Tag: Avi Eisenberg

Crypto is going sideways: Avi Eisenberg trial begins, Uniswap gets a Wells notice, Bitfinex Securities in El Salvador

  • By Amy Castor and David Gerard

“this ape is a message
we considered ourselves to be a powerful yacht club
this ape is not an ape of honor
no highly esteemed juice is slurped here”

— more falafel please, SA

What are you gonna do, convict me?

Avi Eisenberg’s criminal commodities fraud trial started on April 9 and continues for two weeks. Eisenberg is the DeFi trader who drained Mango Markets of $110 million in October 2022 by manipulating the price of MNGO, the exchange’s native token. [CoinDesk]

Eisenberg used various anonymous accounts to take a long position on MNGO, drive up the price of MNGO ridiculously high, use the inflated value of MNGO to “borrow” all of the crypto on Mango Markets, and then default. He cashed out and flew to Israel that day. He bragged about his brilliant trade on Discord. He even tweeted: “What are you gonna do, arrest me?”

Eisenberg returned to the US and was arrested in Puerto Rico in December 2022. He’s been held in New Jersey ever since. 

Extensive and detailed laws exist on commodity market manipulation. Merely trading with intent to manipulate is a crime.

Almost all of what goes on in DeFi was always just straight-up illegal by the letter of US law. The CFTC first warned that it was unhappy about the highly manipulated state of crypto markets as far back as 2017.

This will be a tough one for Eisenberg to win. The defense does not dispute the sequence of events. They argue that Eisenberg was simply using the protocol as designed — code is law. The DOJ is arguing that just because you can do something doesn’t mean you should.

The defense has tried to impeach a government expert witness by … sandbagging him with documents saying he owes back taxes? If that’s the best they have, then Eisenberg is in trouble. [Twitter, thread]

Inner City Press has been covering the Eisenberg trial. [Twitter, thread; Twitter, thread; Twitter, thread; Twitter, thread]  

No, “fun markets” are a dumb and bad idea

In discussing Mango, Matt Levine of Bloomberg, who we usually regard highly, floats an old libertarian dream idea: what if we just … throw out regulation for a large chunk of the crypto market? [Bloomberg, archive]

I am just saying that you could resolve those disagreements by letting everyone go their separate ways. Have Nice Crypto — probably the bulk of it? — where manipulation is disfavored and government intervention is, at least in theory, welcomed. And have Fun Crypto for the applied game theorists to play their games against each other. Have a market that makes it explicit, in advance, on the web page, “Anything that you can do on our platform is allowed, and if the results are absurd then that is fun for you and bad for someone else, you’re on notice!”

This is an amazing thing to write when the crypto collapse of 2022 was precisely how that approach worked out in practice. But the answer to most libertarian dreams of deregulation is “on the other hand, history.”

It’s true that if it’s your money, you have the God-given right to set it on fire. If you really want to get into investments forbidden to retail, you can probably find a way to send your money down a hole.

But when we let companies promote that sort of investment to ordinary people, what happens in practice is that the investors go all-in on the highest-interest bet, and then they lose the lot. This is extremely well understood from the historical record!

DeFi is a dumpster fire. Everything collapses weekly in flames and screaming. Our dear friends the crypto degens like it that way. It’s a warm and cozy dumpster fire they have there.

In zero-interest times, people couldn’t make a sufficient return from sane investments — so they got into insane investments. They put their money into Celsius, Voyager, and Terra-Luna.

Celsius took money from retail customers and put it into DeFi. In fact, Celsius was the third biggest single player in the DeFi markets. It literally hired a DeFi trader, Jason Stone of KeyFi, to manage its investments and give retail investors huge exposure to the dumpster fire.

Levine assumes that if the dumpster fire is set up as a “fun market” that somehow the fire won’t spread. But we know from Celsius that market dumpster fires do spread.

In the fraud trial of former Celsius CEO Alex Mashinsky, the DOJ is currently collecting victim impact statements. We don’t expect Mashinsky’s victims had a lot of “fun.” Mashinsky probably did, though. That’s what “fun markets” mean in practice. [Twitter]

Market contagion is one of the US Treasury’s greatest fears about crypto — because they know all about dumpster fires too.

What we have for a “fun market” in the US are markets for accredited and institutional investors — where you can buy all the dubious magic beans you like. But even there, laws against misrepresentation and market manipulation still apply. There might be historical reasons for this.

Levine talks a whole lot about the interesting and intricate financial engineering possibilities of crypto and hardly ever about its real life victims. We realize the first is his ambit, but the second sort of come with the deal.

Esto no puede ser tan estúpido, debes estar explicándolo mal

Bitfinex Securities is an exciting new crypto securities platform run by the fine people who brought you the Bitfinex crypto exchange and the Tether stablecoin. They also wrote themselves special new laws in El Salvador to let them set up Bitfinex Securities.

