Tag: Alameda

Tether, FTX, and Deltec Bank: MONEY TIME

  • By Amy Castor and David Gerard

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

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

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

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

The amended complaint

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

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

FTX/Alameda: MONEY PARTY THE BEST PARTY

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

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

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

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

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

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

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

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

MOOONNNEEEYYY TTTIIIIMMMMEEEE

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

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

MONEY PARTY THE BEST PARTY

it is MONEY TIME INDEEDE

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

Moonstone Bank

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

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

North Dimension: Ipad 11 “ich Cell Phone

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

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

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

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

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

Tether and Deltec

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

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

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

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

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

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

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

FTX’s alleged Tether scam

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

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

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

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

Attachments to the complaint

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

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

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

Harborne corrects the record by lawsuit

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

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

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

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

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

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

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

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

Squeal!

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

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

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

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

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

Just in case

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

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

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

Heading for the trillion

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

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

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

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

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

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

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

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Posted on by Amy Castor 3

New York vs DCG/Genesis and Gemini: Kids, kids, you’re both ugly

  • By Amy Castor and David Gerard

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  • If you like this article, please forward it to just one other person. Thank you!

The New York Attorney General is suing crypto investment fund Genesis, its parent company Digital Currency Group (DCG), and the Gemini crypto exchange for defrauding customers of Gemini’s Earn investment product. [Press release; complaint, PDF]

Earn put investors’ money into Genesis — where it evaporated.

The lawsuit also charges former Genesis CEO Soichiro (a.k.a. Michael) Moro and DCG founder and CEO Barry Silbert for trying to conceal $1.1 billion in crypto losses with an incredibly dubious promissory note.

New York is asking the court to stop all three companies’ business in “securities or commodities” in the state. That’s all but a death sentence — bitcoin is a commodity in the US.

The SEC was already suing both Gemini and Genesis over the Gemini Earn product because it looked an awful lot like a securities offering. Separately, Gemini sued DCG in July 2023 — and just last week, Gemini also sued Genesis to reclaim missing funds. [Adversary complaint, PDF]

What happened?

Three Arrows Capital (3AC) crashed on June 13, 2022, and blew a gaping hole in Genesis’ loan book. DCG scribbled an IOU to shuffle an imaginary $1.1 billion of value into Genesis reserves.

This financial styrofoam filler didn’t save Genesis, which ultimately halted all withdrawals on November 16, 2022, just days after FTX/Alameda declared bankruptcy. Genesis filed for chapter 11 bankruptcy on January 19, 2023.

The NYAG says that Genesis and Gemini defrauded more than 230,000 Earn investors of more than $1 billion total, including at least 29,000 New Yorkers. New York says that thousands more lost money because of DCG’s actions.

The NYAG claims that:

  • Genesis and Gemini lied to investors about Earn and Genesis’ credit-worthiness;
  • Genesis lied to Gemini that it was solvent;
  • DCG and Gemini lied to the public, including investors, about the promissory note;
  • Earn is an unregistered security under New York’s Martin Act.

This is a complaint we recommend you read. We all knew some of what went on between Genesis, DCG, and Gemini, but this suit goes into great detail about what happened behind the scenes.

This is a civil complaint, not a criminal indictment — but the NYAG describes several crimes being committed, particularly by DCG, Genesis, Moro, and Silbert.

How Earn worked

Gemini, owned by Tyler and Cameron Winklevoss, and Genesis Capital, a subsidiary of DCG, partnered to launch the Gemini Earn program in February 2021 — just as bitcoin’s number was going up really fast. Crypto was a hot product!

Gemini and Genesis marketed Earn to the public as a “high-yield investment program” — which is just coincidentally a common marketing term used by Ponzi schemes. 

Earn promised to pay up to 8% yield. Ordinary investors could deposit their crypto via the Gemini exchange. You could get your money back anytime!

Earn was a pass-through fund to Genesis. Retailers put their crypto in Earn. Gemini then handed the funds off to Genesis, who then lent the money to institutional investors, notably crypto hedge fund 3AC in Singapore. Genesis was substantially a 3AC feeder fund — of which there were many.

