Tether and sanctions: what’s coming for Paolo’s beautiful launderette

By Amy Castor and David Gerard

Tether has long played financial shell games to keep its dollar stablecoin USDT up and running. It’s also been happy to ignore money laundering laws for most of its existence.

But we think Tether’s day of reckoning is on the horizon due to USDT’s latest use case: sanctions evasion.

How sanctions work

The international financial sanctions system, led by the US and Europe, aims to cut off cash flows to serious bad actors — terrorists, enemy countries, major criminals, and so on.

As Congressman Juan Vargas told Mark Zuckerberg of Facebook in the Libra hearings: “The dollar is very important to us as a tool of American power and also a tool of American values. So we would much prefer to put sanctions on a country than send our soldiers there.”

The US regards the power of the dollar and the sanctions system as part of the national defense. Sanctions are taken very seriously.

The Office of Foreign Assets Control at the US Treasury keeps a list of sanctioned individuals, countries, and companies. [OFAC]

Doing business with an OFAC-sanctioned entity is a strict liability offense that can result in massive fines. That hasn’t stopped Tether.

Use case for Tether: North Korea, Hamas, Russia

Tether’s sanction violations started hitting the papers two years ago.

In August 2022, the US sanctioned Tornado Cash — the favorite crypto mixer of North Korea’s Lazarus Group for laundering stolen ETH to help the country get hard currency. OFAC posted a list of sanctioned Ethereum blockchain addresses for the Tornado Cash smart contract.

Tether flat-out ignored the sanctions. The company posted that it “does not operate in the United States or onboard U.S. persons as customers,” so is not obliged to comply with US sanctions. [Tether, archive]

(This theory doesn’t quite hold, as we detail later.)

The Palestinian Islamic Jihad received $93 million in crypto between August 2021 and June 2023, according to Elliptic. Wallets connected to Hamas received $41 million over a similar period, almost all in USDT, according to Israeli blockchain firm Bitok. [WSJ, archive]

Chainalysis found that stablecoins like Tether were used in the vast majority of crypto-based scam transactions and sanctions evasion in 2023. [Wired, archive; Chainalysis]

TRM Labs concurred, saying that Tether was the most used stablecoin in illicit crypto flows in 2023. Tether on the Tron blockchain in particular had “cemented its position as the currency of choice for use by terrorist financing entities.” [TRM; Bloomberg, archive]

In April 2024, Reuters reported that PDVSA, Venezuela’s state-run oil company, was steering users to USDT and asking for half of each payment upfront in tethers to avoid having their money frozen in foreign bank accounts. US President Biden lifted sanctions in October — but said he would be reimposing them as Venezuelan President Nicolas Maduro had failed to uphold his commitment to free and fair elections. [Reuters, archive; CoinDesk]

Also in April, the Wall Street Journal reported that tethers had become “indispensable” to fund the Russian invasion of Ukraine. Russian middlemen used USDT to skirt US sanctions and procure parts for drones and other equipment. [WSJ, archive]

Bloomberg reported that the US and the UK were investigating $20 billion in tethers that passed through Garantax, a Russian-based crypto exchange that both the US and the UK have sanctioned. [Bloomberg, archive]

Russians were using tethers to skirt sanctions quite soon after the invasion of Ukraine in February 2022. You would buy tethers in Russia with rubles and sell them in London for pounds. [CoinDesk]

The Counter ISIS Finance Group is a group of countries aiming to cut off funding to the Islamic State of Iraq and Syria. Most of ISIS’s funding is in cash — but the US Treasury fact sheet on the CIFG’s January 2024 meeting has a whole section on their fondness for tethers, particularly in Western Africa. [Press release; fact sheet, PDF]

Liberty Reserve

Liberty Reserve was a digital currency service run out of Costa Rica, active from 2006 to 2013. It issued dollar-backed liabilities called “LR.” These were just entries in a ledger at Liberty Reserve — everything was centralized. But otherwise, LR worked very like a stablecoin.

Customers purchased LR through middlemen — such as Gerry Cotten and Michael Patryn, who ran Midas Gold before starting the now-collapsed Quadriga crypto exchange. These “exchangers” bought LR in bulk directly from Liberty Reserve and sold them to secondary users. This helped obscure the money trails.

LR and its ilk ushered in a new era of cyber money laundering. Gone were the days of crossing borders with suitcases full of cash. You could simply set up an LR account and send dollar equivalents digitally!

Liberty Reserve was a bustling laundromat for seven years — until the DOJ seized its website and arrested its merry band of founders in Spain and New York. The US charged them under the Patriot Act with money laundering and running an unlicensed money transmitter. Liberty Reserve’s founder, Arthur Budovsky, is currently serving a twenty-year sentence. [DoJ; DoJ]

Liberty Reserve Junior

Tether is Liberty Reserve but on the blockchain.

Tether has large clients who purchase USDT in bulk — or maybe borrow it, the tethers being created out of thin air with the loan being the “backing reserve.”

Secondary users buy the tethers on offshore crypto exchanges, such as Bitfinex, Binance, and Huobi.

Tether disclaims any responsibility for what these secondary users do with their tethers — even as Tether has complete control over all USDT and can freeze or destroy individual tethers at any time.

Tether is an improvement over Liberty Reserve because it runs on a blockchain — 15 different blockchains, in fact, with Tron being its main blockchain.

As well as DeFi shenanigans local to each chain, this also facilitates chain hopping — where you take a pile of tethers from multiple customers, mix them up, and move them to a new chain, making the funds harder to trace.

Tether routinely creates hundreds of thousands of tethers at a time on one chain, so they can “swap” them from another chain. Sometimes they actually burn the old tethers on the original chain! [Tether]

While Liberty Reserve was mainly used by fraudsters, hackers, and traffickers, it never grew to the scale that Tether has — and it never became popular as a tool for sanctions evasion, not just crime.

Why hasn’t Tether been shut down yet?

Shutting down Liberty Reserve was a huge job — it took a multi-year investigation spanning 17 countries. Tether is even more complex.

Tether is not very linked to the US. None of its principals are US citizens. The company is registered in the British Virgin Islands. The CEO, Paolo Ardoino, lives in El Salvador. Tether’s main bank is Deltec in the Bahamas. A major owner is based in Thailand.

Tether has a long and sketchy history, back to its launch in 2015. They operated under the radar for years. By 2017, federal enforcement agencies were too busy tackling the ICO boom to take notice. So Tether grew unchecked.

In 2018, the New York Attorney General charged Tether and its crypto exchange sibling Bitfinex with fraud when they tried to cover up $850 million in missing reserves. The companies settled in February 2021 for $18.5 million, a small slap on the wrist.

In the process of investigating Tether and Bitfinex, the NYAG accumulated quite a lot of dirt on the companies. You might think they would have passed this pile of evidence to the Feds with a bow on top — and they did try.

In his book Number Go Up, Zeke Faux writes how New York reached out to the SEC, the DOJ, and the CFTC about Tether in early 2021 — but the Feds just weren’t interested?! The CFTC did eventually act against Tether later in 2021.

It wasn’t until 2022 that the Feds finally started to pay attention — when they noticed Tether’s role in sanctions evasion.

A bigger hammer

Despite Tether’s claims to have no links to the US, the company has more than a little US exposure — they have substantial backing reserves held in the US in dollars, such as their Treasury notes at Cantor Fitzgerald. This makes them at least slightly subject to US law.

In any case, non-US entities who work around US sanctions risk being sanctioned themselves. This may be applied to individuals as well as companies. [OFAC, PDF]

An entity may be cut off from the US dollar system altogether — and from any entity elsewhere in the world that wants to keep its access to US dollars. This is a financial death penalty. It’s a big stick.

If Tether remains noncompliant, this could put their banking and reserve relations at risk. Having Tether as a client could become too risky even for Cantor.

By 2023, Tether had wised up a bit. They froze 32 wallets that were linked to terrorism and warfare in Ukraine and Israel in October 2023. In December, Tether froze 41 wallets tied to sanctions as a “precautionary” measure. [Tether; Tether]

By this time, the Feds were keeping a close eye on Tether.

Ardoino wrote public letters to US senators in November and December proclaiming Tether was now in “alignment” with OFAC, and they were fine with freezing secondary addresses. Also, Tether had “onboarded” the Secret Service onto their platform — though it’s not clear just what that meant — and they were working with the FBI and the DOJ. [Yahoo; Tether; Letter, PDF; Letter, PDF]

Seriously, stop it

While Tether was blocking addresses and trying to convince the world it was in full compliance, the US government was making its annoyance more explicit.

Treasury Secretary Wally Adeyemo gave a speech at the November 2023 Blockchain Association Summit. This was the earliest example we could find of the government using the words “national security” about cryptocurrency: [Treasury]

While some have heeded our calls and taken steps to prevent illicit activity, the lack of action by too many firms—both large and small—represents a clear and present risk to our national security.

Adeyemo doesn’t name Tether in the speech, but it’s clear who he’s talking about:

We cannot allow dollar-backed stable coin providers outside the United States to have the privilege of using our currency without the responsibility of putting in place procedures to prevent terrorists from abusing their platform.

He gave this speech just after the Binance settlement dropped.

Senators Elizabeth Warren (D-MA) and Roger Marshall (R-KS) sent a letter to the Treasury, the Department of Defense, and the White House in April 2024 saying that they were concerned about Russia, Iran, and North Korea using Tether to evade sanctions: [Letter, PDF; WSJ]

The national security threat posed by cryptocurrency requires a commensurate response by our country’s defense community. We seek information on the additional authorities you may need in order to neutralize this threat.

The US has decades-old laws in place for dealing with sanction violators. The Bank Secrecy Act, the Patriot Act, and the International Emergency Economic Powers Act give the US sweeping powers.

The government is also working on new stablecoin regulations — and any effective regulation on US dollar stablecoins would likely be fatal to Tether.

What happens next?

Binance already learned this lesson after supplying services to Iran. They had to settle fines of more than $4 billion for violating the BSA, money transmitter laws, and the IEEPA. Former Binance CEO Changpeng Zhao was sentenced to four months in prison. Binance is getting a monitor.

We expect something similar to happen to Tether — large fines, compliance requirements, and the possibility of jail time for Tether principals.

If the heat gets too much, Tether might try to unwind the entire fund and shut down. The tricky parts will be how to do this while keeping as much of the money as possible and how to realize and return the dollar value of what reserves actually exist in any tangible sense.

But most importantly, they have to not unduly upset any of the more demanding sort of Tether customer who knows where they live.

___________________

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Posted on May 14, 2024May 14, 2024 by Amy Castor 3

Everybody hates Binance: Two staff held in Nigeria; finding the cash for $4.3b in US fines

Nigeria has been deeply unhappy with Binance for a while. Now two Binance officials have been held in Nigeria after they arrived in Abuja on February 26.

Also, Binance is going to have to pay the first installment of its $4.3 billion fine to US regulators real soon. Where will it get the cash?

Our latest is over on David’s blog. [David Gerard]

Posted on March 16, 2024 by Amy Castor 0

Bitcoin hits a new all-time high! World reacts: “Wow, that thing’s still around?”

There’s a time to move quickly, and this was that time. This one is on David’s blog.

Summary: it’s all about the stablecoins. Hey, that sounds like a song.

Posted on March 6, 2024 by Amy Castor 0

Crypto collapse: Mt Gox payouts, Tether hooks up the feds, SEC says no to Coinbase, crypto media mergers

By Amy Castor and David Gerard

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It’s not over until withdrawals are temporarily paused due to unusual market activity.
— Jacob Silverman

Tightening Tether’s tethers

Tether’s been under some regulatory heat after the reports of how useful USDT is for financing terrorists and other sanctioned entities. Even Cynthia Lummis, the crypto-pumping senator from Wyoming, loudly declared that Tether had to be dealt with.

The US government isn’t entirely happy with Tether’s financial shenanigans. But they’re really unhappy about sanctions violations, especially with what’s going on now in the Middle East.

So Tether has announced that it will now be freezing OFAC-sanctioned blockchain addresses — and it’s onboarded the US Secret Service and FBI onto Tether! [Tether, archive; letter, PDF, archive]

Tether doesn’t do anything voluntarily. We expect they were told that they would allow this or an extremely large hammer would come down upon them.

There’s more to Tether’s criminal use case than sanctions violation. The most jaw-dropping chapter in Zeke Faux’s excellent book Number Go Up (US, UK) is when he traced a direct message scammer to a human trafficking operation in Cambodia that favored tethers as its currency. South China Morning Post follows up on this with an in-depth report on how Cambodian organized crime uses tethers. [SCMP]

Credit rating firm S&P Global rated eight stablecoins for risk. Tether and Dai got the lowest marks. S&P notes in particular the lack of information on Tether’s reserves. [press release; S&P; Tether report, PDF]

At least some of the claimed Tether backing in treasuries is held in the US with Cantor Fitzgerald — exposing Tether to US touchability. This has been known since February 2023, and was proudly confirmed in December 2023 by Cantor CEO Howard Lutnick: “I hold their Treasuries, and they have a lot of Treasuries. I’m a big fan of Tethers.” [Ledger Insights; Forbes]

Cointelegraph had a fascinating story on a company called Exved using tethers for cross-border payments from Russia! Then they deleted it, for some reason. Exved was founded by Sergey Mendeleev, who also founded the OFAC-sanctioned crypto exchange Garantex, which was kicked out of Estonia. Exved is working with InDeFi Bank, another Mendeleev venture. We’re not so sure the new OFAC-compliant Tether will be 100% on board with this. [Cointelegraph, archive; Telegram, in Russian; Protos]

SEC answers Coinbase’s prayers: “No.”

In July 2022 — just after crypto crashed — Coinbase wrote to the SEC proposing new regulatory carveouts for crypto.

The SEC took its sweet time responding. Eventually, Coinbase sued in April 2023 with a writ of mandamus, demanding a bureaucratic response. The court told the SEC to get on with it, or at least supply a date by which it would answer.

Finally, the SEC has responded: “the Commission concludes that the requested rulemaking is currently unwarranted and denies the Petition.” The SEC thinks existing securities regulations cover crypto securities just fine, and there’s no reason for special rules for Coinbase. [SEC rejection, PDF; Coinbase letter to court, PDF; Gensler statement]

Coinbase general counsel Paul Grewal welcomed the opportunity to challenge Coinbase’s dumb and bad proposal being turned down. [Twitter, archive]

4 (continued)

Binance founder and former CEO Changpeng Zhao will not be returning home to Dubai anytime soon. US District Judge Richard Jones ordered CZ to remain in the US until his sentencing on February 24. He can travel within the US, but he cannot leave. [Order, PDF]

After being busted hard, Binance is still behaving weird. At the FT Crypto and Digital Assets Summit in London, the exchange’s new CEO Richard Teng refused to answer even basic questions, like where Binance is headquartered and whether it’s had an audit. “Why do you feel so entitled to those answers?” Teng said when pushed. “Is there a need for us to share all of this information publicly? No.” [FT]

CZ and Binance have been trying to dismiss the SEC charges against them. This is mostly loud table pounding, wherein Binance claims that what the SEC argued were securities are not really securities. [Doc 190, PDF, Doc 191, PDF]

France was the first country in Europe to grant Binance regulatory approval. State-endorsed blockchain courses for the unemployed and NFT diplomas helped push the country’s most vulnerable into crypto. Since the collapse of FTX and Binance’s $4.3 billion fine for money laundering, French President Emmanuel Macron’s relationship with CZ has fallen under scrutiny. [FT, archive]

London law firm Slateford helped to cover up Binance’s crimes and attempted to intimidate media outlet Disruption Banking from writing about Binance’s sloppy compliance hiring practices. (Disruption Banking told Slateford to get knotted and didn’t hear from them again.) [Disruption Banking]

Binance is finally removing all trading pairs against Great British pounds. [Binance, archive]

FTX: The IRS wants its money

FTX filed a reorganization plan in mid-December. The plan is 80 pages and the disclosure statement is 138 pages, but there’s a notable lack of detail on what happens next. None of the talk of starting a new exchange has made it into the current plan — this appears to just be a liquidation.

The plan treats crypto claims as their value in cash at the time of the bankruptcy filing on November 11, 2022, back when bitcoin was at $17,000 — less than half of what it is now.

Creditors will vote on the plan in 2024. The court must approve the plan before it is implemented. [Bloomberg, archive; Plan, PDF; Disclosure statement, PDF]

The IRS is demanding $24 billion in unpaid taxes from the corpse of FTX. John Jay Ray wants to know how the IRS came up with that ludicrous number — the exchange never earned anything near those amounts. The IRS originally wanted $44 billion, but brought the number down. Judge John Dorsey has told the IRS to show its working. [Doc 4588, PDF; Bloomberg, paywalled]

Three Arrows Capital

Three Arrows Capital was the overleveraged crypto hedge fund that blew up in 2022 and took out everyone else in crypto who hadn’t already been wrecked by Terra-Luna. After months of dodging culpability, co-founder Zhu Su was finally arrested in Singapore in September as he was trying to skip the country.

Zhu was released from jail and appeared before the Singapore High Court on December 13, where he had to explain to lawyers for the liquidator Teneo what happened when 3AC went broke. The information will be shared with creditors. [Bloomberg, archive]

A British Virgin Islands court froze $1.1 billion in assets of Zhu and his co-founder Kyle Davies and Davies’ wife Kelly Chen. [The Block]

Teneo expects a 46% recovery rate for 3AC creditors on $2.7 billion in claims. [The Block]

Crypto media in the new Ice Age

Crypto news outlet Decrypt has merged with “decentralized media firm” Rug Radio. No, we’d never heard of them either. The two firms will form a new holding company chaired by Josh Quittner. Decrypt had spun out from Consensys in May 2022, just before everything crashed. It’s reportedly been profitable since then — though crypto sites always say that. [Axios; Axios, 2022]

Forkast News in Hong Kong has merged with NFT data provider CryptoSlam and fired most of its staff. Forkast was founded in 2018 by former Bloomberg News anchor Angie Lau; it shut down editorial operations on November 30. [The Block]

Crypto news outlets ran seriously low on cash in 2019 and 2020, just before the crypto bubble, and they’re struggling again. We expect more merges and buyouts of top-tier (such as that is in crypto) and mid-tier crypto outlets. We predict news quality will decline further.

Amy recalls the old-style crypto media gravy train and eating in five-star restaurants every night in Scotland and London while embedded with Cardano in 2017. Thanks, Charles! Nocoining doesn’t pay nearly as well, but these days crypto media doesn’t either. There’s probably a book in those Cardano stories that nobody would ever read.

Regulatory clarity

The Financial Stability Oversight Council, which monitors domestic and international regulatory proposals, wants more US legislation to control crypto. FSOC’s 2023 annual report warns of dangers from:

crypto-asset price volatility, the market’s high use of leverage, the level of interconnectedness within the industry, operational risks, and the risk of runs on crypto-asset platforms and stablecoins. Vulnerabilities may also arise from token ownership concentration, cybersecurity risks, and the proliferation of platforms acting outside of or out of compliance with applicable laws and regulations.