There have been a couple of tokens on Bitfinex Securities, but they haven’t had any trades for months at a time. [Protos]

A new token, HILSV, hopes to raise $6.25 million to build a hotel near the Aeropuerto Internacional de El Salvador: “The Hampton by Hilton.” HILSV has been seeking out rather more publicity. [Bitfinex, archive; Bitfinex, archive; La Prensa Gráfica, in Spanish]

HILSV will trade on Bitfinex Securities against tethers and US dollars. The tokens are medium-term corporate bonds, priced at $1,000 each. Buyers are promised a remarkable 10% annual interest, paid semi-annually, for five years and then they get their principal back. The raise is scheduled to begin May 13.

The developer, Inversiones Laguardia (Laguardia Investments), is a real developer. They’re also good friends of the current El Salvador government and have had close and fruitful relations with past administrations.

Founder Ricardo Laguardia said in the press release that it would be impossible to raise the funds without access to new capital markets.

This seems an implausible claim. Hotels are a well-understood business, Laguardia is an experienced developer, and $6.25 million is a plausible sort of price for a new hotel complex. If your business plan was sane, why wouldn’t you just take out a loan? And why would you offer to pay 10% interest when you could get a loan for less?

We suspect that Inversiones Laguardia is doing this hotel project with an offering that will obviously be filled just so Bitfinex can get its new stock market up and running. We expect they have actual investors (and likely friends of the Salvadoran government) already lined up.

Of course, someone might have $6.25 million in dirty tethers that need shining up. But we’re sure Inversiones Laguardia would never be a party to such activities.

Every crypto real estate project in El Salvador since 2021 has been a rugpull or a nothing burger. This is the fourth attempt at a crypto-backed real estate project — after the Astro Babies NFT-backed casino and the Bitcoin Towers and Fusso NFT projects.

Laguardia does have a history of surprisingly sweet deals, such as the lease for a development at the same airport in 2018 for a remarkably low rent. We’re sure it’s all fine, though. [Portal de Transparencia, PDF, in Spanish, 2018] 

Uniswap: the searing light of regulatory clarity

Uniswap is the largest decentralized exchange in DeFi. The idea is that they run an exchange trading tokens that are almost all unregistered penny stocks. Then they claim that somehow they don’t actually run the exchange — except the bit where they get paid for not-running the exchange.

But if you make money from running an exchange for unregistered securities, the SEC may knock on your door. So Uniswap got a Wells notice letting them know of forthcoming enforcement action — reportedly for operating as an unregistered securities broker and an unregistered securities exchange. [CoinDesk; blog post, archive]

This is no surprise. The SEC announced it was investigating Uniswap in 2021. Enforcement lawyers told the WSJ they were looking into how investors used the exchange and how the exchange was marketed. [WSJ, 2021, archive]

Uniswap runs on the Ethereum blockchain. It has its own native token, UNI, that allows traders and investors to vote in its DAO. The exchange is extensively US-linked.

Hayden Adams founded Uniswap in 2018. He got an initial $11 million investment round in 2019 and another $165 million in 2022. Top investors — and holders of the UNI token — include Paradigm, a16z, and Union Square Ventures. [Form D; Techcrunch, 2022] 

Because Uniswap is “decentralized and there are no listing fees,” anyone can list a token on the exchange and create an alleged price in dollars for their token. Coincidentally, nearly all tokens on Uniswap turn out to be rugpulls. [arXiv, 2022, PDF]

Uniswap trader Nessa Risley led a class action against Uniswap in 2022. She claimed that the investors were “intimately involved” in overseeing its operations and were therefore responsible for the fraud on the exchange. She also said Uniswap had been operating as an illegal exchange and brokerage. 

Judge Katherine Polk Failla dismissed Risley’s suit in August 2023, saying that the individuals behind the scam tokens were in the wrong, not the platform itself. (Faillia is also overseeing the SEC lawsuit against Coinbase.) Risley is appealing. [Opinion and order, PDF; case docket]

Adams says he’s “ready to fight” the SEC all the way to the Supreme Court if necessary. [Twitter]

The SEC filed enforcement actions against Coinbase, Bittrex, and Kraken for dealing in securities without a license. We strongly suspect they’ll call out a bunch of tokens on Uniswap that are securities, including UNI.

We wouldn’t be surprised if Uniswap was forced to shut down. But they probably have the resources to fight for a while. 

