News: Tether extends doc deadline, resumes printing; GBTC’s premium melts away; Ken Kurson pardoned

We are three-quarters of the way through the first month of the new year. We have a new president in the Whitehouse, and people are getting vaccinated—a glimmer of hope at the end of a long dark tunnel. I’m doing some volunteer work for VaccinateCA, making calls to pharmacies. (I saw @patio11 tweeting about the project and wanted to contribute.)

Maybe toward the end of 2021, we’ll see more in-person crypto conferences, but for now, it looks like Coindesk’s big money-maker Consensus will be virtual again—only $50 to register compared to $2,500 for the real thing in past years. Currently, bitcoin is trading at around $32,000 after climbing to an all-time high of nearly $42,000 earlier this month, and Tether is closing in on $25 billion worth of tethers.

A reminder that I have a Patreon account. If you find my work useful, informative, entertaining, please become a subscriber for as little as $5 a month. I could certainly use the support.

Tether needs 30 more days, restarts presses

Jan. 15, the big document deadline day for Bitfinex/Tether in the NY AG fraud investigation, came and went. On Tuesday, after a three-day weekend, Tether’s law firm requested a 30-day extension to give them more time to turn over documents. The request was on behalf of all parties, so NYAG was apparently okay with this.

We won’t get another status update until mid-February. Until then, Tether has agreed to maintain the status quo, meaning the injunction is still in effect, and Bitfinex cannot dip into Tether’s reserves. (Court filing)

For now, it’s back to business as usual. After what appeared to be a short reprieve, Tether is once again printing tethers with abandon. (On Jan. 19, Tether printed another 400 million USDT.) They literally can’t stop, won’t stop, because they are too deep into the game.

In lieu of an audit, which would put this whole matter of “Are tethers backed?” to rest, Tether continues to recruit reporters, bank execs, and other gullible parties to profess to the world that tethers are fully backed. Meet the next actor in this ongoing charade: Gregory Pepin, Deltec Bank’s deputy CEO. Deltec is an offshore bank in the Bahamas where Tether has been doing its banking since 2018

“Every tether is backed by a reserve and their reserve is more than what is in circulation,” Pepin told Laura Shin on the Unchained Podcast. “We can see it firsthand, so I can confirm that,” he said, while repeatedly dismissing the anonymous “Bit Short” article,” mentioned in my last newsletter, as FUD.

Tethers are fully backed, but backed with what? Before they were called tethers, realcoins were supported by “one-to-one fully auditable stores of dollars,” according to a July 2014 article in the Independent Investor. “The bearer of these realcoins will have the first right to redeem them for subsequent U.S. currency.”

A reasonable assumption at this juncture is that tethers are backed by loans to third parties, bitcoins, equity in an offshore bank, a pile of shit coins, and increasingly fewer real dollars.

So far, we’ve heard from Stuart Hoegner, Paulo Ardoino, and a reporter from The Block, all talking up Tether lately, while the triad—Phil Potter, J.L. van der Velde, and Giancarlo Devasini—have slid off into the hills. (Granted, Potter claims he stepped down a while back.)

Tether invests in Fleet

Tether has invested $1 million of its customer’s money into an ICO. Game publisher Exordium, the company behind Infinite Fleet—a name perhaps borrowed from a popular saline enema product—has launched a public security token offering. It is unclear if Tether invested USDT or real dollars, but public participants can put in euro, BTC, or USDT, according to a company press release. (Decrypt, Infinite Fleet)

Infinite Fleet is Samson Mow’s blockchain game. Coincidentally, Mow is the chief strategy officer at Blockstream, a company responsible for a huge chunk of Bitcoin’s source code. Bitfinex is also a Blockstream investor. These types of incestuous relationships help explain why so many Bitcoin-related company execs are so fiercely defensive of Tether.

Is Tether partnering with startup exchanges?

There is reason to suspect Tether is partnering with startup exchanges by giving them USDT. Over the past year, all kinds of smaller exchanges have been announcing sizable tether giveaways. Alex Dreyfus, CEO and founder of Chiliz, for instance, said he was preparing for a 100,000 USDT giveaway. He also admitted he is a client of Tether and Deltec Bank.

Do a search for “USDT” and “giveaway” on Twitter and plenty will come up. Kucoin is one example. (Binance, an established Tether customer, is also giving away tethers.)

GBTC’s premium melts away

Here is something that hasn’t gotten enough attention. Grayscale Investments has played a role in fueling the bitcoin bubble. By convincing institutional investors they could buy into GBTC at net asset value and sell on secondary markets at a 20% to 30% premium after a six-month lock-up, it has created a self-reinforcing market dynamic.

Accredited investors looking to take advantage of an arbitrage opportunity, bought into GBTC, pushing up GBTC assets under management, which was then used to promote the idea that institutional investors, dominated by hedge funds, were scooping up bitcoin products. All this, in turn, lured more retail suckers into the market. “Look, all the big companies are rushing in! This must be a safe bet!”

But now that premium has dried up as fewer retailers are showing an interest in bitcoin, given the price has dropped by $10,000 in recent weeks. GBTC was recently trading at just 2.8% over NAV, leaving accredited investors stuck with GBTC in an illiquid market. (Bloomberg, Trolly’s thread)

Meanwhile, it looks like Barry Silbert has left the chatroom. He stepped down as CEO two weeks ago.

Just like that, Kurson off the hook

Surprise, surprise. Former Ripple board member Ken Kurson was one of the 74 people Donald Trump pardoned at the last minute on Jan. 19. Kurson is also the co-founder of crypto rag Modern Consensus, where I worked for an intolerable six weeks. It’s just unbelievable this guy, who was criminally charged with cyberstalking, got a pardon. (Full list of pardons, NBC)

While many of Trump’s pardons went to political pals—including Steve Bannon, another pro-bitcoin guy—Kurson’s was an obvious favor to Jared Kushner, whose father, Charles, also received a pardon. Kurson’s pardon stands out, in part, because of the risk it poses to some of the women he stalked and harassed. (The Daily Beast, paywalled) 

“Suffice it to say, what he was actually arrested for was part of an ongoing pattern of abuse, revenge, & sociopathy,” Deborah Copaken, a contributing writer at the Atlantic, said on Twitter. She worked for Kurson in the past, wrote about the experience, and helped the FBI with their investigation. “All jokes aside, I am worried about my own safety. @FBI – How do you protect those who helped you but who are now totally exposed because of a presidential pardon?”

Other newsworthy bits

“How can $24 billion worth of tethers move a $650 billion bitcoin market cap?” The is an insufferably dumb question, and I explain why in a recent blog post. (My Blog)

David Gerard wrote about the history of wildcat banks and early “stablecoins” with excerpts from an 1839 Michigan Bank Commissioner report. (Gerard’s blog)

Craig Wright is at it again. He is now claiming the Bitcoin white paper and Bitcoin.com are his. He is trying to force Bitcoin.org to take down the white paper, which they now refuse to do. (Coindesk)

Balaji Srinivasan outdid himself on Twitter when he compared bitcoin, one of the world’s biggest energy hogs, to a battery, setting off the “bitcoin is a battery” meme.

Stephen Diehl, a programmer, compares crypto to a “giant smoldering Chernobyl sitting at the heart of Silicon Valley which a lot of investors would prefer you remain quiet about.” His thread went viral.

Gary Gensler is officially named for SEC chair. (NYT) We can expect greater crypto oversight from him. (Bloomberg)

Meanwhile, Allison Herren Lee was sworn in as SEC acting chair until Gensler takes over. (SEC, Decrypt)

MicroStrategy bought another 314 bitcoins for $10 million cash. Saylor’s company now holds 70,784 bitcoins acquired at an aggregate $1.135 billion. (SEC Filing, Coindesk)

Circle has surpassed $5 billion worth of its USDC stablecoin. They produce regular monthly attestations. But as Frances Coppola points out, if Circle/Centre were a bank, they would have to produce actual audited accounts.

Updated on Jan 24 with more info on Kurson’s pardon and a quote from Deborah Copaken. Also added the bit about Craig Wright.

‘How can $24B in tethers move a $650B Bitcoin market cap?’ and other mathematically illiterate questions

A question, or some version of it, that keeps popping up on social media lately is, “How can $24 billion worth of tethers move a $650 billion bitcoin market cap?”

This is “a blitheringly stupid question on multiple levels, starting with basic arithmetic,” bitcoin hater David Gerard said on Twitter. “It’s also a perennial dumb question.”

The question is being put forth by bitcoiners in an attempt to put people’s minds at ease about Tether. The thesis is that if tethers were to vanish—something that could happen if the U.S. Department of Justice were to give Tether the Liberty Reserve treatment—it would have little impact on bitcoin’s price, so you should stop worrying and keep buying bitcoin.

Someone posed the query recently on r/buttcoin. I am going to take a stab at sensibly answering the question in three parts starting with, What is market cap?

1. Market cap is meaningless nonsense

Market cap is a nonsensical number when it comes to bitcoin. It’s calculated by multiplying the last transaction price of bitcoin by the number of bitcoins in circulation—currently $35,000 x 18.6 million.

That doesn’t mean that people bought every bitcoin in existence for that price. The vast majority of people who own bitcoin bought it at a far lower price than what it is today. It also doesn’t mean that if everyone suddenly decided to sell all of their bitcoins, each bitcoin would bring them $35,000.

In fact, it doesn’t mean that bitcoin has any value at all other than the hope that some bigger dummy will stroll along who is willing to pay more for it than you did. Bitcoiners like to imagine that bitcoins are valuable because there will only ever be 21 million of them. That makes them scarce.

Beanie Babies were scarce in the 90s, too, with some fetching upwards thousands of dollars on eBay. But by the end of the Beanie Baby bubble, no amount of scarcity could make them desirable. They became worthless

Market cap is just another way to make something that is worthless appear valuable.

Market cap came out of the traditional finance world. And then websites like CoinMarketCap came along and began applying the term to bitcoin. In the stock market, market capitalization refers to the total value of a company’s share of stock. But while companies have an intrinsic value, bitcoin does not. There is nothing behind bitcoin. It’s not a company. It is not a thing. It is simply a number in a database.

Here is an example of how silly market cap is when applied to crypto. Say I create 1 million CastorCoins and start listing them on some little-known offshore exchange for $1. Suddenly CastorCoin has a market cap of $1 million dollars. Does that mean I have a million dollars? No, it does not. 

Or, as u/Ifinallycracked puts it on r/buttcoin: “If a bog roll contains 100 sheets and I manage to sell one sheet for a dollar, that doesn’t make it a $100 bog roll. Apply same logic to Bitscoin market cap. Success.”

Once you grasp that the bitcoin market cap does not mean that people have spent $650 billion on bitcoin, $24 billion worth of tethers—which represents 0.03% of the total bitcoin market cap—becomes a lot more significant.

2. Price is determined at the margins

The price of bitcoin is determined at the margins. If you want to drive up the price of bitcoin, you don’t have to buy every single bitcoin at the current price level. You simply have to scoop up the ones that are for sale. 

Money flowing into bitcoin is what keeps the price afloat. If demand increases and people are willing to pay more for bitcoin, that pushes the price up. The more dollars people throw at it, the higher BTC will go. And it doesn’t matter if you are buying bitcoin with real dollars on a banked exchange like Coinbase—or fake dollars on an offshore exchange like Binance, Huobi, or Bitfinex.

Image: CoinCompare

Right now, the latter is more prevalent—there are far more tethers flowing into bitcoin than actual dollars. In fact, 55% of all bitcoin is currently traded against tethers while only about 15% trade against real dollars, according to CoinCompare.

This is what makes the current bitcoin bubble different than the last. In 2017, when the price of bitcoin ran up to nearly $20,000, there were a lot more real dollars in the system and only 1.5 billion tethers in circulation. Now, it’s mostly tethers pushing up the price of BTC.

3. Bitcoin is illiquid

Bitcoin is relatively illiquid. According to data from Glassnodes, 78% of all bitcoin are not moving. In other words, of the 18.6 million bitcoins currently in existence, only about 4.2 million are in constant circulation.

At least 3 million bitcoin are lost because people like this guy can’t find their keys. (Just because you are the former CTO of Ripple, that doesn’t make you clever when it comes to safekeeping bitcoin.) And there are still plenty of folks holding on to their BTC in the hopes it will go stratospheric. Strong hands!

As a result, it doesn’t take a large buy or sell request to move the price of bitcoin. Printing billions of dollars out of thin air and using it to put supply-side pressure on a market as thin as bitcoin forces the prices up. Conversely, if enough people were to get panicky and rush to sell their bitcoin—weak hands!—the results could be catastrophic. Literally, the entire market cap can go to zero in a moment.

The whole point of Tether is to push up the price of bitcoin and other cryptocurrencies, and then move those assets to OTC desks and banked exchanges, where they can be turned into fiat. As @Baskee puts it: “Tether is a ladle; Bitcoin and USD are ashes and bullet casings, respectively.”

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News: Tether’s offshore Deltec Bank, the Bit Short, NYAG’s document deadline, Tether truthers compare skeptics to QAnon

Finally, another newsletter! I am trying to find a way to write a crypto newsletter that doesn’t take all day to write. This is a (failed) attempt at that. Going forward, this sporadic newsletter will assume you know a thing or two about the crypto space. (If not, read the articles I link to!)

First some housekeeping—I’ve been working to update my blog and move it over from WordPress.com to WordPress.org. My main challenge is finding a WordPress theme that I like, preferably one that is free. If you have any recommendations, please let me know.

Also, the crap butterfly keyboard on my Macbook Pro is failing me, so I’ve ordered a Mac Air with the M1 chip, which will arrive in a few weeks. I’m hoping it makes my life easier.

If you want to support my work, a reminder that I have a Patreon account. Think of it as buying me a cup of coffee, a bottle of wine, or a case of wine once a month, depending on what level you subscribe to.  

Now, on to the news, starting with Tether.

Tether conversations reveal things

I wrote two blog posts recently—these are both transcripts with annotations. If you are interested in Tether and Bitfinex, I recommend you read both, as they contain a lot of good information.  

The first is an interview with Tether frontmen Stuart Hoegner and Paolo Ardoino hosted by bitcoin maxi Peter McCormack. The point of the interview was clearly to attack the “Tether FUD.”

Remember, it’s very important that Tether keep up the illusion that real money is behind tethers and all is well in Tetherland. If the charade crumbles, so does Tether’s dollar-peg and along with it, the bitcoin market.

To that end, Hoegner is claiming that the now $24 billion worth of tethers in circulation are fully backed. What a switch. He told us in April 2019—22 billion tethers ago—they were 74% backed. The question is what are they backed with? He won’t tell us. (Deltec is their off-shore bank in the Bahamas, by the way.) 

Peter: You mentioned Deltec. Are you shareholders in the bank? 
Stuart: We don’t talk about the investments that we have on the Tether side.
Peter: Okay, so are tethers fully backed?
Stuart: Look. The short answer is yes. Every tether is 100% backed by our reserves. And those reserves include traditional currency and cash equivalents, and may include other assets and receivables from loans made by tether to third parties. 

The second transcript I wrote up hasn’t gotten as many views but it is also interesting. It’s a debate between The Block’s Larry Cermak and blogger Bennett Tomlin. They argue whether Tether is acting in good faith. Cermak thinks they are. He believes tethers are fully backed—and wants you to believe that, too.

One question we have to ask is why Cermak, who was a staunch Tether skeptic in the past, has suddenly pulled a 180 and joined the campaign to prop up Tether? Assuming good faith, it appears he has fallen for the same con one Bloomberg reporter did two years ago.

Questions around Tether’s Deltec Bank

Another curiosity that sprung up from Paolo and Stu’s interview: Who is Deltec’s banking partner? If Tether keeps its reserves at Deltec and its largest customers have accounts there too, one would think Deltec needs a U.S. bank partner to store USD. In other words, a nostro account in a foreign bank. 

This should not be a secret. When Bitfinex was banking with Noble Bank in Puerto Rico, Noble openly stated on its website that it doesn’t actually hold the money. Instead, it used BNY Mellon as its custodian.

Presumably, Deltec has a custodian, too. This might explain why the Bahamian Central bank is not reporting inflows that match what Tether claims to have in its reserves. (The central bank publishes a quarterly statistical digest that looks at the total assets that all the country’s banks are holding.)

Of course, another explanation as to why the country’s central bank isn’t showing a large inflow of funds could be that Tether doesn’t have the reserves it says it does—or else, maybe, a good portion are in BTC?

In a year-in-review video, Deltec’s CIO Hugo Rogers dropped a bomb. He said, with the straightest face you can imagine, that the bank has a “large position” in bitcoin.

“We bought bitcoin for our clients at about $9,300 so that worked very well through 2020 and we expect it to continue working well in 2021 as the printing presses continue to run hot.” (He is referring to the U.S. printing press, but we know Tether has been running hot, too.)

Hoegner denied that any of those funds were Tether’s, according to The Block.

The Bit Short

An anonymous blogger published a Medium post on Tether titled “The Bit Short: Inside Crypto’s Doomsday Machine.” It’s full of great quotes and insights, like this one, describing how Tether’s core moneymaking engine may possibly work:

  1. Bob, a crypto investor, puts $100 of real US dollars into Coinbase.
  2. Bob then uses those dollars to buy $100 worth of Bitcoin on Coinbase.
  3. Bob transfers his $100 in Bitcoin to an unbanked exchange, like Bybit.
  4. Bob begins trading crypto on Bybit, using leverage, and receiving promotional giveaways — all of which are Tether-denominated.
  5. Tether Ltd. buys Bob’s Bitcoins from him on the exchange, almost certainly through a deniable proxy trading account. Bob gets paid in Tethers.
  6. Tether Ltd. takes Bob’s Bitcoins and moves them onto a banked exchange like Coinbase.
  7. Finally, Tether Ltd. sells Bob’s Bitcoins on Coinbase for dollars, and exits the crypto markets.

And this great quote here:

“Forget the activity on the offshore exchanges for a moment, and just think of a simple mental picture. Imagine you could stand at a metaphorical booth, where Coinbase’s exchange connects with the US financial system. If you could do that, you’d see two lines of people at the booth. One line would be crypto investors, putting dollars in—and the other line would be crooks, taking dollars out.”

If you can visualize the image above with Coinbase, you can start to understand why FinCEN is so anxious to push through its proposed “unhosted” wallets rule.

Tether’s document deadline has passed

Jan. 15 was the deadline for Bitfinex/Tether to submit a trove of documents to the NYAG, which has been investigating them for Martin Act violations. A lot of folks were hoping to see a court filing drop on Friday with the NYAG taking a position on the documents that it has received. The injunction, which limits Bitfinex from dipping into Tether’s reserves, also ended Friday, according to the NYAG’s letter from Dec. 8.

(Update: This is a bit confusing. I am not completely sure if the injunction ended on Jan. 15, according to the NYAG’s December letter, or it is implicitly extended until the next court order, per the original order.)

The NYAG hasn’t filed any new court documents yet, but we are waiting anxiously. Tether says they’ve so far sent 2.5 million docs to the NYAG—I believe that’s called a document dump.

In the meantime, Tether has mysteriously stopped printing tethers. The last big print was 400 million tethers on Jan. 12, and prior to that, 400 million on Jan. 9, according to @whale_alert.

Understanding GBTC

There has been some confusion on Twitter as to how Grayscale Bitcoin Trust (GBTC) works. Grayscale doesn’t buy bitcoin directly. Grayscale customers send Grayscale their bitcoin—or cash to buy bitcoin with—and Grayscale issues shares in return. But why do the shares consistently trade at a premium to net asset value?

This November 2020 article by investor Harris Kupperman explains it well. “Think of GBTC as Pac-Man. The coins go in, but do not go out,” he said, going on to describe how GBTC functions as a “reflexive Ponzi scheme.”

Coinlab cuts a deal with Mt Gox creditors

Coinlab, a former U.S. company that has a $16 billion claim against Mt. Gox, has proposed a deal with Mt. Gox creditors over their claims. If creditors choose to go forward with the deal, they can agree to get back 90% of their BTC ahead of the settlement, according to Bloomberg.

Kim Nilsson of WizSec says Coinlab was never acting in good faith. “CoinLab was insisting on continuing to hold up the process for everyone while they litigate to try to steal everyone’s money, and had to be essentially bribed so as not to obstruct this arrangement.” (WizSec blog)

Other notable news

FinCEN has extended the deadline for comments on its proposed crypto wallet rule. Starting from Jan. 15, you now have 15 days to comment on reporting requirements, and 45 days to comment on proposed rules for reporting counterparty information and record-keeping requirements. (Coindesk, FinCEN notice)

Good-bye and good riddance. Brian Brooks has stepped down as acting commissioner of the OCC. (Coindesk.) The former Coinbase exec recently posted an editorial in the Financial Times shilling DeFi. (FT, paywalled)

The European Central Bank calls for regulating Bitcoin’s “funny business.” (Reuters)

Gary Gensler is reportedly President-elect Joe Biden’s choice to lead the SEC. Gensler is a crypto savvy guy, who taught a course on blockchain at MIT Sloan. Crypto folks can expect greater oversight from him. Hopefully, he will bring the hammer down an all those 2017 ICOs. (Bloomberg)

Tether apologists are now comparing (archive) Tether skeptics to unhinged QAnon conspiracy theorists—an example of what lengths they will go to discredit reasonable questions about Tether’s reserves. Remember, the burden is on Tether to prove they have the assets they say they do.

USDC, a U.S. regulated stablecoin issued by Circle, now has a circulating supply worth $5 billion—far outpacing that of any other U.S. regulated stablecoin.

Frances Coppola debates Nic Carter about bitcoin. (What Bitcoin Did podcast)

Bitcoin mining was partly to blame for the latest blackout in Iran. (Washington Post)

Ripple’s ex-CTO loses access to $200 million in bitcoin. “This whole idea of being your own bank—let me put it this way, do you make your own shoes?” said Stefan Thomas. “The reason we have banks is that we don’t want to deal with all those things that banks do.” (New York Times)

Bitcoin may have helped finance the pro-Trump Capital riots (Decrypt)

Twitter has banned the account of former Overstock CEO Patrick Byrne after he posted conspiracy theories relating to the Presidential election. Byrne is a longtime bitcoiner who led Overstock’s decision to originally accept bitcoin and invest in the space. (Decrypt)

Larry Cermak and Bennett Tomlin debate Tether’s solvency—transcript with notes

Richard Yan of The Blockchain Debate podcast held a debate between The Block’s Larry Cermak and Bennett Tomlin, a data scientist and blogger with an interest in fraud. Patrick McKenzie, a Tokyo-based entrepreneur, who wrote one of the best articles describing Tether to date, joined as a co-host. 

The motion on the debate was, “Is Tether acting in good faith?” Tomlin argued that no, they are not. While Cermak argued for the motion, giving Tether a generous benefit of the doubt.

Cermak is a bit of a puzzle to nocoiners these days. He has recently taken to defending Tether, stating that he believes the BVI-registered stablecoin issuer, which has so far issued $24 billion in tethers, is fully backed. In the past, he took a hard stance against Tether and its sister company, crypto exchange Bitfinex, causing them quite a bit of trouble. In October 2018, for instance, he disclosed in a tweet that Bitfinex was banking with HSBC under a shell. Soon after, the feds froze that bank account. The shell, as it turned out, was registered to Arizona businessman Reginald Fowler, who was indicted the following year on bank fraud charges.

Cermak has also admitted to owning crypto and making money in DeFi markets. He recently bragged on Twitter about gifting his fiancee $1,000 in crypto to gamble in the futures markets. Tomlin, who is working on a book on Tether, told me he does not currently own any meaningful amount of crypto. (At one point, he owned about $500 worth of bitcoin and ether.) “I want to stay as unbiased as possible,” he said.

Tomlin does a good job presenting facts in the debate. He clearly has read through all of the related court documents, and knows what’s in them. Whereas, Cermak tends to rely on “somebody told me this” type of information. His sources appear to be Tether frontman Paolo Ardoino and large Tether customers, such as OTC desks, exchanges, and high-frequency trading firms, who stand to make big profits in the crypto space.

What follows is the transcript with my annotations. I’ve removed filler words (such as uh, basically, you know, right, so, etc.). Brackets indicate words I’ve inserted for clarity. I’ve added links where appropriate and edited out most of the intro. Overall, there’s lots of good info in here, and I recommend reading the full transcript. 

Richard: Bennett, please go ahead and tell us how Tether has been acting in bad faith all this time since they started in 2014.

Bennett: The easiest way to go about this is to look at a specific example that will show many of the patterns that have persisted over this period. Bitfinex gave over $1 billion to payment processor Crypto Capital Corp without a contract or an agreement. This payment processor was not a registered money servicing business or a licensed money transmitter. This payment processor lied to the banks about what the accounts would be used for. And when the principal for this payment processor was arrested, he had in his possession, counterfeit U.S. currency and fake bond certificates

(The “principal” Tomlin is referring to is Reginald Fowler, who allegedly served as Crypto Capital’s money mule, setting up bank accounts under shell companies and moving money for Bitfinex. It is worth mentioning here that Tether and Bitfinex have the same operators: CSO Phil Potter, CEO Jan Ludovicus van der Velde, and CFO Giancarlo Devasini, who are barely heard from these days. Nocoiners refer to them as the triad.)

When this payment processor stopped responding to Giancarlo and Bitfinex’s requests to withdraw funds and the DigFinex executives believed that these funds were potentially lost, Bitfinex publicly insisted that withdrawals were working fine and there were no problems.

(DigFinex is the parent company of Bitfinex and Tether. Here is an org chart for reference. The “lost” funds included $850 million, some of it tied up in a network of 60 bank accounts set up by Fowler and some of it seized by the Polish Ministry of Justice from Crypto Capital’s Polish subsidiary, Crypto Sp. z. oo.)

However, privately, in order to combat this effective insolvency of Bitfinex, the executives of Bitfinex and Tether orchestrated a swap of multiple hundreds of millions of dollars from Tether’s bank accounts to Bitfinex in exchange for a ledger notation saying that tether now possessed the inaccessible funds at Crypto Capital, effectively making Tether insolvent.

This fact was not disclosed and Tether’s homepage and terms and conditions at this point still claimed every tether was fully backed by the equivalent currency, despite this effective insolvency. These are not the actions of good actors in the cryptocurrency space.