Yeah, that about covers it. FSOC recommends (again) that “Congress pass legislation to provide for the regulation of stablecoins and of the spot market for crypto-assets that are not securities.” [Press release; annual report, PDF]

IOSCO, the body of international securities regulators, released its final report on how to regulate DeFi, to go with its November recommendations on crypto markets in general. IOSCO’s nine recommendations for DeFi haven’t changed from the draft version — treat these like the instruments they appear to be, and pay attention to the man behind the curtain. These are recommendations for national regulators, not rules, but look at the DeFi task force — this was led by the US SEC. [IOSCO press release, PDF; IOSCO report, PDF]

London-based neobank Revolut is suspending UK crypto services — you can no longer buy crypto with the app — citing a new raft of FCA regulations, which go into force on January 8. [CityAM; CoinDesk]

Crypto exchange KuCoin has settled with New York. The NY Attorney General charged KuCoin in March for violating securities laws by offering security tokens — including tether — while not registering with NYAG. KuCoin has agreed to pay a $22 million fine — $5.3 million going to the NYAG and $16.77 million to refund New York customers. KuCoin will also leave the state. [Stipulation and consent order, PDF; Twitter, archive]

Montenegro plans to extradite Terraform Labs cofounder Do Kwon to either the US or South Korea, where he is wanted on charges related to the collapse of Terra’s stablecoin. Kwon was arrested in Montenegro in March. Originally it looked like Montenegro was going to pass him off to the US, but the case has been handed back to the High Court for review. [Bloomberg, archive; Sudovi, in Montenegrin]

Anatoly Legkodymov of the Bitzlato crypto exchange, a favorite of the darknet markets, has pleaded guilty in the US to unlicensed money transmission. Legkodymov was arrested in Miami back in January. He has agreed to shut down the exchange. [Press release]

The SEC posted a new investor alert on crypto securities with a very lengthy section on claims of proof of reserves and how misleading these can be. [Investor.gov; Twitter, archive]

Santa Tibanne

It’s been nearly ten years, but Mt. Gox creditors are reportedly starting to receive repayments — small amounts in Japanese yen via PayPal. [Cointelegraph; Twitter, archive]

Some payouts are apparently bitcoin payouts — with the creditors not receiving a proportionate share of the remaining bitcoins, but instead the yen value of the bitcoins when Mt. Gox collapsed in February 2014. This means a 100% recovery for creditors! — but much less actual money.

There are still 140,000 bitcoins from Mt. Gox waiting to be released. If payouts are made in bitcoins and not just yen, we expect that claimants will want to cash out as soon as possible. This could have adverse effects on the bitcoin price.

Trouble down t’ pit

In the Celsius Network bankruptcy, Judge Martin Glenn has approved the plan to start a “MiningCo” bitcoin miner with some of the bankruptcy estate. He says that “the MiningCo Transaction falls squarely within the terms of the confirmed Plan and does not constitute a modification.” [Doc 4171, PDF]

Bitcoin miners are racing to buy up more mining equipment before bitcoin issuance halves in April or May 2024. Here’s to the miners sending each other broke as fast as possible [FT, archive]

Riot Platforms subsidiary Whinstone sent its private security to Rhodium Enterprise’s plant in Rockdale, Texas, to remove Rhodium employees and shut down their 125MW bitcoin mining facility. The two mining companies have been brawling over an energy agreement they had made before prices went up. [Bitcoin Magazine]

More good news for bitcoin

The UK is setting up a crypto hub! ’Cos that’s definitely what the UK needs, and not a working economy or something. [CoinDesk]

Liquid is a bitcoin sidechain set up by Blockstream at the end of 2018. It was intended for crypto exchange settlement, to work around the blockchain being unusably slow. It sees very little use — “On a typical day, there are more tweets about Liquid than there are transactions on its network.” [Protos]

A16z, Coinbase, and the Winklevoss twins say they’ve raised $78 million as part of a new push to influence the 2024 elections. [Politico]

Little-known fact: coiners can donate to the PAC in tethers. All they have to do is send them via an opaque Nevada trust structure to hide the origins of the funds. And this is perfectly legal! [FPPC, PDF, p. 85, “nonmonetary items”]

Ahead of the SEC’s deadline to rule on a bitcoin ETF, Barry Silbert, CEO of Digital Currency, has quietly stepped down from the board of DCG subsidiary and ETF applicant Grayscale and is no longer chairman, according to a recent SEC filing. Silbert will be replaced by Mark Shifke, the current DCG senior vice president of operations. US regulators are suing DCG over the Gemini Earn program co-run by its subsidiary Genesis. [Form 8-K]

Ordinals are an exciting new way to create NFTs on bitcoin! ’Cos who doesn’t want that? The bitcoin blockchain immediately clogged when it was actually used for stuff. Now TON, the blockchain that is totally not Telegram’s, no, no no, has ordinals — and it’s getting clogged too. [The Block]

Image: Mark Karpeles with aggrieved bitcoin trader outside Mt. Gox in Tokyo in 2014.

Posted on December 28, 2023December 28, 2023 by Amy Castor 1

Binance gets hit with crypto’s worst possible fate: compliance

Binance and CZ himself just settled with the US Department of Justice, the Treasury, and the CFTC. The stake through Binance’s heart won’t be the $4.3 billion in fines — it’ll be the compliance.

Real finance businesses that don’t run on crime can do compliance — they just don’t like it. Businesses that run on crime are screwed.

We wouldn’t be surprised if Binance files for bankruptcy next year, and the regulators just become creditors in the bankruptcy.

This one is on David’s blog. [David Gerard]

Posted on November 22, 2023 by Amy Castor 0

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 September 4, 2023 by Amy Castor 0

Crypto collapse: Tornado Cash arrests, Federal Reserve shuts down Farmington Bank, Prime Trust played Terra-Luna

Our latest post on the crypto collapse is on David’s site. [David Gerard]

In this edition:

The US charges Tornado Cash co-founders with laundering over $1 billion in criminal proceeds.
Federal and State regulators shut down FTX-affiliated Farmington State Bank
Prime Trust files its first-day motion — they had been gambling on Terra-Luna!
Everybody still hates Binance
Sam Bankman-Fried says his lawyers told him to do it.

Posted on August 25, 2023 by Amy Castor 0

Crypto collapse: Sam Bankman-Fried goes to jail, SEC appeals Ripple ruling, Prime Trust bankrupt, the tangled tale of TrueUSD and Tron

By Amy Castor and David Gerard

Enjoying our posts? Keep them coming — send us money! Here’s Amy’s Patreon and here’s David’s.
Another way you can help: tell just one other person about our work. Word of mouth is the best way to get information out about any creative work. If you like this, tell someone. Thank you.

“i cant wait until we get julain assange out of jail using Crypto. itll make all the pedophile money laundering worth it”
— dril

Go directly to jail

Sam Bankman-Fried’s bail has been revoked for witness tampering — specifically, that he shared ex-girlfriend Caroline Ellison’s private diary with a New York Times reporter. This was the last straw for Judge Lewis Kaplan, who said the documents were “something that someone who has been in a relationship would be unlikely to share with anyone except to hurt and frighten the subject.”

Previously, Sam tried to get in touch via Signal with another witness, former FTX US lawyer Ryne Miller, about getting their stories straight — which nearly saw Sam’s bail revoked that time.

Our hero is currently at MDC Brooklyn — notoriously one of the worst jails in the federal system — but the government has asked that he be remanded at Putnam, where he’ll be allowed more computer access to prepare for his upcoming trial on October 2.

Inner City Press live-tweeted the entire hearing. Sam’s lawyer Mark Cohen immediately filed an appeal. [Twitter, archive; Doc 198, PDF; Notice of Appeal, PDF; Order; PDF]

Prosecutors filed a superseding indictment against Sam on August 14. The new indictment contains seven of the thirteen original charges, removing anything that wasn’t explicitly in the Bahamas extradition agreement. Sam’s $100 million of political contributions are now listed as just another way he misspent customer money. The government also filed its motions in limine — pretrial motions on what evidence is admissible and so on. [Indictment, PDF; in limine, PDF; Doc 165, PDF]

Mathew Russell Lee of Inner City Press has been the man on the scene at the SDNY courthouse for Sam’s hearings. As well as live-tweeting hearings, he collects his writeups as Kindle books. His collection on Sam is just out, recounting the saga as he saw it happen from December 2022 to last week. [Amazon UK; Amazon US]

SEC appeals Ripple

The SEC has asked SDNY District Judge Analisa Torres to pause their case against Ripple so they can appeal her questionable decision on XRP sales to the 2nd US Circuit Court of Appeals. The SEC’s grounds for appeal is that there’s now a genuine intra-district judicial dispute over the issue. [Doc 887, PDF]

On July 13, Torres ruled that XRP is a security when it’s sold to sophisticated investors, but it’s not a security when sold to retail investors on exchanges – which is precisely backward from the past ninety years of US securities jurisprudence.

In the same courthouse, District Judge Jed Rakoff, who is overseeing the SEC lawsuit against Terraform Labs and its cofounder Do Kwon, flatly rejected Torres’ decision and ruled that Terraform’s LUNA and MIR coins may have been securities when sold to retail investors.

John Reed Stark notes: “For SEC lawyers like myself, Judge Jed Rakoff is arguably considered the most respected and experienced securities law jurist not only in the SDNY but perhaps in the entire U.S. federal court system.” [Twitter, archive]

The SEC proposes to file its opening brief on August 18. Ripple would have until September 1 to respond, and the SEC’s reply would be due a week later on September 8. This is quite soon, but Coinbase and Binance are both using the Ripple decision to support their defenses against their own SEC suits.

Prime Trust goes Chapter 11. You had one job!

Crypto custodian Prime Trust filed for bankruptcy protection in Delaware on August 14. Prime halted withdrawals in late June after Nevada regulators put the company into receivership as insolvent.

How did Prime fall insolvent? They lost the keys to a pile of the crypto they were supposed to be keeping safe. This happened in December 2021. You had one job, guys!

From December 2021 until March 2022, Nevada says that Prime used customer funds to buy additional crypto. But for a year and a half, Prime just lied and told everyone they still had their crypto.

Prime has between 25,000 and 50,000 creditors and liabilities of up to $500 million. The firm’s top fifty creditors have claims of $145 million — including the largest claim of $55 million. [Business Wire; Stretto]

Knives out at TrueUSD

Archblock, formerly TrustLabs trading as TrustToken, created TUSD, a supposedly asset-backed $3 billion stablecoin. It then sold TrueUSD to Justin Sun’s Tron in late 2020 — but the connection to Tron has always been a bit murky, and TrustLabs has never been upfront about who the coin’s actual owner was.

TrustLabs said the new owner was Techteryx, “an Asia-based consortium” — though TrustLabs/Archblock still managed TUSD until July 2023. [Medium, 2020, archive; Twitter, archive]

Alameda Research was the largest redeemer of TUSD. FTX listed TUSD when they knew that TrustLabs was misrepresenting who owned it.

TrueUSD’s main custodian was Prime Trust — and Prime was also its main fiat on-and-off ramp for the US banking system. Prime Trust was thus Justin Sun’s main link to US banking. At least until Signature, Prime’s main banking partner, collapsed in March.

We wrote previously about how the TUSD coin seems pretty clearly unbacked and was being used by someone in the vicinity of Binance to pump the price of bitcoin earlier this year.

Archblock is now doing a merger to move the company’s domicile from the US to Switzerland, for unclear reasons. [Blockhead]

Daniel Jaiyong (“Jai”) An, co-founder of TrustLabs/Archblock, is not happy with this merger and move. An is suing Archblock and its executives: Rafael Cosman, co-founder and board member; Alex De Lorraine, COO and former board member; and Tom Shields, former chairman of the board.

The complaint was filed pro se on July 14 in Delaware, meaning An did not hire an attorney. He wrote the 58-page complaint himself — and it shows. [DLNews; complaint, PDF]

An was in the midst of negotiating the sale of TrueUSD to Techteryx, whose contact was Justin Sun of Tron. In fact, An describes the sale as being to Tron.

So, yes — TrueUSD is run by Justin Sun, if you ever doubted it.

TrustLabs got $32 million from investors in a 2018 accredited investor ICO under SEC Regulation D for a token called TRU. Investors included Andreessen Horowitz, BlockTower Capital, Danhua Capital, Jump Capital,* ZhenFund, Distributed Global, Slow Ventures, GGV Capital, and Stanford-StartX.

_{*Update: Although An mentions Jump Capital in his complaint, Jump Crypto wrote us to say it wasn’t Jump Capital, but Jump Crypto, a division of Jump Trading Group, who made the investment.}

An says that by January 2020, it was clear that the plan in the TRU white paper would never pass SEC muster. He wanted to pay the investors back, as the SEC would surely require – but he says that his cofounder Cosman blocked this. The other shareholders voted An out in July 2020.

TrustLabs finally issued the TRU token in November 2020, repurposed as the native token of their TrueFi lending protocol. An alleges the other executives enriched themselves with TRU tokens — but not him.

An says the company threatened him with legal action if he informed investors what the company was doing. An then filed as a whistleblower with the SEC. He claims the company has retaliated against him for doing so.

Several paragraphs claim past criminal actions by Cosman.

An remains a shareholder in Archblock. He wants the merger blocked and $94.32 million in damages.

Data Finnovation notes that if An’s allegations are true, then FTX knew since 2020 that TrueUSD was owned by Tron — because Tron’s lawyer Can Sun was working on the deal and Can Sun later ended up working for FTX under Daniel Friedberg. Remember that FTX minted nearly all the tethers on Tron in the same time period. [Twitter, archive; Medium, 2022]

Worldcoin wants your eyeballs

Sam Altman is the founder and CEO of OpenAI, the company behind ChatGPT. Worldcoin is Altman’s proof-of-eyeball cryptocurrency.

Altman promotes Worldcoin as a way to end poverty — and not just a way for him to collect huge amounts of biometric data. In exchange for giving up your iris scan, you’ll get 25 free Worldcoins (WLD). [CoinDesk]

Worldcoin operators use “orbs” to scan eyeballs. The operators get paid in tethers. [MIT Technology Review, 2022]

Since the Worldcoin project launched on July 24, throngs of people in Kenya have been queuing up to get their eyeballs scanned — lured by free Worldcoin tokens.

The problem is converting WLD into actual spendable money. The Worldcoin app has no direct withdrawal option — so the Kenyan users have to trade their WLD for USDT on Binance or put their trust in random over-the-counter buyers. So Worldcoin has become a honeypot for scammers: [Rest of World]

“There’s no regulation in the space, and the people receiving the free tokens don’t have enough information. What do you expect?” Evrard Otieno, a Nairobi-based crypto trader and software developer, told Rest of World. “It’s just another opportunity for traders to make some money in the market.”

Days after the Worldcoin launch, the Communications Authority of Kenya and the Office of the Data Protection Commission ordered Worldcoin to suspend operations while they reviewed the project’s privacy protections. [Twitter, archive]

Kenyan police then raided the Worldcoin Nairobi warehouse on August 5 and seized the orbs. [KahawaTungu].

Data watchdogs in Britain, France, and Germany are also investigating Worldcoin for similar reasons. [ICO; Reuters]

The WLD token launched at $3.58 but had crashed to a low of $1.76 by August 14. WLD trades only against USDT and mostly on Binance. [CoinDesk; CoinGecko]

Worldcoin’s investors, who have collectively put in $125 million, include the usual suspects — Andreessen Horowitz, Coinbase Ventures, Digital Currency Group, Sam Bankman-Fried, and Reid Hoffman, the co-founder of LinkedIn. [Crunchbase]

Hex enduction hour

Hex is an ERC-20 token that doesn’t do anything. Hex was promoted widely, even internationally on billboards, by a fellow called Richard Heart (or Richard Schueler to the tax man).

Hex promised stupendous yield rates. You bought Hex with ETH, then you staked the Hex, then you got paid interest in Hex. The website called Hex the “first high-interest blockchain certificate of deposit” that “was built to be the highest appreciating asset that has ever existed in the history of man.”

To “stake” your Hex, you would send it to … the Ethereum genesis address, 0x0. That is, you would throw your Hex into a black hole from which it could never be recovered. The Hex smart contract would then pay you Hex tokens in the future, apparently.

The SEC has finally sued Heart over Hex, PulseChain (a fork of Ethereum), and PulseX (a fork of UniSwap). They allege that Heart raised over $1 billion from these three unregistered securities offerings beginning in 2019. [SEC press release; Complaint, PDF]

The SEC says that Heart misappropriated investor funds to buy luxury sports cars, Rolex watches, and a 555-carat diamond, known as “The Enigma,” which he purchased in February 2022 in a Sotheby’s auction. Sotheby’s accepted ETH for the purchase. Heart was famous for promoting Hex with photos of himself showing off his wealth.

Heart has an unfortunate past of selling email spam software in the 2000s. He even called himself the Spam King. Bennett Haselton of peacefire.org successfully sued Heart in 2002 under Washington anti-spam laws for sending junk emails with deceptive headers. [ZDNet, 2002, archive; Panama Guide, 2007, archive]

David went on Richard Heart’s livestream in early 2020. David talked about books a bit, then Richard went into his sales pitch for Hex. Richard is a very charming and likable fellow, but in that particular way that cautions you not to let a penny of your cash within a mile of him. [YouTube, 2020]

This bank failure is fine, nothing to see here

A fourth US bank fell over this year — Heartland Tri-State Bank of Elkhart in Kansas, a small bank with just $139 million in assets. David Herndon, the Kansas banking commissioner, closed Heartland on July 28 after it became insolvent because it was “apparently the victim of a huge scam.”

Herndon said he didn’t know what the scam was — but he said other banks in the state were not affected. Our psychic powers tell us he has an extremely good idea what happened. The FBI is on the case.

The FDIC had to pay $54 million out of its deposit insurance fund – more than Heartland’s entire $48 million loan portfolio. [FT, free with login]

An employee of the bank said all workers at the bank are still employed, but Shan Hanes, the president and CEO, is no longer there. The bank was handed over to Dream First Bank as a growing concern.

Everyone has been careful to note that the bank fell due to a “huge scam” and definitely not the sort of thing that took out Silvergate Bank, Silicon Valley Bank, and Signature Bank. The “scam” was first mentioned in an August 4 story in American Banker. [Kansas Reflector; FDIC; American Banker]

Still only good news for bitcoin

The SEC is suing Binance. BAM (Binance US) wants to block further discovery and depositions, because they’ve given the SEC so much information toward the consent order they had to be beaten into. BAM demands only four depositions of BAM employees, no depositions of BAM’s CEO or CFO, and no matters outside the consent order. We suspect that Binance doesn’t have some of the perfectly reasonable stuff the SEC has asked for, such as non-existent financial accounts — so Binance is resorting to the Tether defense. John Reed Stark thinks the SEC will largely prevail. [Doc 95, PDF; Twitter, archive]

The SEC sued Bittrex in April for listing securities without registering as an exchange. Bittrex has now settled with the SEC. They will pay $14.4 million disgorgement, $4 million prejudgment interest, and a $5.6 million civil penalty. [Press release]

CoinDesk is laying off 20 people from editorial — 45% of the editorial staff, or 16% of all staff – to prepare for its sale to the Peter Vessenes and Matt Roszak consortium. We’re pretty sure everyone at CoinDesk is furiously updating their resumes right now. [The Block; TechCrunch]

Wyoming Senator Cynthia Lummis, several lobbyists and academics, and venture capital firms a16z and Paradigm have filed amicus briefs urging the SEC to drop its lawsuit against Coinbase. These mostly repeat Coinbase’s arguments. [Doc 48, PDF; Doc 50, PDF; Doc 53, PDF; Doc 55, PDF; Doc 59, PDF; Doc 60, PDF; Doc 62, PDF]

Kai Lentit of “Programmers Are Also Human” on YouTube goes to Web3 Berlin. “Where people without jobs ask people without companies for jobs.” [YouTube]

Posted on August 15, 2023August 16, 2023 by Amy Castor 1

Crypto collapse: Terra judge repudiates Ripple finding, Razzlekhan cops a plea, Binance’s FDUSD stablecoin, CoinDesk sold, smart contracts still stupid

By Amy Castor and David Gerard

We need your support to keep these posts coming. Send us money! Here’s Amy’s Patreon, and here’s David’s. Sign up today!
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“EXCLUSIVE: IT’S RUMORED THAT GARY GENSLER HAD A BLT FOR LUNCH TODAY. EXPERTS BELIVE THIS IS BULLISH FOR A POSSIBLE SPOT BITCOIN ETF APPROVAL”
— Sean Tuffy

IMPORTANT: Patreon sponsors, please check your pledges!

Patreon changed its billing for this month from California to Dublin. So a lot of banks rejected the transactions as possible fraud.

This would easily be reversible … except that Patreon’s systems automatically wiped all patron relationships where a transaction bounced! [Twitter thread, archive]

If you sponsor anyone on Patreon, not just us: please check your transactions for August, re-send them if they bounced, and rejoin as a patron if you need to. The “retry” link should be located in your billing history. Your creators will be most grateful!

We also have Ko-Fi links where you can send us casual tips — here’s Amy’s and here’s David’s.

