Crypto markets are extremely volatile. You never know how wildly up or down the price may go or when. This turned out to be a disaster for US crypto exchange Poloniex when an obscure token that it offered peer-to-peer margin trading on suffered a flash crash.
On May 26, the price of CLAMdropped so violently that margin borrowers blew their margins multiple times over. The loss was huge: 1,800 BTC, valued at around $14 million.
Now Poloniex has to figure out how to extract the losses from the borrowers. For now, lenders will have to suck up the loss. On 14:00 UTC on June 6 — a full 10 days after the incident — Poloniex applied a 16.202% haircut to the principal of all active BTC loans. Even lenders not active at the time of the crash were affected.
David, it's straight out of the Bitfinex 2016 playbook. Haircut on unrelated lenders some time after the actual losses were incurred.
Prior to announcing the haircut, Poloniex suspended trading for several hours on Wednesday as part of a “planned” maintenance. It wasn’t until trading resumed that margin lenders realized a portion of their BTC was missing.
In a Medium post, Poloniex revealed that a large part of the loans were collateralized in CLAM — so both the borrowers’ positions and their collateral lost most of their value. In other words, the funds simply evaporated, and there was nothing to repay loans with.
The exchange says it has frozen all defaulted borrowers’ accounts until they repay their loans, as spelled out in the the company’s terms of service.
“As we recover funds, we will return them to affected lenders. We’re also exploring other ways to help defray margin lender losses,” Poloniex wrote.
Naturally, the margin lenders, which only account for 0.4% of Polo’s user base, are completely pissed off. Why did Polo not have better risk management in place? Why did it not have an insurance fund set up to absorb the loss? And why did Polo allow margin trades — and collateral loans — on an extremely illiquid coin in the first place?
What is margin trading?
Margin trading is risky business, even more so when you are trading crypto assets, due to their high volatility. When you trade on margin, you put down a collateral and borrow against that, doubling, tripling, quadrupling — or whatever — your trade.
Trading on margin magnifies your profits, but also your losses. If the trade goes in your favor, you can repay the loan and tuck in a nice profit. But if the price of the asset slips enough so it looks like your trade won’t pay off, the exchange can call in your margin, and you lose all of the collateral you put down for the loan.
Bitcoin derivatives exchange BitMEX loans you the funds for margin trades. Poloniex does something different. It uses peer-to-peer margin trades, where a common pool of lenders puts up BTC, CLAM, and other coins. They get paid in interest. According to Poloniex’s website (archive), only customers who are outside of the US are allowed to loan their funds on the exchange.
As a lender, you set your own daily interest rate, and Poloniex takes a fee of 15% from the interest earned. Margin traders consume lending offers starting with the lowest rate. If your rates are too high, your funds sit in the pool, and you don’t earn any interest.
CLAM, the casino coin
If you were paying close attention a year ago, you may have heard John Oliver mention CLAM on “Last Week Tonight,” along with Titcoin, Jesuscoin, Trumpcoin and a bunch of other coins with hilarious names.
CLAM stands for “Caritas Libertas Aequitas Monetas,” which roughly translates to freedom, fairness, equality coins — whatever that means. The coin launched in May 2014, as a fork ofBlackcoin (BLK), which launched in February 2014 as a fork of Peercoin, an early proof-of-stake coin.
On May 12, 2014, CLAM was sent to all active users of bitcoin, litecoin and dogecoin —three popular coins at the time. Every unique wallet address pulled from those blockchains that had a balance above zero got about 4.6 CLAM. The total amount of CLAM distributed to those addresses was 14,897,662.
CLAM was mainly intended for use on Just-Dice, a gambling site created by a Canadian known only as “dooglus.” Originally Just-Dice relied on bitcoin. But due tonew bitcoin regulation in Canada, dooglus decided to switch to CLAM in late 2014.
The circulating supply of CLAM is only 3,624,208. Nearly all of that—99.81%—is traded on Poloniex. At one point, CLAM was listed on Bittrex and Cryptopia, but Bittrex delisted the coin in October 2018 and Cryptopia went belly up in May 2019.
According to CoinMarketCap, CLAM has a daily trading volume of less than $100,000, meaning the coin barely has a pulse. Three months ago, two traders complained on Reddit of long delays withdrawing CLAM as they waited for the lifeless network to pick up their transactions.
“I withdrew CLAM 11 days ago. Poloniex Support said ‘as soon as a miner picks up the transaction’ How f@%#$%g long is that?,” wrote Reddit user interop5. (Technically, CLAM is a proof of stake coin, so it relies on stakers, not miners.)
CLAM’s lack of liquidity makes it extremely easy to manipulate. All you need is one person to put up a large sell order to crash the price. Poloniex has yet to release details on what happened, but we can guess it was something along those lines.
How to Clams Trade 1) accumulate cheap clams in account A 2) move some to account B and long your clams w/ your clams 3) dump your account A spot clams on your account B margin clam buy orders 4) rugpull 5) make 500-1k btc in account A while burning 50-200 btc in account B
As a result of the flash crash debacle, Poloniex has removed CLAM from margin trading, along with three other coins: bitshares (BTS), factom (FCT), and maidsafecoin (MAID). The exchange outright admits these coins lacked sufficient liquidity:
“In order for margin liquidations to process in an orderly manner, the market must have sufficient liquidity, and these tokens currently lack that liquidity. We will continue to monitor them and may reinstate margin trading for them in the future”
This is not the first time Poloniex removed CLAM as a margin market and collateral coin. It was removedin early November 2017 due to low liquidity, after an earlier flash crash, despite CLAM’s liquidity never recovering, at some point, Poloniex decided to add CLAM back as a margin market and collateral coin—though I’m not sure exactly when.
And then, of course, the exact same thing happened. In February 2019, the price of CLAM started to climb rapidly on Poloniex. In a matter of six weeks, it went from around $1.50 to a high of nearly $20 on May 26. At that point, the bottom fell out with CLAM losing three-quarters of its value in the blink of an eye. It sunk down to around $5.
According to Andrew Hires, a neurobiology professor at the University of Southern California, who has been watching the exchange, Poloniex had been struggling with its CLAM wallet for months. He tweeted:
“All deposits had to be manually credited via ticket. This screwed up the sell-side liquidity. Huge bids (>500BTC), presumably margin longs, crept up over months, pushing $ price up 17x. Just after it hit $20, everything imploded.”
Spreading the loss
Socializing losses is unique to crypto exchanges. Like Poloniex, OKEx alsosocializes extreme margin losses, but literally requires customers to pass a test on their terms of service before they can trade futures, so they are absolutely clear on how it works.
According to crypto lawyer David Silver, socializing losses could open Poloniex to a lawsuit. Another lawyer, Stephen Palley, disagrees. Palley told The Block, he doesn’t think Poloniex breached its terms of service.
On the other hand, Emilien Dutang, who was pinged by the haircut and says he offered margin lending on the exchange after the flash crash, is threatening legal action.
I was NOT lending on the 26 may, I started lending on the 27th.
THERE IS ABSOLUTLY NO JUSTIFICATION FOR YOU TO TAKE MY BITCOINS TODAY.
Do not try to hide your fuck up behind the fact that it impacted "only" 0.4% of your users
None of this bodes well for Poloniex. Circleacquiredthe exchange in early 2018 with the intention of cleaning it up and dealing with a humongous backlog ofsupport tickets. But at this level, Poloniex appears only slightly more competent than QuadrigaCX.
Bitfinex was not happy with the New York Attorney General’s April 24 ex parte court order, which demanded that the crypto exchange stop dipping into Tether’s cash reserves and hand over documents that were requested in November 2018. It struck back with a strongly worded motion to vacate, or overturn the order.
On May 3, the Office of the Attorney General (OAG) submitted an opposition to that motion. The agency argues that Bitfinex violated the Martin Act, New York’s anti-fraud law, widely considered the most severe blue sky law in the country.
Legally, Tether and Bitfinex are separate entities, but they are managed by the same individuals. To note, the OAG’s order does not prohibit Bitfinex from operating. Nor does it prohibit Tether from issuing or redeeming tethers (USDT) for U.S. dollars.
The order simply prohibits Bitfinex from helping itself to anymore of Tether’s funds. This, of course, poses a problem for Bitfinex, because it desperately needs cash to stay afloat. (It’s latest effort to fill the gap is a token sale, but that is another matter.)
There are currently 2.8 billion USDT in circulation, and each of them is supposed to be backed 1:1 with the dollar, but as of now, they are only 74% backed.
The alleged fraud
The OAG began investigating Bitfinex late last year. If there is any question as to how Bitfinex allegedly committed fraud and misled its customers, the OAG spells that out clearly in its memorandum. I’m paraphrasing some this.
Bitfinex failed to disclose to its clients that it had lost $851 million of “wrongfully commingled” client and corporate funds to Crypto Capital, an overseas entity, which it used as an intermediary to wire US dollars to traders on its platform.
Bitfinex knew in mid-to-late 2018 that Crypto Capital’s inability—or unwillingness—to return the funds meant it would have problems filling out client requests to withdraw cash off the exchange. Nevertheless, it told the public that rumors of insolvency were a “targeted campaign based on nothing but fiction.”
In November 2018, Bitfinex tried to cover up the loss by moving (at least) $625 million from Tether’s legitimate bank account into Bitfinex’s account. In return, Bitfinex “credited” $625 million to Tether’s accounts with Crypto Capital. OAG says the credit was “illusory,” because the money at Crypto Capital was lost or inaccessible.
(In its motion to vacate, the OAG notes that Bitfinex contradicted itself by saying the “credit” Bitfinex gave to Tether was $675 million—a $50 million discrepancy.)
Bitfinex later shifted to a new strategy. It engaged in “an undisclosed and conflicted transaction” to let Bitfinex dip even further into Tether’s reserves. The exchange took out a $900 million loan from Tether, secured by shares of iFinex—the parent company of both Tether and Bitfinex. OAG says there is little reason to believe the iFinex shares have any real value, especially in the event iFinex itself defaults.
In March 2019, $900 million represented almost half Tether’s available reserves at the time, but Bitfinex and Tether did not disclose this to its customers. In fact, up until February 2019, Tether telling its customers that USDT was fully backed. Bitfinex told the OAG that it has already dissipated $750 million of Tether’s funds.
Bitfinex demonstrates “a pattern of undisclosed, conflicted, and deceptive conduct” that its customers would “find material, and indeed, essential to buying tethers and trading assets, like bitcoin, on the Bitfinex platform,” the OAG said.
In its motion to vacate, Bitfinex argues that the Martin Act stands or falls on whether tethers are securities or commodities. It does not, the OAG says. In fact:
“The Bitfinex trading platform transacts in both securities and commodities (like bitcoin) and is of course at the core of the fraudulent conduct set forth in the OAG’s application.”
The OAG points to other events that underscore the need to maintain the status quo.
Since the original order, two individuals, Reginald Fowler and Ravid Yosef, were charged with bank fraud in connection with their operation of a “shadow bank.” Fowler was arrested on April 30, while Yosef is still at large.
The operation processed hundreds of millions of dollars of unregulated transactions on behalf of numerous cryptocurrency exchanges and associated entities—“several of which,” the OAG says, are at the center of its own investigation.
This appears to indicate the OAG’s is looking into other exchanges, which makes sense, given it sent out a questionnaire to more than a dozen cryptocurrency exchanges in April 2018, requesting they disclose key information about their operations.
While the OAG does not specifically state that the “shadow bank” is Crypto Capital, it points to the Memorandum in Support of Detention of Fowler, which said that companies associated with Fowler “failed to return $851 million to a client of the Defendant’s shadow bank.”
There is so much going on now with Bitfinex. My eyes are burning and my head hurts from reading piles of court docs. Here is a rundown of all the latest—and then some.
The New York Attorney General (NYAG) is suing Bitfinex and Tether, saying tethers (USDT) are not fully backed—after $850 million funneled through third-party payment processor Crypto Capital has gone missing.
It’s still not clear where all that money went. Bitfinex says the funds were “seized and safeguarded” by government authorities in Portugal, Poland and the U.S. The NYAG says the money was lost. It wants Bitfinex to stop dipping into Tether’s reserves and to handover a mountain of documents.
In response to the NYAG’s ex parte order, Tether general counsel Stuart Hoegner filed an affidavitaccompanied by a motion to vacate from outside counsel Zoe Phillips of Morgan Lewis. Hoegner admits $2.8 billion worth of tethers are only 74% backed, but claims “Tether is not at risk.” Morgan says New York has no jurisdiction over Tether or Bitfinex. Meanwhile, the NYAG has filed an opposition. It wants Bitfinex to stop messing around.
Bitfinex: No one is willing to audit us because they don't want to damage their reputation by auditing us! Asymmetric risk!
New York Attorney General: We'll audit you! For free! Bitfinex: NOT LIKE THIS! New York Attorney General: Send documents. Bitfinex: NO GOD PLEASE NO!
Football businessman Reggie Fowler and “co-conspirator” Ravid Yosef were charged with running a “shadow banking” service for crypto exchanges. This all loops back to Crypto Capital, which Bitfinex and Tether were using to solve their banking woes.
In an odd twist, the cryptocurrency saga is crossing over into the sports world. Fowler was the original main investor in the Alliance of American Football (AAF), an attempt to create a new football league. The league filed for bankruptcy last month—after Fowler was unable to deliver, because the DoJ had frozen his bank accounts last fall.
The US government thinks Fowler is a flight risk and wants him held without bail. The FBI has also found a “Master US Workbook,” detailing the operations of a massive “cryptocurrency scheme.” They found it with email subpoenas, which sounds like it was being kept on a Google Drive?
Yosef is still at large. She appears to have split her time between Tel Aviv and Los Angeles. This is her LinkedIn profile. She works as a relationship coach and looks to be the sister of Crypto Capital’s Oz Yosef (aka “Ozzie Joseph”), who was likely the “Oz” chatting with “Merlin” documented in NYAG’s suit against Bitfinex.
All eyes are on Tether right now. Bloomberg reveals the Commodity and Futures Trading Commission (CFTC) has been investigating whether Tether actually had a stockpile of cash to support the currency. The DoJ is also looking into issues raised by the NYAG.
Meanwhile, bitcoin is selling for a $300 to $400 premium on Bitfinex — a sign that traders are willing to pay more for bitcoin, so they can dump their tethers and get their funds off the exchange. This isn’t the first time we’ve seen this sort of thing. Bitcoin sold at a premium on Mt. Gox and QuadrigaCX before those exchanges collapsed.
Bitfinex is still in the ring, but it needs cash. The exchange is now trying to cover its Tether shortfalls by raising money via—of all things—a token sale. It plans to raise $1 billion in an initial exchange offering (IEO) by selling its LEO token. CoinDesk wrote a story on it, and even linked to my Tether timeline.
It's funny because LEO also means law enforcement organization
Tether wants to move tethers from Omni to the Tron blockchain. Tron planned to offer a 20% incentive to Omni USDT holders to convert to Tron USDT on Huobi and OkEx exchanges. But given the “recent news” about Bitfinex and Tether, it is delaying the rewards program.
Coinbase is bidding adieu to yet another executive. Earn.com founder Balaji Srinivasan, who served as the exchange’s CTO for a year, is leaving. It looks like his departure comes after he served the minimum agreed period with Coinbase.
Elsewhere, BreakerMag is shutting down. The crypto publication had a lot of good stories in its short life, including this unforgettable one by Laurie Penny, who survived a bitcoin cruise to tell about it. David Gerard wrote an obituary for the magazine.
The Los Angeles Ballet is suing MovieCoin, accusing the film finance startup of trying to pay a $200,000 pledge in worthless tokens—you can’t run a ballet on shit coins.
Police in Germany and Finland have shut down two dark markets, Wall Street Market and Valhalla. And a mystery Git ransomware is wiping Git repository commits and replacing them with a ransom note demanding Bitcoin, as this Redditor details.
The U.S. government wants a football businessman linked to an investigation into $850 million of missing Tether and Bitfinex funds to be held without bail.
According to a memorandum in support of detention filed with the District Court of Arizona on May 1, Reginald Fowler poses a serious flight risk due to his overseas connections and access to hundreds of millions of dollars.
The court doc also presents startling new twists in an already tangled plot—a “Master US Workbook,” which details the financial operations of the “cryptocurrency scheme,” fake bond certificates worth billions of dollars, and a counterfeit money operation.
Fowler, 60, is a former minority owner of the Minnesota Vikings and the original main investor in the Alliance of American Football —an attempt to form a new football league. The AAF collapsed when Fowler withdrew funding—after the Department of Justice froze his bank accounts in late 2018.
I did a search on Pacer and got a number of hits showing Fowler has been in and out of courts for years. In fact, in 2005, ESPN reported that he had been sued 36 times.
Most recently, Fowler was charged with bank fraud and operating an unlicensed money services business. These crimes relate to his alleged involvement in a “shadow bank” on behalf of cryptocurrency exchanges, in which hundreds of millions of dollars passed through accounts that he controlled in jurisdictions around the world.
Fowler operated Global Trading Solutions LLC in the US, which provided services for Global Trade Solutions AG, the Zug, Switzerland-based parent company of Crypto Capital Corp, a third-party payment processor. At one time or another, Crypto Capital serviced QuadrigaCX, Bitfinex, Kraken, Binance, and BitMEX—some of the top crypto exchanges.
In October and November 2018, five U.S. bank accounts were frozen—three of them were Fowler’s personal accounts and two were held under Global Trading Solutions. On April 11, Fowler was indicted in the Southern District of New York. And on April 30, he was arrested in Chandler, Arizona, where he lives.
Fowler is looking at spending the rest of his life in prison—the bank fraud counts alone carry a maximum sentence of 30 years.
The cryptocurrency scheme was not limited to the U.S. Fowler set up bank accounts around the world and coordinated the scheme with co-conspirators in Israel, Switzerland, and Canada, according to court documents. The scheme involves a “staggering amount of money,” and the government believes that Fowler still has access to overseas bank accounts.
Master US Workbook
Even more revealing, via email search warrants, federal prosecutors have obtained a document entitled “Master US Workbook,” which details the operations of the scheme. The workbook lists 60 bank accounts. It shows the scheme received over $740 million in 2018 alone. As of January 2019, the combined bank balance was $345 million. Approximately $50 million is held in U.S. accounts. The rest is located overseas.
Apparently, Fowler had “shown a willingness to help himself to these funds in the past.” In mid-2018, he sent $60 million from scheme accounts to his personal bank accounts, feds said. Scheme members set up a “10% fund” from client deposits, available for his personal use. The government does not know the location of those accounts.
After Fowler’s bank accounts were seized in October 2018, he agreed to cooperate with FBI agents and keep the investigation confidential, which he did not do. When agents sent him emails, he would share those with other scheme members.
Other illegal activity
Fowler appears to have been involved with other illegal activities, such as wire fraud related to the 10% fund. He also tried to take out loans by presenting banks with fraudulent bond certificates worth billions of dollars.
FBI agents also found evidence that Fowler was involved in a counterfeit money operation. They found $14,000 in fake bills consisting of sheets of $100 bills in a filing cabinet in his Chandler, Arizona office.
