Coinbase’s entire business model has been built around avoiding regulation and lobbying Congress for special rules. Well, those days are over. After a year of warning them repeatedly, the SEC has finally taken action against the largest crypto exchange in the US.
It’s David’s turn, so this one is over on his blog.
Image: Brian Armstrong and Paul Grewal on YouTube awkwardly responding to the SEC’s warning in late March that an enforcement action was in the works.
Arizona businessman and sports investor Reggie Fowler spent decades talking himself out of sticky situations. But in a Manhattan courtroom on June 5, reality finally caught up to him.
US District Judge Andrew Carter sentenced Fowler, who is 64 years old, to 6 years and 3 months in prison for his role in hiding cryptocurrency transactions on behalf of shadow banking operation Crypto Capital and the disappearance of hundreds of millions of dollars. Fowler will surrender in Phoenix at 10 a.m. on June 30, giving him three weeks to get his affairs in order and rehome his dog.
Inner City Press attended the sentencing. [Twitter; Inner City Press; SDNY press release]
Fowler has agreed to pay $53 million in restitution to the defunct Alliance of American Football (AAF), an alternative football league that he defrauded as one of its investors. Inner City Press tells us that the judge also ordered Fowler to forfeit the full $740 million prosecutors had asked for, dismissing Fowler’s argument that this was so high as to violate the 8th Amendment. [Order of restitution, PDF]
Fowler’s crypto frauds were the beginning of the more recent frauds in the crypto space, and the failures of the Silvergate and Signature banks, prosecutors said in court.
“I have harmed the people of the AAF and my family,” sobbed Fowler. “I am embarrassed and ashamed.” Poor fellow.
Crypto Capital was a Panama-incorporated money transmitter that served as a shadow bank for many US and Canadian crypto exchanges, including Bitfinex and the failed QuadrigaCX — because they had enormous trouble getting proper banks to talk to them.
Throughout 2018, Fowler was Crypto Capital’s US contact. He set up a network of bank accounts in the US and abroad so that Crypto Capital could process payments for its customers without worrying about all those tedious anti-money-laundering laws.
Fowler lied to the banks, telling them that the accounts were for his real estate business. His scheme ran internationally and received over $740 million just in 2018. Most of this was Bitfinex customer money. A “Master US Workbook” listed more than 60 bank accounts around the world, which totaled over $345 million by January 2019. [Decrypt]
Fowler didn’t worry too much about separating Crypto Capital or Bitfinex money from his own funds. He and his co-conspirators set up a “10% Fund,” skimming from client deposits for themselves.
In the original indictment, and again at today’s sentencing, prosecutors detailed “additional criminal conduct” Fowler seemed to be involved in — though he wasn’t charged on these.
Fowler allegedly tried many times to get bank loans using fraudulent bond certificates, valued in the billions, as collateral. He tried to use funds from the Crypto Capital scheme as collateral for loans. He was caught with $14,000 in sheets of counterfeit $100 notes right there in his office.
Fowler was arrested in Chandler, Arizona, on April 19, 2019.
Prosecutors piled on more charges in a superseding indictment in February 2020 after they discovered Fowler had been using Crypto Capital money to fund the AAF. That funding fell through after the Department of Justice seized $68 million from Fowler’s bank accounts at HSBC in late 2018.
Fowler, who had fumbled an opportunity for a plea deal in January 2020, pleaded guilty to all five counts against him in April 2022, throwing himself at the mercy of the court. He has remained out of jail since his initial arrest on $5 million bail.
Fowler’s lawyer Ed Sapone wrote a letter to the judge on April 10 asking for clemency for his client — that is, no jail time at all.
Sapone argued that Fowler had lived a hard life, growing up in the South without parental support, and had never broken the law before. At least not in any way that landed him behind bars. [Doc 124, PDF]
Never mind that Fowler was a fully-grown 59-year-old man at the time of his crimes with a long career as a (cough) sharp businessman behind him.
Sapone also neglected to mention that Fowler had been sued 36 times in the past, mainly for just not paying people — and had even stiffed his previous lawyers in this very case for $600,000. [ESPN, 2005]
In a sentencing submission, prosecutors said that they didn’t appreciate that Fowler had blown $200,000 gambling in casinos since his guilty plea, rather than using those funds to pay back his victims. [Doc 125, PDF]
Prosecutors also noted that in December 2016, Fowler was stopped at the Canadian border with items associated with a “black money scam” — a scheme where a con artist claims to have stacks of US bills dyed black to avoid detection. The bills will come clean if you just purchase this expensive “special chemical.”
Fowler’s story reads like an episode of American Greed — where money seduces and power corrupts.
Before his path crossed that of Crypto Capital, Fowler’s main business was Spiral Inc. — a holding company for about a hundred different businesses, including ice rinks, car washes, and a foam food tray manufacturer company. Most of the businesses were located between Arizona and Colorado.
Fowler was also a pilot and owned two jets — a Cessna Citation CJ2 and a CJ3, which he flew for business and loaned out.
He touched many lives including friends in the sports world and those who depended on him for their livelihood. Because Amy wrote about Fowler regularly, people who knew him contacted her. Sources described Fowler as well-read, charming, and a “fantastic salesperson, overbearing and confident.” He was not a gambler, at least not before his indictment, said a source. He never drank and worked out at the gym religiously.
What Fowler was not good at, however, was shedding businesses that were dogs — like his “Shammy Man” carwashes in Arizona, which he co-owned with a partner who served time in federal prison — or putting money into the ones that were doing well.
His firm Styro-Tech in Denver was making money hand over fist, but Fowler couldn’t seem to invest in better equipment and he was always hiring illegal immigrants cheap. “He could never pay anybody what they were worth,” said one source. “I don’t know how many times he got caught hiring illegals.”
Fowler was a football player in his youth and remained an obsessive fan. His obsession with the game played no small part in his downfall.
He kept a Cincinnati Bengals helmet in his office and gave people the impression that he had played professionally for the Bengals — though he had only attended training camp.
In 2005, Fowler tried to purchase the Minnesota Vikings from Red McCombs in a $600 million deal. “He was 100 percent committed to getting it done,” McCombs said. “He was very straightforward. He said, ‘I am going to buy your football team.’” Fowler would have been the NFL’s first Black owner. [LA Times, 2005]
But the deal led to financial scrutiny, and the Star Tribune uncovered several outright lies in Fowler’s resume, so Fowler pursued a limited partnership instead. The cash he put up for the 3% ownership in the Vikings got him into financial trouble. [Minnesota Public Radio, 2005]
Things went from bad to worse, and Fowler went deeper into debt. He refinanced Spiral in 2006, landing him $65 million in debt. The credit crisis followed in 2008, and Spiral never recovered. By 2013, the company was in receivership, and Fowler lost control of all his businesses. By October 2014, Fowler no longer had a stake in the Vikings. [Resolute, 2022; Star Tribune, 2014]
At some point over the following years, a debt-saddled Fowler crossed paths with the people at Crypto Capital — Oz Yosef and his sister Ravid. The Yosefs were both later indicted for their part in Fowler’s fraud, but remain at large.
Crypto had an interesting year in 2017. Bitfinex, the largest crypto exchange at the time, lost its ties to the traditional banking system when its Taiwanese banks were cut off from correspondent banking by Wells Fargo. Short of real dollars, and trying to recover from a $72 million hack in 2016, Bitfinex and its sister company, stablecoin issuer Tether, began pumping out tethers at a pace unlike anything before — frequently with no dollars backing them at all. (Just like the salty nocoiners told you at the time.)
Fueled by these unbacked fake dollars pouring into the crypto markets, the price of bitcoin climbed to new highs. A year later, Fowler found himself in control of bank accounts with hundreds of millions of dollars flowing through them. And then football called to him again.
Alternative football leagues have a long history of dismal failure. In 2017, TV producer Charles Ebersol came up with an idea for a springtime football league that would be a feeder for the National Football League.
Somehow “millions” of fans would have an interest in watching football after the Super Bowl. The Alliance of American Football would even come with a killer app that promised to change sports gambling as we know it.
Ebersol and AAF co-founder Bill Polian, an NFL executive, attracted some seed capital. In June 2018, Willie Lanier, a former Super Bowl champion, introduced Ebersol to Fowler. Fowler offered to be a lead investor, committing $170 million — a $50 million line of equity and a $120 million line of credit. Prosecutors wrote in their letter to the court:
During a June 2018 meeting with AAF executives, including AAF co-founder Charlie Ebersol, Fowler showed the AAF corporate team printouts of bank account information purporting to show that Fowler had hundreds of millions of dollars in foreign bank accounts. Fowler would not let anyone take the printouts after the meeting. Fowler told Ebersol that Fowler’s wealth, which he said was largely in cash, came from real estate holdings and an aviation business that built drones in Germany for U.S. Government contracts. During an October 2018 meeting, one of Ebersol’s associates took a picture of a bank account printout that Fowler presented. That printout showed roughly $60 million in an HSBC account.
That HSBC account would be one of the accounts that was frozen by the Department of Justice in that very month.
Ebersol claims in an affidavit that he did his due diligence on Fowler — though clearly he did not. All Eberson would have had to do was look up all the multiple lawsuits against Fowler. Peter Thiel also invested in AAF through his Founders Fund.
The league kicked off in February 2019 — with eight teams and more than 400 players — but after eight weeks of play, the dream unraveled when Fowler missed a $28 million payment because all his money had been frozen. [Affidavit, PDF; CNBC, 2018]
The AAF disintegrated into the football version of the Fyre Festival. They missed payroll in the first week one, blaming it on a computer glitch. Players had been booted out of their hotels and had to pay cash for their flights back home.
Another investor, Tom Dundon, took over the league, but he soon gave up throwing money into the pit as well. The AAF declared bankruptcy on April 17, 2019 — and multiple lawsuits against its founders ensued. [Twitter, archive; Twitter, archive; Sports Illustrated]
What can we learn from Reggie Fowler? Mostly that pigs get fat, but hogs get slaughtered.
Fowler spent decades doing sharp business that didn’t quite get him in trouble with the law. Then he got in a bind and let his hubris do the thinking for him. Like so many in crypto, he found out that this works until it doesn’t.
By the time he gets out of jail, Fowler will be 70. In the four years between his arrest and today’s sentencing, he spent his time just going to work every day. We predict he’ll get out of jail and just get back into running businesses until the day he drops. Hopefully less flagrantly illegal ones.
Let’s do a quick pivot to AI for an LOL, one of us said. Should be easy, not much work. Here we are — three thousand words later. Turns out AI grifters are remarkably similar to crypto grifters, and they are often the same guys.
If this is a huge hit — and particularly if the patrons like it — we may touch on AI again if there’s something worth saying. We do have a pile of crypto here for next time as well!
Fahrenheit has officially won the bid for the bankrupt Celsius Network’s assets — pending approval by the court, which is near-certain, and by regulators, which is less so. A $10 million deposit is due by Monday. [Doc 2713, PDF]
Fahrenheit is a consortium that includes VC firm Arrington Capital, miner US Bitcoin, investment firm Proof Group, former Algorand CEO Steven Kokinos, and Seasons Capital CEO Ravi Kaza.
The new deal is an adaptation of the previous NovaWulf proposal. A “NewCo” will be created to take ownership of Celsius’ remaining DeFi tokens, its loan portfolio, its venture capital investments, its bitcoin mining operation, and $500 million in “liquid cryptocurrency” (not specified, but presumably Celsius’ remaining BTC and ETH). US Bitcoin will manage Celsius’ bitcoin mining operation.
Holders of Earn claims, some holders of Convenience claims, Withhold claims, and Borrow claims will receive equity in NewCo, pro rata. NewCo will endeavor to get a public stock exchange listing for the equity. Earn claimants will also get a distribution of the liquid cryptocurrency and any proceeds from litigation.
If you’re a Celsius creditor, the plan contains lots of important details. Read it and discuss this with your fellow creditors.
As with the original NovaWulf proposal, we think this is a Hail Mary pass that can only work if number goes up. On the other hand, it’s doing something and not just liquidating what little remains. Also, Alex Mashinsky won’t be involved.
In the Genesis bankruptcy, Genesis’ parent company Digital Currency Group missed a $630 million payment to Genesis due earlier this month. Note that that’s a payment from themselves to themselves, and they still failed to make it.
This failure to pay was noted by Gemini, which has a tremendous interest in getting that money so Gemini Earn investors can be paid back. Gemini Earn’s retail customers are the largest creditor of Genesis. [Gemini, archive of May 25, 2023]
Gemini Earn was an investment product where Gemini customers put their money into Genesis to earn unlikely interest rates. Gemini’s customers were not so happy at the prospect of their money being stuck in the Genesis bankruptcy for months or years.
So in February, the creditors worked out an “agreement in principle” — not, you’ll note, an actual deal — whereby they would get money back from DCG, as the owners of Genesis. [press release]
In April, the creditors got sick of DCG messing about and upped their demands. This led to a bizarre statement from DCG on May 9 that they were “in discussions with capital providers for growth capital and to refinance its outstanding intercompany obligations with Genesis.” They didn’t have the money to pay themselves. [CoinTelegraph]
Gemini also plans to file a reorganization plan of its own. This is likely why Genesis has filed asking for its exclusive right to make reorganization proposals to be extended to August 27. The court will hear this motion on June 5. [Doc 329, PDF]
Either DCG is trying extremely hard to screw over Genesis customers … or, despite all the millions and billions with dollar signs in front in their accounts, and “$200 million” a year in Grayscale management fees, DCG is broke — at least in actual money — and has been pretending not to be broke. And we’re pretty sure Gemini is pushing this point this hard because they can’t cover their customers either. Imaginary assets are great — until you have to pay up.
Reuters has caught Binance at it again. This time, Binance was commingling customer funds and company revenue on the order of billions of (actual) dollars in their Silvergate accounts in 2020 and 2021. Controls? What are controls? [Reuters]
Binance told Reuters that this was money being used to buy BUSD and this was “exactly the same thing as buying a product from Amazon,” per Brad Jaffe, Binance’s VP of communications since August 2022.
This explanation is at odds with Binance’s previous claims to customers that dollars they sent to Silvergate were “deposits” that they could “withdraw” as dollars. Jaffe said that “the term ‘deposit’ is a communication term, it’s not an indication of the technical treatment of the funds.” Oh, a communication term — you mean like when words mean things in a context?
Reuters didn’t find any misappropriation of customer funds in the documents they saw. But commingling is a massive red flag for incompetence (as it turned out to be with FTX) and fraud — such as moving money around to evade regulatory scrutiny. Reuters includes a complex diagram of the international flows of Binance’s cash in the report.