(The NY attorney general has been investigating Tether and Bitfinex since late 2018 for violating the Martin Act. Most of the details of what Tomlin is referring to can be found in a court filing.)

Richard: Thanks Bennett. That was very thorough. And I would say you’re probably one of our first guests that have actually prepared a statement and read from it as if this was a hearing or something. But anyway, thank you, Bennett. I definitely don’t think you are in the minority there when you accuse Tether of being in bad faith. So I’d love to hear what Larry has to say next. Larry, please go ahead with your opening statement.

Larry: First of all, Bennett’s statement was great. There’s a lot of merit to it. That being said, Tether has seen tremendous growth this year. It’s important in several different products. It’s incredibly important for the current market structure. Basically all the futures are collateralized by Tether. Now the majority of volume is coming from tether pairs, and we’ve seen legitimate growth from Tether this year. Some people argued that growth is pumped by Tether itself, where you can see similar growth in USDC and competing stablecoins. 

(USDC is a US regulated stablecoin that has also seen a lot of growth, but that growth is dwarfed by Tether, which since March 2020, when BTC plunged to below $5,000, has issued 20 billion tethers.)

There is, at least in my experience, overwhelming evidence that there is money going into Tether and there’s money being redeemed by several different parties. These parties are usually OTC desks, market-makers, and exchanges. The reason why there isn’t much public evidence of this is because these parties tend to be more on a private end and they don’t have much of a reason to actually tell people that they’re redeeming for hundreds of millions of dollars.

I do think that Tether used to act questionably and Bennett highlighted that really well. I do think that they’ve changed significantly in the past year and a half. I’ve been watching Tether for the past four years now. And the behavior has changed a lot. 

They are much more transparent publicly. They are much more transparent in their goals, how they operate. And I do think that right now, my belief is that they are fully backed. And my belief is that they are not acting in bad faith. Quite the opposite. I think they are super important to the crypto space. And I agreed that it’s important to consider the possibility that Tether might at some point stop existing. But I don’t think it’s fair to say that they’ve been acting in bad faith, especially in the last couple of years.

(Tether has not been transparent at all. In a recent podcast, Tether frontmen Poalo Ardoino and Stuart Hoegner refused to say what assets were backing tethers. However, one thing they were clear on—it wasn’t all cash.)

Patrick: If I can jump in here. Assuming, arguendo, that Tether is fully backed, Tether has said a few definitions over the years as to what constitutes backing. Under which definition do we believe that they are fully backed? What is the collateral? Where is it?

Larry: That’s a good question. I think that they are fully backed when it comes to dollars on bank accounts. Tether has the mandate to invest in super low-risk yielding opportunities. So as far as I know, the vast majority is in US dollars on their bank accounts and they don’t just have one, it’s possible. Some of it is in some bonds or really low-yield investment vehicles. I don’t believe that any of that backing is in cryptocurrencies or some kind of other more risky vehicle.

(In his recent podcast, Hoegner counted Tether’s remaining $550 million loan to Bitfinex as an asset backing Tether. In an April 2019 affidavit, Hoegner said the 2.1 billion tethers in circulation at the time were only 74% backed. Tether/Bitfinex have never said anywhere publicly that they’ve invested in bonds. Also, Tether’s terms of service says tethers are backed by “traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”)

Richard: And when we say bank accounts, are those bank accounts at Deltec Bank in the Bahamas or are those bank accounts at Deltec Bank somewhere else? Are there banks that the world doesn’t know [about]?

Larry: Absolutely. As far as I know. The last time I talked to Paolo was maybe a month ago when we were working on a stablecoin report. I asked him this question as well. He did say that the majority of funds are at Deltec and there are also some other banks that they’re working with, but only for smaller amounts. I assume that’s mostly just to make the redemptions and the transfers easier for customers. But I do think that the majority of the funds is at Deltec in The Bahamas.

Bennett: If I can ask a question, because I’ve been curious about that too, just as an outside observer, as to where the funds might be held.

The Central Bank of the Bahamas publishes a quarterly statistical digest that looks at the total assets that all the banks in the Bahamas are holding. And if you look at it, with the most recent one being released in November, you do not see any increase in assets held at Bahamian banks over the last year. Either there must be comparable outflows from somewhere else to match any inflows from tether, or there’s some reason Deltec Bank would not be counted among those statistics. Do you have any insight into why that would be?

Larry: I don’t. I really don’t know. I’ve looked into those documents as well. I’m not sure if it even encompasses all the money that is in the Bahamian banking system. I’m not sure why that is honestly.

Basically the reason why I believe that Tether is fully backed is not just because I talked to Paolo and they feed me this marketing stuff. It’s because I talked to a lot of different actors in the crypto space, those being massive OTC desks, large traders, exchanges directly, and basically anyone who deals with Tether directly, and they have redeemed tens of millions of dollars. I mean, I’ve seen proof of that.

I trust these people, and I’ve talked to so many of them at this point that it’s beyond reasonable doubt that Tether is operating as it should when it comes to redeeming money. The frequent argument that I hear from people on the other side is, why isn’t the supply decreasing at all? Basically, why is it only going up?

The simple answer is that the demand is just so much higher, and they don’t do these redemptions every week or something. They have a system, where if more money is coming in then is coming out, they obviously don’t reduce the supply. And this happens in fairly long periods of time. So that’s why it’s not happening. 

And if what you guys are conferring is that if Tether was not back fully or only had a really small amount of the backing, they would not be able to serve these redemptions. And basically without any issues, these things are happening quickly. And to the point where a lot of these large traders or institutional customers have started their own bank accounts in Deltec, just so they can make the process more efficient. 

(Paolo and Stu confirmed in their podcast that several of their customers also bank at Deltec. Yet, we have no idea what type of arrangement Tether has with its large customers, whether Tether is in fact loaning USDT to them and counting those loans as backing, or what the deal is.)

And so that’s the basis for my argument that Tether is backed. And then also just talking to Paolo and having conversations with people that are close to the business. At this point, I would be shocked to find out that it was less than 98% or 99% backed.

Bennett: I have a couple of things I want to add to that. The initial document released in the New York attorney general investigation said, at that point, the largest redemption was $24.2 million. So Do you think that Tether’s documents that they were handing over before the ex-parte order were incomplete, that the average size of the redemption has gone up significantly in the intervening two years? What would explain that dynamic? 

Larry: Oh, absolutely. I think it has gone up way significantly in the last two years, to the point where now a hundred-plus million dollar redemptions are completely normal. 

That’s because the space has just grown quite a lot. Like I said, the dynamic with Tether has changed significantly. Bitcoin used to be the main reserve currency when it comes to crypto, both for futures and derivatives. Now it’s tether and the same is happening for the pairs. It used to be all bitcoin, now it is tether. 

So Tether is much more important now. The supply is much higher and these parties are using it unquestionably because if they want to get access to futures, and these features are extremely liquid, they do have to have access to tethers. So these redemptions are definitely increasing in size. There’s no doubt about that. 

Also, one thing I would like to point out is that you have to understand that Tether obviously doesn’t want any of their information to be public. And that is not only because they are covering something shady, which could be the case, but it’s also because they just don’t want their own business information to be out there for everyone like you and me. So that’s my basic response to that. I do think that the redemptions are now significantly larger. That still means that they’re not acting in bad faith.

Bennett: There’s one other point I wanted to make there before we move on. You said that you were confident tethers were fully backed because they’ve been able to service these large redemptions. But you also said that there are more deposits actively coming then going out, which would mean to service these redemptions, until there’s a whole group of them, they could in theory, service them with a small amount in reserve and the incoming deposits, correct?

Larry: Yes. It’s hard to estimate how much they would need to have to justify this condition. So I agree with you. Again, I guess the main question here is: What do you think they’re doing with the money? Do you think they’re just taking it for themselves or what do you think they’re doing with it?

Bennett: We know from the New York attorney general investigation, that Tether executives do receive large, aperiodic payments from comingled client and corporate funds out of the Tether account. That was discussed when they were arguing for the initial injunction against them, with the limits on related party transactions. So I do think there is the possibility that money has been exfiltrated by Tether executives.

Their lawyers also argued that their mandate is not just to invest in easy yield or things like that, but that Tether has the ability per Tether themselves to keep zero in reserves and invest anywhere they see fit, including—and the lawyer made very clear that they had done this—in bitcoin and crypto assets. So it is conceivable to me that a meaningful portion of their backing is currently invested in extraordinarily volatile assets.

Larry: I think that’s definitely not true. And again, I’ve had conversations with Tether executives and talked to different people. And as far as I can tell, that’s not true. They’re not investing in bitcoin and volatile assets. They are investing in low-yielding opportunities. 

(It is interesting Cermak would say this, considering he literally wrote an article for The Block in March 2019 with the headline “Tether admits in court to investing some of its reserves in bitcoin.”)

And to your point that some of the money used to go out to some of the executives. I do agree that’s a terrible look. I think it can mostly be explained by the fact that they just had so much trouble banking themselves that they used their personal bank accounts, which is a terrible practice, I agree. I don’t necessarily think that they’re acting in bad faith, but they acted in a careless way. I don’t think at this point that they’re just taking money out of it for their own personal gain. And that’s mainly because Tether now has more than $20 billion [worth of tethers] in supply.

Even if you say that they’re yielding about maybe 0.05% or around 0.01%, that’s a lot of money and the business is really treating them well in that regard. They’ve grown significantly this year and they’re generating a lot of money from it. And that’s while Bitfinex itself, as an exchange, has struggled this year. 

Now it’s picking up again. Early this year and late last year, the volumes really dropped significantly. And that again is another argument against people that think that Bitfinex is just faking value. They’re just creating a lot of Tether, and then the volumes are going up. 

That’s definitely not the case. And the clear evidence against that is because in 2017 and 2016, Bitfinex was one of the most important exchanges when it comes to spot. Now it’s not even in the top five and the volume has dropped significantly compared to other exchanges. So I don’t agree with that fully.

Patrick: It is extremely curious that their lawyers wouldn’t bring up that we only invest in low volatility as zero-custodial-risk assets when asked that in the course of investigation as to whether they were dissipating client funds and instead chose to tell the court that they had the right to invest it in absolutely anything they wanted, including cryptocurrencies. And we’re doing that. These seem difficult to square for me.

Larry: I was the one that read the document first. And I was the one that led the coverage on that first. So I know what the document said. It wasn’t as clear. It was a little bit more ambiguous. 

They’ve said they’ve previously invested on small amounts of cryptocurrencies. Again, I don’t believe that to be a significant amount. And if it was, I still believe that it was a very small amount of the total. And again, it’s hard to explain some of these things because that’s just by talking to people and understanding how Tether works in the background. 

But you keep coming back to the point that they basically can do anything, and that the lawyers don’t want to disclose what they don’t want to tell people. And that to me makes a lot of sense, right? Tether can do almost anything. It’s in their best interest not to disclose the information because they feel like the US people and the United States overall, they don’t have any jurisdiction. Tether claims to not function there. So I would say that kind of explains that.

Patrick: The jurisdictional point is an interesting one for me, because I’m not super familiar with banking regulations in the Bahamas, but if hypothetically Tether is holding large amounts of dollars at Deltec and not in the Bahamas, then the natural thing for me to assume is that they’re holding it in some sort of correspondent banking relationship elsewhere. And so it would matter a bit whether those jurisdictions would care whether the US believes that Tether is subject to a US court order.

So do we actually know what those jurisdictions are? Are they ones like, without loss of generality, Russia, which don’t care about us court orders? Or are they ones like Japan or the United Kingdom, which would happily enforce one?

Larry: I don’t think we know the details. Again, what do you think would have to happen for the money to be frozen by the US authorities?

Patrick:  A polite request to? 

(Banks don’t like dealing with crypto money, so if an onshore bank knew that it was holding Tether money, they would likely freeze the accounts. This is exactly what happened with CIBC and QuadrigaCX in Canada. And it’s why Wells Fargo cut Bitfinex off in early 2017. Bitfinex tried to sue Wells Fargo for it, but later dropped the suit.)

Larry:  Why do you think that would happen? There will have to be significant evidence of some sort of fraud or the money not being used in the right way. And we haven’t seen that yet.

(The NYAG is literally investigating Tether and Bitfinex for fraud at this moment. They have already uncovered evidence, in the form of Bitfinex hiding from its customers the fact that it lost access to $850 million in 2018, leaving the exchange insolvent.)

Bennett: I remember a case where an analyst published some evidence that Bitfinex was using global trade solutions at HSBC. And shortly after that, their accounts got shut down and they had to switch to new banking.

Larry: Oh, absolutely. And I used to be in the same boat as you are. What I realized later is that they’re doing this because they are having so much trouble finding a bank. And that’s why when they find a banking relationship that works for them, they tend to stick to it. And Deltec seems to be the one that has stuck. 

I one hundred percent agree with you. It is really weird when you see they open a new bank account, and then all of a sudden, after everyone finds out, it gets shut down. And that’s because no bank really wants to associate themselves with Tether because they’re risking way more than they would be gaining out of it. That’s just a natural response. 

(Banks have to comply with strict KYC/AML rules. If they touch dirty money, they face huge fines, and crypto money is often dirty, so naturally, they don’t want to do business with Tether, for that reason.)

And also because Tether—and again, I don’t think this is necessarily a bad faith, it could come across as that—but when they start these bank accounts, it’s because they basically are forced to. I want to make sure that everyone who listens understands my position isn’t to defend Tether. They’ve made several major mistakes before, but I do think that they’re super important to the space. And I do think that they’re acting well now. But they were in a difficult position because no one would give them bank accounts. So at that point, you really have no other choice almost.

Patrick: That’s the answer to my question on what the United States government would likely take issue with. If one assumes, arguendo, that tether has not been entirely candid with what it said to prior banking relationships, and then gotten frozen out of their accounts. That record of being less than entirely candid might not just go away because they got a new bank that was willing to say, politely, have a broader risk tolerance, not that a lawyer couldn’t speculate, but that would be a thing that I would not want in my history if I wanted a stable US dollar banking in the future.

Larry: I think that the response to that from Tether would be that they have not really been involved with a lot of the US customers directly. And the US court system doesn’t really have much of a jurisdiction over what they’re doing. I want to be clear again, I do think that something like this is possible. And I’ve warned people about it. Tether at this point is massively important to the crypto space. And if something like a black Swan event were to happen, it’s important to be ready and to be prepared to do something about it, and make sure that you don’t get completely screwed over if something like this happens. I don’t think it’s likely at this point.

(Cermak is on one hand defending Tether, and on the other, he is telling traders “to be ready” in the event something catastrophic happens.)

Richard: Can we take the debate in a different direction? Let’s talk about the fact that institutions do business with Tether. What is the nature of the business relationship between these businesses and Tether? Why do they not do business with USDC on a similar scale, for example. And when they obtain their USDTs, given the fact that Tether had this history of not being fully backed to put it politely, what kind of discount, if any, do the hedge funds or OTC desks get when they get the tethers?

Larry: They get no discount whatsoever. And that was the one point I was going to bring up as well before. If you guys believe that they’re not fully backed and if you believe that they might be acting in bad faith, why do you think there is no discount? And why do you think there is no premium? The discount only happened twice, if I recall correctly. And it was always about 10% maximum, then went back quickly. 

So why do you think that there is no premium, there is no discount. Why do you think it’s trading at par? It’s actually less volatile than USDC, for example, or at least comparable.

Bennett: Generally, if you look at the USDT/USD markets, it trades pretty even at 1:1. And there hasn’t been a major premium since, say, the end of 2018, like comparing tether to spot exchanges. And just speaking more broadly, the OTC quotes I’ve been able to see for tether do generally have it priced right around a dollar. 

I don’t think there’s any major discount in the market for tether like that. And even accepting that tether is not fully backed, I don’t necessarily think there would be a discount, so long as you believe that it’s redeemable or that, at that moment, you’ve got more need for it than you would for the comparable dollar. And so I still think even a potentially fractional reserve tether could still trade one-to-one without that being evidence of it.

Larry: I don’t agree with that myself. I agree with Bennett saying that if it’s only like 85% backed, 90% backed, they would still trade at 1:1. It’s only trading at 1:1 because there’s a future expectation that it will be back 1:1 at some point in the future. Not just because you can redeem it.

These large traders, again, they’re not idiots. They have to hedge their risks. And if they do think that at some point in the future, there might be a background on tether and they won’t be able to redeem all their money, they’re not going to even deal with it. So I don’t agree that. 

Richard: And what about the earlier part of my question? Why don’t these OTC desks do business with USDC, which also has experienced dramatic growth?

Larry: To your earlier point, and then maybe then Bennett can jump in. The biggest reason is because Tether has been the first and it has by far the biggest network effects. 

I brought this up earlier already, but the majority of futures is now collateralized by tether. And that wasn’t the case early this year before BitMEX really started to be affected. And now effectively it’s not even important anymore. BitMEX was all collateralized by bitcoin. And it was by far the largest futures exchange, the most important one by far. 

(Four BitMEX operators were indicted in October for Bank Secrecy Act violations. One was arrested, three remain at large.)

It’s not anymore. Now you have Binance, you have Huobi, you have OKex, you have Deribit, most of them are collateralized by USDT. So that dynamic itself, that shift, has already happened. And those network effects are why these OTC desks and these large institutional players have to get exposure to Tether because the products that they’re available on only function in tether. There are no futures that are collateralized by USDC.

Really the only alternative you have is bitcoin, but then you’re not trading the most liquid futures. The same thing can be said about crypto exchanges. The role of Binance has also grown so much this year, and that’s actually another thing I’m a little bit concerned about. Tether and Binance are by far the two most important companies right now in the space. And if something happens to either of them, we are definitely in trouble. 

I want to make sure that people understand that. And those risks need to be understood and prepared for, if they do happen at some point, even if it’s a low chance of happening. To answer your question, it’s because the market structure just demands tethers. And it’s mostly because of the network effects.

Patrick: Are we seeing some fragmentation of the network where half of the network exists, or some percentage of the network exists in, let’s say the United States and tightly aligned countries and some percentage of the network exists everywhere else. Because it would seem to me, if you want futures exposure, you can get futures exposure at the Chicago Mercantile Exchange at the price of having to be credible to the CME and deal exclusively in regulated dollars. And what I hear you saying is that you would want futures exposure at an exchange that is more flexible with respect to how one funds that futures exposure. Does this portend well for those networks continuing?

Larry: The biggest reason why these funds and these clients are interested in trading on these venues is because they are more liquid. And that’s because, like you said, they’re a little bit more lenient when it comes to which clients they take. It’s hard for someone in China to trade on CME. It’s not hard if they want to trade on Binance or Huobi. 

And naturally, the products with the most liquidity, they end up attracting the most liquidity, and it compounds the debt. CME is not a perfect product. It’s cash settled. But for example, there are pretty high limits of how much you need to get exposure to. And a lot of these exchanges, like Binance or Huobi, they also have a ton of retail clients. And needless to say, some of these funds do want to trade against those people because they’re less sophisticated and it’s easier to market make and all that. CME right now is not a product that is really an alternative to something like Binance or Houbi because you don’t have the same possibilities.

Bennett: I agree almost completely with Larry’s last two answers. Tether’s got the largest market cap and the most adoption because it was the earliest and it is the most used [stablecoin]. It’s been integrated at the most exchanges, it’s used as collateral for the most things. And I do think there is an appeal for a lot of people that Tether is less willing to serve at the beck and call of US regulators. So you see adoption for tether out of China and out of Russia, but even for online gambling and stuff in the Chinese mainland. And the kind of people who would be interested in tether there would not be probably interested in USDC because they would expect there to be a larger risk of funds being frozen or inaccessible, in the sense that Circle would freeze the tokens or block the redemption more so than Tether would.

Larry: I absolutely agree with that. And USDT is viewed by some people, like Bennett said, as less friendly to US regulators and the US overall jurisdiction. The influence of the United States is viewed as much smaller than USDC or Paxos or Gemini dollar. 

Also, one thing I want to point out and I’m sure Bennett will agree as well. The first massive growth of tether initially, end of 2017. We have to remember the reason was that Chinese exchange has got cut off from the fiat systems. And a lot of that money ended up flowing into tether. First couple of billion, or the majority of the money early on, has come from the Chinese exchanges. What that means is that because of these early network effects, there are massive OTC markets in China that use USDT and China was super important early on in crypto, and it still is and those network effects are at this point super hard to destroy. 

And so I do think that when it comes to trading, unless there is some regulatory intervention, Tether will remain the stable candidate it’s used by far the most.

(China told all of its crypto exchanges to shut down in 2017. After that, the only way for traders to on-ramp from the yuan into the crypto world has been via OTC exchanges, which enable peer-to-peer trading by connecting buyers and sellers.)

Richard: Let’s take an audience question. So this is from Nevine Mishra [spelling ?], and this is a question for everyone here. What would be the ratio of bad transactions in Tether? So the bad here basically refers to money laundering, and Tether is basically on-ramp outside of the USD payment system. Just not sure if tether has necessarily instituted the mechanisms to do the proper KYC/AML and so forth. Even though recently they did put out a tweet affirming that they do so. So can you guys speak to basically the possibility and the extent to which these transactions are of the money-laundering nature facilitated by tether?

Larry: I tend to start and then maybe Bennett can answer after me. I do think because of the dynamics that we talked about, it’s by far the most used by trading, it’s also viewed as the most lenient when it comes to just allowing stuff to happen. 

It does end up being used for nefarious activities and activities that are illegal. But it is my belief that Tether’s KYC/AML system internally is as advanced as USDC, as advanced as Paxos. I do think that the compliance is on always the same level, if not the same model.

Their compliance team is great. You can find all the people associated with Tether and the ones that they work on compliance. Also, it’s important to realize that they have frozen a lot of money this year, and a lot of transactions. By far more than USDC, far more than Paxos, and far more than any regulated stablecoin.

(I am not aware of any evidence that points to Tether’s superior KYC/AML system. As noted in the Ardoino and Hoegner podcast, Tether says it does check the identities of its customers, but what about the thousands of other users that tether trickles down to? My theory is that Tether’s large customers are akin to Liberty Reserve exchangers, acquiring tethers in bulk and distributing them in smaller quantities to individuals who require anonymity in their payments.)

Richard: Can you elaborate on that point? The freezing.

Larry: Because it’s more likely to be associated with these activities. And when tether finds out about it, especially this year, they have been really ruthless. When they think something weird is going on, they block it. Some people do believe that they’re more lenient, but actually they do end up blocking a lot. If there is any suspicion that it’s involved in some money laundering activity, they freeze it immediately. 

That has happened a lot this year, and it’s not really happening with USDC and Paxos. The best thing about stablecoins on Ethereum is that all of this data is public. You guys can, after this podcast, go and find the number of blocked addresses on USDC and Paxos, and you’ll see it’s much, much lower than Tether. So the argument that they are less active, it’s like weird that way. But yeah.

Bennet: Larry, you mentioned something that’s one of my biggest frustrations with Tether, and that is that they are at their essence, a finance company that is supposed to be keeping track of all these records of tethers issued, assets in their bank accounts, and all of that. And on their transparency page, on their website, for years, they’ve listed for Omni, their quarantined USDT, the stuff that was frozen, either as part of the initial hard fork after the hack or later after the Omni devs added the freezing ability to Omni. And that number, the number of quarantined USDT they have in their transparency page does not match with what happens if you add up what you can find in the Omni blockchain. And that’s been true for years. So talking about ostensibly, a company where this type of record is the most important thing they keep, and it’s been publicly wrong for years. And it took me like 45 minutes of scanning the blockchain to figure that out and Tether hasn’t done that.

Larry: Again, I do think that Tether has been extremely negligent early on, and to some extent still is, in small ways. So I do agree with that. It is behavior that doesn’t come across. 

The contra agreement to that is that Tether simply doesn’t care about you and me. That’s the thing that Tether skeptics don’t realize. They just don’t care about what’s viewed publicly. They care about one thing, and that’s if they can find counterparties to actually trust them enough, to send them real money and then work with them to redeem their money as well. 

One thing that we didn’t touch on yet, and it’s really important for this to be known, is that Tether functions in a B2B way. It only works with large clients, like exchanges, like OTC desks, like traders, and it only redeems [tethers] with them. 

Whenever there is an argument on Twitter [where someone says] I tried to redeem tether with them directly, it is just not possible. And I agree that early on, [Tether] stated that it was possible—and that’s a major mistake—but they don’t function that way. They don’t care about Tether skeptics at this point. They only care if the tether peg actually remains the same, and they only care if they can find more clients to put in more money and earn more yield. That’s their point of view. And they don’t care about me and Bennett. Why would they?

Bennett: There’s a couple of things here I want to look at. One is yes, they’re B2B. And they really always have been, but that leads to the question of why they publish their stated minimum, which is only $100,000 to redeemed, and why they made such a big deal of reopening their verification platform, supposedly for clients to redeem tethers.

(In November 2018, Tether announced that customers could once again redeem tethers directly via Tether, but all accounts needed to have a minimum issue and redemption of $100,000. At one point, customers could redeem tethers via Bitfinex, but that is no longer possible.)

Also, Tether, themselves, are the ones who still proclaim on their website that they are the most transparent, that they will provide this look inside. And so I don’t think it’s unreasonable to hold them to their own statements.

Larry: I totally agree. And I do think that it makes almost no sense why they would do that. I think initially, it was for people to trust them. Because early on, you have to remember, all this was new and you had a couple of tens of millions in it. It was hard to trust it. And they had to gain the trust somehow. I do think they made some of these statements up because they just wanted people to trust it more, so the peg would actually hold.

One thing that’s important for fiat-backed stablecoins. It’s really the only thing that’s important is trust in that stablecoin itself, because when the trust breaks, it’s very hard to get it back. I think they just were super careless, super negligent, made several of these mistakes before, where they claimed that something was true and that they couldn’t follow up on it. Another example we didn’t bring up yet is they used to claim that they are a hundred percent audited and there was never any audit. There was barely any proper attestation. And I do think that was in some way acting in bad faith—pretending to do something just to gain early trust so it would work at a larger scale. 

Bennett: The curious thing to me is that when they were banking in the Taiwanese banks, they had an accounting firm who did give them a monthly attestation that is in large form similar to what Grant Thornton gives to Circle. And then they stopped that. And a couple years later we got the Friedman report. And then a little bit after that, we got the Freeh report and then the Deltec letter and then nothing. So at one point they were able to get monthly attestations saying that the balance in their accounts was greater than the number of tethers issued. And then they stopped.

