutant Apes, dog NFTs, and ApeCoins! You’re not investing in a speculative startup, you’re buying art!

The SEC has so far sued one NFT company, Impact Theory, after it raised $30 million through NFT sales. The SEC said the NFTs were promoted as investment contracts and not registered. [Complaint, PDF]

We didn’t say too much about NFTs in our 2024 predictions, but we expect that the SEC will go after more NFT projects this year, as they clear their backlog of violators.

Q. I’d like a definitive explanation on the amount of apes you can feed with a single slurp juice. [Etienne Beureux on Twitter]

Slurp juices were popularized in a tweet about Astro Apes, a Bored Apes knockoff, which also featured tokens called “slurp juices” that you could apply to your Astro Ape tokens to generate more Astro Ape tokens and get rich for free.

The tweet was posted on May 4, 2022 — just a few days before Terra-Luna exploded and popped the 2021-2022 crypto bubble.

Also, the guy who tweeted about slurp juices is a neo-Nazi. Welcome to crypto. [BuzzFeed News]

Q: I’ve often wondered why new languages like Solidity were necessary for smart contracts. [David John Smailes on Twitter]

The Ethereum team originally just wanted to use JavaScript, but it didn’t quite do what they needed in terms of functionality and data types — so they created Solidity, a new language based on JavaScript.

A blockchain is an extremely harsh programming environment. It’s hard or impossible to modify your code once deployed — you must get it right the first time. It’s about money, so every attacker will be going after your code.

In situations where programming errors have drastic consequences, you usually try to make it harder to shoot yourself in the foot — functional programming languages, formal methods, mathematical verification of the code, not using a full computer language (avoid Turing completeness), and so on.

Solidity ignores all of that — and the world’s most mediocre JavaScript programmers moved sideways to write the world’s most mediocre smart contracts and cause everyone to lose all their money, repeatedly. Smart contracts are best modeled as a piñata, where you whack it in the right spot and a pile of crypto falls out.

Other blockchains saw Ethereum-based projects making a ton of money (or crypto) and wanted that for themselves — so they tend to just use the Ethereum Virtual Machine so they can run buggy Solidity code too.

There are other, somewhat better, smart contract languages — but Solidity is overwhelmingly the language of choice, which keeps the comedy gold flowing nicely.

Q. Miner extracted value? [Cathal Mooney on Twitter]

Miners — or now validators — supposedly make money from block rewards and transaction fees.

There is a third way for validators to make money. Smart contract execution depends on the order of transactions within a block. Since the validator controls what transactions they can put in a block and how they order those transactions, they can front run the traders — the validator sees an unprocessed transaction, creates their own transaction ahead of that one and takes some or all of the advantage that the trader saw.

The term “Miner Extractable Value” was coined in the paper “Flash Boys 2.0: Frontrunning in Decentralized Exchanges, Miner Extractable Value, and Consensus Instability” in 2020. [IEEE Xplore]

Front-running is largely illegal in real finance. But since the Ethereum Foundation couldn’t stop their validators from front-running their users, they decided to claim it was a feature, which they have renamed “maximal extractable value.” [Ethereum Foundation]

Q: What do you think will eventually happen to all the Satoshi Nakamoto Bitcoin wallets? [Steve Alarm on Twitter]

Quite likely nothing. We suspect the keys, and thus the million bitcoins, are simply lost. Nobody has heard anything verifiably from Satoshi since April 13, 2011, when he sent a final email to bitcoin developer Mike Hearn. [Plan99]

If the Satoshi coins ever did move, there would be a lot of headlines. But we don’t think the crypto trading market would be affected much — the market is so thin, there are multiple large holders who could crash the market any time they felt like it, and the market is already largely fake. We think everyone will just pretend nothing happened and everything is fine.

Q. Did Do Kwon actually sell all his BTC to prop up Luna? [Saku Kamiyūbetsu on Twitter]

Terra (UST) was an algorithmic dollar stablecoin and luna was its free-floating twin. Terraform Labs ran the Anchor Protocol, which promised 20% interest on staked UST. At peak, there were 18 billion UST in circulation.

It turned out there was money to be made in crashing UST — so in May 2022, someone did. There is a strong rumor (and DOJ investigations) that it was Alameda. Other parties who collapsed because of Terra-Luna left the gaping hole in Alameda that eventually killed FTX. If Alameda fired the first shot directly into their own leg, that would be extremely crypto, as well as extremely funny.

UST was crashing, so Terraform Labs tried to prop up Terra-Luna. The bitcoins came from the Luna Foundation Guard, which promised to deploy $1.5 billion worth of bitcoin to defend UST. This didn’t work. [Twitter, archive]

We haven’t found a smoking gun that Luna actually spent the bitcoins on buying up UST or luna. In 2023, the SEC charged Terraform Labs and Do Kwon and said that Kwon and Terraform took over 10,000 BTC out of Luna Foundation Guard in May 2022 and converted at least $100 million into cash.