Binance PR person Patrick Hillmann dismissed the story as “1000 words of conspiracy theories” and said that Reuters was “making stuff up.” Though Hillmann never stated at any point that Binance hadn’t commingled funds at Silvergate. Hillmann also decried “the xenophobia behind consistently mentioning @cz_binance’s ethnicity without noting that he’s been Canadian since the age of 12” … which the Reuters story didn’t do at all. [Twitter, archive]
The Hong Kong Securities And Futures Commission (SFC) has finished its consultation on virtual asset trading platforms opening to retail investors. The rules allow licensed exchanges to offer trading to the public in tokens that are highly liquid and are not securities.
The rules are strict — no securities, no lending, no earn programs, no staking, no pro trading, and no custody. Unlicensed crypto exchanges are not allowed to advertise. Hong Kong very much wants to avoid the sort of embarrassment that comes with a large exchange like FTX failing.
Exchanges will be required to assess the failure risk of all tokens they offer trading in. Tokens are required to have a 12-month track record. Exchanges will need to get smart contract audits where appropriate. 98% of client assets must be in cold wallets (offline); hot wallets must not hold more than 2%.
Margin trading is not yet allowed even for professional investors, but the SFC will issue guidance on derivatives in the future.
The guidelines take effect June 1, which is when exchanges can begin to apply for a license. [SFC; Consultation Conclusions, PDF]
Japan will be enforcing FATF rules on crypto from June. This went through with no objections because Japan learned its lesson from Mt. Gox and regulated crypto exchanges early. [Japan Today]
FATF tells CoinDesk that it didn’t actually demand that Pakistan not legalize crypto. “Countries are permitted, but not required, to prohibit virtual assets and virtual asset service providers.” [CoinDesk]
The International Organization of Securities Commissions is putting together recommendations on crypto. Service providers need to address conflicts of interest, separation of functions, and accounting client assets, and this has to work across borders. Get your comments in by July 31. [IOSCO, PDF; recommendations, PDF]
Huobi gets kicked out of Malaysia for failure to register. Not registering is a violation of Malaysia’s Capital Markets and Services Act of 2007. The Securities Commission Malaysia said Huobi has to disable its website and mobile apps on platforms including the Apple Store and Google Play. [Securities Commission Malaysia]
The CFTC is talking about all the fraud in crypto, says it’s on good working terms with the SEC on these matters, and warns the crypto industry that it’s not going to be a soft touch. [Reuters]
The SEC has changed the disclaimer that commissioners say before speeches — probably in response to William Hinman’s comments saying ether wasn’t a security being cited in the Ripple case. [blog post]
Molly White put up Rep. Sean Casten (D-IL) questions at May 18, 2023, stablecoin hearing, and it’s a lovely five minutes. This guy understands precisely how Web3 was fundamentally a venture capital-funded securities fraud. [YouTube]
The Organized Crime and Corruption Reporting Project obtained an internal report on the August 2016 hack of the Bitfinex crypto exchange — the hack that led to the Tether printer going wild and the 2017 crypto bubble.
The report was commissioned by iFinex and prepared by Ledger Labs. It was never released, but OCCRP has obtained a draft.
Bitfinex kept transaction limits secured by three keys. It looks like someone made the mistake of putting two of the three keys on the same device. This is how the hacker was able to raise the global daily limit and drain the accounts.
One key was associated with a generic “admin” email address and another linked to “giancarlo,” which belonged to Bitfinex CFO Giancarlo Devasini. The report does not blame Devasini for the hack.
Ledger Labs thinks the hacker came in from an IP address in Poland. [OCCRP]
Tether’s issuance is up — but its usage is through the floor. The trading volume is at its lowest in four years. Most of the tether trading happens on Binance, which is where the majority of all trading volume happens, and where USDT is accepted as being worth a dollar. We mentioned last time that volume was down, but Kaiko has the numbers. [Kaiko]
Do Kwon’s bail has been scrapped. He’s back in jail in Montenegro, awaiting his local trial on charges of forging documents, specifically the ones he was using to try to get out of Montenegro to his next bolt-hole. [Reuters]
Glassnode tells us that hodling has never been more popular! 68.1% of BTC hasn’t moved in the past year! Now, you might think that this is because most people who bought in during the bubble are still underwater. But “baghodler” isn’t yet a word. [Glassnode]
Shaquille O’Neal was finally served in the FTX class action suit against the exchange’s celebrity promoters — at the former FTX Arena. [Washington Post]
Openfort is scraping up the very last of the Web3 gaming venture cash — they just got $3 million to do an online crypto wallet for blockchain games. You know, that gigantic current market that anyone has the slightest interest in. Openfort doesn’t appear to have a customer as yet. [VentureBeat]
Coinbase has a new TV ad! We know you lost all your money — but crypto is like the early Internet, really. [Youtube]
Solana is so thoroughly out of ideas that they’re adding a ChatGPT plugin. Presumably, it can write tweets for them. [The Block]
Crypto fans make up new justifications for the importance of their magic beans all the time. David Rosenthal takes us through a few. [DSHR Blog]
Video: The problems with Crypto Currency. Max Silverman wanted to do an animation, so asked David for 90 seconds of audio. It came out great! [YouTube]
* Tether releases another work of accounting fantasy fiction.
* UK Parliamentary Committee wants to regulate retail crypto like gambling.
* The US, China, the EU and Pakistan bring the searing light of regulatory clarity.
* Voyager, Celsius and FTX still shamble forth.
* It can’t be that stupid, I must be understanding it wrong.
Apologies for the posts only being weekly of late — we’re both very busy, particularly with family issues. We’re still here and doing this live!
Bittrex’s US entity, Desolation Holdings LLC, and Bittrex Malta filed for Chapter 11 bankruptcy in Delaware on May 8. The move came just weeks after Bittrex shut down its US operations, which was soon after they were sued by the SEC for trading securities without registering as a securities exchange. [Bloomberg; Bittrex; case docket]
The bankruptcy is apparently the fault of the SEC. The first-day declaration cites several SEC actions against other firms — and harps on about a “lack of regulatory clarity.” [Doc 9, PDF; first day declaration, PDF]
Bittrex says the bankruptcy will totally not impact its non-US operations, and funds are safe! Surely Bittrex didn’t do any commingling of company and customer funds like every other crypto exchange in trouble keeps turning out to have done.
The debts are largely fines levied against Bittrex by US government agencies — who are the only named creditors. OFAC is the largest creditor, owed $24.2 million. FinCEN is also a top 50 creditor with a $3.5 million claim. The SEC is listed with an undetermined amount of claims. [Doc 1, PDF]
Bittrex wishes to avail itself of a debtor-in-possession loan of 700 BTC so as to wind down Desolation and Bittrex Malta in an orderly manner and return customers’ funds. The loan will be from themselves — Aquila Holdings Inc, Bittrex’s parent entity, which is not in bankruptcy. [Liquidation plan, PDF]
The precedence of creditors (who gets paid back first) would be: themselves, then the customers, then the US government. That’s novel.
Michel de Cryptadamus notes several other interesting wrinkles. Bittrex’s US gross (not net) revenue for 2022 was $17 million, against the $30 million in government fines. “Several states alleged that BUS was undercapitalized and demanded that BUS immediately surrender its money transmitter licenses in those states.” Bittrex’s complicated corporate structure is reminiscent of FTX. And Bittrex may also be trying to protect the salaries of Bittrex executives from being seized by the SEC. [Twitter, archive]
Michel thinks the whole filing is a massive troll. We concur. The idea seems to be for Bittrex to set up a sacrificial entity to pay back their customers but stiff the US government. We are unconvinced that the government agencies will be inclined to let this one slide.
Market makers are leaving Binance US. Jane Street Group in New York and Jump Trading in Chicago — two of the world’s top commodities market makers — are pulling back from crypto in the US as regulators crack down on the industry. Their business in normal commodities is much larger, and they could do without the regulatory heat. [Bloomberg]
The Department of Justice is investigating Binance for possible violations of US sanctions against Russia. There’s already plenty of evidence that Binance has committed sanctions violations. Binance was the final destination for millions in funds from Bitzlato, an exchange shut down for money laundering. Now Dirty Bubble writes that Binance partner Advcash may be facilitating transfers from Russian banks. [Dirty Bubble]
Binance is withdrawing from Canada, owing to a surfeit of regulatory clarity. [Twitter, archive; Reuters]
Bitcoin has been trading at a premium of up to $650 on Binance US. A premium like this is usually an indication that people can’t get their dollars out of the exchange, so they buy bitcoins and move those to another exchange to cash out. [CoinDesk]
We also saw bitcoin trading at a premium on Mt. Gox just before that exchange collapsed in 2014, and the same with QuadrigaCX, which imploded in 2019. Naïve traders who don’t understand what’s happening will often move their BTC to the dying exchange, thinking it’s an arbitrage opportunity.
Trading at a premium is not a good sign, but a worse sign is when people complain they can’t get their crypto off an exchange. Binance US has long had a reputation for demanding arbitrary new KYC documentation when users try to withdraw.
Binance paused withdrawals twice on Sunday, May 7. The first time was due to a “congestion issue.” Later in the day, Binance paused withdrawals again due to a “large volume of pending transactions.” [Twitter, archive; Twitter, archive]
For once, Binance might have been on the level. On May 7, the bitcoin mempool was clogged with 400,000 transactions waiting to be processed, and transaction fees surged.
In bitcoin, the mempool, or memory pool, is where pending transactions pile up before a miner selects the most profitable ones and puts them together as a proposed block. If your transaction stays in the mempool too long, it gets dropped.
The best way to break a blockchain is to try to use it for something. In this case, some idiot worked out how to do NFTs on bitcoin.
“Ordinals” are a new way to create NFTs on bitcoin by linking a JPEG, video, or another image type to a satoshi, the smallest denomination of a bitcoin. Ordinals came out in January, and bitcoin has been filled with monkey pictures since. Bitcoin maxis condemn ordinals as a conspiracy to destroy bitcoin by using the network for a purpose. [Decrypt]
Sam Bankman-Fried’s defense team is trying to strike 10 of the 13 criminal charges against their client. They argue that the Bahamas did not agree to several of the charges — including one claim that Sam hid millions of dollars in political donations — while other claims didn’t meet the legal requirements of the underlying criminal statutes. [Docket, see filings 137-147]
The facts against SBF are solid. There’s no reason to doubt that Sam did everything the US claims. So the defense seems to be going for unreasonable doubt and hoping they have a dumb enough jury member or two.
Former federal prosecutor Sean Shecter of Lewis Brisbois says SBF’s lawyers want to preserve an appeal, so they have to try everything they can think of, “even if it involves throwing spaghetti against the wall.” He thinks the defense is likely hoping that the government gives up “nuggets of information” in response to the motions. [Law360, paywall]
Prosecutors have until May 29 to respond. Judge Lewis Kaplan will hear oral arguments on June 15.
The IRS has hit the FTX companies with a $44 billion tax bill, with the largest chunk being $20.4 billion for Alameda. It looks like the IRS reclassified all FTX employees from contractors to employees and charged for unpaid employment taxes. [Docket, see filings April 27, 28; IRS Alameda claim, PDF; CoinDesk]
The IRS has not released its calculations in detail, but we’d assume the bill is inflated by fraud (fictitious profits), penalties, and interest. John Jay Ray is sure to fight this. But even if Ray gets that amount substantially reduced, this is still sure to be a huge hit for FTX creditors.
The IRS claims are treated as unsecured — but they will receive priority status as ordinary and necessary business expenses of the bankruptcy estate. So the IRS will come before ordinary unsecured creditors.
Ishan Wahi will spend two years in prison for insider trading as a former product manager at Coinbase. He previously admitted to passing on confidential information from Coinbase to his brother and friend, who profited from the tips. [WSJ, paywall; DOJ press release]
In Estonia, nearly 400 VASPs (“virtual asset service providers,” the FATF term for companies dealing in crypto) have shut down or had their licenses revoked after the government’s recently enhanced terrorist financing prevention and anti-money laundering laws came into effect in March. [Protos; Estonia Financial Intelligence Unit]
Bakkt has delisted a bunch of tokens from the institutional crypto business they bought from Apex Crypto, including several that the SEC has indicated it considers securities. “Our review process ensures those interests are best served when we contemplate the most up-to-date regulatory guidance.” [CoinDesk]
John Reed Stark thinks an SEC action against Coinbase is imminent. He explains the regulations and how they work in detail and why Coinbase doesn’t stand a chance.
Stark notes also that Coinbase’s “regulatory estoppel” claim — that the SEC approving their S-1 public offering means the SEC must have approved the exchange dealing in securities — is directly contradicted by the mandatory “no approval clause” in the S-1: “Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.” Whoops. [LinkedIn]
QuadrigaCX bankruptcy claimants will get 13% on the dollar. They will be paid out the dollar value of their crypto at the time Quadriga filed for bankruptcy — April 15, 2019, when bitcoin was in the toilet.
It’s amazing that creditors will even get back that much. Most of the Quadriga money was gambled away by cofounder Gerald Cotten and filched by shady payment processors. We’re surprised no criminal charges were filed — but then, most of the money was stolen by a guy who is supposedly dead. [EY notice, PDF; CoinDesk]
Arthur Hayes of BitMEX has been tweeting at Three Arrows Capital co-founders Su Zhu and Kyle Davies because 3AC owes him $6 million following its collapse in June 2022. Rather than returning Hayes’ money, 3AC cofounder Su Zhu has filed a Singapore restraining order to prohibit Hayes from using “threatening, abusive or insulting words” and “making any threatening, abusive or insulting communication, that would cause the Applicant harassment, alarm or distress.” [Twitter, archive; Twitter, archive; CoinDesk]
BlockFi users discover that BlockFi owned their coins. Bankruptcy Judge Michael Kaplan ruled that BlockFi users who had money in BlockFi’s interest-bearing accounts gave up ownership of their bitcoins — all they owned was a liability from BlockFi — and all of the $300 million in crypto deposits is now the property of the bankruptcy estate, as is normal. [Bloomberg]
P2P exchange Paxful has resumed operations after it shut down last month amidst a messy dispute between cofounders Ray Youssef and Artur Schaback. The entire operation has been comedy gold. Youssef and Schaback say the exchange is now owned by a custodian — who they never actually name — and the custodian, Schabeck, and Youseff all serve as directors. [Paxful, archive; CoinDesk]
In the crypto bubble, Miami crypto companies boomed with the enthusiastic support of Mayor Francis Suarez. Now there’s empty real estate and lawsuits. “Most of crypto was a pyramid scheme,” said local businessman Ryan Kirkley. Suarez is now trying to lure tech startups into Miami instead. [WSJ, paywalled]
Robert F. Kennedy Jr., who is running for US President on the gibbering insane Twitter blue check conspiracy theorist ticket, will be making the first appearance of his campaign giving the keynote at Bitcoin 2023 in Miami later this month. So, on brand then. [Twitter; NBC]
A propaganda movie is in the works for bitcoin mining — because consuming a country’s worth of electricity is actually good news for bitcoin. Based on the trailer, the film is amazing, but not in a good way. [Dirty Coin the Movie]
Amy spoke to Bloomberg about the growing ranks of crypto skeptics after the crypto collapse: “There were a handful of us before, screaming into the abyss. Now there’s a lot more.” We’ll just be over here, quietly being right. [Bloomberg]
The latest from David and me! In this edition:
David and I are both incredibly busy in our non-crypto lives, but we’re getting these out weekly at least! Also, they keep ending up huge …
“All financial complexity is a footnote to ‘don’t hand all your money to some random guy promising high returns.’”