Razzlekhan cops a plea

Bitcoin rapper Heather “Razzlekhan” Morgan and her husband Ilya Lichtenstein were arrested in February 2022 for hacking Bitfinex in 2016. They agreed to a plea deal a couple of weeks ago. [DOJ press release; Reuters]

The plea hearings were today, Thursday, August 3. Morgan pleaded guilty to money-laundering conspiracy and conspiracy to defraud the United States. The BBC says that “Morgan masqueraded as a rapper.” [BBC]

Lichtenstein pleaded guilty to money-laundering conspiracy. He also admitted to being the original perpetrator of the Bitfinex hack!

Lichtenstein stashed some of the hacked funds as buried gold coins. Arrr. [Bloomberg, archive; CNBC]

Curve: smart contracts, stupid humans

“Smart contracts” are small programs that run right there inside a blockchain. In enterprise computing, these would be called “database triggers” or “stored procedures.”

You never use triggers or stored procedures unless you absolutely have to, because they’re very easy to get wrong and a pain in the backside to debug. In the real world, you keep your financial data and the programs working on it separate.

So, of course, crypto uses programs embedded in the database for everything and touts the difficulty in working with them as a feature and not evidence of the idea’s incredible stupidity.

A smart contract full of crypto can reasonably be treated as a piñata, just waiting for you to whack it in the right spot and get the candy.

Today’s piñata is Curve Finance, a DeFi exchange used for trading stablecoins and other tokens. Curve was hacked on July 30 due to a bug in the Vyper language compiler. Smart contracts that were using Vyper versions 0.2.15, 0.2.16, and 0.3.0 were vulnerable. About $70 million in funds was drained from liquidity pools whose smart contracts used these versions. [Twitter, archive; Twitter, archive]

Vyper, which is inspired by Python, was supposed to have been an improvement over the hilariously awful Solidity — a.k.a. “JavaScript with a concussion” — that most Ethereum Virtual Machine smart contracts are written in. Unfortunately, the Vyper compiler had a bug that meant compiled code was exploitable. So you could mathematically prove your smart contract program was correct … and the compiled version could still be exploited. This could hit any Vyper smart contract using vulnerable versions. [Twitter, archive]

Some have suggested that the Vyper exploit and subsequent Curve hack were “state-sponsored” — which is quite possible, given that we already know that North Korea actively seeks to launder money using crypto.

If North Korea is caught cashing out from the Curve hack, then we suspect large DeFi protocols may get a call from OFAC soon for the same reasons that Tornado Cash did.

David wrote an entire book chapter on all the ways that smart contracts were stupid back in 2017. He foolishly thought that this would knock the idea firmly on the head.

CoinDesk on the block

The bankruptcy of Genesis left Genesis owner Digital Currency Group scrambling to sell off the silverware. DCG’s news site CoinDesk was rumored in January to be up for sale. CoinDesk is now being bought for $125 million by an investor group led by Matthew Roszak (Tally Capital) and Peter Vessenes (Capital6). [WSJ]

DCG bought the failing media outlet in 2016 for $500,000. It’s been shoveling money into CoinDesk ever since. DCG wants to keep the CoinDesk conference business, which is the only part of the site that makes any money.

Bitcoin old-timers will remember Vessenes from the Bitcoin Foundation of the early 2010s. He was the CEO of CoinLab, which was functionally a US agent for the Mt Gox exchange. CoinLab and Mt Gox sued each other repeatedly over alleged contractual breaches. After Mt Gox went bankrupt, CoinLab escalated its claims against the dead exchange from $75 million to an amazing and implausible $16 billion. [Bitcoin Magazine, 2013; Cointelegraph, 2019]

We don’t know what Vessenes wants with a media outlet that only loses money, even from a commercial propaganda perspective. We suppose he could alienate the site’s expensive hires of the past couple of years.

A Ripple in the war on Terra

Terraform Labs issued the TerraUSD and Luna coins, which triggered the crypto crash of May 2022, which popped the 2021 bubble.

We were surprised to hear that Terraform is not dead! It has a new CEO, Chris Amani, who was previously the firm’s COO and CFO. Amani’s hot plan is to revive the Terra blockchain. Amani says that Terraform won’t be launching a new stablecoin. Founder Do Kwon, who is in jail in Montenegro, is still Terraform’s majority shareholder. [WSJ]

The SEC’s case against Terraform proceeds. Terraform filed in May to dismiss the SEC’s complaint, using similar arguments as Coinbase and Ripple. Terraform recently filed that the bizarre July finding in the Ripple case supports dismissing the SEC complaint.

The SEC responded to Terraform and confirmed that it’s appealing the Ripple ruling because it’s nuts: “Ripple’s reasoning is impossible to reconcile with all of these fundamental securities laws principles … SEC staff is considering the various available avenues for further review and intends to recommend that the SEC seek such review.” So we can look forward to that appeal in Ripple. [Doc 29, PDF; Doc 47, PDF; Doc 49, PDF; case docket]

Judge Rakoff concurred with the SEC and got quite pointed about the very dumb and bad ruling in Ripple: [Doc 51, PDF]

Howey makes no such distinction between purchasers. And it makes good sense that it did not. That a purchaser bought the coins directly from the defendants or, instead, in a secondary re-sale transaction has no impact on whether a reasonable individual would objectively view the defendants’ actions and statements as evincing a promise of profits based on their efforts.

… Simply put, secondary-market purchasers had every bit as good a reason to believe that the defendants would take their capital contributions and use it to generate profits on their behalf.

We don’t expect the Ripple ruling to stand.

4

Crypto trading is illegal in China — technically, anyway. The Wall Street Journal says that Binance users coming in from China still trade $90 billion a month — it’s “Binance’s biggest market by far,” with over 900,000 users. [WSJ]

The importance of China is “openly discussed internally.” In fact, “the exchange’s investigations team works closely with Chinese law enforcement to detect potential criminal activity.”

Binance denies the reports, with the very specific wording: “The Binance.com website is blocked in China and is not accessible to China-based users.” Good thing nobody in China uses a VPN, hey. The WSJ says that Binance directs its Chinese users to “visit different websites with Chinese domain names before rerouting them to the global exchange.” [Cointelegraph]

Binance CEO Changpeng “CZ” Zhao responded “4” — meaning that it’s all FUD. [Twitter, archive]

Fore!

The US Department of Justice is considering charges against Binance, but worries about causing a run on the exchange — or so says Semafor, which says the DoJ is considering fines or a deferred prosecution agreement instead. We think that any Binance user who hasn’t already priced in yet more US government action against Binance, particularly an indictment, just doesn’t want to be told. [Semafor]

Binance is cutting employee benefits, citing a decline in its profits — which suggests its customers are running away screaming. The non-US employees laid off in June were offered severance of two months’ salary paid in BNB tokens. [WSJ]

If Binance has a drop in profits, it’s likely the large institutional traders — Binance’s “VIPs” — jumping ship while they can. Where can they be going? Is there a good casino left for the VIPs with an ample supply of suckers to milk? Or was Binance the end of the line?

CZ has filed a motion to dismiss the CFTC complaint against him. He holds that Binance just doesn’t do business in the US, so the CFTC doesn’t have jurisdiction. Also, the securities aren’t securities, apparently. [Doc 59, PDF]

CZ wanted to just shut Binance US earlier this year because of the regulatory heat, two people told The Information. The BAM board voted, but the lone holdout was Binance US CEO Brian Shroder. CZ also considered selling Binance US to Gemini or a sovereign wealth fund. Binance told Cointelegraph that it was “not commenting” on this issue. [The Information, paywalled; Cointelegraph]

In June, the SEC Nigeria ruled that Binance Nigeria had to stop operating in the country. Binance claimed that “Binance Nigeria” had nothing to do with them. SEC Nigeria has now reiterated that they really do mean binance.com. Nigeria has also told all other crypto platforms to desist: “all platform providers, making such solicitations, are hereby directed to immediately stop soliciting Nigerian investors in any form whatsoever.” [SEC Nigeria]

Everybody gets a stablecoin!

On July 26, Binance listed a new coin, FDUSD — a “1:1 USD-backed stablecoin issued by First Digital Labs. Reserves of FDUSD are held by First Digital Trust Limited.” Its trading pairs are BNB, USDT, and BUSD — with zero fees. [Twitter, archive; Binance]

Binance has been going through the stablecoins lately. Binance’s own BUSD has shut down, Binance doesn’t seem to be on such solid terms with Tether, and it tried pumping out a few billion questionably backed TrueUSD after that coin’s main custodian, Prime Trust, had collapsed. First Digital — previously known as Legacy Trust — just happens to be the remaining custodian for TrueUSD.

FDUSD was launched on June 1. Data Finnovation wonders why millions of dollars of deposits to and minting of FDUSD started a week before its supposed launch. “If you believe these are strongly linked to real usd you deserve what you’re gonna get.” [press release; Twitter, archive]

Vincent Chok, CEO of First Digital, has a storied history in business. Before Chok’s move to Hong Kong, he was selling real estate in Canada with Platinum Equities in 2014 — a company that was sanctioned by the Alberta Securities Commission for fraud (though Chok wasn’t named). Chok’s previous company was Intreo Wealth Alliance in Calgary. [press release]

None more stable

Wyoming is trying to do a stablecoin again with their Stable Token Commission! The total budget for the initiative: $500,000. We wrote before about Caitlin Long’s crypto bank Custodia and what a disaster that was. Custodia also hoped to launch a national stablecoin backed by the Fed, but the Fed was having none of it. So good luck, guys. [Wyoming Truth]

Michel de Cryptadamus notices that Tether’s attestations show its actual cash on hand is getting quite low. On December 31, 2022, they claimed to have $5.31 billion in cash. On March 31, 2023, they claimed $481 million. On June 30, 2023, they claimed just $90 million. This is as the issuance of tethers keeps going up. But we’re sure it’s all fine. [Twitter, archive]

The New York Fed wrote about “Runs on Stablecoins” — concerning the Terra-Luna collapse of May 2022. David Rosenthal contextualizes the New York Fed paper: “Note in particular that traders don’t actually believe that USDT is safe, it is just that its size makes it convenient for traders to use USDT unless, like Wile E. Coyote, they look down at it as they did last May.” [NY Fed; blog post]

The White House has told Rep. Patrick McHenry’s stablecoin bill to go away, at least according to McHenry. [The Block]

Coinbase: not so keen on regulatory clarity

Coinbase wants regulatory clarity. The SEC was happy to give it to them. Brian Armstrong of Coinbase told the Financial Times that prior to the SEC suing Coinbase in June, the commission told them to delist all cryptocurrencies other than bitcoin. [FT, archive]

The SEC told CoinDesk that “SEC staff does not ask companies to delist crypto assets. In the course of an investigation, the staff may share its own view as to what conduct may raise questions for the Commission under the securities laws.” [CoinDesk]

Coinbase told CoinDesk that the FT report “lacks critical context” but was somehow unable to also say what the context was.

This is pretty rich given that it was literally Armstrong who told this to the FT, presumably hoping to gin up the crypto crowd — which he certainly did.

Coinbase concurred that the SEC did not, in fact, formally tell the exchange to delist everything except bitcoin.

We strongly suspect the actual conversation was Coinbase asking “Well how can we absolutely avoid breaking any laws then, smart guy?” and then the SEC fellow suggesting the very safest possible option.

Good news for bitcoin

Kyle Davies from Three Arrows Capital (3AC) has gone sovereign citizen. Davies holds that renouncing his US citizenship in October 2020 means that he can’t be held in contempt of court for not responding to 3AC liquidators Teneo in their US action. Davies’ lawyers also claimed that he hadn’t been properly served, as if he could claim not to know about the proceeding while arguing it in court. [Doc 106, PDF; Doc 107, PDF; case docket]

The SEC suggests that crypto “attestations” that aren’t audits might be a worry … for the accountants. Subheadings in the SEC’s statement on “The Potential Pitfalls of Purported Crypto ‘Assurance’ Work” include “The Accounting Firm’s Potential Liability for Antifraud Violations.” The footnotes mention that “liability for fraud may extend to “attorneys, engineers, and other professionals or experts.” This means that the SEC will look at what the developers were doing. [SEC]

Swift is running a pilot program that lets you make instant payments across different currency zones! So what backend do you need to use for instant remittances across currency zones? It turns out the answer is: a database. [FinExtra]

Kuwait has banned cryptocurrency for payments or investments. The National Committee for Combating Money Laundering and Terrorism Financing says it’s doing this to implement FATF requirements. Crypto mining is also banned. Securities under the Central Bank of Kuwait or Capital Markets Authority regulation are exempt. [Arabian Business; Al Jarida, in Arabic]

FedNow, the Federal Reserve’s real-time retail settlement system, has gone live, dragging US retail banking kicking and screaming into the 2000s. This puts a Fed CBDC into the trash can, as the White House had already noted. The hard part is getting thousands of banks to sign up. But the Fed has its ways of asking for things. [Federal Reserve]

Media stardom

David told the Moscow Times — who are not fans of Mr. Putin and who are currently banned in Russia — that a CBDC ruble wouldn’t do anything new to help evade sanctions that Russia can’t already do with rubles: “The problem is that nobody wants rubles.” [Moscow Times]

Posted on August 3, 2023August 4, 2023 by Amy Castor 1

Crypto collapse: Alex Mashinsky of Celsius arrested, Ripple’s bizarre XRP win, Gemini sues Genesis, Gisele Bündchen knew nothing!

The latest episode of the crypto collapse is out. This edition is on David’s blog. [David Gerard]

In this episode, we cover:

The Mashinsky Method: mycrimes.epub
Good, if bizarre, news for XRP
Binance hates Binance
Coinbase, the battle continues
A spot of regulatory clarity
Gisele Bündchen: Crypto? What’s a crypto?

Image: Alex Mashinsky shows up for his arraignment after an early morning arrest.

Posted on July 15, 2023 by Amy Castor 0

Crypto collapse: TrueUSD in trouble, Prime Trust and Banq go down, Europe hates Binance, BlockFi, Terra-Luna, Twitter is just resting

We’ve been catching up on the latest crypto collapse news. It’s David’s turn to post, so you’ll find the writeup on his blog. [David Gerard]

In this episode:

Twitter is becoming unusable! Archive everything!
Prime Trust takes out TUSD.
Banq, Prime Trust, Jon Jiles, and NFTs.
Europe really hates Binance.
Everybody hates Binance.
BlockFi creditors get spicy.

Also, if you haven’t already, please support us on Patreon!

Posted on July 2, 2023 by Amy Castor 0

SEC sues Binance, part 3: VIPs on VPNs, wash trading, the Binance US equity sale, who is Guangying Chen?

I’m still wading through grief and dealing with a mountain of estate stuff after my father’s passing. Normally, David and I take turns posting, but our latest is once again on his site.

In part 3 of SEC sues Binance:

More on the consent order
VIPs on VPNs
Wash trading.
The Binance.US equity offering
Guangying Chen: “the real CFO”

Posted on June 24, 2023 by Amy Castor 0

SEC sues Binance, part 2: asset freeze, securities, Coley and Brooks, Gensler’s alleged COI

Part 2 of SEC sues Binance is over on David’s blog.

In this episode:

Binance responds to the SEC’s proposed Temporary Restraining Order

Catherine Coley and Brian Brooks: What we did on our holidays

A review of the alleged securities listed on Binance.US

BNB, BUSD, BNB Vault, and Simple Earn — securities promoted by Binance

Gensler and the alleged conflict of interest.

Posted on June 17, 2023June 17, 2023 by Amy Castor 0

SEC sues Binance, part 1: the complaint, Binance US asset freeze, Tai Chi plan, sock puppet CEOs, weird cash flows

By Amy Castor and David Gerard

ONE WEIRD TRICK they don’t want you to know: Send us money! Here’s Amy’s Patreon, and here’s David’s. Sign up today!
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“Every single one of these news updates from the slow motion implosion of the great fake tech money pyramid scheme is like reading headlines that say: ‘Man confused as to why his clothing caught fire after dousing self with kerosene.’ Every one.”
— A Shiny Blue Thing

CZ: “4”
SEC: “Fore!”

A day before the SEC sued Coinbase, the agency also filed a suit against Binance, the world’s largest offshore crypto casino, and its affiliate Binance.US. Binance founder Changpeng Zhao, better known as “CZ,” was also named in the suit.

CZ tweeted “4,” which means he is dismissing the complaint as “FUD, fake news, attacks, etc.” If you have a single-digit shorthand for this sort of thing, you may already be in trouble. [Twitter, archive; Twitter, archive]

The 136-page complaint, filed in the District of Columbia on June 5, outlines 13 charges. Unlike the Coinbase suit, this one alleges fraud. The complaint comes with nearly 100 exhibits, some of which are incendiary. [Press release, Complaint, PDF; Docket]

CZ has his hands full these days. The US Department of Justice is currently investigating Binance over money laundering. In March, the CFTC filed its own enforcement action against Binance and CZ — which Binance has until July 27 to respond to. [CFTC docket]

The SEC complaint covers some of what’s in the CFTC complaint. But there’s a pile of new stuff. This is a huge amount to cover, so we’ll be doing it over a few posts.

The SEC complaint

The lawsuit is against Binance Holdings Limited, BAM Trading Services Inc., BAM Management US Holdings Inc., and Changpeng Zhao. (BAM Trading runs Binance.US; BAM Management is a holding company that owns BAM Trading.) Summons were served to listed company addresses and to an address for CZ in Malta. [defendant list, PDF]

The SEC comes out of the gate loud:

This case arises from Defendants’ blatant disregard of the federal securities laws and the investor and market protections these laws provide.

Among the accusations:

Binance and BAM Trading both operated as unregistered securities exchanges, broker-dealers, and clearing agencies, while raking in $11.6 billion in revenue.
Binance’s own BNB and BUSD tokens are securities, as are 10 other tokens listed for trading on Binance.US.
Binance lending products (Simple Earn and BNB Vault) and Binance.US staking products are also securities.
CZ claimed BAM operated separately from its offshore parent and had its own leadership. In practice, he firmly controlled BAM and the US platform’s customer assets.
Binance secretly enabled US-based high-value “VIP” customers to trade on its non-US platform.
BAM defrauded company investors of $200 million by lying to them about non-existent controls against abusive trading on the platform.
CZ funneled customer funds to Sigma Chain, a trading entity that he owned.
Sigma Chain inflated the trading volume on the US site through wash trading — because the Binance trading engine let anyone trade with themselves.
Binance and CZ commingled billions in customer funds on Binance.US and sent them to market maker Merit Peak, also owned by CZ.

The SEC wants Binance and BAM permanently enjoined from doing any of this ever again, disgorgement of ill-gotten gains with interest, civil money penalties, and equitable relief.

The SEC has also sought to freeze customer assets on Binance.US — specifically to protect US customers from CZ and Binance.com.

Tai Chi: A plan to evade regulation

CZ launched Binance in July 2017 to rapid popularity. He evaded accountability from the start, moving his headquarters from China to Japan to Malta.

Per the complaint, CZ denies that Binance has an office at all: “Wherever I sit is the Binance office. Wherever I meet somebody is going to be the Binance office.”

A month after launching in China, Binance revealed that the US and China together made up nearly half of its customer base. [Binance, archive]

But how to keep the ball rolling? Crypto trading was banned in China in 2019. It continued online through foreign exchanges until September 2021, when China declared all cryptocurrency transactions illegal.

CZ needed US customers — especially “VIP” ones — but not US regulation. So, starting in 2018, he worked on how to surreptitiously evade US securities laws. As his chief compliance officer Samuel Lim admitted: “we do not want [Binance].com to be regulated ever.” [Doc 17-5, PDF]

The trouble was, as Lim put it to fellow Binance employee Alvin Bro: “we are operating as a fking unlicensed securities exchange in the USA bro.”

Lim was keenly aware of the hazards of US law enforcement:

there is no fking way in hell i am signing off as the cco for the ofac shit

theres a certain point where money is totally useless, and that is making a declaration to the USA that you are clean

when shanghai is totally cowboy

there is no fking way we are clean

i have zero visibility on our VIP clients

ZERO

the strategy of bnb is to survive for 2 years and f off

and in this 2 yrs try ur bestest to not land in jail

An unnamed “consultant” who ran “a crypto asset trading firm in the United States” suggested options to CZ and his team. One option was low-risk: settle the regulators’ concerns in an orderly manner. But if they went that route, they might be shut out of the US market entirely for months or years. The second option was risker, but more profitable: create a separate US entity that would head off the regulators.

