The latest from David and me! In this edition:
- The process of cutting Signature up for its organs
- Other banking woes across crypto
- FTX foolishness
- Tether is pumping
- Voyager appeal
- and we stick our necks out again and predict the near-term obvious
The latest from David and me! In this edition:
I just got a story published in MIT Technology Review on why Bitcoin will likely never move to proof of stake. [MIT Tech Review]
Since Ethereum migrated to proof of stake, that’s got more people asking, “Why is it necessary for Bitcoin to consume an entire country’s worth of energy?”
Bitcoin is decentralized in theory only and the folks who control the code are fiercely tied to keeping Bitcoin in its original form for completely irrational reasons.
Bitcoin Cash in 2017 was the last attempt to make any reasonable update to the Bitcoin reference code — and BCH ended up just another altcoin.
Bitcoin purists still refer to Bitcoin Cash as a “rebellion” and a “corporate takeover” as opposed to a sincere effort to reduce congestion on the network.
Now that lawmakers and regulators are getting more fed up with crypto, the pressure for Bitcoin to reduce its CO2 footprint will only increase.
“i have a lot more respect for the binance guy, having seen a competitor stumble and taken the opportunity to very publicly shank them five or six times while they’re on the ground, under the guise of trying to help”— infernal machines, SomethingAwful
We’re exhausted keeping up with all the good news for bitcoin.
Crypto.com didn’t have the greatest weekend. As we write this, withdrawals are clogged, but some are reported to be coming through okay.
The test an exchange faces is: can it stand a run on the bank?
The test bitcoin as a whole faces is: how will the price hold when lots of people are dumping for cash?
After the bitcoin price had been floating at around $20,000 for several months, FTX crashed. On the day Binance reneged on its offer to buy FTX’s remains, BTC dropped below $16,000. It’s a bit above that now.
The actual dollars have gone home, and the wider crypto casino is having to pretend harder and harder that the alleged mark-to-market value of illiquid trash means anything.
Real dollars continue to disappear from crypto. Retail trading at Coinbase was down 43% in the third quarter of 2022, compared to Q2.
Reddit /r/buttcoin has a new header image
Crypto.com is not having a great time.
The crypto markets are jittery. After the dramatic collapse of FTX, crypto holders are left shell-shocked and traumatized. They don’t trust any centralized exchange now at all.
It doesn’t take much to set the markets off.
Despite claiming to have near-zero exposure to the fallout of FTX, over the last year, Crypto.com sent multiple very large stablecoin transfers to FTX, totaling approximately $1 billion. [Reddit, Australian Financial Review]
On November 12, crypto Twitter caught wind of the fact that Singapore-based Crypto.com and China-based Gate.io were passing funds back and forth to post stronger-looking proof of reserve statements, suggesting they didn’t have the funds they purported to have.
Crypto.com CEO Kris Marszalek waved it off as just a whoopsie, saying they accidentally sent $400 million of their ETH to Gate.io on October 21, instead of their cold wallets, but that Gate.io had sent the money back. Everything was fine. [Twitter, archive; WSJ]
The crypto market wasn’t buying it. Instead, the news set off an FTX-style bank run, as panicked users raced to get their funds off Crypto.com. Within hours, more than 89,000 transactions pulled customer funds out of Crypto.com wallets. You could watch it in real time on Etherscan. [Chainsaw, Twitter]
Picture old-timey cartoons of guys in a stock exchange, hats popping off their heads and cigars falling out of their mouths in shock, shouting, “SELL! SELL! SELL!” Crypto.com was like that but in basements around the world.
By Monday, the run had made mainstream international news — Sky, AFP, and Reuters, as well as financial outlets such as Bloomberg. [SkyNews]
Crypto.com should have collapsed right then, but it didn’t. Binance bailed Crypto.com out with infusions of ETH and USDC from their “recovery fund.” Cryptocurrency just reinvented the idea of a central bank as a lender of last resort. [Twitter; Twitter; Twitter]
Of course, given what he had just done to FTX, is it really a smart idea to let CZ know you have liquidity problems?
The following day, Marszalek did an Ask-Me-Anything to reassure everyone that the funds were safe. “At no point were the funds at risk of being sent somewhere they could not be retrieved,” he said. “It had nothing to do with any of the craziness from FTX.” [YouTube]
Binance also held an AMA to tell everyone that everything is fine. [Twitter; Verge]
Kris Marszalek co-founded Crypto.com in 2016. It was initially called Monaco but bought the “crypto.com” domain from cryptographer Matt Blaze in 2018.
Based in Singapore, the firm has spent huge money on ad campaigns, including a $700 million deal to put its name on LA’s sports arena (formerly Staples Center) and a “Fortune Favors the Brave” Super Bowl commercial featuring Matt Damon. [GQ]
The company makes money by charging fees for trades on its smartphone app. It promises Ponzi-like yields — up to 14.5% annually, paid out in stablecoins.
To access the higher stake yield, you have to buy Cronos (CRO), the platform’s native trader token, whose price floats freely. CRO tanked over the weekend over concerns about Crypto.com’s reserves. [BeinCrypto]
Marszalek, 42, is a Polish-born serial entrepreneur who lives in Hong Kong. He dropped out of college and started his career selling computer equipment. He doesn’t appear to have any trading experience at all prior to Crypto.com.
You’ll be delighted to hear that Marszalek has the sort of background you want in a crypto CEO. Specifically, running a voucher sales company that collapsed in 2016 and stiffed everyone.
Founded in 2010 in Singapore, Ensogo offered Groupon-style “daily deals” and so forth. After going through multiple name changes and acquisitions, Ensogo was listed as a standalone company on the Australian Securities Exchange. It pivoted to an “open marketplace platform” in late 2015. [ASX, PDF]
By April 2016, Ensogo had closed its Malaysian office and had stopped paying merchants. The company’s first-quarter report to the ASX showed an AUD$5 million deficit, despite firing half its staff in the first quarter of 2016. It had already lost AUD$67 million in 2015. Ensogo finally stopped operations in June — leaving merchants and consumers in the lurch. One Hong Kong merchant lost HK$20,000. [Tech in Asia; Tech in Asia; Tech in Asia]
In the third quarter of 2022, US exchange Coinbase suffered “another tough quarter.” Institutional trading was down 22% and retail volume was down 43%, compared to the previous quarter. Net revenue in Q3 was $576 million, down from $803 million in Q2, and $1.2 billion the year before. The company lost $545 million in Q3, compared to a net profit of $406 million in the same period last year. [FT, archive; Shareholder letter, PDF]
In Hong Kong, AAX has suspended withdrawals. The crypto exchange had just blogged that it had no exposure to FTX and that user funds were never exposed to counterparty risk. [AAX; AAX; Coindesk]
The FTX collapse has taken out a variety of firms across crypto, including other exchanges and crypto hedge funds. Many projects used FTX like it was a bank. So many projects are now wrecked because they treated FTX like it was a safe place to store their cryptos.
Expect more trouble and possible bankruptcies to come. People keep treating crypto exchanges as banks. They are not banks.
The hard part is: what do you do instead?
Loud and weird crypto nerds, particularly bitcoin maxis, are saying “not your keys not your coins” again a lot.
Back in the real world, approximately 100% of crypto users are in it for the money. And that’s only achievable with the coins on an exchange, where they can actively buy and trade them.
More importantly, almost all crypto users have flat zero technical knowledge. They have no idea how any of it works. They trusted the newspaper headlines. They just about get “number go up.” They won’t be self-custodying en masse.
DeFi traders will tell you that self-custodying is the only way to do anything, but they also get rekt a whole lot.
We concur that users should treat centralized exchanges as risky places to store cryptos. The trouble is, what else to do with them? If you don’t want to do the sensible thing — i.e., dump your coins and get the heck out of crypto — you’re going to have to learn way more about how the technology works than you ever wanted to.
It’s going to suck because — despite the user-friendly Super Bowl ads — crypto is not a product. It’s a pile of wires on a lab bench. Get out your soldering iron, you’re gonna be your own bank.
“I kept up the bluff, hoping that I might eventually hit upon some workable plan to pay all my creditors in full.”— Charles Ponzi, The Rise of Mr. Ponzi
Crypto has crashed, and some of our readers are asking us why the price of bitcoin has been holding steady at around $19,000 to $20,000 for the past few months. Why won’t it go down further?
We think the price of bitcoin is a high wire act. If the price drops too low, some leveraged large holders could go bust. So the number needs to be kept pumped above that level. If the price goes up too far, the suckers — not just retail, but the bitcoin miners — may be tempted to cash out at last.
The idea is to pump just enough to keep the price up — but not so much that suckers dump their bitcoins directly into the pump.
If too many bagholders try to sell, what quickly becomes obvious is there are no actual buyers. At least, none with real money.
The party is over. Retail investors have all gone home, so there are no more suckers getting in line to pump the price up anymore. Coinbase’s 10-Q showed a drop in retail dollars.
In addition to a dearth of real dollars, there’s also been a dearth of fresh tethers coming in since June. That dearth lasted until October 25 — when a billion tethers were printed and prices suddenly jumped 10%, just in time to liquidate a pile of short-margin traders on FTX.
Bitcoin miners in North America have been taking on increased debt, so there’s still no real incentive for them to sell their bitcoin. Core Scientific is the exception, as we note below, because they’re running out of cash — not least because they’re stuck with hosting Celsius.
Bitcoin derivatives — assets that derive their value from bitcoin — aren’t doing well either. The ProShares Bitcoin Strategy ETF (BITO) tracks the CME’s bitcoin futures. These are just bets in dollars on the price of bitcoin. Bloomberg Intelligence analyst James Seyffart says: “If you just want exposure to Bitcoin” — i.e., not doing anything so gauche as touching a bitcoin — “BITO is the best option in the ETF landscape, at least in the US.” But in the more than a year that it’s existed, BITO has performed even worse than bitcoin itself. BITO holders have mostly stayed holding, so its holders are just like bitcoin bagholders too. [Bloomberg]
Celsius Network is dead. It’s an ex-parrot. Most of the back-and-forth in the bankruptcy is over the spare change that might be in the corpse’s pockets. Also, the spare change is being nibbled away by lawyers’ fees and operational costs. So the creditors think it’s time to see what they can get by just selling it all for parts.
At the same time, Celsius is saying “I’m not dead yet!” and throwing up plans to come back to life. That’s the difference between a Chapter 7 liquidation and a Chapter 11 reorganization — Celsius has to pretend it has a future.
And also, the US Trustee got an examiner on the case, to see just what happened here — if this bankruptcy was the result of ineptitude … or of Celsius being a scam.
The examiner’s report is a wild card. It could blow up the whole bankruptcy proceeding. We think the Trustee, who is part of the Department of Justice, suspects Celsius is a crime scene.
Judge Martin Glenn has approved the bidding procedure plan for Celsius to sell virtually all of its assets — including its mining business. He is quite concerned that this business is, in bankruptcy jargon, a “melting ice cube,” and wants to make the sale happen for the sake of the creditors. [Memorandum Opinion and Order, PDF]
The initial bid deadline is November 21. Final bids are due on December 12. An auction, if necessary, is scheduled for December 15.
The court directed the Trustee to “promptly” appoint a privacy ombudsman with experience in consumer privacy laws to protect consumer data. The Trustee has appointed Lucy L. Thompson. [Appointment, PDF; Order, PDF]
The Trustee, the examiner, and the consumer privacy ombudsman will be able to listen in on the auction — but they can’t interfere.
Celsius is required to submit any stalking horse approval to the court. A stalking horse is a bid that is arranged in advance to prevent other bidders from making lowball offers.
The final deadline for bids falls after the examiner begins to reveal her findings. An interim report is due on November 18, and an initial report is due on December 10.
The court has yet to decide whether the contents of Celsius Custody and Withhold accounts belong to the individual customers, or to the bankruptcy estate.
The issues are set to be heard on December 7 and 8, and they’ll raise a host of questions about what constitutes ownership in crypto. If someone else controls the keys to your crypto, is that really your crypto? There is no straightforward answer to this.
In a letter filed with the court on October 17, Judge Glenn notes: “cases involving cryptocurrency may raise legal issues for which there are no controlling legal precedents in this Circuit or elsewhere in the United States or in other countries in which cases arise.”
So, he’ll be using the Law Commission of England and Wales’ lengthy and detailed “Digital Assets Consultation Paper” as his framework in this case. [Doc 1073, PDF; Consulting Paper]
We think he’ll be particularly interested in Chapter 16 of the paper, which specifically talks about custody and what happens in an insolvency.
This is surprisingly big news for US crypto in general — it will introduce a whole swathe of legal thinking that’s entirely new for US crypto regulation and jurisprudence. This may turn out to be a lasting consequence of the Celsius bankruptcy.
Who owns cryptos in custody is already fraught. A few months ago, it turned out that cryptos held in Coinbase Custody are not the customer’s cryptos, being held by Coinbase — instead, they’re assets of Coinbase that are liabilities Coinbase has to the customer, just like cryptos on deposit on the Coinbase trading platform. This is precisely not what Coinbase was selling Custody to its customers as! But that’s how SEC regulations said to account for it.
Judge Glenn has denied the motion for an official equity committee, which would have allowed Celsius investors to bill their professional fees to the bankruptcy estate. We discussed this motion last time.
It’s actually not uncommon for equity security holders to request the appointment of official equity committees to represent their interests in bankruptcy cases — and to get a formal seat at the negotiations table.
But in this case, Judge Glenn wasn’t convinced. He thinks the equity investors already have adequate representation in the form of existing stakeholders, particularly the board of directors, who literally represent the owners of the company. The court also feels there is little chance investors will recoup any of their $400 million — it’s normal in bankruptcy for equity holders to get zero — and the costs involved are unlikely to benefit the estate. [Doc 1166, PDF]
The equity investors also want Celsius to list liabilities and assets in dollars, not crypto — which is quite normal even for volatile and illiquid assets like crypto. [Doc 1183, PDF]
The purpose of filing Chapter 11 is to wipe out debt and start anew. But a party can object to the discharge of a particular debt — or the entire bankruptcy case — by filing an adversary proceeding, as we detailed last time.
In Chapter 11, the deadline to file objections to dischargeability is 60 days after the first creditors’ meeting. Celsius has agreed with state regulators to extend the states’ deadline by six months, to April 18, so the states can finish their investigations. And they’ve agreed on the same with the Federal Trade Commission. [Doc 1107, PDF; Order, PDF]
The Securities and Exchange Commission wants to extend its deadline to January 17. If Celsius raised money in a way that knowingly violated securities law or other laws — which they totally did, come on — then those debts might not be dischargeable. [Order, PDF]
As we mentioned last time, Core Scientific doesn’t want to keep paying the ever-increasing electricity bills for hosting Celsius’ bitcoin mining. Core Scientific, Celsius, and the Unsecured Creditors’ Committee are asking Judge Glenn to schedule a hearing on the matter on or after November 9. [Scheduling, PDF]
Celsius’ bills are a big problem for Core Scientific, who are already short on cash. Core Scientific dumped $20 million of bitcoin in September, and still only has $27 million in cash on hand — they burned through $25 million in the last month. They are on the verge of filing for bankruptcy themselves: [SEC]
“Furthermore, the Company may seek alternative sources of equity or debt financing, delay capital expenditures or evaluate potential asset sales, and potentially could seek relief under the applicable bankruptcy or insolvency laws. In the event of a bankruptcy proceeding or insolvency, or restructuring of our capital structure, holders of the Company’s common stock could suffer a total loss of their investment.”
Data Finnovation thinks he’s found Tether’s loans to Celsius, which are a major point of contention in the Celsius bankruptcy. “We found the Tether-Celsius loans, Tether’s equity investment into Celsius, and can therefore prove a lot about both defects in the Celsius business model and questionable conduct by Tether.” [Data Finnovation]
There’s failing upward, and then there’s whatever this is: ex-Celsius exec Aaron Lovine joins JPMorgan as the new executive director of crypto regulatory policy! [Reuters]
The next Celsius omnibus hearing is November 1. The November 30 omnibus hearing has been rescheduled for December 5. [Doc 1169, PDF]
Voyager is trying to sell itself off to FTX US. The deal is still tentative. Texas is concerned that FTX is offering unregistered securities to US retail customers. New York is sniffing around Voyager as well.
Voyager’s sale to FTX is part of Voyager’s broader bankruptcy plan, which creditors need to vote on next month. If they vote yes, the court still has to confirm the plan. A hearing for plan confirmation is set for December 8. In the meantime, Judge Micheal Wiles wants Voyager to stay open to better offers.