— Matt Levine on Celsius Network
Crypto bitterly resents any possible regulation. It’s an industry of proud scofflaws. This presents some difficulties to regulators, who are used to financial firms that listen to them.
Coinbase keeps demanding “regulatory clarity.” What this means is that they want special permission to do things that are presently just illegal.
FTX blew up spectacularly in November, and its CEO and top execs were indicted for fraud. In the wake of FTX’s collapse, the SEC has the political backing it needs to get much more serious about making crypto exchanges comply with rules that have always been there.
In the meantime, the SEC’s lack of jackbooted statist enforcement over the last decade has allowed Coinbase to grow larger and larger — which means that Coinbase has bigger guns to challenge the regulator with.
In July 2022, Coinbase petitioned the SEC to make a clear framework for crypto asset trading. Coinbase handwaved that putting unregistered securities on a blockchain was “a paradigm shift from existing market practices, rendering many of the Commission rules that govern the offer, sale, trading, custody, and clearing of traditional assets both incomplete and unsuitable for securities in this market.” [Petition, 2022, PDF]
The SEC didn’t respond — because this claim is just stupid — and in the time since have stated repeatedly that they think the Howey test of what is a security in the US is just fine.
In March, the SEC sent Coinbase a Wells notice saying that they were going to file an enforcement action. Coinbase promptly filed a petition for a writ of mandamus to try to force the SEC to respond to their July 2022 letter. [CNBC; Writ of Mandamus, PDF]
The petition pounds on the table and cites an extensive range of blog posts as legal authorities. The introduction sets the tone:
“Contrary to the prior actions and statements of the Commission and its officials, the SEC Chair now claims that it is ‘clear’ the securities laws already apply to digital assets and platforms.”
Never mind the DAO Report from 2017, let alone the past century of judicial precedent that securities laws apply to what you do, not what you call the assets you are trading. A security is a security is a security.
And the SEC has been very clear — it’s saying that most crypto tokens are securities. There are rules for trading in those securities, and Coinbase needs to comply — or stop trading in them.
As Gary Gensler’s latest dad joke video puts it: “Many crypto platforms are just pretending that these investment contracts that they offer are more like goldfish … It’s not a lack of regulatory clarity.” [Twitter, video]
Coinbase has also put up its response to the SEC’s Wells notice. [Response, PDF]
The exchange claims that the SEC approving the company’s S-1 filing to go public surely constitutes approval of all its possible business lines — a claim that crypto pumpers have been promoting heavily. This theory is, in legal jargon, on crack.
Coinbase also confidently asserts that none of what’s listed on the exchange is a security. None of it! Coinbase’s theory is that a given asset is a security only if and when it’s determined in court to be one — despite extensive legal precedent that something can be a security before it’s registered or has come to the SEC’s attention.
It’s just not possible to run a digital assets exchange trading in securities that follow SEC rules, Coinbase pleads. Apparently, this is a problem for the SEC, not for the violators.
Coinbase has threatened the SEC with a scorched earth legal battle: “if the Commission pursues this matter, it will face a well-resourced adversary that will necessarily be motivated to exhaust all avenues” — much as Ripple has been. We think this is unlikely to get the SEC to back down.
So confident is Coinbase in its legal position in the Wells notice that it’s making videos to reassure its user base that all is well. This just makes Coinbase look desperate and clownish — winners don’t make promotional videos for their legal filings. [YouTube]
Why is Coinbase so insistent on trading unregistered securities? Because Coinbase’s business is in deep trouble. Trading volume on the exchange is through the floor — it’s dropped to $26.8 billion so far in April. March was $49 billion in total. This is the lowest volume on the exchange since the crypto crash. [FT]
Binance US pulled out of its $1 billion purchase of Voyager Digital. On Tuesday, April 25, Binance sent Voyager a letter canceling the sale. [Twitter; Doc 1345, PDF]
Voyager will now proceed to liquidation — as it probably should have when it first declared bankruptcy in July 2022 — and give the creditors whatever’s left.
Voyager’s lawyers said in a Wednesday hearing that they were surprised by the letter — Binance was still talking with them about the deal up to the previous Friday. Likely recoveries for Voyager creditors are in the range of 40% to 65%. [CoinDesk]
Imagine how much creditors’ money Voyager could have saved on expensive bankruptcy professionals if they’d just gone straight for liquidation nine months ago. Recoveries would have been on the order of 70%.
Terraform Labs has answered the SEC’s February suit, which claims that the collapsed UST stablecoin and its free-floating twin LUNA were offered as securities. The SEC’s case asserts that UST was part of Terraform’s Anchor Protocol investment scheme because you had to first buy UST to get into Anchor.
Terraform wants the suit dismissed on the grounds that digital assets can’t be securities — good luck with that one, guys! — and even if they can, UST was a stablecoin, and therefore can’t be a security. Terraform’s motion appears to be written in crayon. [Notice of motion, PDF; Memorandum, PDF]
Crypto VC firm Paradigm submitted an amicus brief in support of Terraform’s very stupid theory. Paradigm argues that SEC’s premise for treating stablecoins as securities would “radically and impermissibly” expand the definition of a security. [Amicus, PDF; Docket]
Terraform Labs co-founder Daniel Shin was finally indicted in South Korea along with nine others. Shin is facing charges that include violating capital markets laws. Do Kwon, the other co-founder of Terra, was arrested in Montenegro last month. [YNA; Bloomberg]
The legal net around Binance tightens. Last month the CFTC filed a civil suit against them. A long-running criminal investigation is being led by the Justice Department’s Money Laundering and Asset Recovery Section and prosecutors in the US attorney’s office in Seattle. The SEC is conducting a parallel investigation.
Binance and CZ have lawyered up and are in discussion with regulators and the Justice Department: [NYT, archive]
“In February, Patrick Hillmann, its chief strategy officer, revealed the exchange was in talks with regulators about a settlement to resolve the various legal investigations with a fine or some other penalty. He said the company was ‘highly confident and feeling really good’ about the discussions. A month later, the C.F.T.C. filed its lawsuit.”
David Silver thinks Binance is screwed: “The truth will come out,” he said. “And Binance will be held culpable.”
Binance has resumed its support for Russian-issued credit and debit cards after Russian cards were cut off for the past year. Payments go via Qiwi. The withdrawal limit is 200,000 RUB (about $2,486). [Meduza]
The FBI has searched the Washington, DC, home of former FTX executive Ryan Salame on the morning of Thursday, April 27. It’s not clear what they were looking for. Salame was the first FTX insider to turn on Sam Bankman-Fried. [NYT]
Gemini wants to set up a non-US crypto derivatives exchange. Their first product would be BTC-GUSD perpetual futures, with ETH-GUSD to follow. [Bloomberg; Gemini]
The US Justice Department has charged North Korean bank official Sim Hyon Sop for his role in two crypto laundering conspiracies. “The IT workers gained employment at U.S. crypto companies using fake identities and then laundered their ill-gotten gains.” [Press release; Sop indictment, PDF; Sop et al indictment, PDF]
Digital Currency Group subsidiary Genesis is bankrupt. Creditors have noticed that DCG is substantially cashed-up compared to Genesis and are insisting that DCG put more money toward the bankruptcy estate — particularly given how much control DCG clearly exercised over Genesis. So Genesis has filed for mediation over the amount that DCG will need to contribute to the reorganization. [CoinDesk]
Bloomberg writes about Celsius Network creditors and how they’re feeling. Their money is just gone, and it’s not coming back. Mashinsky et al. stole some of it and set the rest on fire through ineptitude. All the creditors have left is hope. Celsius really should have liquidated rather than declared Chapter 11. [Bloomberg]
David Rosenthal has written a marvelous summary of his decades in the world of blockchains: “Crypto: My Part In Its Downfall.” [blog post]
Image: Coinbase CEO Brian Armstrong. Photo by Steve Jennings (Getty Images for TechCrunch) enhanced for (regulatory) clarity.
Our latest crypto collapse episode is out! It’s David’s turn this time. [David Gerard]
In this edition:
“Please god let FTX go back into business, take a lot of money from crypto rubes, then collapse and lose everything again. Please let there be people who lost money in two separate FTX collapses.”
– Ariong
The US Treasury released its “Illicit Finance Risk Assessment of Decentralized Finance.” The 42-page report examines DeFi from the perspective of anti-money laundering and sanctions laws. [Press release; Report, PDF]
This report is not about consumer protection — it’s about national security, sanctions busting, and terrorist financing. The Treasury is not happy:
“The assessment finds that illicit actors, including ransomware cybercriminals, thieves, scammers, and Democratic People’s Republic of Korea (DPRK) cyber actors, are using DeFi services in the process of transferring and laundering their illicit proceeds.
… In particular, this assessment finds that the most significant current illicit finance risk in this domain is from DeFi services that are not compliant with existing AML/CFT obligations.”
The report makes clear: blockchain analysis is not sufficient for KYC/AML. Calling something “decentralized” or a “DAO” doesn’t absolve you of responsibility. And almost everything in DeFi falls squarely in the ambit of existing regulation.
How’s regulatory clarity for crypto? Just fine, thank you:
“Through public statements, guidance, and enforcement actions, these agencies have made clear that the automation of certain functions through smart contracts or computer code does not affect the obligations of financial institutions offering covered services.”
The report recommends “strengthening U.S. AML/CFT supervision and, when relevant, enforcement of virtual asset activities, including DeFi services, to increase compliance by virtual asset firms with BSA obligations” and “enhancing the U.S. AML/CFT regulatory regime by closing any identified gaps in the BSA to the extent that they allow certain DeFi services to fall outside of the BSA’s definition of financial institution.”
Nicholas Weaver tells us the report “should be thought of as being as serious as a heart attack to the DeFi community, as this represents the US government regulation at its most serious. Indeed, the report can be summarized in a sentence: ‘If you want to continue to OFAC around, you are going to find out.’”
SEC chair Gary Gensler is fed up with Coinbase blatantly trading unregistered securities and not registering with the SEC as a proper securities exchange. So he’s going to update the rules.
The SEC has reopened the comment period for a proposal, initially issued in January 2022, that would update the definition of an “exchange” in Rule 3b-16 of the Exchange Act. [SEC press release; Fact sheet, PDF; Gensler statements]
Gensler’s comments are laser-targeted at Coinbase — and also DeFi:
“Make no mistake: many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws.”
He reiterates that “the vast majority of crypto tokens are securities” — the SEC’s position since 2017 — so “most crypto platforms today” meet the definition of a securities exchange. He adds:
“Yet these platforms are acting as if they have a choice to comply with our laws. They don’t. Congress gave the Commission a mandate to protect investors, regardless of the labels or technology used. Investors in the crypto markets must receive the same time-tested protections that the securities laws provide in all other markets.”
On Saturday, The US House Financial Services Committee published an as-yet-untitled discussion draft bill for regulating stablecoins a few days before a hearing on the topic on Wednesday, April 19. [Discussion draft, PDF; hearing agenda]
The bill refers to stablecoins as “payment stablecoins.” This is utterly hypothetical. Nobody uses stablecoins to buy things. They’re chips for gambling on speculative assets in the crypto casinos.
This bill was a sudden surprise for a lot of people — but it appears to be a version of a draft bill that Senate Banking Committee Ranking Member Pat Toomey (R-PA) was circulating last year. [Stablecoin TRUST Act, 2022]
The bill divides stablecoin issuers into banks and nonbanks. Credit unions and banks that want to issue stablecoins would need approval from the financial regulator they fall under‚ the National Credit Union Administration, the FDIC, or the OCC. Non-bank stablecoin issuers would fall under the Federal Reserve.
For this bill, USDC or Pax Dollars, under the Fed, might pass muster. But Tether would be kicked out of anything touching the US because they wouldn’t be able to meet the transparency or liquidity requirements.
All stablecoins that circulate in the US would need to be backed by highly liquid assets — actual dollars and short-term treasuries — and redeemable within one day. That doesn’t leave much room for the issuers to turn a profit by putting the deposits in longer-term investments.
Custodia is not a bank under the Bank Holding Act, so for this bill, it would also be considered a non-bank. This bill would derail Custodia’s lawsuit against the Federal Reserve and the Federal Reserve Bank of Kansas City to try to force a Fed master account out of them.
The bill also calls for a moratorium on new algorithmic stablecoins until a study can be conducted.
Finally, the bill includes a request for federal regulators to study a central bank digital currency (CBDC) issued by the Fed. As we noted previously, FedNow would make a CBDC completely superfluous.
Hilary Allen, a professor of law at American University Washington College of Law, points out important shortcomings in the stablecoin bill. She argues that the bill is stacked in favor of stablecoins, and notes that the bill’s payment stablecoin definition could be a way of avoiding SEC jurisdiction. And while the bill calls for monthly attestations, it doesn’t say anything about full audits for stablecoin reserves. [Twitter]
John Jay Ray III, FTX’s CEO in bankruptcy, released his first interim report on the control failures at FTX and its businesses. Ray documents a shocking level of negligence, lack of record keeping, and complete disregard for cybersecurity at FTX. [Doc 1242, PDF]
The report confirms what we’ve been saying all along: all crypto exchanges behave as much like Quadriga as they can get away with. A few highlights:
Ray and his team have so far recovered $1.4 billion in digital assets and have identified an additional $1.7 billion they are in the process of recovering. (We’re still waiting for him to ask for money back from The Block, but maybe that’s coming.)
In other FTX news, Voyager and FTX and their respective Unsecured Creditors’ Committees have reached an agreement on the money FTX paid to Voyager before FTX filed bankruptcy that FTX wants to claw back now — $445 million in cash will go into escrow while things are sorted out. [Doc 1266, PDF]
South Korean prosecutors have seized 414.5 billion won ($312 million) in illegal assets linked to nine Terraform Labs execs. None of the assets tied to Do Kwon have been recovered. Kwon converted everything to BTC and moved the funds — worth an estimated 91.4 billion won ($69 million) — to offshore exchanges. [KBS, Korean]
Who crashed UST in May 2022? Terraform Labs seems to have played no small part. In the three weeks leading up to the collapse, Terraform dumped over 450 million UST on the open market. [Cointelegraph]
A bill limiting benefits and tax incentives for crypto miners in Texas unanimously passed a Senate committee vote and now it’s in the chamber. The bill was sponsored by three Republican state senators. Even they’re sick of the bitcoin miners. [SB 1751, PDF; CoinDesk; Fastdemocracy]
Bitcoin mining doesn’t create jobs — so Sweden has ended the 98% tax relief it gave data centers, including crypto miners. Crypto is outraged. [CoinDesk]
The downfall of peer-to-peer bitcoin exchange Paxful is a comedy goldmine. Paxful cofounders Ray Youssef and Artur Schaback originally blamed Paxful’s closure on staff departures and regulatory challenges — but now they’re turning against each other in court.