Larry: Yeah, that’s a really good question. And when I talked to Paolo and if someone at Bitfinex is listening to this, I one hundred percent agree. Attestations should be the bare minimum of what they publish, especially because it’s fairly easy to do and it’s reasonable, cheap. Everyone else does it. 

I think the reason why they don’t do it goes back to the point that they just don’t have to. It just functions well enough without that the attestations and people at this point trust it enough that they just feel like it’s not even worth their time, right? 

Tether is still a relatively lean team, similar to Bitfinex. And they just probably feel, who cares? Unless the peg starts breaking, we’re not going to release any attestations. And there’s precedent to this before. I’m sure you recall, Bennett, but whenever there was some sort of a break to the peg, historically, pretty much like clockwork, like a week or two afterwards, they started doing some sort of a relationship that confirmed some of these reserves, and they work with Bloomberg as well. So my view on this is that they only do the bare minimum because they just don’t feel like they have to. They feel like at this point, they’re trusted enough that they just don’t have to go to these lengths and spend the money. But if someone, again, if someone at Bitfinex is listening right now, I think this would be the bare minimum. They make enough money right now to justify it and it’s really a no brainer.

Patrick: Do you feel that their reticence with regards to attestations might be related to their reticence with regards to disclosing banking relationships? If I recall back in the day on the UI for requesting a wire from them, they put in red text that they didn’t want you to disclose the wiring information to or from them because it would put the entire cryptocurrency economy at risk. I think I read that in a tweet of yours, if I’m not mistaken. Are we allowed to take them at their word? Is that the reason why they don’t want to disclose this?

Larry: I don’t agree with this approach as well. Their argument is that they have these banking relationships that at least back then used to work in a way that had to be in almost a shady way. And they believed that was the case. 

I don’t think that’s the case anymore, by the way. I do think that all the banking partners that they have now are aware of the relationship. And I do think that at this point, they’re functioning in a much more legit way that they were before. Back then that’s why I was a Tether skeptic as well because they had literally, no one was associated with each other. No one really was able to answer these questions that I had. That has changed. So I’ve changed my mind on a lot of these things because of their approach and because of the information I’ve been provided by other third parties. But I was in the same boat as well.

Richard: We’re seeing a lot more institutional interest in Bitcoin, but the counter narrative to Bitcoin right now is just that it’s heavily manipulated with tether possibly being the biggest manipulator. What do you think is the level of due diligence these institutional investors have performed on this particular matter?

Larry: The first thing I would like to address is that this is like one of the laziest arguments that people make on Twitter, that Tether is manipulating the markets, that they’re creating tethers to pump the price of Bitcoin. There have been several papers debunking the system. And it’s apparent from data that they’re not doing this.

I track data on a daily basis. I track pretty much all the indicators that are there and every indicator this year has been going up. Everything like spot inflows, [just talking to?] exchanges that support fiat. There’s no evidence whatsoever that Tether is creating USDT to pump the price of Bitcoin. 

You can do some fairly simple data analysis by how the market reacts based on when the tethers are created. Really, the simplest explanation to why some people are confused is because when new money comes into Tether, they have to create USDT and that money ends up going into some sort of a cryptocurrency because otherwise they wouldn’t even put it in tether. 

They conflate the relationship of training tethers to market going up. It’s just a natural reaction when you put more money in the system, the price will go up. I would like to just make sure that people actually study this relationship more closely because that’s one of the latest arguments. And I think that Bennett agrees on this point.  

Bennett: I largely do. Generally when people are talking about tether manipulating the market, they’re referring to the paper from University of Texas that was published in 2018, “Is Bitcoin Untethered?” And that paper has some methodological issues, specifically, if I remember right with periodicity, meaning that to get the results they get, it’s very dependent on which periods you look at and how you analyze the flows with respect to that.

I don’t necessarily think that’s we’re seeing. The common conspiracy theory is: unbacked tethers are printed, and they’re used to buy bitcoin. The bitcoin is then inflated, sold. Money goes back into each Tether’s bank account [while they’re backed?]. The market I think is too liquid for that to really effectively work.

Tether can’t move the market enough to get back enough to make that effective. However, there is still again, we get back to the question of backing and what’s really behind the tethers. Because if there’s a general belief in the marketplace that there are 23 billion real dollars behind this tether purchase, seeing this bitcoin and whatever, if that is not fully backed, if that amount of dollars did not actually enter the ecosystem, I think that could fairly be called manipulation.

Now as to the size of that effect. I don’t necessarily think it’s a large effect. I don’t think tether is responsible for any of the bull runs in bitcoin or anything like that. But I do think that tether could have still slightly inflated the price if they were not fully backed.

(I asked Tomlin later what he meant in saying that tethers aren’t responsible for bitcoin bull runs. “It’s just a highly leveraged frenzy,” he said. “Bubbles are always caused by some amount of organic interest. Bitcoin is exacerbated by being a relatively, or historically at least, thin market that now is loaded with leverage.”

I disagree. I think large tether issuances have a huge impact on the market. Unlike in 2017, I believe the bitcoin price, which recently went as high as $41,000, is mainly pushed up by tethers in this bubble. Price plays a huge part in fueling the frenzy. Read my story, “Are pixie fairies behind Bitcoin’s latest bubble?”)

Larry: To some extent, I agree with that. One thing I would like to add is a fun consequence of the paper being published from manipulation is that, I don’t know if you guys will notice, but now Tether basically like they don’t disclose whenever they create new tethers exactly. They basically give it like a week in advance or something. So they prevent people from actually conflating these two things that’s happening at once.

Richard: You mean they authorize first, right? So they basically mint and then they say they authorize it, but it hasn’t been deployed. And then they distribute them to various places.

Bennett: I feel like you could still do much the same analysis. Instead of tracking the issuing address, you could just check movements from the treasury. 

Larry: You probably could, but it’s just like a funny consequence. 

Richard: Going back to that paper Is “Bitcoin Really Untethered” by John Griffin and Amin Shams that Bennett was referring to, what did you say specifically was the issue with their methodology? And also about other papers that have been debunking this? 

I actually have the papers here, but I am not sure where the debunking part is. One of them is called “The Impact of Tether Grants on Bitcoin,” by Wang Chun Wei. And then the other one is, “What keeps Stablecoins Stable,” by Richard Lyons and Ganesh Viswanath-Natraj.

The first paper, “The Impact of Tether Grants on Bitcoin,” conducts an independent study as to whether Tether prints prior to bitcoin pumps. If there’s any kind of statistical relationship and basically says, there’s none. But it doesn’t directly debunk “Is Bitcoin Really Untethered.” So when Bennett says there’s some kind of methodology problem, I’m not familiar as to what exactly the issue is there.

Bennett: It’s been a while since I looked at that paper in specific. But if I remember, and they even mentioned this in one of the appendixes for the paper. If you change the way the period is measured or something like that, you see the impact from the tether flows decreases significantly. 

The other thing we do need to talk about is what Larry said is you expect when tethers enter the market, when legitimate money enters the market, that generally the prices of things are going to go up because there’s more money coming in. And so I’ve looked at a bunch of data around tether and I can push it and tweak it and get statistically significant results that are potentially interesting. But in order to get them, you have to pick magic numbers. So you’re picking a certain period, a certain cutoff, a certain something in order to make sure that your data looks the way it does. And the paper has some of those kinds of things in it.

Richard: As you’re saying the statistical finding isn’t sufficiently robust. If you pick a particular window in construction of your variable, you get a favorable result. And if you just move that a little bit, you no longer have a favorable result. Is that what you were saying?

Bennett: Yeah. If I remember even with the change in the periodicity, it was still directionally correct, but the impact became much smaller. And just looking at it, as a skeptic and as someone who tries to observe this market, it was not convincing enough to me and I was predisposed to be convinced by it.

Richard: The other interesting thing that’s been happening lately is that some of the Tether executives seem to have become a little bit more open in terms of appearing on podcasts and having conversations with the public. First of all, do you agree with that assessment that they’re being a little bit more open these days and second of all, if so, why do you think they’re doing that?

Larry: It’s one hundred percent by design and that’s one thing, like I mentioned before, that led me to trust into Tether more than I did before. They are public for one simple reason. And that’s to make sure that people stop spreading conspiracies. It’s for marketing purposes. When  you have a person that can go directly against some of these claims early on, it’s much more effective than letting someone like Bitfinex’ed just go with these theories that sometimes don’t have any merit. Sometimes they do. Sometimes they don’t. 

But they’re doing it because they want people to think of Tether as more legitimate than it has the rep for right now. Paolo keeps claiming that Tether is as regulated as other stablecoins. It’s a marketing move and it’s a good move as well.

(To be clear, the Tether/Bitfinex triad haven’t been seen at all in a long while. Paolo Ardoino, Tether’s CTO, took on the role of Tether frontman starting around November 2019. He constantly tweets reassurances that Tether is fully backed, regulated and is following KYC/AML protocols.)

Bennett: I am not necessarily convinced that they are more public. If you go back in time to earlier Bitfinex and Tether history, like I’ve saved the entire post history of Raphael Nicolle, the founder of Bitfinex on Bitcoin Talk. I’ve got the same for Giancarlo Devasini, and “myself” [a pseudonym for] one of the early consultants for Bitfinex, and Phil Potter would frequently show up, not on podcasts and stuff like this, but if you’re looking back to 2016, 2017 on the Whalepool teamspeaks and in other places like that, where they were still trying to reach out to crypto traders and stuff like that. 

And I agree with Larry, it definitely is a marketing move, but it’s also interesting to me that not all the executives have been more public, like Paolo. He’s probably the most public face of both. And  Stuart, Hoegner, the general counsel for both Bitfinex and Tether, is probably the one you hear from next often. You will almost never hear from [J.L. van der Velde], the CEO of both Bitfinex and Tether, who originally came over from Perpetual Action Group Asia, or you’ll occasionally hear from Giancarlo now, but you hear from him a lot less even than you used to. I don’t necessarily buy that they’re more public or more open about this stuff now than they were historically. 

Richard: The weird thing is, if you are going to spend the time to go on all these podcasts and try to assuage the public about your legitimacy, why not just spend the money and do the report? Obviously, we have just been through this point and it sounds like both of you actually agree that some attestation should be in order.

Larry: Like I mentioned briefly before, Bitfinex hasn’t been doing so well in the past two years and they attribute that to marketing as well. Because they haven’t done much of marketing before and volumes went down significantly. Liquidity went down. So I don’t think it’s just about Tether, it’s about Bitfinex as well. And it’s about overall just having a face that you can connect to Bitfinex and Tether that is more public facing. 

Richard: Let’s take another audience question. This is from someone called EastMother: Does a stablecoin issuer, such as Tether, have fiduciary duties towards the people to whom issuances are made and, or the secondary market token holders, any opinion on us.

Bennett: This was a matter of debate of law in the New York attorney general case when Bitfinex was trying to appeal it. They basically claimed even in the initial transcript that they had no responsibility to secondary market participants, meaning tether holders who were not directly contracted with Tether Holdings Ltd. 

I think it’s reasonable to say that Tether, if they don’t have a legal responsibility, at the very least as a moral responsibility, that if they are issuing this asset that they say will maintain this value, that the asset does that, whether or not there’s a legal obligation fiduciary obligation towards any secondary market holders. I’m not qualified to answer.

Larry: I totally agree with Bennett there. I don’t think that legally they do. I do think that ethically that they do, but also one thing to realize that we haven’t touched on it much yet, but the collapse of Tether, if it were to happen at some point, and if we are assuming that they’re acting fraudulently, it would be terrible for their business and Bitfinex and Tether as well. They’re pretty profitable. 

So that argument to me never made too much sense. Yeah, you can probably make more money more quickly if you just rug pull and take all the money now, but you’re sitting on a business that’s generating millions dollars in revenue. You have Coinbase going public this year and likely trading at more than $40 billion and all these exchanges are going to be worth gold soon. So you would have to be shooting yourself in the leg, if you were doing this. Like why not just run the business for 10 years and probably end up making even more money? It seems ridiculous to me that some people think that this would be a legitimate strategy.

Richard: Back to the fiduciary duty part. So there have been recent regulations put forth by the US government. And one of them is the [proposed] STABLE Act, which basically says, if you are a stablecoin operator, you need to be regulated like a bank. And the second one is more of a rumor in that stablecoins might be classified as security and as such an SEC would have jurisdiction over them. Neither of them actually is law, but if they were to become law, what would be the implication on tether and then second order effect on the crypto market?

Larry: The first thing, I believe that stablecoins will never be considered securities. I don’t think that will ever happen, but I am not a lawyer, so I can’t say that for sure, but I think that’s extremely unlikely. The STABLE Act, I think, is a little bit more realistic, and it would definitely affect in a lot of ways, because if you do have to have a banking charter, if you do have to have to essentially be a bank to operate stablecoins in US dollars, that would put Tether in a really difficult spot. And it would be interesting to see if they would continue operating.

Richard: That would conflict with an earlier point in that the Tether folks basically think that the US doesn’t have jurisdiction over them. If so, then the STABLE Act or whatever the SEC wants to do, as long as they claim Americans aren’t touching this stuff, then it’s fine.

Larry: That’s a really good question. Maybe Bennett has some views here. I’m not an expert on this, and I’m not sure if they would continue operating if they were directly against one of these laws. I think they might, but not so sure, honestly.

Bennett: This is a tricky question. So I don’t think currency backed stablecoins, like a one-to-one backed, or pegged coin will be considered a security anytime soon. Now, there were more complicated algorithmic models like Basis before they were shut down. I thought there was the potential for parts of that model to end up being considered a security, but that necessarily an acute worry with something like Tether.

Richard: Why is that though? With stablecoins, there’s no expectation to profit from the effort of others. So that particular component of Howey Test wouldn’t work.

Bennett: When I mentioned before was a multi token system involving Basis bonds and a couple of other pieces all working together in order to allegedly maintain a pegged value, which ended up accruing a larger number of Basis coins, the stablecoins, to the holders of the Basis bond.

Larry: Basically what Bennett is trying to say that it’s a multitoken system where one of these tokens is very similar to security.

Bennett: It’s a functioning part of the stablecoin system. And I could even see the argument being made that Maker is a security, but I can’t necessarily see the argument Dai [is a security.]

Larry: Right. I absolutely agree.

Bennett: As for the STABLE Act, this is always where I get conflicted with tether because they try to act as though they’re not regulated by US regulators, but in early 2016, Bitfinex was willing to sign a settlement with the CFTC and collaborate with regulators in those respects. 

My guess is a more restrictive, stablecoin law, like the STABLE Act would be somewhat similar to a regulatory shutdown of Tether with the difference being, they would probably be able to spin it down more gracefully, so there’d be a lot less collateral harm to the market and to holders. 

But I would agree with Larry and say that with a regulation like that, it is unlikely to me that Tether would continue to offer a dollar-backed stable coin. They initially tried to diversify with the Euro tether, which was never popular. They kept trying again and they’ve got the Tether Gold and the Chinese yen tether and all that. My guess is that is part of the reason they have those other coins.

Patrick: One of the other risks for any regulatory regime is that there’s a sort of regulatory contagion where regardless of whether a Bitfinex or Tether—which are alter egos of each other—regardless of whether they are subject to US law or jurisdiction, some people who would like to be involved in the cryptocurrency ecosystem are subject to US law, or jurisdiction, and they might not be able to interact with US counterparties, which interact with tether because of the risk of, basically the tether cooties, attaching to those counterparties. 

And potentially I know people in the cryptocurrency ecosystem don’t think this is likely because it’s so technically easy to mix funds via distributed finance, et cetera, et cetera, but potentially that sort of contagion risk could cause… If your regulated stablecoin is fungible for a non-regulated stablecoin via any mechanism you can reasonably foresee, then you have to solve that problem for the government, basically.

Bennett: This proves Tether’s claim that they’re not subject to US regulation that they’re separate from all that doesn’t hold up. They are a dollar-backed stablecoin. And fundamentally, if you’re working in dollars, the long arm of the United States government will extend to you. And I mean, that’s part of the fundamental risk of Tether is that at some point that long regulatory arm of the United States government, whether it be the CFTC, the Department of Justice or a state government, like the New York attorney general, will find something that justifies them seizing a large amount of tether’s funds and leaves them deeply insolvent.

Larry: I do agree that’s a significant risk that’s worth considering. I think that Bennett’s totally right. I do think that if the US government and the US system wanted, they can take out Tether, probably fairly easily. But one thing that I don’t necessarily agree with, maybe Bennet has more information on this, but I don’t believe that they claim they’re less affected by US regulation and the United States itself. I think that’s what people assume, but I’m not sure that actually claims this. 

Bennett: This is where you get into their public statements in press releases, blog posts and things Phil Potter says in a Whalepool teamspeak because you’ll see the Bitfinex executives try to make arguments like that, that they’re not subject to certain US regulations because of where they’re domiciled. And you saw Giancarlo making these back on Bitcointalk a couple of years into Bitfinex’s existence and stuff like that. So there are public statements by DigFinex executives making those kinds of claims. But the press releases, the blog posts, marketing materials on the website will generally be carefully worded to give them the impression that they’re compliant with all relevant US regulations.

Larry: And are you aware of any of these statements being made more recently versus early on in Tether’s functioning?

Patrick: The litigation with the NYAG at oral argument, they were asked point blank, who is your regulator? And they said, we are not regulated.

Larry: This is a really nuanced topic. We’ve been working on a stablecoin report for almost two months. And we talked to several different stablecoin providers, like USDC, Paxos, all of those. But when we asked them about this, what does it mean to be regulated as a stablecoin? And everyone has different answers. It’s like when you use the word regulated, it’s just so ambiguous. 

You have to think of several different ways of how you regulate it. One is, do you have AML and compliance teams? There are several other aspects. Where are you keeping your funds? Is someone monitoring that? Do you have the compliance manual? 

It’s just so many different things like that. And so Tether publicly claims that they are as regulated as a USDC. I think that’s questionable. They are registered with FinCEN, which means that they have to report when some activities out of the ordinary happen. 

But it’s probably not as stringent as when you are registered with the New York Department of Financial Services, like Paxos or Gemini Dollar. It is difficult to say what regulated means in this sense, because there are no clear rules. And because these things function globally and every jurisdiction has different rules and different regulations.

Richard: As far as the NYAG lawsuit goes, and I’ve asked this question in a previous podcast as well, but I’m curious to hear your thoughts. What do you think is the timeline for some kind of outcome and some kind of resolution. And what do you think would be the knock on impact on the Tether ecosystem?

Bennett: So the next due date for a document production is January 15th, which is coming up right around the corner. What will be included in that? If documents will be provided. [Here is the NYAG’s letter to the NY supreme court.]

Richard: Which documents are the prosecutors looking for?

Bennett: Financial records for Tether going back to 2017 showing KYC, AML history of redemptions and history of issuances. But I do not have that in front of me.

Larry: My question for you, Bennett, is do you think that the NYAG  has the right to ask for these documents while. Bitfinex has pretty publicly said that no customers can have access to Tether.

Bennet I am a New York resident. The Block was very recently able to register an account on Bitfinex and trade with the name “I am NY resident.”

Richard: I’m not familiar with what you were saying about The Block registering as a New York resident. Can you guys elaborate on this?

Larry: It was an article that we published a year and a half ago, or almost two years ago, where some user registered with a name that said, “I’m a New York resident.” And as part of registration, when you go through the registration process, there’s a box that says that you have to tick that says, I’m not a resident of New York, or I’m not a resident of the United States. 

And that user ticked that box, even though the name said, I’m a NY resident. And it was supposedly to test if the compliance would pick up on it. But the reason why I’m bringing it up is because sure, your customers definitely had exposures to Tether, but it is probably reasonable to say that Bitfinex is not interested in those customers, unless they are based outside of the US with their own subsidiary.

Bennet: That’s irrelevant for New York jurisdiction, Bitfinex being interested in them. Doesn’t matter to the New York attorney general. 

Larry: I agree.

Bennett: And going back, this is particularly striking because if you read the 2016 CFTC settlement that Bitfinex signed, they agreed to ensure that they would stop violating sections 4A and 4D of that act. And part of that was making sure they were at no point offering non-physically delivered futures to US citizens. 

And I think it’s pretty safe to say that they continued to do that for a while after early 2016. And I think if you look at what the New York attorney general has found, meaning that there are several professional firms that Tether has hired in New York, that there are tether traders in New York that you’ve got Giancarlo emailing the head of Galaxy Digital and telling him that he should meet up with Phil Potter because they’re both in New York. I think it becomes under the Martin Act, it would appear that New York has the jurisdiction to ask for these documents. I think the better question is, what happens if Bitfinex chooses to ignore the New York attorney general, and not produce the documents? I do not know how far their ability to enforce goes.

Patrick: It’s worth mentioning that this possibly be a legal tactical move to ask for the document production. That question was put to them at oral argument and by the judge, if I recall, and they were given the opportunity to not deny that they were solely looking for Martin Act violations. So it’s possible that they’re using a statutory authority that they have to compel the production of documents, which would allow them to uncover evidence of other things that they could throw at Tether later.

Bennet: Which I think is actually an interesting thing for us to come back to because the New York attorney general launched their investigation into Tether before the really conflicted transaction — where they transferred the [$700 million] out of tether into Bitfinex in order to deal with the insolvency. So there was something before that that triggered a New York attorney general investigation, and Bitfinex and Tether were both producing documents and cooperating with the New York attorney general up until the time of this transaction. 

And that’s when then the Tisha James and [Assistant Attorney General] Brian Whitehurst had to go for the ex parte order. And then Bitfinex has been endlessly appealing and they are now out of appeals. You’re right, the Margin Act violation is not the only thing they’re potentially interested in, but they thought it gave them the best argument for document production.

Larry: I agree with that as well. I will say, some of these New York trading firms have subsidiaries in jurisdictions that allow them to get exposure to these instruments, even if they are officially based in New York. And similar can be said about what The Block published on the NY resident. Yeah, it is true compliance wise. I think it’s probably improved since then. That being said, someone basically had to take someone, who was  not the resident of New York. So technically you are still breaching the registration form.

Patrick: I know I’ve been intervening too much on one side of this debate. Bennett, what would you be satisfied with? Is there a way that tether could demonstrate their operating above board?

Bennett: If they were to start getting regular attestations by a qualified auditing firm, that would go a long way towards assuaging many of my fears. I still think that the history of tether has left them with enough detritus that they’ll never truly be compliant. And that eventually one of those albatrosses around their neck will pull them under water. But if I started seeing a true good faith effort like that to be publicly transparent and show that they are living up to their own promises, that would make me feel a lot better about them.

Richard: There’s an article from Decrypt last year about how a lot of us USDT on-ramp is done by Chinese nationals looking to move their wealth overseas because of the tight capital control there. Can you speak to the extent that this is true and whether you see this trend continuing?

Larry: From my experience and from the data that I’ve seen, I don’t think it’s as much of a problem as Decrypt made it out to be. Tether does have a lot of clientele in China and a lot of the money that was sitting on Chinese exchanges that then got cut off the fiat system. Some of it is now sitting in Tether. So there’s a very large Chinese ecosystem when it comes to tether. 

I don’t think it’s being used that much for fleeing capital controls. It definitely is to some extent, I don’t think it’s one of the biggest use cases of tether. Because there’s already a lot of money that was previously in these Chinese exchanges now with tether. But it’s important to say, the OTC markets for tether is the primary on-ramp for crypto in China right now. Basically running exchanges in China is illegal. You can argue whether that’s being enforced or not, but a lot of these exchanges like Huobi, Binance, and OKex, they have OTC P2P desks that allow people to convert their fiat to tether a Bitcoin directly. It is definitely being used. I don’t think it’s used at a massive scale. 

Richard: If I can summarize our debate so far, it seems that what Larry is saying is that tether has had these unprofessional practices, to put a charitably, in the past, where they also had constraints with banking access and so forth. But ultimately they crossed the line in various different ways in the past. But now the situation is slightly different. 

Number one is they’re a B2B business. They have enough institutional flow as it is. So they don’t really care so much for the retail opinion. Therefore, they don’t have to worry about attestation reports and so forth. And secondly, they have made up their mind, or at least taking comfort in the fact that they are outside the relevant jurisdiction that is pursuing legal action with them. That’s why they basically continue to operate the way they do. But ultimately, Larry’s arguing that they’re no longer acting in bad faith because they’re just doing enough to satisfy their existing clientele. Is that a fair summary of your position, Larry?

Larry: Yes. That’s a very good summary. Did a great job.

Richard: I think a big question on my mind is whether Tether is playing these games to pump the market with unpacked collateral. I know we’ve run around on this, but so far, I don’t think I’m thoroughly convinced that they’re not doing this. So if Larry, you could summarize in one or two sentences to convince somebody that this is not the case, what arguments would you use?

Larry: When new money comes into the system, you can expect the price to go up and evidence here is that when new tether is created and deployed, the price of Bitcoin goes up and even this relationship can be true while not manipulating the market. That’s really the only argument that I have.

Richard: The biggest hole I see in that argument is that there’s no proof that there’s money coming to the market. If there’s proof, which is probably what the attestation report can provide, then I think that whole logic will flow. But right now the problem is just that there’s no proof that money is coming in, right?

Bennett: That’s largely my problem is that we don’t have any public attestation, audit, or anything like that to suggest that the $23 billion in US dollars are actually there. And other oddities, like the fact that you don’t see those show up in the Bahamian central bank report and other things like that. Again, Tether making a better effort to be more public on that stuff would assuage lots of those fears.

Richard: I think the most favorable view with regard to this under collateralization problem is something like, even though there’s a lot of issuance of tether, right after a bearish movement in Bitcoin price and after the tether issuance, the Bitcoin price comes up. Even though that’s all true, that doesn’t mean there’s foul play. It could very well be that there’s authentic demand that is rushing into the market to take advantage of a temporary price dislocation. But the issue is that somehow still not sufficient to change people’s skepticism. 

Larry: It’s almost impossible to change their mind, honestly. [Their thinking is that] it’s beyond reasonable doubt that tether is manipulating the price. And if you believe this, your bias is too much to be objective. 

Richard: Let’s move on to the concluding remarks stage. Starting with Bennett, synthesize your thoughts and tell us how you feel after having this debate regarding your initial.

