Category: Blogging

FTX updates: How Sam Bankman-Fried got bail, and more

  • By Amy Castor and David Gerard

The entire industry is Wile E Coyote and they don’t want to look down because if they don’t look down gravity won’t acknowledge they are standing on the clear blue sky.

Patrick McKenzie

How SBF got out on bail

How did Sam Bankman-Fried get out on $250 million bail with only his parent’s $4 million Palo Alto house put up as security? A lot of people — including lawyers! — are confused by this.

The short answer is that federal court, unlike state courts, defaults to the presumption of release.

Sam was released to stay with his parents on his own personal recognizance — which is little more than a promise that he’ll show up in court again. There’s no financial obligation. The terms of Sam’s bond initially required the signatures of Sam and his parents — Barbara Fried and Joseph Bankman — for his initial release on December 22. [Bail disposition, PDF; Appearance bond, PDF]

The idea of bail is to make sure that the accused will show up in court. In the federal court system, the Bail Reform Act of 1984 says that unless someone is a flight risk, they should get bail — and the court has great leeway in setting conditions.

The judge was reasonably sure that SBF wasn’t a flight risk. This was his first arrest, he wasn’t accused of a violent crime, he was a publicly-known person, and he complied with extradition. He did have to give up his passport, though. He can’t leave Palo Alto other than to show up in court in New York.

Bail works completely differently for federal white-collar defendants than for poor people accused of crimes in a state court — where bail can be arbitrary without regard to ability to pay, and is often punitive and used to try to coerce the defendant into pleading guilty. This is the sort of bail most people will have heard about, and that seems to be the source of the confusion.

Compare Reggie Fowler, Bitfinex/Tether’s money man in the U.S. The government pushed hard to have Fowler held as a flight risk. But the judge let Fowler out on a $5 million personal recognizance bond, and he hasn’t flown yet — though his sentencing has been delayed to March. In SBF’s case, federal prosecutors weren’t even pushing to hold him.

Many are also wondering why SBF’s parents did not have to come up with 10% of the bail, or $25 million, for the bond. This is also a misconception about state versus federal bail — where the convention is that you can pay a bail bondsman a nonrefundable 10% of your bail and he’ll put up the rest. Again, this is not at all a requirement at the federal level.

While Sam and his parents didn’t have to put any money down, it’s another story if Sam disappears. Sam’s parents’ home could be seized and the government could hold the bond co-signers liable for the full amount of the bond — which Sam’s parents obviously won’t be able to pay.

In SBF’s bail is a provision that by January 5, he has to find two wealthy friends, one of whom must be a non-family member, to put up surety — they need to sign bonds in lesser amounts “to be agreed to.” But if Sam can’t find anyone else to sign, it’s not clear how concerned the court will be, as long as Sam doesn’t flee and doesn’t violate other bail conditions. Sam’s parents have until January 12 to post the equity interest in their home.

The house is technically owned by Stanford University — the original Stanford land grant said that the land could not be sold. Professors buy a multi-decade lease on houses on campus, and Bankman and Fried put up their interest in that lease as security for the bail. This does not mean that Stanford is putting up Sam’s bail, as some have been claiming.

Ken White, better known as Popehat, a criminal lawyer in Los Angeles, was surprised that the court agreed to let Sam out on bail. Is the prospect of bankrupting his parents enough to keep Sam from misbehaving? “Personally, he strikes me as a man-child sociopath unlikely to be deterred by the complete destruction of his family.”[Serious Trouble] 

Fresh hell from FTX

Caroline Ellison and Gary Wang had their plea hearings on December 19. The hearings weren’t open to the public. Bloomberg reporters went and got the transcript from the court. (You have to go to the court physically.) Ellison and Wang both said they acted as directed by Sam Bankman-Fried, and they knew what they were doing was wrong. [Bloomberg]

Ronnie Abrams, the Southern District of New York judge who was overseeing the SBF case, has stepped down: “It has come to the Court’s attention that the law firm of Davis Polk & Wardwell LLP, at which my husband is a partner, advised FTX in 2021, as well as represented parties that may be adverse to FTX and Defendant Bankman-Fried.” [Bloomberg]

SBF appears to have pledged the same shares in day-trader brokerage Robinhood as collateral for multiple loans. There are now four jackals circling the corpse: BlockFi, FTX creditor Yonathan Ben Shimon, FTX led by John Jay Ray, and SBF himself, who has mounting legal bills. FTX has asked the court to freeze the shares until the issue is sorted out. [Doc 291, PDF]

SBF hasn’t posted to Twitter since December 12. But he’s still using Twitter, and just followed Dogecoin co-creator, Billy Markus. [Reddit]

Other FTX fallout

The collapse of FTX had systemic effects on crypto. Basically, everyone was just using FTX as their bank.

Didier J. Mary follows crypto-colonialism, where cryptocurrency missionaries try to inveigle themselves into poor countries — now that America is sick of crypto. Smart but poor people in Africa, wanting an opportunity, thought crypto might work to help them get ahead. The usual flurry of crypto-trader academies, masterclasses, and hype followed. Bank the unbanked!

A huge number of these African enterprises kept their cryptos at FTX — the blockchain contingent at the World Economic Forum promoted FTX in particular. That’s all gone now, and everyone’s wrecked. This post is in French but is very readable with a translator. [LinkedIn, in French]

Sam Bankman-Fried ended up putting $100 million into Elon Musk’s purchase of Twitter. John Ray will definitely be calling to get that back. [Semafor]

Brendan Greeley from the Financial Times has locked down his Twitter in these post-Musk times, but in 2018 he gave us “Greeley’s First Law of Capitalism: Any industry that can afford stadium naming rights needs more aggressive regulation.” [Twitter]

Even Zhu Su from Three Arrows Capital (3AC) was calling out Alameda in 2019. [Twitter, archive] 

A&P has provided me with the world’s smallest turkey

As you sit around the Christmas table with the family, don’t forget to ask that relative how their “bot-coins” are going. Merry Christmas, and don’t let the buttcoins bite.

Feature image: This terrible picture is from a 2021 FTX Christmas tweet, in which Santa Sam takes treats out of the stockings and sends them to Alameda. [Twitter]

Posted on by Amy Castor 0

FTX: Sam Bankman-Fried out on bail, Ellison and Wang cop pleas

We just posted our latest coverage on the FTX saga. This one is on David’s blog. [David Gerard]

SBF is back on US soil, after being escorted by the FBI from the Bahamas to NY, and yes, he is free on bail. His parent’s secured their Palo Alto home on a $250 million personal recognizance bond. Their home is only worth a fraction of that.

SBF’s friends Caroline Ellison and Gary Wang have been charged as well, but they’ve ratted Sam out to save themselves. 

Expect more superseding indictments to come. The DoJ is coming down fast and hard on FTX.

The entire game in crypto right now is pretending you’re solvent when you’re not. We’ve put together a list of clever tricks that crypto firms are currently employing to do this. 

Posted on by Amy Castor 0

Crypto collapse: Binance is not so fine, FTX Delaware vs FTX Bahamas, Celsius, Voyager, Gemini, Tether

due to a mistake in the internal reporting system, it didn’t tell him that he’d taken all the customers’ money and given it to his hedge fund to gamble with

— Qwertycoatl on SomethingAwful

When your auditor quits, that’s bad

Binance is broke. It’s got the same problem as the rest of crypto — the assets are imaginary, but the liabilities are real.

Remember the 2 billion BUSD bailout fund for distressed crypto enterprises that Binance announced in November? Bitfinex’ed suggested it was for a hole in Binance’s accounts — and now we’re seeing that Binance is sure behaving like there’s a huge hole in their books.

But Binance got an audit! Well, not an audit as such. But it was done by accountants who sometimes audit other things!

The “proof of reserves,” issued by Paris-based accounting firm Mazars, specifically disclaims being anything meaningful. But it makes sure to use the word “proof.”

The report didn’t address any of the tricky bits — it didn’t include non-crypto liabilities, it didn’t assess the effectiveness of internal financial controls, and it didn’t actually vouch for the numbers. Michael Burry: “The audit is essentially meaningless.” [Mazars, archive; WSJ; Twitter, archive] 

Mazars has been issuing these “proofs of reserves” for Crypto.com and Kucoin as well. But now Mazars has abruptly halted all work for crypto firms — and scrubbed all mention of such work from its website. This is Mazars running like hell to get as far away from the bomb as possible before it goes off. [Bloomberg]

Meanwhile, users have been taking their cryptos off Binance and going home. Binance outflows hit $6 billion in the week Mazars halted its work for crypto. [FT]

Binance cut off USDC withdrawals again, claiming a “wallet upgrade.” It just looks a bit like a “wallet inspector.” [Twitter] 

CZ went on CNBC Squawk Box to reassure everyone that everything is fine … though he didn’t seem as at ease as he usually does:

CZ: “We are financially okay.”

Rebecca Quick: “Can you have a 2.1 billion withdrawal?”

CZ: “We will let our lawyers handle that.”

CZ was asked why he wouldn’t engage a Big Four auditor to pick up where Mazars left off. CZ said most of these big firms “don’t even know how to audit crypto exchanges.” Andrew Ross Sorkin then pointed out that Coinbase has a Big Four auditor, Deloitte. Quick rolls her eyes at the end of CZ’s stumbling explanation (0:26 in the Twitter link). [YouTube; Twitter]

Why Binance may not have as much money as they want you to think

When FTX bought out Binance’s share in the company, Binance got paid $2.1 billion in funny money. CZ told Squawk Box that “it was all in FTT tokens, which are now worthless.” [Twitter]

70% of Binance’s reserves are in BUSD, Tether, and BNB — the last of which is their internal exchange token, akin to supermarket loyalty card points, in the style of FTX’s FTT.

The BNB token has crashed in the past week, from $290 to $240, according to Coingecko. 

Keep in mind that BUSD on Binance is internal magic beans, and absolutely not the same as Paxos dollar-backed BUSD. If Binance thinks it could get away with cashing in the bridged BUSD at Paxos, that’s $2 billion of actual US dollars Binance could secure for itself.

BUSD on Binance is on their own BNB blockchain, formerly known as Binance Smart Chain — a very hacked-up fork of the Geth software for Ethereum. The idea is to have a platform that runs the Ethereum Virtual Machine, lets you rug pull, and so on. This “blockchain” features transactions that seem to parachute assets into the system from space with no verifiable history. Data Finnovation digs into the weird bits. “It’s probably not fair to call this a ‘blockchain’ anymore.” [Twitter, archive]

And there’s still no verifiable evidence that tethers can actually be cashed in for dollars — even if you’re Binance.

Sounding smart doesn’t mean you are smart

Confidence men are called that because they can say the most outlandish things and not bat an eye. CZ has mostly come across in media as fundamentally being on the ball.

But remember that Sam Bankman-Fried projected being smart as well — until we got a look inside FTX, and saw how incredibly stupid every single smart guy in FTX really was. 

After Reuters published multiple reports of money laundering at Binance — including Binance letting Iran cash out bitcoins in violation of international sanctions — the U.S. Justice Department is “split” over charging Binance with money laundering. The split seems to be whether to charge them now or later: “Some of the at least half dozen federal prosecutors involved in the case believe the evidence already gathered justifies moving aggressively against the exchange and filing criminal charges against individual executives including founder Changpeng Zhao, said two sources.” The DoJ has discussed various plea deals with Binance’s lawyers. The investigation has been going on since 2018. [Reuters]

Binance was also slashing staff in late November. [Twitter, archive]

It’s only a matter of time before Binance starts freezing withdrawals — just like FTX, Voyager, Celsius, and so many other crypto exchanges in the last seven months.

Who can bail out Binance? Only Tether is left. Perhaps some new crypto exchange will pop up and achieve improbable volumes in a remarkably short time. There should be some Jane Street wunderkind on hand to front the operation.

Strange things in the Bahamas 

The FTX liquidation proceedings in the Bahamas are distinctly odd and in direct conflict with FTX’s Chapter 11 proceedings in the U.S. [Bloomberg]

FTX froze withdrawals on November 8. The Bahamas government placed FTX Digital Markets, FTX’s Bahamas subsidiary, into liquidation on November 10. And John Jay Ray III, who took over as CEO of FTX Trading, filed for Chapter 11 in the US on November 11.

The joint provisional liquidators (JPLs), the three men in charge of liquidating FTX Digital Market’s assets, now want dynamic access to FTX systems — they don’t want just lists of specific data, they want to be able to go fishing through the system themselves.

Ray, who cut the JPLs off from the system on November 12, is saying “no way.” He and his team are pissed because of all the pillaging of FTX that occurred after FTX froze withdrawals.

FTX objected to the Bahamas motion saying there was no urgency and the other side was being utterly uncooperative: [Objection, PDF]

“Debtors have made repeated overtures to JPLs and Commission to meet and those overtures were met with avoidance and obfuscation. The JPLs and the Commission have refused to provide responses to Debtors’ questions about the assets ‘secured’ by the Commission. Instead, the JPLs file baseless motions seeking extraordinary relief on an unnecessarily truncated timeframe.”

Ray thinks FTX cofounders Bankman-Fried and Gary Wang, the JPLs, and the Bahamas Securities Commission are all in cahoots. He told Congress: [Twitter, archive]

“The process in the Bahamian islands is not a transparent process. We have opened up the ability to share everything we have with the Bahamian government, similar to how we share with other liquidators around the world not only in this case but in other cases. It’s meant to be a very cooperative situation. The pushback that we’ve gotten is sort of extraordinary in the context of bankruptcy. It raises questions, it seems irregular to me, there are lots of questions on our part, and obviously, we’re investigating.”

James Bromley, one of FTX’s attorneys in the bankruptcy, has filed a declaration with rancorous correspondence between FTX and the Bahamas liquidators attached as exhibits. [Declaration, PDF]

Judge Michael Dorsey, who is presiding over the Chapter 11 proceedings in Delaware, told lawyers for the JPLs and Ray to try to find a middle ground. (His job is to be a referee, after all.) If they can’t work things out, they’ll be facing off in an evidentiary hearing tentatively scheduled for January 6, 2023. [Doc 197, PDF; Doc 203, PDF] 

So that you can understand FTX’s concerns, here’s a rundown of all the questionable stuff that’s happened so far:

On November 9, the day after FTX froze withdrawals, SBF told Bahamas attorney general Ryan Pinder that he would open withdrawals for Bahamian customers. Pinder previously worked at Deltec Bank — Tether’s banker since 2018 — but we’re sure that hasn’t influenced his decision-making, probably. [Doc 203, PDF]

From November 10 to 11, roughly 1,500 individuals, who claimed to be Bahamian residents, withdrew $100 million in crypto from FTX. Every other FTX customer in the world remained locked out of the system.

SBF said the Bahamas Securities Commission had told him to let the local customers in. The BSC denied this. [Twitter, archive]

SBF later told Tiffany Fong that he let the locals get their cryptos out because “you do not want to be in a country with a lot of angry people in it.” Could he have had in mind, not a mob, but particular individuals who might have had very robust opinions about not getting their cryptos back? [YouTube]

Separately from these withdrawals, at least two actors accessed FTX systems and withdrew another $477 million — hours after Ray filed for Chapter 11 on November 11. They also minted new FTT tokens. [Elliptic]

Ray and his lawyers say that SBF and Wang, who, acting on orders from the Bahamas Security Commission, minted FTT and transferred funds to a cold wallet under the control of the Commission. Ray still hasn’t figured out who the other actor was, but he’s working on it.

The JPLs have been tight-lipped as to what assets the Commission seized or how the assets were transferred.

There’s also the issue of the $256 million that FTX spent on 35 properties in the Bahamas — including land for a massive headquarters that never got built. The Bahamas regulators want to claim the properties back and they want the sale of the properties administered locally. Ray is likely to push back on this as well. [CNBC]

It’s hard to say for sure what’s going on here. We are beginning to suspect that FTX was a money-laundering chop shop, with some crypto businesses on the side. This would further suggest possible bribery of some local authorities. But the dots aren’t yet joined up.

Rats turn on each other

After four days, SBF has decided that Bahamas prisons aren’t so great, and he would rather be in a nice U.S. jail instead. [Reuters] 

Ryan Salame, co-chief executive of FTX Digital Markets, is the first FTX insider on record as spilling the beans on SBF. He told the Bahamas Security Commission on November 9 that FTX customer funds had been used to cover losses at Alameda Research. [Doc 225, PDF, page 34; FT, archive]

In 2021, Salame was a budding megadonor to U.S. Republican Party candidates — in step with SBF donating to Democratic candidates. Salame took out a $55 million loan from FTX, paid cash for a $4 million home in Maryland, and was buying up restaurants in Lenox, a town in Western Massachusetts. [NYT]

We’re not saying that’s what he used it for — but restaurants are notorious as a vehicle for laundering dubious cash.