As an example of their good judgment, in 2016, the pair drew police attention when they were spotted in Miami aiming an A15 rifle off their penthouse balcony for photo purposes. Former employees allege “favoritism, erratic dismissals, lavish spending on travel and reports of routine cannabis usage on the job by Youssef himself.”
Paxful’s business model was based on price-gouging fees on gift cards, according to one former employee. You want 10 euros worth of bitcoin? That’ll be 20 euros worth of gift cards. Coincidentally, money launderers are usually quite happy to pay fees on the order of 50%. Schaback thinks Paxful is still a viable enterprise. [CBS, 2016; CoinDesk]
As you might expect, OPNX, the new exchange for tokenized crypto debt run by the founders of the failed Three Arrows Capital and CoinFLEX, has gotten off to a feeble start. Trading volume in the first 24 hours was $13.64. [The Block]
The Winklevoss twins made a $100 million loan to Gemini. The move came after Gemini had informally sought funding from outside investors in recent months without coming to any agreements. We can’t find if the loan was in actual dollars or in crypto — or if it was just an IOU. [Bloomberg]
Binance relinquished the financial services license for its Australian derivatives business, Oztures Trading, after the Australian Securities and Investments Commission said they were likely to suspend it. Customers have until April 21 to close their accounts. [ASIC]
Who were the unnamed “VIP” traders on Binance mentioned in the CFTC suit? Jane Street, Tower, and Radix. [Bloomberg]
The Mt. Gox payout window has opened! Slowly. [Mt Gox, PDF; The Block]
Cryptadamus thinks that Crypto.com’s Canadian bank accounts are frozen. [Mastodon]
The Ethereum Shanghai upgrade went through on April 12. You can now withdraw your staked ether! As we predicted, there wasn’t a rush for the exits. [CoinDesk]
Bitfinex money mule Reggie Fowler will be sentenced on April 20. His lawyer wrote a lengthy letter to the judge asking for clemency — no jail time — because Fowler lived a hard life and never did anything wrong before. Nothing he was busted in court for, anyway. [Letter, PDF]
Michael Saylor’s MicroStrategy has bought yet more bitcoin, digging itself ever deeper. The company purchased an additional 1,045 BTC for $23.9 million, or an average price of $28,016, between March 23 and April 4. [8-K filing]
Tether got its tendrils into the US dollar system via Signet — former Signature Bank’s real-time payments system. Tether instructed crypto firms to send dollars to its Bahamas-based banking partner Capital Union Bank via Signet. We’re not clear on whether this violated the New York settlement — though if they lied about who they were, it broke banking law. [Bloomberg]
Cross River Bank, the banking partner of Coinbase and Circle, built its business on buy-now-pay-later (BNPL) and pandemic loans. What could go wrong? [Dirty Bubble]
With its firm commitment to quality cryptocurrency journalism, CoinDesk is hot on getting into generating its hopium space-filler using AI text generators. [CoinDesk]
“Ukraine wants to fund its post-war future with crypto” — with quotes from David. [Techmonitor]
“A lot of ordinary people who got into crypto just lost everything in various ways or lost chunks of it,” Gerard said. “And this is a lot of why I think retail investors should just keep the hell away from crypto.” [Business Insider]
Our latest blog post details our incredible clown car journey through Custodia’s attempt to get a Fed account by capture of the least populous state in the US (Wyoming), in the face of their own blithering incompetence.
This was supposed to be a 400-word summary of why Custodia’s application for a master account with the Fed got rejected. But something happened along the way, and here we are 3,000 words later.
The full post is on David’s blog. [David Gerard]
“Unless they allow crypto crime, all the innovation in crime is going to go overseas, and we’ll fall behind in crime!”
— Doctor Orrery
Your actual money has been locked in Binance US since late March: [Binance.US, archive]
“Due to recent developments in the banking industry, Binance.US is transitioning to new banking and payment service providers over the next several weeks. Some USD deposit services will be temporarily impacted during the transition. Apple Pay and Google Pay deposits are temporarily unavailable. Wire deposits and withdrawals are temporarily unavailable. For <5% of customers, Debit Card deposits are temporarily unavailable. We are working to restore all services as soon as possible.”
BUSD trading pairs on Binance US are also suspended, and fiat withdrawals for institutional clients are cut off as well. [Twitter]
Catherine Coley has shown up alive and well! Coley was the CEO of Binance US until April 2021, when she abruptly left the company. Coley hasn’t said a word to the press or social media since — to the point where crypto people wondered what had happened to her. In the wake of the CFTC suit against Binance, Coley has finally surfaced. She’s hired Sullivan & Cromwell partner James McDonald, a former director of enforcement at the CFTC, for the suit. Coley appears to have started working with McDonald as early as January 2022. [Reuters]
The Australian Securities and Investments Commission (ASIC) is conducting a “targeted review” of Binance’s Australian operation. Oztures Trading misclassified about 500 Australian retail investors as wholesale operators and sold them derivatives that were only for sophisticated investors. [AFR]
“Crypto warning: AK-47s, crooks, and the exchange Aussies should avoid” — David was quoted by news.com.au on the CFTC charges against Binance. “Regulators should also kick the company out of the banking system, cryptocurrency expert David Gerard said.” This story came out exactly as David had hoped it would. (Written by the other guy who originally started Rocknerd. We’re all in the rock journalist to finance journalist pipeline.) [Daily Telegraph, archive]
Voyager Digital wanted to sell itself to Binance US. The plan included an exculpation clause — that Voyager, the Unsecured Creditors’ Committee, Binance, and any professionals were not “liable at any time for the violation of any applicable law, rule, or regulation governing the solicitation of acceptances or rejections of the Plan or such distributions made pursuant to the Plan.” They wanted this bankruptcy court to grant them broad criminal immunity.
The US government and various regulators objected, and the February 28 version of the plan explicitly carved government action out of the exculpation provision. But the exculpation crept back into the March 2 version of the plan. The government and the regulators objected again, leading to this appeal. This time they are asking that the provision be removed, or else that the whole deal be blocked — at which point Voyager can only go into liquidation.
Judge Jennifer Rearden concurs with the government that exculpation is meant to head off suits between stakeholders in the bankruptcy itself — it’s not there for courts to “prospectively immunize debtors and non-debtors from law enforcement and other actions undertaken by the Government.” As such, she considered the appeal plausible, so has granted the stay. That said, Judge Rearden is painfully aware that Voyager is a melting ice cube, so she wants the government brief by April 4 (today!) and the Voyager and UCC briefs by April 14.
We wonder just what snakes are lurking in the deal such that Voyager and Binance tried to sneak in such a weirdly broad exculpation after it was already knocked back once. [Order & opinion, PDF]
With less than an hour to go before Celsius’s exclusive right to propose a plan lapsed, Kirkland & Ellis filed the Celsius chapter 11 plan for the NovaWulf deal, which we summarized previously. On April 12, Celsius will file the disclosure statement, which the court has to approve before creditors can vote on the plan. The disclosure statement lists Celsius’ assets, liabilities, and business affairs. [Doc 2358, PDF; Plan summary, PDF]
Shoba Pillay, the examiner in the Celsius bankruptcy, has filed nicely hyperlinked PDFs of her interim and final examiner reports. [Interim report, PDF; final report, PDF]
Pillay’s work is done now. She’s been officially discharged. [Doc 2364, PDF]
Based on the jaw-dropping criminality in the examiner’s reports, the Celsius Unsecured Creditors’ Committee filed a suit on February 14 against past Celsius executives to recover as much money from them as possible. The UCC has now filed a revised complaint. The new filing includes a redline against the previous version of the complaint, starting at page 139 of the PDF — it mainly adds two extra claims of misappropriation. [Doc 2349, PDF]
Matt Damon says his crypto.com ad at the 2022 Super Bowl was just because his water nonprofit was short of cash. If only there was a way to do good except by doing a ton of bad! [Gizmodo]
BaFin has lifted a finger and kicked Crypto.com out of Germany. The Singapore exchange was licensed in Malta and wanted to use that license in Germany. But Germany also required that they get a permit to advertise the investment offer, which Crypto.com didn’t bother doing. [The Paypers]
The Bittrex crypto exchange is leaving the US market. The only reason they give is that “regulatory requirements are often unclear and enforced without appropriate discussion or input, resulting in an uneven competitive landscape.” [Bittrex, archive; The Block]
We suspect the regulations Bittrex has in mind are very clear, and they just couldn’t survive with a legal business model. Bittrex’s volume dropped below 1% of the US market in 2021 and didn’t recover. Last year, they paid $53 million to OFAC and FinCEN for sanctions violations. [Treasury, 2022]
FTX EU LTD (Cyprus) launched a new website for withdrawals. The exchange will be returning funds on account to customers, per Cyprus law. This does not cover all EU customers — just those who were dealing with this particular FTX entity. [PR Newswire; FTX EU]
Paxful, a peer-to-peer bitcoin trading platform, is suspending operations. Paxful claims “regulatory challenges for the industry”— but also that “we unfortunately have had some key staff departures.” Did they depart in a police van, maybe? [Paxful, archive]
Lost all your money in a dodgy crypto company? Why not trade your bankruptcy claims on a new exchange run by the guys who lost all your money! Brought to you by the founders of the defunct Three Arrows Capital and the troubled CoinFLEX, OPNX is currently only doing spot trading in cryptos but promises to bring trading in bankruptcy claims some time soon. None of the proprietors are in any way on the run and hiding out from regulators, you understand — but they’re all just doing business strictly from Dubai for now. Your lack of funds is safe. [CoinDesk]
The US government sold 9,861 BTC connected to Silk Road, the first darknet market, on March 14. It intends to sell another 41,490 BTC in four batches over the course of a year. Tether coincidentally printed 2 billion USDT the same day — though the government will only accept real money. [Court filing, PDF; Twitter]
A South Korean court has once again denied the prosecutor’s request to issue an arrest warrant for Terraform Labs co-founder Daniel Shin. This was the second attempt made by South Korean authorities to arrest Shin following the arrest of Do Kwon, Terraform’s other co-founder. [Cointelegraph]
The Seoul Southern District Prosecutor’s Office has confiscated 210 billion KRW ($160 million) in assets — primarily real estate — from eight people connected to Terraform Labs, including Shin and former Terraform vice president Kim Mo. [KBS, in Korean]
Justin Sun of Tron turns out not to be Grenada’s ambassador to the World Trade Organization — he was kicked out when the new administration came in June 2022. So for the past nine months, the “H. E.” in his Twitter name must just have stood for something other than “His Excellency.” After the local news story reporting this came out, Sun first told The Block that he was totally still the ambassador — then tweeted how his term was actually ending as of March 31, 2023, y’see. OK. [GBN; The Block; Twitter]
Crypto news site The Block has just waved good-bye to a third of its staff.
Larry Cermak, the site’s former head of research, has been promoted to CEO by the new company board, which features Evgeny Gaevoy of crypto hedge fund Wintermute.
The move comes in the wake of The Block’s FTX funding scandal.
Don’t worry too much about how the rise of Wintermute, and the excuses for it, are disconcertingly parallel to the story of FTX/Alameda — the nigh-magical arbitrage and how Gaevoy is a mathematical genius, much as SBF was.
We beat CoinDesk on this one. Read the full story on David’s site. [David Gerard]
“who needs an examiner when you can just hand sam an empty sheet of paper and wait”
— haveblue
A new superseding indictment against FTX founder Sam Bankman-Fried alleges that he paid Chinese officials $40 million in crypto in a bribe to unfreeze $1 billion in crypto on Alameda — which would violate the Foreign Corrupt Practices Act. Sam now faces 13 criminal counts. [Superseding indictment, PDF]
On Thursday, March 30, Sam took a trip to New York and pleaded not guilty to his latest five charges. He had to battle his way through a gaggle of reporters just to get in the door. At least it got him out of the house. [Twitter; YouTube; NYT]
In early 2021, China froze $1 billion of cryptos in various Alameda accounts on two of the country’s biggest crypto exchanges (which aren’t named in the indictment). Bankman-Fried “understood that the Accounts had been frozen as part of an ongoing investigation of a particular Alameda trading counterparty.” A bribe was sent from Alameda to a private blockchain address in November 2021. The accounts were unfrozen shortly after, and Alameda got its cryptos back.