Bennett: I still believe tether has at many points in their history been a bad faith actor. You see this as early as 2015, when they’re lying about their ownership. You see this continuing through with the frivolous lawsuit against Wells Fargo. You see it continue with the interactions with Crypto Capital. You see it compounded by some of their opacity surrounding the tether hack and the forced hard fork of the Omni network. And just this continued pattern of behavior combined with just the public incompetence of failing to track their own assets on their public transparency page makes me believe that Tether does not at this point deserve the benefit of the doubt. And there is not sufficient evidence that they are making a good faith effort to be a good member of the crypto community and to be publicly transparent about both their functioning and their backing.

(Bennett has provided additional notes on his blog, as a follow up to this debate.)

Richard: Okay, great. Larry, go ahead with your closing remarks. 

Larry: I agree with Bennett that Tether has acted in, what someone, can call bad faith. I think I would call it bad faith early on, as well. I think they were forced to act in this way to basically survive and to find the product market fit early on, and then to grow that business early on.

I think some of it was necessary for the business to function. I don’t agree with a lot of these practices and I do think that they’ve made several mistakes. They’ve behaved in a negligent way. They behave unprofessionally. That being said, recently it has changed drastically. I don’t think they’re acting in bad faith anymore. I think they’re a really important actor in the crypto space. And I think that with all that I’ve said, and it might sound like I’m defending tether, but I still think that there is a chance that there is a regulatory intervention at some point, which would put the markets into chaos for some time.

And I do think it’s a possibility that even people like me that don’t think Tether is acting in bad faith should consider because the US government can do something about Tether and can if they really want to and let it set. And this one, it’s a reasonable possibility. I still think it’s fairly low chance that something happens, but whoever’s listening to this, it’s important to, consider this closely. And if it does happen, make sure that you’re prepared for that possibility. 

That being said again, I think this was a good debate and I agree with a lot of Bennet’s points, but I do not think that Tether is acting in bad faith now. And I don’t think it has been in the past year and a half. 

Richard: Okay, great. Thanks for joining the debate today, Bennett and Larry, and thanks for co-hosting Patrick.  

# # #

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Tether’s Paolo Ardoino and Stuart Hoegner do a podcast—transcript and my comments

Avid bitcoiner Peter McCormack released a podcast interview (archive) with two Tether/Bitfinex frontmen today—CTO Paolo Ardoino and General Counsel Stuart Hoegner.  

McCormack is a well-known Tether apologist whose podcasts are funded almost exclusively by bitcoin companies. Tether is also paying his legal fees in a libel suit brought against him by Craig Wright. Despite that, McCormack claims to be completely objective, although he makes it clear he believes all the “Tether FUD” circulating on Twitter stems mainly from “salty nocoiners,” who are upset because everyone is getting hilariously rich with bitcoin but we’re not.

I’ve transcribed the interview and added my comments. I skip the first few minutes of the interview where McCormack lists his numerous crypto sponsors and goes on to say he thinks Tether is legit. I’ve also edited out the “uhs,” and some repeated words to make reading easier.

Peter: Can you just explain to me and for other people who are listening, because they probably don’t really fully understand it, how tethers are issued and redeemed?

Stuart: Let’s be clear on our terminology, if we’re going to talk about issuances and redemptions. We use four principal terms when we talk about this: authorized tethers, issued tethers, redeemed tethers, and destroyed. 

Authorized tethers are tokens that are created on a blockchain, and they’re available for issuance to the public. This process involves multiple blockchains and multiple persons participating to sign creation transactions. Once created, they’re available for sale to third parties, but until then, they sit in Tether’s treasury as authorized but not issued.

These authorized-but-unissued tokens aren’t counted—or [are] not counted—in the market cap of tethers as they have not been issued or released into the ecosystem. You should think of them a little bit like an inventory of products that are sitting on the shelf that are awaiting purchase. 

Issued tethers are authorized tokens in actual circulation, and they have been sold to customers by Tether and are fully backed by Tether and the reserves, unless, and until they’re redeemed. 

As tokens are issued, the stock of authorized-but-not-issued tethers, is depleted. And they’re replenished through authorization of new tokens based on market demand. When that happens, this is what Paolo is referring to in his PSA on the replenishment of the tether inventory. This is adding to the authorized and unbacked and ready for sale, but not issued, sold and backed tethers.

(I love how Hoegner makes it clear that authorized tethers in the hundreds of millions, like this one here, which we see going out via @whale_alert, are not actually backed. They’re just tethers on the shelf. Tether has issued $24 billion in tethers to date—and nearly 20 billion of them since March 2020.)

Peter: Okay. Why do you need to do that? Because I would have thought the creation of tethers is a very simple and easy job. Why do you need to leave them on the shelf?

Stuart: It’s a straightforward job, but it’s an important job. And it’s one that comes with security risks, and Paolo can speak to this a little bit. But there are security risks involved in using sensitive private keys to create new tethers, authorized. And to have those at the ready, and not in the marketplace, not backed. That exposes those keys to less risk. That’s not just a theoretical risk—there’s a serious security risk associated with that. Paolo, do you want to speak about that?

Paolo: Yeah, I believe that we can think [of] Tether authorization, private keys as among the most important sets of private keys in our industry. If you get hold of the private keys, you can really issue any amount of tethers you want. What we want to do is to limit the number of times per week when these private keys get accessed by signers. 

So, having an unsigned [ro? roll?] transaction that gets prepared with a fixed amount and then signed when they need to, that really helps tether security. Because then you can see that we are issuing round numbers, like $200 million, right? 

It means that we pre-prepared a [ro?] transaction that is an authorization transaction. Then tether signers, sign that transaction and broadcast it. And as Stu said, we are leaving a bit of inventory on the shelf in order to fulfill what we think that future requests from customers could be.

(The inventory does fly off the shelf pretty quickly. You can literally watch in realtime tethers shooting off to crypto exchanges Binance, Huobi, Bitfinex, and lots of unknown wallets, where they are quickly put to work.)

In our day-to-day activity, we are always in talks with customers. So, we [have] a good sense of what they might need, or they ping us in advance and they say, okay, we might need a certain [of] this amount or we might need that amount of tethers. In time, we learned how much tethers we should authorize in advance and keep it on the shelf in order to make these tethers available as soon as they are needed. But at the same time also protecting the security of tether, not continuing to touch the private keys every single time there is just one insurance.

Peter: Okay, I’m going to just push back on you saying they’re the most important private keys in the industry. I would say, personally, my private key is the most important one. Outside of that, I would probably say wherever the biggest honeypot is, maybe it’s Satoshi, his private keys, are the most important because Bitcoin is completely censorship resistant—but Tether isn’t, right? You can, if required, censor transactions. You can, if somebody issued a bunch of fake tethers, you could block those, I believe.

Paolo: First of all, I agree that bitcoin private keys are, well, everyone’s private keys are like their own babies. No doubt about that. The difference as you said is that if someone gets ahold of the private keys in tether, they can issue anything that they want. While in Bitcoin, if someone gets hold of the private keys, they can just steal the funds of the people that got hacked, rather than minting fake bitcoins. 

So this is really important, and this is the reason why we want to keep these private keys so secure and touch them as little as possible. 

So, yes, we can freeze, fake tethers. But at the same time, you can imagine if someone gets ahold of the…in order to freeze tethers, someone has to have the private keys. But if someone already has the private keys, then he can unfreeze our attempt to freeze tethers. 

So we will become an endless attempt of freezing and unfreezing and trying to save tether. That is not ideal. The responsible thing to do is touch the private keys as little as possible and use, of course, for our blockchain, we use a multisig approach. So there are multiple private keys held by different signers in geographical different [locations] so that we can ensure the highest security possible in all our operations.

Peter: Stuart, I interrupted you, you were going to talk about redemptions. We should finish that bit off.

Stuart: Sure. So redemptions are just when customers send their tokens back to tether and they get fiat back and return. Those tokens then go back into inventory, like their products that have been returned to inventory, awaiting future purchases. And then those tokens can be held by tether and its treasury or destroyed. 

And then destruction is just, multisig transactions being broadcast to reduce the number of outstanding tokens existing on the selected blockchain. And those tokens are forever eliminated. Basically, that’s the reverse of authorization. So those four concepts you have the lifecycle of the tether.

(The only time we’ve seen Tethers destroyed was in October 2018 when Tether burned 500 million USDT. This was just after Bitfinex lost access to $850 million in the hands of its Panamanian payment processor Crypto Capital, and the NYAG began investigating Tether/Bitfinex for fraud. Hoegner confirms our suspicions that once tethers are created, they are generally never uncreated.)

Peter: So, Paolo, who is using tethers. What are they using it for and what is the KYC process for people who want to use tether? And actually I’ll throw another one in there: who can’t [use tether]? Who applies and who do you turn down?

Paolo: Let’s start with who uses Tether. I think Stuart can speak better about the KYC/AML process,

Tether was born in 2014. It started from the Omni Layer. And the reason why it was born is because there was an issue among crypto trading exchanges. In 2013, Bitcoin reached, for the first time, $1,000, but across different exchanges, you [could] see that the spread was $200 to $300. And the reason was pretty simple.  

Bitcoin moves with the pace that is every 10 minutes because that is the average block time, while dollars and fiat in general move much slower. So you send a wire and you can take one day, five days, and that was not allowing proper arbitrage across platforms. And that is really important for healthy markets. You don’t want to have OKCoin to be $1,000 and Bitfinex to be [$1,300] and so on. That is the job of arbiters. They step in and try to close these gaps. 

But with just fiat, it was really difficult in 2014. It is slightly a bit better now, but you want both legs of a trading pair, like BTC/USD, to move at the same speed, at the same pace. And the only way to do that was to use the same underlying technology. So, the Omni Layer was and is using Bitcoin transactions to move tethers on-chain. That was the perfect use case. And so tether was born for that specific reason—to solve a problem

Recently, of course, we started to look into different use cases because I believe that is the time that tether should outgrow the crypto market. That is still our main market, but we are looking to work with [inaudible] businesses that offer remittances, businesses that want to optimize their payment solutions—payments for salaries, for inventory, for anything. So we got bombarded on a daily basis [with] requests. And that’s pretty awesome because we don’t want to be only for crypto. We were born in crypto, but we want to go on a global scale. So, Stu, you may or may want to touch base about our process onboarding customers.

(Tether first started issuing tethers in large quantities in 2017, after Bitfinex lost its banking. Note that Ardoino is trying to say that Tether’s massive issuance of tethers over the course of 2020 was due to expanded growth—e.g., we want to go global. Of course, there is no evidence of Tether being used outside of crypto except for online gambling in China. And the idea that businesses would want to use tether to pay salaries makes no sense, as you can’t pay rent and buy groceries with tethers.)

Stuart: Sure. I’m always happy to discuss this, because contrary to the online characterizations in some quarters, tether has an outstanding compliance program. Our AML and our CTF sanctions program is built to exceed or meet the standards of the U.S. Bank Secrecy Act and applicable BVI laws. We work hard to detect, monitor and deter AML/CTF violations. And our program is tested periodically by independent third-party auditors. We always work to understand the identity, business type, source of funds, and the related risks of each and every customer on tether. And we conduct enhanced due diligence on all customers. We risk-rate every customer. We monitor all customers using World-Check and we deploy Chainalysis to detect potential crime related to our services and users. 

We regularly help international law enforcement agencies with investigations in order to trace and potentially freeze wallets. Also, tether will share information with law enforcement when given valid legal process, and we’ve helped law enforcement and victims to freeze and return millions of USDTs. That’s a bit of an overview of our compliance and what we look to do.

(Hoegner claims Tether does due diligence and knows who its customers are, but who are its customers? Further along in this interview, he hints that Tether’s customers consist of a small group of “large customers,” likely exchanges and OTC desks, that bank with Deltec Bank & Trust. What about the hundreds of thousands of tether users? They are apparently not counted as customers. This leads me to think that Tether’s “big customers” serve a function akin to Liberty Reserve exchangers—acquiring tethers in bulk directly from Tether and then distributing them in smaller quantities to individuals who require anonymity in their transactions.)

Peter: Have any customers ever lost their account?

Stuart? Lost their account? 

Peter: Yeah. Have you ever closed people’s accounts? They can’t work with you anymore. Have there been in any instances where you’ve tracked behavior and, like, you can’t work with us anymore. Or has everyone kept a clean relationship? 

Stuart: We have ended relationships with customers in the past. Sure.

Peter: Okay. Interesting. In terms of the issuance of tethers, there’s a lot that seems to happen on times when banks essentially would be closed, right? So weekends and holidays. There was certainly some over the holiday break, and I’ve seen people commenting on that. How come that’s happening? How are you able to do that?

Paolo: I will take this one. So you’re right. There is a lot of misconception and FUD around this very point. You would expect that to go to HSBC on Sunday and it is closed, so you cannot move your money. Right? We, as Tether, are using Deltec as a primary bank, and most of our biggest customers are banked into the same bank. 

(They claim Deltec Bank & Trust is their main bank. If most of their “biggest customers” have accounts at this tiny bank in the Bahamas, that likely means Tether doesn’t have a lot of what it considers customers.)

During the weekends, during all the days, there is always personnel from the bank that allows internal transfers between accounts. So, Tether has its own accountant, and let’s say, customer A has his own account. Customer A wants to acquire new tethers. So they ask the bank personnel to do an internal transfer from their account to Tether, a Deltec account. And that gets settled and is available immediately to tether. 

So, when we issue tethers, they are fully backed because we already received the internal transfer. So, the problem that people are making fun of—the fact that we are issuing over weekends—is just pure [mis]understanding on how the financial market and the banking system works.

(It sounds here that one of the advantage of being a big Tether customer with a Deltec account is you have a close, trusted relationship with Tether. Also, we are definitely seeing a trend where the BTC price is pumped on the weekends, followed by a selloff on Mondays.)

Peter: You mentioned Deltec. Are you shareholders in the bank? 

Stuart: We don’t talk about the investments that we have on the Tether side.

Peter: Okay, so are tethers fully backed?

Stuart: Look. The short answer is yes. Every tether is 100% backed by our reserves. And those reserves include traditional currency and cash equivalents, and may include other assets and receivables from loans made by tether to third parties. 

(Essentially, tethers are backed by cash and a bunch of other stuff that Tether won’t disclose. For years, Tether claimed that tethers were backed “1-to-1” by U.S. dollars held in cash reserve. Tether changed the rules of the game in 2019, after Bitfinex lost access to $850 million and had to dip into Tether funds. Tether’s terms of service now states that reserves means “traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”)

Now that lending includes the loan to Bitfinex, which currently stands at a principal balance of $550 million. The principal having been paid down ahead of schedule. The loan is on commercially reasonable terms. All interest is prepaid to the end of this month, and it’s otherwise in good standing. 

(Hoegner says Bitfinex has paid off $150 million of the $700 million it took out of Tether’s reserves in early 2019. And he is including the loan as a legitimate part of Tether’s reserves, which makes absolutely no sense at all. This is missing money, so how can it be used to back anything? Also, note that Hoegner keeps referring to Tether’s original loan to Bitfinex and claiming it is insignificant and paying interest. But his language does not exclude the possibility that Tether has made other loans to other customers or even to Bitfinex itself.

Here’s how the “loans” part might work: Even though Tether could say that it issued USDT—say to Bitfinex—in exchange for USD or BTC, Bitfinex does not have to actually hand over the USD or BTC right away. It can just promise to do so. Then that promise can be counted as a loan that backs those USDT.

And one more thing—what happened to the $1 billion that Bitfinex raised when it sold all those LEO tokens? I would have thought that would have been plenty to cover the $700 million loan.)

Every USDT is also pegged one-to-one to the dollar. So USDT is always valued by tether at one USDT to one USD. Tether has always been able to honor redemption requests, and to put it simply, there’s never been a single instance in which tether could not honor a redemption and our detractors can’t point to one because one doesn’t exist.

And in fact, there’s considerable evidence of USDT being redeemed by our customers, freely. [Cofounder of CMS Holdings] Dan Matuszewski has talked about this before. [Head of OTC-APAC at Alameda Research] Ryan Salame just recently spoke about this, confirmed. 

We can’t share specific information about customers because of confidentiality concerns. But they are free to share that information with the market, if they wish. 

(Ryan Salame said in a tweet that he has been redeeming tethers for three years, but he doesn’t say for what, so we don’t know if it was an actual dollar redemption. Matuszewski said in the past that he “created and redeemed billions of tethers” when he was head of Circle’s OTC desk.)

So let me just ask if anyone seriously believes after we, you know, that we could be put under the microscope in the way that we have and still be operating if we weren’t backed. Defies logic. 

Let me touch on one issue here that might be of interest to your listeners. The 74% number that’s come up from time to time, specifically in the context of tether’s backing. This is another number that’s been talked about a lot, and I want to be clear about this and give some context.

I swore out an affidavit in New York, in the New York litigation with the AG on April 30th of last year. And that affidavit contained a number of items, including touching on tether backing. 

And in a statement, I said that of the then $2.1 billion in reserves. And today, just for context, that amount has grown to $22 billion. 

Tether had cash and cash equivalents on hand representing approximately 74% of the current outstanding tethers. And that referred to issued tethers. You remember, we were talking about authorized and issued tethers, et cetera? That was issued tethers. 

People took from that, that I said, this means they’re only 74% back. But that’s not correct. And that’s not what I said. It meant and means that the reserves were 74% cash and cash equivalents. Tethers were and are 100% backed by reserves. 

So the loan to Bitfinex is still good backing. Interest has been paid ahead of schedule, as I said, and the principal has been repaid again, ahead of schedule. 

So that forms part of tether’s reserve backing. So maybe people object to the amount of the backing, but it’s not nothing. It’s a valuable and productive asset. And just note that that loan is now $550 million, out of almost $22 billion in reserves, or 2.5% of the total. So I just want to be clear about the nature of the backing and the context and our overall asset mix on that point.

(Hoegner is backtracking and doing his own math to now claim that Tether has always been 100% backed. This is nonsense. He said in an affidavit in April 2019 that tethers were 74% backed. The truth is nobody really knows what is behind tethers and what difference does it make anyway? Tether makes it clear that it is not obligated to redeem tethers at all, and if it does, it can hand you back whatever useless assets it wants.

According to its terms of service, “Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves.” 

Peter: Okay. So you talk about the backing of currencies and different currencies. Is any of the backing in Bitcoin?

Stuart: We were very clear last summer in court that part of it is in bitcoin. And if nothing else, there are transaction fees that need to be paid on the Omni Layer. So bitcoin was and is needed to pay for those transactions, so that shouldn’t come as a surprise to anyone. And we don’t presently comment on our asset makeup overall as a general manner, but we are contemplating starting a process of providing updates on that on the website in this year, in 2021.

Peter: But you have to manage the assets that back the tether. Are there any instances where you are buying bitcoin because you think it’s a good asset to hold within the basket?

Stuart: Again, we don’t comment on the basket of assets in a general manner, but we are exploring providing updates on that on the website in 2021.

(Hoegner won’t reveal what sort of assets are backing tethers. If it’s only partly cash, what part is cash? And what is the rest made up of? Tether has so far issued $24 billion worth of tethers, but it is not telling customers what is behind those tethers—for all we know, nothing but a lot of worthless assets.

Peter: Okay. Because that’s one of the areas where people will be like, hmm, they can issue tether. They can buy the bitcoin, which backs the tether, at the right time in the market. And that’s where people might say that you have the ability to essentially pump the market.

Stuart: Well, hold on, we don’t have the ability to buy the bitcoin at the right time in the market. We’re not prognosticators about whether the market’s going to go up or down. That presumes some level of clairvoyance that we know when markets go down, which we don’t have.

Peter: No, it doesn’t mean that. I just mean that if you have to manage your basket of assets and if bitcoin, was say…any investment you have to make, you have to make a decision. You could make a decision and say, look, we believe that bitcoin would be a good investment right now. And you could issue tethers to buy bitcoin.

Stuart: No, no, we don’t issue tethers to buy bitcoin. We issue tethers to customers that want tethers.

Peter: So how does bitcoin end up within your basket?

Stuart: Well, as I said, if nothing else, bitcoin is there to pay for transactions on the Omni Layer.

Peter: No, no, but how does it get there? How does, what’s the process of the bitcoin reaching your basket?

(This is a good question. If bitcoin is backing tethers, what is Tether using to buy those bitcoin with? Notice how Hoegner is being very careful not to say that they are buying BTC with tethers. Well, what else would they be buying them with? Why not hand tethers out to Tether customers in exchange for BTC? Or you could set up an account on Bitfinex, fund it with tethers, and use those to buy BTC from your own customers on the exchange.)

Stuart: Oh, Paolo, do you have any comments on that?

Paolo: I’m not sure if the question is really clear. We talked about the fact that how we acquire the bitcoin that we need in order to fulfill the Omni Layer transactions.

(Ardoino is pretending like he doesn’t understand the question.)

Stuart: So how do we get that bitcoin, Paolo?

Paolo: I would say that [there] are a good amount of bitcoin remaining from past acquisitions that we likely did in 2015, 2016. That with the fact that the Omni Layer is slowing a bit down compared to the other blockchains that we are supporting…the amount of bitcoins that we luckily got a really good price in 2015 and 16, is probably enough for perpetuity.

(Now he is saying that they happened to have a stash of BTC lying around from five or six years ago, and that’s what they are using to back tethers. If Tether had a stash of bitcoin that large, it could have sold them long ago and taken care of the $850 million hole left when the money disappeared from its payment processor.)

Stuart: But again, Peter, let me emphasize, this has been in the public records since at least last summer. In my view, this isn’t new or shouldn’t be new to anyone. 

Peter: What I’m trying to understand is, if it’s only bitcoin, that’s held for transactions on the Omni Layer. I understand that. But if bitcoin is held within the basket because it’s seen as a good asset to hold, then how does it end up there? I’m just trying to understand that.

Paolo: So, but why we should issue—even in the case someone would like to add the bitcoin to its own basket. Why issuing tethers to do that? Right. So there are fiat exchanges. So why, if someone wants to manage his portfolio would just take part of dollars and buy bitcoins. So why issue tether to do so?

Peter: I don’t know. That’s why I’m asking. 

Paolo: In any case, the entire concept of us issuing tether to buy bitcoin for ourselves, doesn’t make sense. So why issuing tethers when we already have the dollars and we have the ability to manage our inventory and our portfolio, so we could just use the dollars, right? So the entire narrative is completely nonsense, right? So why we have to do two steps when we can do one?

(Ardoino wants us to believe that if Tether wanted to buy bitcoin, it would simply go to a banked exchange and buy BTC with cash. But why would Tether use cash to buy its stash of bitcoin if it has copious tethers on hand? He is doing a terrible job of trying to evade this question. )

Peter: That’s fair. Okay. Okay. 

In terms of an audit, this is something that comes up over and over. And I discussed this with Phil Potter a long time ago. I know you’ve got it on your website, but people don’t trust your own lawyers providing the audit. Is there anything stopping you from having a full and independent audit? 

(The only thing that would remove all doubt that Tether has any cash or reasonable assets backing tether at all, would be an independent audit. But Tether and Bitfinex have consistently avoided this over the years, and they always have some excuse.)

Stuart: We spoke about this two and a half years ago when we said that we couldn’t get an audit in part because of the amount of business that we had at a single financial institution at that time. 

We have provided consulting reports from our accounting firm. I think you’re referring to these in your question, from a law firm, Freeh Sporkin Sullivan, a firm of ex-federal judges and an ex-director of the FBI, and a letter from our bank. 

And those were good faith efforts to try to provide transparency, and some of the comfort that assurance services would provide. We said at the time that we continue to search for new ways to bring more information to the community. I mentioned Ryan Salome’s remarks earlier, that’s part of those efforts. Interviews like this are part of those efforts, public comments from our bankers are part of those efforts. 

So we continue to look for useful ways to share information with the community, to be more open and transparent. And we have important plans in that regard for the coming year. But I can’t get into specifics on that just now. So all I can say on that one is stay tuned. 

Peter: Well, we can keep talking. Okay. So the reason I reached out to you is I get a lot of DMs, a lot of emails, and just suddenly over the last couple of weeks, I’ve had so many about tether and I’m posting things online and people say, it’s tether manipulation, and I haven’t seen it in a long time. 

Now that I’ve done my own research. I don’t believe tether is manipulating the market.

Stuart: Few serious people do.

Peter: And that’s what I realized, few serious people do. So my question really is for you is where do you think this is coming from?

(I love how McCormack is acting like it is a complete mystery why anyone would think Tether is anything but a completely legitimate operation.)

Stuart: That’s a good question. I couldn’t hazard a guess. I think it’s probably nocoiners that just don’t believe in the bitcoin project and by extension, they don’t believe in Tether. It could be people with their own agenda. That’s really not for me, for us to speculate.

But, we’ve noticed the same thing, Peter. Like this comes up from time to time. It’s almost a six months schedule. Every six months or so, there’s some kind of huge push to get a whole bunch of FUD out there. And it can vary as to the reasons why. This current batch might be related to the January 15th date that people have been talking about in the NYAG litigation.

Peter: Well, I’m going to ask you about that, but you’ve got people like Nouriel Roubini, Amy Castor, Frances Coppola, all quite openly accusing you of manipulating the market and running a pump with tether to pump bitcoin. So they’re quite serious allegations from quite known profiles. Have you not considered any litigation against them for libel?

(I’m truly flattered my name would come up here. Nocoiners believe Tether has printed billions of unbacked tethers out of thin air because Hoegner has flat out admitted in court documents that tethers are not fully backed. And he is telling us here, again, in this interview, that they are backed by mysterious assets, nonsense loans and goofy math. We believe Tether is manipulating the markets because we know for a fact that more BTC are traded against USDT than fiat. I find it amusing McCormack is suggesting Tether sue us all for libel.)

Stuart: Look, we don’t believe in suing our critics into silence. We have never made a claim against anyone for defamation. It’s not to say that we wouldn’t ever, but it would be a high bar. We think it’s better to try to counter fiction with facts and truth. And in fact, contrary to what some may think we’re not particularly litigious people. And that obviously, for what it’s worth, extends to journalists as well. We’re not about to hail Forbes media into federal court in New Jersey. As to why Nouriel, why Frances, why Amy, are engaging this kind of discussion, these kinds of statements. You’d have to ask them.