Total donations by FTX to US politicians seem to be about $89 million when you trace all the darkish money as best as possible. [Institute for New Economic Thinking] 

$73 million of those political donations are at risk of being clawed back in the bankruptcy proceedings. [Bloomberg]

The correct regulator for crypto is the Department of Justice

Molly White live-tooted the Senate hearing on FTX and summarized it in her newsletter. [Mastodon; Substack] 

Here are all of the written testimonies. [Senate Housing Committee, PDFs] 

John Jay Ray III wants to sell FTX subsidiaries, starting with LedgerX, FTX Japan, and FTX Europe AG. [Doc 233, PDF]

FTX now has an official creditors’ committee of nine firms or individual investors, including crypto trading firm Wintermute. They still need to pick counsel, which should happen any day now. One of the first matters they will be weighing in on is a proposal to redact personal information rather than publishing a full list of creditors. [Doc 231, PDF]

When the Ontario Teachers’ Pension Plan invested in FTX, it asked the company a slew of questions related to their financial affairs — but received answers only to a few of them. OTPP put in $95 million anyway. [Globe and Mail, archive] 

How a crypto exchange can inveigle itself into the banking system — and how FTX seems to have done this with its Farmington equity purchase. Buy a bank, convert to a Federal Reserve member bank, notify the Fed that you’re going into digital assets and you’ve determined it’ll all be fine and you’re totally going to set up risk management. “If you’re lucky, your bank won’t be examined for a year or two. By then, you might have cranked up quite a dumpster fire.” [American Banker; Wall Street on Parade]

Canada has tightened crypto regulation even further in the wake of FTX. Client cryptos must be stored with a custodian and have no margin or leverage for Canadian customers. Non-Canadian platforms with Canadian customers will also be required to follow these rules. The Ontario Securities Commission had already refused FTX permission to operate in the province, but other provinces didn’t — and many Canadian FTX customers got caught up in the bankruptcy. [Leader Post]

Eliezer Yudkowsky, the AI risk guy who named “Effective Altruism,” advises his fellow Effective Altruists to take the FTX money and run. For the sake of charity, you understand. Others mention that clawbacks in bankruptcy exist — but ehh, it’ll probably be fine, right? [Effective Altruism forum, archive]

David spoke on CBC on Tuesday about FTX. It went pretty well. “TWO AND TWO MAKES FOUR! GRAVITY WORKS! MAGIC DOESN’T HAPPEN!” [Twitter; Yahoo News]

Celsius and Voyager

There’s no interesting news in the Celsius Network or Voyager Digital bankruptcies. Looking through the filings, it’s all procedural sports ball and not matters of real import. Everyone’s on holiday and nothing is going to happen until January. Perhaps Celsius won’t have run out of cash by then.

The next report of the examiner on Celsius was supposed to be out in December — but the court still hasn’t resolved the question of who investigates whether Celsius was Ponziing, which is the big bomb here.

Voyager is just sitting around and giving money to expensive bankruptcy professionals. Binance was talking about buying Voyager’s assets — but frankly, that’s a deal we suggest the creditors not take. They only just escaped being caught up in FTX’s bankruptcy.

Celsius has filed a motion to commence a $7.7 million clawback action against Voyager, as well as an extension of time to file a claim against Voyager’s estate. The Voyager Unsecured Creditors’ Committee is reviewing Celsius’ motion with the intention to object. [Twitter, archive]

Bankruptcy professionals will cost Celsius $115 million in the three months leading up to mid-February. [Doc 1676, PDF] 

Gemini

Crypto broker Genesis owes the Gemini exchange $900 million. Gemini has now formed a creditors’ committee to recoup the funds from Genesis and its parent DCG. [FT]

Did you know that 80% of the current market cap (613 million) of Gemini’s dollar stablecoin GUSD was printed in the weeks before the FTX collapse? Even odder, one unlabeled wallet appears to have minted 460 million GUSD. [Twitter, archive] 

On September 30, 2022, Gemini sought to incentivize GUSD adoption by increasing GUSD deposits to MakerDAO’s PSM (peg stability mechanism). MakerDAO was unimpressed. [The Defiant] 

Tether

Tether’s accountant, BDO Italia, is reconsidering whether it wants to do crypto attestations. “In common with several other professional service firms, we are currently evaluating our approach to this sector and the work we undertake for our clients.” Tether only hired them in August. [WSJ, paywalled]

In the lead-up to FTX going down, CZ from Binance was very upset that SBF appeared to be destabilizing Tether’s peg with … a mere $250,000 trade. We know this because there’s a secret chat group for the exchanges to conspire, er, sort out issues. SBF also put screenshots from these chats into the Congressional Record in his bizarre written testimony before the hearing, which he didn’t manage to attend. [WSJ; Forbes]

The secret ingredient is still crime. Police in China have arrested a gang who laundered $1.7 billion via crypto, including Tether — even after Beijing’s crackdown on crypto. [CNBC]

Other crypto firms who are fine

Three Arrows Capital (3AC)’s liquidator Teneo estimates 3AC’s assets at $1 billion as of July. That’s $37 million of actual money, $238 million in cryptos, $22 million in NFTs, and $502 million in venture and other investments. A lot of those “assets” are obviously imaginary. 3AC’s liabilities, which are extremely real, are over $3 billion. [The Block]

Grayscale wanted to turn GBTC into an exchange-traded bitcoin fund. The SEC said “LOL, no.” Grayscale sued claiming unequal treatment compared to the bitcoin futures ETFs, and even questioning whether the SEC had the right to decide against its ETF proposal. Now the SEC has written a 73-page response to Grayscale’s dumb lawsuit. [SEC, PDF]

Argo Blockchain Plc, a UK-incorporated bitcoin miner, has had trading in its shares suspended by the Financial Conduct Authority. The company is planning to file for bankruptcy. [Twitter; Bloomberg]

MicroStrategy is still going down the toilet. Bitcoin prices fell well below the “low watermark” for carrying value in Q3 2022. The company will likely face a new record digital-asset impairment charge in Q4. [Marketwatch] 

Dump on retail managed: Coinbase founder Brian Armstrong no longer holds any Coinbase stock. But he’s very bullish on crypto, he wants to make clear! [Protos] 

Image: Robyn Damianos for the Wall Street Journal

Posted on by Amy Castor 7

Crypto collapse: Regulatory altruism at FTX — Sam Bankman-Fried arrested

While I’ve been sick with a bug for a few days, David was able to finish up and post our latest. This one is on his blog. [David Gerard]

“Take the money and run” is a plan with just two parts. Sam Bankman-Fried completely failed to get around to the second part.  

After SBF’s extensive tour of confessing financial crimes to anyone from the press who would listen, the Weasel of Wall Street was arrested in the Bahamas at the request of the U.S. on Monday, December 12, where he awaits extradition.

Image by npcdad on Reddit

Posted on by Amy Castor 0

Celsius hearing, December 8: Selling GK8 to Galaxy Digital

  • By Amy Castor and David Gerard
  • It’ll take a lot of Patreon money to buy us apartments in the Bahamas, but you’ll never know if you don’t try! Here’s Amy’s, and here’s David’s. Give so we can point and laugh at SBF some more.

Celsius is bankrupt, with liabilities that are hugely greater than its assets. So they’re selling what can be sold — such as subsidiaries that are solvent going concerns.

Celsius bought Israeli crypto custody company GK8 in October 2021 for $115 million — $100 million in cash, and the rest in their own CEL tokens.

Now Celsius wants to sell GK8 to Mike Novogratz’s Galaxy Digital for $44 million, plus $100,000 assumed liabilities (debts that Galaxy will be responsible for). This is a huge loss — but Galaxy was the only qualified bidder. [Notice of successful bidder, PDF]

Galaxy wants GK8’s assets free and clear. The tricky bit is whether creditors in the bankruptcy have any claims against Celsius subsidiaries and affiliates. So the December 8 hearing was about this sale. [Amended agenda, PDF]

Judge Martin Glenn, who is overseeing the bankruptcy, was inclined to approve the sale — if the tricky details can be resolved.

This was a “hybrid hearing,” taking place both in the Southern District of New York courtroom and over Zoom. This hearing was on Thursday after a long, exhausting week of hours of hearings on Monday on Earn accounts and more hours of hearings on Wednesday on Custody and Withhold accounts.

Lawyers were dumping GK8 documents on Judge Glenn at the last minute on Wednesday, so he was up late the night before reading them — much to his displeasure. Everyone knows Celsius is running out of money. The holidays are coming up, and the mood was tense. The judge blew up at the lawyers more than once. 

Why does Galaxy Digital want GK8?

Galaxy Digital is Mike Novogratz’s crypto hedge fund. Galaxy is publicly traded on the Toronto Stock Exchange (GLXY.TO). Its stock is down 83% in the last year.

GK8 was founded in 2018 by two former Israeli government cybersecurity experts, Lior Lamesh and Shahar Shamai, the CEO and CTO of the company. Even though the firm has forty employees, these two pretty much are the company.

Celsius had planned to integrate GK8’s custody product into its own platform. But alas, Celsius filed for bankruptcy in July. So it started shopping for a buyer for GK8.

GK8 is a going concern — but it doesn’t seem ever to have made money. In fact, it needs funds to keep going.

We don’t understand what Galaxy wants GK8 for. This sale doesn’t make sense.

This could be an acquihire — Galaxy wants the founders, and the founders insist on bringing the company.

Or the sale could be Galaxy attempting to plug a hole in its books by buying a custody firm — if they account for assets in custody US-style, as company money with a liability, and not as customer money. (Now, you might think that resolving this would mean eventually stiffing the customers.)

But we’re speculating here. Maybe Novogratz will get a GK8 tattoo to go with his Terra-Luna tattoo?

We just know that Celsius needs to sell GK8 as soon as possible — and Galaxy Digital are a keen buyer, and GK8 would be very happy to go to Galaxy.

Do Celsius customers have a claim against GK8?

Do creditors have claims against just particular Celsius entities, or do they also have claims against Celsius subsidiaries and close affiliates? Such as ones the company wants to sell?

Celsius and the Unsecured Creditors’ Committee (UCC) both feel that Celsius’ terms of use — in all eight versions — made it clear that depositors were contracting with Celsius Network LLC and its affiliates. 

But Andrew LeBlanc from Milbank, for the preferred equity holders in Celsius, had a different interpretation of the terms of service: “there are limitations in the documents that exclude claims against affiliates.”  

Celsius, the UCC, and the preferred equity holders want the court to approve a briefing schedule that would allow them to clear a path for Celsius to come up with a reorganization plan. Here’s the briefing schedule. [Doc 1338, PDF]

Judge Martin Glenn said this is a gating issue — a blocker on a reorganization plan — and he wants it resolved sooner rather than later. He told the lawyers to gather their extrinsic evidence — evidence of contractual intent that isn’t written in the contract — so they can work out everything in a single hearing. 

“I don’t want this being prolonged. I think this is an important issue,” said the judge. He told Patrick Nash (Kirkland & Ellis), Andrew Zatz (White & Case), and LeBlanc to revise the briefing schedule accordingly.

Why the sale of GK8 assets is messy

Celsius will run out of cash by early 2023. It needs this GK8 sale to go through soon. Here’s the sale motion. [Doc 1615, PDF]

Dan Latona from Kirkland, for Celsius, told the court that the GK8 sale was a result of “hard-fought and arms-length negotiations between the debtors and potential bidders and their respective advisors.”

Judge Glenn cut him off immediately to point out that this wasn’t just Celsius and the advisors negotiating — GK8 insiders also heavily negotiated, insisting on employment contracts and transfer of all potential avoidance claims, so that Galaxy could buy GK8 assets clear of any reclamation rights. “I have real questions on whether this is an arms-length transaction,” he said.

An avoidance action is an action to undo (avoid) certain transactions that the debtor engaged in before the bankruptcy. These include clawbacks.

Centerview, an investment banking advisor, managed the marketing and bidding. The GK8 sale started as an equity sale but morphed into an asset sale. In his declaration, Centerview’s Ryan Keilty said: “During the second round, all prospective bidders indicated an asset sale was the only structure in which bidders were willing to bid.” [Doc 1622, PDF]

Keilty explained that Celsius would have preferred an equity sale, as “a path of least resistance” — but the bidders insisted on an asset sale, given the backdrop of potentially billions of dollars of exposure in customer-related claims. 

Galaxy’s bid was conditioned on retaining GK8 founders Lamesh and Shamai. In turn, Lamesh and Shamai were unwilling to continue with Galaxy without certainty as to their future. On December 2, the parties struck an agreement: Galaxy would pay $44 million in cash, plus $100,000 of assumed liabilities for GK8.

To complete the sale, Celsius filed Chapter 11 for the GK8 corporate entity. They want approval to appoint Celsius CEO Chris Ferraro as a foreign representative and to file recognition proceedings in Israel to seek enforcement of the sale order. Later in the hearing, Judge Glenn approved first-day motions for GK8.

The asset purchase agreement contemplates assuming all operational liabilities. “The purpose of the sale is to insulate the GK8 assets from the hang of potential Celsius account-related claims,” said Latona.

Avoidance claims

GK8 has forty employees. Judge Glenn was concerned that if any of them had crypto on Celsius and withdrew those assets within 90 days (if retail buyers), a year (if insiders), or even up to two years (in the case of fraudulent conveyance) before Celsius filed bankruptcy, it might raise so-called “avoidance issues.” 

Judge Glenn wanted to know if anyone had looked into potential avoidance claims. “If that analysis showed there were $50 million in claims for the individuals, the $44 million price tag just disappeared. You’re getting nothing.”

Latona for Celsius said was unlikely it would be $50 million in avoidance actions, but the judge pushed on this topic. “How do you know?”

The judge, who had only just read some of the GK8 filings — because they were all sprung on him the day before — went ballistic. “You’ve provided the court with zero analysis of the potential avoidance claims against any of these people. Maybe there aren’t any. But I don’t know whether you are proposing to transfer a valuable asset of the estate to Galaxy. And I am not approving a sale until I understand that, with evidence.” 

Latona stressed that the legal claims would have little if any value. Zatz for the UCC said that avoidance claims, if any, would remain property of the bankruptcy estate, and are not being transferred.

The judge was somewhat mollified by Latona and Zatz. But he still wanted one or more declarations along with a memorandum of law summarizing the analysis that Zatz provided about specific provisions of the purchase agreement — i.e., what potential claims are being transferred to Galaxy and what claims remain with Celsius. 

Shara Cornell for the US Trustee thought GK8 should have its own creditors’ committee. Cornell also noted that GK8 hadn’t filed schedules yet. Judge Glenn said he couldn’t imagine there being a separate creditors’ committee for GK8, and overruled her objections. 

Ron D’Aversa from Orrick, for Galaxy Digital, worried that Judge Glenn’s additional request for memorandums of law and declarations would delay the GK8 sale: “The timeline, the sequence, along with everything else in this agreement was painstakingly negotiated for months,” he told the court. 

Judge Glenn, who had already been doing double time reading Celsius bankruptcy filings all week, didn’t like being told he had to move faster. He ripped into D’Aversa: “You are not going to cram down unreasonable deadlines for me to act. So go back to your client and tell them that you can either negotiate now for a revised schedule or you can just blow up the deal. And that is too bad, as far as I am concerned, but don’t tell me that I have to act today or tomorrow or Monday, because it isn’t going to happen.”

Pro se creditor Simon Dixon asked if the GK8 deal could be settled in bitcoin, rather than dollars. Galaxy has an OTC (over-the-counter) trading desk, so in his mind, this made sense. “Any sale in bitcoin would be very beneficial to the estate” — that is, creditors could get their bitcoins back. The judge told Dixon that was not going to happen. 

Judge Glenn said he would withhold a ruling on the GK8 asset sale until he got memoranda of law and one or more declarations specifically addressing the issues regarding the avoidance claims. But he was “tentatively inclined to approve the sale of the GK8 assets.”

Latona and Zatz said they would both do a filing in support of the sale by Monday at 5 p.m. 

First-day motions and uncontested matters

Judge Glenn granted several administrative motions, including the motion allowing Celsius CEO Chris Ferarro to represent GK8 as a foreign entity in Israel. [Doc 1626, PDF; Doc 1628, PDF; Doc 1637, PDF) 

Celsius wants to repay a DeFi loan of $3.26 million loan in USDC and get back collateral (wrapped BTC and USDC) worth $7.5 million. The revised order just says that the judge has to rule that Earn is a property of the estate. [Doc 1360, PDF; Doc 1636, PDF]

The judge said that Celsius could go ahead and pay back the loans — but the collateral would have to be held in a separate wallet subject to the court’s determination on whether Earn assets are property of the estate, which he hadn’t ruled on yet.

What’s next?

An omnibus hearing in the Celsius bankruptcy is scheduled for December 20. We expect that issues in the sale of GK8 will be in that somewhere. Further omnibus hearings are scheduled for January 24, 2023, and February 15, 2023. [Doc 1393, PDF]

It’s important to keep in mind that this week’s hearings have been furious arguments over the alignment of the deck chairs on the Titanic. But the iceberg is still there. Celsius is flat broke. There’s no business. There are pennies left for creditors at best. Celsius is a shambling zombie. It should have been liquidated in July.

There’s also the much-anticipated final version of the Examiner’s Report, including the question of whether Celsius was operating a Ponzi. And there are still multiple state regulators looking to issue charges against Celsius, and possibly against founder Alex Mashinsky personally. The fun stuff should really get going in 2023.

Posted on by Amy Castor 1

Celsius hearing, December 7: Custody and Withhold accounts, and a partial ruling

I sat through the Celsius bankruptcy hearing on Wednesday to learn the fate of the Celsius Custody and Withhold accounts. I passed my notes along to David. Our coverage is on his blog. [David Gerard]

This hearing was very technical with lots of lawyer details and bankruptcy details But we think we have the issues explained.

The judge wants Celsius to open withdrawals for “pure” Custody accounts and for Custody accounts below $7,575 because these aren’t subject to preference claims — but everything else is!