The sale to FTX is valued at about $1.4 billion, of which $51 million is in cash. As part of the sale, FTX US would move customers onto its platform and return them 72% of their claims. [Second Amended Plan, PDF; Bloomberg; Bloomberg Law, archive]
Only creditors who transition to FTX US will receive crypto — customers who don’t go to FTX US will receive cash from the bankruptcy estate. FTX US doesn’t support Voyager’s VGX token, but it has offered to purchase all VGX for $10 million.
Voyager is pushing the FTX sale plan hard. Creditors have until November 29 to cast their votes. [Voyager, archive]
We mentioned on October 16 that Texas objected to the Voyager sale because the state was going after FTX, and then the rest of the crypto media covered the story the day after we posted it. The Texas Tribune spoke to Joe Rotunda, Director of the TSSA Enforcement Division, who discovered that FTX would let him trade securities from his Austin office. [Texas Tribune]
In its response to objections, Voyager holds that the sale to FTX is within its business judgment. For Texas’ objections regarding FTX, they’re adding a note that nothing should be construed as restraining state regulators. [Doc 558, PDF, Doc 559, PDF]
The New York Department of Financial Services has applied for an order lifting the automatic bankruptcy stay on an action against Voyager to “permit DFS to proceed with an investigation into whether the Debtors, or any one of them, have engaged in fraudulent activity and/or violated applicable law with respect to unlicensed cryptocurrency business activities within New York.”
There’s a provision in section 362 of the Bankruptcy Code for “police action” to proceed during a stay. Payment of a fine might be delayed — but that shouldn’t stop an investigation. The DFS outlines why it thinks it could just proceed anyway — but it’s asking nicely. There’s a hearing on November 15. [Doc 573, PDF]
Kadhim Shubber from the Financial Times spotted a hilarious detail in a disclosure statement that Voyager filed on October 17 — on precisely how Three Arrows Capital screwed them over. [Doc 540, PDF, p47 on; Twitter]
Terraform Labs’ UST and luna tokens collapsed in mid-May. This sent 3AC bust, immediately — they were up to their necks in Terraform’s Anchor protocol and had a ton of UST.
Voyager asked their debtors if they had been affected by the UST-luna crash. Voyager’s contact at 3AC assured them everything was fine.
Later that month, 3AC reached out to Voyager asking to borrow even more from them — when 3AC was already 25% of Voyager’s loan book. Voyager said no.
Celsius froze withdrawals on June 12. Voyager again reached out to its debtors, asking how things were. Their 3AC contact assured Voyager on June 13 that 3AC was not exposed to Celsius.
Voyager put out a press release on June 14 assuring everyone that everything was fine. [Press release, archive]
Upon seeing the press release, Voyager’s 3AC contact called them straight away and told them that the founders of 3AC had gone silent and weren’t answering queries from their own employees. Their contact suggested that Voyager should recall all of its loans to 3AC immediately. This was the point at which Voyager knew that it, too, was bust.
We now know, of course, that 3AC’s founders had skipped Singapore sometime in late May — as soon as they realized there was no way to come back from the UST-luna collapse. They just locked the office doors and vanished. We even have a photo of the mail piling up on the office floor.
(You can tell it’s a rug pull from the lack of a carpet.)
Teneo is the court-appointed receiver in 3AC’s bankruptcy. Teneo wants US Judge Martin Glenn — yes, the same one overseeing Celsius — to let them subpoena 3AC founders Zhu and Davies via Twitter and email.
Teneo previously requested that Advocatus Law, the Singapore law firm representing the founders, accept the service of papers. Advocatus resisted. [Doc 54; Doc 55; The Block]
The CFTC and SEC are looking into the collapse of 3AC, according to “people familiar with the matter.” The question is whether 3AC broke any laws by misleading investors about the strength of its balance sheet and not registering with the agencies. [Bloomberg]
Laura Shin’s podcast with Terraform Labs founder Do Kwon is now up! David Z. Morris at CoinDesk dissects it, straight-up calling Kwon a sociopath. [Unchained; CoinDesk]
Last week, I spoke with CBC Radio One, a national business radio show in Canada. Paul Haavardsrud interviewed me. The show went live on Sunday. [Cost of Living]
Paul was a great host. He let me do most of the talking! Paul wants to know why crypto is crashing. I tell him it’s because the money is all gone. He asks, “Well, where did it go?” Excellent question!
Naturally, that led me to bring up Tether. I also explained that while bitcoin’s value may never drop completely to zero, it could become a lot more difficult to trade if liquidity dries up.
The show repeats on Tuesday, June 28, at 11:30 a.m. NT in most provinces.
If you want to learn more about why the crypto bubble is bursting, read “How 2020 set the stage for the 2021 bitcoin bubble,” by myself and David Gerard, along with “The Latecomer’s Guide to Crypto Crashing.”
We often get asked by reporters: “Why are crypto markets crashing?” The short answer is because there’s no money left, and no more coming in. The long answer is more complicated.
Bitcoin peaked at $64,000 in April 2021 and again at $69,000 in November 2021. Many of the network effects that drove the price of bitcoin to those heights were put into place in 2020.
The same network effects are now working in reverse. Markets take the stairway up and the elevator down.
The 2017 bubble was fueled by the ICO boom and actual outside dollars entering the crypto economy. Bitcoin topped out just below $20,000 in December 2017.
The crash that followed over the next 12 months was like air being slowly let out of a balloon — much like the 2014 deflation after Bitcoin’s prior 2013 peak. ICO and enterprise blockchain promoters tried to keep going through 2018 like everything was fine, but the party was clearly over.
In contrast, the 2022 crash is like a wave of explosive dominoes all crashing down in rapid succession. How did we get here?
Let’s start in early 2020. It was the crypto winter. Bitcoin’s price had spent two years bobbling up and down from infusions of tethers, and traders on BitMEX rigging the price to burn margin traders. (And, allegedly, BitMEX itself burning its margin traders.) [Medium, 2018]
But the dizzying price rises were peculiarly bloodless. There was little evidence of fresh outside dollars from retail investors — the ordinary people. The press would write how bitcoin had just hit $13,000 — but they’d also call people like us, and we’d tell them about Tether.
Throughout 2019 and into 2020, crypto pumpers were desperately trying scheme after scheme — initial coin offerings, initial exchange offerings, bitcoin futures, selling to pension funds — to lure in precious actual dollars and get the party re-started.
Then Corona-chan knocked on the door.
On March 13, 2020, the US government declared a pandemic emergency. The panic drove down stocks and crypto. Investors sold everything and flew to the safest, hardest form of money they could find: the US dollar! Bitcoin dropped from $7,250 to $3,858 over the course of that day.
It was an edge-of-the-cliff moment for bitcoin. Any further drop could force liquidations and create a ripple effect across dozens more crypto projects. For bitcoin miners, the price of bitcoin was now below the cost of mining.
Worse, only two months away was the bitcoin “halvening” — an every-four-year event when the number of bitcoins granted in each freshly-mined block halves. If bitcoin dropped too low in price, the miners wouldn’t be able to pay their enormous power bills. The crypto industry desperately needed to push bitcoin’s price back before May.
Tether, launched in 2014, is an offshore crypto company that issues a dubiously backed stablecoin of the same name. Tether works like an I.O.U. — Tether supposedly takes in dollars and issues a tether for each dollar held in reserve. Since Tether has never had an audit, nobody knows for sure what’s backing tethers. The company has an extensive history of shenanigans — see Amy’s Tether timeline.
The issuance of tethers in March 2020, was 4.3 billion, but that’s when the Tether printer kicked into overdrive — minting tethers at a clip nobody had ever seen before.
Tether minted 4.4 billion tethers in April 2020 — crypto’s version of an economic stimulus package. By May, Bitcoin reached $10,000, just in time for the halvening.
Once the price of bitcoin goes up, though, there’s no way to turn off the Tether printing press. It has to keep printing. If the price of bitcoin goes down, people will sell, creating an exodus of real dollars from the system. So Tether kept printing, pushing the price of bitcoin ever skyward.
In May, June, and July 2020, Tether issued a combined total of 3 billion tethers. In August, when the price of bitcoin reached $12,000, Tether issued another 2.6 billion tethers. In September, when bitcoin slid below $10,000, Tether issued another 2.2 billion tethers.
By the end of 2020, Tether had reached a market cap of 21 billion. The printer kept going. In 2021, Tether pumped out 60 billion more tethers. By May 2022, Tether’s market cap had reached 83 billion. Bitcoin’s price peaks in April 2021 ($64,000) and November 2021 ($69,000) both coincided with an influx of tethers into the market.
You can’t just redeem tethers. Only Tether’s big customers — it has about ten of them — can redeem. You can try to sell your tethers on an exchange. But you can’t just go up to Tether to redeem them for dollars. There were no redemptions of tethers, ever, until May and June 2022 — the present crash.
Curiously, Tether’s reserve as declared to New York in April 2019 contained $2.1 billion of actual money — cash and US Treasuries. But Tether’s reserve attestation as of March 31, 2021, still contained just $2.1 billion of cash and treasuries!
This suggests that the rest of the reserve over that time was made up of whatever worthless nonsense Tether could claim was a reserve asset — loans of tethers, cryptocurrencies, and dubious commercial paper credited at face value rather than being marked to market.
Dan Davies, in his essential book Lying for Money, marks this as the key flaw in frauds of all sorts: they have to keep growing so that later fraud will keep covering for earlier fraud. This works until the fraud explodes.
Grayscale’s Bitcoin Trust (GBTC) played a huge role in keeping the price of bitcoin above water through 2020. It offered a lucrative arbitrage trade, an exploitable inefficiency in markets, that a lot of big players went all-in on.
GBTC was an attempt to wrap Bitcoin in an institutionally compatible shell. All through 2020 and into 2021, GBTC was trading at a premium to bitcoin on the secondary markets. Accredited investors would acquire GBTC at net asset value — some large proportion being in exchange for direct deposits of bitcoins, not purchases for cash, although all the accounting was stated in dollars. After a six-month lock-up, the accredited investors would sell the shares to the public at a 20 percent premium, sometimes more. Rinse, repeat, and that’s a 40 percent return in a year.
GBTC functioned like a “reflexive Ponzi.” When Grayscale bought more bitcoin for the trust, that drove up the price of bitcoin, which pushed up the GBTC premium, which resulted in investors wanting more GBTC and Grayscale issuing more shares.
Grayscale ran a national TV advertising campaign at the time, targeted at ordinary investors. The ads warned that disaster was imminent, inflation would eat your retirement, and bitcoin was better than gold — so you should buy bitcoin. Or, this shiny GBTC, which was implied to be just as good! [YouTube, 2019]
In a bull market, retail investors didn’t mind paying a premium — because the price of bitcoin kept going up. The market treated GBTC as if it was convertible back to bitcoins, even though it absolutely wasn’t. [Adventures in Capitalism]
Grayscale ultimately flooded the market with GBTC. When an actual bitcoin ETF became available in Canada, GBTC’s premium dried up. Since February 2021, GBTC has been trading below the price of bitcoin. As of March 2022, the trust holds 641,637 bitcoins. And they’re staying there indefinitely — leaving GBTC holders locked in on an underwater trade.
Decentralized finance, or DeFi, didn’t directly pump the price of bitcoin in 2020. But DeFi was one of the stars of the 2021 bubble itself, and eventually caused the bubble’s disastrous explosion. All of the structures to let that happen were set up through 2020.
DeFi is an attempt to put traditional financial system transactions — loans, deposits, margin trading — on the blockchain. Regulated institutions are replaced with unknown and unregulated intermediaries, and everything is facilitated with smart contracts — small computer programs running on the blockchain — and stablecoins.
All through 2019 and 2020, DeFi was heavily promoted as offering remarkable interest rates. At a time of low inflation, this got coverage in the mainstream financial press. Here’s the diagram the Financial Times ran, depicting DeFi as a laundromat for money: [FT, paywalled, archive]
The key to DeFi is decentralized exchanges, where you can trade any crypto asset that can be represented as an ERC-20 token — such as almost any ICO token — with any other ERC-20 token.
DeFi also lets you take illiquid tokens that nobody wants, do a trade, assign them a spurious price tag in dollars, then say they’re “worth” that much. This lets dead altcoins with no prospective buyers claim a price and a market cap, and attract attention they don’t warrant. If you put a dollar sign on things, then people take that price tag seriously — even when they shouldn’t.
You can also create a price for a token that you made up out of thin air yesterday and use DeFi to claim an instant millions-of-dollars market cap for it.
This was the entire basis for the valuation of Terraform Labs’ UST and luna tokens — and people believed those “$18 billion” in UST were trustworthily backed by anything.
You can also use those tokens you created out of thin air as collateral for loans to acquire yet more assets. An unconstrained supply of financial assets means more opportunities for bubbles to grow, and more illiquid assets that you can dump for liquid assets (BTC, ETH, USDC) when things go wonky.
By September 2020, five hundred new DeFi tokens had been created in the previous month. DeFi hadn’t hit the mainstream yet — but it was already the hottest market in crypto. [Bloomberg]
The problem was that in 2020, to use DeFi you had to know your way around using the actual blockchain. Retail investors, and even most institutional investors, haven’t got the time for that sort of dysfunctional nonsense.
Retail was more attracted to the “CeFi” (centralized DeFi) investment firms, such as Celsius and 3AC, offering impossible interest rates. These existed in 2020 but didn’t gain popularity until the following year when the bubble had started properly.
By late 2020, crypto promoters were searching for a new grift to lure in retail money, one that would have broader mainstream appeal. They soon found one.
NFTs as we know them got started in 2017, with CurioCards, CryptoPunks, and CryptoKitties. NFT marketing had continued through the crypto winter — in the desperate hope that ordinary people might put their dollars into crypto collectibles.
The foundations of the early 2021 burst of art NFTs were laid in late 2020, when Vignesh Sundaresan, a.k.a. Metakovan, first started looking into promoting digital artists, such as Beeple — whose $69 million JPEG made international headlines for NFTs in March 2021, and officially kicked off the NFT boom.
Late 2020 also saw the launch of NBA Top Shot, the only crypto collectible that ever got any interest from buyers other than crypto speculators. Top Shot traders were disappointed at how incredibly slow Dapper Labs was at letting them withdraw the money they’d made in trading — and became some of the first investors in the Bored Apes.
By late 2020, several big company CEOs started promoting the concept of bitcoin on the company dime. These included Jack Dorsey at Twitter, Dan Schulman at PayPal, and Michael Saylor at business software company MicroStrategy.
In October 2020, Saylor revealed his company had bought 17,732 bitcoins for an average of $10,000 per coin. Over the next 18 months, Microstrategy would plow through its cash reserves and take on debt to funnel more money into bitcoin, spending $4 billion in the process. Buying MSTR shares become the newest way for retail investors to bet on bitcoin. Saylor also put himself forward as bitcoin’s latest prophet and crazy god.
PayPal set up bitcoin trading in 2020, though only as a walled garden, where you couldn’t move coins in or out. Still, it made gambling on crypto more accessible to retail investors.
By late 2020, we suspect there was very little actual cash in crypto. But bitcoin needed to continue its upward ascent.
The biggest tip-off that the fresh outside dollars had stopped flowing was when bitcoin miners stopped selling their coins. Bitcoin miners mint 900 new bitcoins per day. They typically sell these to pay their energy costs — power companies don’t accept tether — and buy new mining equipment, which becomes obsolete every 18 months. At $20,000 per bitcoin, that would equate to $18 million, in actual dollars, getting pulled out of the bitcoin ecosystem every day.
In October 2020, Marathon Digital (MARA), one of the largest publicly traded miners, stopped selling its bitcoins. They took out loans, which allowed them to buy their equipment and hold their bitcoins. Marathon even bought additional bitcoins!
Borrowing against mined bitcoins, and not selling them, reduced selling pressure on bitcoin’s price in dollars. US-based miners used this model heavily from July 2021 onward — taking low-interest loans from their crypto buddies, Galaxy Digital, DCG, and Silvergate Bank. Although, in 2022, the loans started running out and they had to start selling bitcoins.
This also set Marathon up for potential implosion when energy prices went up and the price of bitcoin dropped in 2022. Marathon is presently losing $10,000 on every bitcoin they mine.
2020 was a weird year of market panics, bored day traders, and easy money — for some.