Miners dumping

The bitcoin price has been all over the place. One reason is that miners have been dumping their holdings while number is up. We suspect that’s what’s causing quite a few of the recent crashes. [CoinDesk]

Miners are now competing with AI for cheap power in the US. These are the AI guys who make the same bad excuses for their ghastly power consumption as the crypto miners. [Bloomberg, archive]

Central banking, not very on the blockchain

Central bank digital currencies aren’t getting a lot of consumer takeup. Franklin Knoll, a payment specialist at the Federal Reserve Bank of Kansas, writes about three retail CBDCs issued in the Caribbean over the last four years and how they’ve fallen flat. [Kansas City Fed]

Knoll looked at the Bahamas Sand Dollar, DCash from the Eastern Caribbean Currency Union (ECCU), and the Jamaican JAM-DEX.

Each launched with great fanfare — but “the new payment methods have thus far seemed to fall flat with consumers, merchants, and, in some cases, the financial institutions meant to operate the payment platforms.”

As David wrote when the Bahamian Sand Dollar and DCash launched, money is a social construct. You can’t just build a system and think people will come to it.

Good news for bitcoin

Christopher Harborne’s lawyers are at it again. Following their defamation lawsuit against the Wall Street Journal, they sent another letter to Dirty Bubble (James Block) regarding his story “Tether’s Secret Agent.” Last time, Block edited bits out of his story. This time, he took the entire story down. He says he’s contemplating “next steps.” [Twitter]

The SEC is pivoting to AI too. They busted a couple of investment advisors for saying they used AI when they didn’t. [SEC]

Media stardom

Amy is in a documentary on NFTs called “NFT:WTF?” It will be on Netflix in the UK starting April 10. You can also watch it on YouTube. [Youtube]

_________________________________

And now a word from our sponsors!

Posted on by Amy Castor 4

Crypto collapse: SEC brings regulatory clarity to Kraken and Celsius, stablecoins for the UK, crypto money laundering

  • By Amy Castor and David Gerard

Most of the deliberation time was spent saying “Wow, that was a lot of crime” “Just so much crime” “Maybe too much crime”

— Allistair Hutton

Regulatory clarity for Kraken

The crypto industry demands regulatory clarity! So the SEC keeps stating the regulations as clearly as it possibly can. Isn’t that nice of them? On November 20, the SEC sued the Kraken crypto exchange.

The causes of action are very similar to those against Coinbase and Bittrex. Kraken deals in crypto securities and acts as an exchange, a broker, a dealer, and a clearing agency, all in the same company and without the proper registrations for each. The particular crypto securities in this case are ADA, ALGO, ATOM, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, and SOL.

The SEC also alleges Kraken commingled customer assets with its operating accounts. Kraken’s own auditors said this created “a significant risk of loss” to customers and led to “material errors to Kraken’s financial statements for 2020 and 2021.”

The message the SEC is sending in this series of cases is that it just isn’t going to put up with crypto exchanges doing all the securities jobs in one company anymore, and they need to stop. [SEC press release; complaint, PDF]

The Financial Stability Board, which monitors the global financial system, thinks what the SEC is doing is very good and cool. Its new report “The Financial Stability Implications of Multifunction Crypto-asset Intermediaries” sets out precisely how and why crypto exchanges combining all these functions (an exchange, a broker, a dealer, and a clearing agency) “can exacerbate structural vulnerabilities in those markets.” It uses precisely what happened in the crypto collapse as its example. Risk to the actual economy is limited, says the FSB — though the biggest issue is how the exchanges wrecked the few banks willing to talk to them. [Press release; cover sheet; report, PDF]

It’s not just the SEC cracking down on crypto. The US government is generally sick of crypto nonsense and looking to shut it down. This is what we’ve spent the past year and a half advocating for as loudly as we possibly could.

IOSCO, the International Organization of Securities Commissions, released its final policy recommendations to securities regulators on crypto. In short: regulate the heck out of this stuff for what it clearly is — and don’t accept handwaving about technology. IOSCO will release a second part on DeFi before the end of 2023. [Press release; recommendations, PDF]

SEC trashes Celsius bankruptcy plan 

Judge Martin Glenn approved the Celsius NewCo plan on November 9, giving creditors fresh hope that all the nonsense they’d been trudging through since July 2022, when Celsius initially filed for Chapter 11, was finally coming to an end. But it was not to be. 

The original plan was that NewCo would be managed by Fahrenheit LLC, which won the bidding for Celsius’ assets in May. This business would focus on bitcoin mining and ether staking. [Doc 3972, PDF] 

Creditors would get shares in NewCo, which would trade on NASDAQ. NewCo could issue shares without registration — under an exemption in the bankruptcy code that would allow it to do the initial issuance without filing an S-1 form with the SEC. Creditors would also get back $2 billion in crypto in January 2024. 