Q: I’m baffled at the lack of interest from crypto critics that the DoJ will not be pursuing additional charges against SBF. Specifically, the charges that could make some politicians very uncomfortable. [Amer Icon on Twitter]

The issue was specifically whether to further prosecute Sam Bankman-Fried. The prosecution letter to the judge quite clearly explains their reasons why a second case wouldn’t do anything useful in this regard. [Letter, PDF]

The evidence that Sam was the guy who made these bribes was presented in the case that just concluded and will be considered when he’s sentenced in March — they don’t need a second trial to nail those facts down.

Hypothetical other evidence that might have come to light about other parties wasn’t a factor in considering what to do about Sam Bankman-Fried. It’s quite reasonable to want to get those guys, but you will probably need a more direct method than a side factor in an additional case against a guy who is already likely going to jail forever.

Q. snarkier memes would be worthy [Chris Doerfler on Twitter]

“Esto no puede ser tan estúpido, debes estar explicándolo mal.”

We did a follow-up on this story. Part 2, though not labeled as such, is here!

Image: Amy Landers and Dear David reading today’s Web 3 Is Going Just Great

Posted on by Amy Castor 2

Crypto collapse: Mt Gox payouts, Tether hooks up the feds, SEC says no to Coinbase, crypto media mergers

  • By Amy Castor and David Gerard

It’s not over until withdrawals are temporarily paused due to unusual market activity.

— Jacob Silverman

Tightening Tether’s tethers

Tether’s been under some regulatory heat after the reports of how useful USDT is for financing terrorists and other sanctioned entities. Even Cynthia Lummis, the crypto-pumping senator from Wyoming, loudly declared that Tether had to be dealt with.

The US government isn’t entirely happy with Tether’s financial shenanigans. But they’re really unhappy about sanctions violations, especially with what’s going on now in the Middle East. 

So Tether has announced that it will now be freezing OFAC-sanctioned blockchain addresses — and it’s onboarded the US Secret Service and FBI onto Tether! [Tether, archive; letter, PDF, archive]

Tether doesn’t do anything voluntarily. We expect they were told that they would allow this or an extremely large hammer would come down upon them.

There’s more to Tether’s criminal use case than sanctions violation. The most jaw-dropping chapter in Zeke Faux’s excellent book Number Go Up (US, UK) is when he traced a direct message scammer to a human trafficking operation in Cambodia that favored tethers as its currency. South China Morning Post follows up on this with an in-depth report on how Cambodian organized crime uses tethers. [SCMP]

Credit rating firm S&P Global rated eight stablecoins for risk. Tether and Dai got the lowest marks. S&P notes in particular the lack of information on Tether’s reserves. [press release; S&P; Tether report, PDF]

At least some of the claimed Tether backing in treasuries is held in the US with Cantor Fitzgerald — exposing Tether to US touchability. This has been known since February 2023, and was proudly confirmed in December 2023 by Cantor CEO Howard Lutnick: “I hold their Treasuries, and they have a lot of Treasuries. I’m a big fan of Tethers.” [Ledger Insights; Forbes]

Cointelegraph had a fascinating story on a company called Exved using tethers for cross-border payments from Russia! Then they deleted it, for some reason. Exved was founded by Sergey Mendeleev, who also founded the OFAC-sanctioned crypto exchange Garantex, which was kicked out of Estonia. Exved is working with InDeFi Bank, another Mendeleev venture. We’re not so sure the new OFAC-compliant Tether will be 100% on board with this. [Cointelegraph, archive; Telegram, in Russian; Protos]

SEC answers Coinbase’s prayers: “No.”

In July 2022 — just after crypto crashed — Coinbase wrote to the SEC proposing new regulatory carveouts for crypto.

The SEC took its sweet time responding. Eventually, Coinbase sued in April 2023 with a writ of mandamus, demanding a bureaucratic response. The court told the SEC to get on with it, or at least supply a date by which it would answer.

Finally, the SEC has responded: “the Commission concludes that the requested rulemaking is currently unwarranted and denies the Petition.” The SEC thinks existing securities regulations cover crypto securities just fine, and there’s no reason for special rules for Coinbase. [SEC rejection, PDF; Coinbase letter to court, PDF; Gensler statement]

Coinbase general counsel Paul Grewal welcomed the opportunity to challenge Coinbase’s dumb and bad proposal being turned down. [Twitter, archive]

4 (continued)

Binance founder and former CEO Changpeng Zhao will not be returning home to Dubai anytime soon. US District Judge Richard Jones ordered CZ to remain in the US until his sentencing on February 24. He can travel within the US, but he cannot leave. [Order, PDF] 