After examining the sheets, a special agent for the U.S. Secret Service “determined that they were undergoing a process common in counterfeiting schemes to turn paper bills into passable currency. In fact, the FBI also recovered black carbon paper from the office, which is often used as part of this process for making believable counterfeit bills.”
According to an April 24 court filing, New York State Attorney General Letitia James has alleged that crypto exchange Bitfinex lost $850 million and then tried to pull the wool over people’s eyes by dipping into Tether’s reserves.
Tether issues a dollar-pegged stable coin of the same name. According to the Office of the Attorney General (OAG), Bitfinex has so far siphoned $700 million from Tether funds, meaning that tethers are not fully backed. Given that tether is an essential source of liquidity in the crypto markets—currently, there are 2.8 billion tethers in circulation—this is not good news for bitcoin.
I’ve updated my Bitfinex/Tether timeline to bring you up to speed on the full history of these companies’ past shenanigans. Bitfinex and Tether are operated by the same individuals, and their parent company is Hong Kong-based iFinex. I recommend reading the entire 23-page courtdocument. It reveals a lot about what has been going on under the covers at Tether/Bitfinex. I’ll try and summarize.
Bitfinex was allowing residents of New York to trade on its platform. This is not supposed to happen. Effective August 8, 2015, any virtual currency company that wants to do business in New York State needs to have a BitLicense. This led the OAG to launch an investigation into Bitfinex and Tether in 2018.
Banking has been an ongoing struggle for Bitfinex since April 2017, when it was cut off by correspondent bank Wells Fargo and its main banks in Taiwan. At different periods, Bitfinex has turned to Puerto Rico’s Noble Bank, Bahamas’ Deltec Bank, and more recently, HSBC via a private account with Global Trading Solutions LLC.
Meanwhile, Bitfinex has had to rely on third-party payment processors to handle customer fiat deposits and withdrawals—a fact that it has never been completely up front about. (In fact, the HSBC account turns out to be part of the shadow banking network set up by its payment processor.)
Since 2014, Bitfinex has sent $1 billion through Panama-based Crypto Capital Corp. Bitfinex also told the OAG that it had used a number of other third-party payment processors, including “various companies owned by Bitfinex/Tether executives,” as well as other “friends of Bitfinex” — meaning human-being friends of Bitfinex employees willing to use their bank accounts to transfer money to Bitfinex clients.
This is basically Bitfinex setting up shell companies and playing cat and mouse with the banks—and it sounds a lot like what Canadian crypto exchange QuadrigaCX was doing before it went belly up in January. (Quadriga also used Crypto Capital, but the payment processor is not holding any Quadriga funds.)
By mid-2018 Bitfinex customers were complaining they were unable to withdraw fiat from the exchange. This is apparently because Crypto Capital, which held “all or almost all” of Bitfinex funds, failed to process customer withdrawal requests. Crypto Capital told Bitfinex that the reason the $850 million could not be returned was because the funds were seized by government authorities in Portugal, Poland and the U.S.
Bitfinex did not believe this explanation. “Based on statements made by counsel for Respondents to AG attorneys… Respondents do not believe Crypto Capital’s representations that the funds have been seized,” the court document states.
(This is not in the court filings but Crypto Capital shared this letter with its customers in December 2018. The letter is from Global Trade Solutions AG, the parent company of Crypto Capital Corp——not to be confused with Global Trading Solutions LLC. The letter states that GTS AG is being denied banking services in the U.S., Europe, and elsewhere “as a result of certain AML and financial crimes investigations” by the FBI and cooperative international law enforcements and/or regulatory agencies.”)
In communication logs from April 2018 to early 2019 shared with the OAG, a senior Bitfinex executive “Merlin” repeatedly beseeched an individual at Crypto Capital, “Oz,” to return funds. Merlin writes: “Please understand, all this could be extremely dangerous for everybody, the entire crypto community. BTC could tank to below $1K if we don’t act quickly.” A Crypto Capital customer, who asked not to be named, told me that Merlin is Bitfinex CFO Giancarlo Devasini.
Borrowing money from Tether
Rather than admit it was insolvent, Bitfinex/Tether tried to cover up the problem. According to the court docs, in November 2018, Tether transferred $625 million in an account at Deltec in the Bahamas to Bitfinex. In return, Bitfinex caused $625 million to be transferred from an account at Crypto Capital to Tether’s Crypto Capital account.
Essentially, Bitfinex tries to create the money by doing a one-for-one transfer of real money at Deltec for funds that don’t actually exist at Crypto Capital. Once they realized that this was probably a terrible idea, they re-papered the transfer as a loan.
Bitfinex then borrowed $900 million from its Tether bank accounts. The loan is secured with shares in iFinex stock. In case you didn’t quite follow that, Bitfinex and Tether are basically the same company, so you can think of this as Bitfinex borrowing money from itself—and then backing the loan with shares of itself.
According to the OAG, “The transaction documents were signed on behalf of Bitfinex and Tether by the same two individuals.”
OAG is fed up with the nonsense. It has obtained a court order against iFinex. Under the court order, Bitfinex and Tether are to cease making any claim to the dollar reserves held by Tether. iFinex is also required to turn over documents and information as the OAG continues its probe.
The court has also ordered that iFinex identify all New York and U.S. customers of Bitfinex whose funds were provided to Crypto Capital and the amount of any outstanding funds—and provide a weekly report evidencing any issuance or redemption of tethers.
Bitfinex has issued a response (archive), stating that the OAG court filings “were written in bad faith and are riddled with false assertions.” It claims the $850 million are not lost but have been “seized and safeguarded.”
The exchange continues to deny any problem. It writes:
“Both Bitfinex and Tether are financially strong—full stop. And both Bitfinex and Tether are committed to fighting this gross overreach by the New York Attorney General’s office against companies that are good corporate citizens and strong supporters of law enforcement.”
What does this mean?
It means Bitfinex is in real trouble. The New York’s Attorney General is one of the most powerful in the nation. That should worry Bitfinex.
New York law allows the AG to seek restitution and damages. On top of that, there is also the Martin Act, a 1921 statute designed to protect investors. The Act vests the attorney general with wide-ranging enforcement powers. Under the Act, the attorney general can issue subpoenas to compel attendance of witnesses and production of documents. Those called in for questioning do not have a right to counsel.
The attorney general‘s decision to conduct an investigation is not reviewable by courts. As Stephen Palley, partner at Anderson Kill, points out, the iFinex action arises out of a Martin Act investigation and “Violations of the Martin Act can be civil and criminal.”
The Martin Act is a New York law that gives the N.Y. Attorney General very broad power to investigate securities fraud.
Violations of the Martin Act can be civil and criminal.
Finally, if $850 million is really missing, not just stuck somewhere, Bitcoin is in real trouble, too. Tether could lose its peg and drop substantially below $1. Remarkably, tether’s peg seems to be holding steady now.
Since the news broke, the price of bitcoin has dropped several hundred dollars. A valiant effort is being made to pump the price back up, and it’s working, sort of—for now.
Previously, I wrote that QuadrigaCX cofounders Michael Patryn and the now-deceased Gerald Cotten worked together for a period at Midas Gold, a Liberty Reserve exchanger that ran from 2008 until May 2013, when it was pulled offline. Now it appears that their connections stretch back even further.
According to data gathered by Reddit user QCXINT, the two business partners were active on TalkGold, a popular forum for pushing high-yield investment programs, aka Ponzi schemes, as early as 2003. Likely, that is where they first met. Evidence also suggests the two were active on BlackHatWorld, a site for discussing dubious marketing strategies for websites. Cotten also appears to have been a Ponzi operator himself.
This is a long post, so here is a quick summary of what’s ahead:
Cotten began promoting Ponzi schemes in his teens.
He was posting on TalkGold under the username “Sceptre.”
Michael Patryn, aka Omar Dhanani, posted on TalkGold as “Patryn.”
“Patryn” and “Sceptre” joined TalkGold in 2003, within months of each other.
Michael Patryn also posted as “Patryn” on MoneyMakerGroup and BlackHatWorld.
“Sceptre” first appeared on BlackHatWorld in 2012, but changed his profile name to “Murdoch1337.”
“Sceptre” posted as “Lucky-Invest” on TalkGold to promote a Ponzi.
What is a high-yield investment program?
HYIP schemes typically promise ridiculously high rates of returns, but behind the scenes, no real investment is taking place. The operator simply uses money from new investors to pay off earlier ones, all the while skimming funds off the top for himself. When the supply of new investors runs dry, the scheme collapses. All Ponzi schemes collapse at some point.
Ponzi schemes are nothing new. The name stems from Charles Ponzi, an Italian immigrant who defrauded tens of thousands of Bostonians out of $18 million in 1920. Ponzi went to jail, and when he got out, the U.S. promptly deported him to Italy. New York financier Bernie Madoff ran a $65 billion Ponzi, the largest in history. His Ponzi fell apart during the financial crisis when too many customers started trying to pull their money out. Madoff was convicted in 2008.
In the early 2000s, the internet and the advent of early centralized digital currencies, like E-gold and Liberty Reserve, saw a new wave of Ponzi schemes. Operators anonymously set up their storefronts online and used e-currencies to obscure the source and flow of funds.
HYIP operators typically rely on social media and referrals to create hype and make their offerings appear legitimate. Despite the red flags, many people invest in HYIPs, thinking that if they get in early enough, they can make a buck.
An entire subculture has proliferated around HYIPs. There are sites that track and monitor HYIPs, and forums where people go to promote and learn more about HYIPs. There’s even an HYIP subreddit.
When an HYIP scheme collapses, the collapse is generally blamed on a hack, a theft, or a bad investment—some type of external event that is plausibly at arm’s length from the operator. When that happens, the HYIP operator begins issuing “refunds”—in good faith, of course.
Some HYIP operators even go to the effort of setting up long-winded spreadsheets and paying back dribs and drabs over months. Naturally, the first people to get paid back are generally insiders or the operators themselves—under different names—who then proclaim what a great guy the operator is, and how decent it is of him to spend all of his time and effort refunding everyone.
The U.S. Financial Industry Regulatory Authority (FINRA), the regulatory body charged with governing business between brokers, dealers and the investing public, writes that “virtually every HYIP we have seen bears hallmarks of fraud.”
TalkGold and MoneyMakerGroup
Starting in January 2003, TalkGold and sister site MoneyMakerGroup were two hugely popular internet forums for launching and promoting HYIPs. The sites were pulled offline on August 21, 2017, a day after the Department of Justice filed an asset forfeiture complaint against the Krassenstein brothers, Edward and Brian, who ran the sites. Homeland Security raided the twins’ Florida homes a month later.
“Since at least 2003, Brian and Edward Krassenstein … have owned and operated websites devoted to the promotion of fraudulent HYIPs. In particular, the Krassenstein run sites ‘talkgold.com’ and ‘moneymakergroup.com’ are discussion forums in which HYIP operators advertise and promote their fraud schemes to potential victims.”
Patryn on TalkGold
Michael Patryn, formerly Omar Dhanani, was arrested in October 2004 on charges related to his involvement with Shadowcrew, a cybercrime message board. Operating under the pseudonym “Voleur,” French for thief, he offered Shadowcrew members an e-money laundering service—wire him cash, and he would fund your E-gold account, helping to obscure your financial trail.
After the Shadowcrew bust, TalkGold users began to speculate that “Patryn,” a prolific poster on TalkGold, was in fact, Dhanani—and there is good reason to suspect that he was.
“Patryn” joined TalkGold on April 3, 2003. His profile linked directly to VFS Network, a network for several digital currency exchangers, including three that Patryn himself operated: Midas Gold, HD Money, and Triple Exchange. VFS Network (stands for Voleur Financial Services) was also his business.
“Patryn” also openly admits on TalkGold that he operates Midas Gold. The business registration for Midas Gold also lists “Omar Patryn” (one of Patryn’s known aliases) as its sole director.
Further, Patryn appears to have used the profile name “Patryn” on MoneyMakerGroup, with the same link to VFS Network. He joined MoneyMakerGroup on November 27, 2007, six months after he got out of a U.S. federal prison, where he served 18 months related to his earlier Shadowcrew arrest.
Sceptre on TalkGold
Cotten was likely “Sceptre” on TalkGold. Sceptre joined TalkGold on July 4, 2003, three months after “Patryn” joined. Cotten would have been 15 or 16, at the time.
TalkGold members were able to list “friends” on the site. A May 2013 profile page for Patryn shows that he had six friends—one of whom is Sceptre. Similarly, a May 2013 profile page for Sceptre shows he had one friend—“Patryn.”
The two also interacted. Many of Sceptre’s TalkGold posts appear alongside Patryn’s in the same thread, either promoting or defending VFS Network, Midas Gold, or one of the other exchanges that Patryn operated. (There is also evidence to suggest that Cotten, not Patryn, was the main operator for Midas Gold.)
On December 7, 2009, when a user on TalkGold complains that he is having issues with Midas Gold, Sceptre replies: “I’ve never had any problems with M-Gold. They are usually very efficient.” Patryn follows on the same thread with, “M-Gold does not work during weekends. What is your order reference number? I will have it taken care of ASAP.”
On September 29, 2012, “Patryn” responds to someone complaining about Midas Gold keeping their money. (This was not unusual, by the way. There were many complaints about Midas Gold withholding customer funds. See here, here and here.)
“To the best of my knowledge, both of us have been responding to your emails. You sent me five emails yesterday demanding that I hurry up and resolve this issue. Your issue will be resolved ASAP. Unfortunately, I cannot force the banks to speed up their investigation process.”
In the same thread, Sceptre replies to “Patryn,” almost mocking the customer.
“lol, I’m surprised you’re willing to help him. You offer your dispute resolution for free, and he thanks you by spamming your inbox and complaining that you don’t reply while you’re sleeping.”
In September 2012, a poster asks, “I am looking for a LR Exchanger into HD-Money.” (Basically, the poster wants to convert one digital currency, Liberty Reserve, into another, HD-Money, without having to go through fiat). Sceptre replies, “For this type of trade I would use ecashworldcard.” Patryn follows by posting a link to his HD-Money site, which lists Ecash World Card as an offering.
Cotten and Patryn on BlackHatWorld
BlackHatWorld is a forum where people go to discuss “black hat” marketing tactics. Paid shilling (paying someone to promote your product on social media), negative SEO attacks (improving your SEO ranking by destroying your competitor’s) and gaming a search engine’s algorithm are all topics of discussion on this forum.
These tactics are generally used by Websites that only plan to stick around long enough to make a quick financial gain, which is exactly what HYIPs aim to do.
Someone going by “Patryn” was also active on BlackHatWorld. This person joined on September 6, 2012, and was last active on September 7, 2017. He only posted nine messages.
Another poster—”Murdoch1337″—in BlackHatWorld, was much more active. He joined on February 12, 2012, and his last activity was January 8, 2017. This person appears to have previously been posting as Sceptre, and we believe this was Cotten.
(QXCINT also tells me that one of Cotten’s email accounts—firstname.lastname@example.org, which was tied to a number of Cotten’s domain registrations—has or had an active account on BlackHatWorld, but the method he used was too technical for me to confirm independently.)
Murdoch1337 appears as the original poster in a thread titled “Sceptre’s Spectacular Content Services!!! – $1.50 per 100 words” — an indication that Sceptre likely switched his profile name to Murdoch1337 sometime after he started the thread. He responds to other posters in the thread as if he is the one offering the content services. “That’s all the review copies for now,” he writes. “For everyone else, feel free to place your orders using the order info in my original post.”
On September 10, 2013, Murdoch1337 posts an ad for a developer to help him with an upcoming cryptocurrency exchange. In the ad, he writes:
“I am looking for a programmer who is familiar with Bitcoin to develop a website that is very similar to Bitstamp…Also, I’m looking to get this project built and online quickly, so if you are able to do it quickly, that is a bonus.”
This ad was posted three months before Quadriga launched in beta. The timing makes sense given that Quadriga was based on WLOX, an open-source exchange solution available on Github, which would have dramatically reduced the time it took to create a functioning crypto exchange. Alex Hanin built the Quadriga platform, though it is not clear if Cotten actually recruited Hanin via this ad on BlackHatWorld.
I’m looking for programmers who are knowledgeable when it comes to Bitcoin and I found you.
I have a number of projects that need work, including a new Bitcoin exchange. Are you able to build sites like this? If so, i’d like to get in touch
S&S Investments and Lucky Invest
One of Sceptre’s HYIPs was S&S Investments, a website that opened for business on January 1, 2004. (“Copyright @2004 Sceptre” is written at the bottom of the page.) He promotes the scheme as a way to double your money.
“You invest a sum of money into the program and within 48 hours (usually within 18) you will receive a return of anything from 103% to 150%, possibly more.”
He is sure to point out that this is “not what is called a ponzi or pyramid scheme.” It offers returns that are far better!
In case the first offer sounded a little too far fetched, he changes the text later to something only slightly more believable. S&S now becomes a “fixed-term investment,” which pays 115% in a week….”you can invest and walk away in profit after just 7 days!”
Of course, S&S ultimately collapses, and discussion around it gets moved to the “Closed / Scammed Programs” section of TalkGold, where Sceptre continues to string along anxious investors, who continue to hold out hope for a “refund.” He writes:
“Refunds WILL take some time. I cannot guarantee that they will all be made quickly. The refund process is likely to spread over a long period of time, but I am willing to do my best to refund everyone to the best of my ability. Please be patient and you will receive a lovely surprise in your e-gold, a refund from S&S Investments,” Sceptre writes.
One TalkGold user reviewed what he considered to be the 12 biggest HYIP “scams” on TalkGold. This is what he wrote about S&S Investments:
“S&S Investments is an interesting program because it was operated by a ‘well known’ person in the HYIP arena. I use the quote marks, because this person was not well known at all, in fact he was very anonymous. No one knew his name, other than his nickname he used to post with, Sceptre. He used anonymous proxies, he was very well hidden. Yet because he had over 1000 posts on TalkGold, he earned a kind of pseudo-trust that people get from being very visible and always online.
Sceptre started off with a small little program that promised to pay back a large amount after a few days. It soon grew to become very, very popular, and it was not long before he upgraded to a fully automated script.
Sceptre wouldn’t tell people how he made the money, he just said that was his little secret. Virtually everyone invested into S&S Investments based on his post count on TalkGold. “He’s made a lot of posts on TalkGold, therefore he must be honest” seemed to be the general opinion of the investors.
S&S Investments went for sometime before cracks started to appear. First the website went offline, then was back again, but withdrawals weren’t being honoured, then the site went offline again. Finally, Sceptre made an announcement that S&S Investments were closed and refunds were to promised.
For a while, refunds did proceed, but then things started to dry up. Since the summer, no more refunds have been processed.
Hey, just because someone has thousands of posts on a forum, doesn’t mean he’s a trustworthy guy. Use your head, look at what the whole program is offering.”
In May 2004, Sceptre appears to switch to another TalkGold profile, “Lucky-Invest,” to promote a Lucky Invest HYIP.
At one point in a thread, he apparently forgets to log out of Lucky-Invest and continues responding as if he were Sceptre, until another poster calls him out:
“You forgot to sign in as ‘sceptre’. ohhhhhhhhhhhhhh . .. looks like Lucky-Invest changed their message!!! . . . too funny!!! . .. did you get caught Sceptre??? hahaha ;)”
“I’m not trying to hide. Lucky Invest, the Newest Investment/Game. My profits go to help pay refunds. THIS IS A GAME, IT WILL NOT HAVE ANY REFUNDS.”