(We engage these kinds of discussions because Tether/Bitfinex have failed to provide evidence that Tether is fully backed and the companies have a long history of shenanigans. Also, the NYAG is investigating you for fraud.)

Peter: Yeah, fair enough. Okay. If you look back historically, because you’ve had all these accusations, you have to deal with all this pressure. Is there anything where you look back and you think, okay, we did that wrong? We’ve handled this in the wrong way. Are there things you should have done better, should have done differently?

Stuart: Absolutely. Look, for people out there that are true skeptics, and I’m not talking about deniers, not haters, that it will never be convinced. I think one thing that we could have done better in the past and we’re getting better at now is communications. 

And that’s not a reflection on anyone. Paolo’s brilliant at this stuff, just like he is with everything else. He’s a brilliant guy. Joe Morgan is great whom, you know. And we have very capable defenders out there, making our case for us. But we’ve been so focused on building cool things that we have—and I’ve said this publicly–we have neglected our comps. We have always known that we are a tech firm or not a law firm. We’re not a PR shop. We’re not a compliance shop. Although compliance is very important.

And mea culpa. I want to be clear I’m as guilty of this as anyone else to the extent that I haven’t prioritized public communications. And I’ve said in the past, some of the FUD, it will just go away. You know, let’s not give it oxygen. I was wrong about that. So you can blame me for that. But we are getting better at communicating with people. We’re getting better at this. We’re learning. We’ll continue to learn, and we’ll continue to improve and get the facts and evidence out there.

Peter: All right. Let’s talk about the NYG case. For those people who don’t know, because it is quite complicated, how would you summarize the accusations?

Stuart: Let’s start with some baseline information on NYAG. First, there is no lawsuit or complaint that’s been filed against Bitfinex or tether in New York by the AG. 

Second, this is not a criminal investigation. And third, the special proceeding is only directed at getting information and keeping the injunction in order for the AG to conduct her investigation. 

Now, Bitfinex and Tether have cooperated with the AG’s office for over two years and have produced approximately 2.5 million pages of materials. While the AG’s office originally obtained an injunction relating to Tether’s reserves, in April of 2019, that injunction was substantially narrowed in the ensuing weeks and has not disrupted the day-to-day business of either Bitfinex or tether. And the injunction in the order for information is what we’ve been referring to online when we speak about the 354 order.

So the injunction set to expire by its terms on January 15th, which is the January 15th date that I referenced earlier that people have been talking about. And by that time, the companies expect to have finished producing documents to the attorney general. 

So we’ve seen a lot of FUD and fear-mongering about January 15th, much of it by those who hate, not just tether, but the entire digital token ecosystem. Despite those rumors and attacks, let me assure you that the business of tether and Bitfinex will remain the same after January 15th. I think our discussions with the AG are going well. I think they’re constructive. And we look forward to continuing that conversation with them.

(The Jan. 15 date he is speaking of refers to the date Tether/Bitfinex are supposed to handover their financial records to the NYAG, so the investigation into their business can proceed. The NYAG letter to the court is here.)

Peter: But what is it they’re pursuing here, particularly?

Stuart: The original order had an injunction component, enjoining us from doing certain things, which doesn’t affect our day-to-day business, at this time. It also sought information. So if you go through all of the requests that were in the original order from last April, they set a series of things that they wanted, a series of documents, information they wanted from us. 

We pushed back on that. We appealed the New York Supreme Court’s ruling on that. We lost. We accept that, and we’ve mediated our disputes as the attorney general said in their letter to the courts a few weeks ago. So again, they’re looking for that information. We are in the course of providing that. That’s going to be done by the 15th and we’re continuing to talk with them.

Peter: So what, what happens after the 15th? What are the next steps in this, because two years is a long time. I’m sure you want this wound up as quickly as possible. What are the next steps after that?

Stuart: Time will tell. Again, our discussions with them are constructive. We’re on track to give them everything they’re looking for. And we’ll see where it goes.

Peter: Okay. I’m trying to understand what the various possible outcomes are from this and whether you can even talk about them. Is there a scenario where Tether is wound up? Is there a scenario where Tether is just fine and is there a scenario where they actually complete their investigation, and there’s no action to be taken?

Stuart: Certainly. They may complete their investigation and they may bring a complaint. They may complete their investigation and think that there’s nothing further to be done. There may be some kind of settlement between the parties. There are any number of things that could happen.

Peter: What about the other lawsuit? What about the other one I read about, there’s a class-action lawsuit regarding the traders. Where are you at with that? You applied to have that ended, right?

Stuart: Yeah, so we have filed our motion to dismiss and the plaintiffs have given a reply in that, and we are waiting at this point to see if there’s going to be oral argument on the motion.

Peter: Okay. Just on the regulation side. It’s quite an interesting time for, I’m going to say crypto, and I hate that word, but crypto slash bitcoin slash stable coins and very interesting things that happened with the OCC recently. It feels like there’s more regulation coming, but some of it’s quite open regulation that’s actually allowing this industry to continue, but with a lot of oversight. Specifically, regarding Tether, what are the regulations you have to follow? What are the agencies you have to work with?

Stuart: Tether is registered with FinCEN as a money services business. That means the tether has to make reports up to FinCEN, have a compliance program, which I referred to earlier, just in passing, subject to examination by FinCEN, that kind of thing. 

Tether also makes reports to the BVI’s financial investigation agency under applicable law there, as most of the corps in the Tether group are BVI companies. So the bottom line is that Tether is regulated. So this notion, you’ll see sometimes that tether is quote “unregulated,” which a big word in some mouths, in my view is just flat wrong. And it’s a little bit irritating, but those are the baseline rules that that Tether has to follow. And our compliance program has been built to match or exceed those standards.

(Tether is not regulated in any meaningful sense. The company is registered in the British Virgin Islands. In fact, the reason it got into hot water with the NYAG, is because it was allegedly doing business in NY without a BitLicense, required for crypto companies to do business in the state, and it violated the Martin Act by misleading customers into believing that tethers were fully backed when in fact, they were not.)

Peter: So what did you make of the OCC letter? Because it was quite interesting, the idea that banks can start issuing stablecoins. I imagine for someone like you guys, that’s quite interesting because could you see a scenario where they’re working directly with Tether?

Stuart: I think it’s premature to say that. I agree that the OCC letter was very interesting. Other people far smarter than I am, have talked about that and opined on it already. And I’ll certainly defer to our U.S. counsel on that. But it’s very interesting and look, we always are interested in working with and cooperating with and teaching and learning from regulators and policy-makers and law enforcement agents around the world, not just in the United States. 

That’s another step on that road. I think you’re right. I think increased regulation in this space is coming. I think it’s going to be different, depending on where it is. We don’t take U.S. customers. But we are still registered with FinCEN, so that’s something that we need to pay attention to. And we’ll continue to engage on a worldwide basis with anyone who wants to work with us to help develop their own policies, help develop their own regs and figure out what they can learn from us and what we can learn from them.

(If you are registered with FinCEN but you don’t take U.S. customers, what is the point of being registered with FinCEN?)

In that kind of context. We just think that other people are better qualified to do the last mile and we’re happy to cede the field to them. 

Peter: This might be a question for you Paolo, but are there scenarios where Tether can fail, any form of catastrophic failure?

Paolo: I think that the only one that I’m not worried about, but due to my technical nature, I’m working every single day and second of my life to prevent, is ensuring that the private key stays safe. That’s it, right? So what we do is choose the blockchains that we allow tether on in a really careful way. So we choose blockchains that are, first of all, supported by a wide community. We choose blockchains that have a native type of token support, if possible, that has a built-in multisig pattern that we can use and have support for hardware wallets. 

So these are basically the key requirements for us to operate safely on a specific blockchain. We do have the capability of freezing accounts on most of the blockchains. That is really important. As Stu said, we save tens of millions of dollars. Part of those were also some of these situations were public when we did that. Recall one exchange hack, for example. So, yeah, basically my life is all about thinking how things can go wrong and try and make sure that we can prevent those from happening.

Peter: Which blockchains are you currently supporting?

Paulo: We support bitcoin two ways, from Omni Layer and Liquid. Then we support EOS, Ethereum, Tron, Algorand. [Speaking to Peter] Don’t do that face please. [Laughs]

Peter: Fucking Tron. 

Stuart: On a podcast called What bitcoin did, you’re going to get the grimace, Paolo.

Paolo: Ethereum fees were $16, mate.

Peter: In fairness, you’ve answered all the questions that I wanted to ask you, and these were based on a lot of the questions that were coming out in Twitter, when I put it out there. Most of them are related to, is it fully backed, blah, blah, blah. I personally still think there’s work to be done there. So I’m going to keep pushing you on that. 

Stuart, is there anything I’ve not asked that you kind of wish I had?

Stuart: No, I don’t think so, but I do want to just jump back to your comment. I actually agree with you. I think that there is work to be done. I think you should continue to push us and nothing is perfect. We can always do better and we look forward to doing better this year and beyond, but we’re really excited about 2021. And we look forward to being pushed. We look forward to these questions. We look forward to engaging with the community and putting the facts out there on the table.

Peter: How comfortable would you be doing one in the future, give a couple of months and perhaps allow people to submit questions in and take the questions submitted?

Stuart: I would have to talk to our PR folks. But personally, I’m very comfortable with that. I’m fine with that.

Peter: I think we should do that. As I said in the start, and for full transparency, people should know that I’m in a legal situation and Tether has helped support that at some points

But, at no point, does that change the line of questioning. I told you beforehand, I’m only doing this if I can ask any question I want. People should know that. I wanted to do it because whilst people say, Oh, you’re a journalist Pete, you should be completely impartial. 

I think this is all FUD. And, I’m finding it really annoying. And I’m finding a consistent pattern and who it’s coming from. And it’s coming from people who’ve had an agenda against bitcoin for a long time. And it’s coming from people who I think are nocoiners and they’re salty. 

I haven’t found anyone, I actually respect doing this, so I can be impartial at best with my questions, but I’m not impartial because I believe this is FUD. But I will continue to push you. I’ll continue to ask you questions. And I appreciate you coming on, man. And yeah, hopefully, we’ll do this again in a couple of months and, if that’s okay with you guys, I’ll open up to the floor and see if questions in the community.

Update Jan. 12: An earlier version of this story stated that Tether had minted 20 billion tethers this year alone. That’s incorrect—it’s 20 billion since March 2020.

Related stories:
Nocoiner predictions: 2021 will be a year of comedy gold
Are pixie fairies behind Bitcoin’s latest bubble?

The curious case of Tether: a complete timeline of events

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Nocoiner predictions: 2021 will be a year of comedy gold

The last year has been particularly annoying for nocoiners—those of us who don’t hold crypto and view bitcoin as a Ponzi, like a Ponzi, or something more complex.

We have had to endure Tether minting tethers with abandon ($17 billion worth in 2020 alone) and bitcoiners obnoxiously cheering bitcoin’s new all-time highs, the latest being $33,000. Considering bitcoin began 2020 at around $7,500, that is a long way up. (Things went full crazy in March.) But we believe 2021 will be a year of comedy gold when this giant hill of dung all comes tumbling down.

I’ve spoken with several notable bitcoin skeptics, gathered their thoughts, and compiled a list of new year predictions. They shared their prophecies on Tether (a stablecoin issuer that has so far minted $21 billion in dubiously backed assets to pump the crypto markets), new regulations and the future of bitcoin. 

Here is what they had to say:

Nicholas Weaver: T’will be the year the music stops

“This is the year the music stops,” Nicholas Weaver, a researcher at the International Computer Science Institute in Berkeley, told me. 

Weaver has been following bitcoin since 2011. His work is largely funded by the National Science Foundation. He believes the bitcoin ecosystem is running low on cash. (This is the fate of all Ponzi schemes. Ultimately, they run out of new investors and when that happens, the scheme collapses.) In the case of bitcoin, he believes real dollars in the system are rapidly being replaced by fake ones in the form of tethers.

“Tether has been squeezing every dollar out of the system, and there aren’t enough suckers,” he said, meaning there aren’t enough folks waiting in line to buy bitcoin at its ever increasing prices. “When the dollar stock goes to zero, the system will collapse completely because you get a mining death spiral.”

Miners reap 900 newly minted bitcoin per day in the form of block rewards. If they can’t sell those for enough fiat money to pay their monstrous power bills, it makes no sense for them to stay in business. And since their job is to secure the bitcoin network, bitcoin will become vulnerable to repeated attacks.

Also, governments are finally waking up, said Weaver, alluding to new global efforts to clamp down on money laundering, capital outflows, and the financing of terrorism via cryptocurrencies. 

He foresees Tether getting the Liberty Reserve treatment any day now. He also thinks China will decide “screw it, bitcoin is evading capital controls as a primary purpose, let’s cut off the subsidized electricity.”

Without cheap electricity, bitcoin miners—most of whom are in China—may find it difficult to stay afloat. Already bitcoin miners in Inner Mongolia no longer receive electricity at subsidized rates

Jorge Stolfi: I can’t make price predictions

A computer science professor in Brazil, Jorge Stolfi wants to avoid making predictions on bitcoin’s price. He’s been following bitcoin since 2013—and has seen it through two prior bubbles—so he knows too well that anything can happen.

“I really don’t know how far the insanity can go. The crypto market is 100% irrational, sustained entirely by ignorance and misinformation,” he said. “How can anyone make predictions about that?” 

Stolfi is a denizen of r/Buttcoin, a subreddit that makes fun of bitcoin, where he painstakingly explains the finer points of crypto nonsense to the unenlightened. In 2016, he submitted a letter to the U.S. Securities and Exchange Commission warning against the risks of a bitcoin exchange-traded fund and comparing bitcoin to a Ponzi scheme. (The SEC has shot down every bitcoin ETF proposal to date on the basis that bitcoin’s price is too easy to manipulate.)

“And since price determines everything else in the crypto space, I can’t make predictions on pretty much everything else,” Stolfi continued. “For example, If the price were to crash below $10,000, I bet that we would have a lot of comedy gold coming from MicroStrategy.” 

Over the last several months, the Virginia-based enterprise software company has funneled $1.2 billion of its funds into bitcoin. As a result, Michael Saylor, the company’s CEO, now spends most of his time on Twitter shilling bitcoin. In September, Saylor compared bitcoin to “a swarm of cyber hornets serving the goddess of wisdom, feeding on the fire of truth, exponentially growing ever smarter, faster, and stronger behind a wall of encrypted energy.”

Stolfi also thinks that we will probably forget about several coins that were big in the past, like Bitcoin SV (BSV) and IOTA, maybe even bitcoin cash (BCH). “And we will also forget about blockchain technology.”

Frances Coppola: Crypto exchanges will become like licensed banks 

Over the last week, Frances Coppola has been battling an army of bitcoin trolls and sock puppets on Twitter after suggesting that bitcoin is not scarce in any meaningful sense. 

Scarcity is a key part of the myth bitcoiners perpetuate to make people think bitcoin is valuable in the same way gold is and to create a sense of buying urgency—quick, grab some before it’s all gone!—so naturally, bitcoiners responded by dog piling on her. She isn’t happy about it. 

“I hope bitcoin crashes and burns because I am so bloody furious, but I think it will be a while yet before it does—maybe about June,” she said. 

Coppola is a UK-based freelance writer, who spent 17 years in the banking industry. She wrote the book, “The Case For People’s Quantitative Easing,” and has 58,000 Twitter followers.

The cause of bitcoin’s upcoming crash, she believes, will be an epic battle between the Wild West of crypto and regulators, a topic she covered in a recent Coindesk article.

If the regulators win, crypto exchanges will become like licensed banks and have to comply with things like the Dodd-Frank Act, a sweeping law that reined in mortgage practices and derivatives trading after the 2008 financial crash, she said. On the other hand, if the regulators lose, she believes their next move will be to protect retail investors.

“We’d see drastic restrictions on what interactions banks can have with crypto, perhaps a total ban on retail deposit-takers having crypto exchanges and stablecoins as clients,” she said. 

“We might also see something akin to a Glass-Steagall Act for crypto exchanges and stablecoins, so that retail deposits are fully segregated by law from trading activity.” By that, she means exchanges won’t be able to lend retail deposits to margin traders or use them to fund speculative positions in crypto derivatives. 

David Gerard: Bitcoiners will get their big boy wish

After years of begging for bitcoin to be taken seriously as a form of money, bitcoiners will be getting exactly what they asked for, said David Gerard, a bitcoin skeptic and author of “Libra Shrugged,” a book on Facebook’s attempt to take over the money. 

This year will see more regulation of crypto, as coiners discover to their dismay just how incredibly regulated real-world finance is, he said. “Just wait until someone sits them down and explains regulatory real-time compliance feeds.”

What does Gerard think about Tether? “I could predict the guillotine will finally fall on Tether, but I predicted that for December 2017, and these guys are just amazing in their ability to dodge the blade just one more day,” he said.

Since 2018, the New York Attorney General has been investigating Tether and its sister company, crypto exchange Bitfinex, for fraud. Over the summer, the New York Supreme Court ruled that the companies need to hand over their financial records to show once and for all just how much money really is underlying the tethers they keep printing. The NYAG said Bitfinex/Tether have agreed to do so by Jan. 15.

Gerard also foresees that there will continue to be no use cases for crypto that absolutely anything else does better. “Everything the Buttcoin Foundation was talking about in 2011 is still dumb and broken,” he said.

Trolly McTrollface: Crypto will go to Mars

Elon Musk says he is “highly confident” that his company SpaceX will be sending humans to Mars in six years. Naturally, Musk wants to set up a self-sustaining city on the red planet. And, come to think of it, the city will need its own crypto, something like Dogecoin or Marscoin. Otherwise, how else will its citizens pay for things?

Pseudonymous crypto blogger Trolly McTrollface has this prophecy for 2021: “Elon Musk creates its own cryptocurrency, and adds it to the $TSLA balance sheet. It ends the year in the top 10 crypto list by market cap.”

Nouriel Roubini: Bitcoin’s bubble will explode

Nouriel Roubini, an economics professor at New York University, doesn’t mince words when it comes to crypto predictions. He simply told me: “The Bitcoin bubble will burst in 2021. Triggers will be reg/law enforcement action.” 

There is good reason to take him seriously. Roubini famously warned of the 2008 financial crisis, a prophecy that earned him the moniker “Dr. Doom.” He is also known for his parties, which leads a few of us nocoiners to believe that bitcoiners’ are fundamentally driven by bitterness over the fact that we have better soirées.

David Golumbia: The insanity will continue—unless it stops

If the past is any prediction of the future, bitcoin and other crypto promoters will continue to deceive the public with outright lies about “investing” in tokens until the big tokens collapse. That’s the view held by David Golumbia, known for writing about the cult of bitcoin. He is the author of “The Politics of Bitcoin: Software as Right-Wing Extremism,” and teaches at Virginia Commonwealth University. 

“I tend to agree with other critics that regulators and law enforcement are going to squeeze the space, especially Tether, at some point,” he said. “And that when this happens the whole thing will deflate. But as anyone with experience in investing knows, predicting and identifying bubbles is a fool’s game.”

What Golumbia finds most interesting is that the rising price of bitcoin and other tokens sustains the lies. “I have to imagine that when the tokens collapse, the motivation to keep lying will go away as well,” he said. 

Examples of those lies include: bitcoin offers an alternative finance system to the real one, bitcoin’s price movement is due to technology, the regular financial system rips people off and bitcoin doesn’t, and so on. 

He continued: “Though who knows—the whole story of bitcoin and blockchain includes the worldwide embrace of conspiratorial thinking that parallels QAnon, antivax, COVID-19 denialism, climate change denialism, flat earth ‘theory,’ etc. 

“None of these seem to collapse no matter what the facts do. But then again, the promoters of these theories often profit only indirectly from them, whereas cryptocurrency promoters usually have a direct vested stake in ‘number go up.’ So maybe there will be a positive development for a more realistic relationship to the world if/when prices collapse.”  

My prediction: Only fools will be left hodling

As for my own predictions, I think bitcoin is on the brink of a stupendous crash. Whales and the Tether/Bitfinex triad are working over time to push the price up higher and higher. As more fake dollars flood the system, real dollars are being siphoned out by the big players.

At some point, as Weaver stated, there won’t be enough suckers left in the wings waiting to buy bitcoin—and when that happens, bitcoin holders will learn the hard way that price charts and market caps are meaningless. 

When the price crashes, dropping back to early 2020 levels—or possibly even lower, the people who will get most hurt will be the retail investors who have been duped into believing they can buy bitcoin and get rich. And that, in turn, will provide justification for tighter regulations that make it difficult for exchanges to list any crypto at all.  

I also believe at some point this year, Tether’s operators will be indicted, although it is hard to say when. As Gerard says, we all thought this nonsense was going to come to a grinding halt in December 2017, but here we are three years later. 

The fact that Bitcoin is getting pushed to ATHs, should be a signal that the end is near for Tether, and the crooks are doing their final looting.  

If you own any bitcoin, you would be best to sell what you can now, or at the very least, sell enough to get back your initial investment. Remember, two thirds of bitcoin investors in the 2017 bubble didn’t get around to getting any of the money back that they had put in—don’t be one of those guys. 

Update Jan. 2: An earlier version of this story stated that bitcoin started 2020 at around $3,000. It started at $7,500.

Update Jan. 4: Edited to clarify that a state supreme court ruled that iFinex should turn over records, not the supreme court.

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News: Michael Saylor buys bitcoin with abandon, Tether reaches $20B, MassMutual jumps on BTC bandwagon

The price of bitcoin is headed back over $19,000 again. What will it take to push it past $20,000—more tethers? More institutional buying? Or maybe, more crypto journalists proclaiming (without evidence) that tethers are fully backed? Here’s the news:

MicroStrategy wants more, more, more

Michael Saylor, the new crazy god of bitcoin institutional buying, continues his bitcoin buying spree. He seems really, really confident the price of BTC will go up.

Saylor’s publicly traded company MicroStrategy currently owns 40,824 bitcoins—because no sense using all that excess cash for buying back a ton of stock or paying a big dividend. Better off to gamble it on crypto.

Now the firm is actually going into debt to buy bitcoin. After completing a $650 million bond offering, MicroStrategy plans to plow all the proceeds into buying more bitcoin. (Microstrategy PR, Cointelegraph)

Citibank isn’t impressed. Analyst Tyler Radke downgraded MicroStrategy (MSTR) from neutral to sell, calling the recent rally—MSTR went up after its first few BTC buying announcements—”overextended” and a possibly “deal-breaker” for software investors. (The Block)

Tether: Ain’t no stopping us now

Tether is now at $20 billion worth of tether—that’s assets, but circulating supply is soon to follow—and there is no evidence whatsoever to conclude that there is $20 billion in real cash behind all those tethers. Why? Because the company has never had a formal audit.  

Still, last month, The Block’s Larry Cermak defended tethers as being “either fully backed or very, very close,” telling folks “everything is in order now.” He based that on conversations he claimed to have had with “third-parties” who told him they had successfully redeemed several hundred million in tethers.  

Cermak is not the only one to buy the Tether line of B.S.

In December 2018, after looking at Tether bank statements, Bloomberg’s Matt Leising also reported that Tether appeared to be fully backed. He was wrong.

Unbeknownst to him at the time, in the previous two months, the DOJ froze five NY bank accounts belonging to Reginald Fowler, who ran a shadow banking service for Tether/Bitfinex’s Panamanian payment processor. And in November, the NYAG, having serious concerns about Tether’s finances, issued subpoenas to Bitfinex and Tether asking for details on their banking. Finally, in April 2019, Tether admitted it was only 74% backed. And that’s before it went off and printed another 17.5 billion tethers. So what’s backing all those?

In a recent blog post, David Gerard explains why Tether is “too big to fail.” Essentially, it’s keeping the entire BTC market afloat. If Tether were to get the Liberty Reserve treatment, the price of bitcoin is unlikely to ever recover.

Thus, “the purpose of the crypto industry, and all its little service sub-industries, is to generate a narrative—so as to maintain and enhance the flow of actual dollars from suckers, and keep the party going,” he said. 

NYAG: Tether documents forthcoming

Meanwhile, there’s been a new document filing in the NYAG Tether probe.

In a letter to the NY supreme court, NYAG says Bitfinex/Tether are cooperating on document production and the parties expect to finalize things “in the coming weeks.” These documents, of course, consist of everything NYAG asked for in its original November 2018 subpoena—information that will shed light on the Tether and Bitfinex’s shadowy dealings since 2015.

A part of me wants to get excited about this news, but another part says, wait a minute. In the past when Tether’s operators said they were going to hand documents over, they simply handed over material that was already public information. They also have a long history of shenanigans, so let’s just wait and see.

How to turn USDT into cash 

Jorge Stolfi, a computer scientist from Brazil, shared on Reddit a “mainstream theory” on what could be happening behind-the-scenes at Tether—specifically, how Tether’s operators could convert USDT into cash for their own personal use. Remember, this is totally unproven. It is just a theory. (The “triad,” by the way, refers to Tether CSO Phil Potter, CEO and man of mystery J.L. van der Velde, and CFO Giancarlo Devasini. They are the same operators behind sister company Bitfinex.)

He writes:

  1. The owners of Tether Inc (which I will call “the Triad”) print billions of USDT without any backing.
  2. The Triad deposits those USDT into Bitfinex (which they own too).
  3. The Triad uses those USDT to buy BTC and other cryptos from other Bitfinex clients, attracted by the better price.
  4. The Triad withdraws the BTC to their private wallets.
  5. The Triad moves all or some of those BTC to other exchanges that handle real currencies, such as USD, EUR, JPY, etc.
  6. The Triad sells those BTC for real money.
  7. The Triad withdraws the real money into their personal bank accounts.

This is a theory. This is not proven. But the point is, when you have no checks and balances in place along with massive loopholes in oversight, anything can happen. We saw this already with QuadrigaCX—the Canadian crypto exchange that went bankrupt after the founder disappeared (aka “died in India”), taking along with him hundreds of millions of dollars in customer funds.

Coinbase loses half critical security team

After NYT reporter Nathaniel Popper reported about discriminatory complaints at Coinbase, new information came out. Among those who recently resigned to protest the exchange’s new internal policies, were four of the seven people on Coinbase’s critical security team—aka the “key management team.”