When Earn investors wanted to withdraw their funds, Genesis had five days to return the principal and the interest, minus Gemini’s agent fee.

Gemini earned more than $22 million in agent fees for running Earn, plus more than $10 million in commissions when investors bought crypto on Gemini to put into Earn.

Paper thin

3AC was Genesis’ second largest borrower. 3AC had borrowed $1 billion of crypto at 8% to 15% interest, secured by $500 million of illiquid crypto tokens.

Genesis hadn’t received audited financial statements from 3AC since July 2020. But with interest rates like that, why worry — it’ll be fine, right?

It wasn’t fine. 3AC fell over on June 13, 2022, losing Genesis $1 billion. Babel Finance, another Genesis borrower, fell over on June 17, losing Genesis another $100 million — because in June 2022, everyone was falling over.

Genesis was $1.1 billion in the red — it didn’t have the funds to pay back Earn investors. Between mid-June and July 2022, Silbert and other DCG officers met with Genesis management to work out how to fill the hole in Genesis’ balance sheets — and what to tell counterparties such as Gemini.

One problem was that some of the collateral for 3AC’s loan was GBTC shares, issued by another DCG subsidiary, Grayscale — which Genesis couldn’t sell, due to restrictions on sales of stock by “affiliates” of the issuing company.

Silbert told the board of DCG that Genesis was anticipating a run on the bank if word got out. So DCG began casting about for financing. Silbert also suggested to the DCG board on June 14, 2022, that they “jettison” Genesis.

But DCG and Genesis decided instead to act like everything was fine. On June 15, Genesis told everyone its “business is operating normally.” Two days later, Genesis CEO Michael Moro posted in a tweet reviewed and edited by DCG: “We have shed the risk and moved on.” [Twitter, archive; Twitter, archive]

Everything was not fine. The 3AC hole meant that Genesis’ loss exceeded its total equity, and Genesis couldn’t pay out Earn investors. Genesis hadn’t “shed the risk and moved on” — it still had the gaping hole in its balance sheet. It was not “operating normally” — it was floundering in a panic.

Genesis was unable to find anyone to lend them the money they needed, so they had to find a way to paper the hole before the end of the quarter.

The solution: DCG would make a loan from its right pocket to its left pocket and count the loan as an asset.

(When Tether and Bitfinex tried to pull the exact same trick a few years earlier, the NYAG fined them $18.5 million and kicked them out of the state.)

So on June 30 — the last day of Q2 2022 — DCG gave its wholly-owned subsidiary Genesis a promissory note for $1.1 billion. DCG would pay it back in ten years at 1% interest.

Both Silbert and Moro signed off on the IOU. The note was, of course, not secured by anything.

DCG never sent Genesis a penny — the note was only ever meant to be a $1.1 billion accounting entry so that Genesis and DCG could tell the world that Genesis was “well-capitalized” and that DCG had “absorbed the losses” and “assumed certain liabilities of Genesis.”

None of this was true. DCG wasn’t obligated to pay anything on the note for 10 years. And Genesis was still out $1.1 billion of actual funds.

Michael Patchen, Genesis’ newly appointed chief risk officer, said in internal documents that the promissory note “wreaks havoc on our balance sheet impacting everything we do.” 

Genesis directed staff not to disclose the promissory note to Genesis’ creditors, such as Gemini. Many Genesis staff didn’t even know about the promissory note until months later.

DCG’s piggy bank

DCG made Genesis’ problems even worse by treating Genesis like its own personal piggy bank. 

In early 2022, DCG “borrowed” more than $800 million from Genesis in four separate loans. When $100 million of this came due in July, DCG forced Genesis to extend the maturity date — and DCG still hasn’t paid a penny of it to date.

A DCG executive told a Genesis managing director on July 25, 2022, that DCG “literally [did not] have the money right now” to repay the loan. Genesis had no choice — the managing director replied: “it sounds like we don’t have much room to push back, so we will do what DCG needs us to do.” DCG also dictated the interest rate for this loan.