This is a straight out admission that Lucky Invest was not an actual investment. It was a “game.” In other words, a fraud. Essentially, Sceptre/Lucky-Invest/Gerald Cotten is saying: When you give me your money, it is mine. There are no refunds in this game, just me sharing my profits.
Knowing that Cotten and Patryn did business together on TalkGold does not tell us where the CA$250 million worth of crypto and fiat that went missing on Quadriga went. (Only a fraction of those funds have been recovered so far.) But it does bring up questions. Was Cotten really just a starry-eyed Bitcoin libertarian? Or was he a seasoned con artist who had no qualms about taking other people’s money?
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At a hearing on April 18, Quadriga’s court-appointed monitor continued its battle with the exchange’s third-party payment processors to get them to hand over transaction records and funds. The court also extended Quadriga’s creditor protection until June 28.
The stay (protecting Quadriga) is in place until June 28. The CCCA proceeding will expire at that point. It won’t be a “restructuring” any more. It’ll be a pure bankruptcy.
Craig Wright, who claims to be Satoshi, is suing people who are accusing him of not being Satoshi. (Wright has yet to prove he actually is.) As mentioned in my last newsletter, it all started when Wright sued twitter user Hodlonaut. Wright has now followed with libel suits against Bitcoin podcast host Peter McCormack, Ethereum co-founder Vitalik Buterin and crypto blog Chepicap. (CoinGeek, a publication financed by Calvin Ayre, Wright’s billionaire backer, has a full story.)
Craig has started filing lawsuit against those falsely denying he is Satoshi….they can all have a day in court to try to prove their fake case but the judge will rule that Craig invented Bitcoin because he did and he can prove it. https://t.co/d2W44mU9Tl
Naturally, the Bitcoin community is up in arms. In response, Binance—an exchange that has been traditionally unselective in the coins it lists—has delisted BSV (stands for Bitcoin Satoshi’s Vision), the coin that resulted from the bitcoin fork spearheaded by Wright and Ayre. The move was followed by several other exchanges delisting BSV, including Kraken, ShapeShift and Bittylicious. Blockchain.info removed support for BSV from its wallet.
Kraken’s BSV delisting was in response to a poll it put up on Twitter. This quote from Kraken founder Jesse Powell is priceless. He says:
“In this case, it is a unique case for us, we haven’t delisted any other coins because the founders, people who are promoting it turned out to be total assholes.”
Angela Walch, a law professor at St. Mary’s University School of Law, compared the #DelistBSV movement to Visa and PayPal not processing Wikileaks transactions and expressed surprise the crypto world was cheering it.
Thanks for all the comments! Yes, I know that exchanges are centralized and I know what people say about BSV.
From the outside, this looks an awful lot like a Visa/Paypal not processing Wikileaks transactions, so it's fascinating to see the crypto world cheering for it.
Crypto exchanges just aren’t pulling in the gazillions they used to. Binance generated about $78 million in profit last quarter, up 66 percent quarter-over-quarter. But that still falls short of full year 2018, when the exchange made $446 million in profits. Coinbase brought in revenue of $520 million in 2018, down 44 percent year-over-year.
2018 has been an absolutely brutal year for Coinbase. In mid-2018, they had projected $1.3 billion of revenue for 2018, which means they generated 60% less than they originally projected. Yikes. IPO prospects looking really bleak now
Hacks, inside jobs and irreversible goof-ups are pushing some crypto exchanges to the brink. Coinnest, once South Korea’s third-largest exchanges, is closing. Users have until April 30 to get their funds off the exchange. Coinnest lost $5.3 million in a botched airdrop in January, though it blames its closure on low trading volume.
Elsewhere, on April 10, Bittrex’s application for a BitLicense (required to do business in New York State) was rejected—in part, because Bittrex customers were using fake names, like “Give me my money,” “Elvis Presley” and “Donald Duck” to trade.
Bittrex says the NY Department of Financial Services (DFS) “sent four people who didn’t know anything about blockchain.” DFS responded again, saying the exchange “continues to misstate the facts” and “presents a misleading picture about the denial.”
if only they'd sent people who understood so much about Blockchain that they knew that "Donald Duck", "Elvis Presley" and "Give Me My Money" were legitimate customers
Binance is about to begin the process of moving its BNB (currently an ERC20 token) off the Ethereum network and onto Binance Chain, its custom blockchain. Interestingly, The Block’s Larry Cermak notes that Binance has quietly changed its white paper to remove a clause about the exchange using 20 percent of its profits to buy back BNB.
Arwen, a self-custody solution that uses on-blockchain escrows and off-blockchain atomic swaps to allow traders to maintain control of their keys while they trade, launched on Singapore’s KuCoin earlier this week. KuCoin raised $20 million in VC funding last year, and it is the first exchange to partner with Arwen, created by a company of the same name based in Boston.
Finally, Intercontinental Exchange (ICE), the owner of the New York Stock Exchange, is reportedly eyeing a New York license for its crypto exchange Bakkt. The launch date for Bakkt has been delayed for months due to skepticism from the CFTC. The regulator appears most concerned over how tokens will be stored.
POSConnect, a third-party payment processor holding funds on behalf of failed Vancouver-based crypto exchange QuadrigaCX, has come up with more excuses to delay handing over the money.
Today, at a short and mostly procedural hearing held at the Supreme Court of Nova Scotia, the main topics were extending Quadriga’s creditor protection and dealing with lingering issues related to Quadriga’s third-party payment processors, mainly POSConnect.
Justice Michael Wood agreed to extend the stay until June 28, unless Quadriga’s Companies’ Creditors Arrangement Act (CCAA) proceedings are terminated before then. Quadriga officially entered into a bankruptcy earlier this month.
The stay (protecting Quadriga) is in place until June 28. The CCCA proceeding will expire at that point. It won’t be a “restructuring” any more. It’ll be a pure bankruptcy.
The rest of the 30-minute proceeding was mostly taken up by a back-and-forth between POSConnect’s lawyer and Elizabeth Pillon, a lawyer for Ernst & Young, the court-appointed monitor in Quadriga’s CCAA procedures.
At issue, POSConnect is sitting on CA$281,000 of Quadriga funds. EY wants the payment processor to deliver CA$278,000 right away. The plan is to leave CA$3,000 to cover rolling monthly fees associated with keeping the account open.
POSConnect recently granted George Kinsman, EY’s senior vice president, online access to Quadriga’s documents and transaction data on the platform, and EY would rather pay POSConnect CA$500 a month than risk the firm cutting off all online access.
Pillon said more than 500,000 transactions worth CA$400 million in Quadriga funds were funneled through POSConnect—and sorting all that out is going to take time.
Meanwhile, POSConnect is reluctant to hand over any funds at all. The firm argues that it is due CA$22,000 in legal fees—an amount the POSConnect lawyer called “insignificant” compared to the hundreds of thousands of dollars spent so far in efforts to put Quadriga’s financial affairs in order.
EY is running short on patience. “POSConnect has thrown out more hurdles in respect to their obligation to delivers statements and property than any other third-party payment processor,” Pillon told the judge.
As she explained, EY has been reaching out to POSConnect since February 6 to find a means to get information and funds. Yet it wasn’t until late yesterday that POSConnect put forward $22,000 for legal fees and an administrative cost of $350 an hour to provide reporting—without providing any accounting to support those fees.
Justice Wood said he did not have enough information before him to determine what reasonable legal fees would be for POSConnect. POSConnect will be added to an existing order for other third-party processors, which will require another hearing anyway.
Wood expressed regret that he would no longer be overseeing the Quadriga proceedings. He has been promoted to chief justice of the Appeal Court of Nova Scotia.
Spring is in the air! What are your summer plans? If you are considering buying a boat—or maybe even an “almost new” 51-foot Jeanneau with “very, very few hours” for half a million USD—now would be the time!
The yacht belonged to Quadriga’s now-deceased CEO Gerald Cotten. Here is a video of him putting Canada’s plastic money into a microwave. Here he is tossing Winnie the Pooh into a bonfire. And this is him playing with Pokémon cards.
The latest on QuadrigaCX
I wrote about how Michael Patryn and Cotten appear to have been working together at Midas Gold, a Liberty Reserve exchanger, prior to founding Quadriga. David Z. Morris at Breakermag covered the topic as well. (He credited me, so I’m real pleased about that.)
At a court hearing on April 8, Quadriga was given the go-ahead to shift into bankruptcy. The move will save costs and give Ernst & Young (EY) more power as a trustee.
“The trustee can also sell QuadrigaCX’s assets and start lawsuits to recover property or damages,” Evan Thomas of Osler, Hoskin & Harcourt told Bitcoin Magazine. “The trustee will collect whatever it can recover for eventual distribution to creditors.”
An “Asset Preservation Order” for Jennifer Robertson, Cotten’s widow, was filed on April 11. Law firm Stewart McKelvey is setting up three separate trusts to “collect and preserve” any surplus funds from estate assets, personal assets and corporate assets. Depreciable assets, such as Cotten’s yacht, will be sold.
Per the order, Robertson will continue to receive her drawings from her business Robertson Nova Property Management “in accordance with current levels, for the purposes of satisfying ordinary living expenses.” She will also have access to cash from the “personal assets” account to maintain her properties and to cover legal expenses.
Robertson has 10 days from the court order to provide EY with a list of all her assets—including cash on hand.
A cap on pay for Miller Thomson LLP and Cox & Palmer has been raised from CA$250,000 to CA$400,000. The team will continue to represent Quadriga’s creditors in the bankruptcy.
Quadriga’s third-party payment processors now have 10 business days (as opposed to five previously) from when they receive this court order to deliver the following to EY:
Alto Bureau de Change—assets and property.
1009926 BC—all records and transaction-related information.
POSConnect—access to Quadriga’s online account to George Kinsman, who is a partner at EY.
WB21 (now Black Banx)—all records and account statements related to its Quadriga dealings.
The next hearing to discuss issues remaining from the Companies’ Creditor Arrangement Act, including those tied to third-party payments processors, is scheduled for April 18.
Other crypto exchanges
Popular US-based crypto exchange Coinbase suspended trading of BTC-USD pairs for two hours on April 11 due to a “technical issue” with its order book. BTC-USD is a critical trading pair due to its volume and its impact on bitcoin price measures.
It appears that somebody dumped a load of BTC into the exchange’s buy orders causing liquidity to dry up. Coinbase doesn’t want that to happen, so likely that is why it wiped the books, cancelling any outstanding buy or sell orders.
The books are wiped. You can also pump up the price by $900 with just… 70 Bitcoins.
The entire liquidity of Coinbase basically completely vanished. That's why they froze trading. Incredible. pic.twitter.com/AxsrhxhtzB
Coinbase Pro, Coinbase’s professional exchange, is continuing to expand its altcoin reach. The exchange is listing three more altcoins: EOS (EOS), Augur (REP), and Maker (MKR). Coinbase first committed to listing MKR in December, but according to The Block’s Larry Cermak, due to low volume, Coinbase decided to hold off listingMKR.
Crypto credit cards are back in vogue. Coinbase has launched a Visa debit card. The “Coinbase Card” will allow customers in the U.K. and EU to spend their crypto “as effortlessly as the money in their bank.” The exchange says it will “instantly” convert crypto to fiat when customers complete a transaction using the debit card. PaySafe, a U.K. payment processor, is the issuer of the card. In the past, these crypto Visa cards have been known to suddenly lose access to the Visa network, so fingers crossed.
Another executive is leaving Coinbase. The firm’s institutional head Dan Romero has announced he is leaving after five years. This is the third executive to depart Coinbase in six months. Director of institutional sales Christine Sandler left last month, and ex-vice president and general manager Adam White quit in October.
Switzerland-based crypto exchange Bitfinex has lifted its $10,000 minimum equity requirement to start trading. This will undoubtedly bring more cash into the exchange. “We simply could not ignore the increasing level of requests for access to trade on Bitfinex from a wider cohort than our traditional customer base,” CEO Jean-Louis van der Velde said in a blog post (archive).
Meanwhile, Bitfinex customers are complaining (here and here) that they are unable to get cash out of the exchange. Nowsome are saying they are having trouble getting their crypto out of Bitfinex as well.
Reddit user “dovawiin” says, “Ive been trying repeated attempts for 2 weeks to withdraw funs and it always says processing. Ive submitted multiple tickets with delayed answers. Ive cancelled and attempted again a few time after waiting 48Hours with no results. Im currently trying again and nothing for over 24 hrs. This is ridiculous.”
Bitfinex also enabled margin trading on Tether. Margin pairs include BTC/USDT and ETH/USDT. Tether has already admitted to operating a fractional reserve, so this is basically adding more leverage to what’s already been leveraged. I’m sure it’s fine though—nothing to worry about here.
Johnathan Silverman, a former employee of Kraken, is suing the crypto platform for allegedly failing to pay him for work he did. Kraken says it got out of New York in 2015. Silverman says the exchange still maintained an over-the-counter trading desk in the state, which requires licensing for crypto businesses. Kraken told Bloomberg, Silverman “is both lying and in breach of his confidentiality agreement.”
Finally, Malta-based Binance, one of the largest crypto exchanges by volume, is partnering with blockchain analytics firm CipherTrace to boost its AML procedures.
That's why Binance flees from every single jurisdiction, because they want to comply.
All hell broke lose on Twitter Friday when news got out that Craig Wright is making legal threats against Twitter user “Hodlonaut,” who has been publicly calling Wright a “fraudster” and a “fake Satoshi.” Wright has never been able to prove that he is Satoshi.
In a letter shared with Bitcoin Magazine, SCA ONTIER LLP, writing on behalf of Wright, demands that Hodlonaut retract his statements and apologize, or else Wright will sue him for libel. The letter even includes this bizarre prescribed apology:
“I was wrong to allege Craig Wright fraudulently claimed to be Satoshi. I accept he is Satoshi. I am sorry Dr. Wright. I will not repeat this libel.”
Hodlonaut deleted his Twitter account upon receiving the news. And the crypto community formed a giant backlash against Wright. Preston Byrne is assisting Hodlonaut pro-bono, Peter McCormack is selling T-shirts that say, “Craig Wright is a Fraud,” and Changpeng Zhao, the CEO of crypto exchange Binance threatened to delist Bitcoin SV—the token spearheaded by Wright and billionaire backer Calvin Ayre.
Ayre is also demanding apologies related to some photos of him circulating on Twitter with extremely young-looking women. Coin Rivet writes, “We have agreed to pay Mr Ayre substantial damages for libel. We have also agreed to join in a statement to the English High Court in settlement of Mr Ayre’s complaint.”
China’s National Development and Reform Commission (NDRC) released guidancethat includes shutting down Bitcoin mining. “The risk to Bitcoin in the longer term is other governments taking their cue from China—and taking proof of work more seriously as a problem that needs to be dealt with,” writes David Gerard.
Another Bitcoin mining company has gone belly up. Bcause llc filed for Chapter 11 in Illinois. (Steven Palley uploaded the docs on Scribd.) The company is based in Chicago, but its mining rigs are in Virginia Beach. In January 2018, Virginia Beach Development Authority gave the firm a $500,000 grant to build the $65 million facility. Bcause promised to create 100 full-time jobs, with average salaries of $60,000 a year.
But by January, the price of Bitcoin was already on its way down—so much for all those jobs. At least the neighbors won’t have to suffer the noise anymore.
Last summer, Virginia Beach resident Tommy Byrns, told Wavy News:
“The issue is the noise, the relentless noise … it’s kind of created an atmosphere where we can’t talk to each other in the backyard. You have to go in the house to talk … this was pushed through without any warning into anybody … and now look what we have.”
Crypto, the movie, is out. Gerard wrote a full review for DeCrypt on his new battery-powered AlphaSmart Neo 2 keyboard—a 1990s flashback that keeps him from shit posting on Twitter. The film was mediocre—but it stars KURT RUSSELL.
The now-defunct Canadian crypto exchange QuadrigaCX was founded in November 2013. Where did its co-founders, Michael Patryn and the now-supposedly-deceased Gerald Cotten, first meet? Did they exchange pleasantries in the Vancouver Bitcoin community earlier that year? Did they meet online in some bitcoin chat forum? Or did they have other prior business dealings even further back?
New evidence uncovered by Reddit user QCXINT suggests that Cotten appears to have been involved with Patryn at Midas Gold, a Liberty Reserve exchanger, set up by Patryn in 2008.
Patryn and Midas Gold
Formerly Omar Dhanani, Patryn is a convicted felon who wasarrested in connection with online identity theft ring Shadowcrew.com in October 2004. He was 20 at the time. Working out of his parent’s home in Southern California, he was a moderator on the forum. He also offered forum members an electronic money laundering service. Send him a Western Union money order and—for a fee of 10% of a transaction—he would filter your money through E-gold accounts. E-gold was an early centralized digital currency. Dhanani served 18 months in a US prison and was released in 2007.
After the US deported him to Canada, Patryn picked up where he left off. In April 2008, he founded Midas Gold Exchange. He was listed as the company’s sole director under “Omar Patryn,” with a company address in Calgary—though he was living in Montreal at the time. A few months earlier, the digital currency exchange service launched on M-Gold.com. (Here is an archive of the site taken in its early days, and here is an archive showing an updated design taken just before things took a dive).
In January 5, 2008, the earliest entry on the website reads:
“We have finally launched this website, and are requesting that clients place all future orders through the Contact Us page. We have, of course, been in business since 2005 and hope to continue providing you with the same great service throughout the new year. Thank you once again for your business, and have a happy New Year!”
There are no names of actual people anywhere on the site. But an October 17, 2009, entry gives the impression that a whirl of activity is going on behind the scenes.
“We apologize for the delays experienced for many clients during the course of this week. We are currently undergoing a massive corporate restructuring. During this time, some exchange directions are temporarily disabled. All pending orders should be processed within one business day.”
Digital currencies listed on the site included E-Gold, HD-Money, WebMoney, WMZ E-Currency and AlterGold E-Currency. Midas Gold even started accepting bitcoin inJune 2011, but Liberty Reserve was by far its main money maker.
How Liberty Reserve worked
A Costa Rica-based centralized digital currency service, Liberty Reserve was like PayPal for criminals. You could use it to anonymously transfer the system’s digital currency LR, worth $1 apiece, to anyone who had an account on the system. The system served millions of users around the world before May 2013, when it was shut down by the U.S. government.
To set up an account on libertyreserve.com, all you needed was a valid email address. You could make up whatever fake name you wanted because the site had virtually no KYC/AML to validate identities. You could, literally, use the service to send huge amounts of money around the world without anyone batting an eyebrow.
There was one caveat. You could not fund your Liberty Reserve account directly. If you wanted to buy LR, you had to go through a third-party exchanger, such as M-Gold. Conversely, if you wanted to redeem your LR for cash, you also had to go through an exchanger.
LR exchangers would buy LR in bulk and sell them in smaller quantities, typically charging a 5% transaction fee. This setup allowed Liberty Reserve to avoid collecting banking information on its users, which could leave a financial trail—exactly what criminals want to avoid when choosing a digital currency.