Judge Martin Glenn is still mulling over the Withhold account situation. 

Phase II will be a doozy. That’s when the parties argue clawbacks on customer withdrawals in the 90 days before filing.

Image: Scrooge McDuck

Posted on by Amy Castor 0

Celsius hearings, December 5: Whose stablecoins are these? KERP bonuses, new deadline for restructuring plan

  • By Amy Castor and David Gerard
  • Send us money! Our work is funded via our Patreons — here’s Amy’s, and here’s David’s. Your monthly contributions help greatly!

The Celsius Network bankruptcy held two hearings on Monday, December 5. The first was to establish ownership of Earn accounts and see if Celsius can sell $18 million in stablecoins. The second was an omnibus hearing, dealing with multiple motions. Amy sat through six tedious hours of this, so you wouldn’t have to. [Agenda, PDF; Agenda, PDF]

A Chapter 11 bankruptcy generally has two outcomes: a bankruptcy sale (known as a “363 sale”) and the confirmation of a plan of reorganization. Celsius wants to find a buyer for this ransacked corpse. But first, they have to decide who owns what. They can only sell what’s theirs to sell. The morning hearing was bitter arguments about the spare change in the stiff’s pockets.

Celsius is burning cash at a furious rate. They have no idea how to even coherently propose an ongoing business. So they need to keep finding new ways to keep up the farce and pay tens of millions in advisor and professional fees per month.

The word “liquidation” came up a few times in the first hearing. This ice cube is melting fast.

Whose are the stablecoins?

Celsius wants permission to sell $18 million in stablecoins to pay for ongoing business operations. The stablecoins are held in Earn accounts — Celsius’ main product. You would deposit cryptos and be paid interest on them.

But do the stablecoins belong to the bankruptcy estate or do they belong to the individual Earn account holders? This is what Judge Martin Glenn needs to decide.

Celsius will be out of cash to pay ongoing bills — payroll, vendors, and expensive professionals for the bankruptcy — by late February or early March. The burn rate for Chapter 11 legal costs and professional fees is $15 million to $20 million per month. Celsius needs a cash injection by January or March 2023 the latest. [Doc 1328, PDF]

Interim CEO Chris Ferraro says that right now, the bitcoin mining business is cash positive (which surprises us) — but that too will need a cash infusion by March 2023. 

Celsius (the debtors) and the Unsecured Creditors’ Committee (UCC) think the stablecoins belong to the bankruptcy estate, which would give them the right to sell the coins for cash. But the account holders want their personal money back.

The stablecoins that Celsius wants to sell add up to $18,111,551. That’s 16,549,259 USDT, 1,119,089 NCDAI, 360,743 BUSD, and some shrapnel. Alvarez & Marsal’s Robert Campagna, Celsius’ restructuring advisor, admitted that the stablecoins buy them just a month of continued operations.

“If we sell $18 million now and have access to cash, we can always buy stablecoins again later,” said Campagna. LOL, like Celsius is going to have cash later. But anyway.

If Celsius is allowed to sell the stablecoins, the funds will not be used to cover the bitcoin mining operations. [Doc 1325, PDF]

So what happens after they burn through their stablecoins? Other sources of money include the settlement with Prime Trust, worth around $17 million — but Prime Trust will refund in crypto, not cash. Celsius also hopes for $44 million from the potential sale of Celsius’ custody solution GK8 to Galaxy Digital. GK8 is an Israeli firm that Celsius bought in November 2021 for $115 million. So they’ll take a 60% loss.

Other options to keep the business afloat include intercompany loans and debtor-in-possession financing — but those carry their own risks, Ferraro said. “They require us to post collateral and risk that coins would not be returned if the coins drop in value.” 

What company is going to lend money to Celsius? What collateral? What bank? What?

What did I just sign?

The terms of service for the Earn product changed a lot — in ways that contradicted what Celsius founder Alex Mashinsky had told customers.

Celsius updated its terms eight times between 2018 and September 2022, asking customers to accept changes each time by clicking a box. If they didn’t click on the box, they couldn’t access their coins.

Later versions of the terms, such as version six, more clearly asserted that Celsius owned the deposited cryptos — as is normal with any bank or investment firm, who then have a liability to the depositors. Even as Mashinsky said things that sounded like the investors owned their deposits.

Many small creditors objected that they weren’t aware of the important changes, or that they didn’t even agree to the changed terms.  

More than 90% of Earn account holders signed off on version six of the terms of service, per court filings. These customers held the majority of the coins in the Earn program.

Oren Blonstein, Celsius’ chief compliance officer, was called to the stand. Here are his original and supplementary declaration. [Doc 1327, PDF; Doc 1584, PDF]

Blonstein spent his time at Celsius administering the company’s compliance with the Bank Secrecy Act — money laundering law.

The state attorneys — Layla Milligan for Texas and Karen Cordry for multiple other states — went in hard on Blonstein.

Blonstein told Milligan that they tracked customer activity including acceptance of the terms of use.

This is an amazing interchange between Milligan and Blonstein (as quickly noted by Amy, please excuse errors):

Milligan: To your knowledge, was the business ever in compliance with money transmission laws? 

Blonstein: My understanding is based on a discussion with money transmission laws. 

Milligan: But you are not aware if the company was in compliance with state or federal securities laws?

Blonstein: Yes, correct. 

Cordry closely questioned Blonstein on how they flagged the change of terms — if the changes were ever called out to the customers. Judge Glenn asked Blonstein if the change of ownership in particular was brought to the customers’ attention.

Blonstein admits they didn’t flag the changes, but the customers had to tick the box and agree before they could proceed. Nor was the prior version of the terms available for a customer to compare them.

But Blonstein didn’t think any of this was a substantive issue: “I viewed the wording on the Earn program as you are giving coins to the company to use.”

The stablecoins will likely go to the estate

Despite the arguments over ownership of the stablecoins, Judge Glenn was leaning toward putting them into the bankruptcy estate — because that’s what the terms said, and that’s what you’d expect of an investment product.

Judge Glenn seemed skeptical of the terms meaning anything other than that Celsius owned the coins and had a liability to the depositor. “It was a lending platform, so they had to deploy the assets. There wasn’t a commitment to pay back specific assets.”

It wasn’t like Celsius would use the money to gamble in a “slot machine in Monte Carlo” — they’d use it to pay the bills, noted the judge.

He was also more comfortable if the stablecoins were converted to actual dollars anyway, given how crazy crypto is right now: “The dollars will frankly be safer than crypto.”

Shara Cornell for the US Trustee and Layla Milligan for Texas were not happy. Celsius had not complied with state regulations. The terms of service may have been an illegal contract, and thus void, Milligan argued. 

Judge Glenn responded that ownership of Earn cryptos had been a “gating issue” (an obstacle to recovery) ever since Celsius filed for bankruptcy in July 2022. “They didn’t only just spring this on anyone.”

Celsius had failed hard at compliance, but any buyer would have to comply with regulations — and if Celsius had broken securities laws, “you’ll get your pound of flesh against them,” he told Milligan.

Judge Glenn said that he wouldn’t rule on the stablecoins this week. But we think he’s going to let Celsius sell the coins. Matt Levine at Bloomberg concurred — because not having the money to pay back a liability is what “bankruptcy” means. [Bloomberg]

KERP motion

Celsius employees have been running away screaming. In early 2022, the company had over 900 employees. They are now down to 167 employees. Attrition is a real problem. 

In the afternoon omnibus hearing, Judge Glenn approved Celsius’ Key Employee Retention Plan (KERP) to give out up to $2.8 million in bonuses to 59 key employees, so they don’t quit. Previously, he had denied the motion because Celsius and their lawyers had blacked everything pertinent out. [Doc 1426, PDF; Bloomberg]

You can’t really say no to a KERP if a company is trying to stay a going concern. We know very well that Celsius is a shambling zombie — but while it’s in Chapter 11, the judge probably has to treat it otherwise. 

Celsius lawyers also need to look into who transferred crypto within 90 days of the bankruptcy filing. Those employees will not get bonuses.

Most of the KERP payments will be no more than $75,000. Salaries for the KERP employees range from $25,000 to $425,000.

Celsius will totally come up with a plan, honest

Next, Judge Glenn agreed to grant Celsius’ motion to extend exclusivity  — the exclusive right to come up with a new business plan — until February 15.  

After a Chapter 11 filing, you normally have 120 days to come up with a bankruptcy plan. Celsius still doesn’t have a plan. Judge Glenn said that this is not unusual for large companies. The court can extend the period of exclusivity, though the total period with extensions cannot exceed 18 months.

Once that exclusivity period is up, any party in the bankruptcy can introduce their own reorganization plan. There are already some plans being floated by Celsius creditors. More court time — and bankruptcy estate money — will then be spent discussing all the plans.

Kirkland’s Patrick Nash, appearing for Celsius, wanted to avoid such a free-for-all. Celsius is working to sell the GK8 custody business, and they are working with the UCC on a reorganization they can both agree on. The US Trustee also agreed on extending exclusivity. 

Judge Glenn concurred that lifting exclusivity now would lead to a free-for-all. He worried that a pile of new plans would be “a crushing load on my chambers.” Remember, he has to actually read all these hundreds of pages of legal filings.

The judge can see that Celsius is a melting ice cube and it’s just consuming money. But Celsius has to come up with something. He granted the motion.

For Celsius, this is just a game that they have to play to keep shambling forward and paying themselves from creditor funds. 

Celsius v. Stone et al. 

Jason Stone of KeyFi was Celsius’ DeFi trading guy. Stone is suing Celsius for non-payment. Celsius has countersued, calling Stone incompetent and a thief.

Later in the hearing, Judge Glenn denied a motion by KeyFi and Stone to dismiss Celsius’ counterclaims. [Doc 17, PDF]. 

Stone is being represented by Kyle Roche, formerly of Roche Freedman. He is now in his own practice. Roche is not an eloquent courtroom speaker. He rambles interminably, and Judge Glenn was getting noticeably annoyed at him.

Roche said that Celsius’s claim should be dismissed because the issue is a contractual dispute, and Stone was authorized to transfer the assets in dispute to KeyFi under an asset purchase agreement. Celsius argued that Stone was not a party to the cited APA.

Judge Glenn said he would be denying the motion for now. He told the parties to complete discovery before a scheduled January hearing on Celsius’ motion for a preliminary injunction in the dispute — and he didn’t want them dragging their feet.

Roche said he had collected 150,000 documents as part of discovery. Glenn asked when Roche would produce the documents. Roche said that he had been busy because his grandmother died.

Prime Trust

Judge Glenn approved the settlement with Prime Trust, returning $17 million in cryptos to Celsius that Prime had been holding since the two stopped doing business in June 2021. [Doc 20; PDF]  

Celsius gets cryptos, not the actual dollars it needs to pay the bankruptcy professionals — hence why they want to sell the stablecoins to pay the bills.

Next time

We’ll be writing up the December 7 hearing on who owns the Custody and Withhold accounts and the December 8 hearing on the GK8 sale. Send Amy money for eardrops! [Agenda, PDF; Agenda, PDF]

Posted on by Amy Castor 3

Crypto collapse: FTX headed for examiner, Bahamas crypto shenanigans

We just posted a new crypto update. This one is on David’s blog. [David Gerard]

In this episode, we cover:

  • SBF is fried, because the US Trustee wants to appoint an examiner. 
  • Your funds are on a holiday in the sun: The mystery of the disappearing FTX funds in early November. 
  • Alameda lost $1 billion on a trade involving Mobilecoin. We’re sure this had nothing to do with money laundering.
  • Sam is willing to go before the House Committee on Financial Services, as soon as he has figured out what happened to everyone’s money! 

Image: “We are all trying to find the guy who did this!”

Posted on by Amy Castor 0

Crypto collapse: BlockFi even deader, crypto miners going broke, Sam will not shut up, Binance and Tether are fine

the wonderful thing about bitcoin is that ‘sorry i was too dumb to do things properly so it all collapsed’ is not only a feasible explanation but historically likely

— Boxturret on SomethingAwful

Shut up, Sam

If you may be in legal trouble, any lawyer has one piece of advice: stop talking. If you’ve just filed a high-profile bankruptcy with maybe billions of dollars missing: stop talking. If you’ve got prosecutors sniffing around your activities: stop talking.

Sam Bankman-Fried never got the memo, or he did and threw it in the trash. In reference to his lawyers, he told Tiffany Fong: “they know what they’re talking about in an extremely narrow domain of litigation. They don’t understand the broader context of the world.” [YouTube; Twitter]

Despite producing reams of potential “evidence” that could one day be used against him, SBF will talk to any reporter, anywhere, any time of day. On Wednesday, November 29 he spoke on an NYT DealBook panel. On Thursday, November 30, he spoke to Good Morning America.

He loves the camera. But he still can’t tell you where the money went.

In the DealBook interview with Andrew Ross Sorkin, SBF said he “never tried to commit fraud,” and he didn’t knowingly commingle $10 billion in customer funds. He frames the whole matter as he seemingly lent Alameda customer funds from FTX as a risk management problem that got out of hand. Well, it sure did that. [Video; Transcript] 

George Stephanopoulos from Good Morning America, who actually flew to the Bahamas to talk to SBF, was a lot tougher on him. SBF again denied “improper use of customer funds,” saying he failed at oversight. “You said one of your great talents in a podcast was managing risk.” “That’s right.” “Well, it’s obviously wrong.” [GMA; Twitter]

As Lying for Money author Dan Davies points out, prosecutors just have to show that SBF intentionally deceived clients as to what was happening to their money. When you tell people their money is segregated and it’s not, that’s fraud. “The offence was committed the minute it went in the wrong account.” [Twitter]

If you ignore your lawyer because you’re smarter than everyone, no lawyer is going to work with you. Martin Flumenbaum at Paul Weiss already dumped SBF. We’re hearing unconfirmed rumors that David Mills, his father’s colleague at Stanford, who was advising SBF, is also refusing to work with him further. [Semafor; Twitter]

A lot of FTX employees bailed after the company filed for bankruptcy. But a few have soldiered on — likely so they can nail SBF, who screwed them over about as much as he screwed over all of his customers and investors. While SBF is telling his side of the story to reporters, FTX employees are leaking emails. NYT wrote about the absolute chaos that FTX lawyers and execs endured in wresting power away from the deluded SBF in the wee hours of November 11. [NYT]

If Sam’s lawyer had jumped in front of the camera and ripped Sam’s larynx out with his bare hands, he could reasonably bill it as extremely valuable and important legal services to his client.

Extremely predictably, there goes BlockFi 

In January, there were three big crypto lenders — Celsius, Voyager, and BlockFi. Now all three are bankrupt, and our emails are clogged with new bankruptcy filings.

After weeks of frozen withdrawals, BlockFi filed for voluntary Chapter 11 on November 28 in New Jersey. [Petition, PDF; bankruptcy docket on Kroll; CNBC; press release]

BlockFi was already a dead firm walking. They were dead after Three Arrows blew up in May. FTX kept BlockFi’s head above water with a $400 million credit facility — but then FTX imploded. [Twitter] 

The New Jersey firm doesn’t just have more liabilities than assets — a lot of the assets are missing too. All of BlockFi’s cryptos were in FTX. They were using FTX as their crypto bank.

BlockFi has over 100,000 creditors. Assets and liabilities range between $1 billion and $10 billion. There’s $1.3 billion in unsecured loans outstanding and $250 million in customer funds locked on the platform.

BlockFi has $256.5 million cash on hand — after selling their customers’ crypto:

In preparation for these chapter 11 cases, BlockFi took steps to liquidate certain of its owned cryptocurrency to bolster available cash to fund its business and administrative costs. Through the process, BlockFi was able to raise $238.6 million of additional cash, for a total unencumbered cash position as of the Petition date of $256.5 million.

Ankura Trust is BlockFi’s largest unsecured creditor to which it owes $729 million. Ankura is typically brought in to represent the interest of others in bankruptcy. If so, who are those creditors? We’d love to know.

FTX US is BlockFi’s second-largest unsecured creditor, with a $275 million stablecoin loan. This is the credit facility that SBF “bailed out” BlockFi with in June.

BlockFi’s fourth-largest unsecured creditor is the SEC — BlockFi still owes $30 million of its $50 million in penalties from February. The total settlement was $100 million, with half owed to the SEC and half owed to state regulators. [SEC; Twitter]

All the other creditors’ names are redacted. Very crypto.

BlockFi is entangled in FTX in multiple ways. BlockFi had a $680 million loan to SBF’s Alameda Research. This was collateralized by SBF’s personal shareholding in popular day-trading broker Robinhood — just days before FTX filed for bankruptcy. BlockFi is suing SBF for his stake in Robinhood. It doesn’t help that SBF was shopping his Robinhood shares around as collateral after he’d pledged them to the BlockFi loan. [Filing, PDF; Complaint, PDF; Bloomberg] 

Crypto miners — we told you so

We set out in detail in August this year how publicly traded bitcoin mining companies were always going to leave their lenders and investors as the bag holders.

We predicted that the miners would default on billions of dollars in loans, leaving the lenders with worthless mining rigs and unsaleable piles of bitcoins. They would then go bankrupt — with all the paperwork in order.

The miners depreciated their mining rigs over five years — and not the 15 months they should have — to make their companies look like better investments.