Somehow, Daniel Friedberg, FTX’s chief counsel at the time knew nothing of this. Friedberg said in an affidavit dated March 19, 2021, when the FTX Arena naming rights deal was going through, that FTX and its affiliated companies “do not have any ownership or contracts or any other obligations with respect to any governmental agency of the People’s Republic of China, or any governmental agents or political persons.” [Miami-Dade Legislative Item, PDF, p. 54]
Sam will be kept on a very short leash while he’s out on bail. Sam gets a non-smartphone that only does voice and SMS — no internet access — and a locked-down laptop configured to access only certain websites. He can work with his lawyers, order food from DoorDash, and keep up with the sportsball. YouTube is also on the list, so we’re looking forward to the 10-hour video blogs detailing crimes hitherto unknown to humanity. [Order, PDF]
Sam’s father, Joseph Bankman, is paying his son’s lawyer fees with over $10 million that Sam borrowed from Alameda and gave to his father as a present in 2021. We wonder if John Jay Ray is going to come calling to claw this back for the bankruptcy estate. [Forbes]
In the FTX bankruptcy, a group of ad-hoc FTX creditors with $2 billion in claims want to participate in the bankruptcy without revealing their identities. They include “large institutional market makers and asset managers.” This is the precise sort of creditor that the Bankruptcy Act is not intended to protect from public scrutiny. [Doc 1137, PDF]
FTX appears to have been hiding money under the names of employees. The OKX exchange, formerly OKex, has agreed to turn over $157 million in FTX funds. $150 million of that was in an account of David Ratiney, a former FTX employee. Ratiney says the account was opened on behalf of Alameda. He has agreed to forfeit the assets. [Doc 1189, PDF; Doc 1190, PDF]
The CFTC lawsuit against Binance, which we covered in detail on Tuesday, has rattled customers. Within days, the exchange saw outflows of $2 billion, out of a claimed reserve of $63.2 billion, according to Nansen. Currently, 28% of Binance reserves are in Tether and 10% are in BUSD. [WSJ, paywalled; Nansen]
The three large US hedge funds trading on Binance weren’t named in the CFTC complaint — though Radix Trading later came forward and said that they were “Trading Firm A.” Radix insists they did nothing wrong — they ran their apparent conspiracy to violate commodities laws past their in-house legal team, after all. [WSJ, paywalled]
But the CFTC complaint has “already sent chills” across the commodity trading industry — particularly firms who make their money from real commodity trading and only dabble in the toxic waste barrel of crypto. Market makers are wondering if they’re risking their own broker-dealer licenses. [Bloomberg]
Cash withdrawals from Binance US are no longer working via ACH through Signature. Binance says: “ACH deposits and withdrawals for a small subset of our users were disrupted last week and, out of an abundance of caution, remain paused. Our teams are working through this transition and expect to restore functionality within the next 24 hours.” It’s probably fine. Your funds are safe. [Reddit]
You’ll be shocked to hear that Binance kept substantial business links to China for years after its claimed 2017 exit, despite Binance executives repeatedly saying otherwise. [FT]
The Block reported in 2019 that Binance had offices in Shanghai. CZ hit the roof and threatened to sue them, with the explicit aim of outspending them on lawyers … and The Block stood by its story. (Ben Munster, then of Decrypt, helped with the response story, though The Block took out Ben’s harsher additions.) [The Block, 2019; Twitter, archive; Twitter, archive; The Block, 2019]
The sale of Voyager Digital to Binance US is on hold. The Department of Justice and the US Trustee appealed the sale on the basis that the order granted inappropriate immunity from prosecution, and asked for a stay. The appeals court has granted the request for a stay while the appeal proceeds. [Doc 1222, PDF; Doc 1223, PDF; Bloomberg]
In his statement on the recent bank failures and the federal regulatory response, FDIC Chairman Martin Greunberg explained why Signature failed: the bank was insolvent, contrary to Barney Frank’s claims. [FDIC, PDF]
On March 10, Signature Bank lost 20 percent of its total deposits in a matter of hours, depleting its cash position and leaving it with a negative balance with the Federal Reserve as of close of business. Bank management could not provide accurate data regarding the amount of the deficit, and resolution of the negative balance required a prolonged joint effort among Signature Bank, regulators, and the Federal Home Loan Bank of New York to pledge collateral and obtain the necessary funding from the Federal Reserve’s Discount Window to cover the negative outflows. This was accomplished with minutes to spare before the Federal Reserve’s wire room closed.
Over the weekend, liquidity risk at the bank rose to a critical level as withdrawal requests mounted, along with uncertainties about meeting those requests, and potentially others in light of the high level of uninsured deposits, raised doubts about the bank’s continued viability.
Ultimately, on Sunday, March 12, the NYSDFS closed Signature Bank and appointed the FDIC as receiver within 48 hours of SVB’s failure.
The FDIC has told crypto clients with deposits at Signature Bank that they have until April 5 to close their accounts and move their money. The FDIC is looking to sell off Signature’s Signet inter-crypto-exchange dark liquidity pool. [Bloomberg]
Frances Coppola explains precisely what happened at Signature. [Coppola Comment]
We noted previously how larger US banks don’t want to go within a mile of crypto. But some smaller banks are still feeling lucky. [WSJ, paywall]
The Beaxy crypto exchange shuttered after the SEC filed charges against it for failing to register as a national securities exchange, broker, and clearing agency, and over its 2018 ICO. The SEC also charged a market maker operating on Beaxy as an unregistered dealer. [SEC press release; complaint, PDF; CoinDesk]
Beaxy ran a “private sale” ICO for its internal exchange token BXY from May 2018 to June 2019. The SEC is charging Beaxy and its founder Artak Hamazaspyan over the ICO as an unregistered offering of securities to US retail.
That’s the sort of complaint we’re used to seeing from the SEC — but they’re also charging Windy Inc., who ran the Beaxy platform, and Windy’s founders, Nicholas Murphy and Randolph Abbott, over unregistered securities trading on the exchange.
If cryptos being traded are securities — and it’s likely that most are — that leaves even the normal activities of an exchange subject to a vast array of additional regulations.
The SEC is also charging Brian Peterson and Braverock Investments as unregistered dealers for market-making on Beaxy for the BXY and Dragonchain DRGN tokens. The SEC sued Dragonchain in August 2022, alleging that DRGN was an unregistered offering of securities; that case is proceeding. [SEC, 2022; case docket]
Hamazaspyan is also alleged to have misappropriated $900,000 from the ICO for his own use. Murphy and Abbott discovered this in October 2019 and convinced Hamazaspyan to pay back $420,000 to Beaxy and let Windy run Beaxy going forward.
Windy, Murphy, Abbott, Peterson, and Braverock settled, paying a total penalty between them of $228,579. The SEC case against Beaxy and Hamazaspyan over the ICO is proceeding.
Beaxy shut down on Tuesday, March 28, owing to “the uncertain regulatory environment surrounding our business.” We think it’s deadly certain. [Beaxy, archive]
This is the first SEC action over securities trading on an exchange. It’s a likely template for future SEC cases against other crypto exchanges — like, say, Coinbase.
The Coinbase employee convicted in a criminal case of wire fraud by insider trading is fighting an SEC civil case claiming that the insider-traded tokens were securities. [WSJ]
SEC chair Gary Gensler will be testifying before Congress on April 18. The very non-partisan committee announces that “Republicans will hold @GaryGensler accountable for his flagrant disregard for the law, jurisdiction, and the APA.” (The Administrative Procedure Act.) We hope the Blockchain Eight show up. [Twitter]
Judge Larry Alan Burns of the Southern District of California has denied the motion to dismiss of members of the bZx DAO who held governance tokens (BZRX), finding the DAO is plausibly alleged to be a general partnership. [Order, PDF; CoinDesk]
One of the earliest objections to the original DAO in 2016 was that it would be a general partnership, leaving everyone involved jointly and severally liable. (This is why incorporation is a thing.) The same problem was frequently noted in the rise in DAOs in the recent crypto bubble. Nobody involved can claim they had no idea.
The European Banking Authority has a new consultation paper on anti-money laundering (AML) risk factors that national bank regulators should consider. Crypto-asset providers are listed as an area that regulators should examine closely, including if “Distributed Ledger Technology” is “essential to the sector’s business model and operation” or “where services of the subject of assessment are provided using DLT or blockchain technology.” Comments are due by June 29, 2023. [EBA, PDF]
Coming soon in European AML: no anonymous crypto payments in the EU of over 1,000 EUR. Crypto asset managers will be required to verify “their customers’ identity, what they own and who controls the company.” [EP]
After he was arrested last week, Do Kwon of Terraform Labs is serving time in a Montenegrin prison. Kwon is likely to stay in jail there for at least a year, while his appeals and extradition hearings proceed. We expect he’ll be sent to South Korea first, and only then to the US. [YNA, in Korean; Protos]
South Korean prosecutors are making another effort to arrest Terraform Labs cofounder Daniel Shin, who left the company in March 2020. [Bloomberg]
As part of winding the bank down, Silvergate struck a deal with MicroStrategy to accept $161 million to repay a $205 million bitcoin-backed loan — taking a $44 million loss. Silvergate had said repeatedly that its bitcoin-backed loans were safe. [WSJ, paywall]
MicroStrategy sold 1.35 million shares of MSTR in Q1 2023, diluting shareholders by over 10% to pay off its Silvergate loan — and bought $150 million more BTC between February 16 and March 23. This is a Hail Mary pass praying for number to go up, which it is quite unlikely to do. [8-K; Twitter]
Hindenburg Research’s latest short-seller report is on Jack Dorsey’s Block, formerly Square. Cash App’s growth is aimed at targeting the “unbanked” — which mostly means embracing noncompliance to grow its user base. A Cash App employee told Hindenburg, “every criminal has a Square Cash App account.” And this is before Block has even got into crypto in any substantial way. [Hindenburg]
Indicted crypto promoter Guo Wengui used his culture-war social network Gettr to pump cryptos. Wengui was fined a billion dollars by the SEC in 2021 over his crypto offerings. [Washington Post]
The British Virgin Islands has ordered Three Arrows Capital founders Zu Shu and Kyle Davies to attend an examination on May 22 or be in contempt of court. We’re sure they’ll be right on that. [CoinDesk]
If you click on a lot of old links to theblockcrypto.com, it’ll tell you that The Block has “sunset our News+ product” — their previous paywalled news offering. They didn’t open up those old pages — they’ve just effectively deleted a whole swathe of their journalism from 2018 to 2020!
We discovered this when Amy went looking for one of her old Block pieces on Binance for our article on Tuesday and when David looked for various other Block articles for today’s story.
You’d think a publisher wouldn’t just trash their own search optimization — but in practice, both mainstream and specialist publications destroy their own URLs and content all the time. So it’s pretty likely this was an error. Hopefully a reversible one.
We remember when Decrypt moved their domain from decryptmedia.com to decrypt.co. They saw their Google hits go through the floor and thought they’d been shadowbanned … not realizing they’d done it to themselves. The Block changed its URL to theblock.co around the same time, with similar effects.
In the meantime: ARCHIVE EVERYTHING. Stuff that’s blocked from the Internet Archive saves just fine into archive.is, and archive.is also accepts pages from the Internet Archive, Google cache, and Bing cache and indexes them correctly under the source URL. David uses and recommends the Get Archive extension for Firefox. [Mozilla Add-Ons]
The CFTC dropped a bomb on the world’s largest offshore crypto casino on Monday. It’s suing Binance and its founder Changpeng Zhao (“CZ”) for violating US commodities trading laws. Samuel Lim, Binance’s former chief compliance officer, was also charged with “willfully aiding and abetting” Binance’s violations.
We hope you’re not too shocked to hear that Binance trades against its own customers, or that the CFTC somehow got access to CZ’s phone and private chats on Signal.
This complaint is odd. It reads like it has a shadow twin document — a sealed criminal indictment that’s just waiting until CZ can be extradited.
Read our latest on David’s blog.
Image: The Untouchables
“hello I am Don’t Kwoff, yes I may look like Do Kwon with a fake moustache and wig but rest assured I am a completely separate person.”
— Boxturret
Do Kwon, co-founder of Terraform Labs and creator of the failed UST/luna cryptocurrency pair that took down the rest of crypto when it collapsed, was arrested in Montenegro on March 23. Kwon was detained at Podgorica Airport with falsified documents. [Twitter; CoinDesk; YNA, in Korean]
Also arrested was Han Chang-Joon, Terraform’s former chief financial officer. The two were sitting in a private plane bound for Dubai when authorities nabbed them. They used forged travel documents from Costa Rica and also had documents from Belgium and South Korea on them. Three laptops and five mobile phones were also seized. [Pobjeda, in Montenegrin; DLNews]
Kwon was wanted by South Korea for violating capital market rules (by stealing everyone’s money). South Korea had also issued a “red notice” via Interpol, asking global law enforcement for help finding him. Kwon has been tweeting, talking to reporters, and insisting he was not on the run since September.
After South Korea stripped him of his passport, Kwon was suspected of being in Serbia. He was likely trying to flee the region before authorities caught up to him. [YNA, 2022, in Korean]
Here’s a video of Kwon and Chang-Joon leaving the Montenegrin court in handcuffs. [Twitter, video]
In February, the SEC charged Kwon with securities fraud over the UST/luna/Anchor Protocol scam.
Following Kwon’s arrest in Montenegro, the US Department of Justice also charged him with conspiracy to defraud, commodities fraud, securities fraud, wire fraud, and conspiracy to engage in market manipulation. [Complaint, PDF]
The 2023 Economic Report of the President is out, with Chapter 8 devoted exclusively to digital assets: “This chapter primarily examines crypto assets, whose proponents have been relearning the lessons from previous financial crises the hard way.” [White House, PDF, pp 237-272]
This chapter lays out the Biden administration’s policy toward crypto. It is strident, as you’d expect just after a huge disaster like FTX. This is the no-coiner view coming from the highest levels of power.
Crypto bros and their pet politicians have long claimed that if you overregulate crypto, you’ll kill innovation. The White House is saying that, for all the promises and hot air, there is no innovation here — so the path is clear to regulate the hell out of you.
The chapter begins with crypto’s promises. Crypto assets could be investment vehicles. Crypto could offer money-like functions. Crypto could enable fast digital payments. Crypto could increase financial inclusion. Crypto assets could improve the US’s current financial structure.
“Could” is a word that means “doesn’t.” The report contrasts crypto’s claims with “the reality of crypto assets” — in which crypto falls flat in every instance.
Crypto is mostly used for speculative trading, the report states. The reason tokens are volatile is that many “do not have a fundamental value.” Bitcoin was supposed to be a hedge against inflation — but “as inflation increased globally in the second half of 2021 and in 2022, the prices of crypto assets collapsed, proving them to be, at best, an ineffective inflation hedge.”
The report also goes through bitcoin’s failure as money — in part because you can’t have something both serve as a speculative asset and as money: “the riskier an asset is, the less likely it can effectively serve as money.”
Crypto’s main role in finance is to create new and ever-riskier derivatives with poor regulation. That’s where the “innovation” is. This carries a tremendous risk of economic contagion. The other innovative financial use cases are ransomware and money laundering.
Stablecoins are subject to run risk — just like a bank run — which could “lead to disruptions in the markets for the reserve assets and reduce the market value of the issuer’s remaining reserves because the sales of the reserve assets put further downward pressure on the prices of remaining reserves.”
The report doesn’t miss the horrors of crypto mining either: massive energy waste, e-waste, and noise pollution. “Evidence suggests that cryptomining has substantial costs for local communities and has few, if any, attendant benefits.”
Blockchain, or digital ledger technology (DLT), isn’t magic either. It’s stupendously inefficient for supply chains — if the blockchain bit even does anything. Helium, the fraudulent wireless network project, was an a16z-funded token pump-and-dump.
DLTs are at best experimental. They could be of economic value in the future! Which means they aren’t at all in the present. A private, centralized blockchain is just a clunky, slow database.
One bit of actual news from the report: FedNow, the Fed’s new instant payment service due in July, shoots the idea of a US CBDC through the head, despite all of CBDC’s ill-specified hypothetical potential — “the benefits of circulating digital money after FedNow is launched may be minimal.”
Crypto could be all manner of fabulous things. It just isn’t actually any of those things in practice.
Crypto cannot be allowed to break laws in the pursuit of hypothetical tech-magic benefits — “regulators must apply the lessons that civilization has learned, and thus rely on economic principles, in regulating crypto assets.”
The SEC has sent Coinbase a Wells notice — a threat that action is imminent. This notice is about the current version of the exchange’s Earn product — the one that Coinbase said in its 10-K earnings call was definitely not a security, probably.