The consultant suggested engaging with the SEC on how to comply but “with no expectation of success and solely to pause potential enforcement actions.” The new entity would “become the target of all built-up enforcement tensions” and “reveal, retard, and resolve built-up enforcement tensions.”

The new entity would also give Binance better access to US dollars without Binance.com needing its own banking relationships.

Binance would still need to insulate the new entity from US enforcement: “Key Binance personnel continue to operate from non-US locations to avoid enforcement risk” and “Cryptocurrency wallets and key servers continue to be hosted at non-US locations to avoid asset forfeiture.”

This was the “Tai Chi plan,” first reported in Forbes in October 2020. Binance filed a defamation suit against Forbes for this report, though they withdrew it a few months later. Binance then tried to buy equity in Forbes in a SPAC deal that later fell through — though this didn’t hold Forbes back from going in hard against Binance. The SEC complaint includes the original Tai Chi documents. [Forbes, 2020; Doc 17-2, PDF; Doc 17-3, PDF]

CZ opted to go ahead with the Tai Chi plan. Binance.US launched in July 2019, run by a separate entity, BAM Trading. Binance announced it would begin restricting US customers from transacting on Binance.com and they should use the US site instead.

Today we charged Binance Holdings Ltd. (Binance); U.S.-based affiliate, BAM Trading Services Inc., which, together with Binance, operates https://t.co/swcxioZKVP; and their founder, Changpeng Zhao, with a variety of securities law violations.https://t.co/H1wgGgR5ir pic.twitter.com/IWTb7Et86H
— U.S. Securities and Exchange Commission (@SECGov) June 5, 2023

CZ’s sockpuppets

Binance.US was a supposedly independent US affiliate of Binance.com, run by BAM Trading, incorporated in Delaware. In practice, CZ reportedly ran BAM himself with an iron hand.

Catherine Coley and Brian Books — “BAM CEO A” and “BAM CEO B” in the complaint — sang like birds to the SEC. Brooks detailed to the SEC how CZ was not merely the chairman of BAM, but exercised CEO-level close control.

Even BAM’s accountants cautioned their client that the lack of information around money movements “makes it very difficult to ensure the Company is fully collateralized at specific points in time.”

Only two people — CZ and another person, Guangying Chen, who nobody seems to admit much about — controlled all of the flows of cash and cryptos.

Coley and her team were extremely unhappy after reading the Forbes article on the Tai Chi plan:

As BAM CEO A [Coley] explained to the Binance CFO shortly after the article was released, BAM Trading employees “lost a lot of trust with the article” and “the entire team feels like they’ve been duped into being a puppet.”

The SEC wants to freeze Binance.US funds

The SEC was very concerned about the status of Binance.US customer funds all through early 2023 and couldn’t get straight answers out of BAM or Binance.com as to where the funds were held and who controlled the purse strings.

On June 6, the SEC filed a motion seeking an emergency temporary restraining order and preliminary injunction against Binance and BAM. Customer assets at Binance.US are largely controlled by non-US entities, and Binance has allegedly siphoned a pile of cash out of BAM. Motions like this are what the SEC does when it suspects huge fraud.

The SEC specifically wants to let Binance.US customers withdraw their funds, but not allow Binance to transfer money outside the US. [SEC press release; Doc 4, PDF; Memorandum of law, PDF]

A hearing on the matter is set for Tuesday, June 13 at 2:00pm. It’s expected that Judge Amy Berman will rule on the day as to whether to put the TRO into place.

Where’s the US money?

The SEC’s investigation into Binance and Binance.US started on August 17, 2020 — before Forbes told the world about the Tai Chi plan. [Doc 12, PDF]

The first SEC contact with BAM was a December 17, 2020, subpoena for documentation of BAM’s control of Binance.US crypto assets.

The SEC requested more information in September 2022. BAM finally answered in February 2023, but “its answers were not reassuring.”

BAM had a “wallet custody agreement” such that Binance would custody Binance.US crypto — the part of the Tai Chi plan where the crypto would be held outside the US. BAM told the SEC that the wallet custody agreement “was never operationalized.”

The SEC sent Binance Holdings Limited (Binance.com) a Wells notice, indicating that an enforcement action was imminent, on February 21. BHL responded on March 15 that “BHL does not, and has not, served as the custodian of the digital assets on Binance.US.” [Doc 19-13, PDF]

But the SEC already knew this was not true — based on information it had gotten from Signature Bank, conversations with former BHL and BAM employees, and reports to BAM from BAM’s auditor Armanino.

In the two weeks leading up to filing the June 5 complaint, the SEC was still trying to resolve the custody issue — with “numerous written and oral exchanges concerning custody of Binance.US Platform customers’ assets and, more importantly, who is in ultimate control of those assets.” [Doc 19-15, PDF; Doc 19-16, PDF]

BAM now “disputes its own auditor’s conclusion of past Binance custody over customer assets” (emphasis SEC’s) and “admits that Zhao and Binance continue to possess substantial control over at least some of BAM Trading’s crypto assets.”

BHL and CZ have not been helpful:

Zhao’s attorneys have continued to maintain that Zhao is not subject to the jurisdiction of the United States — despite setting up a crypto trading platform in the United States that has made hundreds of millions from trading with U.S. customers, and despite his beneficial ownership of accounts held at banks in the United States through which billions of dollars flowed to some of his foreign domiciled companies like Merit Peak and Sigma Chain.

As recently as June 4, BHL was begging the SEC not to freeze BAM assets. [Doc 19-14, PDF]

The Binance money funnel

Binance is a network of shell companies. These entities hypothetically have different roles, but in practice, money flows between them in vast amounts — mostly via transfers between the entities’ accounts at Silvergate Bank, and some at Signature. We know this because Silvergate, Signature, and FedWire told the SEC all about it. [Doc 21, PDF]

How much money are we talking about? Sachin Verma, an SEC forensic accountant, says:

At times the amounts being credited and debited during a single month amounts to movement of more than a billion dollars.

… On January 1, 2023, eight Binance/Zhao-owned companies had $58.7 million on deposit. During that same time frame, $840 million was deposited into, and $899 million was withdrawn, from those accounts

Binance could and did transfer funds without BAM’s knowledge. At one point, while she was CEO, Coley had to ask where $1.5 billion in daily transfers was coming from — neither she nor her team had the access needed to verify them.

Coley also had to ask why on earth $17 million in BUSD was moving from Merit Peak (Binance) to Sigma Chain (Binance) via BAM, and where Merit Peak got the money from. [Doc 19-2, PDF]

The billions of dollars flowed in from Binance.US customers, through the various Binance companies’ checking accounts, into a Merit Peak account, to Paxos Singapore (for $21.6 billion of BUSD between 2019 and 2021), and out to … somewhere:

Binance Holdings Limited and Binance Capital Management show large deposits and withdrawals from and to Signature accounts for some Zhao-owned companies, and hundreds of millions of dollars have been transferred.

Per the SEC’s request to freeze Binance.US assets:

During 2022, a U.S. bank account for Swipewallet (beneficially owned by Zhao) sent $1.5 billion offshore in foreign exchange, or “FX,” wires … Between January and March 2023, multiple Binance accounts wired more than $162 million offshore for further credit of a foreign account belonging to the company beneficially owned by the Binance Back Office Manager.

That manager was Guangying Chen.

CZ ran billions of dollars through Silvergate every month. None of it ever stayed in one place for long — all the accounts were just checking accounts where money sat for a moment before being shuffled under another shell.

Unlike Sam Bankman-Fried, CZ seems from all this to have had the good sense to stash away billions of dollars in actual money. He also purchased a home in Dubai in 2021 — a coincidentally non-extradition jurisdiction.

Where did the money end up? Where’s CZ keeping the dollars? Following the money trail is confusing — which appears to be the point.

It’s not clear whether Silvergate filed suspicious activity reports on all these dubious transfers. They certainly should have.

__________________

Also read:

SEC sues Binance, part 2

SEC sues Binance, part 3

Posted on June 12, 2023July 1, 2023 by Amy Castor 0

Crypto collapse: Fahrenheit buys Celsius, DCG may be broke, Hong Kong cracks down, Binance commingling, how Bitfinex was hacked

By Amy Castor and David Gerard

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Temperature drop

Fahrenheit has officially won the bid for the bankrupt Celsius Network’s assets — pending approval by the court, which is near-certain, and by regulators, which is less so. A $10 million deposit is due by Monday. [Doc 2713, PDF]

Fahrenheit is a consortium that includes VC firm Arrington Capital, miner US Bitcoin, investment firm Proof Group, former Algorand CEO Steven Kokinos, and Seasons Capital CEO Ravi Kaza.

The new deal is an adaptation of the previous NovaWulf proposal. A “NewCo” will be created to take ownership of Celsius’ remaining DeFi tokens, its loan portfolio, its venture capital investments, its bitcoin mining operation, and $500 million in “liquid cryptocurrency” (not specified, but presumably Celsius’ remaining BTC and ETH). US Bitcoin will manage Celsius’ bitcoin mining operation.

Holders of Earn claims, some holders of Convenience claims, Withhold claims, and Borrow claims will receive equity in NewCo, pro rata. NewCo will endeavor to get a public stock exchange listing for the equity. Earn claimants will also get a distribution of the liquid cryptocurrency and any proceeds from litigation.

If you’re a Celsius creditor, the plan contains lots of important details. Read it and discuss this with your fellow creditors.

As with the original NovaWulf proposal, we think this is a Hail Mary pass that can only work if number goes up. On the other hand, it’s doing something and not just liquidating what little remains. Also, Alex Mashinsky won’t be involved.

DCG: When your left pocket can’t pay your right pocket

In the Genesis bankruptcy, Genesis’ parent company Digital Currency Group missed a $630 million payment to Genesis due earlier this month. Note that that’s a payment from themselves to themselves, and they still failed to make it.

This failure to pay was noted by Gemini, which has a tremendous interest in getting that money so Gemini Earn investors can be paid back. Gemini Earn’s retail customers are the largest creditor of Genesis. [Gemini, archive of May 25, 2023]

Gemini Earn was an investment product where Gemini customers put their money into Genesis to earn unlikely interest rates. Gemini’s customers were not so happy at the prospect of their money being stuck in the Genesis bankruptcy for months or years.

So in February, the creditors worked out an “agreement in principle” — not, you’ll note, an actual deal — whereby they would get money back from DCG, as the owners of Genesis. [press release]

In April, the creditors got sick of DCG messing about and upped their demands. This led to a bizarre statement from DCG on May 9 that they were “in discussions with capital providers for growth capital and to refinance its outstanding intercompany obligations with Genesis.” They didn’t have the money to pay themselves. [CoinTelegraph]

Gemini also plans to file a reorganization plan of its own. This is likely why Genesis has filed asking for its exclusive right to make reorganization proposals to be extended to August 27. The court will hear this motion on June 5. [Doc 329, PDF]

Either DCG is trying extremely hard to screw over Genesis customers … or, despite all the millions and billions with dollar signs in front in their accounts, and “$200 million” a year in Grayscale management fees, DCG is broke — at least in actual money — and has been pretending not to be broke. And we’re pretty sure Gemini is pushing this point this hard because they can’t cover their customers either. Imaginary assets are great — until you have to pay up.

Binance is outraged at Reuters catching them out again

Reuters has caught Binance at it again. This time, Binance was commingling customer funds and company revenue on the order of billions of (actual) dollars in their Silvergate accounts in 2020 and 2021. Controls? What are controls? [Reuters]

Binance told Reuters that this was money being used to buy BUSD and this was “exactly the same thing as buying a product from Amazon,” per Brad Jaffe, Binance’s VP of communications since August 2022.

This explanation is at odds with Binance’s previous claims to customers that dollars they sent to Silvergate were “deposits” that they could “withdraw” as dollars. Jaffe said that “the term ‘deposit’ is a communication term, it’s not an indication of the technical treatment of the funds.” Oh, a communication term — you mean like when words mean things in a context?

Reuters didn’t find any misappropriation of customer funds in the documents they saw. But commingling is a massive red flag for incompetence (as it turned out to be with FTX) and fraud — such as moving money around to evade regulatory scrutiny. Reuters includes a complex diagram of the international flows of Binance’s cash in the report.

Binance PR person Patrick Hillmann dismissed the story as “1000 words of conspiracy theories” and said that Reuters was “making stuff up.” Though Hillmann never stated at any point that Binance hadn’t commingled funds at Silvergate. Hillmann also decried “the xenophobia behind consistently mentioning @cz_binance’s ethnicity without noting that he’s been Canadian since the age of 12” … which the Reuters story didn’t do at all. [Twitter, archive]

Hong Kong brings some regulatory clarity

The Hong Kong Securities And Futures Commission (SFC) has finished its consultation on virtual asset trading platforms opening to retail investors. The rules allow licensed exchanges to offer trading to the public in tokens that are highly liquid and are not securities.

The rules are strict — no securities, no lending, no earn programs, no staking, no pro trading, and no custody. Unlicensed crypto exchanges are not allowed to advertise. Hong Kong very much wants to avoid the sort of embarrassment that comes with a large exchange like FTX failing.

Exchanges will be required to assess the failure risk of all tokens they offer trading in. Tokens are required to have a 12-month track record. Exchanges will need to get smart contract audits where appropriate. 98% of client assets must be in cold wallets (offline); hot wallets must not hold more than 2%.

Margin trading is not yet allowed even for professional investors, but the SFC will issue guidance on derivatives in the future.

The guidelines take effect June 1, which is when exchanges can begin to apply for a license. [SFC; Consultation Conclusions, PDF]

Regulatory clarity around the world

Japan will be enforcing FATF rules on crypto from June. This went through with no objections because Japan learned its lesson from Mt. Gox and regulated crypto exchanges early. [Japan Today]

FATF tells CoinDesk that it didn’t actually demand that Pakistan not legalize crypto. “Countries are permitted, but not required, to prohibit virtual assets and virtual asset service providers.” [CoinDesk]

The International Organization of Securities Commissions is putting together recommendations on crypto. Service providers need to address conflicts of interest, separation of functions, and accounting client assets, and this has to work across borders. Get your comments in by July 31. [IOSCO, PDF; recommendations, PDF]

Huobi gets kicked out of Malaysia for failure to register. Not registering is a violation of Malaysia’s Capital Markets and Services Act of 2007. The Securities Commission Malaysia said Huobi has to disable its website and mobile apps on platforms including the Apple Store and Google Play. [Securities Commission Malaysia]

The CFTC is talking about all the fraud in crypto, says it’s on good working terms with the SEC on these matters, and warns the crypto industry that it’s not going to be a soft touch. [Reuters]

The SEC has changed the disclaimer that commissioners say before speeches — probably in response to William Hinman’s comments saying ether wasn’t a security being cited in the Ripple case. [blog post]

Molly White put up Rep. Sean Casten (D-IL) questions at May 18, 2023, stablecoin hearing, and it’s a lovely five minutes. This guy understands precisely how Web3 was fundamentally a venture capital-funded securities fraud. [YouTube]

Bitfinex: whoops, apocalypse

The Organized Crime and Corruption Reporting Project obtained an internal report on the August 2016 hack of the Bitfinex crypto exchange — the hack that led to the Tether printer going wild and the 2017 crypto bubble.

The report was commissioned by iFinex and prepared by Ledger Labs. It was never released, but OCCRP has obtained a draft.

Bitfinex kept transaction limits secured by three keys. It looks like someone made the mistake of putting two of the three keys on the same device. This is how the hacker was able to raise the global daily limit and drain the accounts.

One key was associated with a generic “admin” email address and another linked to “giancarlo,” which belonged to Bitfinex CFO Giancarlo Devasini. The report does not blame Devasini for the hack.

Ledger Labs thinks the hacker came in from an IP address in Poland. [OCCRP]

Tether’s issuance is up — but its usage is through the floor. The trading volume is at its lowest in four years. Most of the tether trading happens on Binance, which is where the majority of all trading volume happens, and where USDT is accepted as being worth a dollar. We mentioned last time that volume was down, but Kaiko has the numbers. [Kaiko]

More good news for bitcoin

Do Kwon’s bail has been scrapped. He’s back in jail in Montenegro, awaiting his local trial on charges of forging documents, specifically the ones he was using to try to get out of Montenegro to his next bolt-hole. [Reuters]

Glassnode tells us that hodling has never been more popular! 68.1% of BTC hasn’t moved in the past year! Now, you might think that this is because most people who bought in during the bubble are still underwater. But “baghodler” isn’t yet a word. [Glassnode]

Shaquille O’Neal was finally served in the FTX class action suit against the exchange’s celebrity promoters — at the former FTX Arena. [Washington Post]

Openfort is scraping up the very last of the Web3 gaming venture cash — they just got $3 million to do an online crypto wallet for blockchain games. You know, that gigantic current market that anyone has the slightest interest in. Openfort doesn’t appear to have a customer as yet. [VentureBeat]

Coinbase has a new TV ad! We know you lost all your money — but crypto is like the early Internet, really. [Youtube]

Solana is so thoroughly out of ideas that they’re adding a ChatGPT plugin. Presumably, it can write tweets for them. [The Block]

Crypto fans make up new justifications for the importance of their magic beans all the time. David Rosenthal takes us through a few. [DSHR Blog]

Video: The problems with Crypto Currency. Max Silverman wanted to do an animation, so asked David for 90 seconds of audio. It came out great! [YouTube]

Posted on May 26, 2023 by Amy Castor 0

Crypto collapse: Bittrex files chapter 11, Binance loses market makers, FTX gets a tax bill, bitcoin gets apes

By Amy Castor and David Gerard

ONE WEIRD TRICK they don’t want you to know: Send us money! Here’s Amy’s Patreon, and here’s David’s. Sign up today!
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Bittrex takes a dive

Bittrex’s US entity, Desolation Holdings LLC, and Bittrex Malta filed for Chapter 11 bankruptcy in Delaware on May 8. The move came just weeks after Bittrex shut down its US operations, which was soon after they were sued by the SEC for trading securities without registering as a securities exchange. [Bloomberg; Bittrex; case docket]

The bankruptcy is apparently the fault of the SEC. The first-day declaration cites several SEC actions against other firms — and harps on about a “lack of regulatory clarity.” [Doc 9, PDF; first day declaration, PDF]

Bittrex says the bankruptcy will totally not impact its non-US operations, and funds are safe! Surely Bittrex didn’t do any commingling of company and customer funds like every other crypto exchange in trouble keeps turning out to have done.

The debts are largely fines levied against Bittrex by US government agencies — who are the only named creditors. OFAC is the largest creditor, owed $24.2 million. FinCEN is also a top 50 creditor with a $3.5 million claim. The SEC is listed with an undetermined amount of claims. [Doc 1, PDF]

Bittrex wishes to avail itself of a debtor-in-possession loan of 700 BTC so as to wind down Desolation and Bittrex Malta in an orderly manner and return customers’ funds. The loan will be from themselves — Aquila Holdings Inc, Bittrex’s parent entity, which is not in bankruptcy. [Liquidation plan, PDF]

The precedence of creditors (who gets paid back first) would be: themselves, then the customers, then the US government. That’s novel.

Michel de Cryptadamus notes several other interesting wrinkles. Bittrex’s US gross (not net) revenue for 2022 was $17 million, against the $30 million in government fines. “Several states alleged that BUS was undercapitalized and demanded that BUS immediately surrender its money transmitter licenses in those states.” Bittrex’s complicated corporate structure is reminiscent of FTX. And Bittrex may also be trying to protect the salaries of Bittrex executives from being seized by the SEC. [Twitter, archive]

Michel thinks the whole filing is a massive troll. We concur. The idea seems to be for Bittrex to set up a sacrificial entity to pay back their customers but stiff the US government. We are unconvinced that the government agencies will be inclined to let this one slide.