And miners are now defaulting on their rig-backed loans. Lenders — New York Digital Investment Group, Celsius, BlockFi, Galaxy Digital, NYDIG, and DCG’s Foundry — are getting stuck with worthless e-waste. [Bloomberg]

Iris Energy (IREN) faced a default claim from its lender NYDIG on $103 million “worth” of mining equipment. The company’s miners aren’t making enough money to service their debt. So Iris defaulted! And NYDIG now owns some obsolete mining rigs. [SEC filing, Global Newswire; Coindesk; CoinTelegraph]

Shares in Argo Blockchain (ARBK) dropped 40% after the firm announced that its plans to raise $27 million by selling shares were no longer happening. [Twitter; Decrypt]

Core Scientific hired law firm Weil, Gotshal & Manges and financial advisors PJT Partners to help figure out ways to stave off bankruptcy. The options include exchanging existing debt for equity or additional debt, asset sales, equity, or debt financing. They’re gonna go bankrupt — because that was always the exit strategy. [The Block]

Binance goes shopping

In the financial crisis of 2008, when banks were dropping like flies, some big banks would buy smaller banks that had healthy books — so they could patch the holes in their own books. Bigger and bigger shells to hide the Ponzi under. 

Crypto is doing the same. FTX was buying up, and planning to buy up, small bankrupt crypto firms to try to hide the hole in its own books. And Binance, the largest crypto exchange, just bought Sakuro Exchange BitCoin (SEBC), a Japanese exchange that is already licensed with the country’s Financial Services Agency. [Binance; Bloomberg]

Japan learned its lesson early. Tokyo-based Mt. Gox, one of the first big bitcoin exchanges, blew up in 2014. Japan went on to become one of the first countries to regulate crypto exchanges with a licensing system. Crypto exchanges in Japan are required to keep customer assets separate, maintain proper bookkeeping, undergo annual audits, file business reports, and comply with strict KYC/AML rules. They are treated almost like banks! [Bitcoin Magazine]

Binance tried to set up operations in Japan in 2018, after getting kicked out of China — but Japan’s FSA told Binance they needed to play by the rules and apply for a license or pack their bags. [Bitcoin Magazine]

Binance’s bogus bailout fund 

Binance announced a $2 billion “industry recovery fund” to prop up all of the other flailing crypto firms that have been struggling since FTX blew up. They claim that 150 crypto firms have applied for a bailout. [Bloomberg] 

Binance has its own stablecoin, BUSD, that it claims is run by Paxos and Binance, “and is one of the few stablecoins that are compliant with the strict regulatory standards of NYDFS.” The crypto bailout fund is $2 billion in BUSD.

BUSD is a Paxos-administered dollar stablecoin. Each BUSD is backed by an alleged actual dollar in Silvergate Bank, and attested by auditors. (If not actually audited as such).

That’s true of BUSD on the Ethereum blockchain. It’s not true of BUSD on Binance.

BUSD on Binance is on their internal BNB (formerly BSC) blockchain, bridged from Ethereum. It’s a stablecoin of a stablecoin. Binance makes a point of noting that Binance-BUSD is not subject to the legal controls that Paxos BUSD is under. We’re sure it’ll all be fine if there are any issues, which there totally won’t be. [Binance] 

Treating FTX’s claims about other crypto firms as confessions would have given you pretty detailed correct answers — it was all projection. FTX was accusing others of what they were doing themselves. You should look at what Binance has been saying the same way.

We’re going to go so far as to assert that Binance is a hollow shell too, and the bailout fund is most likely for a hole in its own books.

Every one of the crypto companies accounts for their value in dollars by calculating their mark-to-market value. “We have a billion dollars of $CONFETTI!” Even if they couldn’t get $10,000 in actual money for it.

All of crypto is bankrupt if you account for the crypto assets at realizable value rather than mark-to-market. Realizable value depends on the inflow of actual dollars into crypto — and that inflow has plummeted because the retail suckers went home. 

All crypto companies are Quadriga. Pull back the curtain and you’ll see Celsius/FTX-style non-accounting, a Google spreadsheet if you’re lucky, and incompetence. Such utter blithering didn’t-understand-the-question incompetence. It’s been this way since 2011.

Tether is fine, you FUDster

Tether has been issuing tethers by lending out its USDT stablecoin, rather than exchanging the USDT one-to-one for dollars (LOL).

As of Tether’s attestation for September 30, 2022, 9% of USDT are loans to Tether customers. Tether claims these are collateralized — but they won’t say who the borrowers are or what the collateral is. [Tether; WSJ, paywalled]

In their long-winded response to the WSJ writeup, Tether blames …. the media. [Tether]

We know from the CFTC settlement in October 2021 that Tether was issuing USDT to its big customers with a kiss and a handshake. Now they’re admitting it publicly.

Other crypto exchanges/firms in trouble

CoinDesk’s report on the hole in Alameda’s balance sheet and Alameda’s close ties to FTX did so much damage to the crypto industry — and to Coindesk’s parent company Digital Currency Group — that the news site has attracted take-over interest. [Semafor] 

CoinDesk did not blow apart the crypto industry. This was an unexploded bomb that was set up in May.

It was all going to explode eventually as soon as someone looked inside the box. As CZ told The Block’s Larry Cermak in 2019: “some things are better left unsaid.” [Twitter] 

Japanese social media company Line is shutting down Bitfront, a US-based crypto exchange that it launched in 2020. They said the closure was unrelated to “certain exchanges that have been accused of misconduct.” [Announcement; Bloomberg]

AAX exit scam completed. Hong Kong-based exchange AAX froze withdrawals on November 13, and its executives quietly slipped away as opposed to filing bankruptcy — social media pages removed, LinkedIn profiles deleted. Sources tell us that employees have been laid off and the founders are nowhere to be found. [Hacker News; AAX]

John Reed Stark: Since the FTX debacle, Big Crypto’s SEC hit pieces and talking points calling for “regulatory clarity” are pure pretense and subterfuge, intended to distract and dissemble the truth — that the crypto-emperor has no clothes. [Duke FinReg Blog] 

Image: Sam talking on GMA

Posted on by Amy Castor 3

Crypto collapse: FTX first-day hearing, Genesis screws DCG, Silvergate Bank

We just posted our latest on the crypto crash series. This one is on David’s blog. [David Gerard]

Here’s some of what we cover in this episode:

  • FTX had its first-day hearing in its Delaware bankruptcy.
  • The SEC was told to back off from FTX by eight members of Congress, five of whom got donations from FTX founders.
  • Genesis sets parent company DCG teetering.
  • Gemini Trust was exposed to risk via Genesis.
  • DCG is not bailing out Genesis this time around.
  • Silvergate said its FTX exposure was limited to deposits. It’s not about the deposits!
  • Binance is fine, and nothing is wrong! Probably!

Image: The FTX legal team entering the court.

Posted on by Amy Castor 0

Al Jazeera: FTX meltdown threatens to end ‘Wild West’ era for crypto

The editor of Al Jazeera Asia contacted me for a story about crypto, so I wrote about how the collapse of FTX will result in regulators coming down hard on the space. This was my first story for Al Jazeera. [Al Jazeera]

South Korea, Singapore, and Japan had the greatest number of users on FTX, according to CoinGecko. After Binance pulled out of Singapore last year, many crypto traders in the city-state switched to FTX.

This story was a bit of work because I had to interview five different people. You may recognize some of them — David Gerard, Martin Walker, and Stephen Diehl, among others.

One of my favorite quotes is from Stephen, who predicted: “the crypto industry will mostly be relegated to the dark corners of the financial system as it slowly slides into irrelevance.”

Posted on by Amy Castor 0

Crypto collapse: Celsius’s Interim Examiner Report

  • By Amy Castor and David Gerard
  • Our work here is funded via our Patreons — here’s Amy’s, and here’s David’s. Your monthly contributions help greatly with our coffee and ibuprofen budgets!

Shoba Pillay, the examiner in the Celsius bankruptcy, filed her first interim report on Saturday at 11:45 p.m. ET. [Report, PDF]

Appointed by the Office of the US Trustee — an arm of the Department of Justice — Pillay is here to work out precisely what on earth happened here. She is already conducting Rule 2004 investigations, which let her look into almost anything.

This interim report specifically examines Celsius’ crypto holdings, where they were and are stored, and the change from Earn accounts to Custody and Withhold accounts in April 2022, during which time Celsius was feeling the heat. 

Who owns what and under what terms is hugely contentious, with legal briefs flying back and forth: [Debtors’ brief, PDF; Unsecured Creditors’ brief, PDF; Custodial brief, PDF; Withhold brief, PDF]

This investigation revealed that Celsius reacted to the regulatory scrutiny by launching its Custody program without sufficient accounting and operational controls or technical infrastructure … As a result, customers now face uncertainty regarding which assets, if any, belonged to them as of the bankruptcy filing.

This isn’t the bomb under the Celsius bankruptcy that we have been waiting for — it’s just an interim report ordered by Judge Martin Glenn ahead of the Celsius Custody and Withhold hearings on December 7 and 8.

Nevertheless, it’s jam-packed with the sort of hilarity and horrors that you find when anyone looks inside how any crypto firm actually works. All crypto firms are Quadriga. It’s just that some haven’t exploded yet.

The current report is a window into the fraught issue of whose cryptos are in the Custody and Withhold accounts. It will help the court decide whether the depositors will get back 100% of what they put in or whether the cryptos go into the general bankruptcy estate.

The word “Ponzi” does not appear in this report. Whether the Examiner will look into possible Ponzi scheming by Celsius has yet to be determined. The Unsecured Creditors’ Committee — consisting of seven individuals representing the largest Celsius creditors, who are mostly from the crypto industry — wanted to look into this question themselves.

We think the task should be handed to the examiner, a neutral party — and many of the smaller retail investors concur. Also, we’re impressed by what a relentlessly thorough job the examiner did in this interim report.

Celsius hampered the examiner’s investigation as much as they thought they could get away with:

Documents or information responsive to certain requests were not received until days prior to the filing of this Interim Report, and some were not received at all, which may require the Examiner to further supplement the information contained in this Interim Report when she issues her Final Report.

… In addition, Celsius imposed limitations on interviews of its employee witnesses, including by requesting that the Examiner preview any topics to be covered during the interviews and limiting the time of many interviews to two hours. Further, Celsius claimed privilege over communications between Celsius and the regulators, further limiting her ability to obtain the full scope of relevant facts.

On page 19, the examiner cites one of Amy’s 2017 articles for CoinDesk to define what an ERC-20 token is. [CoinDesk]

Custody accounts

Earn was Celsius’ main product. You would deposit cryptos and be paid interest on them.

Regulators in multiple states had been lining up to shut down Celsius’ Earn product through 2021 and early 2022 — they thought it was the unregistered security that it obviously was. New Jersey in particular said that since Celsius was selling the product from their state, the New Jersey cease-and-desist order would take effect for the whole US. The SEC was also subpoenaing information from Celsius. BlockFi had already suffered cease-and-desists for its similar product.

Regulatory heat was a major factor in the creation of Custody and Withhold accounts. Yarden Noy, who headed regulation for Celsius, told Pillay: “Given the regulators, we came up with Custody.”

Celsius was working under the gun — they worried about having a month unable to accept fresh customer deposits — but they had to release Custody before the regulatory deadline or stop accepting any cryptos from retail US customers.

A lack of fresh cryptos coming in from new investors to pay out previous investors would be a serious issue if Celsius happened to be Ponzi-ing.

Celsius was short of developers. Celsius Engineering Director Steven Koprivica characterized the procedure as: “go back to blackboard, do the minimum of all minimums, this may be manual for the start, involve less developers, let’s discuss deadlines.” So everything about the Custody accounts ended up a mess.

Celsius was already tracking the company’s cryptos in the most advanced software known to cryptocurrency: a Google Sheets spreadsheet called the “Freeze Report.” This was an improvement over Celsius’ previous system, which was to just look at each blockchain address and check the balances by hand.

It wasn’t even clear precisely what the “Custody” product was. The accounts certainly weren’t “custody” in the sense that every other crypto custody firm uses the word — storing the keys for a customer’s large crypto holding securely. Different groups in Celsius had different understandings of what the accounts were supposed to do.

Celsius Custody launched on April 15, 2022. Celsius didn’t tell anyone about Custody ahead of its launch — they worried that customers would leave the platform, and they worried that regulators would give them a hard time about the Custody product itself.

Custody was run badly. Celsius didn’t have time to do anything properly. Rather than relying on software, Celsius used manual reconciliation and hoped to add a more robust process later.

Employees were told to tell customers: “Celsius continues to safeguard customer assets.” In fact, Celsius did not safeguard customer assets. Celsius represented each customer’s Custody account as separate — but in practice, they aggregated all of the crypto, lumping everything into one big pile and kept track of the amounts … shoddily.

Celsius had to manually reconcile the amount of crypto listed in each Custody account with the actual cryptos in the aggregate Custody wallet. This was entirely ad-hoc. On 16 dates, there were shortfalls; Celsius topped up the Custody wallet from the Main wallet as needed, and vice versa. (The report details every occasion in Schedule 2, and there’s a graph on page 12. This report is thorough.)

But the key point is that “the Custody wallets ran a substantial deficit relative to Celsius’s Custody liabilities.”

Custody had new terms of service that changed conditions in important ways, such as who owned the cryptos — but customers weren’t necessarily required to click their acceptance, or to read the terms before clicking. This has been a point of serious contention in the bankruptcy — many customers didn’t agree to the terms.

Withhold accounts

Earn customers who were in states where Celsius didn’t feel safe to offer Custody accounts were transferred to a new group, called “Withhold.” This was supposed to just be Celsius holding the coins for customers to then take out later.

Customers didn’t understand this:

Withhold customers expressed confusion about their accounts. For example, one user explained that he “discovered that [he] had a ‘Withhold Account’” only because it “appeared without explanation on the Celsius app.”

Celsius didn’t consider Withhold a product, so it didn’t create a Terms of Use for Withhold.  

But that didn’t stop Celsius from using cryptos in Withhold for revenue generation — loans, rehypothecation, and so on. Also, Celsius didn’t put Withhold funds into separate wallets per customer or even segregate Withhold accounts from their large general pool of cryptos.

The asteroid strikes

The Terra-Luna collapse blew a hole in the Celsius accounts: “In its May 2022 Board Minutes, Celsius reported that its ‘capital sits near zero.’”

Spooked customers withdrew $1.4 billion in crypto between May 9 and May 24, 2022. Cryptos on hand ran so low that Celsius could no longer honor withdrawals — despite CEO Alex Mashinsky’s frequent tweets of reassurance around this time.

Celsius paused all withdrawals on June 12, citing “extreme market conditions” — specifically, that customers wanted their money back.

Custody and Withhold balances increased after withdrawals were cut off — because customers could still deposit, and “customer assets were allocated to Custody when they attempted to withdraw their coins from Earn.”

What happens next?

Pillay’s report outlines the most contentious issues in the bankruptcy in detail — but it doesn’t point to any clear resolutions for them. Judge Glenn is going to have to untangle all of this himself.

The Examiner and the UCC have to resolve who will investigate the “so-called Ponzi schemes” by Celsius. There’s no clear date for this, but the next omnibus hearing is December 5.

The next interim Examiner’s report is due in the first half of December.

Other news in Celsius

Celsius now has an approved bar date. Creditor claims must be in by January 3, 2023. Government claims need to be in by January 10, 2023. [Order, PDF]

Celsius hasn’t put together any plausible business plan as yet. They are asking the court if they can have until March 31, 2023, an extra 141 days to come up with one. [Doc 1317, PDF]

Posted on by Amy Castor 0

Declaration of John Jay Ray — FTX is worse than Enron

John Jay Ray III took over FTX in the wee hours of November 11. Hours later, he filed for Chapter 11 in a Delaware court.

The new CEO filed his first-day declaration this morning. It’s incredible. David Gerard and I summarize it — this one is on David’s blog. [David Gerard]

  • In his 40-year career, Ray, who oversaw the Enron liquidation, has never seen “such a complete failure of corporate controls.”  
  • Ray has divided SBF’s empire into four silos, but the accounting is all unreliable because he’s gotten the numbers from SBF. 
  • Ray and his team will have to create a balance sheet and financial statements from scratch using what records they have of cash transactions.
  • FTX Digital Markets, the company’s Bahamas subsidiary, filed a for Chapter 15 in SDNY. Ray’s team is asking the court to move the Chapter 15 case to Delaware. 
  • Ray thinks the filing in SDNY was shenanigans by SBF and unnamed agents of the Bahamas government!
  • SBF’s late night DMs with a Vox reporter, published the next day, make it looks like he was in on the plot.
Posted on by Amy Castor 0

Crypto.com’s bad weekend — crypto exchanges are shaky

  • By Amy Castor and David Gerard

“i have a lot more respect for the binance guy, having seen a competitor stumble and taken the opportunity to very publicly shank them five or six times while they’re on the ground, under the guise of trying to help”

— infernal machines, SomethingAwful

We’re exhausted keeping up with all the good news for bitcoin.

Crypto.com didn’t have the greatest weekend. As we write this, withdrawals are clogged, but some are reported to be coming through okay.

The test an exchange faces is: can it stand a run on the bank?

The test bitcoin as a whole faces is: how will the price hold when lots of people are dumping for cash?

Number go down

After the bitcoin price had been floating at around $20,000 for several months, FTX crashed. On the day Binance reneged on its offer to buy FTX’s remains, BTC dropped below $16,000. It’s a bit above that now.