But within hours of the court approving the deal, it fell afoul of the SEC — who would not approve the staking and lending portion of the business. [CoinDesk]

The SEC also wanted more details on the company’s assets and accounts for the “predecessor entity,” i.e., Celsius Networks. Unfortunately, Celsius’ pre-bankruptcy accounts are comical trash, somewhat documented in QuickBooks and some Google spreadsheets. This wasn’t quite good enough. [Doc 4050, PDF]

Celsius is now pivoting to “MiningCo,” a mining-only company with US Bitcoin as the manager and a board of directors. Fahrenheit members will not be part of the new entity.

Celsius’ lawyers argue that the “toggle” to mining-only is just fine, and they had this in their back pocket the entire time. Judge Glenn is not convinced: “This is not the deal that creditors voted on,” he said in a November 30 hearing. Celsius may have to seek a new creditor vote to get approval on the revised plan, putting them right back in the mud again. [Reuters, archive]

Blockchain Recovery Consortium (BRIC), who had been selected as a backup bidder in May if the Fahrenheit plan fell through, argued that Celsius should have gone with its backup bid, rather than pushing forward with this stripped-down “MiningCo” plan. 

A hearing on this mess will take place on December 21.

If the MiningCo plan is not approved, Celsius may be forced to liquidate in Chapter 7.

If this new plan does go through, creditors should count the cash and liquid cryptos they get in the settlement as their actual return — and treat their MiningCo shares as lottery tickets.

My beautiful launderette

Spain has arrested Alejandro Cao de Benós, a long-time Western agent of North Korea and founder of the Korean Friendship Association, on behalf of the US, for working with Virgil Griffith. [Reuters] 

Cao de Benós was indicted in April 2022, along with Christopher Emms, a UK citizen, for signing up Griffith to travel to North Korea in April 2019 to give a talk on crypto at the Pyongyang Blockchain and Cryptocurrency Conference, which the pair organized. Emms, a crypto entrepreneur, is still at large. [DOJ; FBI; FBI] 

We’re guessing the US wants a long discussion with Cao de Benós concerning all of North Korea’s other money laundering as well.

The US is currently working to extradite Cao de Benós from Spain, a process that can take months.

In the US, FinCEN wants to declare crypto mixing to be primarily about money laundering, for no better reason than money laundering is precisely what crypto mixing is primarily about. [FinCEN; Federal Register]

Court to Coin Center over their spirited defense of Tornado Cash: LOL, go away. [Doc 74, PDF]

Following “requests from its wealthy customers,” Ferrari is looking to sell cars to sanctioned Russians (ahem) unspecified entities in a currency-substitute that they have to hand. [Reuters, archive]

Now that’s effective altruism

Sam Bankman-Fried is in a cell, where he belongs. [DOJ statement]

But there was much more to FTX than one crook — or five crooks if you count the guilty pleas of Sam’s former fellow executives. The use case for crypto is crime, and FTX was a money laundering machine. Jacob Silverman and Molly White discuss Sam’s many, many as-yet-unindicted co-conspirators. [The Nation; Molly White]

If you ever need a moment of cheer in your life, imagine how Alex Mashinsky, the criminally charged founder and former CEO of Celsius Network, feels seeing Sam be sent to jail in less than five hours. (The amount of time jurors deliberated.) Mashinsy’s trial is scheduled for September 2024.

Over in the FTX bankruptcy, John Jay Ray is suing the Bybit exchange to recover $953 million. Bybit had a private line into FTX and successfully withdrew $327 million in the run on the exchange just before FTX declared bankruptcy in November 2022. [Complaint, PDF]

Stablecoins for the UK

The more foolishly ambitious parts of the UK government are still talking up crypto. So the Financial Conduct Authority has a new discussion paper on fiat-backed stablecoins for “consumers who wish to pay for their everyday shopping with stablecoins” — a category that does not presently exist. [Discussion paper, PDF]

So far, the plan is to allow UK-issued asset-backed “regulated stablecoins” supervised by the FCA. Overseas-issued “approved stablecoins,” with a UK “payment arranger” taking local responsibility, will come later.

The FCA will be requiring consumer protections, consumer right of redemption, protections in case an issuer fails, coin value stability despite market conditions, and ways to “mitigate the risks and harms that we have observed in the market, and those that arise from existing business practices” — i.e., all the crime.

Anti-money-laundering requirements will apply only on redemption — not on every transaction.

This initiative is not about our friends at Tether or USDC — though the FCA uses them as cautionary tales, particularly with USDC breaking its peg when Silicon Valley Bank went down.

Instead, the FCA seems to be setting a path for non-banks to issue their own asset-backed pounds — a regulated form of wildcat banking, with crypto as the excuse to even contemplate doing this weird thing. Or a privatized CBDC, if you want to be generous. The listed examples don’t even really need a blockchain.