The Federal Reserve dealt with the pandemic panic by showering the markets with stimulus money. At the retail end, $817 billion was distributed in stimulus checks (Economic Impact Payments), $678 billion in extended unemployment, and $1.7 trillion to businesses, mostly as quickly-forgiven loans. [New York Times]
Bored day traders, stuck at home working their email jobs and unable to go out in the evening, got into trading stocks on Robinhood as the hot new mobile phone game. Car rental firm Hertz, a literally bankrupt company, whose stock was notionally worth zero, started going up just because Robinhood users thought it was a good deal. Instead of crypto becoming a more regular investment like stocks, the stonks* had turned into shitcoins.**
What isn’t clear is how much of this money found its way to the crypto market. At least some of it did. A study by the Federal Reserve Bank of Cleveland noted: “a significant increase in Bitcoin buy trades for the modal EIP amount of $1,200.” This increased BTC-USD trade volume by 3.8%! [Cleveland Fed]
But the trades only seemed to raise the price of bitcoin by 0.07%. And the dollars in question were only 0.02% of the money distributed in the EIP program.
* A cheap and nasty equity stock; the term comes from a meme image. [Know Your Meme]
** We are sorry to tell you that this is literally a technical term in crypto trading.
A lot of channels into crypto were put into place in 2020. But the last step was to pump the price over the previous bubble peak of $20,000.
With that bitcoin number achieved, the press would cover the number going up — because “number go up” is the most interesting possible story in finance. That would lure in the precious retail dollars that hodlers needed to cash out.
The push started in late November, with deployments of tethers to the offshore exchanges. On December 18, 2020 — exactly three years after the previous high — bitcoin went over $20,000 again. And that’s when a year and a half of fun started.
Bitcoin broke below $20,000 last night. I got a message on Signal while I was sleeping.
On June 18, 2022, at 6:51 UTC, the price of bitcoin fell from $20,377 to $19,245 on Kraken and then slipped to as low as $18,728 before catching its breath. As I write, it is now $19,174.
Ether also broke below $1,000. The buy wall was destroyed in a matter of seconds.
Bitcoin has now fallen below the previous all-time high it set on December 17, 2017 — officially marking the end of the crypto bubble. The party is over.
Two years ago, as bitcoin embarked on its incredible journey to $69,000 — a number it reached on November 9, 2021 — it was $10,000. At the start of 2020, bitcoin was trading even lower, at around $7,000.
Those numbers give you a sense of how much further bitcoin can fall. As dramatic as the run-up was to $69,000 when every bitcoin bro imagined bitcoin would shoot to the moon, the fall can be equally so, and that is what we are seeing now.
Of course, everyone is asking, why did bitcoin plunge so quickly Saturday night? What pushed it below $20,000 so suddenly? Somebody is selling. Who needs to sell?
Miners have to sell to pay their power bills. They mine 900 newly minted bitcoin per day. The bitcoin network consumes a country’s worth of energy.
The miners have been borrowing money from their buddies, DCG and Galaxy, to cover business costs rather than selling since July 2021. But they can’t borrow any more dollars, so they’re dumping their coins. They also have to pay their credit bills when those loans come due.
Who else is selling? Any number of crypto lenders, yield farms, and other decentralized finance firms that are running desperately low on liquidity — and there are many of them.
Last month, Terra/Luna toppled over. This was DeFi’s Bear Stearns moment. Things seemed to settle down for a moment, but behind the scenes, a titanic shift had begun — the wrecking ball was in action. In the chain of reactions that followed, two other Ponzi schemes collapsed: Celsius and 3AC. Smaller outfits Finblox and Babel soon followed — and more are to come.
When investigators look back and piece together the causes of the crypto apocalypse of 2022, key factors will be huge VC money pouring into the space, the massive printing of Tethers — from 4 billion at the start of 2020 all the way to 83 billion earlier this year — and Grayscale’s Bitcoin Trust.
GBTC was an attempt to wrap Bitcoin in an institutionally compatible shell. As I wrote in “Welcome to Grayscale’s Hotel California,” GBTC’s arbitrage trade brought billions of dollars of real money into the crypto ecosystem.
It also caused explosive growth in crypto leverage. Many of the firms that are collapsing now, looked to GBTC as a way to deliver ridiculously high returns. They would exchange their cash or bitcoin for shares of GBTC and after a 6-12 month lockup, sell those shares on the secondary market for a premium to retail investors. That premium averaged around 18% in 2020.
It was a sure-fire way to make money until the premium dried up. GBTC has been trading below the price of bitcoin since February 2021.
All through 2020 and into 2021, there was a massive retail inflow of cash chasing a “reflexive Ponzi” in the form of a GBTC arb situation. And all Ponzi schemes end the same way — they crash stupendously.
See also David Gerard’s post on the bubble pop.
Further reading: “The Latecomer’s Guide to Crypto Crashing,” by David Gerard and Amy Castor
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Since November 2021, when Bitcoin hit its all-time high of $69,000, the original cryptocurrency has lost 70 percent of its face value. And when Bitcoin falters, it takes everything else in crypto down with it.
The entire crypto space has been a Jenga stack of interconnected time bombs for months now, getting ever more interdependent as the companies find new ways to prop each other up.
Which company blew out first was more a question of minor detail than the fact that a blow-out was obviously going to happen. The other blocks in the Jenga stack will have a hard time not following suit.
Here’s a quick handy guide to the crypto crash — the systemic risks in play as of June 2022. When Bitcoin slips below $20,000, we’ll officially call that the end of the 2021 bubble.
TerraUSD collapse — Since stablecoins — substitutes for dollars — are unregulated, we don’t know what’s backing them. In the case of TerraUSD (UST), which was supposed to represent $18 billion … nothing was backing it. UST crashed, and it brought down a cascade of other stuff. [David Gerard; Foreign Policy; Chainalysis Report]
Celsius crumbles — Celsius was the largest crypto lender in the space, promising ridiculously high yields from implausible sources. It was only a matter of time before this Ponzi collapsed. We wrote up the inevitable implosion of Celsius yesterday. [David Gerard]
Exchange layoffs — Coinbase, Gemini, Crypto.com, and BlockFi have all announced staff layoffs. Crypto exchanges make money from trades. In a bear market, fewer people are trading, so profits go downhill. Coinbase in particular had been living high on the hog, as if there would never be a tomorrow. Reality is a tough pill. [Bloomberg; Gemini; The Verge]
Stock prices down — Coinbase $COIN, now trading at $50 a share, has lost 80% of its value since the firm went public in June 2021. The company was overhyped and overvalued.
US crypto mining stocks are all down — Bitfarms ($BITF), Hut 8 Mining ($HUT), Bit Digital ($BTBT), Canaan ($CAN), and Riot Blockchain ($RIOT). Miners have been borrowing cash as fast as possible and are finding the loans hard to pay back because Bitcoin has gone down.
Crypto trading needs a dollar substitute — hence the rise of UST, even as its claims of algorithmic backing literally didn’t make sense. What are the other options?
Tether — We’ve been watching Tether, the most popular and widely used stablecoin, closely since 2017. Problems at Tether could bring down the entire crypto market house of cards.
Tether went into 2020 with an issuance of 4 billion USDT, and now there are 72 billion USDT sloshing around in the crypto markets. As of May 11, Tether claimed its reserve held $83 billion, but this has dropped by several billion alleged “dollars” in the past month. There’s no evidence that $10.5 billion in actual dollars was sent anywhere, or even “$10.5 billion” of cryptos.
Tether is deeply entwined with the entire crypto casino. Tether invests in many other crypto ventures — the company was a Celsius investor, for example. Tether also helped Sam Bankman-Fried’s FTX exchange launch, and FTX is a major tether customer.
Tether’s big problem is the acerbic glare of regulators and possible legal action from the Department of Justice. We keep expecting Tether will face the same fate as Liberty Reserve did. But we were saying that in 2017. Nate Anderson of Hindenburg Research said he fully expects Tether execs to end the year in handcuffs.
Other stablecoins — Jeremy Allaire and Circle’s USDC (54 billion) claims to be backed by some actual dollars and US treasuries, and just a bit of mystery meat. Paxos’ USDP (1 billion) claims cash and treasuries. Paxos and Binance’s BUSD (18 billion) claims cash, treasuries, and money market funds.
None of these reserves have ever been audited — the companies publish snapshot attestations, but nobody looks into the provenance of the reserve. The holding companies try very hard to imply that the reserves have been audited in depth. Circle claims that Circle being audited counts as an audit of the USDC reserve. Of course, it doesn’t.
All of these stablecoins have a history of redemptions, which helps boost market confidence and gives the impression that these things are as good as dollars. They are not.
Runs on the reserves could still cause issues — and regulators are leaning toward full bank-like regulation.
There’s no fundamental reason for any crypto to trade at any particular price. Investor sentiment is everything. When the market’s spooked, new problems enter the picture, such as:
Loss of market confidence — Sentiment was visibly shaken by the Terra crash, and there’s no reason for it to return. It would take something remarkable to give the market fresh confidence that everything is going to work out just fine.
Regulation — The US Treasury and the Federal Reserve were keenly aware of the spectacular collapse of UST. Rumour has it that they’ve been calling around US banks, telling them to inspect anything touching crypto extra-closely. What keeps regulators awake at night is the fear of another 2008 financial crisis, and they’re absolutely not going to tolerate the crypto bozos causing such an event.
GBTC — Not enough has been said about Grayscale’s Bitcoin Trust, and how it has contributed to the rise and now the fall in the price of bitcoin. GBTC holds roughly 3.4 percent of the world’s bitcoin.
All through 2020 and into 2021, shares in GBTC traded at a premium to bitcoin on secondary markets. This facilitated an arbitrage that drew billions of dollars worth of bitcoin into the trust. GBTC is now trading below NAV, and that arbitrage is gone. What pushed bitcoin up in price is now working in reverse.
Grayscale wants to convert GBTC into a bitcoin ETF. GBTC holders and all of crypto, really, are holding out hope for the SEC to approve a bitcoin ETF, which would bring desperately needed fresh cash into the crypto space. But the chances of this happening are slim to none.
The bitcoins are stuck in GBTC unless the fund is dissolved. Grayscale wouldn’t like to do this — but they might end up being pressured into it. [Amy Castor]
Whales breaking ranks — Monday’s price collapse looks very like one crypto whale decided to get out while there was any chance of getting some of the ever-dwindling actual dollars out from the cryptosystem. Expect the knives to be out. Who’s jumping next?
Celsius operated as if it was a crypto hedge fund that was heavily into DeFi. The company had insinuated itself into everything — so its collapse caused major waves in crypto. What other companies are time bombs?
Three Arrows Capital — There’s some weird stuff happening at 3AC from blockchain evidence, and the company’s principals have stopped communicating on social media. 3AC is quite a large crypto holder, but it’s not clear how systemically intertwined they are with the rest of crypto. Perhaps they’ll be back tomorrow and it’ll all be fine. [Update: things aren’t looking good. 3AC fails to meet lender margin calls.] [Defiant; Coindesk; FT]
BlockFi — Another crypto lender promising hilariously high returns.
Nexo — And another. Nexo offered to buy out Celsius’ loan book. But Nexo offers Ponzi-like interest rates with FOMO marketing as well, and no transparency as to how their interest rates are supposed to work out.
Swissborg — This crypto “wealth management company” has assets under management in the hundreds of millions of dollars (or “dollars”), according to Dirty Bubble Media. [Twitter thread]
Crypto holders have no chill whatsoever. When they need to dump their holding, they dump.
MicroStrategy — Michael Saylor’s software company has bet the farm on Bitcoin — and that bet is coming due. “Bitcoin needs to cut in half for around $21,000 before we’d have a margin call,” Phong Le, MicroStrategy’s president, said in early May. MicroStrategy’s Bitcoin stash is now worth $2.9 billion, translating to an unrealized loss of more than $1 billion. [Bloomberg]
Silvergate Bank — MicroStrategy has a $205 million loan with Silvergate Bank, collateralized with Bitcoin. Silvergate is the banker to the US crypto industry — nobody else will touch crypto. Silvergate is heavily invested in propping up the game of musical chairs. If Silvergate ever has to pull the plug, almost all of US crypto is screwed. [David Gerard]
Bitcoin miners — Electricity costs more, and Bitcoin is worth less. As the price of Bitcoin drops, miners find it harder to pay business expenses. Miners have been holding on to their coins because the market is too thin to sell the coins, and borrowing from their fellow crypto bros to pay the bills since July 2021. But some miners started selling in February 2022, and more are following. [Wired]
Mt. Gox — at some point, likely in 2022, the 140,000 bitcoins that remained in the Mt. Gox crypto exchange when it failed in 2014 are going to be distributed to creditors. Those bitcoins are going to hit the market immediately, bringing down the price of bitcoin even further.
Feature image by James Meickle, with apologies to XKCD and Karl Marx.
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David Gerard and I have been having fun staying poor.
I just helped him write a post about how the gig is finally up for Celsius, the largest crypto lender, along with the impact that is having on the price of bitcoin and the crypto space at large.
We posted it on his website, so head on over there and take a look.
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“Bitcoin Widow” went on sale this week. Jennifer Robertson was busy giving interviews to promote her book. It’s the first time we’ve gotten to see her live and hear her voice.
Robertson was married to Gerald Cotten, who ran QuadrigaCX like a Ponzi. He mysteriously died in India just before things fell apart. Robertson was clever enough to go to college and start a business, but somehow remained completely clueless when it came to her partner’s shenanigans. The lavish vacations, the houses, and private plane trips were nice, though.
Globe and Mail interviewed Robertson. Actually, they interviewed the journalists who interviewed her. You still get to hear a little of Jen’s voice. The interview is pretty dry. No tough questions. (Globe and Mail)
The National, CBC’s flagship current affairs program, was a lot tougher. As politely as possible, they asked why she wouldn’t simply allow Cotten’s body to be exhumed and checked to make sure it’s really him. I make an appearance on the show. (YouTube)
Matt Galloway on The Current spoke with Robertson at length. (The Current)
Galloway: “Did you ever ask why hundred dollar bills were scattered around your house?”
Robertson: “It was kind of a Gerry thing.”
As a follow-up to Galloway’s interview, CBC On The Coast interviewed me about QuadrigaCX and asked me what I thought about the book. Worth a listen! (CBC, My review of the book)
Bitcoin is down to $35,000 from its November record of nearly $70,000. The sell-off has outpaced that of the U.S. stock market. David Gerard opines his thoughts on what is driving down the price. (blog post)
He notes the crypto miners are holding on to their bitcoin. If they sell, they know they will crash the markets, so they’ve got to sit tight on their piles of BTC.
There are still $78 billion tethers out there. Tether hasn’t minted any new tethers in 2022, for some reason. And the Tether transparency page has a new look and feel.
The Grayscale Bitcoin Trust is now trading at 28% below NAV, its lowest ever. (YCharts)
MicroStrategy stock is dropping in tandem with the price of BTC. MSTR tumbled nearly 18% this week. (And the SEC doesn’t care much for the company’s crypto accounting methods, either.) (CNBC)
Fortune favors the brave, or does it? Maybe not.
Crypto.com, the fourth largest crypto exchange, was hacked on Jan. 17 in a 2FA compromise. All told, the thieves got away with $34 million in crypto — 4,836 ETH, 443 BTC, and about $66,000 in another crypto. All funds are SAFU.
The hack was confirmed by Crypto.com CEO Kris Marszalek, but otherwise, the company has been murky on the details, noting “suspicious activities,” and referring to the event as an “incident.” (Crypto.com announcement, Techcrunch)
Crypto derivatives trading platform BitMEX aspires to become a “regulated crypto powerhouse” in Europe. Its European arm BXM Operations AG wants to purchase Bankhaus von der Heydt, a bank in Munich. BaFin, Germany’s financial watchdog, has yet to approve the transaction. The purchase price is undisclosed. (Bitmex blog, Decrypt)
Last summer, BitMEX agreed to a $100 million settlement with FinCEN and the CFTC. Regulators accused the Seychelles-based exchange of failing to maintain a compliant AML program.
In an effort to clean up its image, BitMEX has hired former Coinbase managing director Marcus Hughes as its chief risk officer. (Bitmex blog, WSJ)
Everybody still despises Binance.
Armed with fake credentials, journalist Hary Clynch went undercover to interview for a top position at Binance. Naturally, he was offered the job. Part two of his three-part story is up. (Disruption Banking)
In her latest blog post, Carol Alexander, professor of finance at Sussex, provides visual proof that price manipulation bots on Binance caused massive liquidations on July 25-26, 2021. (blog post)
In public, Binance CEO CZ welcomes regulatory oversight and boasts about his sparkly AML program. Behind the scenes, he withholds information about finances and corporate structure from regulators, according to a report in Reuters.