Around June 18, 2022, DCG borrowed 18,697 BTC (worth $355 million at the time) from Genesis. It partially paid this back on November 10, 2022 — with $250 million worth of GBTC! — but this still left Genesis with no cash to pay back its own creditors. And it still couldn’t liquidate the GBTC. 

It’s hard to consider the deals between Genesis, DCG, and Grayscale as anything like arm’s length — it was a single conglomerate’s internal paper-shuffling.

On November 2, CoinDesk reported that FTX, one of the largest crypto exchanges, was inflating its balance sheet with worthless FTT tokens. The report brought FTX tumbling down, and FTX filed for bankruptcy on November 11, 2022.

Around November 12, 2022, Genesis sought an emergency loan of $750 million to $1 billion from a third party due to a “liquidity crunch.” Its efforts were unsuccessful. On November 16, Genesis halted redemptions.

If you owe Gemini a billion dollars, then Gemini has a problem

Gemini Earn investors were supposed to be able to get their funds back at any time. This meant that those funds had to be highly liquid. Gemini told investors it was monitoring the financial situation at Genesis. 

Gemini absolutely failed to do this. They lied to investors, and they hid material information. 

Gemini got regular financial reports from Genesis. Gemini’s internal risk analyses showed that Genesis’ loan book was undercollateralized for Earn’s entire operating existence. But Gemini told Earn customers that Genesis had more than enough money to cover their loans.

Starting in 2021, Genesis’ financial situation went from bad to worse. In February 2022, after analyzing Genesis’ Q3 2021 financials, Gemini internally rated Genesis capital as CCC-grade — speculative junk — with a high chance of default.

Gemini also found out that Genesis had a massive loan to Alameda — secured by FTT tokens! The same illiquid FTX internal supermarket loyalty card points that were discovered by Ian Allison at CoinDesk to make up about one-third of Alameda’s alleged reserves.

Even after Genesis recalled $2 billion in loans from Alameda, the crypto lender was still full of loans to affiliates, including its own parent company DCG. 

In June 2022, the crypto markets crashed and burned. But Gemini continued to reassure investors that it was safe to feed money to Genesis via Earn.

This was apparently fine when it came to someone else’s money, but according to the complaint: 

During this same period, Gemini risk management personnel withdrew their own investments from Earn. A Gemini Senior Risk Associate working on Earn withdrew his entire remaining Earn investment — totaling over $4,000 — between June 26, 2022, and September 5, 2022.

Likewise, Gemini’s Chief Operations Officer [Noah Perlman], who also sat on Gemini’s Enterprise Risk Management Committee, withdrew his entire remaining Earn investment — totaling more than $100,000 — on June 16 and June 17, 2022.  

This was when DCG tried to paper over the hole in Genesis’ balance sheet with a $1.1 billion IOU.

Gemini realized things weren’t good at Genesis, but it’s not clear that they realized how bad they were — not helped by Genesis lying to Gemini about their true condition.

From June to November 2022, Genesis would send Gemini false statements on their financial condition — for instance, saying that the DCG promissory note could be converted to actual cash within a year, when in fact, it was a 10-year note. 

Gemini didn’t tell investors that Genesis was in trouble. Instead, they thought they’d “educate clients on the potential losses” and “properly set clients’ expectations.”

When the Gemini board was advised of Genesis’ financial state in July 2022, one board member compared Genesis debt-to-equity ratio to Lehman Brothers before it collapsed.

Gemini tried and failed to extricate itself from Genesis. They just could not get the funds back. But they knew that Genesis operated as a closely controlled sockpuppet of DCG, and they wanted Silbert to make good on Genesis’ debt. 

As things at Genesis got worse, Gemini worked out how to break the news to Earn creditors.

On September 2, 2022, Gemini finally decided to terminate Earn. On October 13, Genesis formally terminated the Earn agreements and demanded the return of all investor funds. 

On October 20, 2022, Silbert met with Cameron Winklevoss of Gemini. Silbert said that Gemini was Genesis’ largest and most important source of capital — meaning that Genesis could not redeem Earn investors’ funds without Genesis declaring bankruptcy.