There is nothing a regulated GBP stablecoin would do for ordinary UK consumers that they can’t already do with debit cards. But the FCA says that prospective issuers are already in the wings. Our psychic powers suggest these may be Conservative Party donors, given the present government’s recent track record of blatant kleptocracy.

CoinDesk spoke to Matthew Long, the FCA’s director of payments and digital assets, who confirmed that their intent is not to let rubbish through: “We’ve seen lots of things that we’re really concerned about and at the end of the day, the person this actually affects is the customer.” [CoinDesk]

Submit comments by January 22, 2024.

Bitfinex suffers hardly any data leakage to speak of

The Bitfinex crypto exchange apparently suffered a completely trivial wafer-thin leak of almost no customer information at all sometime in October. They announced this complete non-news at 21:30 UTC on Saturday November 4. [Bitfinex, archive]

How bad do you think Bitfinex’s customer data spill was? Clearly so very insignificant — a mere trifle! — that they couldn’t get away with just saying nothing at all to the very large and important customers with short tempers.

We’re sure it’s fine. “Bitfinex has a very close relationship with law enforcement,” and maybe it’ll get much closer.

More good news for bitcoin

CoinDesk has been sold in an all-cash deal to Bullish, the crypto exchange backed by Peter Thiel via Block.One — and not to the Vessenes consortium that was sniffing around the site in August. Terms were not disclosed. CoinDesk will operate as a totally independent entity, for sure! Bullish says it will inject lots of capital. [Press release; WSJ, archive]

Binance is finally killing its BUSD stablecoin as of December 15, 2023. The remaining BUSD balances will be converted to the totally trustworthy stablecoin FDUSD on December 31. You can redeem BUSD directly at Paxos up to February 2024 — if you can pass their anti-money laundering. [Binance, archive]

Binance had previously been trying to switch to Justin Sun’s TrueUSD. But TrueUSD was having problems in July 2023 — such as billions of pseudo-dollars being minted out of thin air. It turns out TrueUSD was hacked. The company waited a month to announce the hack, giving themselves plenty of time to furiously mint more TUSD tokens and send them to Huobi. [Twitter, archive; Twitter, archive; Protos]

Bankrupt crypto lender BlockFi is winding down at last. Payouts will be between 39.4% and 100%! … so, 39.4%. [Reuters, archive] 

Circle, the company behind the USDC stablecoin, reportedly wants to try going public again in 2024. Circle tried in 2021 to go public through a SPAC offering. But they failed to get SEC approval for the proposed merger with Concord Acquisition, and by early 2023 they had given up. [Bloomberg, archive; WSJ, paywalled]

OpenSea is laying off 50% of its staff, as all the air has been let out of the NFT balloon. When it laid off 20% of its employees last year, around 230 people remained. So now they’re down to about 100 employees. [Twitter, Nitter] 

The trial of crypto trader and alleged exploiter of Mango Markets Avi Eisenberg has been delayed until April 8, 2024. Eisenberg’s lawyers say they need additional time to prepare for the case. He is currently residing at MDC Brooklyn, also the temporary home of Sam Bankman-Fried. [CoinDesk]

Alex de Vries (Digiconomist) has a new report out on bitcoin’s water usage. Each transaction on the bitcoin blockchain uses 16,000 liters of water on average, about 6.2 million times more than a credit card swipe — and enough to fill a backyard swimming pool. [Cell]

We also suggested that someone should become the Digiconomist of AI power usage. It turns out that guy is Digiconomist! De Vries’ article “The growing energy footprint of artificial intelligence” was published in Joule in October. [Joule]

When you buy a nice house, make sure the previous owner wasn’t a crypto Ponzi scammer. Basketball player Shai Gilgeous-Alexander bought a house in Toronto previously owned by Aiden Pleterski, the guy who was kidnapped and tortured over three days by an extremely upset investor inquiring as to where his funds had gotten to. Further aggrieved investors are still showing up at the house — and so Gilgeous-Alexander wants to reverse the sale. [NYT, archive]

Image: Kraken founder Jesse Powell in a random tie he found out on a road somewhere.

Posted on by Amy Castor 2

Crypto collapse: Tether’s new bank Britannia, Binance woes, nobody uses PayPal’s stablecoin, Avi Eisenberg is not getting his phones back

It’s David’s turn to post, so that’s where you’ll find our latest on the crypto collapse. [David Gerard]

In this installment, Tether finds itself a new banking partner, everybody still hates Binance, and the one joke about libertarians keeps coming up true. Also, bitcoin gets its chance at becoming a tire fire for real.

Posted on by Amy Castor 0

Crypto collapse: DCG’s problem is Grayscale, FTX Bahamas agreement, DeFi trading arrest, Silvergate Bank, Huobi, Binance

  • By Amy Castor and David Gerard

Oh, what a tangled web we weave, when first we practice to deceive!