Good news for Binance

Market makers are leaving Binance US. Jane Street Group in New York and Jump Trading in Chicago — two of the world’s top commodities market makers — are pulling back from crypto in the US as regulators crack down on the industry. Their business in normal commodities is much larger, and they could do without the regulatory heat. [Bloomberg]

The Department of Justice is investigating Binance for possible violations of US sanctions against Russia. There’s already plenty of evidence that Binance has committed sanctions violations. Binance was the final destination for millions in funds from Bitzlato, an exchange shut down for money laundering. Now Dirty Bubble writes that Binance partner Advcash may be facilitating transfers from Russian banks. [Dirty Bubble]

Binance is withdrawing from Canada, owing to a surfeit of regulatory clarity. [Twitter, archive; Reuters]

Bitcoin has been trading at a premium of up to $650 on Binance US. A premium like this is usually an indication that people can’t get their dollars out of the exchange, so they buy bitcoins and move those to another exchange to cash out. [CoinDesk]

We also saw bitcoin trading at a premium on Mt. Gox just before that exchange collapsed in 2014, and the same with QuadrigaCX, which imploded in 2019. Naïve traders who don’t understand what’s happening will often move their BTC to the dying exchange, thinking it’s an arbitrage opportunity.

Trading at a premium is not a good sign, but a worse sign is when people complain they can’t get their crypto off an exchange. Binance US has long had a reputation for demanding arbitrary new KYC documentation when users try to withdraw.

Monkey laundering comes to bitcoin

Binance paused withdrawals twice on Sunday, May 7. The first time was due to a “congestion issue.” Later in the day, Binance paused withdrawals again due to a “large volume of pending transactions.” [Twitter, archive; Twitter, archive]

For once, Binance might have been on the level. On May 7, the bitcoin mempool was clogged with 400,000 transactions waiting to be processed, and transaction fees surged.

In bitcoin, the mempool, or memory pool, is where pending transactions pile up before a miner selects the most profitable ones and puts them together as a proposed block. If your transaction stays in the mempool too long, it gets dropped.

The best way to break a blockchain is to try to use it for something. In this case, some idiot worked out how to do NFTs on bitcoin.

“Ordinals” are a new way to create NFTs on bitcoin by linking a JPEG, video, or another image type to a satoshi, the smallest denomination of a bitcoin. Ordinals came out in January, and bitcoin has been filled with monkey pictures since. Bitcoin maxis condemn ordinals as a conspiracy to destroy bitcoin by using the network for a purpose. [Decrypt]

Child genius, adult moron

Sam Bankman-Fried’s defense team is trying to strike 10 of the 13 criminal charges against their client. They argue that the Bahamas did not agree to several of the charges — including one claim that Sam hid millions of dollars in political donations — while other claims didn’t meet the legal requirements of the underlying criminal statutes. [Docket, see filings 137-147]

The facts against SBF are solid. There’s no reason to doubt that Sam did everything the US claims. So the defense seems to be going for unreasonable doubt and hoping they have a dumb enough jury member or two.

Former federal prosecutor Sean Shecter of Lewis Brisbois says SBF’s lawyers want to preserve an appeal, so they have to try everything they can think of, “even if it involves throwing spaghetti against the wall.” He thinks the defense is likely hoping that the government gives up “nuggets of information” in response to the motions. [Law360, paywall]

Prosecutors have until May 29 to respond. Judge Lewis Kaplan will hear oral arguments on June 15.

The IRS has hit the FTX companies with a $44 billion tax bill, with the largest chunk being $20.4 billion for Alameda. It looks like the IRS reclassified all FTX employees from contractors to employees and charged for unpaid employment taxes. [Docket, see filings April 27, 28; IRS Alameda claim, PDF; CoinDesk]

The IRS has not released its calculations in detail, but we’d assume the bill is inflated by fraud (fictitious profits), penalties, and interest. John Jay Ray is sure to fight this. But even if Ray gets that amount substantially reduced, this is still sure to be a huge hit for FTX creditors.

The IRS claims are treated as unsecured — but they will receive priority status as ordinary and necessary business expenses of the bankruptcy estate. So the IRS will come before ordinary unsecured creditors.

The searing light of regulatory clarity

Ishan Wahi will spend two years in prison for insider trading as a former product manager at Coinbase. He previously admitted to passing on confidential information from Coinbase to his brother and friend, who profited from the tips. [WSJ, paywall; DOJ press release]

In Estonia, nearly 400 VASPs (“virtual asset service providers,” the FATF term for companies dealing in crypto) have shut down or had their licenses revoked after the government’s recently enhanced terrorist financing prevention and anti-money laundering laws came into effect in March. [Protos; Estonia Financial Intelligence Unit]

Bakkt has delisted a bunch of tokens from the institutional crypto business they bought from Apex Crypto, including several that the SEC has indicated it considers securities. “Our review process ensures those interests are best served when we contemplate the most up-to-date regulatory guidance.” [CoinDesk]

John Reed Stark thinks an SEC action against Coinbase is imminent. He explains the regulations and how they work in detail and why Coinbase doesn’t stand a chance.

Stark notes also that Coinbase’s “regulatory estoppel” claim — that the SEC approving their S-1 public offering means the SEC must have approved the exchange dealing in securities — is directly contradicted by the mandatory “no approval clause” in the S-1: “Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.” Whoops. [LinkedIn]

Unvaxxed bitcoin is the new bitcoin

QuadrigaCX bankruptcy claimants will get 13% on the dollar. They will be paid out the dollar value of their crypto at the time Quadriga filed for bankruptcy — April 15, 2019, when bitcoin was in the toilet.

It’s amazing that creditors will even get back that much. Most of the Quadriga money was gambled away by cofounder Gerald Cotten and filched by shady payment processors. We’re surprised no criminal charges were filed — but then, most of the money was stolen by a guy who is supposedly dead. [EY notice, PDF; CoinDesk]

Arthur Hayes of BitMEX has been tweeting at Three Arrows Capital co-founders Su Zhu and Kyle Davies because 3AC owes him $6 million following its collapse in June 2022. Rather than returning Hayes’ money, 3AC cofounder Su Zhu has filed a Singapore restraining order to prohibit Hayes from using “threatening, abusive or insulting words” and “making any threatening, abusive or insulting communication, that would cause the Applicant harassment, alarm or distress.” [Twitter, archive; Twitter, archive; CoinDesk]

Awe that's sweet, is that your way of using symbolism to represent the $6 million you owe me? 1 Oyster = $1 million … https://t.co/ehWJ4wUfXB
— Arthur Hayes (@CryptoHayes) May 2, 2023

BlockFi users discover that BlockFi owned their coins. Bankruptcy Judge Michael Kaplan ruled that BlockFi users who had money in BlockFi’s interest-bearing accounts gave up ownership of their bitcoins — all they owned was a liability from BlockFi — and all of the $300 million in crypto deposits is now the property of the bankruptcy estate, as is normal. [Bloomberg]

P2P exchange Paxful has resumed operations after it shut down last month amidst a messy dispute between cofounders Ray Youssef and Artur Schaback. The entire operation has been comedy gold. Youssef and Schaback say the exchange is now owned by a custodian — who they never actually name — and the custodian, Schabeck, and Youseff all serve as directors. [Paxful, archive; CoinDesk]

In the crypto bubble, Miami crypto companies boomed with the enthusiastic support of Mayor Francis Suarez. Now there’s empty real estate and lawsuits. “Most of crypto was a pyramid scheme,” said local businessman Ryan Kirkley. Suarez is now trying to lure tech startups into Miami instead. [WSJ, paywalled]

Robert F. Kennedy Jr., who is running for US President on the gibbering insane Twitter blue check conspiracy theorist ticket, will be making the first appearance of his campaign giving the keynote at Bitcoin 2023 in Miami later this month. So, on brand then. [Twitter; NBC]

A propaganda movie is in the works for bitcoin mining — because consuming a country’s worth of electricity is actually good news for bitcoin. Based on the trailer, the film is amazing, but not in a good way. [Dirty Coin the Movie]

Media stardom

Amy spoke to Bloomberg about the growing ranks of crypto skeptics after the crypto collapse: “There were a handful of us before, screaming into the abyss. Now there’s a lot more.” We’ll just be over here, quietly being right. [Bloomberg]

Posted on May 14, 2023May 14, 2023 by Amy Castor 0

Crypto collapse: Coinbase rattles sabres at the SEC, Voyager sale collapses, Terra-Luna, Binance

By Amy Castor and David Gerard

ONE WEIRD TRICK they don’t want you to know: Send us money! Here’s Amy’s Patreon, and here’s David’s. Sign up today!
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“All financial complexity is a footnote to ‘don’t hand all your money to some random guy promising high returns.’”
— Matt Levine on Celsius Network

Coinbase takes on the SEC

Crypto bitterly resents any possible regulation. It’s an industry of proud scofflaws. This presents some difficulties to regulators, who are used to financial firms that listen to them.

Coinbase keeps demanding “regulatory clarity.” What this means is that they want special permission to do things that are presently just illegal.

FTX blew up spectacularly in November, and its CEO and top execs were indicted for fraud. In the wake of FTX’s collapse, the SEC has the political backing it needs to get much more serious about making crypto exchanges comply with rules that have always been there.

In the meantime, the SEC’s lack of jackbooted statist enforcement over the last decade has allowed Coinbase to grow larger and larger — which means that Coinbase has bigger guns to challenge the regulator with.

In July 2022, Coinbase petitioned the SEC to make a clear framework for crypto asset trading. Coinbase handwaved that putting unregistered securities on a blockchain was “a paradigm shift from existing market practices, rendering many of the Commission rules that govern the offer, sale, trading, custody, and clearing of traditional assets both incomplete and unsuitable for securities in this market.” [Petition, 2022, PDF]

The SEC didn’t respond — because this claim is just stupid — and in the time since have stated repeatedly that they think the Howey test of what is a security in the US is just fine.

In March, the SEC sent Coinbase a Wells notice saying that they were going to file an enforcement action. Coinbase promptly filed a petition for a writ of mandamus to try to force the SEC to respond to their July 2022 letter. [CNBC; Writ of Mandamus, PDF]

The petition pounds on the table and cites an extensive range of blog posts as legal authorities. The introduction sets the tone:

“Contrary to the prior actions and statements of the Commission and its officials, the SEC Chair now claims that it is ‘clear’ the securities laws already apply to digital assets and platforms.”

Never mind the DAO Report from 2017, let alone the past century of judicial precedent that securities laws apply to what you do, not what you call the assets you are trading. A security is a security is a security.

And the SEC has been very clear — it’s saying that most crypto tokens are securities. There are rules for trading in those securities, and Coinbase needs to comply — or stop trading in them.

As Gary Gensler’s latest dad joke video puts it: “Many crypto platforms are just pretending that these investment contracts that they offer are more like goldfish … It’s not a lack of regulatory clarity.” [Twitter, video]

Coinbase pivots to video

Coinbase has also put up its response to the SEC’s Wells notice. [Response, PDF]

The exchange claims that the SEC approving the company’s S-1 filing to go public surely constitutes approval of all its possible business lines — a claim that crypto pumpers have been promoting heavily. This theory is, in legal jargon, on crack.

Coinbase also confidently asserts that none of what’s listed on the exchange is a security. None of it! Coinbase’s theory is that a given asset is a security only if and when it’s determined in court to be one — despite extensive legal precedent that something can be a security before it’s registered or has come to the SEC’s attention.

It’s just not possible to run a digital assets exchange trading in securities that follow SEC rules, Coinbase pleads. Apparently, this is a problem for the SEC, not for the violators.

Coinbase has threatened the SEC with a scorched earth legal battle: “if the Commission pursues this matter, it will face a well-resourced adversary that will necessarily be motivated to exhaust all avenues” — much as Ripple has been. We think this is unlikely to get the SEC to back down.

So confident is Coinbase in its legal position in the Wells notice that it’s making videos to reassure its user base that all is well. This just makes Coinbase look desperate and clownish — winners don’t make promotional videos for their legal filings. [YouTube]

Why is Coinbase so insistent on trading unregistered securities? Because Coinbase’s business is in deep trouble. Trading volume on the exchange is through the floor — it’s dropped to $26.8 billion so far in April. March was $49 billion in total. This is the lowest volume on the exchange since the crypto crash. [FT]

The Voyager sinks

Binance US pulled out of its $1 billion purchase of Voyager Digital. On Tuesday, April 25, Binance sent Voyager a letter canceling the sale. [Twitter; Doc 1345, PDF]

Voyager will now proceed to liquidation — as it probably should have when it first declared bankruptcy in July 2022 — and give the creditors whatever’s left.

Voyager’s lawyers said in a Wednesday hearing that they were surprised by the letter — Binance was still talking with them about the deal up to the previous Friday. Likely recoveries for Voyager creditors are in the range of 40% to 65%. [CoinDesk]

Imagine how much creditors’ money Voyager could have saved on expensive bankruptcy professionals if they’d just gone straight for liquidation nine months ago. Recoveries would have been on the order of 70%.

The ongoing good news for Terra-Luna

Terraform Labs has answered the SEC’s February suit, which claims that the collapsed UST stablecoin and its free-floating twin LUNA were offered as securities. The SEC’s case asserts that UST was part of Terraform’s Anchor Protocol investment scheme because you had to first buy UST to get into Anchor.

Terraform wants the suit dismissed on the grounds that digital assets can’t be securities — good luck with that one, guys! — and even if they can, UST was a stablecoin, and therefore can’t be a security. Terraform’s motion appears to be written in crayon. [Notice of motion, PDF; Memorandum, PDF]

Crypto VC firm Paradigm submitted an amicus brief in support of Terraform’s very stupid theory. Paradigm argues that SEC’s premise for treating stablecoins as securities would “radically and impermissibly” expand the definition of a security. [Amicus, PDF; Docket]

Terraform Labs co-founder Daniel Shin was finally indicted in South Korea along with nine others. Shin is facing charges that include violating capital markets laws. Do Kwon, the other co-founder of Terra, was arrested in Montenegro last month. [YNA; Bloomberg]

All the good news for Binance

The legal net around Binance tightens. Last month the CFTC filed a civil suit against them. A long-running criminal investigation is being led by the Justice Department’s Money Laundering and Asset Recovery Section and prosecutors in the US attorney’s office in Seattle. The SEC is conducting a parallel investigation.

Binance and CZ have lawyered up and are in discussion with regulators and the Justice Department: [NYT, archive]

“In February, Patrick Hillmann, its chief strategy officer, revealed the exchange was in talks with regulators about a settlement to resolve the various legal investigations with a fine or some other penalty. He said the company was ‘highly confident and feeling really good’ about the discussions. A month later, the C.F.T.C. filed its lawsuit.”

David Silver thinks Binance is screwed: “The truth will come out,” he said. “And Binance will be held culpable.”

Binance has resumed its support for Russian-issued credit and debit cards after Russian cards were cut off for the past year. Payments go via Qiwi. The withdrawal limit is 200,000 RUB (about $2,486). [Meduza]

Other good news for bitcoin

The FBI has searched the Washington, DC, home of former FTX executive Ryan Salame on the morning of Thursday, April 27. It’s not clear what they were looking for. Salame was the first FTX insider to turn on Sam Bankman-Fried. [NYT]

Gemini wants to set up a non-US crypto derivatives exchange. Their first product would be BTC-GUSD perpetual futures, with ETH-GUSD to follow. [Bloomberg; Gemini]

The US Justice Department has charged North Korean bank official Sim Hyon Sop for his role in two crypto laundering conspiracies. “The IT workers gained employment at U.S. crypto companies using fake identities and then laundered their ill-gotten gains.” [Press release; Sop indictment, PDF; Sop et al indictment, PDF]

Digital Currency Group subsidiary Genesis is bankrupt. Creditors have noticed that DCG is substantially cashed-up compared to Genesis and are insisting that DCG put more money toward the bankruptcy estate — particularly given how much control DCG clearly exercised over Genesis. So Genesis has filed for mediation over the amount that DCG will need to contribute to the reorganization. [CoinDesk]

Bloomberg writes about Celsius Network creditors and how they’re feeling. Their money is just gone, and it’s not coming back. Mashinsky et al. stole some of it and set the rest on fire through ineptitude. All the creditors have left is hope. Celsius really should have liquidated rather than declared Chapter 11. [Bloomberg]

David Rosenthal has written a marvelous summary of his decades in the world of blockchains: “Crypto: My Part In Its Downfall.” [blog post]

Image: Coinbase CEO Brian Armstrong. Photo by Steve Jennings (Getty Images for TechCrunch) enhanced for (regulatory) clarity.

Posted on April 29, 2023April 29, 2023 by Amy Castor 1

Crypto collapse: Treasury comes after DeFi, SEC comes after crypto exchanges, stablecoin bill, FTX first interim report

By Amy Castor and David Gerard

ONE WEIRD TRICK they don’t want you to know: Send us money! Here’s Amy’s Patreon, and here’s David’s. Your contributions really help us do all of this. Sign up today!
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“Please god let FTX go back into business, take a lot of money from crypto rubes, then collapse and lose everything again. Please let there be people who lost money in two separate FTX collapses.”
– Ariong

The Treasury brings good news for DeFi

The US Treasury released its “Illicit Finance Risk Assessment of Decentralized Finance.” The 42-page report examines DeFi from the perspective of anti-money laundering and sanctions laws. [Press release; Report, PDF]

This report is not about consumer protection — it’s about national security, sanctions busting, and terrorist financing. The Treasury is not happy:

“The assessment finds that illicit actors, including ransomware cybercriminals, thieves, scammers, and Democratic People’s Republic of Korea (DPRK) cyber actors, are using DeFi services in the process of transferring and laundering their illicit proceeds.

… In particular, this assessment finds that the most significant current illicit finance risk in this domain is from DeFi services that are not compliant with existing AML/CFT obligations.”

The report makes clear: blockchain analysis is not sufficient for KYC/AML. Calling something “decentralized” or a “DAO” doesn’t absolve you of responsibility. And almost everything in DeFi falls squarely in the ambit of existing regulation.

How’s regulatory clarity for crypto? Just fine, thank you:

“Through public statements, guidance, and enforcement actions, these agencies have made clear that the automation of certain functions through smart contracts or computer code does not affect the obligations of financial institutions offering covered services.”

The report recommends “strengthening U.S. AML/CFT supervision and, when relevant, enforcement of virtual asset activities, including DeFi services, to increase compliance by virtual asset firms with BSA obligations” and “enhancing the U.S. AML/CFT regulatory regime by closing any identified gaps in the BSA to the extent that they allow certain DeFi services to fall outside of the BSA’s definition of financial institution.”

Nicholas Weaver tells us the report “should be thought of as being as serious as a heart attack to the DeFi community, as this represents the US government regulation at its most serious. Indeed, the report can be summarized in a sentence: ‘If you want to continue to OFAC around, you are going to find out.’”

The SEC brings good news for Coinbase and DeFi

SEC chair Gary Gensler is fed up with Coinbase blatantly trading unregistered securities and not registering with the SEC as a proper securities exchange. So he’s going to update the rules.

The SEC has reopened the comment period for a proposal, initially issued in January 2022, that would update the definition of an “exchange” in Rule 3b-16 of the Exchange Act. [SEC press release; Fact sheet, PDF; Gensler statements]

Gensler’s comments are laser-targeted at Coinbase — and also DeFi:

“Make no mistake: many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws.”

He reiterates that “the vast majority of crypto tokens are securities” — the SEC’s position since 2017 — so “most crypto platforms today” meet the definition of a securities exchange. He adds:

“Yet these platforms are acting as if they have a choice to comply with our laws. They don’t. Congress gave the Commission a mandate to protect investors, regardless of the labels or technology used. Investors in the crypto markets must receive the same time-tested protections that the securities laws provide in all other markets.”

A regulatory framework for casino chips

On Saturday, The US House Financial Services Committee published an as-yet-untitled discussion draft bill for regulating stablecoins a few days before a hearing on the topic on Wednesday, April 19. [Discussion draft, PDF; hearing agenda]

The bill refers to stablecoins as “payment stablecoins.” This is utterly hypothetical. Nobody uses stablecoins to buy things. They’re chips for gambling on speculative assets in the crypto casinos.