Gemini quietly granted Genesis multiple extensions to return investor funds.

On October 28, 2022, Silbert finally let Genesis tell Gemini the true terms of the promissory note — just two weeks before Gemini cut off withdrawals.

For some reason neither we nor the NYAG can fathom, Gemini cointinued to take investors’ money and put it into Earn right up to the end!

Customer service

Gemini didn’t do anything so upsetting for Earn investors as to tell them about Genesis’ unfortunate condition — even as Gemini’s own staff closed out their positions in Earn.

One customer wrote to Gemini on June 16, 2022, three days after 3AC collapsed, asking if any of their funds were with 3AC. Gemini didn’t answer the question, but replied with vague reassurances about Genesis’ trustworthiness.

Another wrote on June 27, 2022: “with other exchanges like Celsius and Blockfi I am concerned about Gemini. Does Gemini have any similar vulnerabilities? … liquidity vulnerabilities? … risky investments/loans that would risk my assets or cause Gemini to halt withdrawals?”

Gemini responded: “Gemini is partnering with accredited third party borrowers including Genesis, who are vetted through a risk management framework which reviews our partners’ collateralization management process.”

This investor was sufficiently reassured to send in another $1,000.

A third customer wrote on July 24, 2022, asking specifically if Gemini was involved in any of the “drama” around 3AC and if it impacted Earn. Gemini said they weren’t involved in anything regarding 3AC — even as the 3AC crash had in fact blown out Earn.

The consequences

The NYAG is asking the court that all three companies be permanently banned from dealing in “securities or commodities” in New York — e.g., bitcoin.

Some of the press coverage noted this provision — but didn’t notice that it would be a near death sentence for a crypto business. DCG’s profitable Grayscale business would have to leave New York or be sold off. Gemini would be kicked out of the state.

New York is also seeking restitution for the victims and disgorgement of ill-gotten gains.

Also, they all get fined $2,000 each. It’s possible that bit of the General Business Law could do with an update.

Posted on by Amy Castor 0

John Jay Ray sues FTX inner circle for $1 billion, prosecutors want Sam Bankman-Fried’s bail revoked

We just posted an update on the latest happenings with FTX. This one is on David’s blog. [David Gerard]

In recent months, John Jay Ray III and his team have filed a pile of more actions to claw back funds for FTX creditors.

Ray is suing the FTX inner circle for $1 billion in fraudulent transfers. Among their bizarre plans, SBF and the gang wanted to turn the Island of Nauru into a doomsday bunker for effective altruists.

In other news, FTX and Genesis are settling, several media outlets are still battling to keep the court from permanently sealing FTX’s creditor list, and it’s looking like Sam is about to have his bail revoked. The prosecution is fed up with his efforts to “taint the jury pool.” Leaking Caroline’s diary to NYT reporters was the last straw for them. 

Image: Caroline Ellison, Sam Bankman–Fried, Nishad Singh, and Gary Wang

Posted on by Amy Castor 0

FTX: John Jay Ray files second interim report, sues Daniel Friedberg

  • By Amy Castor and David Gerard

Me: [turning to guy at gas station] so the polycule was mostly in the dark about the fraud. SBF had back door access
Guy: [pulling out taser from under seat] is that right

— Ed Zitron

“Attorney-1” was a bad boy

John Jay Ray III, the CEO of FTX in bankruptcy, has released a second interim report detailing how FTX skirted bank secrecy laws and commingled funds — and how an FTX lawyer, “Attorney-1,” served as Sam Bankman-Fried’s fix-it and hatchet man. [Report, PDF]

(We covered the first interim report, which came out in April, here.)  

“Attorney-1” is very obviously Daniel Friedberg, who was FTX’s compliance officer and Alameda’s general counsel. A day after Ray released the interim report, FTX filed suit against Friedberg, alleging malfeasance in the course of his duties. The complaint details many of the same incidents in the report. [WSJ; redacted complaint, PDF]

In 2008, Friedberg was a colleague of Stuart Hoegner at Ultimate Bet, where the pair helped cover up a multi-million-dollar scandal in which the site cheated its players. Hoegner now works for Tether, a dubious stablecoin issuer. 