After being busted hard, Binance is still behaving weird. At the FT Crypto and Digital Assets Summit in London, the exchange’s new CEO Richard Teng refused to answer even basic questions, like where Binance is headquartered and whether it’s had an audit. “Why do you feel so entitled to those answers?” Teng said when pushed. “Is there a need for us to share all of this information publicly? No.” [FT]

CZ and Binance have been trying to dismiss the SEC charges against them. This is mostly loud table pounding, wherein Binance claims that what the SEC argued were securities are not really securities. [Doc 190, PDF, Doc 191, PDF]

France was the first country in Europe to grant Binance regulatory approval. State-endorsed blockchain courses for the unemployed and NFT diplomas helped push the country’s most vulnerable into crypto. Since the collapse of FTX and Binance’s $4.3 billion fine for money laundering, French President Emmanuel Macron’s relationship with CZ has fallen under scrutiny. [FT, archive]

London law firm Slateford helped to cover up Binance’s crimes and attempted to intimidate media outlet Disruption Banking from writing about Binance’s sloppy compliance hiring practices. (Disruption Banking told Slateford to get knotted and didn’t hear from them again.) [Disruption Banking]

Binance is finally removing all trading pairs against Great British pounds. [Binance, archive]

FTX: The IRS wants its money

FTX filed a reorganization plan in mid-December. The plan is 80 pages and the disclosure statement is 138 pages, but there’s a notable lack of detail on what happens next. None of the talk of starting a new exchange has made it into the current plan — this appears to just be a liquidation.

The plan treats crypto claims as their value in cash at the time of the bankruptcy filing on November 11, 2022, back when bitcoin was at $17,000 — less than half of what it is now.

Creditors will vote on the plan in 2024. The court must approve the plan before it is implemented. [Bloomberg, archive; Plan, PDF; Disclosure statement, PDF]

The IRS is demanding $24 billion in unpaid taxes from the corpse of FTX. John Jay Ray wants to know how the IRS came up with that ludicrous number — the exchange never earned anything near those amounts. The IRS originally wanted $44 billion, but brought the number down. Judge John Dorsey has told the IRS to show its working. [Doc 4588, PDF; Bloomberg, paywalled]

Three Arrows Capital

Three Arrows Capital was the overleveraged crypto hedge fund that blew up in 2022 and took out everyone else in crypto who hadn’t already been wrecked by Terra-Luna. After months of dodging culpability, co-founder Zhu Su was finally arrested in Singapore in September as he was trying to skip the country. 

Zhu was released from jail and appeared before the Singapore High Court on December 13, where he had to explain to lawyers for the liquidator Teneo what happened when 3AC went broke. The information will be shared with creditors. [Bloomberg, archive]

A British Virgin Islands court froze $1.1 billion in assets of Zhu and his co-founder Kyle Davies and Davies’ wife Kelly Chen. [The Block]

Teneo expects a 46% recovery rate for 3AC creditors on $2.7 billion in claims. [The Block]

Crypto media in the new Ice Age

Crypto news outlet Decrypt has merged with “decentralized media firm” Rug Radio. No, we’d never heard of them either. The two firms will form a new holding company chaired by Josh Quittner. Decrypt had spun out from Consensys in May 2022, just before everything crashed. It’s reportedly been profitable since then — though crypto sites always say that. [Axios; Axios, 2022] 

Forkast News in Hong Kong has merged with NFT data provider CryptoSlam and fired most of its staff. Forkast was founded in 2018 by former Bloomberg News anchor Angie Lau; it shut down editorial operations on November 30. [The Block] 

Crypto news outlets ran seriously low on cash in 2019 and 2020, just before the crypto bubble, and they’re struggling again. We expect more merges and buyouts of top-tier (such as that is in crypto) and mid-tier crypto outlets. We predict news quality will decline further.

Amy recalls the old-style crypto media gravy train and eating in five-star restaurants every night in Scotland and London while embedded with Cardano in 2017. Thanks, Charles! Nocoining doesn’t pay nearly as well, but these days crypto media doesn’t either. There’s probably a book in those Cardano stories that nobody would ever read.

Regulatory clarity

The Financial Stability Oversight Council, which monitors domestic and international regulatory proposals, wants more US legislation to control crypto. FSOC’s 2023 annual report warns of dangers from:

crypto-asset price volatility, the market’s high use of leverage, the level of interconnectedness within the industry, operational risks, and the risk of runs on crypto-asset platforms and stablecoins. Vulnerabilities may also arise from token ownership concentration, cybersecurity risks, and the proliferation of platforms acting outside of or out of compliance with applicable laws and regulations.