— Sir Walter Scott, 1808

DCG: Congratulations, you played yourself

The Department of Justice’s Eastern District of New York and the SEC are looking into money flows between Barry Silbert’s Digital Currency Group and its lending subsidiary Genesis, and what investors were told about the transfers. [Bloomberg]

DCG has been playing all the same games as the rest of crypto — trying to create the illusion of money where there is no money, to keep the party going a little bit longer.

Genesis should have declared insolvency in June when Three Arrows Capital (3AC) blew a $2.4 billion hole in its accounts — but DCG purchased 3AC’s defaulted loan from Genesis and financed the purchase with a promissory note of $1.1 billion, to be paid back over 10 years.

That is: DCG and Genesis counted an internal IOU as money, to claim Genesis was still solvent.

The catch with the promissory note is that if the 10-year loan is “callable” — meaning DCG would have to pay Genesis the full amount immediately in the event of a liquidation or bankruptcy — then it could give Genesis creditors a claim on DCG itself, and take all of DCG down with it.

“The Promissory Note is like a noose wrapped tight around the neck of DCG. If Genesis goes over the cliff, it drags DCG with it,” said Ram Ahluwalia, the co-founder of Lumida, an investment advisory firm that focuses on crypto. [Twitter]

In a letter to shareholders in November, Silbert disclosed that DCG borrowed another $575 million from Genesis — due in May 2023. The funds were used for “investment opportunities” and buying back shares of DCG stock from outside investors. [Twitter]

A creditor committee that includes crypto exchange Gemini presented Genesis and DCG with a plan to recover the assets. Silbert had until January 8 to respond. Cameron Winklevoss threatened that “time is running out.” [Twitter; Twitter]

We think Gemini will try to force Genesis into involuntary chapter 11 — they just need three creditors to file a petition with the bankruptcy court. The judge then holds a hearing and decides if the matter will go through. [11 U.S. Code, section 303]

Gemini Earn, Genesis, GBTC, and 3AC

As is usual in crypto, DCG screwed itself by greed. DCG also owns Grayscale, which operates the Grayscale Bitcoin Trust (GBTC) — DCG’s cash cow. Grayscale collects a whopping 2% annual fee on its assets under management — currently, 633,000 BTC.

GBTC traded above the face value of the bitcoins in the fund up to early 2021 — then it dropped below net asset value (NAV).

Genesis took the crypto it got from Gemini Earn customers and lent those funds out to institutional investors and crypto hedge funds — such as Three Arrows Capital.

3AC was one of the biggest investors in GBTC, taking advantage of a lucrative arbitrage opportunity. They would borrow bitcoins from Genesis and swap those for GBTC shares at NAV from Grayscale. After a six-month lockup, 3AC could dump the shares on retail for a handsome profit. Rinse and repeat, and when GBTC was trading at 20% above NAV, they could make a 40% profit a year that way

This GBTC arb played a big role in keeping the price of bitcoin above water in 2020, setting the stage for the 2021 bitcoin bubble.

At the end of 2020, 3AC was the largest holder of GBTC with a position worth $1 billion at the time. After February 2021, the GBTC premium dried up, and GBTC began trading on secondary markets at a steep discount to NAV. 

3AC had hoped the discount would be reversed when the SEC approved Grayscale converting its bitcoin trust to an ETF. But the SEC rejected the application, and the GBTC discount continued to widen. [Bloomberg]

When 3AC defaulted on its $2.4 billion loan to Genesis, Genesis seized the collateral backing the loan, including 17.4 million shares of GBTC, and filed a $1.1 billion claim against 3AC — a claim that is now on DCG’s books. [Coindesk; Affidavit Russell Crumpler, PDF]

Class action against Gemini Earn

Gemini partnered with Genesis for their Earn program. After Genesis lost $175 million in FTX in November, it froze withdrawals. Gemini Earn froze withdrawals in turn. Now Gemini Earn customers are out $900 million.

In an effort to get those funds back, three Gemini Earn customers are seeking class arbitration against Genesis and DCG.  

Gemini and Genesis had a “master digital asset loan agreement,” which Gemini Earn customers entered into — when you became an Earn customer, you agreed you were lending money to Genesis.

The complaint alleges that Genesis breached this agreement by hiding its insolvency through a “sham transaction,” whereby DCG “bought” the right to collect a $2.3 billion debt owed to Genesis by 3AC with the aforementioned $1.1 billion promissory note. The plaintiffs also claim that the Genesis loan agreement created an unregistered sale of securities. [Press release; Complaint, PDF; Master Digital Asset Loan Agreement]

The master loan agreement states that: “Each Party represents and warrants that it is not insolvent and is not subject to any bankruptcy or insolvency proceedings under any applicable laws.”