This bill was a sudden surprise for a lot of people — but it appears to be a version of a draft bill that Senate Banking Committee Ranking Member Pat Toomey (R-PA) was circulating last year. [Stablecoin TRUST Act, 2022]

The bill divides stablecoin issuers into banks and nonbanks. Credit unions and banks that want to issue stablecoins would need approval from the financial regulator they fall under‚ the National Credit Union Administration, the FDIC, or the OCC. Non-bank stablecoin issuers would fall under the Federal Reserve.

For this bill, USDC or Pax Dollars, under the Fed, might pass muster. But Tether would be kicked out of anything touching the US because they wouldn’t be able to meet the transparency or liquidity requirements.

All stablecoins that circulate in the US would need to be backed by highly liquid assets — actual dollars and short-term treasuries — and redeemable within one day. That doesn’t leave much room for the issuers to turn a profit by putting the deposits in longer-term investments.

Custodia is not a bank under the Bank Holding Act, so for this bill, it would also be considered a non-bank. This bill would derail Custodia’s lawsuit against the Federal Reserve and the Federal Reserve Bank of Kansas City to try to force a Fed master account out of them.

The bill also calls for a moratorium on new algorithmic stablecoins until a study can be conducted.

Finally, the bill includes a request for federal regulators to study a central bank digital currency (CBDC) issued by the Fed. As we noted previously, FedNow would make a CBDC completely superfluous.

Hilary Allen, a professor of law at American University Washington College of Law, points out important shortcomings in the stablecoin bill. She argues that the bill is stacked in favor of stablecoins, and notes that the bill’s payment stablecoin definition could be a way of avoiding SEC jurisdiction. And while the bill calls for monthly attestations, it doesn’t say anything about full audits for stablecoin reserves. [Twitter]

FTX’s first interim report reads like Quadriga

John Jay Ray III, FTX’s CEO in bankruptcy, released his first interim report on the control failures at FTX and its businesses. Ray documents a shocking level of negligence, lack of record keeping, and complete disregard for cybersecurity at FTX. [Doc 1242, PDF]

The report confirms what we’ve been saying all along: all crypto exchanges behave as much like Quadriga as they can get away with. A few highlights:

FTX Group was managed almost exclusively by Sam Bankman-Fried, Nishad Singh, and Gary Wang. The trio had “no experience in risk management or running a business,” and SBF had final say in everything.
SBF openly joked about his company’s reckless accounting. In internal docs, he described Alameda as “hilariously beyond any threshold of any auditor being able to even get partially through an audit,” and how “we sometimes find $50m of assets lying around that we lost track of; such is life.”
FTX kept virtually all of its assets in hot wallets, live on the internet, as opposed to offline cold wallets, where they would be safe from hackers.
FTX and Alameda also kept private keys to billions of dollars in crypto-assets sitting in AWS’s cloud computing platform.
SBF stifled dissent with an iron fist. Ex-FTX US president Brett Harrison quit after a “protracted argument” with Sam over how FTX US was run. Sam cut Harrison’s bonuses, and when “senior internal counsel instructed him to apologize to Bankman-Fried for raising the concerns,” Harrison refused.

Ray and his team have so far recovered $1.4 billion in digital assets and have identified an additional $1.7 billion they are in the process of recovering. (We’re still waiting for him to ask for money back from The Block, but maybe that’s coming.)

In other FTX news, Voyager and FTX and their respective Unsecured Creditors’ Committees have reached an agreement on the money FTX paid to Voyager before FTX filed bankruptcy that FTX wants to claw back now — $445 million in cash will go into escrow while things are sorted out. [Doc 1266, PDF]

**Terraform Labs did nothing* wrong**

South Korean prosecutors have seized 414.5 billion won ($312 million) in illegal assets linked to nine Terraform Labs execs. None of the assets tied to Do Kwon have been recovered. Kwon converted everything to BTC and moved the funds — worth an estimated 91.4 billion won ($69 million) — to offshore exchanges. [KBS, Korean]

Who crashed UST in May 2022? Terraform Labs seems to have played no small part. In the three weeks leading up to the collapse, Terraform dumped over 450 million UST on the open market. [Cointelegraph]

Crypto mining: the free lunch is over

A bill limiting benefits and tax incentives for crypto miners in Texas unanimously passed a Senate committee vote and now it’s in the chamber. The bill was sponsored by three Republican state senators. Even they’re sick of the bitcoin miners. [SB 1751, PDF; CoinDesk; Fastdemocracy]

Bitcoin mining doesn’t create jobs — so Sweden has ended the 98% tax relief it gave data centers, including crypto miners. Crypto is outraged. [CoinDesk]

More good news for exchanges

The downfall of peer-to-peer bitcoin exchange Paxful is a comedy goldmine. Paxful cofounders Ray Youssef and Artur Schaback originally blamed Paxful’s closure on staff departures and regulatory challenges — but now they’re turning against each other in court.

As an example of their good judgment, in 2016, the pair drew police attention when they were spotted in Miami aiming an A15 rifle off their penthouse balcony for photo purposes. Former employees allege “favoritism, erratic dismissals, lavish spending on travel and reports of routine cannabis usage on the job by Youssef himself.”

Paxful’s business model was based on price-gouging fees on gift cards, according to one former employee. You want 10 euros worth of bitcoin? That’ll be 20 euros worth of gift cards. Coincidentally, money launderers are usually quite happy to pay fees on the order of 50%. Schaback thinks Paxful is still a viable enterprise. [CBS, 2016; CoinDesk]

As you might expect, OPNX, the new exchange for tokenized crypto debt run by the founders of the failed Three Arrows Capital and CoinFLEX, has gotten off to a feeble start. Trading volume in the first 24 hours was $13.64. [The Block]

The Winklevoss twins made a $100 million loan to Gemini. The move came after Gemini had informally sought funding from outside investors in recent months without coming to any agreements. We can’t find if the loan was in actual dollars or in crypto — or if it was just an IOU. [Bloomberg]

Binance relinquished the financial services license for its Australian derivatives business, Oztures Trading, after the Australian Securities and Investments Commission said they were likely to suspend it. Customers have until April 21 to close their accounts. [ASIC]

Who were the unnamed “VIP” traders on Binance mentioned in the CFTC suit? Jane Street, Tower, and Radix. [Bloomberg]

The Mt. Gox payout window has opened! Slowly. [Mt Gox, PDF; The Block]

Cryptadamus thinks that Crypto.com’s Canadian bank accounts are frozen. [Mastodon]

Good news for bitcoin

The Ethereum Shanghai upgrade went through on April 12. You can now withdraw your staked ether! As we predicted, there wasn’t a rush for the exits. [CoinDesk]

Bitfinex money mule Reggie Fowler will be sentenced on April 20. His lawyer wrote a lengthy letter to the judge asking for clemency — no jail time — because Fowler lived a hard life and never did anything wrong before. Nothing he was busted in court for, anyway. [Letter, PDF]

Michael Saylor’s MicroStrategy has bought yet more bitcoin, digging itself ever deeper. The company purchased an additional 1,045 BTC for $23.9 million, or an average price of $28,016, between March 23 and April 4. [8-K filing]

Tether got its tendrils into the US dollar system via Signet — former Signature Bank’s real-time payments system. Tether instructed crypto firms to send dollars to its Bahamas-based banking partner Capital Union Bank via Signet. We’re not clear on whether this violated the New York settlement — though if they lied about who they were, it broke banking law. [Bloomberg]

Cross River Bank, the banking partner of Coinbase and Circle, built its business on buy-now-pay-later (BNPL) and pandemic loans. What could go wrong? [Dirty Bubble]

With its firm commitment to quality cryptocurrency journalism, CoinDesk is hot on getting into generating its hopium space-filler using AI text generators. [CoinDesk]

Media stardom

“Ukraine wants to fund its post-war future with crypto” — with quotes from David. [Techmonitor]

“A lot of ordinary people who got into crypto just lost everything in various ways or lost chunks of it,” Gerard said. “And this is a lot of why I think retail investors should just keep the hell away from crypto.” [Business Insider]

Posted on April 16, 2023April 16, 2023 by Amy Castor 0

Crypto collapse: No cashing out from Binance US, Catherine Coley lawyers up, Voyager-Binance deal on hold, Celsius

By Amy Castor and David Gerard

ONE WEIRD TRICK: Send us money! Here’s Amy’s Patreon, and here’s David’s. Your contributions really help us do all of this. Sign up today!
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“Unless they allow crypto crime, all the innovation in crime is going to go overseas, and we’ll fall behind in crime!”
— Doctor Orrery

Binance: This is fine

Your actual money has been locked in Binance US since late March: [Binance.US, archive]

“Due to recent developments in the banking industry, Binance.US is transitioning to new banking and payment service providers over the next several weeks. Some USD deposit services will be temporarily impacted during the transition. Apple Pay and Google Pay deposits are temporarily unavailable. Wire deposits and withdrawals are temporarily unavailable. For <5% of customers, Debit Card deposits are temporarily unavailable. We are working to restore all services as soon as possible.”

BUSD trading pairs on Binance US are also suspended, and fiat withdrawals for institutional clients are cut off as well. [Twitter]

Catherine Coley has shown up alive and well! Coley was the CEO of Binance US until April 2021, when she abruptly left the company. Coley hasn’t said a word to the press or social media since — to the point where crypto people wondered what had happened to her. In the wake of the CFTC suit against Binance, Coley has finally surfaced. She’s hired Sullivan & Cromwell partner James McDonald, a former director of enforcement at the CFTC, for the suit. Coley appears to have started working with McDonald as early as January 2022. [Reuters]

The Australian Securities and Investments Commission (ASIC) is conducting a “targeted review” of Binance’s Australian operation. Oztures Trading misclassified about 500 Australian retail investors as wholesale operators and sold them derivatives that were only for sophisticated investors. [AFR]

“Crypto warning: AK-47s, crooks, and the exchange Aussies should avoid” — David was quoted by news.com.au on the CFTC charges against Binance. “Regulators should also kick the company out of the banking system, cryptocurrency expert David Gerard said.” This story came out exactly as David had hoped it would. (Written by the other guy who originally started Rocknerd. We’re all in the rock journalist to finance journalist pipeline.) [Daily Telegraph, archive]

Voyager’s Binance deal is on hold

Voyager Digital wanted to sell itself to Binance US. The plan included an exculpation clause — that Voyager, the Unsecured Creditors’ Committee, Binance, and any professionals were not “liable at any time for the violation of any applicable law, rule, or regulation governing the solicitation of acceptances or rejections of the Plan or such distributions made pursuant to the Plan.” They wanted this bankruptcy court to grant them broad criminal immunity.

The US government and various regulators objected, and the February 28 version of the plan explicitly carved government action out of the exculpation provision. But the exculpation crept back into the March 2 version of the plan. The government and the regulators objected again, leading to this appeal. This time they are asking that the provision be removed, or else that the whole deal be blocked — at which point Voyager can only go into liquidation.

Judge Jennifer Rearden concurs with the government that exculpation is meant to head off suits between stakeholders in the bankruptcy itself — it’s not there for courts to “prospectively immunize debtors and non-debtors from law enforcement and other actions undertaken by the Government.” As such, she considered the appeal plausible, so has granted the stay. That said, Judge Rearden is painfully aware that Voyager is a melting ice cube, so she wants the government brief by April 4 (today!) and the Voyager and UCC briefs by April 14.

We wonder just what snakes are lurking in the deal such that Voyager and Binance tried to sneak in such a weirdly broad exculpation after it was already knocked back once. [Order & opinion, PDF]

Celsius Network

With less than an hour to go before Celsius’s exclusive right to propose a plan lapsed, Kirkland & Ellis filed the Celsius chapter 11 plan for the NovaWulf deal, which we summarized previously. On April 12, Celsius will file the disclosure statement, which the court has to approve before creditors can vote on the plan. The disclosure statement lists Celsius’ assets, liabilities, and business affairs. [Doc 2358, PDF; Plan summary, PDF]

Shoba Pillay, the examiner in the Celsius bankruptcy, has filed nicely hyperlinked PDFs of her interim and final examiner reports. [Interim report, PDF; final report, PDF]

Pillay’s work is done now. She’s been officially discharged. [Doc 2364, PDF]

Based on the jaw-dropping criminality in the examiner’s reports, the Celsius Unsecured Creditors’ Committee filed a suit on February 14 against past Celsius executives to recover as much money from them as possible. The UCC has now filed a revised complaint. The new filing includes a redline against the previous version of the complaint, starting at page 139 of the PDF — it mainly adds two extra claims of misappropriation. [Doc 2349, PDF]

Good news for casinos

Matt Damon says his crypto.com ad at the 2022 Super Bowl was just because his water nonprofit was short of cash. If only there was a way to do good except by doing a ton of bad! [Gizmodo]

BaFin has lifted a finger and kicked Crypto.com out of Germany. The Singapore exchange was licensed in Malta and wanted to use that license in Germany. But Germany also required that they get a permit to advertise the investment offer, which Crypto.com didn’t bother doing. [The Paypers]

The Bittrex crypto exchange is leaving the US market. The only reason they give is that “regulatory requirements are often unclear and enforced without appropriate discussion or input, resulting in an uneven competitive landscape.” [Bittrex, archive; The Block]

We suspect the regulations Bittrex has in mind are very clear, and they just couldn’t survive with a legal business model. Bittrex’s volume dropped below 1% of the US market in 2021 and didn’t recover. Last year, they paid $53 million to OFAC and FinCEN for sanctions violations. [Treasury, 2022]

FTX EU LTD (Cyprus) launched a new website for withdrawals. The exchange will be returning funds on account to customers, per Cyprus law. This does not cover all EU customers — just those who were dealing with this particular FTX entity. [PR Newswire; FTX EU]

Paxful, a peer-to-peer bitcoin trading platform, is suspending operations. Paxful claims “regulatory challenges for the industry”— but also that “we unfortunately have had some key staff departures.” Did they depart in a police van, maybe? [Paxful, archive]

Lost all your money in a dodgy crypto company? Why not trade your bankruptcy claims on a new exchange run by the guys who lost all your money! Brought to you by the founders of the defunct Three Arrows Capital and the troubled CoinFLEX, OPNX is currently only doing spot trading in cryptos but promises to bring trading in bankruptcy claims some time soon. None of the proprietors are in any way on the run and hiding out from regulators, you understand — but they’re all just doing business strictly from Dubai for now. Your lack of funds is safe. [CoinDesk]

The usual good news for bitcoin

The US government sold 9,861 BTC connected to Silk Road, the first darknet market, on March 14. It intends to sell another 41,490 BTC in four batches over the course of a year. Tether coincidentally printed 2 billion USDT the same day — though the government will only accept real money. [Court filing, PDF; Twitter]

A South Korean court has once again denied the prosecutor’s request to issue an arrest warrant for Terraform Labs co-founder Daniel Shin. This was the second attempt made by South Korean authorities to arrest Shin following the arrest of Do Kwon, Terraform’s other co-founder. [Cointelegraph]

The Seoul Southern District Prosecutor’s Office has confiscated 210 billion KRW ($160 million) in assets — primarily real estate — from eight people connected to Terraform Labs, including Shin and former Terraform vice president Kim Mo. [KBS, in Korean]

Justin Sun of Tron turns out not to be Grenada’s ambassador to the World Trade Organization — he was kicked out when the new administration came in June 2022. So for the past nine months, the “H. E.” in his Twitter name must just have stood for something other than “His Excellency.” After the local news story reporting this came out, Sun first told The Block that he was totally still the ambassador — then tweeted how his term was actually ending as of March 31, 2023, y’see. OK. [GBN; The Block; Twitter]

Posted on April 4, 2023April 4, 2023 by Amy Castor 0

Crypto collapse: New Sam Bankman-Fried charge, Binance fallout, SEC sues exchange over crypto securities, how Signature died

By Amy Castor and David Gerard

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“who needs an examiner when you can just hand sam an empty sheet of paper and wait”
— haveblue

Sam is a growing boy, he needs his crimes

A new superseding indictment against FTX founder Sam Bankman-Fried alleges that he paid Chinese officials $40 million in crypto in a bribe to unfreeze $1 billion in crypto on Alameda — which would violate the Foreign Corrupt Practices Act. Sam now faces 13 criminal counts. [Superseding indictment, PDF]

On Thursday, March 30, Sam took a trip to New York and pleaded not guilty to his latest five charges. He had to battle his way through a gaggle of reporters just to get in the door. At least it got him out of the house. [Twitter; YouTube; NYT]

In early 2021, China froze $1 billion of cryptos in various Alameda accounts on two of the country’s biggest crypto exchanges (which aren’t named in the indictment). Bankman-Fried “understood that the Accounts had been frozen as part of an ongoing investigation of a particular Alameda trading counterparty.” A bribe was sent from Alameda to a private blockchain address in November 2021. The accounts were unfrozen shortly after, and Alameda got its cryptos back.

Somehow, Daniel Friedberg, FTX’s chief counsel at the time knew nothing of this. Friedberg said in an affidavit dated March 19, 2021, when the FTX Arena naming rights deal was going through, that FTX and its affiliated companies “do not have any ownership or contracts or any other obligations with respect to any governmental agency of the People’s Republic of China, or any governmental agents or political persons.” [Miami-Dade Legislative Item, PDF, p. 54]

Sam will be kept on a very short leash while he’s out on bail. Sam gets a non-smartphone that only does voice and SMS — no internet access — and a locked-down laptop configured to access only certain websites. He can work with his lawyers, order food from DoorDash, and keep up with the sportsball. YouTube is also on the list, so we’re looking forward to the 10-hour video blogs detailing crimes hitherto unknown to humanity. [Order, PDF]

Sam’s father, Joseph Bankman, is paying his son’s lawyer fees with over $10 million that Sam borrowed from Alameda and gave to his father as a present in 2021. We wonder if John Jay Ray is going to come calling to claw this back for the bankruptcy estate. [Forbes]

In the FTX bankruptcy, a group of ad-hoc FTX creditors with $2 billion in claims want to participate in the bankruptcy without revealing their identities. They include “large institutional market makers and asset managers.” This is the precise sort of creditor that the Bankruptcy Act is not intended to protect from public scrutiny. [Doc 1137, PDF]

FTX appears to have been hiding money under the names of employees. The OKX exchange, formerly OKex, has agreed to turn over $157 million in FTX funds. $150 million of that was in an account of a former FTX employee. The ex-employee says the account was opened on behalf of Alameda. He has agreed to forfeit the assets. [Doc 1189, PDF; Doc 1190, PDF]

Binance: This is fine

The CFTC lawsuit against Binance, which we covered in detail on Tuesday, has rattled customers. Within days, the exchange saw outflows of $2 billion, out of a claimed reserve of $63.2 billion, according to Nansen. Currently, 28% of Binance reserves are in Tether and 10% are in BUSD. [WSJ, paywalled; Nansen]

The three large US hedge funds trading on Binance weren’t named in the CFTC complaint — though Radix Trading later came forward and said that they were “Trading Firm A.” Radix insists they did nothing wrong — they ran their apparent conspiracy to violate commodities laws past their in-house legal team, after all. [WSJ, paywalled]

But the CFTC complaint has “already sent chills” across the commodity trading industry — particularly firms who make their money from real commodity trading and only dabble in the toxic waste barrel of crypto. Market makers are wondering if they’re risking their own broker-dealer licenses. [Bloomberg]

Cash withdrawals from Binance US are no longer working via ACH through Signature. Binance says: “ACH deposits and withdrawals for a small subset of our users were disrupted last week and, out of an abundance of caution, remain paused. Our teams are working through this transition and expect to restore functionality within the next 24 hours.” It’s probably fine. Your funds are safe. [Reddit]

You’ll be shocked to hear that Binance kept substantial business links to China for years after its claimed 2017 exit, despite Binance executives repeatedly saying otherwise. [FT]

The Block reported in 2019 that Binance had offices in Shanghai. CZ hit the roof and threatened to sue them, with the explicit aim of outspending them on lawyers … and The Block stood by its story. (Ben Munster, then of Decrypt, helped with the response story, though The Block took out Ben’s harsher additions.) [The Block, 2019; Twitter, archive; Twitter, archive; The Block, 2019]

The sale of Voyager Digital to Binance US is on hold. The Department of Justice and the US Trustee appealed the sale on the basis that the order granted inappropriate immunity from prosecution, and asked for a stay. The appeals court has granted the request for a stay while the appeal proceeds. [Doc 1222, PDF; Doc 1223, PDF; Bloomberg]

Be your own Signature Bank

In his statement on the recent bank failures and the federal regulatory response, FDIC Chairman Martin Greunberg explained why Signature failed: the bank was insolvent, contrary to Barney Frank’s claims. [FDIC, PDF]

On March 10, Signature Bank lost 20 percent of its total deposits in a matter of hours, depleting its cash position and leaving it with a negative balance with the Federal Reserve as of close of business. Bank management could not provide accurate data regarding the amount of the deficit, and resolution of the negative balance required a prolonged joint effort among Signature Bank, regulators, and the Federal Home Loan Bank of New York to pledge collateral and obtain the necessary funding from the Federal Reserve’s Discount Window to cover the negative outflows. This was accomplished with minutes to spare before the Federal Reserve’s wire room closed.