Founded by Arthur Budovsky and Vladimir Kats, Liberty Reserve went into operation in 2005. Eight years later, the system had more than 5.5 million users worldwide and processed more than $8 billion. Most of that volume came from the U.S.
During 2009 to 2013, Liberty Reserve was in full swing. These were the sunshine days of its criminal activity. A huge number of transactions were related to high-yield investment programs—better known as Ponzi schemes—credit card trafficking, stolen ID information and computer hacking.
A data dump—in one of the USA v. Kats et al. court exhibits (see attachment #180 for GX 1305) related to the takedown of Liberty Reserve—shows that Midas Gold ranked 342 of the top 500 Liberty Reserve accounts in volume.
The name on the Midas Gold account is Omar Patryn, but the email address linked to it is email@example.com. What does this mean? It means whoever owned that email had the authority to operate the Midas Gold account for Liberty Reserve. They could reset the password, enable or disable 2FA, and authorize transactions.
The data indicates Midas Gold bought up more than $5 million worth of LR. At 5% of a transaction. That equates to profits of around $250,000—not a lot, but decent wages.
The email suggests that Cotten and Patryn may have worked at M-Gold.com together—though its not clear if Cotten was involved from the beginning or joined later. If anything, this could even suggest that Cotten had more control over Midas than Patryn.
Let’s pause for a moment. If you were going to be involved in a dodgy business, why would you use an email address that pointed directly to you? That seems like a dumb thing to do, but then Cotten was still a young con at this stage. Maybe this was a rookie mistake. Also, is this really Cotten’s email? Quite likely, yes.
We think this is his email because he appears to have used the same email address for several domain registrations, including,cloakedninja.com, where you could buy proxy sites to hide your IP address, andcelebritydaily.net, an entertainment news blog. A historical WHOIS data snapshot of these site reveals they both have a registration address of 346-1881 Steeles Ave W Toronto. Quadriga Fintech Solutions, the owner and operator of QuadrigaCX, is linked to the same address.
Patryn’s Liberty Reserve account
In addition to the Midas Gold account, Patryn had his own account on Liberty Reserve, but his account had no associated website. He appears to have had at least three other exchangers at the time—HD Money,E-cash World and Triple Exchange. It’s possible he was selling LR through those sites as well as Midas Gold, and was just using the one account. Or else, Cotten could have operated Midas alone, while Patryn handled the other businesses.
Approximately $18.4 million worth of LR went through Patryn’s Liberty Reserve account. Of Liberty Reserve’s 500 largest accounts by volume, his ranked 88. If he took a 5% cut of every transaction, he would have pulled in $920,000.
A passage from the court filing explains:
“Data obtained from Liberty Reserve’s servers reflects the extensive use of the company’s payment system by criminal websites. The Government analyzed the top 500 accounts by transaction volume, i.e. funds sent and received, to attempt to determine the type of activity associated with each account. The total transaction volume for these accounts is approximately $7.26 billion, or approximately 43% of the total volume of transactions on Liberty Reserve’s entire system.”
Also according to the analysis, of the top roughly 500 accounts, 44% were associated with exchangers, 18% could not be categorized, and the remaining 38% were categorized as follows:
“157 of the accounts, accounting for approximately $2.6 billion in transactions, were associated with some form of purported ‘investment’ opportunity. The vast majority of these accounts were linked to websites that, on their face, were clearly ponzi schemes, i.e., HYIPs. Others, at best, were associated with unregulated ‘forex’ (foreign currency trading) websites—which are likewise known to be prominent sources of fraud.”
The demise of Liberty Reserve
Good things never seem to last, and in May 2013, Budovsky was arrested in Spain for running a massive money laundering enterprise. Kats was arrested in Brooklyn, and the the domain libertyreserve.com was seized.
Shortly afterward, US authorities seized more than 30 domains registered as Liberty Reserve exchangers in a civil forfeiture case, including M-Gold.com. According to court docs: “The defendant domain names were used to fund Liberty Reserve’s operations; without them, there would not have been money for Liberty Reserve to launder.”
Following the shut down of Liberty Reserve, users were told to contact the court to recoup their lost funds—on the basis they were conducting legitimate business. According to court docs filed in April 2016: “Notwithstanding that Liberty Reserve had more than 5 million registered user accounts, only approximately 50 individuals have contacted the Southern District Court of New York since May 2013.” Most appeared to be victims of HYIPs and other scams. And only one Liberty Reserve exchanger contacted the court about a potential claim—and that claim was not pursued.
A few months after M-Gold.com was seized, QuadrigaCX launched in beta. The rest is history—or history in the making—depending how you look at it.
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I had to take my website offline for a few hours Tuesday, so if you were searching for one of my stories and got a weird message, my apologies. I asked WordPress to downgrade my site from a business plan to a premium plan, and when they did, a bunch of my content disappeared, so I had to put Humpty-Dumpty back together again.
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Now onto the news, starting with Quadriga, the defunct Canadian crypto exchange that I won’t shut up about. (Read my timeline to get up to speed.)
Ernst & Young (EY), the court-appointed monitor charged with tracking down Quadriga’s lost funds, released its fourth monitor report, which reveals more money going out then coming in. The closing cash balance for March was CA$23,268,411. Incoming cash for the month was CA$4,232, and total disbursements was CA$1,463,860—most of which was paid to professionals. A full half of that (CA$721,579) went to EY and its legal team.
EY is trying to chase down money held by Quadriga’s payment processors. It has drafted a “Third Party Payment Processor Order” for the court to approve on Monday. If that goes through as is, several payment processors, including WB21, will have five business days to handover funds and/or Quadriga documents and transaction data. If they don’t comply, they will be in contempt of court. A shift from CCAA to bankruptcy proceedings will also give EY more power to go after funds as a trustee.
Christine Duhaime, a financial crimes lawyer who worked for Quadriga for six months in 2015 to early 2016, wrote “From Law to Lawlessness: Bits of the Untold QuadrigaCX” for CoinDesk, where she talks about how Quadriga went off the rails following its failed efforts to become a public company.
In the article, Duhaime—who in February called for a government bailout of Quadriga’s creditors (archive)—openly admits to having lost CA$100,000 in funds on the exchange. She claims her involvement with the exchange stopped in early 2016. “I’m glad we were let go by QuadrigaCX for being one of the ‘law and order’ folks,” she said.
Preston Byrne, an attorney at Byrne & Storm, PC,tweeted, “No offense to @ahcastor but this claim that @cduhaime may have owned shares in Quadriga looks to be incorrect. She’s listed as the principal contact for an SPV, and the SPV is the named purchaser. A retraction is in order.”
SPV stands for special purpose vehicle, typically used by firms to isolate them from financial risk. I’ve reworded the paragraph as follows:
This 2015 British Columbia Report of Exempt Distribution, a document of Quadriga Financial Solutions’ ownership, lists Duhaime as the contact for 1207649 B.C. Ltd, which owns—or owned—20,000 shares of Quadriga. I was unable to find the corporate files for 1207649 B.C. The address in the report matches that of Duhaime’soffice.
Update (April 9): I found the corporate files. The actual company name appears to be 1027649 B.C. Ltd.—with the numbers “2” and “0” transposed. The company was founded on February 16, 2015 and dissolved on August 1, 2017. The sole director is “Anne Ellis,” and the registered office is Duhaime Law.
According tocourt documents, Cotten and Quadriga co-founder Michael Patryn had been seeking to buy back shareholdings after Quadriga’s public listing failed, so it is possible one of them may have bought back those shares as well. I reached out to Duhaime for comment a few times, but she has not responded.
Duhaime may have left Quadriga behind, but she continued to have business dealings with Patryn, who we now know is convicted felon Omar Dhanani.
She and Patryn co-founded Fintech Ventures Group, which calls itself “an investment bank focused on digital currency, blockchain, and AI-focused technology.” According to a January 2016 archive of the company’s site, Duhaime was Fintech Venture’s “Digital Finance Maven & Co-Founder.” (Interestingly, former Quadriga director Anthony Milewski worked there, too, as the company’s “Investment Relations Extraordinaire.”)
Duhaime and Patryn were also both advisors at Canadian crypto exchange Taurus Crypto Services, according to this June 2016 archive. (Milewski shows up here again, this time as an advisor.) The exchange was founded in 2014 and shut down in January 2017, when the business shifted to over-the-counter trades.
Like Duhaime, Patryn also claims his involvement with Quadriga ended in early 2016. Although the Globe and Mail said that in October 2018, “it received an e-mail pitch from an ‘executive concierge’ company called the Windsor Group offering up Mr. Patryn for interviews to discuss virtual currencies and describing him as a Quadriga director.” Patryn told the Globe he did not know what the Windsor Group was, nor had he authorized anyone to pitch him as a Quadriga director, as he never served on the board.
Patryn had a personal website michaelpatryn.com, but it got taken down. Here is a 2011 archiveand here is a 2014 archive. From 2016 on, the archives point to his LinkedIn profile, where he now goes by “Michael P.” having dropped all but the first initial of his last name. According to his LinkedIn, he has been an advisor for numerous cryptocurrency platforms going back to November 1999. I guess that means his work at Shadowcrew in 2004 and the 18 months he spent in jail for conspiracy to commit credit and bank card fraud and ID document fraud qualifies as advisory services.
Patryn appears to enjoy the limelight. Several reporters told me they had no trouble reaching him. At one point, Patryn even went into the “Quadriga Uncovered” Telegram group—basically, the lion’s den, where hundreds of pissed off Quadriga creditors sat waiting on their haunches —where I am told he calmly deflected accusations.
Elsewhere in cryptoland, there have been a number of exchanges hacks. Singapore-based exchange DragonEx was hacked on March 24 for an undisclosed amount of crypto.
Blockchain data firm Elementus suspects that Coinbene, another Singapore exchange, was also hacked. On March 25, Elementus noted that $105 million worth of crypto was on the move out of the exchange. Coinbene totally denies it’s been hacked, claiming that delays in deposits and withdrawals are due to maintenance issues.
In order to enhance the user experience, CoinBene upgraded the platform wallet on March 26, 2019. During maintenance, it will affect related operations such as deposit and withdraw, trading will not be affected.
A third exchange, Bithumb was hacked on March 30. The South Korean crypto exchange lost 3.07 million EOS and 20.2 million XRP, worth around $19 million. Bithumb thinks it was an insider job.
Helsinki-based LocalBitcoins, a once go-to for anonymous bitcoin transactions, has added know-your-customer (KYC) identity checks to comply with new laws in Finland. The change goes into effect in November. Per the company’s announcement, this is actually good news for bitcoin, because it will create a “legal status for crypto assets, which should improve significantly Bitcoin’s standing as a viable and legit financial network.”
A study by reg-tech startup Coinfirm found that 69 percent of crypto exchanges don’t have “complete and transparent” KYC procedures. And only 26 percent of exchanges had a “high” level of anti-money-laundering procedures.
With crypto markets in the dumps, exchanges are looking for new ways to attract volume. To that end, San Francisco-based Coinbase is launching a staking service to lure in institutional investors. The service, which starts with Tezos (XTZ), will pay investors to park their money in XTZ. The coins are kept in offline cold wallets. The catch is that the interest will be paid XTZ, and of course, crypto is highly volatile.
The news about Coinbase Custody supporting staking of Tezos is all over Twitter even though Coinbase hasn't even officially announced it yet. Meanwhile, the price of Tezos is up more than 70% in the last 10 days pic.twitter.com/YeYQafrfYu
Cryptocurrency exchange Binance is launching a new fiat-to-crypto exchange in Singapore later this month. (It’s been launching these crypto onramps all over the word.)
Binance also says it’s planning to launch its decentralized exchange (DEX) later this month. The DEX is built on a public blockchain, Binance Chain. Basically, Binance is looking to create an economy for binance coin (BNB), which is totally not a security.
Other interesting news bits
The the U.S. Securities and Exchange Commission issued a “Framework for ‘Investment Contract’ Analysis of Digital Assets.” There is not a lot new to see here. A footnote in the document makes clear this is “not a rule, regulation, or statement of the Commission,” just some thoughts from the SEC’s staff about how they interpret existing securities laws.
Stephen Palley, partner at law firm Anderson Kill, appeared on Bloomberg sporting a beard to explain the framework—definitely worth five minutes of your time to listen to.
Justin Sun, the founder of blockchain project Tron, bungled a Tesla promotional giveaway. After a widespread cry of foul play, he decided to make it up to everyone by giving away—two Teslas. This wasn’t the first time a Tron promotion raised eyebrows.
Ernst & Young (EY), the court-appointed monitor in Quadriga’s creditor protection procedures, filed its fourth monitor report with the Supreme Court of Nova Scotia on April 1.
In the latest twist in the ongoing Quadriga saga, EY is proposing Quadriga shift from its Companies’ Creditor Arrangement Act (CCAA) proceedings into proceedings under the Bankruptcy and Insolvency Act (BIA).
Bankruptcy offers key advantages. Namely, it would remove the need for several professionals, leaving more money to repay Quadriga’s 115,000 creditors. According to court docs, $250 million CAD ($190 million USD) in crypto and fiat were on the exchange when it collapsed, but likely only a fraction of that will be found.
In a bankruptcy, EY would become a trustee. That means Quadriga’s newly appointed chief restructuring officer (CRO) would no longer be needed. Company directors, Jennifer Robertson (the widow of Quadriga’s dead CEO Gerald Cotten) and her stepfather Tom Beazley, would also step out of the picture. (Robertson has already indicated, she doesn’t want to continue serving as a director anyway, which is why she opted for a CRO.)
Quadriga also won’t be needing a representative counsel. Last month, Stewart McKelvey, stepped down from the CCAA proceedings over a potential conflict of interest. The firm was representing both Quadriga in its CCAA proceedings and handling Cotten’s estate. Quadriga has not hired a replacement—and it won’t need to for a bankruptcy.
Cox & Palmer and Miller Thomson LLP, the legal team representing Quadriga’s affected users, would stay on. The recently formed seven-person committee that serves as the voice for Quadriga’s creditors, would also continue with their work.
But here is where things get interesting—as trustee, EY would be given additional investigatory powers without further relief from the court that will be of assistance in investigating the business and affairs of Quadriga, “including the right to compel production of documents and seek examination of relevant parties under oath.”
Finally, bankruptcy would allow for the potential sale of Quadriga’s operating platform.
Preserving Robertson’s assets
In late January, after Cotten’s death and before Quadriga filed for creditor protection, Robertson was moving aggressively to protect her newly acquired assets. She moved two properties into the Seaglass Trust, and Cotten’s airplane and yacht both went up for sale. EY has put a stop to any more of this by filing an “asset preservation order.”
During the course its investigations into Quadriga’s business and affairs, EY says it became aware of occurrences where the corporate and personal boundaries between Quadriga and Cotten were not formally maintained. EY notes that it appeared “Quadriga funds may have been used to acquire assets held outside the corporate entity.”
The asset protection order involves all assets held by the Cotten Estate, Robertson and the Seaglass Trust, and Robertson Nova Property Management—the company that Robertson purchased several properties under between 2016 and 2018. The order will allow EY’s investigation of Quadriga to continue “without concern that assets possibly recoverable for the applicant’s stakeholders may be dissipated,” the report said.
Likely Robertson is agreeing to the plan because, according to the report, EY “temporarily discontinued its preparation for a mareva injunction pending the negotiation and agreement of the draft Asset Preservation Order.”
A mareva injunction would have completely frozen all of the assets. Under an asset preservation order, Robertson is able to maintain control of her properties. She just can’t sell or transfer them. She has agreed to provide a list of relevant assets to EY. And she will be working with EY on monetizing some of the assets to preserve their value.
Wrestling with third-party payment processors
Quadriga had no company bank accounts. Instead, it relied on a patchwork of third-party payment processors. As a Quadriga customer, you would send cash to one of these payment processors, and Quadriga would credit your account with Quad Bucks, which you could then use to buy crypto on the platform. When you put in a request to withdraw fiat from the exchange, a payment processor would wire you money.
After Quadriga ceased operating on January 28, several of these third-party payment processors were left holding money on behalf of Quadriga and its users. EY mentions the following payment processors in its fourth report:
The monitor has been wrestling to get funds from several of these companies, a few of which weren’t exactly at arm’s length from Quadriga. RNCI was operated by Robertson — who earlier told the court she was not involved Quadriga’s operations. Apparently Cotten used RNCI bank accounts to transfer money to Quadriga customers. Robertson is cooperating though. She says RNCI is currently not holding any Quadriga funds, and she is working to get bank statements of all transfers her company made to EY.
700964 N.B. Inc. and 1009926 B.C. Ltd. were both run by Quadriga contractors. 700964 N.B. was run by Aaron Matthews, Quadriga’s director of operations, and 1009926 B.C. was run by Aaron Vaithilingam, Quadriga’s former office manager.
EY has in its possession 1,004 bank drafts, worth $5,824,340 CAD, written out to 1009926 B.C. It had trouble depositing those checks, because 1009926 B.C., the company, had dissolved. (This is yet another example of how sloppily Quadriga handled its affairs.) Now that 1009926 B.C. has been restored, Royal Bank of Canada (RBC) is asking for additional documents to deposit the bulk drafts. But Vaithilingam is not responding to EY’s letters.
EY has also reached out to WB21, the third-party payment processor holding on to roughly $9 million USD ($12 million CAD) in Quadriga funds. WB21 recently changed its name to Black Banx, and it has an office in Canada.
EY wrote to Michael Gastauer, the sole director of WB21, in February, requesting the company return any Quadriga funds to EY. WB21 responded by saying that Quadriga’s account was was closed in December 31, 2018, and it was entitled to withhold funds if there was “reasonable doubt that the end user has engaged in fraudulent activity.” On March 9, EY wrote again requesting copies of the agreements. WB21 wrote back saying it was only holding $11.77 CAD and $5.53 USD and that it “might be able to provide further information” upon conclusion of an internal investigation.
EY is not buying it, and you can bet it’s probably had enough of these shenanigans. The monitor is convinced WB21 is holding “a significant amount of funds.” The monitor also writes that WB21 has been uncooperative and has not provided “even basic info” and that it is inappropriate for WB21 to continue holding funds pending some investigation.
Here is another surprise—EY just discovered that Jose Reyes, who runs Billerfy and Costodian, operates yet another third-party processor, which has also received funds from Quadriga. Despite all the work Reyes has done with EY trying to sort out the $26 million in Bank of Montreal (BOM) drafts, he neglected to mention his other company ePAD also held Quadriga money. EY sent letters requesting account information, but so far, Reyes has not responded. (Read the interpleader order for more history on Reyes.)
EY also wrote to POSconnect who is supposedly holding $331,764 CAD in Quadriga funds. POSconnect followed up stating that it only owed $300,000, but that under the terms of its agreement with Quadriga, it would continue holding the funds until April 28. The monitor wrote again requesting immediate return of the funds.
VoPay is supposedly holding $217,000 CAD on behalf of Quadriga. In February, VoPay told Quadriga’s counsel that it was not in a position to return the funds, because it had gotten legal threats from Quadriga customers. VoPay confirmed it is holding $116,262 CAD for Quadriga and requested indemnity from EY, which EY says it can’t provide and again requested VoPay give back the money asap.