This is why Silbert keeps insisting that Genesis has a liquidity issue and not a solvency issue — even as those are functionally identical in crypto. If Genesis was found to be insolvent and took customer funds in, it would be in violation of that contract. (As well as promptly calling that promissory note from DCG.)

Amidst all of this, Larry Summers, the former US Treasury Secretary and World Bank Chief Economist, has quietly left DCG — going so far as to remove all mention of DCG from his own website. Summers joined DCG as a senior advisor in 2016, a year after the company’s founding. [Protos]

Silvergate Bank

Moody’s has downgraded Silvergate Bank’s long-term deposit rating to Ba1 from Baa2 after the crypto bank announced that its customers — who are almost entirely crypto firms now — withdrew $8 billion in deposits in Q4 2022: [Moody’s] 

The negative outlook reflects Moody’s view that the bank’s profitability over the near term will be weak along with the risk of further declines in deposits from crypto currency centric firms further pressuring profitability. In addition, the negative outlook reflects the increasing regulatory and legal risks that the firm is currently facing.

Silvergate’s other customers are worried about the bank’s solvency and about the regulatory heat coming its way. Silvergate was key to FTX/Alameda having access to actual money — they helped funnel money to FTX from accounts in the name of Alameda and of Alameda’s dubious subsidiary, North Dimensions. 

If Silvergate are found to be complicit in FTX’s fraud, they will be fined. But if there was money laundering and sanctions busting, they could be shut down. They will at the very least be fined. We would guess some individuals will also get a bar from being bankers. Here’s a list of enforcement actions on Federal Reserve member banks. [Federal Reserve]

Silvergate’s 8-K SEC filings this year are full of bad news. We noted Silvergate’s layoffs and writing off its Diem investment last time. [SEC 8-K; SEC 8-K; SEC 10-Q]

FTX

After a series of knock-down-drag-out filings — and the hilarious revelations of how FTX Digital Markets (FTX DM) was functionally Sam Bankman-Fried’s Bahamas partying fund — the US and Bahamas bankruptcies are working together now. John Jay Ray III and his team met in Miami with the joint provisional liquidators (JPLs) handling the FTX DM liquidation, and they’ve reached an agreement. [press release; agreement, PDF]

The Bahamas JPLs will handle everything to do with FTX DM, and the US administrators will handle everything to do with all the other FTX companies. The JPLs will handle the Bahamas real estate and the cryptos being held by the Securities Commission of the Bahamas. (This doesn’t mean that the Bahamas will handle the disbursement of the crypto they have under their control — only that FTX is fine with them holding the funds for now.) The parties will share information. FTX DM’s chapter 15 foreign entity bankruptcy in the SDNY will continue.

We suspect it was clear the US side would win in court, and the Bahamas liquidators realized they weren’t being paid enough to damage their reputations this way. The agreement is subject to approval by the courts in the US and the Bahamas, but it would be surprising for them not to allow it.

The Department of Justice has put out a call for victims of “Samuel Bankman-Fried, a/k/a ‘SBF.’” That’s his rapper name now. [Justice]  

Huobi’s real-time meltdown

Huobi has always been a dodgy crypto exchange — even before it was run by Justin Sun from Tron. Huobi has $2.6 billion in reserves, and 40% of that is its own HT token. If you don’t count its own internal supermarket loyalty card points, Huobi is insolvent. [Twitter]

Huobi is desperately searching its pockets for spare change. On December 30, Wu Blockchain reported that Huobi was canceling year-end bonuses and planning to slash half its staff of 1,200 people and cut the salaries of senior employees. Sun denied the rumors. [Twitter; South China Morning Post; Twitter] 

Other unofficial reports from small accounts on Twitter said that Huobi was offering to pay its employees in stablecoins — USDC and tethers — instead of actual-money yuan. If they objected, they would lose their jobs. [Twitter] 

Employees revolted at being paid in magic beans — so Sun cut off internal communications. On January 4, Bitrun said that “all communication and feedback channels with employees” had been blocked. [Twitter] 

Here’s the unofficial details on how Huobi is treating its employees. Those who quit because they’re getting paid in tethers get no severance pay either. This is what a doomed company does. [Twitter]  

After initially denying Huobi was cutting staff, Sun finally admitted that Huobi was indeed laying off 20% of its employees in the first quarter of 2023 — after rumors swirled that half of all employees would be let go. [FT]

Huobi users rushed to get their funds off of the exchange. Blockchain analytics platform Nansen noted a wave of withdrawals on January 5 and 6. Following the withdrawals, Peckshield reported a wallet associated with Tron moved $100 million in stablecoins — USDC and tethers — into Huobi. [Twitter, Twitter]