The key management team is responsible for securing the cryptographic keys to Coinbase’s cold wallets, where the majority of the company’s crypto is held—somewhere in the neighborhood of $30 billion.

“No job is more fundamental to the company’s success,” Popper said.  

Coinbase’s security chief shot back, saying Coinbase’s security team is managed by several teams with redundancy built in. Of course, he wants us to believe everything is fine, but not everyone is convinced.

MassMutual invests in BTC

Bitcoin has a new institutional investor: MassMutual. The Springfield-Mass insurance firm purchased $100 million worth of BTC for its general investment account, which totals $235 billion. (WSJ)

MassMutual purchased the bitcoin through NYDIG, a New York-based fund management company, which has $2.3 billion worth of crypto under management. MassMutual also acquired a $5 million minority equity stake in NYDIG.

The $100 million cash injection into bitcoin sounds like a lot, but it’s small potatoes. That money will cover the network’s operators—the bitcoin miners—for only six days. Remember, bitcoin miners are selling their 900 newly minted bitcoin per day for $17 million, at current BTC prices. Investors will never see that money again. Bitcoin doesn’t make any real profits on its own—just investor money going in one end, out the other.

Other news

Former Ethereum developer Virgil Griffith moves to dismiss his indictment—again. Attorney Brian Klein argues speech is a protected by the constitution. (Reply memo in support of motion to dismiss.)

Law firm Hogan Lovells is requesting to withdraw their representation of Reggie Fowler in a class-action against Bitfinex and Tether in which Fowler is also named. (Motion to withdraw)

Bryce Weiner has written a nice overview of how Tether works in relation to the crypto industry.

Crypto-friendly CFTC chair Heath Tarbert plans to resign early next year. His term was set to expire in 2024. (The Block)

Bitcoin’s right-libertarian anarcho-capitalism fits right in with far-right extremism. Crypto analyst Tone Vays brags on Twitter about spending a night with the Proud Boys. 

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News: Bitcoin’s new crazy god, Tether’s runaway train, Binance sees $1B profits, STABLE Act threatens stablecoins

Crypto has come of age. What does that mean?

Among other things, it means MicroStrategy CEO Michael Saylor has replaced Patrick Bryne as the new crazy god of institutional bitcoiners. And another crypto exit scam has been invented: dying in India. (See Jorge Stolfi’s full reddit post. He is a computer scientist in Brazil.)

All Ponzi schemes eventually implode, even if it takes 25 years like Bernie Madoff’s did. When that happens, you have two choices: turn yourself in or disappear. Gerald Cotten chose to disappear. Of course, many people believe he is really and truly dead. I’m just not one of them.

With that, here is the news that I find interesting from Bitcoinlandia, an imaginary place where people keep insisting bitcoin is not a Ponzi.

MicroStrategy buys more BTC

MicroStrategy continues to funnel its excess cash into bitcoin. The analytics firm bought another $50 million worth of bitcoin, Saylor disclosed in a tweet.

MicroStrategy bought its most recent pile of bitcoins at an average price of $19,427—at the top of the market—and now owns a total of 40,824 bitcoins.

Here’s the thing: Saylor holds 73% of the voting stock of MicroStrategy, so he does not need buy-in from stockholders to make decisions. He is ruler and king, and if he wants his firm to buy more bitcoin, so be it.

Saylor also has a large private stash of bitcoins. I would be very curious to know how much BTC he owned before and after MicroStrategy’s recent purchase.  

If those bitcoin hold their value, all will be fine, Jorge Stolfi said on Reddit. But, if BTC “drops back to $8,000, the other stockholders will be upset, and may have grounds to sue Michael for mismanagement or whatever—even if there are no other shenanigans. If he did sell his coins while the company bought them, it will be worse.”

Guggenheim Partners

Another institutional investor has jumped on the bitcoin bandwagon. In a recent SEC filing, Guggenheim Partners, a leading Wall Street investment firm, revealed that it is looking to invest 10% of its $5.3 billion Macro Opportunities Fund into Grayscale’s Bitcoin Trust.

To be clear, Guggenheim is not buying bitcoin directly. It plans to invest nearly $500 million in GBTC shares. Grayscale itself now owns more than 500,000 bitcoin.

And Guggenheim isn’t taking on any risk. The firm makes money whether the price of BTC goes up or down. The retailers who are invested in the fund are the ones who carry all the risk.

Bitcoin is highly volatile and has no role in retail investor portfolios. As Economist Nouriel Roubini explained in a lengthy Twitter rant:

“Investing in BTC is equivalent to [taking] your portfolio to a rigged illegal casino & [gambling]; at least in legit Las Vegas casinos odds aren’t stacked against you as those gambling markets aren’t manipulated the way BTC is. Instead BTC is manipulated heavily by Tether & whales.”

Tether’s runaway train

On to my favorite topic: Tether—a firm that mints a dollar-pegged stablecoin that’s hugely popular on unbanked exchanges.

On Nov. 28, Tether surpassed 19 billion tethers in circulation. And like a runaway train with no way of stopping, it is fast on its way to issuing 20 billion tether—worth the notional equivalent in US dollars.

So, what is going on with the New York Attorney General’s investigation into Tether and Bitfinex?

The last bit of real news we had was in September when Judge Joel M. Cohen once again ordered Bitfinex and Tether to turn over financials. However, he did not set a deadline. He left that decision to a special referee, according to Coindesk. And we haven’t heard anything on the matter since.

Stepping back, recall that Bitfinex/Tether have been resisting handing over documents since November 2018 when the NYAG—in pursuant to the Martin Act, which gives it broad powers to investigate fraud—first served subpoenas for information stretching back to January 2015.

In April 2019, when the NYAG was concerned that iFinex (parent company of Bitfinex/Tether) was insolvent and Bitfinex was dipping into Tether’s cash reserves, it sought an ex parte order compelling the companies to produce documents and staying further actions pending the ongoing investigation.

iFinex responded with a motion to dismiss. In August 2019, the Supreme Court denied the motion and the respondents sought to appeal, arguing that the NYAG did not have the power to demand documents since Bitfinex and Tether didn’t have sufficient contacts in New York.

In July 9, 2020, a New York state appeals court sided with the NYAG. (Court filing)

As I’m writing up this newsletter, Coindesk’s Nikhilesh De has just pulled up a new court filing in the case from Dec. 4 that is a bit bewildering. At first glance, it appears to be the same filing from July, repeated twice.

Drew Hinks, a lawyer not involved in the case, said the filing is a remittitur—a jurisdictional document that formally ends the life of an appeal by notifying the world that the decision is final.

I’ll update this post as I learn more—specifically why a remittitur is important after the appellate judgment has already been issued and become final. Does this help the investigation going forward?

(Update: I am pretty sure that the remittitur was just a procedural thing that signals that the appellate court is done and has kicked the ball back to the original court—i.e., Justice Cohen.)

Bitcoin sets new all-time high

On Nov. 30, the price of bitcoin reached $19,900 on Coinbase, according to the Block, surpassing its previous all time high (ATH) set on Dec. 17, 2017, by about $10.

After bitcoin reached its new high, it promptly lost 13% of its value.

When you see bitcoin getting pumped like this, what you are seeing is traders cashing out before the bubble bursts. Bitcoin is not a company. It does not create any actual revenue. Cash coming into the system goes to paying the miners, who sell their 900 newly minted BTC per day and earlier investors lucky enough to sell at the right time.

I’m sure the current pump has nothing to do with the NYAG getting closer to exposing Tether/Bitfinex’s inner workings, the recent indictment of BitMEX operators, and Binance’s latest efforts to aggressively block U.S. citizens from using its exchange.

Binance pulls in big profits

The largest tether exchange expects to earn between $800 million and $1 billion in profits for 2020, its captain Changpeng Zhao (“CZ”) told Bloomberg. The Malta-registered exchange also expected $1 billion in profits 2018.

Speaking of Binance, the crypto exchange is suing Forbes and two journalists for a recent report claiming that the exchange had a plan to dodge regulations. (Here is the complaint.) It’s unlikely CZ will get anywhere with this lawsuit because the suit will get torn apart in discovery.

Similar to when Bitfinex threatened to sue prolific critic Bitfinex’ed in December 2017, this is likely more of warning to other journalist: don’t dig too deep, or we’ll come after you.

STABLE Act

The big news of the week is that three congressional democrats are trying to pass a bill that will require stablecoin issuers to comply with the same regulations and rules as banks.

If passed, the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, would require stablecoin issuers to apply for bank charters, get approval from the Federal Reserve and hold FDIC insurance. (The bill, press release.)

Stablecoin issues are like wild cat banks. Back in the 1800s banks would issue their own currency, and nobody knew what was backing the currency. And because these banks were often in remote, hard to get to locations, people often had trouble redeeming their notes for silver or gold or whatever it was that was supposed to be backing them.

Other news

Facebook’s Libra Association has announced a change of name. It is now the Diem Association. (Press release)

Tether skeptic Cas Piancy debates Sino Global Capital CEO Matthew Graham. (Podcast)

PayPal is shilling bitcoin on Facebook and Twitter.

Reggie Fowler owes his defense team $600,000. Lawyers were conned by a con. (My blog)

Joe Biden intends to nominate Adewale Adeyemo as Deputy Treasury Secretary, not Gary Gensler as previously thought. (New York Times)

Bill Hinman, who first spoke of “sufficient decentralization,” served his last day as SEC’s Division of Corporation Finance director on Friday. (SEC statement on departure)

Spotify is looking to add support for crypto payments. The streaming service wants to hire an associate director to lead activity on the libra project and other crypto efforts. (Coindesk)

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Reggie Fowler hoodwinks his own defense team

Reginald Fowler, the Arizona businessman tied to hundreds of millions of dollars of Tether and Bitfinex’s missing money, appears to have conned his own defense team. 

As I explained in a previous post, Fowler’s lawyers are seeking to withdraw from his case due to nonpayment. (The US government is accusing Fowler of operating a shadow banking operation for cryptocurrency exchanges.) But the details are privileged and confidential, so the judge overseeing the case agreed to allow them to file an ex parte sealed letter.

Judge Andrew Carter has now received the letter—from Hogan Lovells on behalf of itself and Rosenblum Schwartz—reviewed it, and filed a response. As I had suspected, Fowler appears to have hoodwinked his own defense team. Here is the judge’s eight-page opinion and order.

“Money isn’t everything,” the SDNY district judge writes. “But in this case, it is the only thing.” [Emphasis mine.]

According to Carter, Fowler’s jilted defense team recounted several conversations with their client in which Fowler promises to pay, but does not, effectively stringing them along.

“Mr. Fowler assured his attorneys he could pay, referring to planned business transactions, real property and bank accounts,” the judge said.

The defense counsel apparently understood that many of Fowler’s assets were frozen, but the hope was that Fowler could unfreeze certain assets by demonstrating that the assets had no connection to case.

However, during the time Fowler’s lawyers had been pressing him for payment and Fowler telling them he did not have the available funds, the lawyers learned that Fowler had plenty to pay his other lawyers—a large international law firm (name withheld) and an unnamed lawyer.

I’m not sure what exactly this means (a tip-off that Fowler had funds hidden away somewhere?) but Carter said: “The anonymous lawyer gave defense lawyer advice regarding Fowler’s ability to pay legal fees from funds that might not be related to criminal activity.”

So why did Fowler’s lawyers wait this long before asking the court if they could dump their client when the troubles with getting paid started back in February?

According to Carter’s retelling, they thought the case would have been resolved with a guilty plea in January. However, the plea bargain blew up when Fowler learned it would require him to forfeit $371 million.

Recall that after that, federal prosecutors responded with a superseding indictment that added a fifth charge, which would have required a lot of additional (unpaid) work from the defense team.

Fowler’s defense team “decided they would continue representing him even though they had been owed a great deal of money for several months,” Carter said. “But largess shrinks when confronted by the prospect of additional, unpaid hours dedicated to trial preparation.”

What next?

There is still the issue of whether Fowler’s defense team should be allowed to withdraw from the case. But federal prosecutors needs to know more about their reasons for seeking withdrawal, so they can respond.

Some information in Hogan Lovells’ sealed ex parte needs to be made public and some needs to remain sealed, Carter said. Certain information about Fowler’s assets should remain sealed. Any information about plea negotiations needs to remain sealed as well.

However, details about the amount and timing of Fowler’s payments to the defense counsel is “highly relevant and should be made public.”

The name of the large international law firm should also be made public, Carter said, stating that “the size and nature of the firm is relevant to the fact that Mr. Fowler paid something to that firm—but did not fully pay Hogan and Rosenblum—and whether Hogan’s and Rosenblum’s acceptance of relatively low retainers was reasonable.”

Low retainers? This may be a sticky point, and something federal prosecutors make a big issue with in their next response.

The judge ordered Fowler’s defense team to file three versions of their letter—a public version redacting what should not be revealed to the government or the public; a sealed version, redacting what must not be disclosed to the government; and a third ex parte sealed version with no redactions.

All filings need to be completed by Dec. 1; the government has until Dec. 8 to respond. Replies are due by Dec. 11.

Nov. 24: Updated to clarify a few details, like what Fowler is being accused of and to emphasize that the retainer issue will likely come up again in the government’s response.

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Confirmed: Reggie Fowler can’t pay his lawyers

Reginald Fowler’s lawyers confirmed that money is indeed at the center of a conflict between them and their client — and the main reason why they want to withdraw from the case. 

The news was revealed Friday in a telephone status call attended by Assistant US Attorneys Jessica Greenwood, Sheb Swett and Sam Rothschild; Fowler’s defense team, James McGovern, Michael Hefter, and Sam Rackear of Hogan Lovells, and Scott Rosenblum of Rosenblum Schwartz & Fry; and Fowler himself.

Fowler, a former NFL investor — who resides in Chandler, Arizona, and is free on bail — is accused of setting up a shadow banking service that has been linked to Crypto Capital, a Panamanian firm at the center of the New York Attorney General’s investigation into crypto firms Bitfinex and Tether.

As I wrote earlier, Fowler’s defense counsel have been careful about disclosing details on why they want to ditch their client, who they have been working with since Fowler was indicted in April 2019.

District Judge Andrew Carter began the call: “Defense, can you give me a little further elucidation regarding the grounds for your seeking to be relieved without getting into any privileged or confidential materials?”

Fowler’s attorney McGovern said the matter involved privileged and confidential information but added: “I think it is fair to say that it is of the nature that the government assumes in their filing, of a fee-based nature.” 

Judge Carter cut straight to the heart of the matter: “So it is fair to say, without getting into the details, this is about lawyers not getting paid?”

“Yes,” McGovern answered, but added it was “a little bit more than that.” He then suggested that his team file an ex-parte submission setting out the nature and specifics of the request to withdraw. “That way, we’ll provide the court with a substantial amount of information that will provide color for the entire discussion,” he said. 

Fowler is represented by two legal firms. Carter asked if the nature of the conflict was the same for both firms. “Yes,” responded Rosenblum, Fowler’s attorney at the second law firm.

Federal prosecutors have argued that Fowler’s defense can’t simply withdraw from the case without giving some type of explanation.

US Assistant Attorney Greenwood reiterated that argument, telling the judge that “there are significant portions of a fee arrangement that are not potentially privileged.” She suggested Fowler’s attorneys provide details in an ex-parte and then allow the government to access the non-privileged portions “so we can appropriately respond to the motion to withdraw.”  

Judge Carter agreed to allow Fowler’s defense team to file a submission under seal. “Once I receive those materials,” he said, “I will make a determination as to whether or not the document will remain under seal or whether or not there are portions that can, in fact, and should, in fact, be redacted and other portions that should be made public.”

The defense counsel said they would submit the document on Nov. 18.

So where is Fowler’s money?

Fowler has been having money problems for a while—problems that extend back to when the US Department of Justice froze his bank accounts in late 2018, leading to the collapse of the Alliance of American Football, a new football league that he cofounded and was a major investor in.

From there, things seem to have gotten worse.

Recall that in January 2020, Fowler rejected a plea deal that would have required him to forfeit $371 million. It was the forfeiture requirements that blew up the deal. Prosecutors hit back with a superseding indictment that added a new count: wire fraud.

On October 15, Law360, reported that Fowler’s legal team might be open to exploring for a second time potential options to resolve the charges, even though the new wire fraud charge complicated things.

And then, on October 23, Fowler’s defense team went to the court seeking to modify conditions of his bond so that he could pay for his defense. (Here is the original May 2019 bond conditions; here is their request for a change.)

Specifically, they wanted to change the bond conditions to enable Fowler to take credit out on properties he had acquired prior to February 2018 “when the alleged conspiracy began” without approval from pretrial services. And to remove the five properties posted as security for the $5 million bond.

Those properties, based on a rough estimate of looking at them on Zillow, are probably only worth around $1.5 million total.

Whatever happened after that — it clearly wasn’t enough to satisfy his attorneys.

Updated Nov. 14 to add the bit about Fowler’s accounts getting frozen in 2018 and the AAF.

Reginald Fowler’s lawyers want to quit. Did he neglect to pay them?

Reginald Fowler, the Arizona, businessman allegedly linked to hundreds of million of dollars in missing Crypto Capital funds, is about to lose his defense team. Did he neglect to pay them?

And knowing who their client was, did his lawyers ask for a large enough retainer in the event that something unexpected like, say, a superseding indictment might extend their work?

Crypto Capital is the payment processor that Tether and Bitfinex—and several other cryptocurrency firms—used to shuttle money around the globe as a workaround to the traditional banking system. Fowler allegedly helped out by opening up a network of bank accounts for them.

We can only guess the real reason Fowler’s lawyers are keen to drop their client at the moment, but court docs may offer clues. Here is the backstory:

Earlier this week, Fowler’s attorneys—James McGovern and Michael Hefter of Hogan Lovells US LLP—asked a New York judge for permission to withdraw from the case. (Here is their motion to withdraw filed on Nov. 9.)

(Fowler is also represented by Scott Rosenblum of Rosenblum Schwartz & Fry PC, though Rosenblum’s name is not on the motion.)

The lawyers claim they initially told Fowler their reasons for wanting to quit on February 26—coincidentally, just five days after the government added a fifth charge against Fowler in its superseding indictment and a month after Fowler forfeited on a reasonable sounding plea bargain.

In the months follower, the legal team informed Fowler both “orally and in writing on multiple occasions” of their grounds for wanting to withdraw. Now, after much back and forth, they have had enough: they are asking the court for permission to drop him.

McGovern and Hefter don’t offer a specific reason for wanting to quit in their motion, citing attorney-client privileged. But they argue the case has had “limited pertinent discovery,” Fowler has had ample time to find new counsel, and essentially, the case should go on just fine without them.

Federal prosecutors are not convinced. In a letter addressed to Andrew Carter, the Southern District of New York judge overseeing the case, they argue the defense counsel has’t presented enough facts for the court to decide on the motion. (Here is their response filed on Nov. 12.)

Specifically, they dispute the “limited pertinent discovery” claim, saying the government has so far produced over 370,000 pages of discovery, much of which they have already discussed in detail with the defense counsel.

Further, they argue that if this is about a “fee dispute,” the court needs to weigh other factors, such as “nonprivileged facts” about the fee arrangement, including whether a “more careful or prudent approach to the retainer agreement might have avoided the current problem”—i.e., McGovern and Hefter should have insisted on more money up front.

Finally, they claim that if Fowler’s lawyers’ leaving further delays the trial, the court should not allow it. After two postponements, the trial is currently scheduled for April 12, 2021. (It was originally slated to begin on April 28, 2020, and then got moved to January 11, 2021, before the current trial date.)

“Now, approximately five months before the current trial date, defense counsel seeks to withdraw from this matter based on facts they claim were discussed with the defendant as early as February 26, 2020—nearly nine months ago and before both prior adjournments in this case,” federal prosecutors said. “The current motions should be denied if allowing counsel to withdraw at this late stage would further delay trial.”

Read Part II: “Confirmed: Reggie Fowler can’t pay his lawyers

And Part III: Reggie Fowler, man linked to missing Bitfinex funds, hoodwinks his own defense team

(This story was updated on Nov. 13 to note that Fowler is also represented by Scott Rosenblum.)

What’s in Quadriga’s 7th report of the trustee? (Hint: mostly admin stuff)

EY, the court-appointed trustee in the bankruptcy case of failed Canadian crypto exchange QuadrigaCX, has released its 7th report of the trustee. (You can download it here.)

Most of this is administrative and accounting stuff with regard to how EY plans to settle claims, but I’ll summarize for you.

Claims for lost QuadrigaCX money were due on August 31, 2019. Most of the claims came in before that date, but there’s been a small trickle afterward. EY has thus far received 17,053 claims for missing Quadriga funds.

(Recall that earlier, EY said Quadriga had roughly 76,000 active users when the exchange shuttered in early 2019. Presumably, some folks were shy about filing claims and revealing their true identities—or else they had such small amounts on the exchange that it wasn’t worth the fuss.)

All the claims rank pari-passu, meaning they will all get treated the same. None will receive priority over any others, although 25 percent who filed claimed a “right of priority” under the Bankruptcy and Insolvency Act.

Here’s EY’s breakdown of the claims by asset:

Image: EY’s 7th report of the trustee

Choosing a currency conversion date

Affected Quadriga users have submitted claims for missing crypto, Canadian dollars, and U.S. dollars. EY now needs to convert all of the U.S. dollar and crypto claims into Canadian dollars, so it can distribute available funds in the same base currency.*

The question is — what exchange rates do they use, based on what day?

The trustee has the choice of using one of two dates. It could use February 5, 2019, the date Quadriga froze all withdrawals and deposits, which is the same day the exchange filed for creditor protection. (Yes, as unbelievable as it sounds, Quadriga was accepting funds up until that very day, even though its CEO Gerald Cotten died in December.)

Or it could use April 15, 2019, the day that Quadriga officially transitioned into bankruptcy. The price of crypto went up substantially in those two months, so EY is asking the court to establish the exchange rates.

Total claims will be either CA$224 million (US$171 million) or CA$291 (US$223 million), depending on the conversion date used.

Image: EY’s 7th report of the trustee

Accepting claims with errors

Of the 17,053 claim forms it received, EY found that 5,500 contained errors. Most of these were minor errors, such as missing signatures, missing pages, etc. Rather than calling and tracking down the claimants individually to fix the errors — which costs money — EY is requesting a court order that will allow them to accept the claims as is.

EY said it believes this is the “most cost effective way to address the issue” and will maximize the amount the affected users will ultimately recover.

What’s left in the till?

Another big question is, how much money will go to the claimants?

From the period April 15, 2019, to October 30, 2020, EY has rounded up nearly CA$45 million (US$34 million) in missing Quadriga funds — that includes money from liquidating properties held by Cotten’s widow, Jennifer Robertson.

In the same period, EY has paid out CA$5.7 million (US$4.4 million) — that includes a whopping CA$1.9 million for trustee fees and CA$1.4 million in legal fees. That leaves a total of roughly CA$39 million (US$30 million) available for distribution.

Miller Thomson, the legal firm representing Quadriga’s former users, said in September, that two things need to happen before any claims can be filled. First, EY has to review each claim individually. Second, the Canada Revenue Agency needs to complete its audit of Quadriga’s tax liabilities.

*Updated to clarify that the conversion rates for USD and crypto will be applied to the claim amounts, not the amount that EY has recovered.

News: Virgil Griffith wants charges tossed, MicroStrategy bets big on BTC, Ledger hacked

Things are getting antsy here in the U.S. We’ve got two days till the election, and I’m stocking up on food and alcohol, just in case all hell breaks loose.

Meanwhile, here’s the crypto news for the week, starting with…

“Libra Shrugged” is here!

David Gerard’s book “Libra Shrugged” is available on Amazon starting Monday. I bought a copy, and you should, too.

The book covers everything from how Facebook was lured into blockchain in the first place—even that part is crazy—to how its plans for a world cryptocurrency were slammed down by regulators. There’s even a section on central bank digital currencies, or CBDCs.

You would think that a company as large as Facebook would be savvy enough to know how to prep for regulators, but sadly, no. Read the book. It is fabulous. (I helped edit an early draft.)

Virgil tries to get charges dropped

Virgil Griffith, the former Ethereum developer who was arrested last Thanksgiving and charged with one count of conspiracy to violate the International Emergency Economic Powers Act, is trying to get the charges dropped. Griffith, a U.S. citizen who was living in Singapore at the time, flew to North Korea in 2019 to give a talk at a conference. (The IEEPA prohibits U.S. citizens from exporting goods, services, or technology to North Korea without approval from the Treasury Department.)

The motion, filed by attorney Brian Klein, is moving to dismiss based on grounds the indictment was unconstitutional. Essentially the motion claims Griffith didn’t do anything that horrible, like actually teach the DPRK how to evade sanctions. He simply went to a conference there and gave a general speech based on publicly available information, “like he does almost monthly at conferences throughout the world,” Klein wrote. (Coindesk, Cointelegraph, Decrypt)

I’m no lawyer, but I think trying to get the charges dismissed is a long-shot. Griffith was pretty in-your-face about traveling to the sanctioned country, going so far as posting his visa for North Korea on Twitter and encouraging others to come to the conference with him.

The U.S. takes sanctions “very seriously,” Stephen Rutenberg, an attorney at Polsinelli law firm, told Coindesk in January. “It wasn’t like he was going there to play music.”

Bitcoin hits $14,000

The price of Bitcoin hit $14,000 (briefly) on October 31—for the first time since January 2018, when it was in free fall from the biggest bitcoin bubble to date. Bitcoiners (people who are invested in the popular virtual currency and want you to invest, too) are convinced we’ll have another bull run like 2017, so buy now before it goes to the moon!

It is really, really hard to ignore the correlation between bitcoin’s price and the latest fresh supply of tethers (USDT). Tether issued $500 million worth of tethers in one week and is fast on its way to a total of $17 billion worth of tethers in circulation. Take a look at this graph:

Most of those tethers, by the way, go straight to crypto exchanges Bitfinex, Binance, and Huobi, according to Whale Alert.

MicroStrategy’s bitcoin bet

In its Q3 earnings call, business analytics firm MicroStrategy said it was putting its excess stockpiles of cash into stock buybacks and bitcoin—but mostly bitcoin.

Bitcoin is mentioned 52 times in the call by MicroStrategy President Phong Le and CEO Michael Saylor, who spoke to investors. The publicly traded company purchased approximately 38,250 bitcoins for $425 million during the quarter, for an average of around $11,111.