Coinbase’s previous Earn product got a Wells notice before launch, in September 2021. Coinbase didn’t post the notice itself that time — they blustered, then folded. But they posted the notice this time. [blog post; Wells Notice, PDF; 8-K]
Rarely do companies receiving a Wells notice make those notices public. The last crypto firm to disclose a Wells notice was Canadian chat app Kik in 2018, as it geared to do battle with the SEC over whether its KIN token was a security. The SEC sued. Kik went to court, and the judge ultimately ruled against Kik.
Paul Grewal, Coinbase’s chief legal officer, complains that Coinbase spoke to the SEC more than thirty times. Sure — but it turns out that if you sit down with a cop and tell him all the bad things you’re doing, he might be taking notes, and then he might tell you to stop doing the bad things.
Matt Levine thinks the SEC wants Coinbase to stop trading in securities at all, and possibly just go away: [Bloomberg]
If Bernie Madoff came to the SEC and said “if you want a higher class of more trustworthy Ponzi schemes, you will need to write a few new rules adapting the disclosure regime to Ponzi schemes,” the SEC would have said “no we absolutely do not want that, we want much less Ponzi scheming, and we certainly do not want to give our approval to Ponzi schemes by writing rules for them.” One gets the sense the attitude to crypto is similar.
… If you run a crypto exchange and you want to set up a meeting with regulators to talk about how to write regulations to prevent a repeat of the recent crypto collapses, they will not trust you, because that is what FTX was saying too. There is not much goodwill left.
John Reed Stark goes through Coinbase’s public response and why it’s nonsense. “Not only are Coinbase’s argument weak, misguided, and more akin to public relations than legal positions, but Coinbase’s arguments are also proven failures of crypto-mumbo-jumbo and ludicrous jaundiced rhetoric.” [LinkedIn]
Dirty Bubble is shorting $COIN because it’s “a cash-burning regulatory nightmare with limited upside.” [Substack]
In a class action against the Uphold exchange, Judge Denise Cote in the Southern District of New York has found that the Electronic Funds Transfer Act applies to crypto, specifically Reg E of the act. This is a finding that this complaint in the class action can go ahead — but the order is very clear, and if this order isn’t used in later cases we’ll be amazed. Reg E provides consumer protections over unauthorized transactions, error resolution, and provision of receipts and periodic statements. Crypto exchanges are not at all set up for dealing with any of this — so they might want to get onto it. [Credit Slips; Order, PDF; Consumer Finance]
In a letter calling Binance a “hotbed” of illegal activity, Senator Elizabeth Warren (D-MA) along with two other Senators had asked Binance to provide balance sheets, data on the number of US users, internal policies relating to AML, as well as written policies regarding the relationship between Binance and Binance US. Binance responded with a 14-page letter describing its compliance history — and saying it has a team of 750 compliance staffers! — without addressing financials. [Bloomberg]
Crypto advertising in Belgium will need to be submitted to the Financial Services and Markets Authority ten days in advance for approval, from May 17. [FSMA]
The SEC has issued a new alert to investors: “Those offering crypto asset investments or services may not be complying with applicable law, including federal securities laws.” [SEC]
The SEC’s really going for it lately. It’s charged Justin Sun of Tron with issuing unregistered securities — the TRX and BTT tokens — and wash-trading those securities.
Eight celebrities have also been charged, including YouTuber Jake Paul and actress Lindsay Lohan, for illegally touting TRX and BTT without making the proper disclosures. You have to say what you’re being paid to tout for securities, as Kim Kardashian found out previously. [SEC press release; complaint, PDF]
Paul, Lohan, and four of the other celebrities agreed to pay a total of $400,000 to settle the charges. Sun did not settle. Instead, he tweeted that the charges lack merit. So, he’s going to fight this? [Twitter, archive]
Signature Bank has been sold! Well, mostly. Flagstar Bank has acquired most of Signature’s deposits and some of its loans. Flagstar did not acquire $4 billion of deposits from Signature’s crypto operations — those are being left with the FDIC. The Signet inter-crypto-exchange network is also being left behind. [FDIC; Bloomberg]
The FDIC anticipates losses on its insurance fund of up to $2.5 billion. Approximately $60 billion in likely-bad loans will remain in the receivership for later disposition by the FDIC.
Senator Warren wrote another one of her letters to bankers, this time to Joseph DePaolo, the former CEO of Signature, on March 15. Warren asks DePaolo to describe the full scope of his lobbying efforts to roll back Dodd-Frank. She also wants to know details of executive bonuses, including if DePaolo received bonuses related to his efforts to limit the regulation of Signature. [Warren, PDF]
In 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act, scaling back Dodd-Frank regulations. The Act exempted mid-size banks with under $250 billion in assets from strict regulatory scrutiny. By the time Signature collapsed, it was over the old threshold of $50 billion, but under the new one. Warren sees this as the main cause of Signature’s failure.
Patrick McHenry is chair of the House Financial Services Committee, which is investigating the collapse of Signature and SVB. Signature threw a fundraiser for McHenry 10 days before it collapsed. McHenry’s campaign has said it won’t process any of the donations from the event. [Bloomberg]
The Wall Street Journal tells the story of the last days of Signature. “On Sunday afternoon, March 12, the Fed told Signature that it wouldn’t lend it any more money.” [WSJ]
Why was Signature shuttered? Maybe it was insolvent, but insolvency isn’t the only reason regulators take over a bank. Dirty Bubble suspects the takeover relates to misuse of Signature’s Signet payment network. As well as FTX, the bank “collected a laundry list of other bad actors in the crypto space despite their allegedly strict KYC practices.” [Dirty Bubble]
After the demise of Silvergate and Signature, US crypto firms lament that they can’t find new banking partners. CoinDesk asked several banks about crypto — and those that bothered replying said they didn’t want crypto customers. [Bloomberg; CoinDesk]
The Kraken crypto exchange will no longer support ACH transfers following the implosion of Silvergate. “Beginning March 27th, you’ll no longer see a deposit option via Plaid or withdrawal option via ACH Silvergate.” [Twitter; Reddit; CoinDesk]
The Australian Prudential Regulation Authority has told banks to improve their reporting on crypto assets and provide APRA with daily updates. [AFR]
The Federal Reserve has just published its full order denying Custodia Bank’s application for an account at the Fed. We’ll detail this more next time, but we’d summarize it as: “no way are we letting you bozos near the financial system.” [Federal Reserve, PDF] (Update, April 9: Our Custodia report is finally out!)
FTX US says that FTX Digital Markets (FTX DM) — FTX’s Bahamas entity, whose main practical role was to fund Sam Bankman-Fried’s partying — is a legal and economic “nullity,” and that its bankruptcy should just be folded into the US proceeding in Delaware.
The joint provisional liquidators (JPLs) in the Bahamas have apparently been threatening avoidance actions over payments made by the entities in US bankruptcy. The JPLs also applied in the Bahamas for a ruling that FTX US does not own “core assets.”
FTX US is asking Judge Michael Dorsey for declaratory judgments that FTX DM has no ownership interest in FTX’s cryptos, money, intellectual property, or customer information. In an adversarial preceding, FTX wants the court to assert that the assets lodged under the Bahamas unit were “fraudulent transfers,” and are therefore rightfully owned by FTX US. [Complaint, PDF]
We covered the tale of FTX’s very dodgy Bahamas entity previously. FTX US had reached an agreement with the JPLs, but that agreement appears to have failed.
The US Trustee is appealing Judge Dorsey’s refusal to appoint an examiner in FTX. The bankruptcy appellate panel — three bankruptcy judges from another district within the circuit — will hear that appeal. [Doc 1123, PDF]
The FTX bankruptcy estate is set to get back $404 million from Modulo Capital, a hitherto-unknown Bahamas hedge fund that received $475 million in seed capital from Sam Bankman-Fried in 2022. The court needs to approve the deal. [Bloomberg]
Crypto is really a large derivatives market propped up by an ever-shrinking spot market. Traders want leverage. We predicted in December that a new crypto futures exchange would spring up to replace FTX. A new one hasn’t sprung up yet — but a number of existing exchanges are thinking of buying FTX-owned LedgerX to do this job for them. [Bloomberg]
Image: Dont Kwoff
The latest from David and me! In this edition:
“In five years a number of banks will not be around because of blockchain technology.”
~ Joseph DiPaolo, CEO, Signature Bank, 2018
Crypto gets its wish — freedom from the corrupt and filthy fiat currency system! Silvergate and Signature, the two main crypto banks in the US, are gone.
After Silicon Valley Bank collapsed on Friday, March 10, US regulators worried about Signature’s concentration of large deposits that exceeded the FDIC insurance limit. Signature’s customers noticed too. They pulled billions of dollars in deposits from Signature later that same day.
(Morning Brew has a good video explaining the process.) [Twitter, video]
New York regulators shut down Signature on Sunday, March 12. Shareholders are wiped out — but all depositors, even those with deposits above the FDIC $250,000 threshold, will be made whole. [Federal Reserve; NYDFS; FDIC]
The New York Department of Financial Services took control of Signature Bank pursuant to Section 606 of the New York Banking Law. Frances Coppola suspects the NYDFS acted under clauses (b), (c), and (d): the bank was conducting its business in an unauthorized or unsafe manner, it was in an unsound or unsafe condition to transact its business, and it could not with safety and expediency continue business. [FindLaw; Twitter]
Signature had 40 branches, total assets of $110.36 billion, and total deposits of $88.59 billion as of the end of 2022 — making this the third-largest bank collapse in US history.
Leading up to the announcement, President Biden met on Sunday afternoon with Treasury Secretary Janet Yellen, Federal Reserve Vice Chair Lael Brainard, and White House economist Jared Bernstein. Biden directed them to act, and the measures were announced just after 6 pm. [FT]
The closure came as a surprise even to the bank’s management — who only found out just before the public announcement. They were all fired. [Bloomberg]
After a weekend pause, Coinbase began allowing USDC redemptions again on Monday, and USDC has recovered its dollar peg. [Twitter]
Circle says no USDC reserves were held at Signature — but the company was dependent on Signature’s real-time payment rail, Signet. This left Circle scrambling at the last moment to set up new banking. Now Circle will be relying on BNY Mellon and a new partner: Cross River Bank. [Twitter, archive; Twitter, archive]
Cross River, based in Fort Lee, NJ, is another “crypto first” bank. We’re sure this will work out great. [Techcrunch, 2022]
Both Silvergate and Signature ran inter-exchange settlement systems specifically for crypto exchanges — SEN at Silvergate and Signet at Signature. These allowed exchanges to move money between each other at any time of day or night.
One guy told CoinDesk that Signet was still up and running in some capacity on Monday. Though Circle tried it and couldn’t use it. [CoinDesk]
Coinbase had about $240 million in corporate cash in Signature, but it expects to recover the funds fully. [Twitter, archive]
Paxos said it held $250 million of its stablecoin backing reserves at Silvergate, and that it “holds private deposit insurance well in excess of our cash balance and FDIC per-account limits.”[Twitter]
With the closure of Silvergate and now Signature, crypto has been effectively shut out of the US banking system.
Exchanges, stablecoin issuers, and crypto hedge funds are all frantically hunting around for new banking — even looking outside the US. [Bloomberg]
Crypto companies are eyeing up other banks and payment processors, including Mercury, Brex, MVB, Western Alliance, Synapse, and Customers Bank — the last of which presently holds some of the reserves for the USDC and Paxos stablecoins. Or maybe JPMorgan Chase will take their calls. [The Block]
These FDIC interventions are a warning cannonball shot to every other bank in the US. Straighten up your books and don’t specialize in bad customer bases — or the FDIC will swoop in, shoot you through the head, and sell your organs.
Crypto is one such customer base. Crypto customers were already strongly correlated with money laundering and crime — and now crypto correlates with hot money that flows in and out by billions a day. That’s a hazardous kind of customer for any bank to specialize in.
This is terrible news for crypto. Losing your banking rails is the worst thing that can happen to a crypto firm. Unless the crypto industry can find reliable US dollar payment rails that regulators will put up with, crypto in the US is dead as a financial product.
A few small banks will step in to pick up where Silvergate and Signature left off. But we greatly doubt the US is going to let these banks replace Silvergate and Signature.
Good thing crypto is uncensorable and unstoppable and doesn’t need banking.
It isn’t just a liquidity problem — Coinbase has removed all Binance USD trading pairs. The only place you can turn BUSD into dollars is now Paxos itself, BUSD’s issuer. This requires you to pass KYC and AML to US standards. Quite a lot of Binance traders can’t do that — so they’re buying BTC on Binance and moving that off instead. This makes number go up, so it’s definitely good news for bitcoin. [CoinDesk]
Paysafe, Binance’s UK payments processor, has cut them off, effective May 22 this year. “We have concluded that the UK regulatory environment in relation to crypto is too challenging to offer this service at this time and so this is a prudent decision on our part taken in an abundance of caution.” Ya don’t say. [Bloomberg]
HMRC in the UK has required Coinbase to provide information on all users who received a payout of more than £5,000 in the 2021 tax year. HMRC required the same of Coinbase in 2020. If you made money on Coinbase in the UK in the bubble, you may want to double-check if you need to correct your 2021–2022 tax return. These statist jackboots aren’t going to pay for themselves. [circumstances.run; Twitter, 2020]
The US Department of Justice is probing the collapse of Terra-Luna. [WSJ]
Kyle Davies from Three Arrows Capital has a very particular understanding of 3AC’s part in the crypto collapse. “If you think about, why are people angry? It has nothing to do with me actually. They’re angry that the market went down. In terms of us, we have no regulatory action anywhere, no lawsuits at all. There’s just nothing, so I know they’re clearly not mad at anything. They’re mad because the supercycle didn’t happen maybe, I don’t know. Something like that,” Davies said from his new desk in a non-extradition country. [CoinDesk]
Silicon Valley Bank fell on Friday, following the collapse of Silvergate Bank on Wednesday and Signature Bank’s close call.
SVB made the same mistake as Silvergate: they focused on boom-and-bust customers and piled their deposits into long-term securities.
Circle had $3.3 billion in SVB — everything over $250,000 is uninsured.
USDC lost its peg over the weekend, falling below $1.
Like Silvergate and SVB, Circle grew fast in the pandemic years and piled deposits into bonds.
Large uninsured depositors tend to panic easy and yank their deposits.
Anything that grows fast, needs to be checked out in a way it hasn’t been checked out before, said Dan Davies, author of Lying for Money.
Read our full post — this one is on David’s blog. [David Gerard]
“And it seems to me, you lived your life like a candle in the wind. You’ve abruptly toppled over and you’re burning things. Now there’s one less fiat onramp, for those who’ve been orange pilled. And there is no liquidity, for all the crypto shills.”
— Rycochet on Silvergate Bank
Silvergate was the easiest crypto death pool call this week. The bank has announced it is voluntarily unwinding and liquidating, “in light of recent industry and regulatory developments” — its customers kept treating deposits as their own money or something, and regulators and legislators hated it a whole lot. All deposits will be returned in full. [Press release]
“The Company is also considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets.” We’re not sure which proprietary technology this means — Silvergate wrote off its investment in Diem, formerly Facebook’s Libra, in its preliminary Q4 2022 accounts, and it just shut down the Silvergate Exchange Network.