Everything is “FUD,” says CZ. (Twitter)
The SEC shot down a spot market Bitcoin ETF from First Trust Advisors and SkyBridge. The ETF didn’t meet “the requirement that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and ‘to protect investors and the public interest,’” the regulator said.
In other words, all the things that the SEC previously objected to—wash trading, whale manipulation, mining manipulation, manipulative activity involving Tether, fraud and manipulation on exchanges, and so on—were never addressed in the proposal. (SEC, p. 15; Decrypt)
Meanwhile, in Europe, regulators are clamping down on crypto advertising.
Spain’s market regulator issued a mandate that ads for crypto assets must carry a warning that investors risk losing all their money. (Bloomberg)
In Singapore, the city-state is getting rid of bitcoin ATMs as it moves to dramatically limit consumer marketing of crypto. (Bloomberg)
In Italy, Consob, the country’s financial services regulator, has warned of risks linked to an increasing number of financially illiterate Italians investing in crypto. (FT)
And in the UK, the Treasury wants to bring advertising for the crypto industry under the same standards as other types of financial products. (Official statement, FT)
The bitcoin network consumes vast amounts of energy, mainly fossil fuels. As countries in Eastern Europe struggle to rein in electricity use in the coldest months of winter, they want the miners out.
The Bank of Russia is doing all it can to pull the plug on crypto and make bitcoin mining and crypto trading illegal. (Bloomberg)
In Kosovo, where the government has temporarily banned bitcoin mining, miners are now rushing to get out of the business, selling their mining equipment at bargain-basement prices. (Guardian)
And in the Ukraine, authorities bust another crypto mining farm illegally stealing power from the grid. (SSU)
Every celebrity and big business wants to get into the NFT market, it seems.
Gamers won’t have it. They don’t like NFTs because they’re already familiar with broadly similar exploitative paid weapons, skins, loot, etc. When their favorite online games announce plans to incorporate NFTs, gamers push back. (NYT)
If only consumers would push back on this nonsense with a similar passion as gamers.
Dan Davies, author of “Lying for Money,” says gamers are more aware than most of AML compliance issues. He pointed out that Tencent shut down its online version of Call of Duty, after discovering the platform was being widely abused by criminals. (Twitter)
Scammers set up a new server at the URL previously used by Ozzy Osbourne’s NFT project, stealing over a hundred thousand dollars in ETH. (The Verge)
Flyfish Club is an exclusive NFT restaurant in New York City. When it opens in 2023, you can only enter if you buy an NFT. You still have to pay for your food in dirt fiat, because they won’t accept crypto in the establishment. Parent company Crypto VC Group has raised $14 million selling Flyfish tokens, which are being flipped on OpenSea. (Fortune)
What would you expect from an NFT restaurant? Stephen Colbert investigates. (YouTube)
I see a new trend developing, and the SEC is not going to like it. BrewDAO just announced it wants to start a brewery. (Twitter)
Coinbase is teaming with Mastercard, so you can purchase NFTs with your credit card on its soon-to-launch NFT marketplace. (Coinbase blog, CNBC)
Walmart is considering creating its own crypto and selling NFTs. Of course, it is. (Bloomberg)
Meta wants to profit on NFTs as well. Facebook and Instagram are prepping a feature that will allow users to display their NFTs on their profiles. Meta is also working on a prototype for minting NFTs. (FT)
After spending $3 million on a rare Dune book, SpiceDAO is still looking for a way to justify the expense. It failed to negotiate IP rights. Now it wants to develop an entirely independent animated series. (Twitter)
RatDAO, which wants to accumulate blue-chip art, says it’s bought an unsigned Banksy print. Most DAOs I’ve looked at tend to focus on NFTs. (Twitter)
Cryptoland’s plans to buy a $12 million Fijian island have fallen through. The real estate agent selling Nananu-i-cake said the contract to sell it to Cryptoland’s backers fell through and the island is back on the market. Here is the listing, in case you’re interested. (Guardian)
One Jan. 18, Cryptoland founders Max Olivier and Helena López did an AMA. Molly White uploaded it to YouTube. It’s hysterical if you can stand to listen. If not, Molly has threaded the highlights.
Wikipedia editors have voted not to classify NFTs as art, sparking outrage in the crypto community. Beeple and Pak will not be included on its list of the most expensive art sales by living artists. (Artnet)
A women-led NFT project, Famed Lady Squad, is actually being led by guys, the same guys who are behind a bunch of failed NFT projects. (Input magazine)
President Nayib Bukele, thinking Moody’s had downgraded El Salvador’s credit rating, said he “DGAF.” It turns out, Moody’s had not downgraded his country’s credit rating. Moody’s has rated El Salvador Caa1, a very high credit risk, since a downgrade in July. (Bloomberg)
Crypto media outlet CoinDesk is offering employees an equivalent of stock in its parent company DCG, which has its hands in hundreds of crypto companies. David Gerard notes that DCG has a history of pressuring CoinDesk employees to pump company interests. (Blog post)
VC firm A16z wants more money for crypto investments. It’s seeking another $4.5 billion—more than double than what it raised less than a year ago. VCs are fueling the boom in everything crypto. (FT)
MetaMask founder Dan Finlay acknowledges they’ve failed to remedy an IP address leak vulnerability that’s been “widely known for a long time.” (Twitter)
A flood of crypto rich are moving to Puerto Rico for the tax breaks, driving up real estate prices and making the natives unhappy (CNBC)
Ethereum founder Vitalik Buterin and Elon Musk exchange tweets about synthetic wombs. (Twitter)
Dan Olsen posted a two-hour YouTube video explaining NFTs and the problems with blockchain in general. The video is going viral. (YouTube)
Martin Walker explains Web 3.0 in a 20-minute interview. (YouTube)
Crypto promoters often tell us it’s still “early days.” Molly White says the nauseating phrase sounds like it’s coming from people with too much money sunk into a pyramid scheme. (blog post)
Stephen Diehl has a great take on Web3, if you haven’t read it yet. (blog post)
Cryptocurrency is a giant Ponzi scheme. (Jacobin)
Fais Khan illustrates that Coinbase Ventures-backed coins tend to underperform bitcoin after an initial pop on crypto exchange Coinbase—when the VCs cash out. (blog post)
Laura Shin’s book “Cryptopians” is coming out next month. It’s nearly 500 pages long. Public Affairs is the publisher. If you don’t have the time to read it, Patrick McGinty, who teaches in the English Department at Slippery Rock University, wrote up a great review. (Baffler)
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I nearly ventured to Austin Wednesday, but my flight was canceled due to the storm, havoc, and general disaster in the area. I found another flight later in the day and was headed out the door, when I thought, nah. Turned out to be a good decision, since I probably wouldn’t have survived more than a day without wifi.
Last week, Tether issued another 2.2 billion tethers, so you can buy bitcoin with real cash at a higher price. As of today, Feb. 21, there are now $34 billion worth of tethers in circulation—all backed by Tether’s good word. Oh, and they just printed another 800 million this morning.
More lulz for Mr. Musk—this time a double entendre.
Bitcoin is over $57,000. Why? Because it is a Ponzi scheme, and people who put their money into a Ponzi or MLM scheme get excited when numbers go up because they think they are getting hilariously rich. When bitcoin reached $1 trillion market cap earlier this week, it was an occasion for celebration in the bitcoin world. All of the bitcoiners on Twitter gave themselves laser eyes—in the hopes of pushing bitcoin to $100,000—and posted pictures of raw, juicy steaks.
Market cap, as I have explained, is a delusional number when it comes to crypto. A trillion-dollar market cap assumes everyone who owns bitcoin bought it for $55,000 and could sell it for that. That is nowhere near the truth. Many bitcoiners bought bitcoin for a fraction of what it is today. And if everyone sold at once, the market would collapse. It’s all fantasy.
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Okay, let’s talk about bitcoin’s newest crazy god, who also has laser eyes on his Twitter profile.
Every single day, MicroStrategy chief Michael Saylor is on Twitter—or elsewhere—shilling bitcoin. This has literally been his new day job since he staked the future of his entire company and his reputation on “number go up.” His tweets are bizarre and often make no sense. Lately, he has been taking random quotes from famous people and attributing them to bitcoin.
In his latest move, Saylor has taken MicroStrategy deeper down the debt hole. Last week, the company sold $1.05 billion in convertible senior notes, which it plans to invest in more bitcoin. The notes mature in February 2027. (Decrypt, MicroStrategy PR)
This is on top of the firm’s $650 million bond offering in December, which MicroStrategy also used to buy bitcoin. Those notes mature in December 2025. The company owns 72,000 bitcoin per a February regulatory filing. And don’t forget, Saylor has his own personal stash of bitcoin, though we don’t know how much he still has—or if he was selling when MicroStrategy was buying.
If the price of bitcoin collapses, MicroStrategy could literally go bankrupt. But remember, Saylor owns 70% of the company’s voting stock, so he calls the shots. The other MicroStrategy board members can only sit back and watch in horror.
Big companies buying bitcoin and putting them into cold storage means more bitcoin getting pulled out of circulation so that the already small supply of circulating bitcoin grows smaller and the market becomes easier for whales to manipulate—even if those whales bought their hoards of BTC via alias accounts funded with tethers.
So what if MicroStrategy puts another $1 billion into bitcoin and Tesla buys $1.5 billion worth? Tether issues that much fake money in a week. Meanwhile, all the real cash in bitcoin goes out the door as miners sell their 900 newly-minted bitcoin per day for fiat. Bitcoin itself generates no revenue. It’s simply investor money going in one end and out the other.
Jorge Stolfi, a Brazilian computer scientist, estimates that the accumulative amount that bitcoin investors have lost so far is at least $15 billion. When you invest in bitcoin, you immediately lose money, just like all those who invested in Bernie Madoff’s fund, though they went on for years thinking they were making money.
We should be hearing something soon on the New York attorney general’s investigation into Bitfinex/Tether, but probably nothing big, or earth moving—not yet at least.
Bitfinex’s law firm Steptoe filed a letter on Jan. 19, saying Bitfinex/Tether needed more time to send in their documents. Here is what they said exactly: “We will plan to next contact the Court in approximately 30 days to either provide a final status update or to schedule a conference with the Court to discuss any open items.”
The office of the attorney general still has to take a position on the material it receives, and Bitfinex boasted that it had spammed them with some 2.5 million documents. My guess is that Bitfinex, like failed Canadian crypto exchange QuadrigaCX, hasn’t kept accurate records of their financial dealings and they are flying by the seat of their pants. Quadriga operator Gerald Cotten kept no books, commingled funds, and viewed customer money as his personal slush fund.
Some people—Nouriel Roubini in particular—have predicted that Tether will get taken down this year, though it will take a much larger effort than the NY AG alone. Still, what will happen if Tether’s operators are arrested and its bank accounts seized? If Tether collapses, we may see something like the following unfold:
Mind you, bitcoin will never die off completely. Unlike other Ponzi schemes, which disappear when they collapse, bitcoin will spring back to life from time to time. This is the fourth—and by far the biggest—bitcoin bubble since 2009.
After Tesla announced it bought 1.5 billion worth of BTC, bitcoin’s grotesque energy consumption has come under fire. Based on some estimates, the network consumes as much energy as the entire country of Argentina with 45 million people. Christmas lights are literally a more productive use of electricity to bring joy to people’s lives than bitcoin. (This is a joke. In 2018, bitcoiners claimed that Christmas lights consumed more energy than bitcoin.)
Bitcoiners like to argue this is all green energy, but that is simply not true. Two-thirds of bitcoin mining is based in China, a country that relies heavily on coal-fired electricity. Some miners in the Sichuan province get power from hydro, but only during the wet season. The rest of the time, they turn to fossil fuels. (My blog)
And for those still claiming bitcoin uses clean energy, Trolly had a few more points to add:
Coinbase facilitated Tesla’s recent $1.5 billion purchase of bitcoin, according to The Block. An unidentified source told the outlet that the San Francisco-based crypto exchange made the purchase on behalf of Tesla over the course of several days in early February. The price of BTC in the first week of Feb. was around $38,000.
Similar to how it helped MicroStrategy make its big BTC purchase, Coinbase broke up Tesla’s order into small pieces and routed those to over-the-counter trading desks to minimize the impact on the overall bitcoin market.**
Coinbase wrote up a case study on how it bought bitcoin for MicroStrategy.
Another ship of fools has headed off to sea.
The Motley Fool is a private financial and investing advice company based in Alexandria, Virginia. It’s been around since 1993, so you would think they actually do their due diligence. Apparently not. Also, regular folks rely on them for sage investment advice, which is why I was shocked to learn Motley Fool was putting $5 million into bitcoin. (Fool announcement)
Motley Fool justified the investment with these three reasons:
All three reasons are blitheringly stupid. Medium for transactions? If the price stabilizes in the future? Name one time in the past decade where the price of bitcoin has stabilized. As I explained earlier, the more people who hodl bitcoin, the less stable it becomes. It will never be a stable asset. And you can’t call bitcoin a “store of value” if you get only 20% of what you paid for it.
At least one sensible Motley Fool contributor explained why investing in bitcoin is a horrible idea.
I spent two hours on Thursday watching the first half of a five-hour GameStop House Financial Services Committee hearing. Most of the questions were not that interesting. This is the first of three hearings. I’m not sure I can watch anymore, unless someone from the SEC, such as Gary Gensler, joins in on the questioning.
The nut is that Robinhood CEO Vlad Tenev apologized to his users for stopping customer trading during the peak of the madness, but says he wasn’t colluding with hedge funds. “We don’t answer to hedge funds,” he said. “We serve the millions of small investors who use our platform every day to invest.” (NPR)
He also would not admit there was a liquidity problem when he limited trades in January.
David Portnoy doesn’t like Vlad’s hair. He thinks it makes him look untrustworthy.
And Keith Gill (Roaring Kitty), who made $48 million from a $53,000 investment in GameStop, came off as a likable, honest guy. Although, he may need those profits to defend himself against at least one proposed class-action. (Complaint)
Cynthia Lummis (R-WY) added laser eyes to her Twitter profile pic, confounding the political press and turning bitcoiners into a bunch of cooing babies (Slate)
A few years ago, the SEC shut down the entirely fraudulent ICO market. A sudden shutdown of the DeFi money market (DMM) may be the start of the next regulatory wave. (David Gerard)
The U.S. Treasury Department accused crypto payments platform BitPay of facilitating over 2,100 transactions with individuals in sanctioned nations. BitPay will pay $500,000 to settle the charges. (Coindesk, enforcement notice)
JP Morgan calls Tether an unbacked wildcat bank. “A sudden loss of confidence in USDT would likely generate a severe liquidity shock to Bitcoin markets, which could lose access to by far the largest pools of demand and liquidity,” analysts said. (Bloomberg)
FTX, one of Tether’s biggest customers, claims on Twitter that its volume and customer numbers are real. All you need is an email to set up an account—no KYC for tier 0, 1 accounts with up to $9,000 USD daily withdrawal,* which means anyone can set up any number of alias accounts. Trading volume is a meaningless number due to robot trading and probably wash trading.
Stephen Diehl on Bitcoin mining: “The Crypto Chernobyl.” (blog post)
BitMEX’s Arthur Hayes—who was indicted in October and is still at large—has resurfaced to argue the Robinhood shutdown was orchestrated by financial elites. This is a sign that retail investors should buy crypto, he said. (Cointelegraph) (Tweet)
*Updated to note FTX has no KYC on both tier 0, 1 accounts. In an earlier version of this newsletter, I said you did not need KYC to withdraw up to $1,000. But it’s actually up to $9,000 per day for high-volume accounts.
**Updated March 2: An earlier version of this story incorrectly stated that Coinbase routed the Tesla order to OTC desks, so as not to “crash” the price of BTC. This is incorrect. A large order would lift the market. Story has been altered to reflect that.
Feature image: Ship of fools depicted in a 1549 German woodcut
We are midway through February. Tether has surpassed $32 billion in tethers and appears to be quite proud of the fact. BTC is scratching $49,000 and ETH is over $1,800. There is so much craziness now in the crypto markets with shitcoins pumping galore, and big companies getting in on the bitcoin Ponzi.
In the meantime, I am concerned crypto is going retail again. Friends are calling and asking about bitcoin. One of my friend’s offspring was talking up dogecoin on Facebook. And I am overhearing conversations about crypto in grocery stores and parking lots—flashbacks of 2017, but this is worse. Retailers are going to get hurt all over again.
Another reminder, I have a Patreon account. If you want to support my writing, please consider subscribing. I’m currently making $572 a month on Patreon, which is fantastic because I can now buy decent bottles of wine. But at some point, I would love to bring that up closer to $2,000 or find a way to make a living doing this.