Saylor also disclosed in a recent tweet that he personally “hodls” 17,732 BTC, which he bought at $9,882 each on average for a total of $175 million. He claims MicroStrategy knew of his personal investments before the company went ahead and bought BTC on its own.

As Wall Street Journal columnist Jason Zweig notes, MicroStrategy stock was hot during the dot-com bubble of the late 90s, but after the SEC accused the firm of accounting fraud in December 2000, its stock never recovered.

To settle the charges at the time, Saylor paid $350,000 in civil penalties to the SEC and disgorged $8.3 million. Two other executives also paid $350,000 to the SEC and returned $1.6 million and $1.4 million to shareholders. They did not admit or deny the charges. (SEC litigation release)

Now, after complaining to the WSJ about the low returns on cash, Saylor said he is willing to take a risk on bitcoin. But what about the company’s stockholders? Is this why they are buying a publicly traded stock? So they can gamble on bitcoin?

“Investors who wish to buy bitcoin could always do so themselves with the proceeds of a dividend or share buybacks,” Zweig writes. “The point of buying a stock is to get a stake in a business, not to take a flier on cryptocurrency.”

Keto dietary hazards

Bitcoiners are famous for their weird dietary habits. Last week, I mentioned Soylent, the dreadful drink that is a meal replacement substitute, which some bitcoiners were investing in—and drinking. And a lot of bitcoiners follow a strict all-meat diet. But at least one has ended up in the hospital.

“After about a month of a 90% strict carnivore diet, and years of a mostly [low carb, high fat] diet before that, I have now been hospitalized since Sunday morning for diverticulitis of the large intestine. I won’t be able to eat anything but soups and mashed things for a while,” bitcoin advocate Knut Svanholm tweeted from his hospital bed.

Ledger hacked

You would think a cryptocurrency wallet—meant to help you safely store your bitcoin—would be big on security right? Think again.

After a hack resulted in a leak of Ledger’s customer emails (and phone numbers, too, apparently), owners of the hardware crypto wallet are being targeted by a phishing attack.

A third-party is sending them emails and text messages that appear to come from Ledger support telling them to download the latest version of the Ledger app. (The Block)

One Ledger customer posted on Reddit a confusing email from Ledger explaining the situation.

Customers are upset because they say Ledger hasn’t been transparent about the breach and what exactly was stolen.

So, if you want to buy bitcoin, but you’re worried about how to safely manage your keys, invest in a hardware wallet—but preferably not one that will lose your emails.

News: Modern Consensus co-founder arrested, PayPal embraces bitcoin, Peter Schiff in the hot seat

It’s October, and the year so far feels like a foggy dream. After spending the last two weeks in the wonderful city of Austin wandering around Zilker Park and Barton Springs and getting bitten by mosquitoes at dusk, I’m trying to get back into writing. Here is the crypto news for the week — not all of it, but stuff that I found interesting, and maybe you will, too.

The Kurse” gets arrested

Ken Kurson, co-founder of crypto outlet Modern Consensus, was arrested Friday for cyberstalking. The criminal complaint outlines months of alleged batshit behavior while Kurson was going through a divorce in 2015. All of this came to light in 2018, when the FBI did a background check on him, blowing sky high his chances for a prestigious federal position.

I was employed by Modern Consensus earlier this year but left due to a hostile and abusive work environment that Kurson enabled. I made the decision to leave the day I stumbled on two articles, one in the Atlantic and another in the NYT, detailing his history of mistreating women. It was clear, at that point, I needed to get out.

In a tweet following the arrest, Deborah Copaken said dozens of women contacted her after she wrote her story in the Atlantic. I was one of them.

Kurson co-founded MC in January 2018 with Lawrence Lewitinn who went on to work for CoinDesk before I joined. Before his departure, Lewitinn hired Leo Jakobson, an old friend of his, who was my direct report. 

Kurson is an XRP investor and Ripple board member. He also has connections with Trump, Giuliani and Kushner, as detailed in the NYTimes and Washington Post, who covered his arrest.

CoinDesk hemorrhaging reporters

Six reporters have exited CoinDesk since July—during a pandemic when media jobs are scarce. Some of the outlet’s dirty laundry was aired in a leaked memo penned by one of its employees last week. Here’s the bit that caught my eye: Among other grievances, the memo states that “DCG portfolio companies felt comfortable trying to direct our coverage…” 

Digital Currency Group is CoinDesk’s parent company. It has investments in more than one hundred crypto companies. Despite moving into the same building as DCG in September 2019, CoinDesk promised its readers that the two companies would operate independently.

CoinDesk Chief Content Officer Michael Casey published the leaked memo in an upbeat blog post titled “How a Newsroom Learns and Grows From Its Mistakes,” In the post, he downplayed morale issues, saying only one or two reporters left due to internal tensions, and promised “big changes.” 

In a recent Decrypt piece, Ben Munster sits down with CoinDesk reporter Leigh Cuen. The story offers clues on what it’s like working in crypto.

PayPal embraces crypto trading

Payments giant PayPal has entered the cryptocurrency market. According to a company press release, beginning next year, PayPal users can “buy, hold and sell” cryptocurrencies, starting with bitcoin, ether, bitcoin cash and litecoin, directly within the PayPal digital wallet.

Bitcoin skeptic David Gerard is baffled by the move. “If PayPal pursues this crypto trading market, I would expect trouble when—not if—mum-and-dad investors get ripped off,” he said in a blog post.

PayPal’s crypto service won’t allow users to transfer their cryptocurrency to another wallet—the only way out of the PayPal system is cash. What benefit then does this offer the user, if you can’t really control your own bitcoin?

None, Nicholas Weaver, a researcher at the International Computer Science Institute, told me. He points out that PayPal’s lawyers undoubtedly took note of the recent U.S. Department of the Treasury’s Office of Foreign Assets Control notice saying that companies that facilitate ransomware payments could be in violation of federal law.

“I suspect this is some Bitcoin/Libertarian VP’s vanity project,” Weaver said. He predicts PayPal is “going to call it a pilot program, see that nobody wants to actually use it, and quietly vanish it in the memory hole.”  

What about Epik?

Curiously, earlier this month, just prior to announcing it was embracing Bitcoin, PayPal closed an account held by domain registrar Epik, home to several right-wing websites. (Here’s the unhinged letter Epik sent to PayPal, calling the move an “unwarranted abuse of civil liberty.”)

One source told Mashable the problem lies with Epik’s virtual currency “Masterbucks,” which can be used to purchase products sold by Epik or converted into U.S. dollars. On its website, Epik touts Masterbucks as “liquidity for the domain industry.” (Sounds eerily like QuadrigaCX bucks.)

The big question: if PayPal has concerns about compliance issues with Epik, why is it getting involved with crypto, potentially an even bigger compliance nightmare? 

Armstrong not so apolitical after all

Brian Armstrong, the CEO of Coinbase, doesn’t want to touch on politics unless it supports Trump—or some candidate other than Joe Bidden.

After making a big to-do about supporting Black Lives Matter and then telling employees they shouldn’t engage in politics at work, Armstrong tweeted a rambling blog post by Robert Rhinehart, the founder of Soylent, a company that makes a meal replacement drink, titled “Why I am Voting for Kanye West.”

In the post, Rhinehart, who has the writing style of a nine-year-old child, hails West, who suffers from bipolar disorder, as some kind of genius.

“I know, in my heart, that Kanye West, while he is not perfect, is the best person to lead America,” he writes. “Even if Kanye West was not running for president, I would vote for him.”

Armstrong referred to the post as “Epic.”

It is worth noting Coinbase’s connections with Soylent. Apparently, the crypto exchange’s employees were guzzling the foul concoction as far back as 2013. And at one point, you could purchase Soylent with BTC.

About Peter Schiff’s offshore bank

Gold bug, Bitcoin skeptic and libertarian economist Peter Schiff is in the hot seat for tax evasion. His Puerto Rican bank Euro Pacific’s anti-money laundering efforts are lax, and the bank’s customers include entities linked to a who’s who of financial and organized crime, according to reports in the Age, the NYT and 60 Minutes Australia. The trio of news outlets say that Schiff’s bank is being probed by a team of international investigators.

I met the outspoken Schiff in person at the 2017 Nexus crypto conference in Aspen, where he gave his usual spiel on the upcoming economic apocalypse and dollar collapse. Naturally, he was there representing Euro Pacific Bank.

“It was fairly apparent that Peter Schiff was operating in a manner that was intended to attract customers who were looking to either evade tax or perhaps launder money,” John Chevis, former Australian Federal Police investigator, told 60 Minutes Australia. Schiff, who denies any wrongdoing, stormed off of the 60 minutes Australia set when pressed for details.

Tether spins out another billion

Last week, Tether surpassed $16 billion in total liabilities, representing the total amount of tethers in circulation.

Tether began issuing its wildly popular stablecoin in 2015. It took more than two years to issue the first billion. By January 2020, Tether was at $4.5 billion worth of Tethers. And here we are today, with the company putting out as much as $1 billion worth of tethers every two weeks.

I’m sure all of these tethers are backed by real assets and generated by real demand, as the NYAG will eventually discover in its ongoing investigations — as soon as Tether/Bitfinex hand over that paperwork any day now.

Filecoin’s disastrous launch

Filecoin, a blockchain-based data storage network, raised more than $200 million in an initial coin offering three years ago.

After much anticipation and many delays, the mainnet finally launched on October 15. Since then, the price of the FIL coin has been a wild rollercoaster ride, soaring more than 100 percent at first, then tumbling 80 percent days later, as Cointelegraph explains.

But the bigger problem is the handling of the miners, who provide the storage for the system. Initially, they weren’t able to pull a profit.

Miners have to stake a large number of FIL tokens to start their mining operations. At first, they weren’t getting enough tokens to do this via mining rewards because they had to vest 100% of those rewards for six months. This forced them to buy tokens on the open market at high prices if they wanted to ramp up to capacity.  

As a result, two days after the platform launched, five of the largest miners switched off thousands of rigs in protest, according to 8btc.

Since the folks behind Filecoin didn’t foresee any of this, they are now scrambling to make changes. The latest system upgrade allows miners to access 25 percent of their block rewards immediately, per the Block.

Quadriga’s trustee hires blockchain analytics firm

The search for what happened to QuadrigaCX’s missing money is a never-ending one. 

In the latest twist, Ernst & Young, the trustee in the Canadian crypto exchange’s bankruptcy case, hired an analytics firm to probe the blockchain for additional clues on where it all went. 

Miller Thomson, the law firm representing Quadriga’s former users, sent out a letter to Quadriga creditors on Friday, letting them know that on August 17, EY retained Kroll Associates “to conduct further analysis on a subset of transaction data.” 

The decision was guided in part by the “official committee,” a subset of Quadriga users who represent the exchange’s former users as a whole. The group has been working with EY since February collecting and reviewing proposals from third-party cryptocurrency­ asset tracing firms, Miller Thomson said.

Kroll, a division of New York-based financial consultancy firm Duff & Phelps, will not be tackling the project alone, however. It is joining forces with Coinfirm, a London-based blockchain analytics firm.

Kroll will receive up to $50,000 USD for their efforts. And EY has provided a contractual indemnity of up to $150,000 USD—three times the professional fees—to protect Kroll from any lawsuits or negligence claims. 

Crypto Capital

In its letter, Miller Thomson also noted that it appears Crypto Capital is not holding any of Quadriga’s money. 

Recall that back in January, Miller Thomson reached out to creditors asking for help in identifying if Quadriga had used the Panamanian third-party processor to funnel cash in and out of the exchange.

Crypto Capital is of interest because it is tied to crypto exchange Bitfinex, which is allegedly missing some $850 million. (I guess the hope was that some additional Quadriga money might have been tied up in all of that mess—and there would be more to reclaim.)

Disbursement of funds

So far, EY has located $35 million (CA$46 million ) to pay out to creditors. The amount represents a fraction of the total $190 million (CA$246 million) that went missing when the exchange went belly up early last year. 

As of May, EY has received 16,959 claims from the 76,000 or so users who held funds on the exchange when it collapsed.

Two things have to happen before those claims can be filled. The first is that EY has to review each claim individually, and that takes time and money.

But the bigger holdup by far is that the Canada Revenue Agency needs to complete its audit of Quadriga’s tax liabilities, said Miller Thomson.  

In March, the CRA collected a vast trove of documents from EY, and there’s no telling how long that will take to dig through, especially given current circumstances.  

“The CRA did not confirm a timeline of when the CRA Audit will be completed given the COVID­19 pandemic,” the law firm said.

 

Judge reschedules Reggie Fowler’s trial for next year

reggie-fowler-1Reginald Fowler stood before a New York judge Thursday and pleaded not guilty to wire fraud. The new charge brought the total counts against him to five. An irked-looking judge agreed to move the trial date, originally set for next month, to Jan. 11. (Court doc.)

The wire fraud charge was added in a superseding indictment on Feb. 21. The Arizona businessman and ex-NFL owner had already pleaded not guilty to the four prior counts, which had to do with bank fraud and illegal money transmitting. He was looking at a trial date of April 28.

However, with the new charge piled on, Fowler’s lawyer James McGovern wanted more time to prepare. Matthew Lee of Inner City Press, live-tweeted Fowler’s arraignment in court today.  

“The trial is scheduled. Mr. Fowler did not plead guilty. Now he wants an adjournment of the trial,” said U.S. Attorney Jessica Fender, according to Lee’s account. 

Judge Carter granted the adjournment and offered Oct. 28 as a new date for the trial. But Fender turned it down saying her colleague was unavailable at that time.

“Really? A prosecutor not being available is not grounds under the Speedy Trial Act,” said Judge Carter.

Finally, a new date of early next year was settled upon — and the judge appeared irritated with the government, Lee told me.

The law moves slow

Nothing is happening fast in this case. But the right to a speedy trial isn’t for the benefit of the public — it’s for the benefit of the defendant, who can waive it. And since Fowler is free on $5 million bail while he awaits trial, he can afford to do that. After all, he could find himself behind bars for many years after the trial.

Fowler was originally indicted on April 30, 2019, along with Israeli woman Ravid Yosef, who remains at large. The pair allegedly ran a shadow banking service on behalf of Crypto Capital Corp, a Panamanian payment processor that counted Bitfinex and the failed QuadrigaCX cryptocurrency exchanges as customers.

A plea deal would have seen three out of four charges against Fowler dropped. The deal was conditioned upon him forfeiting $371 million* allegedly tied up in some 50 bank accounts, but he wouldn’t—or couldn’t—agree to that.

After Fowler turned down the plea deal, federal prosecutors heaped on the newest charge of wire fraud. The fifth count was no surprise. In a court transcript filed in October 2019, Assistant U.S. Attorney Sebastian Swett told Judge Carter:

“We have told defense counsel that, notwithstanding the plea negotiations, we are still investigating this matter, and, should we not reach a resolution, we will likely supersede with additional charges.”

Fowler, who resides in Chandler, Ariz., will likely go about his daily life until next year when his trial begins. Is he rattled by any of this? Who knows. This is a man who has plenty of experience dealing with lawyers and judges. In 2005, ESPN reported that he had been sued 36 times.

Updated (3/7/20) to add names of attorneys.

*Updated (3/5/20 at 11:30 p.m ET) to note that Fowler’s proposed plea deal was based on him forfeiting $371 million, not $371,000 as previously stated.

We’re in Vancouver for a Quadriga documentary

Well, it’s finally happening. I’m in Vancouver with David Gerard, my mentor and the person responsible for turning me into a bitter nocoiner. If it weren’t for him, I would be doing something productive and useful with my life. Instead, I’m writing about crypto for my blog. Next thing you know, I’ll be a Wikipedia gatekeeper.    

This is my first time meeting him in the flesh. I flew in from Boston Saturday with a layover in Toronto, and almost as soon as I got here, David — who arrived several hours earlier on an eight-hour direct flight from London — met me in the hotel lobby. He was everything I pictured — six-foot-four-inches tall, legs a mile long, says “fuck” a lot and likes to drink beer. Naturally, we made a bee-line to the bar.  

20200223_100227We’ve both come here to be interviewed for a documentary on failed Canadian crypto exchange QuadrigaCX. I initially met with filmmaker Sheona McDonald last year in Nova Scotia — after a harrowing drive through a blizzard to attend a Quadriga court hearing — so the plan to bring me and David together has been in the works for nearly a year.

The documentary is for CBC, Canada’s national public broadcaster. We aren’t sure when it will be out, but Sheona tells us the film may be in a few festivals first before it’s on TV.

IMG_3027 (1)It’s been a tight schedule this weekend. After a long day of travel, this morning, we went to this cool loft in downtown Vancouver for the filming. I was on the hot seat first, followed by David. As it turns out, talking for two-hours is really exhausting, especially when you’ve had only a few hours of sleep.

But this is exciting stuff, and it’s great to be able to hash over the details on what went on inside Quadriga with David. Sheona keeps asking us if we think Gerald Cotten, Quadriga’s cofounder who supposedly single-handedly drove the exchange to insolvency after February 2016, is really dead. David is split 50/50, but I’m leaning toward, no that’s not his body buried in Nova Scotia.

This evening, we got to meet up with fellow journalist and Vancouver local Cali Haan for a nocoiner convention at Starbucks and later for a beer.

We have more filming ahead Monday. While today we were interviewed separately, tomorrow Sheona will shoot us in a coffee shop, sharing ideas about what we think happened with Quadriga. And then after that, it’s off to the airport.

See also David’s post.

Want to learn more about Quadriga? Read the timeline.

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Reggie Fowler allegedly funded sports league with ill-gotten gains

A superseding indictment filed with the SDNY court Thursday includes a new charge of wire fraud for ex-Minnesota Viking co-owner Reginald Fowler.

Fowler, who is living in Chandler, Ariz., while free on $5 million in bail, currently faces four other charges related to bank fraud and operating an illegal money transmitting business, so this makes for count number five.

According to federal prosecutors, from June 2018 to February 2019, Fowler obtained money through “false and fraudulent pretenses” to fund a professional sports league in connection with his ownership stake in the league.

imagesWhat sports league would that be? The indictment does not tell us. But Fowler invested $25 million in the Alliance of American Football — an attempt to form a new football league — right before its inaugural season and shortly before his arrest on April 30, 2019.

The league ran into problems after withdrawals from Fowler’s domestic and foreign accounts were “held up around Christmas,” freezing a principal source of the league’s funding.

Shortly before then, the Department of Justice froze five U.S. bank accounts—three of them were Fowler’s personal accounts and two were held under Global Trading Solutions LLC, a shell company that he set up.

Global Trading Solutions LLC has been directly linked to Crypto Capital Corp., a Panamanian shadow bank used by Bitfinex and the failed Canadian crypto exchange QuadrigaCX.

Due to money problems, the AAF collapsed on April 2, 2019, and filed for Chapter 7 bankruptcy two weeks later. The league claimed assets of $11.3 million and liabilities of $48.3 million and held just $536,160.68 in cash.

After forgoing a plea deal last month, Fowler is set to go trial on all five counts on April 28.

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Personal update: I left my job at Modern Consensus

I’ve stepped down from my role as senior editor of Modern Consensus. It was a matter of not seeing eye-to-eye with my direct report. I tried hard to resolve the situation, but ultimately, I made the decision to leave.

It was not an easy decision to make. I did not have another job lined up. I wasn’t sure where the money would come from. Like everyone else, I have bills to pay, and life in these modern times isn’t cheap. When I explained my quandary to another woman writer, whom I admire greatly, she told me: “Have faith in yourself.” And so, I chose to believe that things will turn out for the best.

What’s next? I’m going to keep writing, obviously. I will write for my own blog because I enjoy it immensely. I’ll write for other publications when I can. I’m open to any and all freelance work. If you have a project you need help with, my Twitter DMs are open, or you can reach me here. I’m also starting up my Patreon account again, so if you want to support my work, you can subscribe for as little as $5 a month.

In the short term, however, I am going to take some time off. I always work hard, but I’ve worked especially hard the last year. When I wasn’t working long days, I was worried about work or thinking about going back to work. I look forward to enjoying leisurely cups of coffee in the morning, going on long walks, and focusing on my yoga.

Silhouette of Girl Leaping Over Cliffs With Sunset Landscape
This is me taking a leap of faith.

 

Documents point to QuadrigaCX using payment processor Crypto Capital

Last month, Miller Thomson, the law firm representing Quadriga’s former users, asked creditors for help in identifying if the failed Canadian exchange had used Crypto Capital Corp, a payment processor that is allegedly missing some $850 million

In a letter posted on its website on Jan. 22, the law firm said that it had received information that Quadriga had used a “Panamanian shadow bank” in the final quarter of its operation—presumably, that means September thru December 2018, since the exchange went belly up in January 2019.

Specifically, the law firm asked creditors to forward any emails or financial statements with names of people or companies linked to Crypto Capital. It offered a lengthy list that included Global Trading Solutions LLC and Global Trade Solutions AG.

The former was a shell company in Chandler, Ariz., set up on Feb. 14, 2018, by Reggie Fowler, one of the individuals alleged to have connections to Crypto Capital. The latter was the Swiss parent company of Crypto Capital. (The firm was cited as a parent company on Crypto Capital’s website.)

Screen Shot 2020-02-13 at 8.14.16 AM

Also, in a December 2018 letter published on this blog, Crypto Capital boss Ivan Molina wrote that “Global Trade Solutions AG and related entities” were being denied banking in the U.S., Europe and elsewhere as a result of financial crimes investigations. Molina was arrested for money laundering last year.

What about GTS Germany?

Global Trade Solutions Gmbh is not on Miller Thomson’s list. I can’t find it on any legal or court docs either, but someone posted on Reddit a year ago that they had received their Crypto Capital withdrawals from the company. 

The sole officer for Global Trade Solutions Gmbh is Ralf Hülsmann, who started on June 15, 2016. Researcher Robert-Jan den Haan found the German public registry for the company, and it is clearly associated with Spiral Global Trade Solutions AG, which is directly linked to Fowler.

Spiral Inc. is a holding company Fowler set up in 1989. At one time it held more than 100 businesses. He also owns Spiral Volleyball.

Screen Shot 2020-02-12 at 11.15.44 PM

Links to Quadriga

Two documents recently shared by individuals on Telegram claiming to be Quadriga creditors show funds sent to Global Trade Solutions Gmbh

On June 28, 2018, one creditor wired $50,000 CAD from the Royal Bank of Canada in Toronto to an account at Deutsche Bank in Germany belonging to Global Trade Solutions Gmbh.

“I should have followed my gut feelings when I was at the bank making this wire transfer,” the user told me. “I just had a very shady feeling.”

Screen Shot 2020-02-11 at 6.54.47 PM

Another creditor shared the following document on Telegram. Similarly, it shows funds being sent to a Global Trade Solutions Gmbh account at Deutsche Bank. The transfer appears to be going out from a bank in Toronto, but there is no date on it.

Screen Shot 2020-02-11 at 8.01.17 PM

Other evidence

There is other evidence to support Quadriga using Crypto Capital. At one time, the payment processor listed Quadriga on its website as a client. Gerald Cotten, the exchange’s now-deceased founder also admitted to using it in the past.

In an email to Bloomberg News on May 17, 2018, he wrote: “Crypto Capital is one such company that we have/do use. In general it works well, though there are occasionally hiccups.”

Assuming Quadriga did use Crypto Capital, the only question that remains is, was the payment processor holding any Quadriga funds when the exchange went belly up? (Remember, Quadriga didn’t keep any books, so it’s up to Miller Thomson and court-appointed trustee Ernst & Young to piece things together.) And if so, is there any chance in hell of getting those funds back?

(Read my complete Quadriga timeline to dig in deeper.)


Updated on Feb. 19 to add Ralf Hülsmann and link to someone on Reddit who said they received CCC withdrawals via Global Trade Solutions Gmbh. 

Updated on Feb. 13 to fix typo — Global Trade Solutions AG, not Global Trading Solutions AG — add a screenshot from Crypto Capital’s website and mention missing $850 million.

 

News: Crypto Mom wants to give criminals a head start, IOTA’s meltdown, Lubin’s organism divides

As a reminder, I will be traveling to Vancouver on Feb. 22 to spend about a day and a half with David Gerard. We are being interviewed for a QuadrigaCX documentary. I know when we get there, we are going to wish we had more time to hang out and meet people in the area. Especially given how far Gerard has to travel (from London) and how beautiful Vancouver is. And with that, here is the news from the past week.

Crypto Mom wants to give criminals a head start

SEC Commissioner Hester Peirce (aka “Crypto Mom”) has unveiled her proposal to create a “safe harbor” for crypto startups, allowing them a three-year grace period after their ICO to achieve a level of decentralization sufficient to pass through the agency’s securities evaluations, specifically the Howey Test. (My story in Modern Consensus.)

Where to begin? Given that most, if not all ICOs are illegal securities offerings, this is like giving fraudsters free reign, so they can pump up their coins, cash in and leave the country. It’s like 2017 all over again. This whole notion of “sufficiently decentralized” is something that first came in mid-2018 when Bill Hinman, the SEC’s director, division of corporate finance, mentioned it in a talk he was giving about Ethereum. There is no clear way of defining “sufficiently decentralized.” It’s a murky concept to begin with. (See David Gerard’s story on Peirce. He goes into more depth and is not nearly so kind.)

Peirce is a Republican with libertarian leanings. Her term expires June 5. With a proposal like this and a nickname “Crypto Mom,” I can only assume she is buttering up for her next gig? Also, the odds of this rule passing are slim to none, especially given SEC Commissioner’s Jay Clayton’s strong criticism of ICOs in the past. 

IOTA’s meltdown

IOTA is in full meltdown mode. Apparently, IOTA founders Sergey Ivancheglo (aka Come-from-Beyond) and David Sønstebø were working on a ternary computing development project called Jinn. But it fell apart, and now the two can’t stop pointing fingers at each other. Ivancheglo says that he no longer works for foundation director David Sønstebø and is suing him for 25 million MIOTA (~ $8.5 million). Sønstebø wrote this really long Medium post, which I had trouble staying awake through. There is also a r/buttcoin Reddit post that spells out the full drama, if you’re in need of entertainment.