Over the weekend, liquidity risk at the bank rose to a critical level as withdrawal requests mounted, along with uncertainties about meeting those requests, and potentially others in light of the high level of uninsured deposits, raised doubts about the bank’s continued viability.

Ultimately, on Sunday, March 12, the NYSDFS closed Signature Bank and appointed the FDIC as receiver within 48 hours of SVB’s failure.

The FDIC has told crypto clients with deposits at Signature Bank that they have until April 5 to close their accounts and move their money. The FDIC is looking to sell off Signature’s Signet inter-crypto-exchange dark liquidity pool. [Bloomberg]

Frances Coppola explains precisely what happened at Signature. [Coppola Comment]

We noted previously how larger US banks don’t want to go within a mile of crypto. But some smaller banks are still feeling lucky. [WSJ, paywall]

The SEC shuts down Beaxy

The Beaxy crypto exchange shuttered after the SEC filed charges against it for failing to register as a national securities exchange, broker, and clearing agency, and over its 2018 ICO. The SEC also charged a market maker operating on Beaxy as an unregistered dealer. [SEC press release; complaint, PDF; CoinDesk]

Beaxy ran a “private sale” ICO for its internal exchange token BXY from May 2018 to June 2019. The SEC is charging Beaxy and its founder Artak Hamazaspyan over the ICO as an unregistered offering of securities to US retail.

That’s the sort of complaint we’re used to seeing from the SEC — but they’re also charging Windy Inc., who ran the Beaxy platform, and Windy’s founders, Nicholas Murphy and Randolph Abbott, over unregistered securities trading on the exchange.

If cryptos being traded are securities — and it’s likely that most are — that leaves even the normal activities of an exchange subject to a vast array of additional regulations.

The SEC is also charging Brian Peterson and Braverock Investments as unregistered dealers for market-making on Beaxy for the BXY and Dragonchain DRGN tokens. The SEC sued Dragonchain in August 2022, alleging that DRGN was an unregistered offering of securities; that case is proceeding. [SEC, 2022; case docket]

Hamazaspyan is also alleged to have misappropriated $900,000 from the ICO for his own use. Murphy and Abbott discovered this in October 2019 and convinced Hamazaspyan to pay back $420,000 to Beaxy and let Windy run Beaxy going forward.

Windy, Murphy, Abbott, Peterson, and Braverock settled, paying a total penalty between them of $228,579. The SEC case against Beaxy and Hamazaspyan over the ICO is proceeding.

Beaxy shut down on Tuesday, March 28, owing to “the uncertain regulatory environment surrounding our business.” We think it’s deadly certain. [Beaxy, archive]

This is the first SEC action over securities trading on an exchange. It’s a likely template for future SEC cases against other crypto exchanges — like, say, Coinbase.

The Coinbase employee convicted in a criminal case of wire fraud by insider trading is fighting an SEC civil case claiming that the insider-traded tokens were securities. [WSJ]

SEC chair Gary Gensler will be testifying before Congress on April 18. The very non-partisan committee announces that “Republicans will hold @GaryGensler accountable for his flagrant disregard for the law, jurisdiction, and the APA.” (The Administrative Procedure Act.) We hope the Blockchain Eight show up. [Twitter]

More good news for decentralization

Judge Larry Alan Burns of the Southern District of California has denied the motion to dismiss of members of the bZx DAO who held governance tokens (BZRX), finding the DAO is plausibly alleged to be a general partnership. [Order, PDF; CoinDesk]

One of the earliest objections to the original DAO in 2016 was that it would be a general partnership, leaving everyone involved jointly and severally liable. (This is why incorporation is a thing.) The same problem was frequently noted in the rise in DAOs in the recent crypto bubble. Nobody involved can claim they had no idea.

Regulatory clarity, European style

The European Banking Authority has a new consultation paper on anti-money laundering (AML) risk factors that national bank regulators should consider. Crypto-asset providers are listed as an area that regulators should examine closely, including if “Distributed Ledger Technology” is “essential to the sector’s business model and operation” or “where services of the subject of assessment are provided using DLT or blockchain technology.” Comments are due by June 29, 2023. [EBA, PDF]

Coming soon in European AML: no anonymous crypto payments in the EU of over 1,000 EUR. Crypto asset managers will be required to verify “their customers’ identity, what they own and who controls the company.” [EP]

Terra-Luna

After he was arrested last week, Do Kwon of Terraform Labs is serving time in a Montenegrin prison. Kwon is likely to stay in jail there for at least a year, while his appeals and extradition hearings proceed. We expect he’ll be sent to South Korea first, and only then to the US. [YNA, in Korean; Protos]

South Korean prosecutors are making another effort to arrest Terraform Labs cofounder Daniel Shin, who left the company in March 2020. [Bloomberg]

MicroStrategy doubles down

As part of winding the bank down, Silvergate struck a deal with MicroStrategy to accept $161 million to repay a $205 million bitcoin-backed loan — taking a $44 million loss. Silvergate had said repeatedly that its bitcoin-backed loans were safe. [WSJ, paywall]

MicroStrategy sold 1.35 million shares of MSTR in Q1 2023, diluting shareholders by over 10% to pay off its Silvergate loan — and bought $150 million more BTC between February 16 and March 23. This is a Hail Mary pass praying for number to go up, which it is quite unlikely to do. [8-K; Twitter]

More good news for bitcoin

Hindenburg Research’s latest short-seller report is on Jack Dorsey’s Block, formerly Square. Cash App’s growth is aimed at targeting the “unbanked” — which mostly means embracing noncompliance to grow its user base. A Cash App employee told Hindenburg, “every criminal has a Square Cash App account.” And this is before Block has even got into crypto in any substantial way. [Hindenburg]

Indicted crypto promoter Guo Wengui used his culture-war social network Gettr to pump cryptos. Wengui was fined a billion dollars by the SEC in 2021 over his crypto offerings. [Washington Post]

The British Virgin Islands has ordered Three Arrows Capital founders Zu Shu and Kyle Davies to attend an examination on May 22 or be in contempt of court. We’re sure they’ll be right on that. [CoinDesk]

Freeing yourself from fiat history

If you click on a lot of old links to theblockcrypto.com, it’ll tell you that The Block has “sunset our News+ product” — their previous paywalled news offering. They didn’t open up those old pages — they’ve just effectively deleted a whole swathe of their journalism from 2018 to 2020!

We discovered this when Amy went looking for one of her old Block pieces on Binance for our article on Tuesday and when David looked for various other Block articles for today’s story.

You’d think a publisher wouldn’t just trash their own search optimization — but in practice, both mainstream and specialist publications destroy their own URLs and content all the time. So it’s pretty likely this was an error. Hopefully a reversible one.

We remember when Decrypt moved their domain from decryptmedia.com to decrypt.co. They saw their Google hits go through the floor and thought they’d been shadowbanned … not realizing they’d done it to themselves. The Block changed its URL to theblock.co around the same time, with similar effects.

In the meantime: ARCHIVE EVERYTHING. Stuff that’s blocked from the Internet Archive saves just fine into archive.is, and archive.is also accepts pages from the Internet Archive, Google cache, and Bing cache and indexes them correctly under the source URL. David uses and recommends the Get Archive extension for Firefox. [Mozilla Add-Ons]

Posted on March 30, 2023March 7, 2024 by Amy Castor 0

CFTC cracks CZ’s phone, sues Binance — what’s a little terrorist financing between friends

The CFTC dropped a bomb on the world’s largest offshore crypto casino on Monday. It’s suing Binance and its founder Changpeng Zhao (“CZ”) for violating US commodities trading laws. Samuel Lim, Binance’s former chief compliance officer, was also charged with “willfully aiding and abetting” Binance’s violations.

We hope you’re not too shocked to hear that Binance trades against its own customers, or that the CFTC somehow got access to CZ’s phone and private chats on Signal.

This complaint is odd. It reads like it has a shadow twin document — a sealed criminal indictment that’s just waiting until CZ can be extradited.

Read our latest on David’s blog.

Image: The Untouchables

Posted on March 28, 2023 by Amy Castor 0

Crypto collapse: Good night Silvergate Bank, unbanking crypto exchanges, Voyager sale to Binance proceeding

By Amy Castor and David Gerard

Send us money! Here’s Amy’s Patreon, and here’s David’s. Your contributions help us do all of this!
Our patrons can also get a couple of “Bitcoin: It Can’t Be That Stupid” stickers just by messaging one of us and asking.
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“And it seems to me, you lived your life like a candle in the wind. You’ve abruptly toppled over and you’re burning things. Now there’s one less fiat onramp, for those who’ve been orange pilled. And there is no liquidity, for all the crypto shills.”
— Rycochet on Silvergate Bank

Big thanks to @davidgerard for this pile of stickers I’ll be leaving all around Portland and Las Vegas in the near future pic.twitter.com/c76tEufeFr
— Dio – Holy Diver 8-bit.mp3 (@killhamster) March 8, 2023

Silvergate Bank: Time wounds all heels

Silvergate was the easiest crypto death pool call this week. The bank has announced it is voluntarily unwinding and liquidating, “in light of recent industry and regulatory developments” — its customers kept treating deposits as their own money or something, and regulators and legislators hated it a whole lot. All deposits will be returned in full. [Press release]

“The Company is also considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets.” We’re not sure which proprietary technology this means — Silvergate wrote off its investment in Diem, formerly Facebook’s Libra, in its preliminary Q4 2022 accounts, and it just shut down the Silvergate Exchange Network.

FDIC examiners went into Silvergate last week — as we predicted — and have been reviewing Silvergate’s books since. [Bloomberg]

The FDIC was discussing how to keep Silvergate alive — even suggesting a rescue by crypto-related investors. Yeah, right. We suspect they already asked every other bank in the US, none of whom would offer a dollar for this thing.

The big question is: what happens to the loans secured by bitcoins that Silvergate made to MicroStrategy and various bitcoin miners?

Silvergate’s total loan book, bitcoin and otherwise, was $1.4 billion as of September 30, 2022, including the infamous $205 million loan to MicroStrategy. The bitcoin loans are not “bad loans” — they’re not in default, as yet. But they were clearly stupid loans — some idiot thought that lending money to weird companies with insane business models, against an asset that was only up because of a bubble, was a good idea.

So, if Silvergate’s cut up for parts, who takes on these loans?

Loans collateralized with crypto will be a nuisance to transfer because you also need to transfer rights to the collateral (which is sitting in Coinbase Custody, the MSTR loan at least). The MSTR crypto was pledged rather than transferred — there’s a custody account for this specific deal — which is a bit less fiddly. And the bitcoin price is, of course, incredibly volatile, so the collateral itself is risky.

No sane bank is going to want to take on these loans at anywhere near face value. But we expect there will be some buyer who’s interested, at a suitable discount.

If no bank is willing to buy a loan from an insolvent bank, the FDIC tries to close the loan by negotiating with the borrower about possible early repayment. But we don’t expect these loans to end up in that position.

Silvergate Capital stock (NYSE:SI) is a dead cat bouncing between $3.00 and $3.50 today. It was $219 in November 2021. We hope the short sellers have managed to cash out. [Yahoo!]

Frances Coppola on Silvergate: “This is the story of a bank that put all its eggs into an emerging digital basket, believing that providing non-interest-bearing deposit and payment services to crypto exchanges and platforms would be a nice little earner, while completely failing to understand the extraordinary risks involved with such a venture.” [Coppola Comment; Coppola Comment]

Unbanking, on the blockchain

Marco Santori, chief legal officer at Kraken crypto exchange, tells The Block that Kraken is going to start its own crypto bank any day now. With “pens with the little ball chains.” [The Block]

Kraken got itself a Wyoming SPDI charter in 2020 — that’s the same charter as Caitlin Long’s Custodia Bank, which was recently refused an account at the Federal Reserve.

Kraken Bank originally told Decrypt it was aiming to launch in the first quarter of 2021. It’s currently “planning a phased launch” in, er, 2022, apparently. [Kraken, 2020; Decrypt, 2020; Kraken, 2023, archive]

Kraken recently lost US dollar access via Signature Bank for non-corporate customers. In the meantime, Kraken has various other dollar options. The dollar channel for ordinary schlubs is via SynapseFi, “The Launchpad for Financial Innovation” — a payment processor marketing itself hard to crypto companies, though stressing that it never touches crypto itself — or MVB Bank of West Virginia, which thinks there’s a market in “Web3.” [Kraken, archive; SynapseFi; MVB Bank]

UK payments processor BCB Group is angling to take over from Silvergate as the fiat rails to the crypto industry. BCB actually has an FCA license, so the FCA considered they could pass basic money laundering muster at least. BCB launched its BLINC network in 2020; BCB’s recent publicity push is marketing for that. [Coindesk; Coindesk, 2020]

Crypto.com has lost its onramps for actual money, except euros in the European Economic Area and a GBP onramp via BCB — but no US dollar access. [CoinDesk]

Michel de Cryptadamus writes up crypto.com: “At the end of the day we will probably discover that the entire cryptocurrency industry is 5,000 shell companies run by 20 dudes in a foul smelling room in some non-extradition country.” [Cryptadamus]

Outdoor miners

Crypto miners operating on public land haven’t been paying their taxes. Federal mineral lease operators have been using natural gas to power crypto mining without paying their gas royalties. The miners have been using mobile data centers in containers to evade oversight. [Office of Inspector General, PDF; Gizmodo]

Bitcoin miner Riot Platforms, née Riot Blockchain, has now filed its delayed 10-K for 2022 after the SEC told Riot to restate its accounts. There isn’t a lot that’s exciting here. The bitcoin mining business is knife-edge, bitcoin prices are down, and governments and the general public increasingly loathe bitcoin miners. Riot is branching out into selling its expertise in data center power distribution. Risks to Riot’s business include a pile of lawsuits against executives and directors concerning “allegedly false and misleading statements made in prior securities filings.” [SEC]

Voyager Digital

At the March 7 hearing in the bankruptcy of Voyager Digital, Judge Michael Wiles approved the purchase of Voyager assets by Binance US — assuming Binance US can pass various regulatory hurdles. (LOL.) [Doc 1159, PDF]

SEC staff think Binance US is likely an unregistered securities broker, but their objections weren’t specific enough to convince Judge Wiles to stop the sale. [WSJ]

In the hearing, Binance stressed that it really wants personal information, such as social security numbers, for all Voyager customers. Not just the ones moving to Binance US, but all of them: “Data is at the heart of the deal.” Judge Wiles was not impressed and said that SSNs from the Voyager customers who didn’t go to Binance would definitely not be a thing that Binance got. [Twitter]

More good news for bitcoin

The Financial Conduct Authority is hitting more UK crypto ATMs, this time in east London. No crypto ATM operator in the UK is registered with the FCA for anti-money laundering purposes, so all of them are illegal. [FCA]

In India, the Financial Intelligence Unit of the Ministry of Finance is now requiring crypto-asset businesses to register with the FIU as reporting entities under AML laws. They also have to do basic know-your-customer — which they weren’t obliged to do before. Local crypto companies are actually positive about this move. [Gazette of India, PDF; CoinDesk]

In the US, the Public Company Accounting Oversight Board warns that crypto exchange “proof of reserves” statements are meaningless garbage. [PCAOB]

FTX in bankruptcy wants to redeem Alameda’s GBTC shares for the bitcoins backing them. Grayscale said no, so FTX is suing for redemption. Remember that Grayscale could now redeem GBTC any time they like — they just choose not to. [Press release]

Easy Money by Ben McKenzie and Jacob Silverman is available for preorder! The release date is July 27. [Amazon US; Amazon UK]

Image: With apologies to Alex Shaeffer.

Posted on March 9, 2023March 11, 2023 by Amy Castor 0

Crypto collapse: Binance hits reserves, FTX’s Singh sings, miners’ creative accounting, bitcoin markets are thin

This is our second post this weekend! You’ll find our latest on the crypto collapse on David’s blog. [David Gerard]

Also, please support our work via Patreon, if you haven’t already. Our stories are free to read for everyone, but if you want to help us get the word out, become subscribers. Links in post!

In this episode:

More documents have come out on Binance’s “Tai Chi” plan to subvert US regulation.
Binance appears to have been channeling bridged USDC reserves to Cumberland/DRW.
Senators write a scathing letter to Binance, asking for a slew of documents.
We told you bitcoin miners were fiddling accounts!
Nishad Singh, another member of SBF’s inner circle, turns against Sam.
Also, lawyers propose tighter bail restrictions for Sam — a flip phone and virtually no internet access.

Posted on March 5, 2023 by Amy Castor 0

Crypto collapse: Binance USD shut down, Celsius insiders sued, Paxos, Voyager, FTX

By Amy Castor and David Gerard

For your convenience, we still have banking. Put your fiat currency into our Patreons in confidence — here’s Amy’s, and here’s David’s.
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“somethings are better left unsaid. Recommend no more news like these, for the sake of the people, our industry (and your business)”
— Changpeng Zhao, Binance

Binance USD shuts down — party like it’s 2008

Binance USD (BUSD) is a $16 billion stablecoin — an Ethereum ERC20 token — issued by New York-based Paxos. It’s backed by actual dollars in bank accounts.

There’s also a version of BUSD on the Binance BNB Blockchain, bridged from Ethereum. Sometimes the Binance-peg BUSD is fully backed by Paxos BUSD! Other times, it isn’t.

Both the SEC and the New York Department of Financial Services have acted against Paxos and its issuance of BUSD.

The NYDFS has told Paxos to cease issuing BUSD — so there will be no new BUSD after February 21. Paxos has told customers it will proceed with orderly redemptions, as long as they have proper KYC. In its consumer alert, the NYDFS wrote: [WSJ, paywalled; NYDFS; Paxos; PR Newswire]

DFS has ordered Paxos to cease minting Paxos-issued BUSD as a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD.

… It is important to note that the Department authorized Paxos to issue BUSD on the Ethereum blockchain. The Department has not authorized Binance-Peg BUSD on any blockchain, and Binance-Peg BUSD is not issued by Paxos.

The SEC has sent Paxos a Wells Notice alleging that BUSD is an unregistered security. Paxos issued a statement saying it disagrees and is prepared to “vigorously litigate if necessary.” Of course, Paxos is already stopping issuing new BUSD. [WSJ, paywalled; Paxos]

A Wells Notice is a heads-up that an enforcement action is very close to coming your way. Paxos can respond with a Wells Submission — where they try to convince the SEC not to sue them — but we doubt they will because any response would be public. More likely, Paxos will negotiate a settlement.

We don’t know the SEC’s precise issue with BUSD because Paxos hasn’t released the Wells Notice, and the SEC hasn’t filed a complaint yet. But we can make a few educated guesses:

Paxos-issued BUSD is not an “investment contract,” per the Howey test, because there is no expectation of profit. But an investment contract is only a subset of securities. Paxos BUSD is more akin to a “note” — a promise to pay a specified sum — which is presumptively a security, especially since it can be traded. The correct test for a note is the Reves Test. [Justia]
Dollar-backed stablecoins resemble unregistered money market funds. MMFs are also regulated by the SEC.
The SEC may not like Paxos’ relationship with Binance, who do all manner of security-like things with BUSD.
The process of creating a liquid tradeable instrument from a less liquid one is called “securitization.” So Binance peg BUSD, as a more liquid form of Paxos BUSD, is likely a security.
The SEC may also be taking aim at Binance through Paxos. Binance auto-converts all other stablecoins — and incoming actual dollars — to BUSD. So if you have 1 USDC on the Binance exchange, Binance will automatically convert that to 1 BUSD. This makes the BUSD more liquid.