SBF hiring Friedberg should have been the first clue that FTX.com was a massive fraud. 

Friedberg resigned around the time the FTX Group filed for bankruptcy. Weeks later, he met with the FBI, the DOJ, and the SEC and told them he wanted to cooperate with any investigations.

There’s an interesting line in the interim report:

The Debtors have identified on Attorney-1’s hard drive a final copy of the false written testimony that Bankman-Fried provided to Congress.

FTX has access to the hard drive from Friedberg’s computer. Did Friedberg just leave the evidence behind when he quit FTX? Or did he willingly hand over his laptop to FBI agents? This hard drive seems to have had all sorts of interesting documents on it.

Friedberg hasn’t been charged with any crimes as yet — but based on Ray’s report and the ensuing lawsuit, we wouldn’t be surprised if there’s a sealed indictment out there waiting for him.

Following the money

FTX owes $8.7 billion in customer funds — over $6.4 billion of which is cash and stablecoins. According to Ray, Friedberg lent a helping hand when FTX executives “used commingled customer and corporate funds for speculative trading, venture investments, and the purchase of luxury properties, as well as for political and other donations designed to enhance their own power and influence.”

Ray details what he found about various FTX accounts and the flows of cash in and out of them. Tracking money flows was “extraordinarily challenging”:

… from the inception of the FTX.com exchange, the FTX Group commingled customer deposits and corporate funds, and misused them with abandon … Commingling and misuse occurred at their direction, and by their design.

Ray and his team have recovered $7 billion in “liquid assets” so far, which is astounding — though we’re not sure how liquid the crypto component of that will be in practice, or how much is unsaleable FTT tokens.

The report does not include FTX in Japan, Cyprus, or Singapore — areas where funds were properly segregated by law. It also does not address FTX.US, which Ray says is still under investigation. 

No, no, it’s research 

FTX lied to banks — a lot. Alameda Research had “research” in its name so that it could get bank accounts without immediately being flagged for enhanced due diligence as a money services business. FTX couldn’t get banking, so they used Alameda bank accounts to receive customer cash, right from the start. 

But banks started asking inconvenient questions. When “Bank-1” — likely either Signature or Silvergate — asked why FTX was sending money to Alameda, an Alameda employee told them that “customers occasionally confuse FTX and Alameda” but that all wires through the account were to settle trades with Alameda.

This was false. In just 2020, one of Alameda’s accounts received more than $250 million in deposits from FTX customers and more than $4 billion from other Alameda accounts that were funded in part by customer deposits, says the report.

When banks started rejecting wires to Alameda accounts, FTX set up North Dimension so it could continue to funnel money to FTX. Friedberg and SBF told “Bank-1” that North Dimension was a crypto trading firm with substantial operations. In fact, it was an empty shell with no employees or operations.

Friedberg also engaged his old law firm to create a fake corporate register for North Dimension for the bank: “Specifically, after Bank-1 asked for a copy of the register, Attorney-1 directed a law firm to create a register.”

Time travel by document

In 2021, FTX Trading Ltd was planning to go public. As part of the paperwork for that, it needed an audited financial statement.

The problem was that from April 2019 when FTX.com first launched until the end of August 2020, FTX.com customers had been sending cash deposits to Alameda bank accounts. FTX needed to cover up the fact that they were just using Alameda to move customer and company funds around without any agreement to do so.

So in January 2021, Friedberg had his old law firm draft a “cash management agreement” to explain why Alameda held FTX cash. Friedberg created from this a fake “Payment Agent Agreement.”

FTX usually signed documents with DocuSign to provide an electronic record. In this case, to avoid a DocuSign timestamp, SBF wet-signed the document on behalf of Alameda and FTX on April 16, 2021 — backdated to 2019 “for the sole purpose of providing it to an external auditor.”

How did Ray’s team know the document was backdated? They found the original document file on Friedberg’s hard drive:

While metadata reflects that Attorney-1 created the Payment Agent Agreement on April 12, 2021, and that the executed version was last modified on April 16, 2021, the agreement purports to have an “Effective Date” of June 1, 2019 —nearly two years earlier.