The actual dollars have gone home, and the wider crypto casino is having to pretend harder and harder that the alleged mark-to-market value of illiquid trash means anything.

Real dollars continue to disappear from crypto. Retail trading at Coinbase was down 43% in the third quarter of 2022, compared to Q2.

Reddit /r/buttcoin has a new header image

A slight case of the runs

Crypto.com is not having a great time.

The crypto markets are jittery. After the dramatic collapse of FTX, crypto holders are left shell-shocked and traumatized. They don’t trust any centralized exchange now at all.

It doesn’t take much to set the markets off. 

Despite claiming to have near-zero exposure to the fallout of FTX, over the last year, Crypto.com sent multiple very large stablecoin transfers to FTX, totaling approximately $1 billion. [Reddit, Australian Financial Review]

On November 12, crypto Twitter caught wind of the fact that Singapore-based Crypto.com and China-based Gate.io were passing funds back and forth to post stronger-looking proof of reserve statements, suggesting they didn’t have the funds they purported to have.   

Crypto.com CEO Kris Marszalek waved it off as just a whoopsie, saying they accidentally sent $400 million of their ETH to Gate.io on October 21, instead of their cold wallets, but that Gate.io had sent the money back. Everything was fine. [Twitter, archive; WSJ]

The crypto market wasn’t buying it. Instead, the news set off an FTX-style bank run, as panicked users raced to get their funds off Crypto.com. Within hours, more than 89,000 transactions pulled customer funds out of Crypto.com wallets. You could watch it in real time on Etherscan. [Chainsaw, Twitter]

Picture old-timey cartoons of guys in a stock exchange, hats popping off their heads and cigars falling out of their mouths in shock, shouting, “SELL! SELL! SELL!” Crypto.com was like that but in basements around the world.

By Monday, the run had made mainstream international news —  Sky, AFP, and Reuters, as well as financial outlets such as Bloomberg. [SkyNews]

Crypto.com should have collapsed right then, but it didn’t. Binance bailed Crypto.com out with infusions of ETH and USDC from their “recovery fund.” Cryptocurrency just reinvented the idea of a central bank as a lender of last resort. [Twitter; Twitter; Twitter]

Of course, given what he had just done to FTX, is it really a smart idea to let CZ know you have liquidity problems?

The following day, Marszalek did an Ask-Me-Anything to reassure everyone that the funds were safe. “At no point were the funds at risk of being sent somewhere they could not be retrieved,” he said. “It had nothing to do with any of the craziness from FTX.” [YouTube] 

Binance also held an AMA to tell everyone that everything is fine. [Twitter; Verge]

The life and times of Kris Marszalek 

Kris Marszalek co-founded Crypto.com in 2016. It was initially called Monaco but bought the “crypto.com” domain from cryptographer Matt Blaze in 2018.

Based in Singapore, the firm has spent huge money on ad campaigns, including a $700 million deal to put its name on LA’s sports arena (formerly Staples Center) and a “Fortune Favors the Brave” Super Bowl commercial featuring Matt Damon. [GQ]

The company makes money by charging fees for trades on its smartphone app. It promises Ponzi-like yields — up to 14.5% annually, paid out in stablecoins. 

To access the higher stake yield, you have to buy Cronos (CRO), the platform’s native trader token, whose price floats freely. CRO tanked over the weekend over concerns about Crypto.com’s reserves. [BeinCrypto]  

Marszalek, 42, is a Polish-born serial entrepreneur who lives in Hong Kong. He dropped out of college and started his career selling computer equipment. He doesn’t appear to have any trading experience at all prior to Crypto.com.

You’ll be delighted to hear that Marszalek has the sort of background you want in a crypto CEO. Specifically, running a voucher sales company that collapsed in 2016 and stiffed everyone.

Founded in 2010 in Singapore, Ensogo offered Groupon-style “daily deals” and so forth. After going through multiple name changes and acquisitions, Ensogo was listed as a standalone company on the Australian Securities Exchange. It pivoted to an “open marketplace platform” in late 2015. [ASX, PDF]

By April 2016, Ensogo had closed its Malaysian office and had stopped paying merchants. The company’s first-quarter report to the ASX showed an AUD$5 million deficit, despite firing half its staff in the first quarter of 2016. It had already lost AUD$67 million in 2015. Ensogo finally stopped operations in June — leaving merchants and consumers in the lurch. One Hong Kong merchant lost HK$20,000. [Tech in Asia; Tech in Asia; Tech in Asia]

Other exchanges 

In the third quarter of 2022, US exchange Coinbase suffered “another tough quarter.” Institutional trading was down 22% and retail volume was down 43%, compared to the previous quarter. Net revenue in Q3 was $576 million, down from $803 million in Q2, and $1.2 billion the year before. The company lost $545 million in Q3, compared to a net profit of $406 million in the same period last year. [FT, archive; Shareholder letter, PDF]

In Hong Kong, AAX has suspended withdrawals. The crypto exchange had just blogged that it had no exposure to FTX and that user funds were never exposed to counterparty risk. [AAX; AAX; Coindesk]

What’s a user to do?

The FTX collapse has taken out a variety of firms across crypto, including other exchanges and crypto hedge funds. Many projects used FTX like it was a bank. So many projects are now wrecked because they treated FTX like it was a safe place to store their cryptos.

Expect more trouble and possible bankruptcies to come. People keep treating crypto exchanges as banks. They are not banks.

The hard part is: what do you do instead?  

Loud and weird crypto nerds, particularly bitcoin maxis, are saying “not your keys not your coins” again a lot.

Back in the real world, approximately 100% of crypto users are in it for the money. And that’s only achievable with the coins on an exchange, where they can actively buy and trade them.

More importantly, almost all crypto users have flat zero technical knowledge. They have no idea how any of it works. They trusted the newspaper headlines. They just about get “number go up.” They won’t be self-custodying en masse.

DeFi traders will tell you that self-custodying is the only way to do anything, but they also get rekt a whole lot.

We concur that users should treat centralized exchanges as risky places to store cryptos. The trouble is, what else to do with them? If you don’t want to do the sensible thing — i.e., dump your coins and get the heck out of crypto — you’re going to have to learn way more about how the technology works than you ever wanted to.

It’s going to suck because — despite the user-friendly Super Bowl ads — crypto is not a product. It’s a pile of wires on a lab bench. Get out your soldering iron, you’re gonna be your own bank.

Posted on by Amy Castor 3

FTX files for bankruptcy, and the fallout begins. Who’s next?

It’s been an exhausting week trying to keep up with the chaotic news coming out on FTX. Here’s our latest crypto collapse update and analysis. This one is on David’s blog. [David Gerard]

While many people have been comparing the fall of FTX to Enron or Lehman Brothers, it’s really more like MF Global, a major global financial derivatives broker that went belly-up in 2011.

MF Global’s fatal flaw was the same as FTX-Alameda: They failed to segregate funds and used billions of dollars in customer money to cover up losses in trading.

Everyone should have seen this crash coming, especially the “sophisticated” venture capitalists who neglected to do due diligence on FTX and instead kept shoveling money into the fire, creating the myth of Sam Bankman-Fried, boy genius, in the process.

You should assume that every offshore crypto firm is like the failed Canadian exchange Quadriga — Zeppelins flying high, waiting for a single spark to set them off.  

Image: Hindenburg exploding

Posted on by Amy Castor 1

Crypto collapse: J. Pierpont Moneygone — FTX rekt, bought by Binance

  • By Amy Castor and David Gerard
  • Send us money! Our work is funded by our Patreons — here’s Amy’s, and here’s David’s. Your monthly contributions help greatly!

The 2021–2022 crypto bubble made a lot of traders look like geniuses. Then the bubble popped, the tide went out, and the traders turned out to be hugely overleveraged formerly-lucky idiots.

Sociologists know that when a cult prophecy fails, most cultists exit the cult, and the remaining factions turn on each other.

Crypto watchers know that this can also be exceedingly funny.

Imaginary assets, real liabilities

Sam Bankman-Fried’s boosters compare him to the legendary banker J. P. Morgan. He’s spent the crypto collapse bailing out ailing companies to keep the entire market afloat.

Bankman-Fried runs three large crypto enterprises:

  1. Alameda Research, his crypto hedge fund;
  2. FTX, his unregulated offshore crypto casino that doesn’t allow US customers;
  3. FTX US, his exchange for US customers that purports to operate under US law and accepts actual dollars.

On November 2, Coindesk’s Ian Allison posted an explosive story on a partially leaked balance sheet for Alameda. [CoinDesk]

Of Alameda’s $14.6 billion in claimed assets, $5.8 billion is FTT — FTX’s internal exchange token. You can use FTT for cheaper trading fees and increased commissions. FTT is also traded outside FTX.

Allison also noted that $5.8 billion is actually 180% of the circulating supply of FTT!

Alameda’s liabilities are listed at $8 billion, most of which is $7.4 billion of loans — quite a bit of that from FTX.

Alameda is super cashed-up … if you account for FTX’s own FTT token at mark-to-market, and not what you could actually get for that much of their private illiquid altcoin.

To make matters worse, Dirty Bubble notes that a lot of Alameda’s other assets are crypto tokens from other Sam Bankman-Fried enterprises. [Dirty Bubble Media]

Alameda and FTX seem to have printed FTT, pumped its price using customer assets — FTX was quite open that it was the FTT market maker, and there’s no other real demand — and used the mark-to-market value of their illiquid made-up token as collateral for loans, or as evidence that pension funds should invest in crypto companies.

This works great while number is going up!

Regular readers will know that this sort of flywheel scheme is precisely what Celsius Network tried to run with their CEL token and Nexo with their NEXO token. Celsius is bankrupt, and regulators have noticed that Nexo is only solvent if you allow them this particular tricky bit of accounting.

Alameda CEO Caroline Ellison said the leaked balance sheet Coindesk got a hold of was “incomplete,” and there were $10 billion in assets not listed there. [Twitter, archive] 

The crypto world spent a few days wondering if Alameda was the next Three Arrows Capital.

CZ pulls the plug

Large flows of FTT were noticed on the blockchain on November 6. Binance CEO Changpeng Zhao confirmed that this was Binance selling off its FTT: [Twitter, archive]

“As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books.”

The remaining FTT that Binance sold was worth $530 million. [Bloomberg]

CZ was also annoyed at Bankman-Fried’s lobbying efforts for crypto regulation in Washington: “We won’t support people who lobby against other industry players behind their backs.” [Twitter, archive]

The crypto market is incredibly shaky. Alameda and FTX operate as separate corporations, but the market seems to think they’re closely entwined. Trouble at Alameda leads to worry about FTX.

So panicked holders, thinking Alameda might be insolvent, started withdrawing funds from FTX as fast as possible — and hardly deposited anything at all.

FTX paused all withdrawals on the Ethereum, Solana, and Tron blockchains around 11:37 a.m. UTC on November 8, according to Steven Zheng at The Block. [The Block]

Finally, just after 4 p.m. UTC, Bankman-Fried and CZ announced that Binance was buying FTX. Specifically, they have a non-binding letter of intent, pending due diligence. [Twitter, archive; Twitter, archive]

Essentially, CZ started a bank run on FTX, then swooped in to buy his competitor after breaking it. CZ did to Bankman-Fried what Bankman-Fried has been accused of doing to a string of others.

At present, this is only a letter of intent, not a done deal — CZ is making Bankman-Fried suffer. He could just let FTX go hang.

How screwed are FTX and Alameda?

CZ said FTX was in a “significant liquidity crunch.” This is the sort of “liquidity crunch” that everyone else calls “insolvency.” If it were just liquidity, FTX could have borrowed against its assets and found another way out of this. [Twitter, archive]

We don’t know for sure that Alameda was trading with FTX customer funds — but this sort of fractional reserve operation is the only not-entirely-fraudulent reason that FTX could have run out of customer funds in this way.

Bankman-Fried claimed on November 7 that “FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries).” This appears not to have been true, and he later deleted the tweet. [Twitter, archive]

If FTX couldn’t get its funds back from Alameda quickly, that would have then led to the liquidity crunch.

What about FTX US?

Bankman-Fried was quick to reassure customers that FTX US was not affected and that it was “fully backed 1:1, and operating normally.” So at least FTX US explicitly claims it isn’t playing the markets with your deposits. [Twitter, archive]  

FTX US is also attempting to buy the remains of the bankrupt Voyager Digital, a deal that we think is likely to go through.

The separation of customer funds and platforms is the whole point of FTX US versus FTX. It’s there to make Sam look good to regulators.

But it’s all Sam Bankman-Fried. It’s Sam’s left pocket versus his right pocket.

We think that if your paycheck goes into FTX US, you probably want to stop doing that immediately.

What happens next? It’s contagion time!

Alameda has likely been borrowing against the FTT it held — the FTT that is now crashing. (Earlier today, FTT was worth $19; as we post this, it’s trading at $4.60.)

Binance might rescue FTX, but it’s sure not going to rescue Alameda.

This means a series of margin calls by everyone who’s lent to Alameda. If Alameda defaults, those lenders will likely end up with worthless FTT.

BlockFi and Genesis have a pile of money in Alameda. BlockFi is or will be owned in some unspecified manner by FTX US, but that doesn’t make the books balance — there’s already a rumor of a 24-hour margin call by BlockFi against Alameda. [Twitter]

Remember that Three Arrows Capital collapsed when their UST turned out to be worthless. This then took out a pile of other crypto trading firms — most notably Celsius Network and Voyager Digital.

We’re left with two questions:

  1. Who is lending to Alameda?
  2. Who’s lending to those lenders — and risks going down in turn?

The crypto market is not happy. Bitcoin has been up and down like a yo-yo today, from $19,500 just before 4 p.m. UTC to a peak of $20,500 and a trough of $17,500.

We predict more market excitement to come — specifically, a possible Alameda collapse, a chain reaction of lender failures, and attempts to cover sudden balance-sheet holes, much as we saw after the Terra-Luna and Three Arrows collapses.

But Caroline Ellison from Alameda insists there’s another $10 billion behind the sofa or something. Maybe it’s all fine!

Image: FT Alphaville

Posted on by Amy Castor 2

Celsius bankruptcy hearing November 1, 2022: stablecoins, KERPs and Ponzis

A hearing was held in the Celsius bankruptcy proceedings on November 1 at 11 am ET.

It went on for three hours. I sat threw all of it and drafted a story. David Gerard polished the draft and added more comments and analysis. You can read the full post on David’s blog. [David Gerard]

Here’s what we covered:

  • Secret Celsius employees will not get bonuses.
  • The examiner expands her work plan to include the CEL token and how Celsius marketed its services — send us your coins! We’re your friend, banks are you enemies! HODL!
  • The P-word came up multiple times in the hearing.
  • Celsius can’t sell its $23 million in stablecoins until it’s clear who owns them.
  • The examiner report is a ticking time bomb set to blow up the best made plans.

Please take a moment to subscribe to our Patreon accounts. We need your support, even if it’s just a few dollars a month. Links are in the blog post!

Posted on by Amy Castor 0

Crypto collapse: Bitcoin stagnant, selling Celsius and Voyager, how 3AC died

“I kept up the bluff, hoping that I might eventually hit upon some workable plan to pay all my creditors in full.” 

— Charles Ponzi, The Rise of Mr. Ponzi

Crypto has crashed, and some of our readers are asking us why the price of bitcoin has been holding steady at around $19,000 to $20,000 for the past few months. Why won’t it go down further?

We think the price of bitcoin is a high wire act. If the price drops too low, some leveraged large holders could go bust. So the number needs to be kept pumped above that level. If the price goes up too far, the suckers — not just retail, but the bitcoin miners — may be tempted to cash out at last.  

The idea is to pump just enough to keep the price up — but not so much that suckers dump their bitcoins directly into the pump.

If too many bagholders try to sell, what quickly becomes obvious is there are no actual buyers. At least, none with real money. 

The party is over. Retail investors have all gone home, so there are no more suckers getting in line to pump the price up anymore. Coinbase’s 10-Q showed a drop in retail dollars.

In addition to a dearth of real dollars, there’s also been a dearth of fresh tethers coming in since June. That dearth lasted until October 25 — when a billion tethers were printed and prices suddenly jumped 10%, just in time to liquidate a pile of short-margin traders on FTX.

Bitcoin miners in North America have been taking on increased debt, so there’s still no real incentive for them to sell their bitcoin. Core Scientific is the exception, as we note below, because they’re running out of cash — not least because they’re stuck with hosting Celsius.

Bitcoin derivatives — assets that derive their value from bitcoin — aren’t doing well either. The ProShares Bitcoin Strategy ETF (BITO) tracks the CME’s bitcoin futures. These are just bets in dollars on the price of bitcoin. Bloomberg Intelligence analyst James Seyffart says: “If you just want exposure to Bitcoin” — i.e., not doing anything so gauche as touching a bitcoin — “BITO is the best option in the ETF landscape, at least in the US.” But in the more than a year that it’s existed, BITO has performed even worse than bitcoin itself. BITO holders have mostly stayed holding, so its holders are just like bitcoin bagholders too. [Bloomberg] 

Celsius: the state of play

Celsius Network is dead. It’s an ex-parrot. Most of the back-and-forth in the bankruptcy is over the spare change that might be in the corpse’s pockets. Also, the spare change is being nibbled away by lawyers’ fees and operational costs. So the creditors think it’s time to see what they can get by just selling it all for parts.