On Thursday and again on Saturday, Tether issued $1 billion in tethers. These are the biggest single prints of USDT ever—and there were two in a row. Previously, the biggest prints were $600 million, which was rare. Normally, bigger prints were $400 million, and if Tether needed more, it would simply issue several in a row. But that’s clearly not enough to feed the monster now.
By monster, I mean this snowball is getting so big, Tether is struggling to manage it. Seventy percent of bitcoin is traded against tethers, and as real money keeps getting siphoned out of the system, Tether needs to create more and more fake dollars to fill the ever-widening chasm. Tethers are counterfeit. They are not real dollars, but they are treated as such on offshore exchanges.
You can’t have a system built entirely on fake money. Eventually, it will collapse under its own weight. We saw this with QuadrigaCX. As soon as enough people tried to cash out, the exchange’s founder Gerald Cotten flew to India and pulled off what appears to have been one of the most bizarre exit scams in history—unless you believe he is really dead.* I’m still getting calls from reporters and filmmakers wondering what the hell happened.
Tether CTO Paolo Ardoino says the $1 billion prints were for replenishments and chain swaps—wherein a customer sends in tethers and gets them reissued on a different blockchain. If it were a chain swap, you would see a corresponding burn. But we aren’t seeing any burns, meaning those tokens went almost immediately into circulation.
Luca Land tracked the first 1 billion print and found that the entire amount—previously, I said “majority,” but Luca says all of it—went to Bitfinex, Huobi, RenrenBit, Binance, and FTX.** The largest recipient was FTX, followed by Binance. Those of us who follow @whale_alert are accustom to seeing tethers flying off to “unknown wallets.” Luca thinks those unknown wallets serve as intermediate wallets to throw us off the trail.
The Block published a story on Thursday, right after Tether’s first monster print, with lots of quotes from Ardoino, who explains that big companies are buying USDT from over-the-counter desks and high-frequency trading firms. This explains the demand for all these tethers, he claims.
“When clients of these firms want to buy bitcoin, they send USD, and then these firms convert USD to USDT to bitcoin. This method is faster and most convenient,” he told The Block.
Why would someone go to the trouble of converting cash to USDT to buy BTC when they could simply buy BTC directly with cash on a regulated exchange? That makes no sense—unless it involves money laundering and capital flight. Tether does have a big market in Asia, Ardoino said.
Another explanation is that Tether is printing USDT out of thin air, using those to buy bitcoin with alias accounts on unregulated exchanges and cashing out via banked exchanges and OTC trading desks. Or else, they buy BTC and hold onto it as a way to make the markets more illiquid and easier to manipulate. (If they sold all the bitcoin they were buying with tethers, they would crash the markets, so until a new influx of cash comes into the system, they have to hold onto it.)
Coindesk interviewed Nouriel Roubini on CoindeskTV. Of course, he gave it to them straight, calling Tether a criminal enterprise and Michael Saylor a cokehead. The three reporters broke out into giggles. The questions they asked were naive, for instance, how is Tether printing tethers different from what is going on in Washington with all their dollar printing? Roubini made important points and predicts Tether will be dead within the year—read the transcript on my blog.
Tether has agreed to hand over a slew of documents to the NY attorney general showing how they issue tethers, what’s behind tethers, and so on. The original deadline was Jan. 15, but they needed another 30 days and the NY AG was okay with that. We are looking for another court filing to drop at some point after Feb. 15.
Don’t expect miracles anytime soon, though. The NY AG will still need time to take a position on what she has received. I’m sure her office is working with the Department of Justice in their investigation—and passing all the material along to them.
Someone was asking me on Reddit, what can the NY AG actually do to Tether? Answer: She has sweeping investigatory and prosecutorial powers, and she can issue a cease and desist. But ultimately, the U.S. Department of Justice and Homeland Security will be instrumental in taking Bitfinex/Tether down.
To put things in perspective, Tether has been in operation for six years. It took seven years and the coordinated effort of law enforcement in 17 countries to bring down Liberty Reserve. (ABC News)
The big news of the week was Tesla purchased $1.5 billion of bitcoin, as revealed in its 10-K filing. Here you have a company dedicated to clean energy buying one of the filthiest assets in the world. The bitcoin network requires the energy of a small country like Argentina, Norway or the Netherlands. Musk doesn’t give a hoot about the planet. (My blog)
Just to be clear, $1.5 billion is peanuts. It will support the bitcoin miners for about a month. Of course, on the news of Tesla buying bitcoin, the price of BTC shot up from 39,400 to 48,000 in less than 24 hours. The higher the price of BTC, the faster real money exits the system when the miners sell their 900 newly minted BTC per day.
Michael Burry, the investor from “The Big Short,” said in a series of deleted tweets (apparently, he routinely deletes tweets) that Musk bought BTC to distract from Chinese regulators looking into quality complaints with Tesla vehicles. Burry is shorting Tesla and has called on the electric-vehicle company to issue more stock at its ridiculous price. (Business Insider)
Most of the world doesn’t realize that bitcoin uses a country’s worth of electricity. They think it’s mainly used for ransomware and by criminals to buy drugs and such, so when they learn about bitcoin’s horrendous CO2 production, they become alarmed.
As a result, bitcoiners are desperately scrambling to declare that bitcoin consumes renewable green energy. Most of what they are spouting is blithering nonsense with no facts to support their claims. They are also trying to say that bitcoin consumes less energy than the rest of the financial system, which is simply dumb, as Frances Coppola points out.
Gerald Cotten may be dead and buried—or more likely, sipping cocktails on a beach somewhere—but QuadrigaCX sprung to life again! However, it turns out scammers set up an imitation Quadriga website to lure in potential victims. EY, the trustee for the failed exchange, sent out a warning notice. The website has since been taken down. (EasyDNS)
India is set to ban cryptocurrency investments completely. Investors will be given a transition period of three-to-six months after the new law goes into force to liquidate their investments. (Bloomberg Quint)
Crypto Capital money mule Reginald Fowler has three more weeks to find new counsel after he stiffed his previous attorneys. (My blog)
Dogecoin has been pumping thanks to r/wallstreetbets and Musk and others tweeting about it for the lulz. David Gerard wrote a wonderful piece on dogecoin explaining its unique history. (Foreign Policy, paywalled)
Apparently, Elon Musk was tweeting about DOGE for the lulz back in April 2019. (Financial Times)
Dogecoin creator Billy Markus said on Reddit that he sold all his dogecoin in 2015 after he got laid off. He wanted dogecoin to be a force of good, and he is disappointed to see the nonsense “pump and dumping, rampant greed, scamming, bad faith actors.”
The Sydney Morning Herald did a feature on Australian-born-and-raised Greg Dwyer, one of the founders of Bitmex, who was indicted last year for violating anti-money laundering laws, but is still at large. “As recently as July, social media posts suggested Dwyer was in Bermuda, and enjoying all it had to offer.”
Miami Mayor Francis Suarez (R) wants municipal workers to get paid in bitcoin. Aside from the legal and tax ramifications and all the difficulties in setting this up, I’m sure employees will be so happy to wake up and find their paycheck lost 30% of its value whilst they were sleeping. No, this is a terrible idea. (The NY Post)
BNY Mellon, the world’s largest custody bank, said it will hold, transfer and issue bitcoin and other crypto on behalf of its asset-management clients. The bank will begin offering these services later this year. Because they are a state-chartered bank, they can do this in NY without a BitLicense. (WSJ, Coindesk)
Mastercard is planning to support crypto natively on its network. However, it’s only going to support cryptocurrencies that meet certain requirements—including stability, privacy and compliance with anti-money laundering laws. The problem is that no cryptocurrencies meet Mastercard’s criteria. (Arstechnica, Mastercard announcement)
BitPay’s bitcoin cards can be added to Apple Wallet, giving crypto holders a new way to spend via Apple Pay. BitPay converts your bitcoin to cash, so it’s no different than selling your BTC first, and merchants won’t know the difference. (Business Insider)
This Valentines Day, consider giving that special someone a CryptoFlower! It will only set you back 4 ETH ($7,200). Each flower is genetically unique and immutable. And they don’t need water or sunlight because they live on the Ethereum blockchain. (FT)
Last but not least, the CBC QuadrigaCX documentary is coming soon! It was nearly a year ago that David Gerard and I met in Vancouver for the filming. It was also one of the last times I enjoyed a meal inside a restaurant sitting next to people.
*Update, Feb. 14—Someone on Reddit was giving me a hard time, arguing that I can’t say Cotten pulled off an exit scam unless I explain that he might actually be dead. I won’t believe he is dead until someone exhumes the body and proves it’s him. See my Quadriga timeline for details.
**Update, Feb. 15—The unidentified tether customer in Luca Land’s diagram turns out to be FTX.
Tesla bought $1.5 billion worth of bitcoin, the company said in a regulatory filing on Monday, effectively putting nearly all of the money it earned on clean car credits towards the world’s filthiest asset.
Where to begin? Let’s start with the firm’s SEC filing. As of January 2021, the Silicon Valley-based company updated its investment policy to allow it more flexibility in diversifying its returns on cash. Those changes allow Tesla to buy bitcoin and other cryptocurrencies, which it immediately did.
“Thereafter, we invested an aggregate $1.50 billion in bitcoin under this policy and may acquire and hold digital assets from time to time or long-term. Moreover, we expect to begin accepting bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt.”
The filing does not say how Tesla bought the bitcoin or how they are custodying it. It also does not tell us how many bitcoin it purchased or for what average price. We only know Tesla bought bitcoin sometime between Jan. 1 and early February, when the price was between $30,000 to $41,000.
Tesla says its customers will be able to buy its vehicles with bitcoin. However, “liquidate upon receipt” means that if you purchase a Tesla with bitcoins, the company is likely to sell those bitcoins for cash immediately, something that is usually done by sending the funds through a payment processor first.
This is what most large merchants do when they say they are accepting bitcoin. They convert it to cash, so they don’t have to deal with bitcoin’s wild volatility. So if you buy a Tesla with bitcoin in the future, it will likely be the same as selling your bitcoin for fiat and then handing the cash over to Tesla.
Tesla earns tradable credits under various regulations related to zero-emission vehicles, greenhouse gas, fuel economy, renewable energy, and clean fuel. It then turns around and sells those credits to other automakers when they can’t comply with auto emissions and fuel economy standards.
In 2020, Tesla reported making $1.58 billion in selling these tradable credits it received. And here is the important bit: without those tradeable credits, the company would not have been profitable. Tesla would have lost money. So what does it do with that money? It turns around and buys bitcoin.
Bitcoin is an environmental disaster. The bitcoin network currently burns around 116.87 terawatt-hours (TWh) per year, according to the University of Cambridge’s Centre for Alternative Finance. To give you an idea of how devastating that is to our climate, that is as much energy as a small country or seven nuclear power plants.
Keep in mind, bitcoin’s energy consumption increases right alongside the price of bitcoin. As bitcoin goes up in price, more people want to mine the virtual currency for profit, leading to greater energy consumption as they pile more money into power-hungry ASIC rigs.
Bitcoin is not only filthy for its energy waste but also because it is the currency of choice in underground economies. Ransomware would probably not exist if it were not for bitcoin.
And bitcoin fits the very definition of a Ponzi scheme. It has no intrinsic value—any money new investors put into the system immediately goes out via bitcoin miners selling their 900 newly minted bitcoin per day. Tesla’s massive influx of cash will fund the bitcoin miners for about a month and a half, at most.
Two years ago, Musk and Tesla paid a combined $40 million penalty to the SEC after Musk’s cryptic tweets about taking Tesla private led to stock fluctuations. The regulator charged him with securities fraud. As part of the settlement, Musk agreed to step down as chairman of the company, although he continued to hold the title of CEO.
Apparently, Musk has learned nothing from that experience. Last month, presumably around the time Tesla was buying up hoards of bitcoin unbeknownst to the general public, Musk caused the price of bitcoin to go up 20% when he changed his Twitter bio to include the word “bitcoin.”
Soon after changing the bio, Musk said in a tweet: “In retrospect, it was inevitable.” In retrospect, that tweet looks like an early hint that Tesla was funneling money into the digital asset.
Will Musk get into trouble for his bitcoin tweets?
It is unlikely, Columbia University Law Professor John Coffee, Jr., told the Wall Street Journal, especially given that a federal judge rebuked the SEC when it sought to hold Musk in contempt in 2019. “I don’t think the commission would dare push it that far,” he said.
The latest Tesla news caused bitcoin to spike 18% this morning, sending the price to over $44,000, and setting a new all-time high.
Updates Feb. 8: Bitcoin topped $44,000 on Monday, even higher than the $43,000 I mentioned earlier. I added that in the SEC settlement Musk agreed to step down as chairman of Tesla. And I added the Coffee quote from WSJ.
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A question, or some version of it, that keeps popping up on social media lately is, “How can $24 billion worth of tethers move a $650 billion bitcoin market cap?”
This is “a blitheringly stupid question on multiple levels, starting with basic arithmetic,” bitcoin hater David Gerard said on Twitter. “It’s also a perennial dumb question.”
The question is being put forth by bitcoiners in an attempt to put people’s minds at ease about Tether. The thesis is that if tethers were to vanish—something that could happen if the U.S. Department of Justice were to give Tether the Liberty Reserve treatment—it would have little impact on bitcoin’s price, so you should stop worrying and keep buying bitcoin.
Someone posed the query recently on r/buttcoin. I am going to take a stab at sensibly answering the question in three parts starting with, What is market cap?
Market cap is a nonsensical number when it comes to bitcoin. It’s calculated by multiplying the last transaction price of bitcoin by the number of bitcoins in circulation—currently $35,000 x 18.6 million.
That doesn’t mean that people bought every bitcoin in existence for that price. The vast majority of people who own bitcoin bought it at a far lower price than what it is today. It also doesn’t mean that if everyone suddenly decided to sell all of their bitcoins, each bitcoin would bring them $35,000.
In fact, it doesn’t mean that bitcoin has any value at all other than the hope that some bigger dummy will stroll along who is willing to pay more for it than you did. Bitcoiners like to imagine that bitcoins are valuable because there will only ever be 21 million of them. That makes them scarce.
Beanie Babies were scarce in the 90s, too, with some fetching upwards thousands of dollars on eBay. But by the end of the Beanie Baby bubble, no amount of scarcity could make them desirable. They became worthless
Market cap is just another way to make something that is worthless appear valuable.
Market cap came out of the traditional finance world. And then websites like CoinMarketCap came along and began applying the term to bitcoin. In the stock market, market capitalization refers to the total value of a company’s share of stock. But while companies have an intrinsic value, bitcoin does not. There is nothing behind bitcoin. It’s not a company. It is not a thing. It is simply a number in a database.
Here is an example of how silly market cap is when applied to crypto. Say I create 1 million CastorCoins and start listing them on some little-known offshore exchange for $1. Suddenly CastorCoin has a market cap of $1 million dollars. Does that mean I have a million dollars? No, it does not.
Or, as u/Ifinallycracked puts it on r/buttcoin: “If a bog roll contains 100 sheets and I manage to sell one sheet for a dollar, that doesn’t make it a $100 bog roll. Apply same logic to Bitscoin market cap. Success.”
Once you grasp that the bitcoin market cap does not mean that people have spent $650 billion on bitcoin, $24 billion worth of tethers—which represents 3% of the total bitcoin market cap—becomes a lot more significant.
The price of bitcoin is determined at the margins. If you want to drive up the price of bitcoin, you don’t have to buy every single bitcoin at the current price level. You simply have to scoop up the ones that are for sale.
Money flowing into bitcoin is what keeps the price afloat. If demand increases and people are willing to pay more for bitcoin, that pushes the price up. The more dollars people throw at it, the higher BTC will go. And it doesn’t matter if you are buying bitcoin with real dollars on a banked exchange like Coinbase—or fake dollars on an offshore exchange like Binance, Huobi, or Bitfinex.
Right now, the latter is more prevalent—there are far more tethers flowing into bitcoin than actual dollars. In fact, 55% of all bitcoin is currently traded against tethers while only about 15% trade against real dollars, according to CoinCompare.
This is what makes the current bitcoin bubble different than the last. In 2017, when the price of bitcoin ran up to nearly $20,000, there were a lot more real dollars in the system and only 1.5 billion tethers in circulation. Now, it’s mostly tethers pushing up the price of BTC.
Bitcoin is relatively illiquid. According to data from Glassnodes, 78% of all bitcoin are not moving. In other words, of the 18.6 million bitcoins currently in existence, only about 4.2 million are in constant circulation.