The IPO never happened — but the fake document did help the FTX companies get more funding from “potential investors in connection with its $400 million Series C financing that closed in January 2022.”

Sam the philanthropist

SBF was famous for his Effective Altruism. He used FTX funds by preference:

The Debtors have been able to identify certain transactions that appear clearly to have been funded in part with commingled customer deposits. These include political and “charitable” donations, venture investments and acquisitions, and the purchase of luxury real estate for senior FTX Group employees in the Bahamas.

Sam’s charitable donations got a bit esoteric. The FTX Foundation gave one guy $300,000 to “Write a book about how to figure out what humans’ utility function is” — a question that LessWrong rationalist philosophy needs to answer so as to construct the perfect superintelligence to rule over us all. And that hopefully won’t turn out to be Roko’s basilisk. [LessWrong, PDF, 2004]

The Foundation gave someone else $400,000 to make YouTube videos to promote LessWrong rationalism and Effective Altruism.

Closer to home, the Foundation gave $20 million to the Guarding Against Pandemics PAC, which was run by Sam’s younger brother Gabe Bankman-Fried.

FTX sues Friedberg

Friedberg’s malfeasance was egregious enough that FTX  is suing him for “damages caused by breaches of fiduciary duties, legal malpractice, and other wrongdoing, and to recover fraudulent transfers.” 

The suit also alleges Friedberg paid off whistleblowers rather than deal with the compliance issues they raised.

Friedberg worked at FTX from 2017 until its collapse in 2022, the last 22 months of that as general counsel at Alameda and chief compliance officer at FTX. Joe Bankman, SBF’s father, pushed Sam to hire Friedberg and keep him “in the loop … so we have one person on top of everything.”

FTX paid Friedberg millions of dollars in salary and bonuses, and tens of millions in crypto — a $300,000 salary at FTX.US, a $1.4 million signing bonus, an 8% equity stake in FTX.US, and a $3 million payment from Alameda. 

Plaintiffs want compensatory damages to be determined at trial, disgorgement of all of Friedberg’s compensation including the cryptos, punitive damages, and attorney’s fees.

Chief noncompliance officer

Friedberg’s putative job as chief compliance officer was to make sure the proper checks and balances were in place to prevent fraud, commingling of funds, and other wrongdoings. Per the complaint, he didn’t do any of that. Instead, “Friedberg actively participated in and facilitated such misconduct.”

Money was funneled to FTX insiders and booked as “personal loans” — which were never repaid, and which there was never any serious discussion of paying — “despite Friedberg’s false statement to the outside accountants that interest was paid quarterly on the loans.”  Friedberg was involved in more than $2 billion in such “loans.”

Friedberg also encouraged the use of Signal for corporate messaging, preferably set to make messages disappear.

Ray is still appalled at how bad FTX’s accounting was:

Those entities that did produce financial statements used QuickBooks, Google documents, Slack communications, Excel spreadsheets, and other inadequate means for measuring the level of assets and liabilities held by the FTX Group. Entries in QuickBooks were often made months after transactions occurred, rendering real-time financial reporting and risk management impossible.

Hush money

Friedberg served as SBF’s fixer. He paid off whistleblowers and “retained” whistleblowers’ attorneys — that is, he paid them off too. 

In November 2019, FTX and Alameda were hit with a class action lawsuit that accused the companies and their executives of racketeering and market manipulation. [Docket; Decrypt, 2019]

The lawsuit doesn’t name “Plaintiff’s Attorney-1” — but this is clearly Pavel Pogodin, who set up Bitcoin Manipulation Abatement for the sole purpose of filing crypto class actions.

Alameda said at the time: “The troll has no evidence of any wrongdoing, and will not further discover any — because there was no wrongdoing to discover evidence of.” [Medium, 2019]

Nevertheless, Friedberg took the suit seriously enough that he paid Pogodin off. (The details are redacted.) The suit was dismissed in December 2019.