At the same time, Celsius is saying “I’m not dead yet!” and throwing up plans to come back to life. That’s the difference between a Chapter 7 liquidation and a Chapter 11 reorganization — Celsius has to pretend it has a future.

And also, the US Trustee got an examiner on the case, to see just what happened here — if this bankruptcy was the result of ineptitude … or of Celsius being a scam. 

The examiner’s report is a wild card. It could blow up the whole bankruptcy proceeding. We think the Trustee, who is part of the Department of Justice, suspects Celsius is a crime scene.

Celsius’ bidding process approved

Judge Martin Glenn has approved the bidding procedure plan for Celsius to sell virtually all of its assets — including its mining business. He is quite concerned that this business is, in bankruptcy jargon, a “melting ice cube,” and wants to make the sale happen for the sake of the creditors. [Memorandum Opinion and Order, PDF]

The initial bid deadline is November 21. Final bids are due on December 12. An auction, if necessary, is scheduled for December 15.

The court directed the Trustee to “promptly” appoint a privacy ombudsman with experience in consumer privacy laws to protect consumer data. The Trustee has appointed Lucy L. Thompson. [Appointment, PDF; Order, PDF]

The Trustee, the examiner, and the consumer privacy ombudsman will be able to listen in on the auction — but they can’t interfere.

Celsius is required to submit any stalking horse approval to the court. A stalking horse is a bid that is arranged in advance to prevent other bidders from making lowball offers.  

The final deadline for bids falls after the examiner begins to reveal her findings. An interim report is due on November 18, and an initial report is due on December 10.

Your keys, whose coins?

The court has yet to decide whether the contents of Celsius Custody and Withhold accounts belong to the individual customers, or to the bankruptcy estate. 

The issues are set to be heard on December 7 and 8, and they’ll raise a host of questions about what constitutes ownership in crypto. If someone else controls the keys to your crypto, is that really your crypto? There is no straightforward answer to this.

In a letter filed with the court on October 17, Judge Glenn notes: “cases involving cryptocurrency may raise legal issues for which there are no controlling legal precedents in this Circuit or elsewhere in the United States or in other countries in which cases arise.”

So, he’ll be using the Law Commission of England and Wales’ lengthy and detailed “Digital Assets Consultation Paper” as his framework in this case. [Doc 1073, PDF; Consulting Paper]

We think he’ll be particularly interested in Chapter 16 of the paper, which specifically talks about custody and what happens in an insolvency. 

This is surprisingly big news for US crypto in general — it will introduce a whole swathe of legal thinking that’s entirely new for US crypto regulation and jurisprudence. This may turn out to be a lasting consequence of the Celsius bankruptcy.

Who owns cryptos in custody is already fraught. A few months ago, it turned out that cryptos held in Coinbase Custody are not the customer’s cryptos, being held by Coinbase — instead, they’re assets of Coinbase that are liabilities Coinbase has to the customer, just like cryptos on deposit on the Coinbase trading platform. This is precisely not what Coinbase was selling Custody to its customers as! But that’s how SEC regulations said to account for it.

No equity committee for you

Judge Glenn has denied the motion for an official equity committee, which would have allowed Celsius investors to bill their professional fees to the bankruptcy estate. We discussed this motion last time.

It’s actually not uncommon for equity security holders to request the appointment of official equity committees to represent their interests in bankruptcy cases — and to get a formal seat at the negotiations table. 

But in this case, Judge Glenn wasn’t convinced. He thinks the equity investors already have adequate representation in the form of existing stakeholders, particularly the board of directors, who literally represent the owners of the company. The court also feels there is little chance investors will recoup any of their $400 million — it’s normal in bankruptcy for equity holders to get zero — and the costs involved are unlikely to benefit the estate. [Doc 1166, PDF]

The equity investors also want Celsius to list liabilities and assets in dollars, not crypto — which is quite normal even for volatile and illiquid assets like crypto. [Doc 1183, PDF] 

Discharge objections

The purpose of filing Chapter 11 is to wipe out debt and start anew. But a party can object to the discharge of a particular debt — or the entire bankruptcy case — by filing an adversary proceeding, as we detailed last time.

In Chapter 11, the deadline to file objections to dischargeability is 60 days after the first creditors’ meeting. Celsius has agreed with state regulators to extend the states’ deadline by six months, to April 18, so the states can finish their investigations. And they’ve agreed on the same with the Federal Trade Commission. [Doc 1107, PDF; Order, PDF]

The Securities and Exchange Commission wants to extend its deadline to January 17. If Celsius raised money in a way that knowingly violated securities law or other laws — which they totally did, come on — then those debts might not be dischargeable. [Order, PDF]

Other Celsius stuff

As we mentioned last time, Core Scientific doesn’t want to keep paying the ever-increasing electricity bills for hosting Celsius’ bitcoin mining. Core Scientific, Celsius, and the Unsecured Creditors’ Committee are asking Judge Glenn to schedule a hearing on the matter on or after November 9. [Scheduling, PDF]

Celsius’ bills are a big problem for Core Scientific, who are already short on cash. Core Scientific dumped $20 million of bitcoin in September, and still only has $27 million in cash on hand — they burned through $25 million in the last month. They are on the verge of filing for bankruptcy themselves: [SEC]

“Furthermore, the Company may seek alternative sources of equity or debt financing, delay capital expenditures or evaluate potential asset sales, and potentially could seek relief under the applicable bankruptcy or insolvency laws. In the event of a bankruptcy proceeding or insolvency, or restructuring of our capital structure, holders of the Company’s common stock could suffer a total loss of their investment.”

Data Finnovation thinks he’s found Tether’s loans to Celsius, which are a major point of contention in the Celsius bankruptcy. “We found the Tether-Celsius loans, Tether’s equity investment into Celsius, and can therefore prove a lot about both defects in the Celsius business model and questionable conduct by Tether.” [Data Finnovation] 

There’s failing upward, and then there’s whatever this is: ex-Celsius exec Aaron Lovine joins JPMorgan as the new executive director of crypto regulatory policy! [Reuters]  

The next Celsius omnibus hearing is November 1. The November 30 omnibus hearing has been rescheduled for December 5. [Doc 1169, PDF]  

Voyager Digital 

Voyager is trying to sell itself off to FTX US. The deal is still tentative. Texas is concerned that FTX is offering unregistered securities to US retail customers. New York is sniffing around Voyager as well.

Voyager’s sale to FTX is part of Voyager’s broader bankruptcy plan, which creditors need to vote on next month. If they vote yes, the court still has to confirm the plan. A hearing for plan confirmation is set for December 8. In the meantime, Judge Micheal Wiles wants Voyager to stay open to better offers. 

The sale to FTX is valued at about $1.4 billion, of which $51 million is in cash. As part of the sale, FTX US would move customers onto its platform and return them 72% of their claims. [Second Amended Plan, PDF; Bloomberg; Bloomberg Law, archive]

Only creditors who transition to FTX US will receive crypto — customers who don’t go to FTX US will receive cash from the bankruptcy estate. FTX US doesn’t support Voyager’s VGX token, but it has offered to purchase all VGX for $10 million.

Voyager is pushing the FTX sale plan hard. Creditors have until November 29 to cast their votes. [Voyager, archive]

We mentioned on October 16 that Texas objected to the Voyager sale because the state was going after FTX, and then the rest of the crypto media covered the story the day after we posted it. The Texas Tribune spoke to Joe Rotunda, Director of the TSSA Enforcement Division, who discovered that FTX would let him trade securities from his Austin office. [Texas Tribune]

In its response to objections, Voyager holds that the sale to FTX is within its business judgment. For Texas’ objections regarding FTX, they’re adding a note that nothing should be construed as restraining state regulators. [Doc 558, PDF, Doc 559, PDF]

The New York Department of Financial Services has applied for an order lifting the automatic bankruptcy stay on an action against Voyager to “permit DFS to proceed with an investigation into whether the Debtors, or any one of them, have engaged in fraudulent activity and/or violated applicable law with respect to unlicensed cryptocurrency business activities within New York.”

There’s a provision in section 362 of the Bankruptcy Code for “police action” to proceed during a stay. Payment of a fine might be delayed — but that shouldn’t stop an investigation. The DFS outlines why it thinks it could just proceed anyway — but it’s asking nicely. There’s a hearing on November 15. [Doc 573, PDF] 

The fall of Three Arrows Capital

Kadhim Shubber from the Financial Times spotted a hilarious detail in a disclosure statement that Voyager filed on October 17 — on precisely how Three Arrows Capital screwed them over. [Doc 540, PDF, p47 on; Twitter]

Terraform Labs’ UST and luna tokens collapsed in mid-May. This sent 3AC bust, immediately — they were up to their necks in Terraform’s Anchor protocol and had a ton of UST.

Voyager asked their debtors if they had been affected by the UST-luna crash. Voyager’s contact at 3AC assured them everything was fine.

Later that month, 3AC reached out to Voyager asking to borrow even more from them — when 3AC was already 25% of Voyager’s loan book. Voyager said no.

Celsius froze withdrawals on June 12. Voyager again reached out to its debtors, asking how things were. Their 3AC contact assured Voyager on June 13 that 3AC was not exposed to Celsius.

Voyager put out a press release on June 14 assuring everyone that everything was fine. [Press release, archive]

Upon seeing the press release, Voyager’s 3AC contact called them straight away and told them that the founders of 3AC had gone silent and weren’t answering queries from their own employees. Their contact suggested that Voyager should recall all of its loans to 3AC immediately. This was the point at which Voyager knew that it, too, was bust.

We now know, of course, that 3AC’s founders had skipped Singapore sometime in late May — as soon as they realized there was no way to come back from the UST-luna collapse. They just locked the office doors and vanished. We even have a photo of the mail piling up on the office floor.

(You can tell it’s a rug pull from the lack of a carpet.)

Teneo is the court-appointed receiver in 3AC’s bankruptcy. Teneo wants US Judge Martin Glenn — yes, the same one overseeing Celsius — to let them subpoena 3AC founders Zhu and Davies via Twitter and email.

Teneo previously requested that Advocatus Law, the Singapore law firm representing the founders, accept the service of papers. Advocatus resisted. [Doc 54; Doc 55; The Block] 

The CFTC and SEC are looking into the collapse of 3AC, according to “people familiar with the matter.” The question is whether 3AC broke any laws by misleading investors about the strength of its balance sheet and not registering with the agencies. [Bloomberg] 

Terra-Luna

Laura Shin’s podcast with Terraform Labs founder Do Kwon is now up! David Z. Morris at CoinDesk dissects it, straight-up calling Kwon a sociopath. [Unchained; CoinDesk]

Posted on by Amy Castor 4

Celsius Network bankruptcy hearing, Thursday 20 October 2022

A hearing in the Celsius bankruptcy was held via Zoom at 10 a.m. Eastern on 20 October. Anyone could listen in — so I did, and took copious notes.

David helped me go through the notes, add comments and analysis, and polish things up. Next thing you know, we have another blog post.

If you’re curious about melting ice cubes and stalking horses, head on over to David’s blog. [David Gerard]

Image: Judge Martin Glenn

Posted on by Amy Castor 3

Crypto collapse: 40 states chasing Celsius for possible securities fraud; Texas chasing Voyager and FTX for possible securities fraud

  • By Amy Castor and David Gerard

“Of all the offspring of Time, Error is the most ancient, and is so old and familiar an acquaintance, that Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome.” 

~ Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

Celsius: dodge the cops by diving down the drain

Celsius Network seems to be admitting the company’s dead and it’s not coming back. The debtor companies filed a motion on September 29 to sell off whatever assets remain.

The leading contender is, wait for it, Sam Bankman-Fried of FTX, who was previously noted to be sniffing around the gaping balance sheet hole called Celsius. [Bloomberg]

Here’s the filing to sell off everything, with its marvelous title in full: Debtors’ Motion Seeking Entry of an Order (I) Approving the Bidding Procedures in Connection with the Sale of Substantially All of the Debtors’ Assets, (II) Scheduling Certain Dates with Respect Thereto, (III) Approving the Form and Manner of Notice Thereof, (IV) Approving Contract Assumption and Assignment Procedures, and (V) Granting Related Relief. [Motion, PDF]

The filing asks to start a bidding process, in a conventional manner, for any remaining spare change to be found in the stiff’s pockets. Celsius would like bids to be put in by November 15, with a hearing to approve the winner around November 28. Celsius hopes to sell any remaining assets by December 20. The auction would be advertised in the New York Times and CoinDesk.  

This isn’t actually a bad idea. We’ve said repeatedly that taking Celsius out of everyone’s misery is the right move. Celsius is an ex-parrot. It is bereft of life. There’s no viable business here. In any ordinary bankruptcy, selling off whatever’s left would be the correct thing to do at this point.

But this isn’t an ordinary bankruptcy. Vermont’s filing sets out the issues. There have been shenanigans here, and Vermont doesn’t want those put aside before the examiner can report: [Objection, PDF]

“As of the Petition Date, at least 40 state securities regulators were engaged in a multistate investigation arising from, inter alia, concerns about potential unregistered securities activity, mismanagement, securities fraud, and market manipulation by Celsius and its principals. At least six of those states had taken regulatory enforcement action against Celsius as of the Petition date, and several more states have done so since then.”

Ownership of the “custody” and “withhold” accounts have yet to be resolved. Do the accounts belong in full to the named creditors or are they part of the general pool of assets? (See our list of Celsius account types.) And who owns the stablecoins?

If any of the assets constitute securities, Vermont wants those to be registered as offerings of securities. (Spoiler: many of them are likely to constitute securities, and none are registered.)

Also unresolved: Celsius insiders withdrew nearly $18 million in cryptos in the weeks before Celsius froze withdrawals on June 12.  

Texas, Alabama, Arkansas, California, the District of Columbia, Hawaii, Maine, Missouri, New York, North Dakota, and Oklahoma all concur with Vermont’s objections. The states want to see the examiner’s report before any sale goes forward. They also want to approve the bidders to verify that they are compliant with state regulations, or can become compliant in a timely manner. [Texas objection, PDF; Coordinating states’ objection, PDF]

The US Trustee also objects to the auction. As well as the above objections, the Trustee asks that a privacy ombudsman be appointed, as “customers of these Debtors have significant concerns regarding transparency and irregularities.” [Objection, PDF]

Some individual creditors object on the same grounds — e.g., Daniel Frishberg, who thinks the examiner’s report may show that Celsius was a Ponzi scheme. Immanuel Herrmann has objected on behalf of an unofficial “Steering Committee” of Earn, Loans, and CEL depositors — they don’t object to an asset sale but do feel this current proposal is rushed. [Frishberg objection, PDF; Herrmann objection, PDF]

The forlorn quest for your money

The US Trustee held a 341 creditors’ meeting on October 13. Celsius interim CEO Chris Ferraro responded to questions under oath — and Ferraro knows nothing, nothing! Most of his answers amounted to “I’ll have to follow up on that,” “I don’t know,” and “I need to consult with my lawyers.” [Reddit]

The next Celsius hearing is on October 20 at 10 am ET. There’s an omnibus hearing on November 1 at 11 a.m. ET.  Custody and withhold hearings are scheduled for December 7 and 8 at 9 a.m. ET. [Schedule, PDF]

Celsius has requested to set a “bar date,” the deadline for customers to submit proofs of claims, of December 13, 2022. [Motion, PDF]

If you agree with the schedules of assets and liabilities that Celsius filed earlier, you don’t need to file a claim. Go to page 92 to check your claim. [Schedule, PDF]

If you do need to file a claim, Celsius has submitted a form for approval with the bar date motion. 

An inspector calls

As soon as she was appointed examiner in the Celsius bankruptcy on September 29, Shoba Pillay, previously an assistant US attorney, set to work.

She has already spoken to the debtors. She has outlined the various documents she will be requesting and has set forth a plan on how to avoid duplicating work already done.

Pillay has also filed a “Rule 2004 Motion,” to collect almost anything she might need. This motion will be heard on October 20 and is sure to be granted. [Rule 2004 motion, PDF; Notice motion, PDF]

Federal Rule of Bankruptcy 2004 — that’s a rule number, not a year — allows tremendously broad discovery and deposition. A witness in a 2004 examination is not always entitled to attorney representation or cross-examination and has only a limited right to object to questions. 2004 exams are sometimes referred to as “fishing expeditions” — because they need to be, in order to do their job. [Cullen Dykman; Nolo]

Pillay has proposed a work plan: [Motion, PDF]

  • Interview 15 to 25 witnesses under Rule 2004.
  • Monitor investigations by governmental entities.
  • Hire professionals as needed. She’s already put forth a motion to retain as counsel Jenner & Block, the Chicago law firm where she serves as a partner.
  • Hire Huron Consulting Group as her forensic accounting and financial advisor. 
  • Ascertain if the scope of the investigation needs to be expanded.

Hosting services

Core Scientific provides hosting services to Celsius Mining. Core claims the bankrupt company owes them $5.4 million. They’re tired of subsidizing Celsius’ failing mining business. They want their money, or they want out of their contract before Celsius turns them into a dead parrot too.  

Celsius argues that Core breached their agreement by failing to deploy mining machines on time, and is unjustly trying to pass on power charges. They say Core is in violation of the automatic stay, which stops creditors from trying to collect debts until court bankruptcy proceedings are completed. They have called for a hearing on October 20 to ask the court to enforce the stay. [Filing, PDF; Coindesk; The Block]

Core responded saying that Celsius’ claims were “premised on the incorrect notion that Core Scientific must subsidize the Debtors’ money-losing mining business to the tune of millions of dollars a month.” 