Alto Bureau de Change is a currency exchange shopfront in Montreal. Alto believed it had never done business with Quadriga, but EY noted a transfer from Quadriga to Alto of $160,000 CAD worth of bitcoins and $30,000 CAD processed on behalf of Quadriga by NB Inc. EY believes that Alto currently holds either $20,876 or $36,213 of Quadriga funds.
EY is seeking a court order to get several of the third-party payments processors to hand over funds and/or any documentation related to Quadriga.
The monitor’s research into Quadriga’s missing funds is winding down. It plans to file its final monitor report in a few weeks. Oddly, this report did not mention anything about recovery of the platform’s historical data on AWS—a big issue in the third report.
Yesterday, I did a podcast with CoinSpice’s C. Edward Kelso. He turned it around fast, and the podcast was live a few hours later.
Kelso asked me about collapsed Canadian crypto exchange QuadrigaCX and also about legal threats made to me by WB21 (now Black Banx), the third-party payment processor holding $9 million in Quadriga funds, after I wrote about them.
WB21 has a history of threatening reporters, so this was nothing new. But after so much bad press, WB21 rebranded, and I wrote about that, too.
It is always a little overwhelming talking about Quadriga. The story is so long, involved and complex that it really belongs in a Netflix series.
The story was about how crypto exchange ShapeShift requested analytics firm CipherBlade to repeat a September 2018 report by the Wall Street Journal. The original report said ShapeShift had been used to facilitate $9 million in money laundering over a period of several years. The investigation took place before ShapeShift implemented KYC identity checks in October 2018.
After I published my story, CipherBlade founder and CSO Richard Sanders sent me a response late in the evening on March 24. What follows is his letter in full, which adds a little more background to the whole story. Thank you, Richard.
Thanks for taking the time to review some items I noticed in your article. I’ll quote particular items and provide some feedback on each.
The second WSJ report does not address what happened to Quadriga’s missing funds, only that, according to two independent researchers, some ether left the online accounts of the platform and moved through ShapeShift before Quadriga became insolvent. But the implication was the same—money laundering.
I haven’t looked into this myself, but FYI, I believe ShapeShift looked into this. If I recall correctly, these transactions were indicative of liquidity—if you can’t find the bit I’m referencing, let me know, and I’ll hunt it down for you. I’d equally be happy to review proof the WSJ provides behind their claim, but to be frank, don’t expect that to be provided by them.
To defend its reputation, ShapeShift “requested” CipherBlade, a hitherto unknown
This has been addressed in numerous articles, so I’m not sure how to appease the “requested” bit here. However, this request was done indeed—ShapeShift has been aware of CipherBlade for some time now (as most major exchanges/platforms are) and knows what we do. Regarding the ‘hitherto unknown,’ we’ve spent precisely $0.00 on marketing. In this current phase, we just don’t need to—we have more than enough requests coming our way, primarily via word of mouth. We’re quite well known by the current demographics that constitute the largest demand for our services (ICOs, exchanges, attorneys) – and while we may not yet be on the tip of the tongue of the average person in blockchain, we’re certainly well-known enough to get a stream of word of mouth referrals large enough that we can’t take all of the requests.
It is important to clarify what the new report actually says. It does not vindicate ShapeShift. It only says the laundering was less than what WSJ said. But money laundering is money laundering, and no matter how you slice or dice it, or who else is allowing it, it’s still money laundering.
I’ll start with saying that I have extensive respect for the way you worded this—the report indeed did not vindicate ShapeShift. ShapeShift was very, very aware that if our findings were damning, they’d still be our findings. However, I will disagree with the “but money laundering is money laundering” bit. There is significant importance behind analyzing the extent instances of laundering takes place on any platform. Analyzing how much money has gone through any system contingent with volume is a KPI that’s existed before blockchain was a thought, and continues to be a metric of review for anyone in the know on these topics. Obviously, in a perfect world, the amount would be $0 – but we live in a far from perfect world. If you’d like to break down percentiles of dirty funds going through other platforms, I’m keen to discuss more in-depth – but the short version is that, relative to other platforms, the percentile of laundered funds that went through ShapeShift is substantially lower, and yeah, this matters a lot.
I personally am based in Pittsburgh, and the core team is spread out mostly in Europe. This datapoint, as you linked, is from our LinkedIn, which has a location of Pittsburgh since it is much more of a tech hub and place someone may decide to meet me in person. Your other due diligence on registered office/incorporation aside, I simply find it sensible to be public-facing enough to a degree to say “hey, I’m here if anyone cares to meet.” This is more than many companies have done, and frankly, a step I think as an industry we must demand more of – so why not practice what I preach, right?
You can file “incident reports” on CipherBlade’s website. A basic report costs $100. Adding a police report brings the price to $350. The platform accepts payments in bitcoin, ether and go—the latter being an obscure coin that mainly trades on Binance. The company does accept cash, but only via bank wires.
So by now, a few other articles analyze bits about our Report function (and why it exists,) but allow me to go more in-depth with you directly: often times (and this ties into why people would pay for a Report) law enforcement doesn’t have the training on how to handle these types of incidents. Local/state police in the US often don’t even know where to direct victims (typically, would be an IC3 report) and victims (and sometimes law enforcement) often don’t know what should be in a report of one of these incidents. While I wish I had all of the time in the world to help everyone for free, I don’t – and the fees we charge for help on these reports, to be quite candid, is obviously not of a level that is highly attractive to us as a business. This may be explained better on a call, as it’s a lot to type in a brief paragraph – but the short version is that most incidents aren’t reported at all, and the few that are reported often don’t have what LE needs in them. The reports we generate give LE everything in what I like to call “a nice pretty box with a bow on it,” increasing the likelihood of action on these reports.
“Matthew [Greene] paints a picture of a company doing James Bond-level work.”
I have to chuckle a bit here, because I hear this joke on at least a weekly basis. Yeah, we do some pretty… interesting stuff, and indeed, some of it does involve tradecraft (I have and do cover both the cyber and physical realms in these cases,) but that’s pretty rare.
Sanders is the public face because his background, experience, training, and connections “hedge the risk he is exposed to,” Matthew [Greene] said. He added that Sanders likes “to joke that we should state on our website that all death threats should kindly be addressed to him directly.”
I mean, again, in fairness—I know you’re quoting Matthew here with the hedge the risk portion, but it’s simply the reality. There are indeed death threats we receive—and many in the industry get these (though, obviously, based upon angering criminals and friends of criminals, we get more,) so you’d likely have some context. The majority of these threats hold little to no merit of concern even for the average person – those making the threats are highly unlikely to act on them. However, we have done numerous reports that have identified sophisticated criminal organizations and even nationstate actors as responsible for a particular incident (actually, no less, one of these was identified via someone that filed via Report—and we identified a key logger ran by a particular organization that was benefiting a particular nationstate.)
If you do want a hilarious quote for an article, do feel free to ask me what another journalist once did – if I’m scared about this.
Where am I going with all this? Nowhere, other than, when a company issues a report that downplays money laundering on a crypto exchange, you may be interested in finding out just how that company actually knows about the subject—of money laundering, that is. The answer may surprise.
So I disagree extensively with your wording here, and here is why—all of the items regarding the company registration/incorporation have already been covered. Our knowledge of laundering primarily stems from my knowledge of laundering, drawn across an extensive case history. Without delving into cases, let’s simply say this – I can respect and appreciate the due diligence attempted on a company, and it would be fair to analyze connections in the way you did. However, to imply a company that has someone like me public-facing being knowledgeable of money laundering by premise of past history therein is a pretty insane accusation if you contemplate my background, holding of a security clearance, the fact I’m extremely public-facing (and, certainly, US Gov’t keeps tabs on what I’m doing and who I associate with)—it’s simply not a strong connection to make. I can go far more in depth about my knowledge of money laundering, whether in crypto, fiat (suitcase of cash stories?) or both—tell me what you need to know.
Lastly, I need to chuckle with you on this one…
His bio reads a bit like an Internet tough guy.
My military service making me have a label of “tough guy” (let alone internet tough guy, which, typically, is someone faking the funk and hasn’t served) isn’t warranted. In reality, I’m a huge softy. I’m continually baffled why I’m hearing multiple claims basically alluding to “badass” “tough guy” or other variations. I volunteered to do a job, and I did that job. It was my choice to do it. I expect no (nor do I want) any labels ranging from “brave” to “tough guy”—either side is just not applicable. There is courage in numerous lines of work, just like there is courage in being a journalist hunting for truth in the best interests of the public. We all have our roles. I served my role as a soldier, and I now serve my role as someone cleaning up this industry. I’m a bit baffled as to why CipherBlade, and especially in particular myself, are receiving labels that essentially amount to “scary”—the only people that need to be scared of me are people that have commit crime.
Put simply—I think that equipping you with some perspective from my end may prove beneficial to you. Make whatever revisions you see fit having had read this, and feel free to ask me any questions you have. I certainly assess you as the type receptive to getting the record straight.
Side note, props for your work on Quadriga. I was just in Toronto to do a solvency and security audit on an exchange… you know, the types of steps folks like you and I are pushing to make fair expectations. It’s a damn shame it had to come to that, but the overall vibe of transparency is reflected in both situations here.
(Sanders also wrote a lengthy response to David Gerard’s CipherBlade report.)
ShapeShift was none too pleased when the WSJ put out areport in September 2018 claiming that the crypto exchange was being used to facilitate money laundering.
In an article titled “How Dirty Money Disappears Into the Black Hole of Cryptocurrency,” WSJ said it did an independent investigation and learned that ShapeShift facilitated at least $9 million worth of money laundering over several years.
Founded in 2013, with headquarters in Colorado, ShapeShift made a name for itself early on by allowing anyone to instantly switch out one crypto for another—while requiringno personal information. That changed inSeptember 2018 when the firm announced it would soon require a log-in. ShapeShift didn’t specify why it added know-your-customer identity checks, but likely regulatory pressure was behind the move.
Nonetheless, the WSJ story was bad press for ShapeShift, one of the oldest of the crypto exchanges. The last thing you want when regulators have their eyes on you is to be associated with criminals. Of course, this was not the first time ShapeShift had been linked to criminal activity. In August 2017, WannaCry ransomers also tried to funnel their bitcoin through the exchange. ShapeShift responded by freezing their accounts.
Erik Voorhees, the exchange’s founder and CEO, fought back against WSJ’s claims on Twitter. “We are aware of the poorly-researched piece written against us by someone at WSJ. The implications are disingenuous and misleading,” he said when the story came out. He also posted a lengthy rebuttal online.
In February,WSJ struck again, this time stating that ShapeShift allegedly received hundreds of thousands of ether from Canadian crypto exchange QuadrigaCX in the months before its CEO, Gerald Cotten, died under mysterious circumstances, taking with him the secret to the whereabouts of 100s of millions of dollars in customer funds.
The second WSJ report does not address what happened to Quadriga’s missing funds, only that, according to two independent researchers, some ether left the online accounts of the platform and moved through ShapeShift before Quadriga became insolvent. But the implication was the same—money laundering.
To defend its reputation, ShapeShift “requested” CipherBlade, a hitherto unknown blockchain analytics company, to do a separate investigation. On Thursday, the analytics firm unveiled the results of what it said was a months-long project in aMedium post under the headline “How Truth Disappears Into the Black Hole of Shoddy Journalism.”
It what it claims was a recreation of the 2018 WSJ report, CipherBlade announced that “the WSJ’s $9 million ‘laundering’ claim was overstated by a factor of 4x.”
It is important to clarify what the new report actually says. It does not vindicate ShapeShift. It only says the laundering was less than what WSJ said. But money laundering is money laundering, and no matter how you slice or dice it, or who else is allowing it, it’s still money laundering.
it turns out that "what about THAT OTHER GUY we're not talking about" is a bad excuse in general, even if it's literally bitcoiners' favourite frickin' argument https://t.co/2MCl6Cwp1j
CipherBlade said its analysis was based upon publicly available data and that it made extensive use of the “txstat” function of ShapeShift’s public API. The company also denies that ShapeShift or anyone else paid for the investigation. “We did this as pro bono work because CipherBlade has an interest in preserving the reputation of highly compliant and helpful organizations like ShapeShift,” the firm said.
Crypto trade publications jumped on the redemptive news. “WSJ’s ShapeShift Exposé Overstated Money Laundering by $6 Million, Analysis Says,” wroteCoinDesk. (The pub also included a glowing comment from Voorhees, who said that “Crypto is bringing light, truth, and openness to finance.”) The Block published a story with the headline, “WSJ’s ShapeShift money-laundering claims greatly overstated, says CipherBlade.”
Meanwhile, Voorhees took the opportunity to once again condemn WSJ on social media. “A respectable publication would issue a retraction or correction. WSJ made up false claims against [ShapeShift] both quantitative and qualitative, in order to push an anti-crypto, pro-bank surveillance agenda. WSJ may lie, but blockchains don’t,” hetweeted.
One question nobody seemed to be asking was, “Who isCipherBlade?”
In short, CipherBlade is a firm with links to hundreds of shell companies and a director who has associations to Panama law firm Mossack Fonseca, one of the world’s largest providers of offshore financial services—but I’m sure, none of that means anything.
On its website, the eight-month-old CipherBlade claims to have “recovered millions of dollars of stolen funds, prevented dozens of ICO scams, and professionally handled PR disasters and other emergency situations.” The company was founded in August 2018.
You can file “incident reports” on CipherBlade’s website. A basic report costs $100. Adding a police report brings the price to $350. The platform accepts payments in bitcoin, ether and go—the latter being an obscure coin that mainly trades on Binance. The company does accept cash, but only via bank wires.
The only employee listed on CipherBlade’s website isRichard Sanders, the company’s chief security officer and co-founder. His bio reads a bit like an Internet tough guy. He “served in US army Special Operations Forces” and “rose to site security lead at Google.” A spokesperson for the company going by “Matthew” (no last name given) told me in an email that the company does have other employees—they just aren’t on the website.
Matthew paints a picture of a company doing James Bond-level work. Sanders is the public face because his background, experience, training, and connections “hedge the risk he is exposed to,” Mathew said. He added that Sanders likes “to joke that we should state on our website that all death threats should kindly be addressed to him directly.”
The company’s only human director is Genevieve Magnan, a 36-year-old woman, who is a citizen of Seychelles, an archipelago island off of the Indian Ocean. Seychelles is “an offshore magnet for money launderers and tax dodgers,” according to a 2014 International Consortium of Investigative Journalists (ICIJ) report.
According to her LinkedIn profile, Magnan is the corporate administrator for Seychelles-based AAA International Services, a “corporate services provider” — essentially, a company that helps other companies set themselves up in off-shore jurisdictions.
CipherBlade describes Magnan as a nominee director, whose only role is to be publicly visible in paperwork, such as the company registry. Matthew explained to me that the purpose of this company setup is to keep most of the CipherBlade team “shielded,” based on the nature of its work. “We’ve worked cases that involve very dangerous individuals and groups, including nation-state actors,” he said.
A little more digging pulls up a maze of companies. Magnan, for instance, holds shares ofSera Company, a holding company for an issuing company based in Cyprus (with a placeholder name “The Bearer”) that holds shares in 20 other companies.
Shell companies are ghost companies that have no significant assets or operations of their own. They are not illegal. In fact, ICIJ, which houses the leaked Panama Papers database—where I got a lot of the information for this story—makes it clear that “there are legitimate uses for offshore companies and trusts.”
I don’t want to suggest or imply that CipherBlade or any of the companies that it is linked to have done anything improper—as Matthew said, CipherBlade’s setup has a purpose, obviously. However, shell companies lend themselves to illegal activity. Criminals know how to use them to move money and create a house of mirrors to fool the system.
As examples, one company Magnan is listed as being a director of — Big365.com—is the recipient of a disgruntled review on Forexpeacearmy. “Jeff_calgary” claims the firm disappeared with his money. Magnan also appears to be the director of StocksM, which anotherForexpeacearmy user describes as a high-yield investment, aka ponzi, scheme.
Where am I going with all this? Nowhere, other than, when a company issues a report that downplays money laundering on a crypto exchange, you may be interested in finding out just how that company actually knows about the subject—of money laundering, that is. The answer may surprise.
you're joking right, I'm tracing Cipherblade's corporate shells within shells right now
all leading back to AAA International in the Seychelles
i mean, I can certainly believe Cipherblade have considerable expertise related to money laundering, and that you hired experts, https://t.co/mUmuEaFwXV
Travel has been a bit exhausting lately, but my talk on QuadrigaCX at the MPWR Crypto Mining Summit in Vancouver, B.C. went well. If anyone wants to learn more about the events leading to the collapse of Canada’s largest crypto exchange, I’m told the video should be up within 30 days. I’ll post as soon as it’s available.
I depend on reader support for the work I do. If you benefit from my stories and the resources I make available for free, please take a minute to subscribe to my Patreon account. Every little bit counts.
Now onto the news—first Quadriga.
Stewart McKelvey, the law firm representing Quadriga in its Companies’ Creditor Arrangement Act (CCAA) has withdrawn amid concerns of a conflict of interest. What’s weird is that nobody outside of Ernst & Young (EY), the the court-appointed monitor, knows what the “potential” conflict of interest is exactly.
The firm was also representing the estate of dead Quadriga CEO Gerald Cotten and his wife Jennifer Robertson. In and of itself, that does not necessarily represent a conflict of interest. I mean, EY would have known about this from the beginning, right? But some new info appears to have surfaced. I suspect the details will emerge eventually. We just have to keep waiting for those monitor reports to come out.
You recall my story on WB21, the payment processor holding $9 million in Quadriga funds? It seems like every reporter who has written about WB21 has received some type of threat—usually, a legal threat. (My story was also followed by threats on social media and email.)
Now a reporter has come forward saying that after he wrote a story on WB21, a thug appeared at his door. Totally unrelated, I’m sure.
Because a thug came to my home, the #fintech game has changed. Because someone is trying to scare me away from #wb21, I believe it merits more investigation.
I’m surprised more media outlets have not covered WB21 in relation to Quadriga. But I suspect that will change soon—after all, $9 million is no small change. What I still don’t get is why Quadriga did not do due diligence before partnering with the firm. The internet is littered with people claiming to have lost money on WB21. This is one more example of how irresponsibly Quadriga conducted its business.
EY should be coming out with a fourth monitor report soon. I’ll be curious to hear if they’ve gained access to Cotten’s AWS account, which contains the platform’s historical transaction data. According to court docs, the Quadriga database was backed up hourly. (You would expect a lot more frequent backups for an exchange handling hundreds of millions of dollars in customer funds.) Also, I’m curious to learn more about the role of Quadriga’s new chief restructuring officer—and what his hourly rate is. (I’m almost certain I’m in the wrong business.) And has the representative counsel pulled together a committee of jilted Quadriga users yet? Until that happens, they have no voice to represent.
In a written statement on March 13, Robertson said that Cotten had mixed his private funds with those of the exchange’s. She wrote: “While I had no direct knowledge of how Gerry operated the business, he told me that he had been putting his own money back into QCX to fund user withdrawals in 2018 while the CIBC money remained frozen.”
This is not new information. Robertson already mentioned this in her first affidavit, filed with the court on January 31. “Gerry told me that he was advancing his own personal funds in order to ensure that payments were made to Quadriga users,” she wrote. I can’t say what this means, other than more sloppy bookkeeping for EY to sort out.