As a California Bar member of flawless repute, Pogodin is happy to be paid not to do anything. He sent a letter in January 2022 threatening further possible action against FTX. Friedberg offered him “$1.6 million and $50,000 paid on a monthly basis.”

In sum, Friedberg arranged for the FTX Group to pay Plaintiffs’ Attorney-1 $3,320,000 through July 2022. Upon information and belief, Plaintiffs’ Attorney-1 provided no actual legal services to the FTX Group after signing the engagement letter.

An FTX.US employee on a $200,000 salary was fired after less than two months. She sent a demand letter in December 2021 claiming that “Alameda [was] nothing more than an extension of FTX, used to bolster investor confidence in FTX projects, and in turn drive up the prices of projects FTX had developed or invested in itself” and let employees insider-trade.

Friedberg gave this employee an “extraordinary settlement” (redacted in the filing) — and made a $12 million deal to retain Whistleblower-1’s attorney. Their only work for FTX was a three-page memo.

In early 2022, an attorney working at FTX for less than three months discovered that Alameda owned North Dimension. He flagged to Friedberg that North Dimension accounts were being used to fund FTX customer withdrawals and that Alameda didn’t have the proper money transmitter licenses.

Friedberg promptly fired him. The complaint details how the attorney was paid a large (redacted) severance package.

Other FTX news

John Ray’s team has so far racked up $200 million in fees — and the fee examiner thinks this is quite reasonable. Gotta pay the undertaker: [Bloomberg; summary report, PDF] 

Without question, the fees incurred to date are remarkable, but so is the professionals’ performance. The Fee Examiner has been struck by the creativity, professionalism, and personal sacrifice of the Retained Professionals who sprung into action in November to begin transforming a smoldering heap of wreckage into a functioning Chapter 11 debtor-in-possession.

Over in the criminal case, SBF moved to dismiss 10 of the 13 charges against him. Judge Lewis Kaplan has told SBF to get knotted: “The Court has considered all of the arguments of the parties. To the extent not addressed herein, the arguments are either moot or without merit.” [Doc 136, PDF; Doc 148, PDF; Doc 149, PDF; NYT; Doc 167, PDF] 

Sam wants to blame his troubles on Fenwick & West, the law firm used by FTX and Alameda, who apparently told him that all the hamfistedly obvious crimes he did were all totally legal. The DoJ and FTX objected, and Judge Kaplan has again told Sam to get knotted: “Neither Fenwick nor the FTX Debtors are part of the ‘prosecution team,’ and the government has no obligation to produce materials that are not within its possession, custody, or control.” [Bloomberg; Doc 150, PDF; Doc 151, PDF; Doc 151-1, PDF; Doc 156, PDF; Doc 159, PDF; Doc 166, PDF]

Over at Lightcone, who build and run LessWrong and the Effective Altruism Forum: “Funding is quite tight since the collapse of FTX.” They’re asking the users for $3 million to $6 million over the next year. [LessWrong]

Posted on by Amy Castor 5

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

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

— Boxturret on SomethingAwful

Shut up, Sam

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

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

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

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

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

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

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

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

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

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

Extremely predictably, there goes BlockFi 

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

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

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

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

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

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

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

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

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

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

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

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

Crypto miners — we told you so

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

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

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

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

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

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

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

Binance goes shopping

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

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

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

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

Binance’s bogus bailout fund 

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

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

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

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

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

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

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

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

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

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

Tether is fine, you FUDster

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

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

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

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

Other crypto exchanges/firms in trouble

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

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

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

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

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

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

Image: Sam talking on GMA

Posted on by Amy Castor 3

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

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

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

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

Crypto watchers know that this can also be exceedingly funny.

Imaginary assets, real liabilities

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

Bankman-Fried runs three large crypto enterprises:

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

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

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

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

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

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

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

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

This works great while number is going up!

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

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

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

CZ pulls the plug

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

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

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

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

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

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

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

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

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

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

How screwed are FTX and Alameda?

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

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

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

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

What about FTX US?

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

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

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

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

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

What happens next? It’s contagion time!

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

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

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

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

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

We’re left with two questions:

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

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

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

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

Image: FT Alphaville

Posted on by Amy Castor 2