Now that Paxos has stopped issuing BUSD, Binance will have to find another stablecoin to auto-convert to, probably Tether. Coincidentally, Tether just minted another billion USDT. [Twitter]

The BUSD price is still very close to $1. But the Binance exchange has had a surge in withdrawals — $831 million net outflows in 24 hours — and the price of Binance’s free-floating BNB token has crashed. [Coindesk; Twitter]

What does all this mean for Binance? The US has already cut off Binance’s banking by forcing Silvergate and Signature to cut ties with the exchange. Europe and other jurisdictions have done the same. Binance can’t get access to actual dollars, and now it can’t get access to dollars via BUSD either.

Frances Coppola and Dirty Bubble have excellent posts on Binance and its stablecoins. [Coppola Comment; Dirty Bubble]

Fox News reporter Eleanor Terrett posted a rumor on February 14 that the SEC had issued Wells notices to other US stablecoin companies including Circle — ordering them to cease and desist sales of unregistered securities. This turns out not to have been the case! As yet, anyway. [Twitter, archive; Twitter, Twitter]

Celsius and creditors sue the insiders

Based on the jaw-dropping criminality revealed in the examiner’s report, Celsius Network and the Unsecured Creditors’ Committee have filed suit against past executives of Celsius to recover as much money from them as possible. [Doc 2054, PDF]

Celsius and the UCC are suing co-founders Alex Mashinsky, Daniel Leon, and Hanoch “Nuke” Goldstein; former CFO Harumi Urata-Thompson; former general counsel Jeremie Beaudry; former head of trading Johannes Treutler; former vice-president of lending Aliza Landes, who is also Daniel Leon’s wife; and Kristine Mashinsky, wife of Alex.

The suit itself starts on page 25 of the PDF. Most of the complaint reiterates the events detailed in the examiner’s report. The claims are:

breach of fiduciary duty (Celsius was insolvent);
breach of fiduciary duty of loyalty (CEL price manipulations, KeyFi purchase, not avoiding conflicts of interest);
breach of the director’s duties to exercise independent judgment (multiple failures to act);
preferential and fraudulent transfers from July 2021 to May 2022 (insider withdrawals — full list in Exhibit A, PDF page 149).

The plaintiffs ask for actual and punitive damages.

Celsius: Hang on lads, I’ve got a great idea!

Meanwhile, Celsius has a recovery plan! We outlined the various recovery proposals previously. Celsius and the UCC have picked the NovaWulf plan — transfer substantially all assets and businesses to a NewCo, 100% owned by the creditors, and issue SEC-compliant “revenue share tokens.” NovaWulf will contribute $45 million to $55 million in actual cash and manage the company. [Doc 2066, PDF]

The shares will be tokens, but the share issuance has to pass SEC registration. It’s just an ordinary equity stock. But it’ll run on a blockchain, apparently.

“Earn” creditors with claims below $5,000 get liquid crypto (BTC, ETH, and USDC) up to about 70% of their claim.

Other Earn creditors will get liquid crypto and equity in NewCo, which will own illiquid crypto, mining, retail and institutional loans, and other assets. The NewCo will actively seek out new business.

The large Earn creditors will also get an interest in a “well-funded litigation trust” to “vigorously pursue designated litigation claims against certain former insiders of Celsius and other third parties.” (See above.)

Insider CEL claims get zero; outsider CEL claims get $0.20 per CEL.

NovaWulf Digital Management has previously provided services for bitcoin mining (TeraWulf and Marathon). For their $45 million, NovaWulf get … to manage NewCo? There are some Management Share Tokens in the plan.

We think this looks a bit speculative and hopeful. It’s not clear that it’s better than just liquidating. But at least it’s a plan? Celsius creditors large and small seem to be very receptive to hope right now.

FTX examiner denied; Sam’s sportsball shenanigans

In the FTX bankruptcy, Judge Michael Dorsey has denied the US Trustee’s motion to appoint an examiner. It would cost too much time and money: “I have no doubt that the appointment of an examiner would not be in the best interest of the creditors,” he said. “Every dollar spent in these cases on administrative expenses is one dollar less to the creditors.” He thinks John Jay Ray III is sufficiently independent of the previous management’s malfeasance to investigate what happened here just fine. [The Block]

In the FTX criminal case, Judge Lewis Kaplan has ordered the names of Sam Bankman-Fried’s two additional bail bond co-signers to be unsealed. Both are from Stanford. The signer for $200,000 is Andreas Paepcke, a senior research scientist at Stanford University. The signer for $500,000 is Larry Kramer, the former dean of Stanford Law School, and a close friend of Sam’s parents. Neither has had to put in any actual cash as yet. [Bloomberg]

Prosecutors are not happy that Sam has been using a VPN to access the internet. Sam’s lawyers say he used the VPN to access his NFL Game Pass subscription to watch the AFC and NFC championship games, as well as the Super Bowl. We flatly don’t believe that Sam has the faintest interest in any variety of sportsball. [Doc 66, PDF, Coindesk; Bloomberg]

FTX gave $400 million to obscure hedge fund Modulo Capital. The money is currently sitting in a JPMorgan account. JPMorgan was Modulo’s prime broker, handling its stocks and stock futures. In November, the holdings were converted to cash. It’s unclear why federal prosecutors haven’t seized the funds yet. [NYT]

Daniel Friedberg, the former FTX chief regulatory officer, was also a George Santos donor. Truly a fitting donor. [Seattle Times]

Patrick McHenry (R-NC) and Bill Huizenga (R-MI) from the House Financial Services Committee have questions for the SEC about the arrest of SBF. He was arrested the night before he was supposed to testify before the Committee, on charges that the SEC had a part in authorizing. “The timing of the charges and his arrest raise serious questions about the SEC’s process and cooperation with the Department of Justice.” Was the SEC conspiring to get Sam arrested? Huge if true. [Financial Services, PDF]

**Voyager Special Committee [*redacted***]

In Voyager, the Special Committee of the Board of Directors of Voyager LLC has produced an Investigation Report, conducted by Quinn Emanuel Urquhart & Sullivan, which has been filed in redacted form. [Doc 1000, PDF]

Judge Michael Wiles let the company redact the document for privileged information and attorney-client work product, and the Voyager UCC was okay with this. So the executive summary states the report’s conclusion as:

Upon consideration of the factual record developed over the course of the Investigation and research and analysis of relevant legal theories, Quinn Emanuel has concluded [rest of paragraph redacted]

In summary: Voyager, and crypto itself, were both just too good and pretty for such fragile beauty to survive macroeconomic factors and “severe industry headwinds.” Also, a quarter of Voyager’s loan book was an entirely unsecured loan to 3AC. Blame them, they screwed everyone! It is not our fault that we were making blitheringly stupid loans while number was going up — our Risk Committee was only “kind of” formalized. It’s definitely not worth suing the directors or officers, okay?

The report’s entire “CONCLUSIONS AND RECOMMENDATIONS” section is redacted.

Furthermore, [redacted] [redacted] [redacted]

More good news for bitcoin

The trouble with an 18% interest rate is that anything offering those sort of returns in the real world is a Ponzi scheme, and the company offering 18% will go broke and you’ll lose all your money. Celsius and Voyager investors are discovering the other problem — you have to pay tax on that 18% interest, even if the company is in chapter 11 and you can’t get your money out. [Bloomberg]

The Bank of Lithuania has shut down another payment processor, Payrnet UAB — which used to issue credit cards for various crypto companies, including Crypto.com. [Twitter]

Paul Grewal, chief legal officer at Coinbase, argues that none of the prongs of the Howey test of whether a financial product is a security apply to Coinbase’s staking product, which takes money from customers and gives them a return on it. Oookay. [Coinbase, archive]

Every crypto ATM in the UK has been illegal since the FCA refused to license any of the operators in March 2022 and told them to shut down or else. Police, working with the FCA, are finally raiding the operators. [Guardian]

Image: Paxos hosted a party with synchronized swimmers at the Versace Mansion at Bitcoin 2022 in Miami. James Jackman for WSJ.

Posted on February 15, 2023February 15, 2023 by Amy Castor 0

Crypto collapse: Crypto.com’s shadow bank Transactive, US banks and crypto, Binance not so good with actual money

By Amy Castor and David Gerard

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“funds are safe. we’ve done a risk assessment and found that 100% of hacks happen when someone has access to their coins, so we’re revoking that access to make them even safer”
— Boxturret

Transactive: Lithuania shuts down a money laundromat

Crypto exchanges have trouble finding stable gateways for actual money. Proper banks won’t talk to them, so they turn to shadow banks, which cater to high-risk clients and use lots of tricks to skirt the traditional banking system.

Sometimes the exchanges just lose their gateway — and your money.

We wrote earlier about how Crypto.com customers’ euro deposits were seized by the Lithuanian government as part of an anti-money laundering enforcement action against the exchange’s payment provider, Transactive Systems UAB. Cryptadamus has a great post explaining what happened. [Substack]

If you had EUR on Crypto.com before this, it’s gone. The “EUR” you see in your account is unbacked. Work out what you can do to extract value from your outstanding balance, while Crypto.com gives you the runaround.

Transactive was also the payment channel for crypto lender Nexo, whose Bulgarian offices were recently raided by authorities. Transactive has an office in the UK as well — Transactive Systems Ltd. [Transactive]

After getting authorization from the UK Financial Conduct Authority and the Bank of Lithuania to act as an electronic money institution (EMI), Transactive grew astonishingly quickly in just five years — thanks to its clientele in crypto, gambling, and forex, and whoever else they were processing money for. [Bloomberg, archive]

Given Transactive’s sordid history, it’s amazing that the FCA authorized them at all.

Transactive emerged from the rubble of PacNet Services, an international payments company that started in Vancouver. PacNet was forced to wind down after the US Treasury sanctioned it as a “transnational criminal organization” — specifically, being the middleman for mail-fraud scam artists. Several PacNet executives were charged with fraud and money laundering. [US Treasury, 2016; DOJ, 2019]

A CNN investigative report from 2016 details how PacNet employees moved large piles of money around the world. PacNet set up bank accounts in the names of shell companies, they sent packages of cash labeled “legal documents,” they bribed Russian banking officials, and they even used a private plane to ferry cash to customers. [CNN, 2016]

So the money launderers left PacNet and moved over to a totally legitimate new business —Transactive, co-founded by convicted healthcare scammer Scott Roix.

In February 2022, the Bank of Lithuania fined Transactive 20,000 EUR for commingling customer and company funds. Transactive had also misreported its customer balances and its equity capital. [Lieutvos Bankas, in Lithuanian]

In January 2023, the Bank of Lithuania accused Transactive of massive money laundering and froze the company’s funds. It ordered Transactive to stop servicing clients in finance, forex, and crypto, pending a review. [Lietuvos Bankas, in Lithuanian]

Transactive notified clients about this trivial hiccup and said their funds were being “safeguarded” — a word meaning “you’ll never see your money again.” If an investigation discovers any of the money was dirty (if!), the government will seize the funds. [Reddit]

Crypto.com has told its euro-using customers that their SEPA (Single Euro Payments Area) transfers are being migrated to a new provider. Now the exchange has to find a new provider.

Here are Crypto.com customers screaming into the void to get their funds back. Crypto.com has yet to tell them what actually happened to their money. [Twitter, Twitter]

Unless Crypto.com had euros stored somewhere other than Transactive Systems UAB, they are likely insolvent in EUR and will have to start from scratch, paying withdrawals with new deposits until they can somehow fill the gap — or not.

US crypto banks are out of favor

In the US, Crypto.com still banks with Silvergate, which allows their institutional clients to transfer USD from their bank accounts to the exchange. This channel may have problems in the near future, due to Silvergate’s dealings with FTX.

The US Federal Reserve really, really hates banks touching crypto and is not putting up with it even a bit — especially after Silvergate needed a $4.3 billion bailout. The Fed issued a policy statement on January 27: [Federal Reserve; Federal Reserve, PDF]

“The statement makes clear that uninsured and insured banks supervised by the Board will be subject to the same limitations on activities, including novel banking activities, such as crypto-asset-related activities.

In particular, the preamble would provide that the Board would presumptively prohibit SMBs from holding most crypto-assets as principal, and also would provide that any SMB seeking to issue a dollar token would need to demonstrate, to the satisfaction of Federal Reserve supervisors, that the bank has controls in place to conduct the activity in a safe and sound manner, and to receive a Federal Reserve supervisory nonobjection before commencing such activity.”

That second paragraph directly addresses Silvergate’s plan to revive Diem (née Facebook’s Libra) and do their own private stablecoin for retail customers. Yeah, no. Silvergate says it’s written off its Diem investment after previous regulator refusals to let them print private money, but the Fed evidently thought it was still worth emphasizing their “no.”

The US Department of Justice is investigating Silvergate over its FTX and Alameda Research dealings. FTX customers were wiring money to Alameda and to Alameda’s dubious subsidiary North Dimension via the bank, thinking that money was going directly to FTX. The DOJ wants to know what Silvergate knew, and when they knew it. [Bloomberg]

Binance: increasingly freed from the chains of filthy fiat

In the UK, the Binance crypto exchange should have no access to pounds, ever. After the Financial Conduct Authority warned in March 2022 that “in the FCA’s view, Binance Markets is not capable of being effectively supervised,” UK banks cut off direct deposit to Binance immediately. [FCA, 2022]

But Binance knows you can’t keep a dedicated gambling addict down, so they keep trying to weasel their way back into the UK’s Faster Payments network, most recently through payments processor Paysafe. Sometimes this works. Binance recommends UK customers send money in and out via Visa — but even that’s being cut off by the banks. [Twitter; CoinDesk]

Cryptadamus traces Binance’s Visa connection — Binance owns crypto debit card issuer Swipe, which it bought in 2021! Swipe also issued a crypto debit card for FTX. [Twitter; Binance; FX Empire]

Australian users also report payment issues with Binance — even via Visa. [Twitter]

In the US, Binance users say they can’t withdraw funds in amounts of less than $100,000 from American banks. Binance says that’s fake news and everything is fine. Cryptadamus has been documenting the difference between Binance’s official statements and what customers report. [Reddit]

When Bitfinex was cut off from banking in 2017, users would buy bitcoins just to get their funds out of the exchange. This drove the price of bitcoin up and may have helped trigger the 2017 crypto bubble. So all of this is good news for bitcoin!

FTX in bankruptcy

At the next FTX bankruptcy hearing on February 6, Judge John Dorsey will hear arguments for and against appointing an examiner. FTX and the Unsecured Creditors’ Committee are against hiring an examiner, but the US Trustee and various state regulators want one. John Reed Stark thinks it’s absolutely necessary. [Agenda, PDF; LinkedIn]

Brian Glueckstein of Sullivan & Cromwell for FTX filed a declaration in support of FTX’s objection to an examiner. It’s 3,855 pages of mainly exhibits. But the US Trustee wants it stricken from the record because the deadline to file was January 25, and Glueckstein filed on February 3, one business day before the hearing. Oops. [Declaration, PDF; Doc 617, PDF]

FTX is suing Voyager for repayment of $446 million of loans. After Voyager filed for bankruptcy in July, it demanded repayment of all outstanding loans to FTX and Alameda. FTX paid the money back for Alameda — but because they paid it back so close to FTX’s bankruptcy filing, FTX wants to claw it back again. [Complaint, PDF; Reuters]

In the legal case against Sam Bankman-Fried, Judge Lewis Kaplan has barred Sam from using Signal or Slack and from contacting any former FTX employees without lawyers present until February 9, when he’ll hear arguments. He wasn’t impressed when Sam reached out to a key witness, who we assume is FTX US counsel Ryne Miller, to “vet” things on the phone. [Order, PDF]

SBF’s bail conditions required two more sureties. These are now in, with their names redacted: $200,000 and $500,000. Judge Kaplan has agreed to unseal the names, but they’ll remain redacted pending possible appeals. [Bond, PDF; Bond; PDF, Memorandum Opinion, PDF]

Digital Currency Group

The second day hearing in the Genesis bankruptcy is February 22. No agenda yet. We wonder if anyone will attempt to go after Genesis’ owners, DCG. [Notice, PDF]

The Gemini crypto exchange implied to its Gemini Earn customers in 2022 that their deposits were protected by FDIC insurance, and customers took Gemini’s statements to mean they were protected by the FDIC from Genesis failing. But Gemini didn’t technically say that! So it must be fine, right? [Axios]

DCG’s crypto news site CoinDesk claimed to have prospective buyers approaching them unsolicited and offering hundreds of millions of dollars for the site. The new rumor is that the prospective buyers are looking at buying only parts of the site — the conference business or the media outlet — and certainly not at paying hundreds of millions of dollars. [Twitter]

Other good news for bitcoin

Coinbase was fined 3.3 million EUR (USD$3.6 million) by De Nederlandsche Bank for not registering as a money transmitter in the Netherlands. [Reuters]

Coinbase bragged about having proper registration in September 2022. But the violation occurred in the years prior when they weren’t properly registered. [Coinbase, 2022]

MicroStrategy posts another loss. This is its eighth straight quarterly loss in a row. Before former CEO Michael Saylor started to amass bitcoin in 2020, the company had $531 million in cash. Now it’s down to $43.8 million in cash. [Bloomberg]

MicroStrategy is one of the loans that Silvergate is particularly worried about. In March 2022, MicroStrategy borrowed $205 million in a three-year loan from Silvergate. The loan was collateralized with bitcoin — and Silvergate will need to worry about that too.

Image: PacNet’s part owner Don Davis (on the left) posted on LinkedIn. Airplanes are great for moving piles of cash.

Posted on February 5, 2023February 6, 2023 by Amy Castor 0

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Independent Journalist

How sanctions work

Use case for Tether: North Korea, Hamas, Russia

Liberty Reserve

Liberty Reserve Junior

Why hasn’t Tether been shut down yet?

A bigger hammer

Seriously, stop it

What happens next?

Tightening Tether’s tethers

SEC answers Coinbase’s prayers: “No.”

4 (continued)

FTX: The IRS wants its money

Three Arrows Capital

Crypto media in the new Ice Age

Regulatory clarity

Santa Tibanne

Trouble down t’ pit

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Go directly to jail

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Prime Trust goes Chapter 11. You had one job!

Knives out at TrueUSD

Worldcoin wants your eyeballs

Hex enduction hour

This bank failure is fine, nothing to see here

Still only good news for bitcoin

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Curve: smart contracts, stupid humans

CoinDesk on the block

A Ripple in the war on Terra

4

Fore!

Everybody gets a stablecoin!

None more stable

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Good news for bitcoin

Media stardom

CZ: “4”SEC: “Fore!”

The SEC complaint

Tai Chi: A plan to evade regulation

CZ’s sockpuppets

The SEC wants to freeze Binance.US funds

Where’s the US money?

The Binance money funnel

Temperature drop

DCG: When your left pocket can’t pay your right pocket

Binance is outraged at Reuters catching them out again

Hong Kong brings some regulatory clarity

Regulatory clarity around the world

Bitfinex: whoops, apocalypse

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Bittrex takes a dive

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Monkey laundering comes to bitcoin

Child genius, adult moron

The searing light of regulatory clarity

Unvaxxed bitcoin is the new bitcoin

Media stardom

Coinbase takes on the SEC

Coinbase pivots to video

The Voyager sinks

The ongoing good news for Terra-Luna

All the good news for Binance

Other good news for bitcoin

The Treasury brings good news for DeFi

The SEC brings good news for Coinbase and DeFi

A regulatory framework for casino chips

FTX’s first interim report reads like Quadriga

Terraform Labs did nothing* wrong

Crypto mining: the free lunch is over

More good news for exchanges

Good news for bitcoin

Media stardom

Binance: This is fine

Voyager’s Binance deal is on hold

Celsius Network

Good news for casinos

The usual good news for bitcoin

CZ: “4”
SEC: “Fore!”

**Terraform Labs did nothing* wrong**

**Voyager Special Committee [*redacted***]