In a lengthy Twitter thread, Sun assures you that your funds are totally safe. We fully expect the exchange to blow up at any moment. [Twitter]

Binance

US prosecutors for the Western District of Washington in Seattle are sending subpoenas to hedge funds for records of their dealings with Binance. John Ghose, formerly a Justice Department prosecutor who specialized in crypto and now a lawyer at compliance vendor VeraSafe, thinks this is about money laundering. [Washington Post]

We noted previously that “BUSD” on Binance is not the BUSD issued by Paxos, which claims to be backed by actual dollars in Silvergate Bank. Binance “BUSD” is a stablecoin-of-a stablecoin, maintained internally. This is the sort of arrangement that’s fine until it isn’t.

It turns out that Binance has been issuing uncollateralised “BUSD” on its own BNB blockchain. Data Finnovation looked at the Ethereum and BNB blockchains and saw that Binance has a history of minting fake “BUSD” internally on BNB. At some points in 2021, there were $500 million to $1 billion of fake dollars circulating on BNB. They’re caught up now, though — so that’s all fine, right? [Medium]

Dirty Bubble thinks Binance US isn’t meaningfully separate from Binance.com, if you look at how the cryptos flow. But that shouldn’t be news to anyone here. [Dirty Bubble]

Reuters is still on the Binance beat. Here’s a special report on Binance’s accounts, as far as can be told. Reuters calls Binance’s books a “black box.” Private companies don’t have to disclose their financials, especially if they’re operating outside all effective regulation — but even Binance’s former CFO, Wei Zhou, didn’t have full access to the company’s accounting records in the three years he was there. We’ve noted previously how regulators have a heck of a time getting the most basic information out of Binance. [Reuters] 

John Hyatt from Forbes notes how Binance is spending tens or hundreds of thousands of dollars sponsoring Politico’s Playbook newsletter to reach politicians and bureaucrats. Worked great for FTX! [Twitter thread]

DeFi: Go directly to jail

Discussions of crime on the blockchain hardly ever point out that almost all of what goes on in DeFi was always just straight-up illegal under US law.

Pretty much every token was always an unregistered security. The sort of market manipulations that are standard practice in the DeFi trash fire have been illegal under Dodd-Frank since 2010. And that’s before we get to the rugpulls, hacks, and “hacks.”

The authorities are finally moving in. Every DeFi trader should consider themselves on notice.

Hotshot DeFi trader Avraham “Avi” Eisenberg was arrested in Puerto Rico on December 27 on a Department of Justice (Southern District of New York) indictment for commodities fraud and commodities manipulation in the $110 million trade that took out Mango Markets. [indictment, PDF; case docket]

Mango Markets is a decentralized exchange that runs on Solana. Users can lend, borrow, swap, and trade on margin. The exchange is overseen by a DAO, made up of people who hold MNGO — the native token of the exchange.

On October 11, someone drained the project of $110 million by manipulating the platform’s price oracle. After others had traced it to him, Avi Eisenberg came forward and explained the trade.

Eisenberg sold MNGO perpetual futures from one account he controlled to another account also under his control. He then bought large amounts of MNGO, which had the effect of increasing the value of his large holding of MNGO perpetuals. He then borrowed against these holdings and withdrew $110 million in assorted cryptocurrencies. 

This also rendered the Mango platform insolvent. Eisenberg himself explained that the insurance fund in place was “insufficient to cover all liquidations.” He gave back some of his trading profits. [Twitter; Bloomberg]

Eisenberg tweeted: [Twitter, archive]

I believe all of our actions were legal open market actions, using the protocol as designed, even if the development team did not fully anticipate all the consequences of setting parameters the way they are.

Eisenberg’s lawyer will likely explain his client’s erroneous legal reasoning to him.

Eisenberg wasn’t just arrested, he was denied bail as a flight risk — he has significant ties outside the US, he already left the US for two months just after the alleged offense, he likely has crypto stashed away somewhere, the charge carries a heavy penalty, and his background could not be checked. (Compare Sam Bankman-Fried’s release on bail.) [Order of detention pending trial, PDF]

It’s not clear why prosecutors went after Eisenberg in particular. We’d guess the CFTC and DoJ were looking for someone to make an example of. The bit where Eisenberg tweeted a complete confession probably helped, much as SBF’s confession tour of the press helped get him indicted.

What Eisenberg did to Mango was not remarkable at all. DeFi traders pull this nonsense all the time. Perhaps you don’t think DeFi trading shenanigans should be crimes, and that’s nice for you that you think that.

As Avi tweeted on October 19: “What are you gonna do, arrest me?” [Twitter, archive]

Posted on by Amy Castor 1