At least 3 million bitcoin are lost because people like this guy can’t find their keys. (Just because you are the former CTO of Ripple, that doesn’t make you clever when it comes to safekeeping bitcoin.) And there are still plenty of folks holding on to their BTC in the hopes it will go stratospheric. Strong hands!
As a result, it doesn’t take a large buy or sell request to move the price of bitcoin. Printing billions of dollars out of thin air and using it to put supply-side pressure on a market as thin as bitcoin forces the prices up. Conversely, if enough people were to get panicky and rush to sell their bitcoin—weak hands!—the results could be catastrophic. Literally, the entire market cap can go to zero in a moment.
The whole point of Tether is to push up the price of bitcoin and other cryptocurrencies, and then move those assets to OTC desks and banked exchanges, where they can be turned into fiat.
Update on August 16, 2022, to remove an analogy that nobody understood at the end.
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Avid bitcoiner Peter McCormack released a podcast interview (archive) with two Tether/Bitfinex frontmen today—CTO Paolo Ardoino and General Counsel Stuart Hoegner.
McCormack is a well-known Tether apologist whose podcasts are funded almost exclusively by bitcoin companies. Tether is also paying his legal fees in a libel suit brought against him by Craig Wright. Despite that, McCormack claims to be completely objective, although he makes it clear he believes all the “Tether FUD” circulating on Twitter stems mainly from “salty nocoiners,” who are upset because everyone is getting hilariously rich with bitcoin but we’re not.
I’ve transcribed the interview and added my comments. I skip the first few minutes of the interview where McCormack lists his numerous crypto sponsors and goes on to say he thinks Tether is legit. I’ve also edited out the “uhs,” and some repeated words to make reading easier.
Peter: Can you just explain to me and for other people who are listening, because they probably don’t really fully understand it, how tethers are issued and redeemed?
Stuart: Let’s be clear on our terminology, if we’re going to talk about issuances and redemptions. We use four principal terms when we talk about this: authorized tethers, issued tethers, redeemed tethers, and destroyed.
Authorized tethers are tokens that are created on a blockchain, and they’re available for issuance to the public. This process involves multiple blockchains and multiple persons participating to sign creation transactions. Once created, they’re available for sale to third parties, but until then, they sit in Tether’s treasury as authorized but not issued.
These authorized-but-unissued tokens aren’t counted—or [are] not counted—in the market cap of tethers as they have not been issued or released into the ecosystem. You should think of them a little bit like an inventory of products that are sitting on the shelf that are awaiting purchase.
Issued tethers are authorized tokens in actual circulation, and they have been sold to customers by Tether and are fully backed by Tether and the reserves, unless, and until they’re redeemed.
As tokens are issued, the stock of authorized-but-not-issued tethers, is depleted. And they’re replenished through authorization of new tokens based on market demand. When that happens, this is what Paolo is referring to in his PSA on the replenishment of the tether inventory. This is adding to the authorized and unbacked and ready for sale, but not issued, sold and backed tethers.
(I love how Hoegner makes it clear that authorized tethers in the hundreds of millions, like this one here, which we see going out via @whale_alert, are not actually backed. They’re just tethers on the shelf. Tether has issued $24 billion in tethers to date—and nearly 20 billion of them since March 2020.)
Peter: Okay. Why do you need to do that? Because I would have thought the creation of tethers is a very simple and easy job. Why do you need to leave them on the shelf?
Stuart: It’s a straightforward job, but it’s an important job. And it’s one that comes with security risks, and Paolo can speak to this a little bit. But there are security risks involved in using sensitive private keys to create new tethers, authorized. And to have those at the ready, and not in the marketplace, not backed. That exposes those keys to less risk. That’s not just a theoretical risk—there’s a serious security risk associated with that. Paolo, do you want to speak about that?
Paolo: Yeah, I believe that we can think [of] Tether authorization, private keys as among the most important sets of private keys in our industry. If you get hold of the private keys, you can really issue any amount of tethers you want. What we want to do is to limit the number of times per week when these private keys get accessed by signers.
So, having an unsigned [ro? roll?] transaction that gets prepared with a fixed amount and then signed when they need to, that really helps tether security. Because then you can see that we are issuing round numbers, like $200 million, right?
It means that we pre-prepared a [ro?] transaction that is an authorization transaction. Then tether signers, sign that transaction and broadcast it. And as Stu said, we are leaving a bit of inventory on the shelf in order to fulfill what we think that future requests from customers could be.
(The inventory does fly off the shelf pretty quickly. You can literally watch in realtime tethers shooting off to crypto exchanges Binance, Huobi, Bitfinex, and lots of unknown wallets, where they are quickly put to work.)
In our day-to-day activity, we are always in talks with customers. So, we [have] a good sense of what they might need, or they ping us in advance and they say, okay, we might need a certain [of] this amount or we might need that amount of tethers. In time, we learned how much tethers we should authorize in advance and keep it on the shelf in order to make these tethers available as soon as they are needed. But at the same time also protecting the security of tether, not continuing to touch the private keys every single time there is just one insurance.
Peter: Okay, I’m going to just push back on you saying they’re the most important private keys in the industry. I would say, personally, my private key is the most important one. Outside of that, I would probably say wherever the biggest honeypot is, maybe it’s Satoshi, his private keys, are the most important because Bitcoin is completely censorship resistant—but Tether isn’t, right? You can, if required, censor transactions. You can, if somebody issued a bunch of fake tethers, you could block those, I believe.
Paolo: First of all, I agree that bitcoin private keys are, well, everyone’s private keys are like their own babies. No doubt about that. The difference as you said is that if someone gets ahold of the private keys in tether, they can issue anything that they want. While in Bitcoin, if someone gets hold of the private keys, they can just steal the funds of the people that got hacked, rather than minting fake bitcoins.
So this is really important, and this is the reason why we want to keep these private keys so secure and touch them as little as possible.
So, yes, we can freeze, fake tethers. But at the same time, you can imagine if someone gets ahold of the…in order to freeze tethers, someone has to have the private keys. But if someone already has the private keys, then he can unfreeze our attempt to freeze tethers.
So we will become an endless attempt of freezing and unfreezing and trying to save tether. That is not ideal. The responsible thing to do is touch the private keys as little as possible and use, of course, for our blockchain, we use a multisig approach. So there are multiple private keys held by different signers in geographical different [locations] so that we can ensure the highest security possible in all our operations.
Peter: Stuart, I interrupted you, you were going to talk about redemptions. We should finish that bit off.
Stuart: Sure. So redemptions are just when customers send their tokens back to tether and they get fiat back and return. Those tokens then go back into inventory, like their products that have been returned to inventory, awaiting future purchases. And then those tokens can be held by tether and its treasury or destroyed.
And then destruction is just, multisig transactions being broadcast to reduce the number of outstanding tokens existing on the selected blockchain. And those tokens are forever eliminated. Basically, that’s the reverse of authorization. So those four concepts you have the lifecycle of the tether.
(The only time we’ve seen Tethers destroyed was in October 2018 when Tether burned 500 million USDT. This was just after Bitfinex lost access to $850 million in the hands of its Panamanian payment processor Crypto Capital, and the NYAG began investigating Tether/Bitfinex for fraud. Hoegner confirms our suspicions that once tethers are created, they are generally never uncreated.)
Peter: So, Paolo, who is using tethers. What are they using it for and what is the KYC process for people who want to use tether? And actually I’ll throw another one in there: who can’t [use tether]? Who applies and who do you turn down?
Paolo: Let’s start with who uses Tether. I think Stuart can speak better about the KYC/AML process,
Tether was born in 2014. It started from the Omni Layer. And the reason why it was born is because there was an issue among crypto trading exchanges. In 2013, Bitcoin reached, for the first time, $1,000, but across different exchanges, you [could] see that the spread was $200 to $300. And the reason was pretty simple.
Bitcoin moves with the pace that is every 10 minutes because that is the average block time, while dollars and fiat in general move much slower. So you send a wire and you can take one day, five days, and that was not allowing proper arbitrage across platforms. And that is really important for healthy markets. You don’t want to have OKCoin to be $1,000 and Bitfinex to be [$1,300] and so on. That is the job of arbiters. They step in and try to close these gaps.
But with just fiat, it was really difficult in 2014. It is slightly a bit better now, but you want both legs of a trading pair, like BTC/USD, to move at the same speed, at the same pace. And the only way to do that was to use the same underlying technology. So, the Omni Layer was and is using Bitcoin transactions to move tethers on-chain. That was the perfect use case. And so tether was born for that specific reason—to solve a problem
Recently, of course, we started to look into different use cases because I believe that is the time that tether should outgrow the crypto market. That is still our main market, but we are looking to work with [inaudible] businesses that offer remittances, businesses that want to optimize their payment solutions—payments for salaries, for inventory, for anything. So we got bombarded on a daily basis [with] requests. And that’s pretty awesome because we don’t want to be only for crypto. We were born in crypto, but we want to go on a global scale. So, Stu, you may or may want to touch base about our process onboarding customers.
(Tether first started issuing tethers in large quantities in 2017, after Bitfinex lost its banking. Note that Ardoino is trying to say that Tether’s massive issuance of tethers over the course of 2020 was due to expanded growth—e.g., we want to go global. Of course, there is no evidence of Tether being used outside of crypto except for online gambling in China. And the idea that businesses would want to use tether to pay salaries makes no sense, as you can’t pay rent and buy groceries with tethers.)
Stuart: Sure. I’m always happy to discuss this, because contrary to the online characterizations in some quarters, tether has an outstanding compliance program. Our AML and our CTF sanctions program is built to exceed or meet the standards of the U.S. Bank Secrecy Act and applicable BVI laws. We work hard to detect, monitor and deter AML/CTF violations. And our program is tested periodically by independent third-party auditors. We always work to understand the identity, business type, source of funds, and the related risks of each and every customer on tether. And we conduct enhanced due diligence on all customers. We risk-rate every customer. We monitor all customers using World-Check and we deploy Chainalysis to detect potential crime related to our services and users.
We regularly help international law enforcement agencies with investigations in order to trace and potentially freeze wallets. Also, tether will share information with law enforcement when given valid legal process, and we’ve helped law enforcement and victims to freeze and return millions of USDTs. That’s a bit of an overview of our compliance and what we look to do.
(Hoegner claims Tether does due diligence and knows who its customers are, but who are its customers? Further along in this interview, he hints that Tether’s customers consist of a small group of “large customers,” likely exchanges and OTC desks, that bank with Deltec Bank & Trust. What about the hundreds of thousands of tether users? They are apparently not counted as customers. This leads me to think that Tether’s “big customers” serve a function akin to Liberty Reserve exchangers—acquiring tethers in bulk directly from Tether and then distributing them in smaller quantities to individuals who require anonymity in their transactions.)
Peter: Have any customers ever lost their account?
Stuart? Lost their account?
Peter: Yeah. Have you ever closed people’s accounts? They can’t work with you anymore. Have there been in any instances where you’ve tracked behavior and, like, you can’t work with us anymore. Or has everyone kept a clean relationship?
Stuart: We have ended relationships with customers in the past. Sure.
Peter: Okay. Interesting. In terms of the issuance of tethers, there’s a lot that seems to happen on times when banks essentially would be closed, right? So weekends and holidays. There was certainly some over the holiday break, and I’ve seen people commenting on that. How come that’s happening? How are you able to do that?
Paolo: I will take this one. So you’re right. There is a lot of misconception and FUD around this very point. You would expect that to go to HSBC on Sunday and it is closed, so you cannot move your money. Right? We, as Tether, are using Deltec as a primary bank, and most of our biggest customers are banked into the same bank.
(They claim Deltec Bank & Trust is their main bank. If most of their “biggest customers” have accounts at this tiny bank in the Bahamas, that likely means Tether doesn’t have a lot of what it considers customers.)
During the weekends, during all the days, there is always personnel from the bank that allows internal transfers between accounts. So, Tether has its own accountant, and let’s say, customer A has his own account. Customer A wants to acquire new tethers. So they ask the bank personnel to do an internal transfer from their account to Tether, a Deltec account. And that gets settled and is available immediately to tether.
So, when we issue tethers, they are fully backed because we already received the internal transfer. So, the problem that people are making fun of—the fact that we are issuing over weekends—is just pure [mis]understanding on how the financial market and the banking system works.
(It sounds here that one of the advantage of being a big Tether customer with a Deltec account is you have a close, trusted relationship with Tether. Also, we are definitely seeing a trend where the BTC price is pumped on the weekends, followed by a selloff on Mondays.)
Peter: You mentioned Deltec. Are you shareholders in the bank?
Stuart: We don’t talk about the investments that we have on the Tether side.
Peter: Okay, so are tethers fully backed?
Stuart: Look. The short answer is yes. Every tether is 100% backed by our reserves. And those reserves include traditional currency and cash equivalents, and may include other assets and receivables from loans made by tether to third parties.
(Essentially, tethers are backed by cash and a bunch of other stuff that Tether won’t disclose. For years, Tether claimed that tethers were backed “1-to-1” by U.S. dollars held in cash reserve. Tether changed the rules of the game in 2019, after Bitfinex lost access to $850 million and had to dip into Tether funds. Tether’s terms of service now states that reserves means “traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”)
Now that lending includes the loan to Bitfinex, which currently stands at a principal balance of $550 million. The principal having been paid down ahead of schedule. The loan is on commercially reasonable terms. All interest is prepaid to the end of this month, and it’s otherwise in good standing.
(Bitfinex indicated previously—here and here—that it has already paid off $200 million of the funds it took out of Tether’s reserves in early 2019. If the remaining balance is $550 million, that means the total was $750 million.* Also, he is including the loan as a legitimate part of Tether’s reserves, which makes absolutely no sense at all. This is missing money, so how can it be used to back anything? Also, note that Hoegner keeps referring to Tether’s original loan to Bitfinex and claiming it is insignificant and paying interest. But his language does not exclude the possibility that Tether has made other loans to other customers or even to Bitfinex itself.
Here’s how the “loans” part might work: Even though Tether could say that it issued USDT—say to Bitfinex—in exchange for USD or BTC, Bitfinex does not have to actually hand over the USD or BTC right away. It can just promise to do so. Then that promise can be counted as a loan that backs those USDT.
And one more thing—what happened to the $1 billion that Bitfinex raised when it sold all those LEO tokens? I would have thought that would have been plenty to cover the $700 million loan.)
Every USDT is also pegged one-to-one to the dollar. So USDT is always valued by tether at one USDT to one USD. Tether has always been able to honor redemption requests, and to put it simply, there’s never been a single instance in which tether could not honor a redemption and our detractors can’t point to one because one doesn’t exist.
And in fact, there’s considerable evidence of USDT being redeemed by our customers, freely. [Cofounder of CMS Holdings] Dan Matuszewski has talked about this before. [Head of OTC-APAC at Alameda Research] Ryan Salame just recently spoke about this, confirmed.
We can’t share specific information about customers because of confidentiality concerns. But they are free to share that information with the market, if they wish.
(Ryan Salame said in a tweet that he has been redeeming tethers for three years, but he doesn’t say for what, so we don’t know if it was an actual dollar redemption. Matuszewski said in the past that he “created and redeemed billions of tethers” when he was head of Circle’s OTC desk.)
So let me just ask if anyone seriously believes after we, you know, that we could be put under the microscope in the way that we have and still be operating if we weren’t backed. Defies logic.
Let me touch on one issue here that might be of interest to your listeners. The 74% number that’s come up from time to time, specifically in the context of tether’s backing. This is another number that’s been talked about a lot, and I want to be clear about this and give some context.
I swore out an affidavit in New York, in the New York litigation with the AG on April 30th of last year. And that affidavit contained a number of items, including touching on tether backing.
And in a statement, I said that of the then $2.1 billion in reserves. And today, just for context, that amount has grown to $22 billion.
Tether had cash and cash equivalents on hand representing approximately 74% of the current outstanding tethers. And that referred to issued tethers. You remember, we were talking about authorized and issued tethers, et cetera? That was issued tethers.
People took from that, that I said, this means they’re only 74% back. But that’s not correct. And that’s not what I said. It meant and means that the reserves were 74% cash and cash equivalents. Tethers were and are 100% backed by reserves.
So the loan to Bitfinex is still good backing. Interest has been paid ahead of schedule, as I said, and the principal has been repaid again, ahead of schedule.