Core says they have deployed all of the mining equipment Celsius gave them and are paying out of pocket to keep the machines running. They are seeking relief from the court to either terminate their contract or to get paid. They want to delay the hearing on October 20 and they are requesting a status conference. [Letter, PDF]

Celsius’s lawyers responded that Core’s request for a status conference is “unwarranted and premature.” We think Celsius is dragging this out for as long as they can run up a tab with Core that will never be paid. [Letter, PDF]

Cold, so cold

There’s a new tool that lets you search the Celsius creditor database with your name and find your coinage! You can use the leaderboard to find the top losers. [Celsiusnetworth; Gizmodo]

US federal prosecutors from the Southern District of New York subpoenaed Celsius days after it blocked withdrawals in June. The subpoena was issued by a grand jury. Federal grand juries are used by Department of Justice prosecutors to conduct criminal investigations and potentially issue indictments. [FT, archive] 

The SDNY subpoena is disclosed on p. 48 of this October 5 filing. Pages 48-50 list investigations by multiple state regulators. [Filing, PDF]

Celsius has filed its proposal for a key employee retention plan (KERP). They want to divvy up $2.96 million amongst 62 key non-insider employees — so as to keep them working on the dumb “Kelvin” plan to revive this dead parrot. Celsius currently has 275 employees in total. [Motion, PDF]

Alex Mashinsky, who recently stepped down as Celsius CEO, is dumping his CEL tokens for USDC dollar-equivalent stablecoins. [Twitter, Twitter] 

Celsius cofounder Daniel Leon, who also just stepped down, sold $11.5 million worth of CEL in 2020 and 2021. [FT]

Jason Stone of KeyFi, a.k.a. DeFi whale 0x_b1, used to manage Celsius’ investments. Stone sued Celsius in July, saying they hadn’t paid him and called Celsius a Ponzi scheme. Celsius countersued in August, claiming Stone was an incompetent thief. Anyway, Celsius has just updated their counterclaim. [Complaint, PDF] 

Voyager Digital, FTX, and Texas

In a Chapter 11 bankruptcy, the debtor has to file a disclosure statement with their bankruptcy plan. The statement needs to provide “adequate information” about the debtor’s financial affairs so creditors can make an informed decision when they go to vote on the bankruptcy plan. 

Voyager filed its first amended disclosure statement related to its second amended joint plan on October 5. The plan involves selling off all of its assets to FTX US. [Statement, PDF]

The US Trustee objected to Voyager’s disclosure statement. The plan doesn’t say it’s a liquidation plan, but the proposal is basically to liquidate Voyager. The plan also shields Voyager CEO Stephen Ehrlich and his assets from third-party claims. The Trustee wants clearer disclosure for creditors of precisely what this statement is. [Objection, PDF]  

The Texas State Securities Board objects to the sale of Voyager to FTX, “because, at this time, the Debtor and FTX are not in compliance with Texas law.” Texas thinks the plan “attempts to limit the Debtors’ liability for unlawful post-petition — but pre-sale closing — conduct for which state-regulatory fines and penalties may apply.” That is, they think the quick sale is an attempt to hide malfeasance. [Objection, PDF]

Specifically, Texas thinks FTX has been offering investment contracts that constitute unregistered securities to Texas residents. The affidavit from Joe Rotunda, Director of the TSSA Enforcement Division, details Texas’ ongoing case against Voyager since April 2022 for unlicensed offerings of securities — and then it gets stuck into FTX.

Rotunda states that the interest-bearing accounts offered by FTX US are likely unregistered securities. FTX US claims to be registered with FinCEN as a money transmitter — but it isn’t registered with Texas as a money transmitter. FTX Capital is registered with Texas as a broker-dealer, so that’s nice. 

The FTX trading app lets US customers use FTX non-US despite FTX Trading’s claims not to serve US customers, and despite Rotunda correctly entering his address as Austin, Texas. Rotunda transferred ether to a wallet on FTX. Rotunda is pretty sure the FTX (US or not) yield program is an investment contract and not a registered one.

Rotunda also confirms that “The Enforcement Division is now investigating FTX Trading, FTX US, and their principals, including Sam Bankman-Fried.” [Affidavit, PDF]

The lawyers want their money 

Bankruptcies are expensive. The professionals operating on behalf of Voyager Digital and Celsius Network have begun submitting their bills. 

Kirkland & Ellis in Voyager: $2,994,615.46 for July 5 to July 31. [Fee statement, PDF]

Kirkland & Ellis in Celsius: $2,570,322.67 for July 13 to July 31 July — yes, that’s only two and a half weeks. [Fee statement, PDF]

Akin Gump in Celsius: $741,898.56 for July 13 to Aug. 31. [Fee statement, PDF]

Alvarez & Marsal in Celsius: $2,961,249.80 for July 14 to Aug. 31. [Fee statement, PDF]

Other good news for crypto finance

South Korean crypto investment firm Blockwater Technologies defaulted on a loan from TrueFi, a decentralized lending protocol. TrueFi issued a “notice of default” to Blockwater on October 6 after Blockwater missed a payment on a loan of 3.4 million BUSD. TrueFi said the debt represents about 2% of its total outstanding value. Blockworks’ loan was “restructured” in August, and they paid back 654,000 BUSD at that time. TrueFi wants “a potential court-supervised administrative proceeding” —i.e., putting Blockwater into something like bankruptcy. [TrueFi blog; Bloomberg; Twitter]

Do Kwon is the founder of Terraform Labs, whose UST “stablecoin” collapsed in May, took the rest of crypto down with it, and started us on writing this newsletter series. Kwon talked to Laura Shin for her Unchained podcast on October 14 from a totally legitimate unknown location where he definitely isn’t on the run. The podcast comes out on October 18. [Twitter; Unchained]

Grayscale runs crypto investment funds, most notably GBTC, which Amy has dissected at length. Grayscale is now creating Grayscale Digital Infrastructure Opportunities, to buy up used bitcoin mining rigs from distressed mining companies. These will be used for mining by Foundry Digital, which is also owned by Grayscale owner Digital Currency Group. This will be made available as a fabulous investment opportunity to “accredited investors such as hedge funds and family offices at a minimum investment of $25,000.” [Bloomberg]

The Department of Justice has issued a new report on crypto crime: “The Role Of Law Enforcement In Detecting, Investigating, And Prosecuting Criminal Activity Related To Digital Assets.” This report was as required by President Biden’s March 2022 executive order on crypto. [DOJ, PDF]

Posted on by Amy Castor 0

When Wells notice? Yuga Labs, the SEC is coming for you

I’ve been saying for months now that ApeCoin is an unregistered penny stock offering, and Yuga Labs should expect the SEC to come knocking.

Well, guess what? They are knocking. The SEC is probing Yuga Labs to see if Bored Ape Yacht Club NFTs — as well as ApeCoin — are unregistered securities offerings. On Oct. 10, Bloomberg wrote: [Bloomberg]

“The SEC is examining whether certain nonfungible tokens from the Miami-based company are more akin to stocks and should follow the same disclosure rules, according to a person familiar with the matter, who asked not to be named because the probe is private. Wall Street’s main regulator is also examining the distribution of ApeCoin, which was given to holders of Bored Ape Yacht Club and related NFTs.”

Yuga Labs is the parent company of Bored Ape Yacht Club, a collection of NFTs with spin-off NFT projects, such as Mutant Ape Yacht Club and Bored Ape Kennel Club. Yuga is also behind the yet-to-launch MMO game Otherside — which it is building in partnership with Animoca Brands — and the issuance of Otherdeeds, NFTs representing land parcels in the game. 

Bored Ape Yacht Club launched ApeCoin, an ERC20 token, on March 17. The very same day, ApeCoin listed on Coinbase — a first for a coin, but then two Andreessen Horowitz (a16z) people sit on the Coinbase board, and a16z is a major Yuga Labs backer. 

Are Bored Apes securities?

A token is deemed a security if it passes the Howey test, which says that an investment contract — a security — exists “when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” [SEC]

Are NFTs securities? Possibly? Maybe? They are non-fungible, so the argument is not so clear. Each NFT is unique, and in the case of Bored Apes Yacht Club, they represent art. Regulators have yet to issue any strong warnings against NFTs. 

However, some NFTs do have characteristics of securities. In April, two state regulators ordered Sand Vegas Casino Club to stop selling NFTs, alleging the Cryprus company was illegally offering unregistered securities. Sand Vegas had promised holders of its Gambling Apes NFTs profits from the proceeds of the casinos, so you can see why they landed into trouble. [Texas order; Alabama order; Coindesk] 

Otherdeed land sale

Likewise, Yuga Labs’ Otherdeed NFTs have characteristics of securities. Otherdeeds represent 200,000 plots of virtual land in the upcoming Otherside metaverse.  

Yuga Labs sold 55,000 Otherdeeds on April 30, 2022, in what it called the “biggest mint in NFT history.” Yuga netted over $300 million worth of ApeCoin in the sale. ApeCoin was the only currency accepted. [Twitter] 

Specific wording in the terms makes it sound like Yuga suspected Otherdeeds might attract the attention of regulators. You had to essentially agree that you were buying these for fun, not for profit: [Otherdeed purchase agreement, archive] 

“Artistic Purposes Only. Purchaser represents and warrants that Purchaser (A) is purchasing the Otherdeed for personal enjoyment purposes, and (B) is not purchasing any Otherdeed with the intent or expectation of profits from any appreciation in value or otherwise from the Otherdeed or any Access Rights that may from time to time be granted by Animoca or third parties.”

Do Otherdeeds pass the Howey test? Let’s see. 

  • Was there an investment of money? Yes. Buyers paid 305 ApeCoin to purchase an Otherdeed on April 30. 
  • Was there a common enterprise? Yes. The Otherside game. Yuga sold virtual plots of land to investors in exchange for the promise of owning land in a functioning metaverse tomorrow.
  • Was there an expectation of profit? Yes. Despite the language in the terms, Otherdeed owners immediately began flipping their Otherdeeds for more money. Case in point: Otherdeed #59906 sold for 625 ETH ($1.5 million) just 10 days later. Some Otherdeeds even came with one or more creatures on them called Kodas, also represented by NFTs. Otherdeeds with Kodas fetch a significantly higher price on third-party marketplaces. [The Block; OpenSea]
  • Was the profit to be derived from the efforts of others? Yes. If the investor has a significant hand in the success of an investment, it’s most likely not an investment. Otherdeeds are meant to involve the participants in the game. According to Otherside’s website, “Rather than a static representation of a piece of land, your Otherdeed is designed to evolve along with what you choose to do in the game.” But the game does not exist yet. So, as of now, everything is based on the efforts of Yuga and Animoca and their ongoing promotion of the game. [Website]

ApeCoin, a clear case

While Otherdeeds could be a securities offering, there is an even stronger case to be made that ApeCoin is a security.  

ApeCoin is fungible, and it carries voting rights. Critically, its value is dependent on the work of Yuga Labs. 

SEC Chair Gary Gensler has given clear warning about ERC20 tokens. He has already stated, more than once, that most cryptocurrencies are securities. [CNBC; SEC]  

“I think, and my predecessors thought this as well, that most of these tokens are in fact that the public is investing, anticipating and hoping for profit, based on somebody else’s efforts.”

Yuga Labs never sold ApeCoin directly for cash. However, they did sell Bored Ape and Mutant Ape NFTs for money. If you were a holder of one of these NFTs, you got an allotment of ApeCoin worth up to $80,000. Many chose to HODL, hoping the price would go up. It did, for a while. [Decrypt]

When Yuga Labs held its massive Otherdeed land sale, ApeCoin surged to $27.50. It’s now trading for just under $5.

But we’re decentralized!

Yuga Labs went to great lengths to hide the fact that they were behind ApeCoin, saying it was issued by the ApeCoin DAO made up of members who were not Yuga Labs employees. APE Foundation was also formed to administer the decisions of the ApeCoin DAO. 

If you hold ApeCoin, you get voting rights — akin to voting shares in a company. You can vote on proposals put forth by the ApeCoin DAO. In June, ApeCoin holders voted to keep the token on the Ethereum blockchain. [Bloomberg]

Around the time that ApeCoin launched, Yuga Labs received a $450 million round led by a16z. Investors in the round also received a distribution of ApeCoin. 

Here’s how 1 trillion ApeCoin were initially distributed:

  • 1% to charity
  • 8% to Yuga Labs founders 
  • 14% to launch partners, including a16z and Animoca 
  • 15% to Yuga Labs
  • 15% to Bored Ape/Mutant Ape owners
  • 47% to ApeCoin DAO

In mid-September, the ApeCoin DAO released 26 million ApeCoins, so investors could freely dump their bags on retailers via Coinbase. [Decrypt]

David Gerard explains exactly how VCs make millions of dollars via securities fraud: [David Gerard]

“The entire venture capital push for Web3 is so that Andreesen Horowitz (a16z) and friends can dump ill-regulated tokens on retail as fast as possible. This gives the VCs very fast liquidity events — the bit where they make money — and much faster than they get from investing in actual companies.”

ApeCoin will also be the official token of the Otherside game, supposedly to prove that ApeCoin is a decentralized utility token and not an altcoin that investors are hoping to cash out on. 

If you are wondering how all of this decentralized nonsense comes into play — Bill Hinman, when he was working for the SEC as the director of the Division of Corporation Finance, declared that ETH was not a security because it was “sufficiently decentralized.” [SEC] 

Yuga Labs is trying to model itself after Ethereum, so it can effectively say to the SEC, “You can’t sue us, bro!”

They’ve got someone good coaching them. Hinman, who has since retired from the SEC, now works for a16z. [a16z] 

Securities laws exist to prevent fraud. Companies that offer securities are subject to strict disclosure rules for this reason — to protect investors. Yuga Labs main founders Greg Solano and Wylie Aronow thought it would be great to remain CryptoGarga and GordonGoner until they were “doxxed.” [Buzzfeed] 

They were upset when Buzzfeed wrote that story, and they shamelessly brought a lot of ire from the crypto community onto the author of the piece, when their true identities were something they should have openly and responsibly disclosed from day one. 

Solano and Wylie are about to get an education in securities laws, along with the sobering realization they were never witty or clever or even lucky, just pawns in a game that VCs have been playing for years.

With celebs shilling their Bored Ape NFTs on national TV, Bored Apes Yacht Club has gotten a ridiculous amount of press. The SEC will want to make an example of Yuga Labs. I suspect, at some point, Solano and Wylie can look forward to a Wells notice from the SEC, giving them a heads up that an enforcement action is coming down the pipes.

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Crypto collapse: Celsius reveals its creditor list, 3AC NFTs, Terra-Luna, Voyager

The latest crypto crash update is up!

David Gerard and I discuss:

  • Liquidate Celsius already. There’s no viable business here, and Mashinsky has taken all his money out. Krissy’s got her money, too.
  • Celsius filed its schedule of assets and liabilities, listing the names of every creditor and every transaction they made in the last 90 days.
  • Crypto is horrified. My name’s in a public record, omg!
  • Teneo got its hands on 3AC’s NFT collection. We can’t find our friend CryptoDickButt #1462 though!
  • South Korea is clipping Terraform Labs creator Do Kwon’s wings. No more passport. He says he’s not on the run anyway.
  • Voyager is pissed off at Wave Financial’s interview with CoinTelegraph. They’ve filed a very defensive letter with the court.

The full update is on David’s blog this time. Head on over there and read it! [David Gerard]

Image: They look smug here, yes?

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The SEC busts Kim Kardashian over EthereumMax, pour encourager les autres

  • By Amy Castor and David Gerard, for their sins
  • Our work is funded by our Patreons — here’s Amy’s, and here’s David’s. Your monthly contributions help us greatly in steeling ourselves to dive into this jaw dropping foolishness!

Reality show queen Kim Kardashian is not stupid. She’s a billionaire businesswoman. She clearly has basic competence.

Kardashian is even studying law. She passed the first-year “baby bar” exam in December 2021, on her fourth attempt. (This isn’t unusual — the pass rate is around 21%.) [The Guardian; Elle]

But that doesn’t mean she understands securities laws — or that putting “#ad” on the end of an Instagram post promoting a security does not, in fact, leave you in the clear.

Section 17(b) of the Securities Act specifically states that you need to spell out how much you’re being compensated for a promotion — and Kardashian neglected that bit when she posted about EthereumMax (EMAX) to her 225 million Instagram followers on June 16, 2021.

How could Kardashian have known EthereumMax was a security? Paragraphs 6 to 9 of the SEC order against her detail how blatant EMAX was. Kardashian’s post even promoted a token burn that was supposedly “giving back” to the “community” — implying financial benefit. [SEC press release; Order, PDF]

The SEC came down hard on Kardashian. She has agreed to a $1 million fine, and disgorgement of the $250,000 she was paid plus $10,415.35 in prejudgment interest. Kardashian must not promote a “crypto asset security” in the next three years. She will also “continue to cooperate with the Commission’s investigation in this matter.”

We’re pretty sure Kardashian knows what a security is now.

Kardashian is currently launching a private equity firm, SKYY Partners. So she’d better be on top of this stuff. [Fortune]

What’s EthereumMax?