Given the maturity level demonstrated by this project in the past, I’m not surprised by any of this. The project has been a complete mess ever since they tried to roll their own crypto in 2017. I wrote about it for Forbes, and they attacked me with weird blog posts and other nonsense. Cofounder Dominik Schiener even threatened to slap me. And when confronted, he accused me of “leading the FUD race.” FT Alphaville actually covered this in a story titled “FUD, inglorious FUD” at the time. 

Researcher Sarah Jamie Lewis is calling on some journalist somewhere to do a deep dive on this sketchy project. “At a glance it’s really hard to not come to the conclusion that there is rampant criminal fraud afoot,” she said in a Twitter thread.

Ripple perpetual swaps

Bitmex has announced trading of XRP perpetual swaps. Bitmex co-founder Arthur Hayes apparently believes XRP is lowly enough to trade on his exchange. Boo-yaka-sha!

Speaking of Ripple, XRP lost almost half of its value last year. It’s a touchy topic for Galaxy Digital CEO Mike Novogratz, because he has invested $23 million into the coin. He recently told a group of financial advisers in Orlando that XRP will “underperform immensely again this year.” He suggested it’s because Ripple owns a giant pool of the coins and keeps selling them off in a situation he likened to shares. (CoinDesk)  

The total amount of XRP in circulation is 100 billion tokens. While Ripple was “gifted” 80 billion, its holdings are down to 56 billion, most of which are in escrow. The company unlocks one billion XRP each month, sells a portion and puts the rest back in escrow. Does that sound like shares to you?

Mastercard dumps all over Libra

Mastercard was one of several payments companies (along with PayPal, eBay, Stripe, Visa, Mercado Pago) to pull out of the Libra Association in October. In an interview with the Financial Times, Mastercard’s CEO Ajay Banga revealed why.

First, Libra Association’s key members refused to commit to avoid running afoul of local KYC/AML rules. Banga would ask them to put things in writing, and they wouldn’t. Second, he didn’t understand what the game plan was for making money. “When you don’t understand how money gets made, it gets made in ways you don’t like.” Finally, the financial inclusion bit struck him as odd. “I’m like: ‘this doesn’t sound right,’” he said.

This gives us a bit of insight into the lack of thought and planning Facebook put into its Libra project before going public with it. You would think a huge enterprise like Facebook would get this stuff right, but apparently not.

ConsenSys splits in two

images (1)Joe Lubin’s organism (that’s what he used to call it, an “organism) looks to be running into more funding trouble, so it’s going to spin off its venture arm. The company will basically become two separate businesses, a software business and an investment business. In the process, it’s also  cutting another 14% of its staff. This is after cutting 13% of its staff in December. (My story in Modern Consensus.)

At one time, ConsenSys had 1,200 employees. In mid-2018, it reportedly had 900. About 117 were let go in December, and likely another 100 in this last round. This is a company that midwifed many of the ICOs that fueled the 2017-2018 crypto bubble. I can still recall going to ConsenSys’ Ethereum Summit on a sweltering day in May 2017 and watching some guy on stage strip down to his boxer shorts. Such was the exuberance at the time.

ConsenSys now lists only 65 companies in its investment portfolio. When Forbes wrote this scathing article in late 2018, the company had 200 startups. Lubin’s science experiment is starting to unravel.

Justin Sun finally breaks bread with Buffet

On Thursday, Tron CEO Justin Sun tweeted a receipt and pictures to show he finally dined with Warren Buffet. This, after paying $4.6 million in a charity auction last year to have lunch with the multi-billionaire. They were originally supposed to meet in San Francisco six months ago, but Sun postponed. This time they had dinner on Buffet’s home turf in Omaha, so Buffet clearly learned his lesson. Other guests were Litecoin’s Charlie Lee, Huobi CFO Chris Lee, eToro chief Yoni Assia, Binance Charity Foundation Head Helen Hai. The bill was for $515 and Buffet left a $100 tip. (Modern Consensus.)

Craig Wright’s abuse of privilege

Craig Wright, the self-professed creator of bitcoin, is driving the attorneys representing Ira Kleiman and the judge bananas. In a document filed with the court on Feb. 2, plaintiffs claimed that Wright has asserted privilege over 11,000 company documents. That is only part of the problem, they said. “The vague descriptions of what is being withheld makes any meaningful analysis on a document by document basis impossible.”

Wright has also apparently claimed that the” bonded courier” is an attorney and any communications with this person of mystery is privileged as well. (Modern Consensus.)

Altsbit gets hacked

Exchange hacks are extremely rare. We don’t hear about them too often, only once every few weeks or so. The latest victim is a small Italian exchange called Altsbit, which had its hot wallet vacuumed clean last week.

This was especially bad for Altsbit, because for some inexplicable reason, the exchange was keeping almost all of its funds in its hot wallet, which is a terrible idea. Most exchanges keep the majority of their funds in offline cold storage for security purposes.

According to reports, the hackers stole 1,066 Komodo (KMD) tokens and 283,375 Verus (VRSC) coins. The combined value of both stands at about $27,000. That’s small potatoes compared to other exchange hacks, where hundreds of millions worth of coins have gone missing. Almost all of Altsbit’s trading activity was coming from the ARRR/BTC pair. (ARRR is the native token of the Pirate Chain.) Altsbit said in a tweet on Feb. 5, it was investigating details of the hack and would get back to everyone soon, but so far nada. The exchange was founded in April 2018.

Bakkt gets into payments

Bakkt, the ICE-owned bitcoin options and futures exchange, isn’t making any money on bitcoin options, but that’s okay because it has another plan. It’s going into payments. The exchange is set to acquire loyalty program provider Bridge2 Solutions. The master plan is to integrate reward points, crypto, and in-game tokens into a single app, so consumers get an aggregate view of their digital assets. Eventually consumers will be able to spend those as cash via the Bakkt mobile app. But for that to happen, Bakkt will have to invest copious amounts of money into marketing to get merchants to adopt the new system of payment. (My story in Modern Consensus)

Other news

What’s happening with Jae Kwon? As Decrypt reported on Jan. 31, he stepped down as CEO of Cosmos to work on a project called Virgo with lofty aims. Cosmos pulled in $17 million in an ICO in 2017. Now Kwon is tweeting under three different monikers and the people within his company have come to find his behavior untenable. (Coindesk)

U.S. Marshalls is auctioning off $40 million of bitcoin (~4,041 BTC) on Feb. 18. (Coindesk.) If you want to put in a bid, you’ll have to deposit $200,000 in advance. Here is the registration form for anyone interested.  

Another study has come out showing that proof-of-stake is just as costly as proof-of-work. But instead of contributing to global warming, PoS requires stakers to put down tokens, lots and lots of them. It’s more evidence that blockchains aren’t economical.

If you have comments or feedback on this newsletter or a tip, drop me a line or DM me on Twitter at @ahcastor.

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News: Crypto Fyre Fest collapses, Virgil Griffith pleads not guilty, lawyers push to exhume body of Quadriga’s dead CEO

Only three weeks to go before David Gerard and I meet up together in Vancouver for work on a QuadrigaCX documentary. I hope the jet lag doesn’t take too much out of him. (He’s traveling from London.) I want to see what happens when he has a few drinks.  

Massive Adoption
(Photo: @crypt0fungus)

The comedy gold medal of the week goes to Massive Adoption, a bitcoin conference that’s now being called the Fyre Festival of crypto because of the packages sold. Jacob Kostecki promised roundtrip flights, hotels and parties for $300-$400. In a shock to all (note the sarcasm), he called the whole thing off. But don’t worry, your refunds are coming. It may take months, but they’re coming. Promise. I swear. So sorry about all this.

David Gerard was the one to originally report on #CryptoFyreFest. I wrote two stories for Modern Consensus on the topic. You’ll find them here and here.  

Our friend Jacob appears to have alienated more than a few casual strangers on the internet. His own brother Jedrek has been speaking out about him on social media. According to Jedrek, Jacob has left a trail of debt and broken promises behind him. And yes, Jacob confirmed to me in a DM that Jedrek is indeed his brother.

Jacob’s behavior reminds me a bit of Gerald Cotten’s when he was running HYIP schemes on TalkGold: Collect people’s money, and then later, tell them the scheme/event has collapsed. Blame it on something external to your control. (Jacob, for instance, is now pointing fingers at everyone, even me.) Apologize profusely and start issuing refunds in good faith, but slowly and over a long period, until people finally give up and go away. 

Also, I can’t help but notice the strong resemblance of the Massive Adoption logo to that of this media consultancy firm.

Virgil’s pot of gold?

Virgil Griffith, former head of special projects for Ethereum Foundation, pleaded not-guilty on Thursday to conspiring to violate the International Emergency Economic Powers Act. He flew to New York from his parent’s house in Tuscaloosa, Ala., to enter his plea. I guess this means he is planning to go to trial? I have to wonder where all the money is coming from. Brian Klein, Griffith’s high profile L.A. lawyer, has made several trips to New York and these legal services don’t come cheap. Griffith’s parents and sister have already put up $1 million for his bail

Telegram’s ICO investors surface

The SEC alleges that Telegram ran a scheme whereby wealthy investors—including several Silicon Valley heavyweights—would get tokens at a steep discount, then dump them on crypto exchanges to bilk retailers. More of those possible investors are now surfacing in court docs. As reported in CoinDesk, they may include:

QuadrigaCX

The law firm representing QuadrigaCX’s former users are nudging the RCMP to dig up the corpse of Gerald Cotten, the exchange’s dead CEO, to make sure it’s really him and not some random dead guy from India. Everybody is mouthing the word “exit scam,” and this is likely the easiest way to find out. Of course, if the body is exhumed and it’s not Cotten, you can expect a Netflix series soon. (My story in my blog.)

Also, Quadriga’s fifth trustees report is out. Basically, it says that big four accounting firm EY, the collapsed exchange’s court appointed trustee, spent half a million U.S. dollars on fulfilling law enforcement requests in the second half of 2019. The small pile of what’s left of Quadriga creditor’s money continues to shrink. (My story in my blog

Reggie Fowler and the mysterious sealed document

Alleged Bitfinex money mule Reginald Fowler was supposed to plead guilty to one count and have the other three counts dropped. But something weird happened when the Arizona businessman stepped before a New York judge on Jan. 17. According to Bloomberg, Fowler was supposed to surrender ~ $371 million in more than 50 accounts. The deal fell apart when he only agreed to forfeit whatever was in the accounts.

Now, according to a Jan. 31 court filing, the U.S. Government has officially withdrawn its plea offer. Nobody knows the full details of what happened that day, but a mysterious sealed document, which appeared in his court filings on Jan. 30, might contain some clues. His trial begins April 28. 

Screen Shot 2020-02-02 at 3.09.31 PM

Spammers gonna spam

In part two of “Decred fires its publicist because Ditto PR could not get the altcoin project a Wikipedia page” David Gerard, who happens to be a longtime Wikipedia administrator, fires back. He wrote an entire blog post calling Ditto out on their no-coiner conspiracy claims. (Ditto originally alluded to Gerard in saying that “a few influential no-coiners have admin power and are intentionally censoring crypto pages.”) He also wrote an article on Wikipedia Signpost, where he talks about the “ongoing firehose of spam” Wikipedia has had to put up with following the 2017 crypto bubble.

Wikipedia has set rules governing what stays up on the site and what gets taken down, and those rules have nothing to do with the site’s administrators. Ditto should know this, as opposed to hiding behind some mad-capped nocoiner conspiracy theory.

Bakkt is a ghost town

The hope was that bitcoin options would lure institution money into the space and send the price of bitcoin through the atmosphere. The unfortunate reality is that literally, no one is trading Bakkt’s bitcoin options. (The bitcoin futures exchange is governed by the Intercontinental Exchange, the owners of the New York Stock Exchange.)

In the last full trading week of January, not a single bitcoin options contract was traded on Bakkt, Coindesk reported. Bakkt launched the first regulated bitcoin options contract on Dec. 9, having rolled out a cash-settled futures and physically settled futures in November and September, respectively. 

Other news

Chainalysis released a report on criminal uses of cryptocurrency in 2019. As long as you overlook some of the marketing fluff—e.g., 60 million Americans bought bitcoin last year—there’s some interesting takeaways. Like the bit about how crooks seem to cash out their bitcoins via over-the-counter trades going through Binance and Huobi. And how, for the first time in Bitcoin’s history, black market sales in crypto surpassed $600 million last year. (See my story in Modern Consensus.)

There’s been more than one news report claiming coronavirus is good for bitcoin. This is utter nonsense. The reason the price of bitcoin goes wildly up and down is because the markets are thinly traded, making them easy to manipulate. Literally, every time there is a crisis happening somewhere in the world, bitcoiners claims that’s good for bitcoin. 

Far right website @Zerohedge had their Twitter account suspended. They always post wild stuff, but apparently, they crossed a line. Buzzfeed said the site claimed without evidence that a scientist at the Wuhan Institute of Virology created the strain of the virus that has led the World Health Organization to declare a global health emergency.  

Bitcoin core developer @LukeDashjr weirdly commented on Twitter that “Masturbation is a very grave sin, arguably even worse than murder.” I thought he was joking, but apparently, /r/buttcoin has an entire collection of his bizarre quotes.

(Updated Feb. 3 at 9 a.m. ET with a few more details on Fowler.)

 

 

 

 

 

 

Law firm for Quadriga creditors puts pressure on RCMP to dig up Cotten

cottenMiller Thomson, the law firm representing Quadriga’s 76,000 creditors, is ramping up pressure on the Royal Canadian Mounted Police to dig up the body of Gerald Cotten, the deceased founder of the failed Canadian cryptocurrency exchange.

Spring is just around the corner. That means the ground in the cold north is going to thaw, and so will the body of Cotten—or whoever that is buried six feet under—putting it at risk of further decomposition. Time is of the essence!

Miller Thomson originally sent a letter to the RCMP at their headquarters in Ottawa on Dec. 13 asking that they exhume the body of Quadriga’s former CEO pronto. They also requested a post-mortem autopsy to identify if that is truly his body and to determine the cause of death. Apparently, no action has been taken yet. 

So on Tuesday, Quadriga’s court-appointed counsel dashed off a letter to the Honorable Bill Blair, Canada’s Minister of Public Safety and Emergency Preparedness, who is the person responsible for the RCMP. Miller Thomson explained all of this in a separate letter that it emailed to Quadriga’s creditors and posted on its website the same day.

Miller Thomson said that it asked Blair to give them an update on whether the RCMP will conduct an exhumation and post­mortem autopsy on the “alleged” — this is the language they are using now — body of Cotten prior to Spring 2020. 

Miller Thomson also gave out Blair’s email, so that Quadriga creditors could contact him “if they have further questions about the RCMP’s management of this file.”

What this means is, Blair will probably wake up Wednesday to hundreds of angry emails from people who have serious doubts as to whether Cotten is really dead. The law firm also suggested creditors contact their local members of parliament.  

I reached out to Blair for comments. It’s too late for him to respond now, but if he writes back, I’ll post his comments here.

Cotten died in Rajasthan, India, at the age of 30, from complications to Crohn’s disease. His body was embalmed in India before it was repatriated to Canada. The closed-casket funeral service took place at J.A. Snow Funeral Home in Halifax, Nova Scotia, on Dec. 14, 2018—the date he was laid to rest. 

(To learn more about the Quadriga scandal, read my full updated timeline.) 

Photo: YouTube/Decentral

 

 

 

Personal update: My new gig at Modern Consensus

As most of you already know by now, I started a new job at the beginning of the month. I’m now senior editor at Modern Consensus. On Jan. 3, my second day on the job, I smashed my right index finger in my car door, and ended it up in the ER twice, first to stitch up the finger, and again to stop the profuse bleeding. 

ENXP84cXsAAYL1uIt was a bad smash. Early in the morning, after only a few hours sleep and a grueling yoga class, I stopped at a dog park. My dogs dashed out of the car, and as I was watching them, worried about coyotes, other dogs and cars in the vicinity (predators loom large in a tired mind), I wasn’t watching the finger, so I closed the door on it. My finger was so stuck in there, I had to actually pry open the door to get it out. 

The finger is much better now, though still numb at the tip. But the good news is I can type with all my fingers again. No more hunt and peck, which is why I’m finally writing this update now. 

Previous to Modern Consensus, I worked seven months for an ATM publication. Some of that was interesting. I was learning about cash and the world’s move away from cash. I got to cover bitcoin ATMs and the regulation—or lack of—in that space. But on the whole, I missed writing about the crypto space. It kept calling me back. Literally, I was still getting calls from people who knew me from my work around failed Canadian crypto exchange QuadrigaCX

I should mention why I turned to full-time work in June 2019 in the first place. Months prior, with encouragement from prolific nocoiner blogger David Gerard, I discovered the freedom of blog writing. Blogging is great. Nobody steps in to rearrange your sentences, wildly move paragraphs around, cross things out, or stick things in that feel like they don’t belong. (Editors do that kind of thing.) You are your own boss. The problem is, no one is paying you for the work either, so unless you are living out of a van, and don’t have rent or a mortgage, it’s a tough road. (Gerard, by the way, has a full time gig as a system administrator, so blogging is something he does on the side.)

Freelance work, which I’ve also done a lot of, is a tough road, too. A decade ago, you could make $1 a word as a freelance journalist. Now you are lucky to make $0.50. Writing, in general, has become a brutal profession. Nowadays, everyone is competing for clicks and views, and that means SEO and keywords, and at times, sacrificing any sense of individuality. But life is about compromises.

Screen Shot 2020-01-25 at 7.07.56 PMThat said, I am very happy to be working for Modern Consensus. It is a small team, but a small team of very experienced and dedicated journalists, who know their stuff. And if it weren’t for the talented Lawrence Lewitinn leaving that small publication that he cofounded (he’s the one who actually came up with the name “Modern Consensus”) to join CoinDesk, there wouldn’t have been an opening for me fill. Now I get to research and write about crypto and finance and frauds full time until my eyes bleed.  

I still plan to continue writing for my blog though, even if that’s just newsletters and small updates here and there. It’s something I enjoy doing and a chance for me to speak my mind the way I want to.

News: CBDCs are what’s hot, Vodafone pulls out of Libra, more WB21 stuff, Quadriga update

Let me kick off this newsletter with some personal news — I’ll be in Vancouver in the third weekend in February to meet up with David Gerard, the bitter nocoiner we all know and love. We’re both being interviewed for a documentary on QuadrigaCX. It’ll be a quick trip, but I suspect we’ll have enough time for a bottle of champagne, or two. I can’t wait to meet him for the first time in person. Next, on to the news.

CBDCs are all the rage

The big excitement these days tends to be around central bank digital currencies, or CBDCs. Ever since Facebook announced its plans for Libra in June 2019, central banks have been leaping into the digital currency bandwagon, researching the possibility of launching their CBDC.

China wants to be the first advanced economy to launch a CBDC. (Other central banks, such as the Central Bank of the Bahamas and the Eastern Caribbean Central Bank, are well on their way with pilots up and running.) Lawmakers for Japan’s ruling party say they are planning to put a proposal for a digital yen in front of the government next month. (Oops! Apparently, Japan’s legislators are looking to issue a state-backed digital yen, not a CBDC, as I previously thought.) And the Bank for International Settlements says that in three years, one fifth of the world’s population will be using a CBDC. 

What’s a CBDC? While Libra is supposed to be backed by a basket of assets, a CBDC is a  an actual replacement for cash. In other words, it’s legal tender issued and backed by the state’s central bank—not the state itself. This is where things get a bit confusing. 

John Kiff, a senior financial sector expert at the International Monetary Fund, tells me the taxonomy for digital currencies is tricky and some definitions are still a bit fuzzy. He defines a CBDC as “a digital representation of sovereign currency that is issued by a jurisdiction’s monetary authority and appears on the liability side of the monetary authority’s balance sheet.” That should clarify things!

The general idea is, you should be able to use a CBDC to buy movie tickets, pay for groceries or buy a house. The big question here is, why would you want to use a CBDC if your debit card is more convenient and costs less to use? 

Apparently, all this CBDC stuff is nothing new. Aleksi Grym, head of digitalization at the Bank of Finland, said in a Twitter thread that we are going through the third historical wave of digital currencies. During the first wave, in 1993, the Bank of Finland launched a CBDC product called Avant. It was discontinued after 13 years. This February 2000 article in the Economist (paywall) describes the second wave of digital currencies, he said.

Taking us back through time, David Gerard has written a blog post detailing the history of Avant. CBDC advocacy hasn’t changed since the days of Avant, he argues. “CBDCs are the sort of thing the vendor loves — but I’ve yet to see the case for consumers.” Does that mean the debit card will win?  

Another blow to Libra, Tether Gold, Pornhub

Screen Shot 2020-01-25 at 8.31.12 PMVodafone dealt another blow to the Libra project, when it announced on Tuesday it had pulled out of the Libra Association, the independent governing council for Facebook’s planned cryptocurrency. The British telecom giant said that it wants to put the resources it originally intended for Libra into its African mobile money transfer service M-Pesa. The 28 companies originally joining the association had pledged to put in $10 million apiece. Vodafone is the eighth big company to pull out.

You can’t blame Vodafone. Who would want to throw $10 million into a project whose chances of getting off the ground — at least in the format originally intended — are slim to none? Facebook is facing too many regulatory headwinds at this point, and clearly Vodafone doesn’t want to take that risk. 

Elsewhere in the stablecoin world, on Thursday, Tether launched Tether Gold, a stablecoin backed by — you’ll want to sit down for this — real gold. That’s right. No longer do you need to bear the burden of worrying about where to safely store your personal stockpile of gold. Tether will take it off your hands and issue you I.O.U.s in it’s place. Similar to its fiat-backed cousin, Tether Gold is fully redeemable — under certain terms! If you want your full gold bars back, you’ll have to pick them up in Switzerland.  

PayPal stopped supporting payments to Pornhub in November, but that’s okay because now the world’s most popular porn site accepts tethers — the kind that run on the Tron blockchain. The big question here is, what are the webcam models going to do with all the heaps of tether they earn? At some point, they need to convert those to dirty fiat to buy groceries and pay rent. Somehow I don’t think that’s going to be easy. 

More WB21 stuff

I wrote a lengthy story on WB21 (now Black Banx) for Modern Consensus last week. Roger Knox, who was a client of WB21, the payment processor that is allegedly holding $9 million in QuadrigaCX funds, pleaded guilty to running a $165 pump and dump on Jan. 13. Three other individuals connected to the scam have also pleaded guilty. 

  • Matthew Ledvina, a Swiss attorney, pleaded guilty in Boston on Feb. 1, 2019. 
  • Milan Patel, a Swiss attorney, pleaded guilty in Boston on Dec. 3, 2018. 
  • Morrie Tobin, a California resident, pleaded guilty in Boston on Dec. 3, 2018. 

Michael Gastauer, who ran WB21, has not been formally charged, though he was named in the October 2018 civil suit along with Knox. I would assume plans are to indict him as well. It is not unusual for somebody charged by the SEC or law enforcement to cough up information in return for a lesser sentence. So all these guilty pleas probably don’t bode well for him. I’m just not sure if anyone knows where Gastauer is right now. But guessing by some of the schemes he has been involved with, he likely has access to plenty of money. If he is at large, he could stay that way for a while. 

WB21 also allegedly laundered money for cryptocurrency ponzi scheme OneCoin, according to a recent report in Financial Telegram.

Quadriga news

On Wednesday, Miller Thomson, the representative counsel for QuadrigaCX creditors, asked creditors for help in identifying any records — financial or otherwise — related to Crypto Capital Corp.

In a letter (archive) posted on its website, the law firm said it had received information that a “Panamanian shadow bank” may have been a payment processor for the exchange in the final quarter of its operation. In other words, sometime in Q4 2019.

Crypto Capital at one time listed Quadriga on its website as a client. The exchange’s now-deceased founder also admitted to using the firm in the past. In an email to Bloomberg News on May 17, 2018, Gerald Cotten wrote: “Crypto Capital is one such company that we have/do use. In general it works well, though there are occasionally hiccups.”

In other news

On the legal front, in a complaint filed Tuesday, the SEC charged blockchain marketplace Opporty for conducting an unregistered ICO. The company raised $600,000 preselling its OPP tokens to roughly 200 investors in the U.S. and elsewhere. Opporty sold the tokens to wealthy investors via a simple agreement for future tokens, or SAFT contract.  

SAFTs are a bad idea to begin with, but Opporty likely drew even more regulatory scrutiny to itself in describing its platform as some kind of magic do-it-all system. In its offering material, the company described its “ecosystem” as an “online platform that combines a blockchain-powered service marketplace, a knowledge-sharing platform, a system of decentralized escrow and a Proof-of-Expertise blockchain protocol.”

Elsewhere, the Blockchain Association has thrown its support behind Telegram. In a brief filed with the court on Tuesday, the advocacy group sided with the messenger app in the SEC v. Telegram lawsuit. It told the judge that a ruling in favor of the SEC would stifle innovation in the field and hurt investors. Those investors included prominent VC firms Benchmark and Lightspeed Capital, along with several wealthy Russians. Together they put up $1.7 billion in exchange for the promise of future grams. 

The Chamber of Digital Commerce also filed an amicus brief with the court, but with a broader focus, asking the court to come up with a better definition of digital assets.

Plaintiffs in a lawsuit naming Tether have requested the consolidation of three lawsuits claiming that Tether manipulated the price of bitcoin and related bitcoin futures markets. They filed a letter with the court on Jan. 16. Tether seems to be okay with it. 

French officials on Friday filed preliminary charges of money laundering and extortion against Alexander Vinnik, according to a report in the AP. The Russian nationalist was first arrested in Greece in July 2017, after he was accused of laundering $4 billion through the now-defunct exchange BTC-e. Greek authorities ruled that Vinnik should go to France, then to the U.S. and finally to Russia. Vinnik’s not happy about it. He was hoping to go straight to Russia, where he would face lighter sentencing.

Finally, Decred dumped it’s PR agency Ditto PR because they weren’t able to get a Wikipedia page for the project despite getting paid a retainer of $300,000. (It’s not clear if they were paid in DCR or dirty fiat.) Ben Munster covers the story in a hilarious article for Decrypt. And here is the full thread of Decred’s former publicist arguing their case. 

Updated Jan. 26 at 4 p.m. E.T. with a clearer definition of CBDCs and a quote from John Kiff.
Updated Jan. 27 at 10 p.m. E.T. to add a section about Quadriga.