So that forms part of tether’s reserve backing. So maybe people object to the amount of the backing, but it’s not nothing. It’s a valuable and productive asset. And just note that that loan is now $550 million, out of almost $22 billion in reserves, or 2.5% of the total. So I just want to be clear about the nature of the backing and the context and our overall asset mix on that point.
(Hoegner is backtracking and doing his own math to now claim that Tether has always been 100% backed. This is nonsense. He said in an affidavit in April 2019 that tethers were 74% backed. The truth is nobody really knows what is behind tethers and what difference does it make anyway? Tether makes it clear that it is not obligated to redeem tethers at all, and if it does, it can hand you back whatever useless assets it wants.
According to its terms of service, “Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves.”
Peter: Okay. So you talk about the backing of currencies and different currencies. Is any of the backing in Bitcoin?
Stuart: We were very clear last summer in court that part of it is in bitcoin. And if nothing else, there are transaction fees that need to be paid on the Omni Layer. So bitcoin was and is needed to pay for those transactions, so that shouldn’t come as a surprise to anyone. And we don’t presently comment on our asset makeup overall as a general manner, but we are contemplating starting a process of providing updates on that on the website in this year, in 2021.
Peter: But you have to manage the assets that back the tether. Are there any instances where you are buying bitcoin because you think it’s a good asset to hold within the basket?
Stuart: Again, we don’t comment on the basket of assets in a general manner, but we are exploring providing updates on that on the website in 2021.
(Hoegner won’t reveal what sort of assets are backing tethers. If it’s only partly cash, what part is cash? And what is the rest made up of? Tether has so far issued $24 billion worth of tethers, but it is not telling customers what is behind those tethers—for all we know, nothing but a lot of worthless assets.
Peter: Okay. Because that’s one of the areas where people will be like, hmm, they can issue tether. They can buy the bitcoin, which backs the tether, at the right time in the market. And that’s where people might say that you have the ability to essentially pump the market.
Stuart: Well, hold on, we don’t have the ability to buy the bitcoin at the right time in the market. We’re not prognosticators about whether the market’s going to go up or down. That presumes some level of clairvoyance that we know when markets go down, which we don’t have.
Peter: No, it doesn’t mean that. I just mean that if you have to manage your basket of assets and if bitcoin, was say…any investment you have to make, you have to make a decision. You could make a decision and say, look, we believe that bitcoin would be a good investment right now. And you could issue tethers to buy bitcoin.
Stuart: No, no, we don’t issue tethers to buy bitcoin. We issue tethers to customers that want tethers.
Peter: So how does bitcoin end up within your basket?
Stuart: Well, as I said, if nothing else, bitcoin is there to pay for transactions on the Omni Layer.
Peter: No, no, but how does it get there? How does, what’s the process of the bitcoin reaching your basket?
(This is a good question. If bitcoin is backing tethers, what is Tether using to buy those bitcoin with? Notice how Hoegner is being very careful not to say that they are buying BTC with tethers. Well, what else would they be buying them with? Why not hand tethers out to Tether customers in exchange for BTC? Or you could set up an account on Bitfinex, fund it with tethers, and use those to buy BTC from your own customers on the exchange.)
Stuart: Oh, Paolo, do you have any comments on that?
Paolo: I’m not sure if the question is really clear. We talked about the fact that how we acquire the bitcoin that we need in order to fulfill the Omni Layer transactions.
(Ardoino is pretending like he doesn’t understand the question.)
Stuart: So how do we get that bitcoin, Paolo?
Paolo: I would say that [there] are a good amount of bitcoin remaining from past acquisitions that we likely did in 2015, 2016. That with the fact that the Omni Layer is slowing a bit down compared to the other blockchains that we are supporting…the amount of bitcoins that we luckily got a really good price in 2015 and 16, is probably enough for perpetuity.
(Now he is saying that they happened to have a stash of BTC lying around from five or six years ago, and that’s what they are using to back tethers. If Tether had a stash of bitcoin that large, it could have sold them long ago and taken care of the $850 million hole left when the money disappeared from its payment processor.)
Stuart: But again, Peter, let me emphasize, this has been in the public records since at least last summer. In my view, this isn’t new or shouldn’t be new to anyone.
Peter: What I’m trying to understand is, if it’s only bitcoin, that’s held for transactions on the Omni Layer. I understand that. But if bitcoin is held within the basket because it’s seen as a good asset to hold, then how does it end up there? I’m just trying to understand that.
Paolo: So, but why we should issue—even in the case someone would like to add the bitcoin to its own basket. Why issuing tethers to do that? Right. So there are fiat exchanges. So why, if someone wants to manage his portfolio would just take part of dollars and buy bitcoins. So why issue tether to do so?
Peter: I don’t know. That’s why I’m asking.
Paolo: In any case, the entire concept of us issuing tether to buy bitcoin for ourselves, doesn’t make sense. So why issuing tethers when we already have the dollars and we have the ability to manage our inventory and our portfolio, so we could just use the dollars, right? So the entire narrative is completely nonsense, right? So why we have to do two steps when we can do one?
(Ardoino wants us to believe that if Tether wanted to buy bitcoin, it would simply go to a banked exchange and buy BTC with cash. But why would Tether use cash to buy its stash of bitcoin if it has copious tethers on hand? He is doing a terrible job of trying to evade this question. )
Peter: That’s fair. Okay. Okay.
In terms of an audit, this is something that comes up over and over. And I discussed this with Phil Potter a long time ago. I know you’ve got it on your website, but people don’t trust your own lawyers providing the audit. Is there anything stopping you from having a full and independent audit?
(The only thing that would remove all doubt that Tether has any cash or reasonable assets backing tether at all, would be an independent audit. But Tether and Bitfinex have consistently avoided this over the years, and they always have some excuse.)
Stuart: We spoke about this two and a half years ago when we said that we couldn’t get an audit in part because of the amount of business that we had at a single financial institution at that time.
We have provided consulting reports from our accounting firm. I think you’re referring to these in your question, from a law firm, Freeh Sporkin Sullivan, a firm of ex-federal judges and an ex-director of the FBI, and a letter from our bank.
And those were good faith efforts to try to provide transparency, and some of the comfort that assurance services would provide. We said at the time that we continue to search for new ways to bring more information to the community. I mentioned Ryan Salome’s remarks earlier, that’s part of those efforts. Interviews like this are part of those efforts, public comments from our bankers are part of those efforts.
So we continue to look for useful ways to share information with the community, to be more open and transparent. And we have important plans in that regard for the coming year. But I can’t get into specifics on that just now. So all I can say on that one is stay tuned.
Peter: Well, we can keep talking. Okay. So the reason I reached out to you is I get a lot of DMs, a lot of emails, and just suddenly over the last couple of weeks, I’ve had so many about tether and I’m posting things online and people say, it’s tether manipulation, and I haven’t seen it in a long time.
Now that I’ve done my own research. I don’t believe tether is manipulating the market.
Stuart: Few serious people do.
Peter: And that’s what I realized, few serious people do. So my question really is for you is where do you think this is coming from?
(I love how McCormack is acting like it is a complete mystery why anyone would think Tether is anything but a completely legitimate operation.)
Stuart: That’s a good question. I couldn’t hazard a guess. I think it’s probably nocoiners that just don’t believe in the bitcoin project and by extension, they don’t believe in Tether. It could be people with their own agenda. That’s really not for me, for us to speculate.
But, we’ve noticed the same thing, Peter. Like this comes up from time to time. It’s almost a six months schedule. Every six months or so, there’s some kind of huge push to get a whole bunch of FUD out there. And it can vary as to the reasons why. This current batch might be related to the January 15th date that people have been talking about in the NYAG litigation.
Peter: Well, I’m going to ask you about that, but you’ve got people like Nouriel Roubini, Amy Castor, Frances Coppola, all quite openly accusing you of manipulating the market and running a pump with tether to pump bitcoin. So they’re quite serious allegations from quite known profiles. Have you not considered any litigation against them for libel?
(I’m truly flattered my name would come up here. Nocoiners believe Tether has printed billions of unbacked tethers out of thin air because Hoegner has flat out admitted in court documents that tethers are not fully backed. And he is telling us here, again, in this interview, that they are backed by mysterious assets, nonsense loans and goofy math. We believe Tether is manipulating the markets because we know for a fact that more BTC are traded against USDT than fiat. I find it amusing McCormack is suggesting Tether sue us all for libel.)
Stuart: Look, we don’t believe in suing our critics into silence. We have never made a claim against anyone for defamation. It’s not to say that we wouldn’t ever, but it would be a high bar. We think it’s better to try to counter fiction with facts and truth. And in fact, contrary to what some may think we’re not particularly litigious people. And that obviously, for what it’s worth, extends to journalists as well. We’re not about to hail Forbes media into federal court in New Jersey. As to why Nouriel, why Frances, why Amy, are engaging this kind of discussion, these kinds of statements. You’d have to ask them.
(We engage these kinds of discussions because Tether/Bitfinex have failed to provide evidence that Tether is fully backed and the companies have a long history of shenanigans. Also, the NYAG is investigating you for fraud.)
Peter: Yeah, fair enough. Okay. If you look back historically, because you’ve had all these accusations, you have to deal with all this pressure. Is there anything where you look back and you think, okay, we did that wrong? We’ve handled this in the wrong way. Are there things you should have done better, should have done differently?
Stuart: Absolutely. Look, for people out there that are true skeptics, and I’m not talking about deniers, not haters, that it will never be convinced. I think one thing that we could have done better in the past and we’re getting better at now is communications.
And that’s not a reflection on anyone. Paolo’s brilliant at this stuff, just like he is with everything else. He’s a brilliant guy. Joe Morgan is great whom, you know. And we have very capable defenders out there, making our case for us. But we’ve been so focused on building cool things that we have—and I’ve said this publicly–we have neglected our comps. We have always known that we are a tech firm or not a law firm. We’re not a PR shop. We’re not a compliance shop. Although compliance is very important.
And mea culpa. I want to be clear I’m as guilty of this as anyone else to the extent that I haven’t prioritized public communications. And I’ve said in the past, some of the FUD, it will just go away. You know, let’s not give it oxygen. I was wrong about that. So you can blame me for that. But we are getting better at communicating with people. We’re getting better at this. We’re learning. We’ll continue to learn, and we’ll continue to improve and get the facts and evidence out there.
Peter: All right. Let’s talk about the NYG case. For those people who don’t know, because it is quite complicated, how would you summarize the accusations?
Stuart: Let’s start with some baseline information on NYAG. First, there is no lawsuit or complaint that’s been filed against Bitfinex or tether in New York by the AG.
Second, this is not a criminal investigation. And third, the special proceeding is only directed at getting information and keeping the injunction in order for the AG to conduct her investigation.
Now, Bitfinex and Tether have cooperated with the AG’s office for over two years and have produced approximately 2.5 million pages of materials. While the AG’s office originally obtained an injunction relating to Tether’s reserves, in April of 2019, that injunction was substantially narrowed in the ensuing weeks and has not disrupted the day-to-day business of either Bitfinex or tether. And the injunction in the order for information is what we’ve been referring to online when we speak about the 354 order.
So the injunction set to expire by its terms on January 15th, which is the January 15th date that I referenced earlier that people have been talking about. And by that time, the companies expect to have finished producing documents to the attorney general.
So we’ve seen a lot of FUD and fear-mongering about January 15th, much of it by those who hate, not just tether, but the entire digital token ecosystem. Despite those rumors and attacks, let me assure you that the business of tether and Bitfinex will remain the same after January 15th. I think our discussions with the AG are going well. I think they’re constructive. And we look forward to continuing that conversation with them.
(The Jan. 15 date he is speaking of refers to the date Tether/Bitfinex are supposed to handover their financial records to the NYAG, so the investigation into their business can proceed. The NYAG letter to the court is here.)
Peter: But what is it they’re pursuing here, particularly?
Stuart: The original order had an injunction component, enjoining us from doing certain things, which doesn’t affect our day-to-day business, at this time. It also sought information. So if you go through all of the requests that were in the original order from last April, they set a series of things that they wanted, a series of documents, information they wanted from us.
We pushed back on that. We appealed the New York Supreme Court’s ruling on that. We lost. We accept that, and we’ve mediated our disputes as the attorney general said in their letter to the courts a few weeks ago. So again, they’re looking for that information. We are in the course of providing that. That’s going to be done by the 15th and we’re continuing to talk with them.
Peter: So what, what happens after the 15th? What are the next steps in this, because two years is a long time. I’m sure you want this wound up as quickly as possible. What are the next steps after that?
Stuart: Time will tell. Again, our discussions with them are constructive. We’re on track to give them everything they’re looking for. And we’ll see where it goes.
Peter: Okay. I’m trying to understand what the various possible outcomes are from this and whether you can even talk about them. Is there a scenario where Tether is wound up? Is there a scenario where Tether is just fine and is there a scenario where they actually complete their investigation, and there’s no action to be taken?
Stuart: Certainly. They may complete their investigation and they may bring a complaint. They may complete their investigation and think that there’s nothing further to be done. There may be some kind of settlement between the parties. There are any number of things that could happen.
Peter: What about the other lawsuit? What about the other one I read about, there’s a class-action lawsuit regarding the traders. Where are you at with that? You applied to have that ended, right?
Stuart: Yeah, so we have filed our motion to dismiss and the plaintiffs have given a reply in that, and we are waiting at this point to see if there’s going to be oral argument on the motion.
Peter: Okay. Just on the regulation side. It’s quite an interesting time for, I’m going to say crypto, and I hate that word, but crypto slash bitcoin slash stable coins and very interesting things that happened with the OCC recently. It feels like there’s more regulation coming, but some of it’s quite open regulation that’s actually allowing this industry to continue, but with a lot of oversight. Specifically, regarding Tether, what are the regulations you have to follow? What are the agencies you have to work with?
Stuart: Tether is registered with FinCEN as a money services business. That means the tether has to make reports up to FinCEN, have a compliance program, which I referred to earlier, just in passing, subject to examination by FinCEN, that kind of thing.
Tether also makes reports to the BVI’s financial investigation agency under applicable law there, as most of the corps in the Tether group are BVI companies. So the bottom line is that Tether is regulated. So this notion, you’ll see sometimes that tether is quote “unregulated,” which a big word in some mouths, in my view is just flat wrong. And it’s a little bit irritating, but those are the baseline rules that that Tether has to follow. And our compliance program has been built to match or exceed those standards.
(Tether is not regulated in any meaningful sense. The company is registered in the British Virgin Islands. In fact, the reason it got into hot water with the NYAG, is because it was allegedly doing business in NY without a BitLicense, required for crypto companies to do business in the state, and it violated the Martin Act by misleading customers into believing that tethers were fully backed when in fact, they were not.)
Peter: So what did you make of the OCC letter? Because it was quite interesting, the idea that banks can start issuing stablecoins. I imagine for someone like you guys, that’s quite interesting because could you see a scenario where they’re working directly with Tether?
Stuart: I think it’s premature to say that. I agree that the OCC letter was very interesting. Other people far smarter than I am, have talked about that and opined on it already. And I’ll certainly defer to our U.S. counsel on that. But it’s very interesting and look, we always are interested in working with and cooperating with and teaching and learning from regulators and policy-makers and law enforcement agents around the world, not just in the United States.
That’s another step on that road. I think you’re right. I think increased regulation in this space is coming. I think it’s going to be different, depending on where it is. We don’t take U.S. customers. But we are still registered with FinCEN, so that’s something that we need to pay attention to. And we’ll continue to engage on a worldwide basis with anyone who wants to work with us to help develop their own policies, help develop their own regs and figure out what they can learn from us and what we can learn from them.
(If you are registered with FinCEN but you don’t take U.S. customers, what is the point of being registered with FinCEN?)
In that kind of context. We just think that other people are better qualified to do the last mile and we’re happy to cede the field to them.
Peter: This might be a question for you Paolo, but are there scenarios where Tether can fail, any form of catastrophic failure?
Paolo: I think that the only one that I’m not worried about, but due to my technical nature, I’m working every single day and second of my life to prevent, is ensuring that the private key stays safe. That’s it, right? So what we do is choose the blockchains that we allow tether on in a really careful way. So we choose blockchains that are, first of all, supported by a wide community. We choose blockchains that have a native type of token support, if possible, that has a built-in multisig pattern that we can use and have support for hardware wallets.
So these are basically the key requirements for us to operate safely on a specific blockchain. We do have the capability of freezing accounts on most of the blockchains. That is really important. As Stu said, we save tens of millions of dollars. Part of those were also some of these situations were public when we did that. Recall one exchange hack, for example. So, yeah, basically my life is all about thinking how things can go wrong and try and make sure that we can prevent those from happening.