EthereumMax is an ERC-20 token on the Ethereum blockchain. The promotion for EMAX promised all sorts of amazing visionary aspirations — but it’s just another worthless altcoin that doesn’t do anything. [CoinDesk; EthereumMax white paper, archive, PDF] 

EMAX was launched in May 2021, only a month before the June 2021 celebrity push. Kardashian, boxer Floyd Mayweather, and former NBA player Paul Pierce hawked EMAX to their massive social media followings — though this didn’t halt the token’s ongoing price collapse. 

Paid to pump

In September 2021, a few months after Kardashian’s EMAX post, Charles Randall, the head of the UK’s Financial Conduct Authority, gave a speech that called on online platforms to crack down on financial scams. He specifically noted Kardashian’s post: [FCA speech]

“Which brings me on to Kim Kardashian. When she was recently paid to ask her 250 million Instagram followers to speculate on crypto tokens by ’joining the Ethereum Max Community,’ it may have been the financial promotion with the single biggest audience reach in history.

The problem is much wider than Kardashian. Celebrity endorsements for financial toxic waste are an ongoing problem. Actor Ben McKenzie speaks up about it from time to time — including on the case of Kardashian — and suggests celebs stick to promoting non-trash: [Slate]

“To criticize celebrities shilling crypto isn’t to impugn them as people or to say that I’m above accepting an easy payday. (Call my agent, legit companies with not-scammy products!)”

Citing quotes from a “crypto marketing agency” executive, the Financial Times wrote this on celeb crypto promotions: [FT, archive]

“It’s considered easy money,” said an executive at a crypto marketing agency, who asked not to be named, adding that the endorsements are often pushed by talent agents who will offer deals that include posts by several of their high-profile clients, with price tags ranging from tens of thousands to millions of dollars. “You ain’t seen nothing yet.”

Fundamentally, Kardashian’s people failed to realize that the EthereumMax sponsorship would blow up on her. We expect a deeply displeased Kardashian sent more than a few heated texts to her minions along the lines of “what on earth?” — or however you phrase that in Kardashian.

We don’t know of any evidence that Kardashian cared about EthereumMax or knew anything about crypto in general. The only past involvement she had with crypto is that she apparently used some chips with bitcoin logos on them in a charity poker game in 2018. We doubt she cared about crypto then either. [Cointelegraph]  

How about those NFT shills?

Celebrities have been hawking NFTs at top volume for the past year — such as Jimmy Fallon and Paris Hilton pumping bored apes on late-night television, and Madonna tweeting that she finally got her “very own ape” in March. (Madonna’s talent manager Guy Oseary represents Yuga Labs, the company behind the BAYC project. He is also an investor though his fund Sound Ventures.) [Mashable; Twitter]

Almost no celebs would understand the many NFT deals we saw them taking through 2021. Likely, their people would have just told them: “It’s a sponsorship for internet art, free money!” and they’d go “Sounds good, tell me when you need me to nod and smile.”

So far, NFTs are not securities. Mostly. Probably. But they’re still stupid investments best left entirely to the crypto speculators.

Celebrity NFT promotion would be under Federal Trade Commission rules — where disclosing that your promotion is an “#ad” is probably sufficient. Though almost no celebrity Bored Apes promoters did so, for instance.

Some of this stuff flies a bit close to the sun. When celebrities go on TV promoting Bored Apes NFTs, they’re not just promoting Bored Apes, but the entire ecosystem that Yuga Labs has created — including Apecoin, which is an obvious and blatant security offering. 

It’s so unfair!

The SEC moved quicker on Kardashian than on many previous crypto-related violations. It only took a little over a year to charge Kardashian. The SEC hasn’t charged EthereumMax directly for not registering its offering. 

Anyone who calls this “regulation by enforcement” is a clown. This is just enforcement. There’s absolutely no reasonable question of the facts or laws here. The SEC has been warning about this nonsense since 2017. [SEC, 2017] 

Floyd Mayweather in particular already settled with the SEC in November 2018 for failing to disclose payment for promoting ICO tokens. That settlement barred Mayweather from accepting payment for promoting securities — and his EthereumMax promotion in June 2021 would have been within that period. We wonder if there’s an order coming his way too. [SEC press release, 2018; order, PDF, 2018] 

Action against unregistered securities isn’t restricted to the SEC — private citizens can bring actions against unregistered offerings, and against their promoters. In January, a class action was brought against EthereumMax founders Steve Gentile, Giovanni Perone, and Justin French, and promoters Kardashian, Mayweather and Pierce, claiming investor losses on this alleged unregistered security. [Complaint, PDF; The Block]

Kardashian didn’t just fly too high — she set a course directly for the sun, and she got burnt. EMAX was blatantly an offering of securities, the SEC had given clear warning over the previous several years, and there are clear laws governing disclosures when you promote a security. 

Why did she so blatantly just not follow the law? Because she was likely ill-advised, and crypto seemed like easy money.

But it is incredibly irresponsible — and that’s why it’s so reprehensible. You’re encouraging people to engage in risky investments, where they invariably lose money. 

Kardashian is a billionaire — $1.26 million is a trivial fine for her. But this is excellent enforcement by the SEC, pour encourager les autres.

SEC chair Gary Gensler even made a nice video about celebrity endorsements! Securities TikTok awaits. [YouTube]

Posted on by Amy Castor 4

Crypto collapse: States bust Nexo, Terra’s Do Kwon on the run, Celsius CEO resigns, FTX buying Voyager and eyeing Celsius, ETH miners screwed

David Gerard and I just published our latest news roundup and analysis on the ongoing crypto crash.

In this update, we cover:

  • A slew of state regulators drop the hammer on crypto lender Nexo.
  • Terra-Luna: Where in the world is Do Kwon?
  • After a two-week auction, FTX US emerges as the highest bidder for Voyager Digital’s assets. What is SBF buying other than a giant hole in Voyager’s balance sheet?
  • Under pressure from the UCC, Alex Mashinsky steps aside as CEO of Celsius.
  • The US Trustee appoints an examiner to investigate Celsius.
  • Celsius wants to sell off some stablecoins to fund its operations. Texas agencies object! They want the debtor to hold off until the examiner comes out with her report.
  • Crypto miners are unhappy. Good!

Head over to David’s blog to read the full post! [David Gerard]

Image: GPU crypto miners in Vietnam appear to be jet washing their old mining gear before putting the components up for sale.

Posted on by Amy Castor 0

Crypto collapse: Celsius, Voyager, SkyBridge — the liabilities are real, the assets are fake

“To the crowd there assembled, I was the realization of their dreams….The ‘wizard’ who could turn a pauper into a millionaire overnight!”

~ Charles Ponzi

Celsius Network

For years, Celsius founder Alex Mashinsky told people banks were the enemy, and Celsius was your friend. Now everyone is wondering where their money went. Here’s our summary of the current situation at Celsius:

  • The money is gone. There’s almost nothing left for creditors.
  • The lawyers are stripping the last shreds of meat off the bones. 
  • Celsius’ ludicrous plan to run a bitcoin mining operation to get out of debt is a way for execs to put off liquidation a bit longer while they fill their pockets. 
  • Insiders will keep paying themselves with the remaining funds for as long as they can get away with it.
  • An examiner report could lead to a liquidation, possibly more. Any party can file a motion to convert to a liquidation “for cause.” The sooner that happens, the better, as far as we’re concerned. It’s time to close the curtains on this clown show.
  • We can hope for criminal charges — but those would require something like solid evidence of a deliberate Ponzi scheme, which could well come from the examiner, once appointed. 
  • Both the Trustee and the judge have the power to refer a case to the Department of Justice. If the examiner finds evidence of federal crimes, the case will have already been made. 

Let’s review the four types of Celsius customers:

  • Earn: Celsius promised up to 18% APY if you gave them your crypto to invest in … secret things. Crypto deposited into Earn accounts became the property of Celsius. The Earn product resembled an unregistered securities offering. When you give someone your money and they do stuff with it to make more money, that’s an investment contract — a security.

    Not registering such an investment contract when offering it to the public is why BlockFi had to fork over $100 million to state regulators and the SEC, and why Coinbase ultimately had to abandon its Coinbase Lend product.
  • Borrow: Celsius let you take out loans against your crypto assets. Borrow customers were usually crypto gamblers borrowing USDC (casino chips) to play the DeFi markets. You paid interest monthly, and then paid the principal in one lump sum at the end. Similar to Earn, the crypto you put up as collateral became Celsius property.
  • Custody: Celsius launched a Custody solution on April 15, 2022 — 89 days before it filed for bankruptcy, making all of those funds subject to a 90-day clawback under the bankruptcy code.

    Custody was a response to state regulators casting an acerbic eye upon Celsius’ Earn product. “New transfers made by non-accredited investors in the United States will be held in their new Custody accounts and will not earn rewards,” Celsius said. [Celsius blog post, archive]

    Custody essentially served as storage wallets. In the bankruptcy proceedings, this has led to ongoing discussion on whether Custody account holders are secured creditors who will get their money back right away … or unsecured creditors, whose funds are now part of the bankruptcy estate. Judge Martin Glenn, who is preceding over the bankruptcy, says he hopes to resolve the matter sooner rather than later.
  • Withhold: If you lived in a US state where Celsius became unable to offer serviceable Custody accounts, you had to move your Earn funds to Withhold accounts, where they remained frozen. The Withhold group accounts for $14.5 million of the $12 billion in digital assets stuck on Celsius when it stopped withdrawals in June.

The big question now in the Celsius bankruptcy is how to classify creditors: who’s first in line to get their money back, and who’s last in line? This is why, in addition to the official Unsecured Creditors’ Committee (UCC), there are currently three ad-hoc groups, all vying to get the judge’s attention. 

Celsius believes that funds held in Earn and Borrow accounts are property of the bankruptcy estate, meaning those customers will have to wait until the lawyers finish to see what’s left. But Celsius wants to return money held in specific Custody and Withhold accounts to customers now. [Motion, PDF]

Celsius argues that $50 million of the $120 million in Custody and Withhold accounts should go back to customers, if they meet one of the following criteria: [Twitter]

  • The accounts are pure Custody or pure Withhold with funds that were transferred from an external wallet — not Earn or Borrow programs.
  • In instances where the Custody and Withhold accounts do contain funds transferred from the Earn or Borrow programs, they want customers to have their money back, if the transfers were less than $7,575, a specific legal threshold under the bankruptcy code clawback provision, 11 U.S. Code § 547(c)(9). This is an adjusted amount. [Twitter; LII; LII]

Much of the discussion at the third bankruptcy hearing on Sept. 1 centered around whether custody holders should be able to get their money back. [Coindesk]

During the hearing Judge Martin Glenn also emphasized: “Nobody is getting their money back if they remain anonymous. Let me make that clear.” [Twitter]

According to new financial docs, Celsius seems to have magically found $70 million “from the repayment of USD denominated loans.” Imagine that! The company originally forecasted it would run out of money by October, but now it has more runway. [Docket #674, PDF; Coindesk]  

Last month, the Trustee called for an independent examiner and filed a motion to show cause. [Motion, PDF] Creditors — the UCC and the ad-hoc groups — are worried that an examiner will drain more of their dwindling pool of funds.

David Adler, a lawyer with the firm McCarter & English, representing four Celsius borrowers, says an examiner will cost too much money. The group thinks the job can be done with a Chapter 11 Trustee. [response, PDF]

The Vermont Department of Financial Regulation says Celsius sure looked like a Ponzi scheme and is urging the court to appoint an examiner. Vermont is concerned about Celsius’ offerings of unregistered securities. “At a minimum, Celsius has been operating its business in violation of state securities laws. That improper practice alone warrants investigation by a neutral party.” Vermont also alleges that without Celsius’s holdings of its own native CEL token, the firm has been insolvent since at least February 2019. [FT; court filing, PDF]

Celsius has agreed to the Trustee hiring an examiner — as long as the examiner does not duplicate work already done by the UCC. Celsius says they’ve reached an agreement with the Trustee on this point. [response, PDF]

The next Celsius bankruptcy hearing is set for Sept. 14. There is also a hearing scheduled for Oct. 6 to discuss the custody account holders.

Meanwhile, Celsius has announced a Celsius-themed Monopoly game! It appears to be an unlicensed knockoff — not officially endorsed by Hasbro. This seems to have been in the works since well before the bankruptcy. [Web 3 Is Going Great]

Alex Mashinsky had a favorite slogan: “Unbank Yourself.” His wife Krissy is now selling a new T-shirt: “Unbankrupt Yourself.” [Twitter]

Daniel Leon, one of the founders of Celsius, says his 32,600 shares of Celsius stock are worthless. It looks like he wants to use them as a tax write-off. [Docket 719, PDF] 

Voyager Digital

On Aug. 30, the US Trustee held the first 341 creditors’ meeting for Voyager, where the Trustee and the creditors got to ask CEO Steven Ehrlich questions about the bankruptcy — under oath. The Trustee is an agent of the federal government. If you lie to the Trustee, it is like lying to the FBI — a federal crime. 

(We wrote about Celsius’ 341 meeting previously.)

Listening to creditors, it’s clear that they’re upset and confused as to why their crypto, including USDC, has become part of the bankruptcy estate. They thought the money was theirs and they could have it back at any time. It didn’t help that Voyager gave users the false impression that their money was FDIC insured.

Ehrlich kept referring the distraught creditors back to the customer agreement, which many had never read, or never fully understood.

Ehrlich noted during the meeting that Voyager is still staking crypto. He said the firm had filed a motion asking the court if it’s okay to stake even more. The court has allowed Voyager to continue staking pursuant to their ordinary business practices. The UCC oversees their staking. [Docket 247, PDF]

Staking is risky!

Some staking, such as proof-of-stake staking, doesn’t risk losing the coins in that currency. Once Ethereum switches to proof-of-stake and, perhaps several months later provides a way for you to withdraw your stake, there’s little risk when your ETH staking is denominated in ETH.

But most staking activity involves first moving your liquid crypto (such as ETH) into a company’s own crypto (such as CEL or UST), which is basically a self-assembled Ponzi scheme for staking. And a lot of “staking” is just lending to a DeFi structure, which means you’re at risk even when it’s denominated in that staked crypto.

Voyager says it got multiple bids to buy the company. The deadline for bids was Sept. 6 — extended from Aug. 26 — so now it’s headed to auction. The auction will be held on Sept. 13 at 10 a.m. ET in the New York offices of Voyager’s investment bank Moelis & Co. A court hearing to approve the results is scheduled for Sept. 29. [Bloomberg; court filing, PDF]

Sam Bankman-Fried’s FTX and Alameda disclosed a joint bid for Voyager in July. Voyager dismissed this as a lowball bid — but we think SBF is the one who is most interested in Voyager. Maybe they’ll up their offer in the auction?

What is there left to buy anyway? That’s what we want to know. Voyager is in much the same position as Celsius — its liabilities are real, but its assets are fake. What does FTX get if it buys Voyager?

The Georgia Department of Banking and Finance has a limited objection to the sale of Voyager. Voyager is a licensed money transmitter in the state of Georgia. If the auction is a success, the department is asking the court to stay the acquisition unless or until the new buyer is also licensed in the state as a money transmitter. We wonder how harshly that will limit the field of buyers. [limited objection, PDF] 

Bankruptcies are expensive. Quinn Emanuel, special counsel for Voyager, has submitted their first-month fee statement: $244,080. That’s for 196.7 hours of work. The lead lawyer ​​charges $2,130 an hour for his services. Voyager brought Quinn Emanuel on board in July to look into the possibility of insider trading at 3AC. [Doc 358, PDF; Bloomberg Law]

The next Voyager omnibus meeting is on Sept. 13 at 11 ET. The deadline for filing a proof of claims is Oct. 3. 

SkyBridge

FTX is paying an undisclosed sum for a 30% stake in Anthony Scaramucci’s SkyBridge, and SkyBridge will buy $40 million of crypto to hold “long-term.” Scaramucci is not giving up any of his own share of SkyBridge. [Bloomberg; FT]

SkyBridge used to be a general hedge fund then went hard into crypto. “We will remain a diversified asset management firm, while investing heavily in blockchain,” says Scaramucci.

The weird part of this is that SkyBridge is already an investor in FTX and FTX US. We’re reminded of how FTX “bailed out” Voyager, then it turned out that Voyager owed FTX a bundle.

Other stuff

Three Arrows Capital (3AC) withdrew 20,945 staked ether (worth about $33.3 million) from Curve and $12 million in various assets (wrapped ETH, wrapped bitcoin, and USDT) from Convex Finance. Nobody seems to know why they withdrew the funds. [The Block]

The Algorand Foundation has admitted it had $35 million (in USDC) exposure to collapsed crypto lender Hodlnaut. [Algorand blog]

Another class action has been brought against Terraform Labs. This one was brought by Matthew Albright. He is represented by Daniel Berger of Grant & Eisenhofer. The claim alleges Terraform violated the RICO act by artificially inflating the price of their coins and publishing misleading information following UST and luna’s collapses to cover up for an $80 million money laundering scheme. “UST amounted to a Ponzi scheme that was only sustained by the demand for UST created by Anchor’s excessive yields.” The proposed class is all individuals and entities who purchased UST and luna between May 1, 2019, and June 15, 2022. [Complaint, PDF]

From May: Chancers, the Korean crypto streamer who went to Terraform CEO Do Kwon’s house. [BBC] 

Posted on by Amy Castor 0