Reddit users claim that the Royal Canadian Mounted Police (RCMP) is collecting info on Quadriga. “They are suspicious and are coordinating with the FBI,” Reddit user “u/e_z_p_z-” wrote in quoting someone on Telegram. I contacted RCMP to verify, but they were tight lipped on the matter. “The RCMP is aware of the allegations against QuadrigaCX. We will not be providing any further information,” a spokesperson told me.
Amidst the backdrop of the Quadriga fiasco, two Canadian financial authorities have published a consultation paper. The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIRO) are seeking input from the fintech community on how to shape regulatory requirements for crypto platforms. If you want to share your ideas, submissions are open until May 15.
I don’t think bitcoiners realize how broad of an impact the Quadriga mess will have on crypto markets. Exchanges are key to bitcoin’s liquidity, and exchanges need banking. If Canadian banks were leery of crypto-related funds in the past, now they will completely steer clear of the stuff. And my guess is regulators will do their utmost to make sure what happened at Quadriga (one guy managing gobs of other people’s money on his laptop from wherever he happened to be) never happens again—not on Canadian soil, at least.
In other crypto-exchange-related news, Tether, the company that issues the stablecoin of the same name, admitted that it is operating a fractional reserve. This has been widely suspected for a long time. Tether parted ways with its accountant in January 2018 (never a good sign), and it has never had a proper audit. Amazingly, despite this news, tether has not lost its peg and the price of bitcoin has remained unaffected.
i honestly thought the day that tether just openly admitted they don't have all the cash would be more exciting than this but lol nothing matters
David Gerard wrote a hysterical piece on Tether for DeCrypt. “Every 24 hours, the entire $2 billion supply of tethers sloshes around 3.5 times, performing vital work for the market: completing the Barts on the price charts, burning the margin traders, and keeping the game of musical chairs going just that little bit longer,” he writes.
Bitfinex’ed, the pseudonymous tweeter and persistent critic of Bitfinex, unlocked his twitter account, so you can now retweet his tweets again.
[Read my Tether timeline to learn the full history of Tether and Bitfinex, the crypto exchange that it is linked to.]
Mark Karpeles, the former CEO of Mt. Gox, the Tokyo-based crypto exchange that went bust in 2014, was sentenced in Japan. Judges found him innocent of the major charges of embezzlement and breach of trust, but guilty of improper management of electronic funds. They gave him a suspended sentence of four years. Essentially, that means, as long as he stays out of trouble, he won’t go to jail and is a free man.
CBOE Futures Exchange (CFE), the first U.S. exchange to introduce a bitcoin futures product in December 2017, has decided to pull the plug on bitcoin futures trading.
Bitcoiners have long counted on a flood of institutional money to prop up the price of bitcoin—but it is just not happening. As the crypto markets began to tumble in 2018, CBOE saw scant trading volume on its bitcoin futures product. It also lost market share to Chicago Mercantile Exchange (CME) bitcoin futures, which launched the same month.
Bitcoiners must be so disappointed that the institutional money that was supposed to send Bitcoin to the moon and make them all billionaires never materialised. https://t.co/HJ75AUACNp
Trading volumes for bitcoin futures on both these exchanges pale in comparison to BitMEX, an unregulated exchange in Hong Kong, where you can gamble your bitcoin away at 100x leverage. (I wrote a story on BitMEX for The Block in January.)
More than six months since Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange, revealed its plans for a bitcoin futures market, Bakkt is still awaiting regulatory approval.
Elsewhere, the bear market continues to take its toll on crypto exchanges.
Trading volumes on Coinbase are dropping precipitously. The Blockestimates that the U.S.-based exchange will make less than half the amount on trading commissions in 2019 than it did the prior year—if market conditions remain the same.
To make up for that, Coinbase is raising some of its trading fees. It is also listing more coins, the latest being Stellar Lumens. Stellar was started by Ripple co-founder Jed McCaleb, with lumens aimed at being part of a low-cost payment network. A bit of history here: McCaleb was the creator of Mt. Gox, which he later sold to Karpeles.
Bithumb, the largest cryptocurrency exchange in South Korea, plans to shed 150 of its 310 employees, according to CoinDesk.
And Hong-Kong based crypto exchange Gatecoin (not to be confused with crypto payment processor CoinGate) is facing liquidation. The story of Gatecoin reads like a series of Mr. Bill episodes. (Terrible things always happened to Mr. Bill.) After losing $2 million worth of crypto to a hack in 2016, the exchange hopped from three different banks only to have its bank accounts frozen at every one of them. Gatecoin gave up on the traditional banking system and turned to an unnamed French-regulated payment processor in September 2018. The firm returned the favor by keeping a large portion of Gatecoin’s funds. Now, a court has ordered the exchange to shut down.
Hong Kong Bitcoin exchange Gatecoin got scammed by a regulated payment service provider. A HK court has ordered Gatecoin to be wound up, a liquidator has been appointed. https://t.co/Xv9F4DCF4X
Stewart McKelvey, the law firm that has been representing Quadriga in its Companies’ Creditors Arrangement Act (CCAA), is stepping down due to a “potential” conflict of interest.
Maurice Chiasson, a partner at the law firm, sent aletter to the Supreme Court of Nova Scotia on March 13. He explained that his firm was stepping down in response to concerns brought up by court-appointed monitor Ernst & Young.
Stewart McKelvey was representing both Quadriga in its CCAA hearing and the estate of the firm’s dead CEO, Gerald Cotten. The letter hints that new information has surfaced since February 5, when the hearings began.
“We have been advised that the concerns regarding a potential conflict have arisen as a result of information, which has come to the attention of the monitor since the start of the CCAA process,” Chaisson said in the letter.
He adds that, “Notwithstanding that no information has been disclosed, which provides a basis to conclude there has been or is the potential for conflict, we are of the view that the appropriate course in these circumstances is to withdraw from our representation of the application companies in the CCAA process effective immediately.”
The firm will continue to represent the estate of Jennifer Robertson, Cotten’s widow.
Chetan Phull, a Toronto lawyer, who specializes in crypto and blockchain, told me it is uncertain why Stewart McKelvey is not insisting that the conflict be disclosed.
“It is even more curious why the firm believes the best course of action is to withdraw, without any evidence of a conflict or potential for conflict,” Phull said.
He noted that a conflict could arise from less obvious aspects of this case, such as whether Robertson breached a duty of care owed to the “corporate applicants” (meaning Quadriga CX) or a dispute with regard to how the firm’s legal fees should be paid.
“At the end of the day, the letter is intentionally vague, probably to avoid raising issues that would prejudice the applicants,” Phull said.
Roughly $220 million CAD ($165 million USD) is still missing or unaccounted for after Quadriga became insolvent. Meanwhile, Robertson seems to have done okay.
In a will signed weeks before his death on December 9, Cotten left an airplane, a yacht, and properties worth millions of dollars to his new bride. Robertson was also left in charge of Quadriga, since she inherited a large share of stock in the company.
Even while Quadriga users were experiencing delays in getting cash out of the exchange, Cotten and Robertson were buying up properties. Between mid-2016 and late-2018, the two bought 16 properties, worth $7.5 million CAD ($5.6 million USD), according toCBC.
Before Quadriga filed for creditor protection on January 31, Robertson removed Cotten’s name from the ownership of four Nova Scotia properties, took out collateral mortgages on all four and moved at least two of the properties into the Seaglass Trust, according to theChronicle Herald. It is not clear if Stewart McKelvey set up the trust.
Robertson is owed $300,000 CAD ($225,000 USD), which she put up to kick off the CCAA process. On March 5, the court deferred an order to pay her back.
Hello new readers! If you enjoy my crypto meanderings and paywall-free Quadriga resources, please subscribe to my Patreon account. I’m an independent writer, and I need your support. You can subscribe for as little as $2 a month.
I will be giving a presentation on Quadriga at MPWR Crypto Mining Summit in Vancouver, B.C. on March 12 at 4:15 p.m. local time. If you lost money on Quadriga, you can get into the event for free. Simply send an email to firstname.lastname@example.org.
On the upside, seeing the hearing live at the Nova Scotia Supreme Court was really cool. Also, while in Halifax, I interviewed with Sheona McDonald, who is working on a Quadriga documentary. I hope to see her again in Vancouver, where she is based.
As far as the hearing goes, the big news is that Quadriga was granted a 45-day stay and the judge gave a thumbs up to the appointment of Peter Wedlake, a senior vice president and partner with Grant Thornton, as a chief restructuring officer (CRO) for the firm.
I was struck by the number of paid professionals sitting before the judge—somewhere between eight and nine, and a few others in the back of the room. What is the hourly rate for a lawyer? And some of them had to fly in, too.
And now, one more mouth to feed: the CRO. According to court documents, Quadriga needs a CRO for “ongoing direction” related to its affairs during its Companies’ Creditor Arrangement Act (CCAA) and in the event of an “anticipated sales process.”
This talk of selling Quadriga is a recurring theme, so watch for it to come up again. The biggest value in the sell would likely be Quadriga’s user base. A similar effort is being made to revive Mt. Gox, the Tokyo-based crypto exchange that went bust in 2014.
in the courtroom at the Quadriga case, a reporter who came in late and sat behind us told us during intermission, "I know a few dozen people who lost mone on #QuadrigaCX; around $200, you know…nothing to go to great lengths over getting back…"
How will customer claims be evaluated? Court-appointed monitor Ernst and Young (EY) is working to gain access to the exchange’s platform data in AWS, where all the customer trades are located. (EY had to get a court order at the hearing to do so.) It will be interesting to see what the monitor finds when it cracks that egg—maybe nothing. Other trails have already been wiped clean. Quadriga has no books and six identified bitcoin cold wallets were found empty, except for an inadvertent transfer reported earlier.
I recently wrote about WB21, the shady third-party payment processor that is holding $12 million CAD ($9 million USD) in Quadriga funds, according to court documents submitted in January. After I published the story, WB21, threatened me with legal action. I responded by posting the documents they sent. Since then, I’ve been getting anonymous threats via social media and email, telling me to stop talking about Quadriga.
Kyle Torpey wrote how bitcoin users in Canada are being targeted with audits by the Canada Revenue Agency (CDA). It is possible this could deter some affected Quadriga users from registering their claims, particularly if they are worried about anyone finding out about their crypto investments.
Bitcoin users in Canada are being targeted with audits by the Canada Revenue Agency (federal tax agency). Attached are some images of the questionnaire being sent out to individuals in relation to the audits.
Elsewhere in the news, Kraken is offering a reward for any info leading to the finding of Quadriga’s lost coins. The US-based crypto exchange writes:
“It is up to our sole discretion which tips warrant a reward, if any. The total of all rewards will not exceed $100,000 USD. Kraken may end this reward program at any point in time. All leads collected by Kraken will be provided to the FBI, RCMP or other law enforcement authorities, who have an active interest in this case.”
Kraken’s CEO Jesse Powell has done two podcasts talking about Quadriga. Why is he so interested? If you recall, Kraken acquired Canadian crypto exchange Cavirtex in January 2016, so it has some Canadian customers. A few people I spoke with speculated that Kraken may have an interest in acquiring Quadriga’s user base. Otherwise, $100,000 USD seems like a lot of money to throw around for an exchange that let go of 57 people in September.
In a bear market where dozens of employees were laid off recently, isn't it a bit odd that Kraken are throwing around a $100k reward for this Quadriga thing? That's a big expense… what's the ROI for them? https://t.co/wGUgt0kT5j
After this post went live, Powell sent me a few comments via email. He assured me the only purpose of Kraken’s reward was to help locate more assets for the Quadriga creditors and uncover any potential foul play. I reminded him that EY is already doing its own investigation into the lost funds. As of yet, Quadriga is not a criminal case.
As for acquiring the Quadriga platform and its user base, Powell thinks the platform is worthless and the user base probably significantly overlaps with Kraken’s already. “We would be open to acquiring the client list, but it wouldn’t be for much,” he said.
He also pointed out that “a lot of money” is relative and unrelated to his firm’s earlier layoffs. “Kraken increased its profitability in September,” he said. “Would you think $100,000 USD was a lot for Amazon, who let go a few hundred people last February?”
Lest there be any lingering doubt, Globe and Mail posted convincing evidence linking Quadriga cofounder Michael Patryn to convicted felon Omar Dhanani. The two appear to be one and the same. I think we can lay that one to rest now.
Meanwhile, The Block wrote about Patryn allegedly trading large positions on BitMEX, an unregulated exchange that lets you bet on whether the price of bitcoin will go up or down. You place all your bets in bitcoin, and you can leverage up to 100x. It’s a great way to risk losing all of your money. (I wrote about BitMEX for The Block last year.) There’s been speculation as to whether Patryn was gambling with Quadriga’s customer funds.
"Michael Patryn turned out to be MikeXBT a known frequent poster on /r/bitcoinmarkets often bragging about and showing proof of his big market moving trades on Bitmex…likely with QuadrigaCX customers' money" CC @ahcastor
Earlier, Coinbase also brought up the possibility that Quadriga was operating a fractional reserve after the exchange suffered multimillion dollar losses in June 2017 due to a smart contract bug.
Wanted to share a summary of what we believe happened to QuadrigaCX. We did our own internal research, including some blockchain analytics, to see if we could help. Important to note that this is just our best guess. Take it as *pure speculation*, nothing more.
Bottom line: anything is possible. Nobody knew what was going on inside Quadriga — and they still don’t. The exchange had no official oversight and as of early-2016, only one person was in charge of that platform and all the money it held, and that was Gerald Cotten, the exchange’s now deceased CEO.
More information will come out as EY continues with its work. I can only imagine the private conversations occurring between the accountants (and lawyers) as more details in the CCAA process emerge. Welcome to crypto!
Quadriga was granted a 45-day stay from its creditor protection deadline, and the judge gave a thumbs up, albeit reluctantly, to the appointment of a chief restructuring officer (CRO).
Canada’s largest crypto exchange was granted creditor protection on February 5, after its CEO died, leaving the company belly up. Now, a growing team of professionals are working to to track down the exchange’s fund.
In front of Nova Scotia Supreme Court Justice Michael Wood on Tuesday, sat eight or nine lawyers and representatives of court-appointed monitor Ernst and Young (EY). Some had to fly in from out of town to attend the hearing. Looking at the group, you easily grasp how Quadriga’s Companies’ Creditors Arrangement Act (CCAA) has already gone through $410,000 CAD ($307,000 USD) in professional fees.
Wood asked what would happen if the stay was not extended. “I think you would have a free for all,” said Maurice Chaisson, Quadriga’s lawyer, who is with law firm Stewart Mckelvey. Chaisson described a situation where creditors from different jurisdictions would begin filing lawsuits willy nilly. Ultimately, Wood granted the stay, telling the court, he felt Quadriga was working in good faith.
When it came to appointing a CRO—a person who would relieve Jennifer Robertson, the widow of Quadriga’s dead CEO, of some of her duties—the judge was not so easily swayed. Robertson and her stepfather Tom Beazley are the only two remaining directors of the company, after a third director, Jack Martel stepped down.
“This is another cost, another burden,” Wood said. Chaisson argued that the CRO would bring value to the CCAA process, especially if Quadriga were to be sold down the line or if “the cryptocurrency search turned out to be highly successful.” (The most recent monitor’s report identified six bitcoin cold wallets that had all been emptied.) “I think the CRO, in that circumstance, would have a useful role to play,” he said.
Chaisson was not the only one to mention the possibility of selling the platform in the future. Speaking on behalf of EY, Elizabeth Pillon, a lawyer with Stikeman Elliott, said, “at this stage, We are still in the data recovery, the asset recovery mode. This might move next into the platform monetization.” She was also in support of a CRO.
Lawyers from Miller Thomson and Cox & Palmer, the law firms representing the Quadriga users were concerned with assembling a committee to represent the creditors. “We are in a bit of a bind,” Gavin MacDonald, a partner at Cox & Palmer told the court. The official committee is not yet formed. We do not have a body from whom we can receive instructions.”
Wood emphasized he did not think the term CRO was appropriate. He described the CCAA process as a search for funds, not the restructuring of a company. In a compromise, he agreed to the appointment as long as the CRO would work at the direction of the monitor to ensure there would be no duplication of work and to keep costs to a minimum. (As a note, nobody has yet said what the CRO’s hourly fee is.)
The judge also granted an order allowing the monitor to gain access to trading platform data stored in the cloud. Quadriga’s CEO Gerald Cotten kept all of the platform on Amazon Web Servers (AWS), but he kept the AWS account in his name — not the company’s name. The data is important to verifying the claims of the creditors and determining what happened to the business prior to Cotten’s death.
Wood also deferred an order on repaying Robertson the $300,000 CAD ($225,000 USD) that she put up to kick off the CCAA process.
The next hearing is scheduled for April 18 at 9:30 a.m.
Jen and her step father have basically told EY and the court that they don't want to serve as directors during the CCAA proceedings. Not that they "can't," but just that it would be easier. for them.
A “bitcoin friendly” payment processor with a reputation for accepting bank wires and not actually processing them, is allegedly sitting on $12 million CAD ($9 million USD) of Quadriga funds.
WB21 is not showing any sign of wanting to hand over those funds either. That has some Quadriga creditors worried that more of their money has vaporized.
When Quadriga, the largest crypto exchange in Canada, went belly up earlier this year, it owed its customers $250 million CAD ($190 million USD). Two thirds of those funds are in the form of cryptocurrency stuck in cold wallets that only the company’s dead CEO Gerald Cotten held the keys to.
Meanwhile, Ernst & Young, the court-appointed monitor in Quadriga’s Companies’ Creditors Arrangement Act, is trying to round up any funds that remain. EY has contacted nine third-party payment processors that may be holding money on behalf of Quadriga. Two of them, Billerfy/Costodian and 1009926 BC LTD, are in the process of signing over $30 million CAD ($23 million USD) to EY.
But according to an affidavit filed by Cotten’s widow Jennifer Robertson on January 31, WB21 has another $9 million CAD and $2.4 million USD “but is refusing to to release the funds or respond to communications from Quadriga.”
After this story was published, Amish Patel, WB21’s global head of litigation, told me in an email that the balances stated by Robertson “are not confirmed,” and that the account is “under investigation.” Patel also accused me of defamation and threatened me with legal action if I did not make several updates to this story.
WB21 stands for “web bank 21st century.” Launched in Switzerland in late 2015, the company touts itself as a virtual bank that lets you “streamline” opening up a bank account from 180 countries. But it is really a payment processor with a shady past that Quadriga got involved with—another shady business partner, what are the odds?
In June 2016, WB21 announced that it was accepting bitcoin deposits. Send in your bitcoin, and WB21 will credit your account in fiat—though it relies on payment service BitPay to convert the bitcoin to fiat. “The funds are instantly available on the account and can be sent out by wire transfers or spent with a WB21 debit card,” WB21 says.
The startup went on to launch a PR campaign that consisted of mainly, well, making stuff up. After 10 months of doing business, WB21 claimed it had 1 million customers and that it had sent cross-border payments totaling more than $5.2 billion.
Those number don’t really add up, especially when you consider it took Transferwise, one of the biggest London-based fintech companies, four years to get a comparable $4.5 billion in transfer money. Also, as Gruenderszene points out, in September 2016, WB21’s official app had only 100 downloads on Google’s Play Store.