Yeah, that about covers it. FSOC recommends (again) that “Congress pass legislation to provide for the regulation of stablecoins and of the spot market for crypto-assets that are not securities.” [Press release; annual report, PDF]

IOSCO, the body of international securities regulators, released its final report on how to regulate DeFi, to go with its November recommendations on crypto markets in general. IOSCO’s nine recommendations for DeFi haven’t changed from the draft version — treat these like the instruments they appear to be, and pay attention to the man behind the curtain. These are recommendations for national regulators, not rules, but look at the DeFi task force — this was led by the US SEC. [IOSCO press release, PDF; IOSCO report, PDF]

London-based neobank Revolut is suspending UK crypto services — you can no longer buy crypto with the app — citing a new raft of FCA regulations, which go into force on January 8. [CityAM; CoinDesk]

Crypto exchange KuCoin has settled with New York. The NY Attorney General charged KuCoin in March for violating securities laws by offering security tokens — including tether — while not registering with NYAG. KuCoin has agreed to pay a $22 million fine — $5.3 million going to the NYAG and $16.77 million to refund New York customers. KuCoin will also leave the state. [Stipulation and consent order, PDF; Twitter, archive] 

Montenegro plans to extradite Terraform Labs cofounder Do Kwon to either the US or South Korea, where he is wanted on charges related to the collapse of Terra’s stablecoin. Kwon was arrested in Montenegro in March. Originally it looked like Montenegro was going to pass him off to the US, but the case has been handed back to the High Court for review. [Bloomberg, archive; Sudovi, in Montenegrin]

Anatoly Legkodymov of the Bitzlato crypto exchange, a favorite of the darknet markets, has pleaded guilty in the US to unlicensed money transmission. Legkodymov was arrested in Miami back in January. He has agreed to shut down the exchange. [Press release]

The SEC posted a new investor alert on crypto securities with a very lengthy section on claims of proof of reserves and how misleading these can be. [Investor.gov; Twitter, archive] 

Santa Tibanne

It’s been nearly ten years, but Mt. Gox creditors are reportedly starting to receive repayments — small amounts in Japanese yen via PayPal. [Cointelegraph; Twitter, archive] 

Some payouts are apparently bitcoin payouts — with the creditors not receiving a proportionate share of the remaining bitcoins, but instead the yen value of the bitcoins when Mt. Gox collapsed in February 2014. This means a 100% recovery for creditors! — but much less actual money.

There are still 140,000 bitcoins from Mt. Gox waiting to be released. If payouts are made in bitcoins and not just yen, we expect that claimants will want to cash out as soon as possible. This could have adverse effects on the bitcoin price.

Trouble down t’ pit

In the Celsius Network bankruptcy, Judge Martin Glenn has approved the plan to start a “MiningCo” bitcoin miner with some of the bankruptcy estate. He says that “the MiningCo Transaction falls squarely within the terms of the confirmed Plan and does not constitute a modification.” [Doc 4171, PDF]

Bitcoin miners are racing to buy up more mining equipment before bitcoin issuance halves in April or May 2024. Here’s to the miners sending each other broke as fast as possible [FT, archive] 

Riot Platforms subsidiary Whinstone sent its private security to Rhodium Enterprise’s plant in Rockdale, Texas, to remove Rhodium employees and shut down their 125MW bitcoin mining facility. The two mining companies have been brawling over an energy agreement they had made before prices went up. [Bitcoin Magazine]

More good news for bitcoin

The UK is setting up a crypto hub! ’Cos that’s definitely what the UK needs, and not a working economy or something. [CoinDesk]

Liquid is a bitcoin sidechain set up by Blockstream at the end of 2018. It was intended for crypto exchange settlement, to work around the blockchain being unusably slow. It sees very little use — “On a typical day, there are more tweets about Liquid than there are transactions on its network.” [Protos] 

A16z, Coinbase, and the Winklevoss twins say they’ve raised $78 million as part of a new push to influence the 2024 elections. [Politico] 

Little-known fact: coiners can donate to the PAC in tethers. All they have to do is send them via an opaque Nevada trust structure to hide the origins of the funds. And this is perfectly legal! [FPPC, PDF, p. 85, “nonmonetary items”]

Ahead of the SEC’s deadline to rule on a bitcoin ETF, Barry Silbert, CEO of Digital Currency, has quietly stepped down from the board of DCG subsidiary and ETF applicant Grayscale and is no longer chairman, according to a recent SEC filing. Silbert will be replaced by Mark Shifke, the current DCG senior vice president of operations. US regulators are suing DCG over the Gemini Earn program co-run by its subsidiary Genesis. [Form 8-K]

Ordinals are an exciting new way to create NFTs on bitcoin! ’Cos who doesn’t want that? The bitcoin blockchain immediately clogged when it was actually used for stuff. Now TON, the blockchain that is totally not Telegram’s, no, no no, has ordinals — and it’s getting clogged too. [The Block]

Image: Mark Karpeles with aggrieved bitcoin trader outside Mt. Gox in Tokyo in 2014.

Posted on by Amy Castor 1