FDIC examiners went into Silvergate last week — as we predicted — and have been reviewing Silvergate’s books since. [Bloomberg]
The FDIC was discussing how to keep Silvergate alive — even suggesting a rescue by crypto-related investors. Yeah, right. We suspect they already asked every other bank in the US, none of whom would offer a dollar for this thing.
The big question is: what happens to the loans secured by bitcoins that Silvergate made to MicroStrategy and various bitcoin miners?
Silvergate’s total loan book, bitcoin and otherwise, was $1.4 billion as of September 30, 2022, including the infamous $205 million loan to MicroStrategy. The bitcoin loans are not “bad loans” — they’re not in default, as yet. But they were clearly stupid loans — some idiot thought that lending money to weird companies with insane business models, against an asset that was only up because of a bubble, was a good idea.
So, if Silvergate’s cut up for parts, who takes on these loans?
Loans collateralized with crypto will be a nuisance to transfer because you also need to transfer rights to the collateral (which is sitting in Coinbase Custody, the MSTR loan at least). The MSTR crypto was pledged rather than transferred — there’s a custody account for this specific deal — which is a bit less fiddly. And the bitcoin price is, of course, incredibly volatile, so the collateral itself is risky.
No sane bank is going to want to take on these loans at anywhere near face value. But we expect there will be some buyer who’s interested, at a suitable discount.
If no bank is willing to buy a loan from an insolvent bank, the FDIC tries to close the loan by negotiating with the borrower about possible early repayment. But we don’t expect these loans to end up in that position.
Silvergate Capital stock (NYSE:SI) is a dead cat bouncing between $3.00 and $3.50 today. It was $219 in November 2021. We hope the short sellers have managed to cash out. [Yahoo!]
Frances Coppola on Silvergate: “This is the story of a bank that put all its eggs into an emerging digital basket, believing that providing non-interest-bearing deposit and payment services to crypto exchanges and platforms would be a nice little earner, while completely failing to understand the extraordinary risks involved with such a venture.” [Coppola Comment; Coppola Comment]
Marco Santori, chief legal officer at Kraken crypto exchange, tells The Block that Kraken is going to start its own crypto bank any day now. With “pens with the little ball chains.” [The Block]
Kraken got itself a Wyoming SPDI charter in 2020 — that’s the same charter as Caitlin Long’s Custodia Bank, which was recently refused an account at the Federal Reserve.
Kraken Bank originally told Decrypt it was aiming to launch in the first quarter of 2021. It’s currently “planning a phased launch” in, er, 2022, apparently. [Kraken, 2020; Decrypt, 2020; Kraken, 2023, archive]
Kraken recently lost US dollar access via Signature Bank for non-corporate customers. In the meantime, Kraken has various other dollar options. The dollar channel for ordinary schlubs is via SynapseFi, “The Launchpad for Financial Innovation” — a payment processor marketing itself hard to crypto companies, though stressing that it never touches crypto itself — or MVB Bank of West Virginia, which thinks there’s a market in “Web3.” [Kraken, archive; SynapseFi; MVB Bank]
UK payments processor BCB Group is angling to take over from Silvergate as the fiat rails to the crypto industry. BCB actually has an FCA license, so the FCA considered they could pass basic money laundering muster at least. BCB launched its BLINC network in 2020; BCB’s recent publicity push is marketing for that. [Coindesk; Coindesk, 2020]
Crypto.com has lost its onramps for actual money, except euros in the European Economic Area and a GBP onramp via BCB — but no US dollar access. [CoinDesk]
Michel de Cryptadamus writes up crypto.com: “At the end of the day we will probably discover that the entire cryptocurrency industry is 5,000 shell companies run by 20 dudes in a foul smelling room in some non-extradition country.” [Cryptadamus]
Crypto miners operating on public land haven’t been paying their taxes. Federal mineral lease operators have been using natural gas to power crypto mining without paying their gas royalties. The miners have been using mobile data centers in containers to evade oversight. [Office of Inspector General, PDF; Gizmodo]
Bitcoin miner Riot Platforms, née Riot Blockchain, has now filed its delayed 10-K for 2022 after the SEC told Riot to restate its accounts. There isn’t a lot that’s exciting here. The bitcoin mining business is knife-edge, bitcoin prices are down, and governments and the general public increasingly loathe bitcoin miners. Riot is branching out into selling its expertise in data center power distribution. Risks to Riot’s business include a pile of lawsuits against executives and directors concerning “allegedly false and misleading statements made in prior securities filings.” [SEC]
At the March 7 hearing in the bankruptcy of Voyager Digital, Judge Michael Wiles approved the purchase of Voyager assets by Binance US — assuming Binance US can pass various regulatory hurdles. (LOL.) [Doc 1159, PDF]
SEC staff think Binance US is likely an unregistered securities broker, but their objections weren’t specific enough to convince Judge Wiles to stop the sale. [WSJ]
In the hearing, Binance stressed that it really wants personal information, such as social security numbers, for all Voyager customers. Not just the ones moving to Binance US, but all of them: “Data is at the heart of the deal.” Judge Wiles was not impressed and said that SSNs from the Voyager customers who didn’t go to Binance would definitely not be a thing that Binance got. [Twitter]
The Financial Conduct Authority is hitting more UK crypto ATMs, this time in east London. No crypto ATM operator in the UK is registered with the FCA for anti-money laundering purposes, so all of them are illegal. [FCA]
In India, the Financial Intelligence Unit of the Ministry of Finance is now requiring crypto-asset businesses to register with the FIU as reporting entities under AML laws. They also have to do basic know-your-customer — which they weren’t obliged to do before. Local crypto companies are actually positive about this move. [Gazette of India, PDF; CoinDesk]
In the US, the Public Company Accounting Oversight Board warns that crypto exchange “proof of reserves” statements are meaningless garbage. [PCAOB]
FTX in bankruptcy wants to redeem Alameda’s GBTC shares for the bitcoins backing them. Grayscale said no, so FTX is suing for redemption. Remember that Grayscale could now redeem GBTC any time they like — they just choose not to. [Press release]
Easy Money by Ben McKenzie and Jacob Silverman is available for preorder! The release date is July 27. [Amazon US; Amazon UK]
Image: With apologies to Alex Shaeffer.
This is our second post this weekend! You’ll find our latest on the crypto collapse on David’s blog. [David Gerard]
Also, please support our work via Patreon, if you haven’t already. Our stories are free to read for everyone, but if you want to help us get the word out, become subscribers. Links in post!
In this episode:
“I like the Bernie Madoff test: does this have a higher return than Bernie Madoff promised? If so, it’s probably a scam!”
— HappyHippo
Amy wrote about why Bitcoin would rather continue contributing to the destruction of the planet than switch to proof of stake. [MIT Technology Review]
Amy was also quoted in Cointelegraph talking about stablecoins, mostly BUSD. [Cointelegraph]
David did a fun podcast with C. Edward Kelso back in November, about FTX exploding and the ongoing forest fires in the world of pretend nerd money. He also did a video in November with El Podcast. [Anchor.fm; YouTube]
What’s next for crypto’s favorite bank? Will a team of FDIC agents storm Silvergate? The market is expecting an unfriendly resolution. The bank’s stock (NYSE:SI) is 95% down on its one-year price and is still being heavily shorted.
We wrote up Silvergate’s current problems on Thursday. One of the many ways that Silvergate screwed itself over was by putting cash deposits into long-term treasuries. When their panicky crypto customers needed their money, Silvergate had to sell bonds at a loss of $1 billion in Q4 2022. If they had just bought one-month T-bills, they would have been better off — but those don’t pay as much interest.
Silvergate has paid back its $4.3 billion loan from FHLB-SF, though. [American Banker]
What we still don’t know is who pressured Silvergate to pay back the loan immediately. It’s utterly unclear why they had to liquidate a chunk of mildly underwater securities to pay off FHLB-SF instead of rolling over the advances.
How did Silvergate end up in this situation in the first place? Greed. A banking charter is a literal license to print money. But that wasn’t enough for them. So Silvergate CEO Alan Lane, who joined the bank in 2008, got into cryptocurrency because crypto was an under-served customer base. But Silvergate didn’t stop to ask themselves why it was under-served. Anyway, look at all this free money!
Worse than that, Silvergate de-diversified — they got rid of those tawdry and tedious retail deposits and mortgages that the bank had focused on since the 1980s. This left them at the mercy of the sector crashing, or one large customer collapsing.
Frances Coppola said: “The problem is not the business model, it’s the customers. If your customers are volatile, you’re at risk of runs. And if your customers are fraudsters, you’re at risk of lawsuits.” [Twitter]
On Friday afternoon, Silvergate made a “risk-based decision” to shut down its inter-crypto-exchange payments network, the Silvergate Exchange Network (SEN). [Silvergate website, archive]
This was a major part of Silvergate’s business. The SEN allowed real-time transfers of real money, any time of day or night, which crypto companies loved. It helped Silvergate attract billions of dollars in deposits from crypto exchanges and stablecoin issuers.
Signature Bank’s similar Signet platform is still up and running, for some reason.
Moody’s just downgraded Silvergate’s credit rating for borrowing from B3 to Ca. This is Moody’s second-lowest grade: “highly speculative and are likely in, or very near, default, with some prospect of recovery in principal and interest.” [Bloomberg; Moody’s, PDF]
MicroStrategy has a loan to pay off to Silvergate — or its successor — by Q1 2025. “For anyone wondering, the loan wouldn’t accelerate b/c of SI insolvency or bankruptcy,” says MicroStrategy. [Twitter]
The MicroStrategy loan is not delinquent — and it has nothing to do with Silvergate’s present crisis. But this loan, and similar loans to bitcoin miners, are part of the thinking that got Silvergate here. If you’re making loans secured by bitcoins at bubble prices, then you’re an idiot.
There were two banks critical to US crypto. Silvergate on the West Coast and Signature Bank in New York. With the potential collapse of Silvergate, that means $750 billion per year in USD transfers between crypto exchanges is gone. Now it’s all on Signature.
Signature Bank’s 10-K for 2022 is out. [Business Wire; 10-K, PDF]
Crypto was one-quarter of deposits to Signature in Q3 2022. When FTX crashed in November, crypto companies were caught short and had to withdraw their dollars in a hurry.
Signature could weather this rush because they were diversified, unlike Silvergate. They then claimed in December, and later in their 10-K, that they were totally trying to get out of crypto anyway. The January letter from the Fed, the FDIC, and the OCC warning banks to stay away from crypto probably helped push this opinion along.
(We wonder slightly where all these crypto exchanges are going to get US dollar banking now. If you have any thoughts, let us know!)
In 2022, Signature’s deposits declined $17.54 billion or 16.5% to 88.59 billion. Most of that ($12.39 billion) was crypto deposits leaving the bank. At the end of last year, the bank’s crypto asset deposits totaled $17.79 billion, or 20% of its deposits.
Unlike Silvergate, Signature doesn’t lend money to the crypto industry, nor do they have loans secured with crypto. Their relationship with crypto clients is only US dollar deposits and their Signet platform.
But Signature’s stock price (NASDAQ:SBNY) is being dragged down with Silvergate’s. SBNY is 64% down on its one-year price.
The Wall Street Journal got hold of some Tether emails. Tether “intermediaries” used faked companies and shell accounts in 2018 to skirt the Bank Secrecy Act and move money for terrorists. Oops. [WSJ]
One of those intermediaries was a major USDT trader in China. On a list of several accounts created for use by Tether and Bitfinex, another account was in Turkey and was allegedly used to launder money raised by Hamas.
Elsewhere, the sentencing of Tether/Bitfinex US money mule Reggie Fowler has been adjourned again. It’s now scheduled for April 20 at 3:30 p.m. ET. [Twitter]
Voyager Digital went broke because a single unsecured loan to Three Arrows Capital was over a quarter of their loan book, and then 3AC went bust. The Unsecured Creditors’ Committee has prepared a report on Voyager’s loan practices in general, but especially that one fatally stupid loan. [Committee Report, PDF]
Voyager’s rewards program was run at a substantial loss — it was “primarily implemented as a marketing tool.” So Voyager implemented the lending program to fund its rewards program.
Evan Psarapoulos, Voyager’s chief commercial offer, told Ryan Whooley, the company’s treasury director “we have to beef up the team and onboard/lend to riskier borrowers.”
So Voyager ran a super risky lending program. Just in 2022, 3AC, Celsius, and Alameda Research each borrowed more than 25% of Voyager’s total assets at various times. If 3AC hadn’t taken down Voyager, it would have been someone else.
Voyager’s risk committee met through 2022, though Voyager executives didn’t believe the committee had the power to overturn decisions by Psarapoulos or CEO Steve Ehrlich.
Various borrowers sent varying amounts of information to be able to borrow from Voyager. Genesis sent audited financials. Galaxy sent unaudited financials. Celsus and BitGo sent balance sheets. Wintermute sent income statements.
But 3AC sent only a single-sentence statement of their net asset value and had a half-hour phone call with Voyager. Here is the complete text of the letter from 3AC that let them borrow a quarter of Voyager’s assets:
AUM Letter PRIVATE & CONFIDENTIAL
Three Arrows Capital Ltd. (the “Company”)
1-January-2022
To Whom It May Concern,
We confirm the following for Three Arrows Capital Ltd as at 1-January-2022 in millions of USD.
NAV 3,729
On behalf of Three Arrows Capital Ltd.[signed]
Kyle Davies
Director
Voyager sought out a relationship with 3AC in particular because of “the prestige that 3AC had at the time in the industry.” So 3AC could set its terms. It only wanted to borrow without providing collateral, and, incredibly, it refused to provide audited financial statements.
Psarapoulos figured 3AC was safe because Genesis had lent to 3AC and Voyager thought Genesis’ diligence process was robust. Ehrlich said refusing to provide financials was “not uncommon for hedge funds.”
Voyager’s first loan to 3AC was on March 8, 2022. Two months later, Terra-Luna collapsed.
Tim Lo from 3AC told Voyager in May that 3AC had lost only $100 million in the Terra-Luna collapse. But on June 14, 2022, Lo told Psarapoulos that 3AC directors Zhu Su and Kyle Davies had disappeared, and things were “in bad shape.”
Voyager recalled all its loans. 3AC returned no assets. On June 24, 2022, Voyager issued a notice of default. 3AC entered liquidation on June 27. Voyager filed for Chapter 11 on July 6.