In defense, WB21 CEO Michael Gastauer told Gruenderszene that WB21 doesn’t rely on its mobile app. A few hours after the conversation, Gruenderszene noted that the app disappeared from the store.
Boasting a $2.2 billion valuation, WB21 also claimed that Gastauer sold Apax Group, a previous payments business, for $480 million, and that WB21 turned down a $50 million funding round after Gastauer invested $24 million of his own money. Kadhim Shubber at the Financial Times did some digging and found no evidence of Apax being sold.
In late 2017, WB21 even got itself in the Wall Street Journal after announcing that it was moving its European head office from London to Berlin after the Brexit vote.
How did WB21, a company spewing so many questionable facts and figures, manage to get all this media coverage? Like another company that we’ve been hearing about lately, the payment processor leveraged the power of social media. WB21 has a Twitter account with 65,000, mostly fake, followers.
Gastauer, a man in his mid-40s who hails from Germany, also appears in an impressive Youtube video at a hitherto unheard of “Global Banking Award 2018” event in Frankfurt, where he apparently won the award. Dressed in a tux, with a fog machine in the background, he is seen in the video giving a speech on the future of banking. “How do you come up with an idea like this?,” he says in the video speaking of his business successes. “Do you wake up one morning thinking you want to revolutionize an 80 trillion dollar industry?”
But the truth has a way of catching up. In October 2018, the U.S. Securities and Exchange Commission revealed a civil lawsuit accusing Gastauer of aiding and abetting the fraudulent sale of $165 million USD worth of shares in microcap stocks.
“In reality, WB21 Group was not a registered bank, and Gastauer’s ‘solution’ was actually a circumvention of banking regulations designed to disguise his clients’ [ . . .] identities,” the SEC said.
As it turns out, this was not Gastauer’s first run in with authorities. Writing again for the Financial Times, Shubber notes:
“In 2010, [Gastauer] was given an 18-month suspended sentence by a court in Switzerland for commercial fraud and counterfeiting. Around the same time, a British gambling company sued him in London for allegedly taking millions of pounds from it. He had set up a payments processor, the company claimed, but kept the payments.”
Shubber goes on to comment:
“The story of Mr Gastauer is not just about alleged wrongdoing in the financial markets; it shows how an accused fraudster might sell himself and his fantastical story using the modern tools of the internet age.”
A Google search finds the Internet littered with WB21 customers claiming the company stole their money.
In August 2018, “bitcoinjack” wrote of WB21 on Reddit: “They will accept incoming funds and credit your account but you will never be able to get it out. They will lie about outgoing payments until you give up.”
Consumer review website Trustpilot has a long list of people complaining that WB21 has taken their money and gone silent.
Quadriga customers began having trouble with WB21 about a year ago. Several complained on Reddit that their bank wires were either not coming through or delayed. In response, Quadriga covered for WB21, blaming the delays on a bank in Poland that it was using:
“We used WB21 for about a week, but the vast majority of delays related to wires comes from the fact that the intermediary bank that handled CAD wires for the Polish bank cut them off due to the association with Bitcoin. We had to reissue all of these from other payment processors, all manually, which has caused delays.”
(This story was updated on March 5, 2019, to include a statement from WB21.)
The news keeps getting worse for QuadrigaCX creditors. The Canadian crypto exchange has apparently jettisoned another $468,675 CAD worth of bitcoin into deep space.
On Feb. 6, literally, one day after Quadriga applied for creditor protection, the exchange “inadvertently” sent 104 BTC to its dead CEO’s cold wallet, according to an initial report released by court-appointed monitor Ernst & Young.
When Quadriga CEO Gerald Cotten died in India on Dec. 9, he carried into the afterlife with him the keys to the exchange’s cold wallets, where $180 million CAD—now $180.5 million CAD—worth of crypto is stored. Unless Cotten springs from the grave, any crypto in those wallets is as good as gone.
You have to scratch your head till it bleeds on that one. Why was anyone at Quadriga allowed to touch those coins after the company applied for creditor protection? EY is now moving to safeguard the remaining crypto, a stash now down to 51 bitcoin, 33 bitcoin cash, 2,032 bitcoin gold, 822 litecoin, and 951 ether, worth a current value of $434,068 CAD. Basically, more than half the money in the hot wallets is now gone.
EY is also working to retrieve about $30 million worth of cash from nine Quadriga payment processors. So far, EY has yet to collect a dime, and one of the processors is stubbornly insisting that “it has the right to continue to hold funds in its possession pursuant to the terms of its agreement with the Applicants.”
Which payment processor would that be then? How about WB21? According to Robertson’s affidavit filed on Jan. 31, WB21 is holding roughly $9 million CAD and $2.4 million USD of the exchange’s money. Even before EY took over, WB21 was “refusing to release the funds or respond to communications from Quadriga.”
A quick Google search reveals that WB21 has long been plagued by accusations that it is a scam. A year ago, Quadriga customers were complaining on Reddit that they were having trouble getting their wires from WB21. And it also turns out, the U.S. Securities and Exchange Commission is suing WB21’s CEO for fraud. (You can find the full SEC complaint here.)
Creditors need their own lawyer
Quadriga’s 115,000 creditors need proper representation. On Feb. 14, three legal teams appeared in court to vie for the position of representative counsel. Nova Scotia Supreme Court Judge Michael Wood said he plans to have a final decision next week.
All this legal stuff is getting expensive. So far, Robertson has put up $250,000 CAD of the $300,000 CAD she promised in her affidavit to fund the CCAA process. And the funds are being gobbled up quick. Quadriga’s lawyer Maurice Chiasson said the money will run out in two weeks, if not sooner.
Chiasson: Jennifer Robertson has put in 250-thousand of the 300-thousand she’s promised to fund this process so far. But that money will run out in the next 2 weeks if not sooner.
After that, where will the money come from? Likely, out of whatever funds EY pulls from those nine payment processors.
Meanwhile, more funny business is starting to surface. In her sworn affidavit, Cotten’s widow stated that she had no dealings with Quadriga prior to Cotten’s death. Yet, three Quadriga creditors (archive) claim they received wires from Robertson’s real estate company, Robertson Nova Property Inc.
The wire transactions occurred in 2016 and 2017. This is interesting, given Jennifer only changed her name to Robertson in April 2017.
Cash delivered to your door
Did you know that if you wanted to cash out of Quadriga, you could opt to have actual boxes of cash dropped off at your door? That was an actual service Quadriga offered its customers. A few have suggested that the money may have come from bitcoin ATM machines that Quadriga operated.
I've been hearing more and more about @QuadrigaCoinEx users receiving significant withdrawals in the form of cash in nondescript packages by Canada Post. AFAIK, cash deposits were not an option. Why did Quadriga have so much cash on hand? @Bitfinexed#QuadrigaCX#seaglasstrust
Remember, Quadriga had no corporate banking. That is why, when you sold bitcoin for cash on the exchange or wired in money via one of Quadriga’s payment processors, your online wallet was credited with QuadrigaCX Bucks—not real bucks.
But who knew? I’ve been speaking to Quadriga creditors and some of them had no clue that the “CAD” they saw in their online wallets was basically Quad Bucks.
“Everyone knows CAD equals Quad bucks now, but I didn’t know that until after the implosion,” one creditor who preferred to remain anonymous told me. “I guess it was in the terms [and conditions], but it wasn’t marked Quad bucks.”
Some traders also told me that bitcoin sold for a premium on Quadriga. That meant, you could buy bitcoin on another exchange, such as Kraken, and then sell it for a profit on Quadriga. As an added incentive to move your crypto onto the exchange, Quadriga also offered free cash withdrawals, as long as you did not mind waiting two weeks or so for the money to hit your bank account. You had to pay a fee for express withdrawals.
Gerry Bot was pushing the price up on quad for YEARS! It was a giant carrot luring in new ignorant money into depositing BTC!
Finally, the Globe and Mail sent its investigative reporters to India, where Cotten and his wife celebrated their honeymoon just before Cotten died. People are still wondering if his death was staged. “That Mr. Cotten did indeed die is a certainty among police and medical professionals in India, and The Globe reviewed hotel, hospital and embalming records that give no suggestion of anything abnormal,” the Globe writes.
But why was Cotten’s body taken from the hospital where he died back to the hotel where he had been staying? (According to Cotten’s death certificate, Fortis Escorts Hospital was the place of death.) Partly because of this, Simmi Mehra, who works at Mahatma Gandhi Medical College & Hospital, refused to embalm the body.
She told The Globe: “That guy [a representative from the hotel] told me the body will come from the hotel. I said: ‘Why the hotel? I’m not taking any body from the hotel, it should come from Fortis.”
The Globe and Mail report also reveals tragic details of the oft-overlooked Angel House orphanage that Cotten and Robertson sponsored. Apparently, the money they donated only paid for building materials. Several doors are still missing from the structure, including one to the toilet. And the operator of the orphanage is sinking into debt.
The orphanage appears to be yet another example of the wake of destruction that Cotten, who otherwise lived as though money were no object, carelessly left in his passing.
Stablecoins—virtual currencies pegged to another asset, usually, the U.S. dollar—bring liquidity to crypto exchanges, especially those that lack ties to traditional banking. Putting it simply, if you are a crypto exchange and you don’t have access to real dollars, stablecoins are the next best thing.
Today, there are several stablecoins to choose from. But by far the most popular and widely traded is tether (USDT), issued by a company of the same name. Of the three or four main stablecoin models, Tether follows the I.O.U. model, where virtual coins are supposed to represent actual money and be redeemable at any time. It all sounds well and good, but for one thing: There is no evidence to suggest Tether is fully backed.
Currently, there are 1.9 billion tethers in circulation. (Note: I originally wrote this article in January 2019. As of March 2022, there are now more than 80 billion tethers in circulation, according to Tether’s Transparency page.) That means, there should be a corresponding $1.9 billion tucked away in one or more bank accounts somewhere. Bitfinex, the crypto exchange closely linked to Tether, claims the money exists, but has yet to provide an official audit to support those claims. (We have seen snapshots of bank account balances at certain points in time, but these are not full audits.)
More troubling, the issuance of tethers correlates with the rapid run up in price of bitcoin from April to December 2017 when bitcoin peaked at nearly $20,000. If authorities were to step in and freeze the bank accounts underlying tether, it is hard to guess what impact that could have on crypto markets at large.
A timeline of events reveals a full picture of the controversy surrounding Tether and Bitfinex.
(An earlier version of this timeline originally appeared in Bitcoin Magazine in February 2018. What follows is a more detailed and up-to-date version.)
2012 — iFinex Inc., the company that is to become the parent company of Bitfinex and Tether, is founded in Hong Kong. (Like its parent company DigFinex, iFinex is registered in the British Virgin Islands. An org chart from NY AG court filings is here.)
2013 — Bitfinex incorporates in Hong Kong. The cryptocurrency exchange is run by the triad: Chief Strategy Officer Phil Potter, CEO Jan Ludovicus van der Velde and CFO Giancarlo Devasini.
July 9, 2014— Brock Pierce, Bitcoin Foundation director and former Disney child actor, launches Realcoin, a dollar-backed stablecoin. Realcoin is built on a Bitcoin second-layer protocol called Mastercoin, now Omni. Pierce was one of the founding members of the Mastercoin Foundation before resigning in July 2014. He founded Realcoin along with Mastercoin CTO Craig Sellars and ad-industry entrepreneur Reeve Collins. (Wall Street Journal)
November 20, 2014 — Realcoin rebrands as “Tether” and officially launches in private beta. The company hides its full relationship with Bitfinex. A press release lists Bitfinex as a “partner.” In explaining the name change, project co-founder Reeve Collins tells CoinDesk the firm wanted to avoid association with altcoins.
May 18, 2015 — Tether issues 200,000 tethers, bringing the total supply to 450,000.
May 22, 2015— Bitfinex is hit with its first hack. The exchange claims it lost 1,500 bitcoin (worth $400,000 at the time) when its hot wallets were breached. The amount represents 0.05 percent of the company’s total holdings. Bitfinex says it will absorb the losses.
December 1, 2015 — Tether issues 500,000 USDT, bringing the total supply to 950,000. (The price of bitcoin has remained stable throughout most of 2015, but climbs from $250 in October to about $460 in December.)
August 2, 2016 —Bitfinex claims it has been hacked again when 119,756 BTC, worth $72 million at the time, vanish. This is one of the largest hacks in bitcoin’s history, second only to Mt. Gox, a Tokyo exchange that lost 650,000 BTC in 2014. Bitfinex never reveals the full details of the breach. (Chapter 8 of David Gerard’s book “Attack of the 50-Foot Blockchain” offers an in-depth explanation of the hack.)
August 6, 2016— Bitfinex is unable to absorb the losses of the hack. The exchange announces a 36% haircut across the board for its customers. It even takes funds from those who were not holding any bitcoin at the time of the hack. In return, customers receive an I.O.U. in the form of BFX tokens, valued at $1 each.
One large U.S. customer reportedly didn’t get the full haircut. “Coinbase, got a better deal after threatening to sue, multiple sources told me,” said NYT’s Nathaniel Popper.
August 10, 2016 — After having been shut down for a week after the heist, Bitfinex resumes trading and withdrawals on its platform. Meanwhile, Zane Tacket, the exchange’s community director, announces on Reddit (archive) that Bitfinex is offering a bounty of 5% (worth up to $3.6 million) for any information leading to the recovery of the stolen funds.
August 17, 2016— Bitfinex announces it is engaging Ledger Labs, a blockchain forensic firm founded by Ethereum creator Vitalik Buterin, to investigate its recent breach. Bitfinex hires Ledger to do a computer security audit, but leads customers into believing that Ledger is also going to perform a financial audit. A financial audit is key to knowing whether Bitfinex was even solvent at the time of the hack.
“We are also in the process of engaging Ledger Labs to perform an audit of our complete balance sheet for both cryptocurrency and fiat assets and liabilities,” Bitfinex says in a blog post (archive).
A footnote added to the blog post on April 5, 2017, makes a correction: “Ledger Labs has not been engaged to perform a financial audit of Bitfinex. When in initial discussions with Ledger Labs in August 2016, we had initially understood that they could offer this service to us.” The exchange goes on to say that it is in the process of engaging a third-party accounting firm to audit its balance sheet.
This audit, as we are to learn, never happens.
October 12, 2016 — Bitfinex tries to reach out to the hacker. In a blog post (archive), titled “Message to the individual responsible for the Bitfinex security incident of August 2, 2016,” the firm writes: “We would like to have the opportunity to securely communicate with you. It might be possible to reach a mutually agreeable arrangement in exchange for an enormous bug bounty.”
October 13, 2016 — Bitfinex announces (archive) that its largest BFX token holders have agreed to exchange over 20 million BFX tokens for equity shares of iFinex, the exchange’s parent company. Many Bitfinex customers accept the offer, having already watched BFX tokens drop far below $1. One Redditor even reported the price dropping to $0.30.
As a way to incentivize BFX holders to convert, Bitfinex creates yet another new token: a tradable Recovery Rights Token (RRT). According to the exchange, if any of the stolen bitcoins are recovered, any excess of funds after all BFX tokens have been redeemed will be distributed to RRT token holders.
If you convert your BFX to iFinex shares before October 7, you get one RRT for each BFX token converted. If you convert between Oct. 8 and Nov. 1, you get half an RRT for each BFX token converted. After that, you get 1/4 of an RRT per BFX token converted. No further RTTs are given after November 30.
December 31, 2016 — In 2016, Tether issued 6 million USDT, six times what it issued the prior year.
March 31, 2017— Correspondent bank Wells Fargo cuts off services to Bitfinex and Tether, according to court documents in a lawsuit that Bitfinex later files. Bitfinex is not a direct customer of Wells Fargo, but rather a customer of four Taiwan-based banks that use Wells Fargo as an intermediate to facilitate wire transfers.
April 3, 2017 — In a blog post(archive), Bitfinex announces plans to redeem any outstanding BFX tokens. “After these redemptions, no BFX tokens will remain outstanding; they will all be destroyed.”
Meanwhile, Potter reveals in an audio that all of the remaining BFX tokens have been converted to tethers. In a nutshell, this means that none of the victims of the August 2016 Bitfinex hack got back any of their original funds—they were all compensated with BFX tokens, RRT tokens and USDT.
April 5, 2017 — Two days after announcing that it had “paid off” all its debt to customers, Bitfinex, via law firm Steptoe & Johnson, files a lawsuit against Wells Fargo for interrupting its wire transfers. Tether Limited is listed as a plaintiff. In addition to an injunction order, Bitfinex seeks more than $75,000 in damages. (See here for a complete list of documents associated with the lawsuit.)
April 10, 2017— A pseudonymous character known as “Bitfinex’ed” debuts online. In a relentless series of tweets, he accuses Bitfinex of minting tethers out of thin air to pay off debts. At this point, the number of USDT in circulation is 55 million, and BTC’s price has begun a steep ascent that will continue to the end of the year.
April 11, 2017 — Bitfinex withdraws its lawsuit against Wells Fargo. In an audio, Potter admits the lawsuit was frivolous, stating the company was only hoping to “buy time.”
April 17, 2017 — Following a notice about wire delays, Bitfinex announces (archive) it has been shut off by its four main Taiwanese banks: Hwatai Commercial Bank, KGI Bank, First Commercial Bank, and Taishin Bank. Bitfinex is now left to shuffle money between a series of banks in other countries without telling its customers where it is keeping its reserves.
In an audio, Bitfinex CSO Phil Potter tries to calm customers by telling them that Bitfinex effectively deals with this sort of thing by setting up shell accounts and tricking banks.
“We’ve had banking hiccups in the past, we’ve just always been able to route around it or deal with it, open up new accounts, or what have you…shift to a new corporate entity, lots of cat and mouse tricks.”
Around this time, Bitfinex begins to rely increasingly upon Crypto Capital Corp, a Panamanian shadow bank, to shuffle funds around the globe—but it does not make this clear to customers. Also, Bitfinex never engages in a formal contract with Crypto Capital, according to later court documents.
April 24, 2017 — Amidst reports that Bitfinex has lost its banking, USDT temporarily dips to $0.91.
May 5, 2017— After finally clarifying (archive) to customers that it only engaged Ledger Labs for a security audit—not a financial audit—Bitfinex hires accounting firm Friedman LLP to complete a comprehensive balance sheet audit. “A third-party audit is important to all Bitfinex stakeholders, and we’re thrilled that Friedman will be helping us achieve this goal,” Bitfinex writes in a blog post (archive).
June 21, 2017 —The Omni foundation and Charlie Lee announce that tether will soon be issued on the Omni layer of Litecoin, but apparently it never panned out, according to Lee. (Omni Blog, archive)
August 5, 2017 — Bitfinex’ed publishes his first blog post titled: “Meet ‘Spoofy.’ How a Single Entity Dominates the Price of Bitcoin.” The post explains how an illegal form of market manipulation known as spoofing works. The post includes a video showing a Bitfinex trader putting up a large order of BTC just long enough to push up the price of bitcoin, before canceling the order.
(This is not the first time a crypto exchange has manipulated the price of bitcoin. Mt. Gox, a Tokyo exchange that handled 70% of all global bitcoin transactions before its 2014 collapse, also manipulated its markets. Former Mt. Gox CEO Mark Karpeles admitted in court to operating a “Willy Bot.” An academic paper titled “The Willy Report” shows how the bots were responsible for much of bitcoin’s 2013 price rise.)
September 11, 2017 — Tether announces they will begin making ERC-20 tokens for US dollars and euros on the Ethereum blockchain. (Ethfinex blog,archive)
September 15, 2017 —In the summer of 2017, rumors were afoot that tethers were not fully backed. To quash those rumors, Tether and Bitfinex arrange for accounting firm Friedman LLP to perform an attestation on September 15, 2017.
In the morning, Tether opens an account at Noble Bank. And Bitfinex transfers $382 million from Bitfinex’s account at Noble Bank into Tether’s account at Noble Bank. Friedman conducts its verification of Tether’s assets that evening.
“No one reviewing Tether’s representations would have reasonably understood that the $382,064,782 listed as cash reserves for tethers had only been placed in Tether’s account as of the very morning that Friedman verified the bank balance,” the NY attorney general wrote in its later findings.
The attestation included $61 million held at the Bank of Montreal in an a trust account controlled by Tether and Bitfinex’s general counsel Stuart Hoegner.
September 28, 2017 — Friedman LLP issues a report alleging that Tether’s U.S. dollar balances ($443 million) match the amount of tethers in circulation at the time. Falling far short of a full audit, the report does not disclose the names or locations of banks.
According to the report: “FLLP did not evaluate the terms of the above bank accounts and makes no representations about the Client’s ability to access funds from the accounts or whether the funds are committed for purposes other than Tether token redemptions.”
August 7, 2017 — In a blog post (archive), Bitfinex announces that over the next 90 days, it will gradually discontinue services to its U.S. customers. Effective almost immediately, U.S. citizens are no longer able to trade Ethereum-based ERC20 tokens, commonly associated with initial coin offerings.
The news follows regulatory crackdowns in the U.S. (The previous month, the U.S. Securities and Exchange Commission issued an investigative report that deemed that tokens issued by the DAO—an investor-directed fund built on top of Ethereum that crashed spectacularly in June 2016—were securities.)
November 7, 2017—Leaked documents dubbed “The Paradise Papers” reveal Bitfinex and Tether are run by the same individuals. Up until now, Tether and Bitfinex insisted the two operations were separate, though they were widely suspected to be the same.
November 19, 2017—Tether is hacked when 31 million USDT are moved from the Tether treasury wallet into an unauthorized Bitcoin address. Tether initiates a hard fork to prevent those funds from being spent.
After this hack, Tether notes on its website (archive) that redemption of USDT for real dollars is no longer possible via the Tether website. (It is worth noting that there is no public record of anyone having redeemed their USDT for dollars at any point before this either.)
“Until we are able to migrate to the new platform, the purchase or sale of Tether will not be possible directly through tether.to. For the time being, though, we invite you to use the services of any one of a dozen global exchanges to acquire or dispose of Tethers for either USD or other cryptocurrencies. Such exchanges and other qualified corporate customers can contact Tether directly to arrange for creation and redemption. Sadly, however, we cannot create or redeem tether for any U.S.-based customers at this time.”
From now until December 2018, tether purchases and redemptions can be made only from Bitfinex. (After December 2018, they switch back to tether.io.)
November 30, 2017 — Bitfinex hires 5W, a scrappy New-York public relations firm led by Ronn Torossian. 5W promptly issues a press release stating that an “audit” from Friedman LLP is forthcoming. The agency also tells journalists they can view Bitfinex’s bank accounts if they sign a non-disclosure agreement first. No journalist takes the bait. “We plan to release regular financial statements and are working with journalists who can review our finances as wel[l],” Torossian says in a tweet.
December 4, 2017— Bitfinex threatens legal action against its critics, according to Bitcoin Magazine. The exchange does not specify who those critics are but the obvious target is Bitfinex’ed, the cynical blogger who continues to accuse Bitfinex of manipulating markets and printing more tether than it can redeem. Bitfinex never actually sues Bitfinex’ed, though Bitfinex’ed collects donations and hires a lawyer just in case.
December 6, 2017— The CFTC subpoenas Bitfinex and Tether, Bloomberg reports. The actual documents are not made public.
December 16, 2017 — The price of bitcoin reaches an all-time high of nearly $20,000, marking the end of a spectacular run-up and bitcoin’s biggest bubble to date. A year before, BTC was only $780.
December 21, 2017 — Without any formal announcement, Bitfinex appears to suddenly close all new account registrations. Those trying to register for a new account are asked for a mysterious referral code but no referral code seems to exist.
December 31, 2017 — Tether has issued roughly $1.4 billion USDT to date.
January 3, 2018— A change to Tether’s legal terms of service (archive) states: “Beginning on January 1, 2018, Tether Tokens will no longer be issued to U.S. Persons.”
January 12, 2018 — After a month of being closed to new registrations, Bitfinex announces it is reopening its doors, but now requires new customers to deposit $10,000 in fiat or crypto before they can trade. Bitfinex does not officially say this, but customers also can no longer make fiat withdrawals of less than $10,000 either.
January 27, 2018 — Tether parts ways with accounting firm Friedman LLP. There is no official announcement; Friedman simply deletes all mention of Bitfinex from its website, including past press releases.
A Tether spokesperson tells CoinDesk: “Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable time frame.”
January 31, 2018 — The 2017 bitcoin bubble has burst. As the price of BTC plummets, tether issuance takes on a rapid, frenzied pace. In January, Tether issues 850 million USDT, more than any single month prior. Of this, roughly 250 million were created during a mid-month bitcoin price crash.
February 2018 — an ex-NFL owner named Reginald Fowler registers a company called Global Trading Solutions LLC. He goes on to set up bank accounts under the company’s name at HSBC.
February 20, 2018 — Bitfinex posts a fiat transactions delays notice, specifically noting delays between Jan. 10 through Feb 5.
February 20, 2018 — Dutch bank ING confirms Bitfinex has an account there. Two members of parliament in the Netherlands lodge questions for the finance minister after Dutch news site Follow The Money first disclosed the relationship on Feb. 14.
March 28, 2018 — Bitfinex weighs a move to Switzerland. Bitfinex CEO J.L. van der Velde tells Swiss news outlet Handelszeitung: “We are looking for a new home for Bitfinex and the parent company iFinex, where we want to merge the operations previously spread over several locations.” They end up moving their servers to Switzerland.
May 23, 2018 — Phil Potter steps down from his role as Bitfinex chief strategy officer. “As Bitfinex pivots away from the U.S., I felt that, as a U.S. person, it was time for me to rethink my position as a member of the executive team,” he says in a statement.
May 24, 2018 — Bloomberg confirms previous speculations that Bitfinex has been banking at Puerto Rico’s Noble Bank since 2017. Real Coin/Tether creator Brock Pierce is a cofounder of Noble Bank, along with John Betts, a former Wall Street executive.
These individuals had past dealings. In 2014, Betts led a group called Sunlot Holdings to try and acquire the failed Mt. Gox exchange. Pierce, along with former FBI director Louis Freeh were also involved in that effort. (Freeh has his own Twitter whistleblower, by the way.)
May 24, 2018 — The U.S. Justice Department launches a criminal probe into bitcoin markets. The focus is on illegal practices like spoofing, the process of putting up a large sell or buy and then cancelling, and wash trading, where a trader simultaneously buys and sells assets to increase trading volume. The criminal probe will bring in other agencies, including the CFTC.
June 1, 2018 — Looking to reassure its customers, Bitfinex hires Freeh Sporkin & Sullivan, a law firm co-founded by Freeh (the same Freeh who held an advisory role at Sunlot Holdings) to confirm that Tether has $2.55 billion in its banks, enough to cover the USDT in circulation at the time.
FSS is not an accounting firm. Further, there appears to be a conflict of interest. FSS Senior Partner Eugene Sullivan is also an advisor to Noble Bank, where Bitfinex and Tether hold accounts.
“The bottom line is an audit cannot be obtained,” Stuart Hoegner, Bitfinex and Tether’s general counsel, tells Bloomberg. “The big four firms are anathema to that level of risk…. We’ve gone for what we think is the next best thing.”
June 25, 2018 — Bolstering suspicions that tether is being used to prop up the price of bitcoin, researchers John Griffin and Amin Shams at the University of Austin, Texas, release a paper titled “Is Bitcoin Really Un-Tethered?” The two write:
“Using algorithms to analyze the blockchain data, we find that purchases with tether are timed following market downturns and result in sizable increases in bitcoin prices.”
June 27, 2018 — Several Bitfinex customers report delayed and rejected wire deposits. A representative of Bitfinex named “Garbis” takes to Reddit (archive) to explain that the situation was caused by a change in banking relations.
October 6, 2018 — According to a report in The Block, Bitfinex appears to be banking at HSBC—a bank previously fined $1.9 billion in 2012 for money laundering—under the shell account “Global Trading Solutions.” (We find out later that the shell was registered by Arizona businessman Reginald Fowler.)
October 10, 2018 — Four days after reports comes out that Bitfinex is banking at HSBC, Bitfinex temporarily suspends all cash deposits, suggesting that the exchange is once again on the hunt for a new reserve bank. (As it turns out, the DoJ froze these accounts, so the money became inaccessible.)
October 14, 2018 — Amid concerns over Tether’s solvency and the company’s ability to establish banking relationships, tether’s peg slips again, this time to $0.92, according to CoinMarketCap, which aggregates prices from major exchanges. On a single crypto exchange Kraken, tether momentarily slips to $0.85.
October 16, 2018 — Tether appears to be holding reserves at Deltec Bank in the Bahamas. According to earlier rumors, the bank account was set up by Daniel Kelman, a crypto lawyer who was actively involved in trying to free the remaining Mt. Gox funds.
Further, Bitfinex appears to be banking through the Bank of Communications under “Prosperity Revenue Merchandising,” a shell company created in June 5, 2018. The Hong Kong bank is owned in part by HSBC and uses Citibank as an intermediate to send deposits to Deltec in the Bahamas.
October 24, 2018 — In a blog post (archive), Tether announces it has “redeemed a significant amount of USDT” and will now burn 500 million USDT, representing those redemptions. The remaining 446 million USDT in its treasury will be used as a “preparatory measures for future USDT issuances.”
November 1, 2018 — Tether officially announces (archive) that it is banking with Deltec and provides an attestation letter from the Bahamian bank that the account holds $1.8 billion, enough to cover the amount of tether in circulation at the time. The attestation has a mysterious squiggly signature at the bottom with no name attached to it.
November 30, 2018 — Recall that in May 2017, the U.S. Department of Justice together with the CFTC began looking into illegal manipulation of bitcoin prices. And then in December 2017, the CFTC subpoenaed both Tether and Bitfinex. Now federal prosecutors have supposedly “homed in on suspicions that a tangled web involving Bitcoin, Tether and crypto exchange Bitfinex might have been used to illegally move prices,” according to Bloomberg.
November 27, 2018 — In a blog post (archive), Tether says its customers can once again redeem tether for actual dollars via tether.io. “Today marks an important step in Tether’s journey, as we launch a redesigned platform allowing for the verification of new customers and direct redemption of Tether to fiat.” All accounts require a minimal issuance and redemption of $100,000 USD or 100,000 USDT.
December, 18, 2018 — A Bloomberg reporter says that he has seen Tether bank statements from accounts at Puerto Rico’s Noble Bank and the Bank of Montreal taken over four separate months. The article suggests Tether holds sufficient dollars to back the tether tokens on the market. But again, these are attestations, not the full audit Tether has been promising for months. Notably from the report: $61 million Canadian dollars in the Bank of Montreal is listed under Stuart Hoegner, Bitfinex’s general counsel.
December 19, 2018 — Crypto Capital shares a letter with its customers. The letter is from Global Trade Solutions AG, the parent company of Crypto Capital Corp—not to be confused with Global Trading Solutions LLC, which is a shell set up by Reginald Fowler. The letter states that GTS AG is being denied banking services in the U.S., Europe, and elsewhere “as a result of certain AML and financial crimes investigations” by the FBI and cooperative international law enforcements and/or regulatory agencies.”
December 31, 2018 — By the end of 2018, roughly 1.9 billion tethers are in circulation.
January 16, 2019 — Bitfinex opens a data center in Switzerland, according to Handelszeitung. Previously, Bitfinex was relying on Amazon cloud servers. An earlier Bitfinex blog post confirms the move.
February 25, 2019 — In a blog post (archive), Bitfinex claims the U.S. government has located 27.7 BTC (worth about $100,000 at this time) taken from Bitfinex in the August 2016 hack and returned the funds to Bitfinex. The exchange says it has converted those bitcoin into USD and distributed the money to its RRT token holders. What is odd here is that the U.S. Department of Justice hasn’t issued any statement about recovered bitcoin. And Bitfinex doesn’t share a transaction record to show it actually received the recovered funds.
February 26, 2019 — Tether admits, for the first time that it is operating a fractional reserve and that tethers are no longer backed by cash alone. An update on the company’s website reads:
“Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”). Every tether is also 1-to-1 pegged to the dollar, so 1 USD₮ is always valued by Tether at 1 USD.”
April 9, 2019 — Bitfinex lifts its $10,000 minimum equity requirement to start trading. “We simply could not ignore the increasing level of requests for access to trade on Bitfinex from a wider cohort than our traditional customer base,” J.L. van der Velde says in a blog post (archive). Meanwhile, customers continue to complain that they are unable to get cash off of the exchange. And now some are saying they are having trouble getting their crypto off the exchange as well.
April 11, 2019 — Reginald Fowler, an ex NFL minority owner, and Ravid Yosef, who lives in Los Angeles and Tel Aviv, are indicted in the U.S. for charges related to bank fraud. The two were allegedly part of a scheme that involved setting up bank accounts under false pretenses to move money on behalf of series of cryptocurrency exchanges. (CoinDesk)
April 17, 2019 — Tether goes live on the Tron network as a TRC-20 token, a standard used by the Tron blockchain for implementing tokens, similar to and compatible with Ethereum’s ERC-20 standard. You can view the issuance on Tronscan.
April 24, 2019 — The New York Attorney General has been investigating Tether and Bitfinex for Martin Act violation. Allegedly, Bitfinex has been dipping into Tether’s reserves when it lost access to $850 million in the hands of its payment processor, Crypto Capital Corp. The investigation become public for the first time when the NY AG office sues iFinex, the parent company of Bitfinex and Tether, saying that the company has been commingling client and corporate funds to cover up $850 million in missing funds.
From 2014 to 2018, Bitfinex placed over $1 billion with Crypto Capital because it was unable to find a reputable bank to work with it. Crypto Capital then either lost, stole, or absconded with $850 million.
In order to fill the gap, Bitfinex dipped into Tether’s reserves for hundreds of millions of dollars. According to the NY AG, “Despite the sheer amount of money it handed over, Bitfinex never signed a contract or other agreement with Crypto Capital.”
April 26, 2019 — In a response to to the NY Attorney General’s allegations, Bitfinex says the $850 million has not been lost, but rather “seized and safeguarded.” Meanwhile, according to CoinDesk, Zhao Dong, a Bitfinex shareholder, claims that Bitfinex CFO Giancarlo Devasini told him that the exchange just needs a few weeks to unfreeze the funds.
In the affidavit, Hoegner admits that $2.8 billion worth of tethers are only 74% backed. And in its motion to vacate, Morgan Lewis argues that the NYAG has no jurisdiction over Tether or Bitfinex’s actions.
On this same day, Reginald Fowler is arrested. A grand jury has accused him of setting up a network of bank accounts to move money for cryptocurrency firms. He is linked to Crypto Capital’s $850 million in missing funds. (DoJ press release and indictment.)
May 2, 2019 — The U.S. Government wants Fowler held without bail due to flight risk.
May 3, 2019 — The NYAG files an opposition to Bitfinex’s motion to vacate. Bitfinex follows two days later with a response to the opposition. In the memo, Bitfinex argues that “nothing in the Attorney General’s opposition papers justifies the ex parte order having been issued in the first place.”
May 8, 2019 — iFinex has a new plan to raise $1 billion: a token sale. The company releases a white paper for a new LEO token. One LEO is worth 1 USDT, a flashback to when Bitfinex offered BFX tokens to cover the $70 million lost in a hack.
Meanwhile, Fowler is out on $5 million bail. He is required to give up his passport. Bail is posted in the Southern District of New York, where he is to appear for arraignment on May 15. His travel is restricted to parts of New York and Arizona.
May 6, 2019 — New York Supreme Court District Judge Joel M. Cohen rules that the NY AG’s ex parte order should remain in effect, at least in part. However, he thinks the injunction is “amorphous and endless.” He gives the two parties a week to work out a compromise and submit new proposals for what the scope of the injunction should be.
May 13, 2019 — Attorneys for the NYAG and iFinex failed to come to a consensus on what Tether should be allowed to do with its holdings. They submit separate proposals. iFinex is asking for a 45-day limit on the injunction and wants Tether employees to get paid using Tether’s reserves. The NYAG is not opposed to employees being paid, but it wants Tether to to pay them using transaction fees—not reserves.
May 16, 2019 — Judge Cohen grants Bitfinex’s motion to modify a preliminary injunction. The preliminary injunction is limited to 90 days, and Tether is allowed to use its reserves to pay its employees. The judge holds that the Martin Act “does not provide a roving mandate to regulate commercial activity.” Bitfinex and Tether still have to handover documents that the NYAG requested in its November 2018 investigative subpoena.
May 21, 2019 — Bitfinex files a motion to dismiss the proceeding brought by the NYAG on the grounds that Bitfinex/Tether do not do business in NY, the Martin Act does not apply to its business, and the Martin Act cannot be used to compel a foreign corporation to produce documents stored overseas. Bitfinex and Tether also seek an immediate stay of the NYAG’s document demands.
May 22, 2019 — Judge Joel M. Cohen of the New York Supreme Court grants Bitfinex’s motion for an immediate stay of the document demands. He issues an order requiring the companies produce only documents relevant to the limited issue of whether there is personal jurisdiction over the companies in New York but staying the document order in all other respects. The NYAG has until July 8 to file a response. And the judge schedules a hearing on the motion to dismiss for July 29.
July 22, 2019 — iFinex files court docs arguing once again that Bitfinex/Tether are not doing any business in New York and tether is not a security. (Here is Bitfinex counsel Stuart Hoegner’s affidavit and an accompanying memorandum of law submitted by the company’s outside counsel).
March 30, 2021 — Tether releases another attestation, essentially saying that Tether has $35 billion in assets backing 35 billion tethers at a blink in time on Feb. 26, 2021. The report was done by Moore Cayman, an accounting firm in the Cayman Islands. It means nothing, as it is not a full audit and doesn’t say what sort of assets tethers are backed by. (David Gerard’s blog,Tether press release)
April 23, 2021 — Coinbase announces that it is listing USDT. (My blog)
May 13, 2021 — Tether publishes a breakdown of the assets behind tethers. It’s a one-pager consisting of two silly pie charts. A critical look reveals there’s only a tiny bit of cash left. (My blog)
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*Update Feb. 20, 2021 — an earlier version of this article said Bitfinex listed tether in Feb. 25, 2015. It was Jan. 15, 2015.)
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