In other Voyager bankruptcy news, Judge Michael Wiles said the SEC had asked him to “stop everybody in their tracks” with its claims that Voyager’s internal VGX token may have been a security. The SEC needs to explain its claim and how to address its concerns. [Reuters]
The Department of Justice, the FTC, New Jersey, and Texas object to wording in Voyager’s latest proposed confirmation order that might purport to restrict government action against Voyager. [Doc 1134, PDF; Doc 1135, PDF; Doc 1136, PDF]
NovaWulf put in a bid to start a new Celsius company with actual lines of business and issue shares to Celsius creditors. This is now the official Stalking Horse bid. NovaWulf hopes to get the new company up and running by June 2023. We think the plan is a hope-fueled bet on crypto bubbling again, but it’s this or liquidation. [Doc 2150, PDF; Doc 2151, PDF]
Celsius, the UCC, and the Custody ad-hoc group want the court to let them put to creditors a settlement that would get Custody holders “72.5% of their eligible Custody Assets on the effective date of the Debtors’ Plan.” [Doc 2148, PDF]
A 60-day stay, with further discovery, has been agreed upon in the KeyFi v. Celsius suit and countersuit. [Stay order, PDF]
Celsius is moving to compensate cooperating witnesses for their time and effort — both their past help to the examiner and further help Celsius may need going forward — in the cause of recovering money for creditors. [Doc 2147, PDF]
Things have been going downhill for Silvergate ever since FTX blew up in November. The latest red flag: Sivergate missed the deadline for its annual 10-K filing.
Silvergate’s crypto customers withdrew $8.1 billion in November when FTX collapsed. The bank was technically solvent — it had loans as assets on its books, such as its bitcoin-secured loans — but it didn’t have the cash to give the customers their money back.
So Silvergate started rapidly selling assets, taking a big hit in the process. It also borrowed in the wholesale market as well, including a $4.3 billion advance from the Federal Home Loan Bank of San Francisco.
Now it has to pay that money back.
Bank failures in the US are rare. But when a bank does fail, the FDIC moves quickly to protect depositors. We would be unsurprised if a team of FDIC agents was to quietly descend on the La Jolla bank in the near future.
Our full write-up is over on David’s blog. [David Gerard]
I just got a story published in MIT Technology Review on why Bitcoin will likely never move to proof of stake. [MIT Tech Review]
Since Ethereum migrated to proof of stake, that’s got more people asking, “Why is it necessary for Bitcoin to consume an entire country’s worth of energy?”
Bitcoin is decentralized in theory only and the folks who control the code are fiercely tied to keeping Bitcoin in its original form for completely irrational reasons.
Bitcoin Cash in 2017 was the last attempt to make any reasonable update to the Bitcoin reference code — and BCH ended up just another altcoin.
Bitcoin purists still refer to Bitcoin Cash as a “rebellion” and a “corporate takeover” as opposed to a sincere effort to reduce congestion on the network.
Now that lawmakers and regulators are getting more fed up with crypto, the pressure for Bitcoin to reduce its CO2 footprint will only increase.
“Sam Bankman-Fried walks into the courtroom. his pants split with a sound like thunder and guns and cocaine spill out all over the floor. he spins around and punches a security officer hard in the face sending him flying. he turns, sits down calmly on his chair and says, to thunderous applause from the fans gathered to hear his famous catchphrase, ‘OK your honour, here’s what I think happened’”
— Hammerite
The criminal indictment against Sam Bankman-Fried has been updated, with a superseding indictment on February 23. [Superseding indictment, PDF]
The new charges are clearly informed by the cooperation of Sam’s former co-conspirators — and by his crime confession tours in the press and on Twitter.
The Federal Election Commission is now listed as a victim of Sam’s fraud, with allegations that SBF tried to buy influence over crypto regulation in Washington.
The indictment details all the tricks that Sam (allegedly) pulled to influence both Democrats and Republicans, in concert with other FTX executives — and how he tried to conceal his influence.
Other new allegations include bank fraud. The act of misleading a bank in the course of business is a crime all by itself — such as when you accept money in the name of one entity (Alameda) for another entity (FTX), or when you set up a shell corporation (North Dimension) and lie to your bank (Silvergate) about what that shell does.
Sam also used Alameda to fill a $45 million hole in FTX US. He gave Alameda a $65 billion credit line, which allowed it unlimited access to customer funds on FTX. Customer and company funds were thoroughly commingled.
The indictment doesn’t specify the cause of the hole in FTX US, but Sam has repeatedly claimed that FTX US was solvent.
Sam ultimately controlled both FTX and Alameda, even after claiming to have stepped away from Alameda.
The indictment also lists billions of dollars worth of assets that have been forfeited, including multiple SBF accounts at Binance.
FTX and its subsidiaries was never a legitimate business. It was Sam’s piggy bank.
The New York Attorney General’s office is suing the CoinEx crypto exchange. The NYAG alleges that CoinEx sold securities and/or commodities, did not register with the CFTC or SEC, and misrepresented itself as registered. [Press release; Complaint, PDF; Affidavit of OAG Detective Brian Metz, PDF]
CoinEx, which is based in Hong Kong, has responded by barring all US citizens. You have until April 24 to get your cryptos off the exchange. [Twitter]
New York alleges that CoinEx offered to New York customers various cryptos that are securities — AMP, LUNA, RLY, and LBC — while the exchange was not registered to deal in securities.
AMP is the token of Flexa, who want to use it to sell burritos. LBC is the token of video site LBRY, which the SEC recently had a slam-dunk win against in court, finding that it was absolutely the security it clearly was. Luna is the twin coin of TerraUSD, which crashed all of crypto last May.
New York says these tokens are all securities under New York’s Waldstein test: “any form of instrument used for the purpose of financing and promoting enterprises, and which is designed for investment, is a security.” They say the tokens are also securities under the federal Howey test — as LBC was recently shown to be.
It happens to be a violation of New York commercial law to call yourself an “exchange” if you offer trading in securities or commodities and you’re not registered with the CFTC or SEC.
CoinEx also failed to respond in any way to a previous NYAG subpoena — and, per General Business Law §353(1), failure to comply with a subpoena is prima facie proof that the subpoenaed entity “is or has been engaged in fraudulent practice.”
New York wants CoinEx to block New York from its website, pay restitution, disgorgement, and costs, “and provide New York investors with the option to rescind their transactions.”
New York is bringing a “special proceeding” — it wants the court to rule on its filing. “A special proceeding goes right to the merits. The Court is required to make a summary determination upon all the pleadings, papers, and admissions to the extent that no triable issues of fact are raised.”
Why did New York go after CoinEx in particular? This complaint is detailed, but it also looks like a template. We suspect this may be the first of many such complaints against crypto platforms. CoinEx ignoring the subpoena probably annoyed New York a lot too.
The SEC previously called out each of the tokens on CoinEx that the NYAG names as securities:
Binance US has delisted AMP. But Coinbase still lists AMP and RLY. Gary Gensler has been saying for a while that he thinks nearly all crypto tokens are securities and that Coinbase should register with the SEC.
Coinbase’s Q4 earnings report is out, as part of its 10-K annual report for the year ending December 31, 2022. Trading volumes are down even further, and they’re still losing money. [10-K]
As a public company, Coinbase has to put on a happy face for investors — but they’ve been bleeding money for a year now. Net loss for 2022 was $2.625 billion, per GAAP. The COIN stock price has gone down 70% in the past 12 months.
Coinbase would prefer you to look at non-GAAP “adjusted EBITDA,” which comes out to a loss of only $371.4 million. Their “adjusted EBITDA” excludes stock-based compensation expenses in particular. Yes, we’re sure your numbers look better if you exclude the bit where you have to pay your employees.
Coinbase makes its money from (1) BTC and ETH trading, and (2) their share of the interest on the USDC reserve. Also, the majority of their volume comes from a few large customers. So Coinbase would extremely much like to diversify.
CFO Alesia Haas said in the investor earnings call: “Our fourth quarter net revenue increased 5% quarter-over-quarter to $605 million. This was driven by strong growth in our subscription and services revenue.” She means that Q4 revenue was only up because of interest on USDC. [Coinbase, PDF]
Coinbase wants to list every token going — even as many of the hottest tokens are blitheringly obviously securities under the Howey test. Coinbase has spent the past several years helping their very good venture capital friends such as a16z dump their bags on retail.
Coinbase goes on at length about the amazing ambiguity in what constitutes a security under US law. Who can even know what might be deemed a security tomorrow? It is a mystery.
Sure, the Howey test is simple and broad, and sure the SEC has won every case it’s ever brought where it claimed a given crypto was a security. But do you feel lucky?
The 10-K even includes a list of tokens Coinbase trades that the SEC has already said are securities! Coinbase questions whether these tokens are really securities, and confidently asserts that “Despite the SEC being the principal federal securities law regulator in the United States, whether or not an asset is a security under federal securities laws is ultimately determined by a federal court.”
This is true. But it’s also true that the SEC has won every single time. And the consent orders in these cases — because almost nobody was stupid enough to take their case to trial — note that the tokens in question were always offerings of securities. It wasn’t a court finding that made the token a security.
But Coinbase is desperate to diversify and makes it clear that they really want to risk their backsides on this business line of maybe-securities that don’t even make them a lot of money.
The SEC shut down Coinbase’s Earn staking product in 2022 before it could be launched. Haas explained in the analyst call why Coinbase thinks its staking product isn’t a security: “we are passing on rewards directly from the protocol. We are not establishing an APY, we are not establishing the reward rate. That is established at the protocol level. And then we are passing that through and collecting a fixed commission on that amount.” We guess we’ll see if the SEC concurs. [Coinbase, PDF]
Coinbase literally lists Satoshi Nakamoto as a risk factor for its business:
“the identification of Satoshi Nakamoto, the pseudonymous person or persons who developed Bitcoin, or the transfer of Satoshi’s Bitcoins”
FTX Japan K.K. users are getting back 100% of their cryptos. Users in other jurisdictions are likely to get cents on the dollar, if that. This is because the US crypto lobby viciously fought any sensible regulation for years — but Japan locked crypto down hard after Mt. Gox exploded in 2014. Taste the freedom! [Bloomberg]
Galois Capital, a real-money hedge fund that thought they’d get into some crypto, shuts its doors after losing $40 million, half its assets, in the collapse of FTX. Whoops! [Twitter, FT, archive]
The Bank for International Settlements — the central bank for central banks — reports that the fall of FTX didn’t have much impact on the rest of the financial world: [BIS bulletin, PDF, Coindesk]
“Nevertheless, despite crypto’s large user base and the substantial losses to many investors, the market turmoil in 2022 had little discernible impact on broader financial conditions outside the crypto universe, underlining the largely self-referential nature of crypto as an asset class.”
Caitlin Long’s Custodia Bank was refused an account at the Kansas Fed. Custodia appealed the decision. The Federal Reserve Board has looked at Custodia’s appeal and told them to go away. [Federal Reserve]
We’ve mentioned previously that the Canadian Securities Administrators (CSA) is introducing new rules for crypto exchange registration in the wake of the collapse of FTX. The new regulations, which will apply in all provinces, have been released:
These apply to any exchange with Canadian customers, including non-Canadian exchanges. [Press release; OSC, PDF]
The Financial Action Task Force, the multi-country advisory group set up to combat money laundering, is not happy that its rules on crypto traceability, such as the travel rule, have not been implemented sufficiently widely. At the FATF Plenary on February 22-24, “delegates further agreed on an action plan to drive timely global implementation of FATF standards relating to virtual assets.” [FATF]
The International Monetary Fund has put out a paper, “Elements of Effective Policies for Crypto Assets,” with guidelines that any country that ever might want to hit up the IMF for a loan would be well advised to follow — “amid the failure of various exchanges and other actors within the crypto ecosystem, as well as the collapse of certain crypto assets. Doing nothing is untenable as crypto assets may continue to evolve despite the current downturn.” [Press release; paper, PDF]
Hong Kong’s Securities and Futures Commission is consulting on licensing requirements for crypto exchanges to be allowed to sell to retail customers. Hong Kong wants safe custody of customer cryptos — they’re not demanding third-party custodians, an arms-length subsidiary will be sufficient — KYC, cybersecurity, accounting and auditing, risk management, AML, and prevention of market misconduct. So, the very basic requirements of being a financial institution. Responses should be in by March 31. [SFC; SFC, PDF]
In the US, the SEC got a lot of stick for not going after crypto harder in the bubble. Then it came out that the Blockchain Eight group of representatives had written to Gary Gensler telling him to back off. Now the legislature has demanded action, and Gensler is delivering. Here’s how the Blockchain Eight got the opposite of what they wanted. [The American Prospect]
“Gensler also made clear that he has been grappling with the same question as many of the rest of us: What, exactly, is the point of crypto?” [Intelligencer]
John Naughton on the latest UK Treasury crypto consultation paper. “The second lesson is that permissionless blockchains can never be allowed within the financial services sector.” [Guardian]
97% of Voyager creditors have voted for Binance to buy Voyager Digital! We think it’s unlikely that regulators will let the deal go through, and Binance US doesn’t have the money to cover all those liabilities to Voyager customers — but hey, who knows? [CoinDesk]
FTX in Chapter 11 is suing Voyager Digital in Chapter 11 for the return of a loan that Alameda paid back to Voyager just before it went into bankruptcy protection. FTX, Voyager and both companies’ Unsecured Creditors’ Committees have come to a settlement! An ad-hoc group of Voyager creditors objects to the deal. [Doc 1048, PDF; Doc 1084, PDF]
The Voyager UCC has subpoenaed the ex-top brass of FTX for depositions — Caroline Ellison, Gary Wang, Sam Bankman-Fried, Sam Trabucco, and Daniel Friedberg. The notices to the court don’t detail what the UCC wants to ask — just that they are asking. Voyager’s link to FTX is the huge pile of FTT that the company counted as part of its assets. [e.g., Doc 1018, PDF]
SBF’s lawyers have already moved that the subpoena was deficient because it was handed to Sam’s mom Barbara Fried and not into Sam’s own hands personally. [Doc, PDF]
Caisse de Dépôt et Placement du Québec (CDPQ) was the pension fund that invested USD$150 million into equity in Celsius Network. Executive vice-president and CTO Alexandre Synnett, who was the executive involved in the Celsius investment, “left the organization on his own volition about two weeks ago,” said CEO Charles Emond in the 2022 earnings call. CDPQ will not be touching crypto going forward. [BetaKit; The Logic, paywalled]
Bitcoin miners are diversifying because mining is sucking as a business. Riot Blockchain has changed its name to Riot Platforms. [Coindesk]
Crypto firm Phoenix Community Capital and its founder Luke Sullivan, with links to various UK parliamentary groups, appears to have vanished. Some of the firm’s assets and its name appear to have been sold to a new company run by an individual called “Dan,” who has told investors it has no obligation towards them. [Guardian]
Data Finnovation, who took out BUSD, now looks into weird bridging on Tether. [Medium]
Image: Coinbase CEO Brian Armstrong is being patted down with a makeup sponge as a big green screen looms behind him. Fortune
Amy Castor 