Peter: Which blockchains are you currently supporting?
Paulo: We support bitcoin two ways, from Omni Layer and Liquid. Then we support EOS, Ethereum, Tron, Algorand. [Speaking to Peter] Don’t do that face please. [Laughs]
Peter: Fucking Tron.
Stuart: On a podcast called What bitcoin did, you’re going to get the grimace, Paolo.
Paolo: Ethereum fees were $16, mate.
Peter: In fairness, you’ve answered all the questions that I wanted to ask you, and these were based on a lot of the questions that were coming out in Twitter, when I put it out there. Most of them are related to, is it fully backed, blah, blah, blah. I personally still think there’s work to be done there. So I’m going to keep pushing you on that.
Stuart, is there anything I’ve not asked that you kind of wish I had?
Stuart: No, I don’t think so, but I do want to just jump back to your comment. I actually agree with you. I think that there is work to be done. I think you should continue to push us and nothing is perfect. We can always do better and we look forward to doing better this year and beyond, but we’re really excited about 2021. And we look forward to being pushed. We look forward to these questions. We look forward to engaging with the community and putting the facts out there on the table.
Peter: How comfortable would you be doing one in the future, give a couple of months and perhaps allow people to submit questions in and take the questions submitted?
Stuart: I would have to talk to our PR folks. But personally, I’m very comfortable with that. I’m fine with that.
Peter: I think we should do that. As I said in the start, and for full transparency, people should know that I’m in a legal situation and Tether has helped support that at some points
But, at no point, does that change the line of questioning. I told you beforehand, I’m only doing this if I can ask any question I want. People should know that. I wanted to do it because whilst people say, Oh, you’re a journalist Pete, you should be completely impartial.
I think this is all FUD. And, I’m finding it really annoying. And I’m finding a consistent pattern and who it’s coming from. And it’s coming from people who’ve had an agenda against bitcoin for a long time. And it’s coming from people who I think are nocoiners and they’re salty.
I haven’t found anyone, I actually respect doing this, so I can be impartial at best with my questions, but I’m not impartial because I believe this is FUD. But I will continue to push you. I’ll continue to ask you questions. And I appreciate you coming on, man. And yeah, hopefully, we’ll do this again in a couple of months and, if that’s okay with you guys, I’ll open up to the floor and see if questions in the community.
*Update Feb. 6: Previously, I said Bitfinex borrowed $700 million of Tether’s money, but it looks like they are now saying it is $750 million. (The NY AG said in April 2019 that Bitfinex had taken “at least $700 million.”)
Update Jan. 12: An earlier version of this story stated that Tether had minted 20 billion tethers this year alone. That’s incorrect—it’s 20 billion since March 2020.
Nocoiner predictions: 2021 will be a year of comedy gold
Are pixie fairies behind Bitcoin’s latest bubble?
The curious case of Tether: a complete timeline of events
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The last year has been particularly annoying for nocoiners—those of us who don’t hold crypto and view bitcoin as a Ponzi, like a Ponzi, or something more complex.
We have had to endure Tether minting tethers with abandon ($17 billion worth in 2020 alone) and bitcoiners obnoxiously cheering bitcoin’s new all-time highs, the latest being $33,000. Considering bitcoin began 2020 at around $7,500, that is a long way up. (Things went full crazy in March.) But we believe 2021 will be a year of comedy gold when this giant hill of dung all comes tumbling down.
I’ve spoken with several notable bitcoin skeptics, gathered their thoughts, and compiled a list of new year predictions. They shared their prophecies on Tether (a stablecoin issuer that has so far minted $21 billion in dubiously backed assets to pump the crypto markets), new regulations and the future of bitcoin.
Here is what they had to say:
“This is the year the music stops,” Nicholas Weaver, a researcher at the International Computer Science Institute in Berkeley, told me.
Weaver has been following bitcoin since 2011. His work is largely funded by the National Science Foundation. He believes the bitcoin ecosystem is running low on cash. (This is the fate of all Ponzi schemes. Ultimately, they run out of new investors and when that happens, the scheme collapses.) In the case of bitcoin, he believes real dollars in the system are rapidly being replaced by fake ones in the form of tethers.
“Tether has been squeezing every dollar out of the system, and there aren’t enough suckers,” he said, meaning there aren’t enough folks waiting in line to buy bitcoin at its ever increasing prices. “When the dollar stock goes to zero, the system will collapse completely because you get a mining death spiral.”
Miners reap 900 newly minted bitcoin per day in the form of block rewards. If they can’t sell those for enough fiat money to pay their monstrous power bills, it makes no sense for them to stay in business. And since their job is to secure the bitcoin network, bitcoin will become vulnerable to repeated attacks.
Also, governments are finally waking up, said Weaver, alluding to new global efforts to clamp down on money laundering, capital outflows, and the financing of terrorism via cryptocurrencies.
He foresees Tether getting the Liberty Reserve treatment any day now. He also thinks China will decide “screw it, bitcoin is evading capital controls as a primary purpose, let’s cut off the subsidized electricity.”
Without cheap electricity, bitcoin miners—most of whom are in China—may find it difficult to stay afloat. Already bitcoin miners in Inner Mongolia no longer receive electricity at subsidized rates.
A computer science professor in Brazil, Jorge Stolfi wants to avoid making predictions on bitcoin’s price. He’s been following bitcoin since 2013—and has seen it through two prior bubbles—so he knows too well that anything can happen.
“I really don’t know how far the insanity can go. The crypto market is 100% irrational, sustained entirely by ignorance and misinformation,” he said. “How can anyone make predictions about that?”
Stolfi is a denizen of r/Buttcoin, a subreddit that makes fun of bitcoin, where he painstakingly explains the finer points of crypto nonsense to the unenlightened. In 2016, he submitted a letter to the U.S. Securities and Exchange Commission warning against the risks of a bitcoin exchange-traded fund and comparing bitcoin to a Ponzi scheme. (The SEC has shot down every bitcoin ETF proposal to date on the basis that bitcoin’s price is too easy to manipulate.)
“And since price determines everything else in the crypto space, I can’t make predictions on pretty much everything else,” Stolfi continued. “For example, If the price were to crash below $10,000, I bet that we would have a lot of comedy gold coming from MicroStrategy.”
Over the last several months, the Virginia-based enterprise software company has funneled $1.2 billion of its funds into bitcoin. As a result, Michael Saylor, the company’s CEO, now spends most of his time on Twitter shilling bitcoin. In September, Saylor compared bitcoin to “a swarm of cyber hornets serving the goddess of wisdom, feeding on the fire of truth, exponentially growing ever smarter, faster, and stronger behind a wall of encrypted energy.”
Stolfi also thinks that we will probably forget about several coins that were big in the past, like Bitcoin SV (BSV) and IOTA, maybe even bitcoin cash (BCH). “And we will also forget about blockchain technology.”
Over the last week, Frances Coppola has been battling an army of bitcoin trolls and sock puppets on Twitter after suggesting that bitcoin is not scarce in any meaningful sense.
Scarcity is a key part of the myth bitcoiners perpetuate to make people think bitcoin is valuable in the same way gold is and to create a sense of buying urgency—quick, grab some before it’s all gone!—so naturally, bitcoiners responded by dog piling on her. She isn’t happy about it.
“I hope bitcoin crashes and burns because I am so bloody furious, but I think it will be a while yet before it does—maybe about June,” she said.
Coppola is a UK-based freelance writer, who spent 17 years in the banking industry. She wrote the book, “The Case For People’s Quantitative Easing,” and has 58,000 Twitter followers.
The cause of bitcoin’s upcoming crash, she believes, will be an epic battle between the Wild West of crypto and regulators, a topic she covered in a recent Coindesk article.
If the regulators win, crypto exchanges will become like licensed banks and have to comply with things like the Dodd-Frank Act, a sweeping law that reined in mortgage practices and derivatives trading after the 2008 financial crash, she said. On the other hand, if the regulators lose, she believes their next move will be to protect retail investors.
“We’d see drastic restrictions on what interactions banks can have with crypto, perhaps a total ban on retail deposit-takers having crypto exchanges and stablecoins as clients,” she said.
“We might also see something akin to a Glass-Steagall Act for crypto exchanges and stablecoins, so that retail deposits are fully segregated by law from trading activity.” By that, she means exchanges won’t be able to lend retail deposits to margin traders or use them to fund speculative positions in crypto derivatives.
After years of begging for bitcoin to be taken seriously as a form of money, bitcoiners will be getting exactly what they asked for, said David Gerard, a bitcoin skeptic and author of “Libra Shrugged,” a book on Facebook’s attempt to take over the money.
This year will see more regulation of crypto, as coiners discover to their dismay just how incredibly regulated real-world finance is, he said. “Just wait until someone sits them down and explains regulatory real-time compliance feeds.”
What does Gerard think about Tether? “I could predict the guillotine will finally fall on Tether, but I predicted that for December 2017, and these guys are just amazing in their ability to dodge the blade just one more day,” he said.
Since 2018, the New York Attorney General has been investigating Tether and its sister company, crypto exchange Bitfinex, for fraud. Over the summer, the New York Supreme Court ruled that the companies need to hand over their financial records to show once and for all just how much money really is underlying the tethers they keep printing. The NYAG said Bitfinex/Tether have agreed to do so by Jan. 15.
Gerard also foresees that there will continue to be no use cases for crypto that absolutely anything else does better. “Everything the Buttcoin Foundation was talking about in 2011 is still dumb and broken,” he said.
Elon Musk says he is “highly confident” that his company SpaceX will be sending humans to Mars in six years. Naturally, Musk wants to set up a self-sustaining city on the red planet. And, come to think of it, the city will need its own crypto, something like Dogecoin or Marscoin. Otherwise, how else will its citizens pay for things?
Pseudonymous crypto blogger Trolly McTrollface has this prophecy for 2021: “Elon Musk creates its own cryptocurrency, and adds it to the $TSLA balance sheet. It ends the year in the top 10 crypto list by market cap.”
Nouriel Roubini, an economics professor at New York University, doesn’t mince words when it comes to crypto predictions. He simply told me: “The Bitcoin bubble will burst in 2021. Triggers will be reg/law enforcement action.”
There is good reason to take him seriously. Roubini famously warned of the 2008 financial crisis, a prophecy that earned him the moniker “Dr. Doom.” He is also known for his parties, which leads a few of us nocoiners to believe that bitcoiners’ are fundamentally driven by bitterness over the fact that we have better soirées.
If the past is any prediction of the future, bitcoin and other crypto promoters will continue to deceive the public with outright lies about “investing” in tokens until the big tokens collapse. That’s the view held by David Golumbia, known for writing about the cult of bitcoin. He is the author of “The Politics of Bitcoin: Software as Right-Wing Extremism,” and teaches at Virginia Commonwealth University.
“I tend to agree with other critics that regulators and law enforcement are going to squeeze the space, especially Tether, at some point,” he said. “And that when this happens the whole thing will deflate. But as anyone with experience in investing knows, predicting and identifying bubbles is a fool’s game.”
What Golumbia finds most interesting is that the rising price of bitcoin and other tokens sustains the lies. “I have to imagine that when the tokens collapse, the motivation to keep lying will go away as well,” he said.
Examples of those lies include: bitcoin offers an alternative finance system to the real one, bitcoin’s price movement is due to technology, the regular financial system rips people off and bitcoin doesn’t, and so on.
He continued: “Though who knows—the whole story of bitcoin and blockchain includes the worldwide embrace of conspiratorial thinking that parallels QAnon, antivax, COVID-19 denialism, climate change denialism, flat earth ‘theory,’ etc.
“None of these seem to collapse no matter what the facts do. But then again, the promoters of these theories often profit only indirectly from them, whereas cryptocurrency promoters usually have a direct vested stake in ‘number go up.’ So maybe there will be a positive development for a more realistic relationship to the world if/when prices collapse.”
As for my own predictions, I think bitcoin is on the brink of a stupendous crash. Whales and the Tether/Bitfinex triad are working over time to push the price up higher and higher. As more fake dollars flood the system, real dollars are being siphoned out by the big players.
At some point, as Weaver stated, there won’t be enough suckers left in the wings waiting to buy bitcoin—and when that happens, bitcoin holders will learn the hard way that price charts and market caps are meaningless.
When the price crashes, dropping back to early 2020 levels—or possibly even lower, the people who will get most hurt will be the retail investors who have been duped into believing they can buy bitcoin and get rich. And that, in turn, will provide justification for tighter regulations that make it difficult for exchanges to list any crypto at all.
I also believe at some point this year, Tether’s operators will be indicted, although it is hard to say when. As Gerard says, we all thought this nonsense was going to come to a grinding halt in December 2017, but here we are three years later.
The fact that Bitcoin is getting pushed to ATHs, should be a signal that the end is near for Tether, and the crooks are doing their final looting.
If you own any bitcoin, you would be best to sell what you can now, or at the very least, sell enough to get back your initial investment. Remember, two thirds of bitcoin investors in the 2017 bubble didn’t get around to getting any of the money back that they had put in—don’t be one of those guys.
Update Jan. 2: An earlier version of this story stated that bitcoin started 2020 at around $3,000. It started at $7,500.
Update Jan. 4: Edited to clarify that a state supreme court ruled that iFinex should turn over records, not the Supreme Court.
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Are the pixie fairies sprinkling gold dust on bitcoin’s market again? By the looks of things, you might think so.
Like in the bubble days of 2017, the price of bitcoin is headed ever upward. On November 18, 2020, it surpassed $18,000 — a number not seen since December 2017 when bitcoin, at its all-time peak, scratched $20,000.
Of course, the market crashed spectacularly the following year, and retailers lost their shirts. But here we are once again, trying to unravel the mysteries of bitcoin’s latest price movements.
Several factors may explain it — Tether, PayPal, and China’s crackdown on over-the-counter desks — but before we get into that, let me reiterate how critical it is for bitcoin’s price to stay at or above a certain magic number.
Bitcoin miners — those responsible for securing the bitcoin network by “mining” the next block of transactions on the blockchain — need to sell their newly minted bitcoins for real money, so they can pay their massive energy bills.
Roughly $8 million to $10 million in cash gets sucked out of the bitcoin ecosystem this way every day. So, in order for the miners — the majority of whom are in China — to turn a profit, bitcoin needs to be priced accordingly. Otherwise, if too many miners were to decide to call it quits and unplug from the network all at once, that would leave bitcoin vulnerable to attacks. The entire system, and its current $345 billion market cap, literally depends on keeping the miners happy.
Now let’s jump to May 11, an important day for bitcoin. That was the day of the “halvening,” an event hardwired into bitcoin’s code where the block reward gets slashed in half. A halvening occurs once every four years.
Before May 11, miners received 1,800 bitcoin a day in the form of block rewards, which meant they needed to cash in each bitcoin for $5,000. But after the halvening, the network would produce only 900 bitcoins per day, so miners knew they needed to sell each precious bitcoin for at least $10,000.
But trouble loomed. Just months before the halvening, the price of bitcoin went into free fall. Between February and March, when the world was first gripped by the COVID crisis, bitcoin lost half its value, dropping to a low of $3,858 on March 13 — barely enough to pay the system’s energy costs post-halvening. Miners were likely pacing, wringing their hands, wondering how they would stay in business. Who would guarantee their profits?
That is when Tether — a company that produces a dollar-pegged stablecoin of the same name — sprung into action and started issuing tethers in amounts far greater than it ever had before in its five years of existence.
Tethers, for the uninitiated, are the main source of liquidity for unbanked crypto exchanges, which account for most of bitcoin’s trading volume. Currently, there are $18 billion (notional value) worth of tethers sloshing around in the crypto markets. And nobody is quite sure what’s backing them.
Due to Tether’s lack of transparency, its failure to provide a long promised audit, and the fact that the New York Attorney General is currently probing the firm along with Tether’s sister company, crypto exchange Bitfinex, for fraud, a good guess is nothing. Tethers, many suspect, are being minted out of thin air.
(Tethers were initially promised as an IOU where one tether was supposed to represent a redeemable dollar. But that was long before the British Virgin Island-registered firm began issuing tethers in massive quantities. And no tethers, to anyone’s knowledge, have ever been redeemed—except for when Tether burned 500 million tethers in October 2018, following the seizure of $850 million from its payment processor Crypto Capital.)
According to data from Nomics, at the beginning of 2020, there were only $4.3 billion worth of tethers in circulation. That number remained stable through January and February and into March. But starting on March 18, just five days after bitcoin dipped below $5,000, the tether printer kicked in.
Tether minted 4.4 billion tethers in April 2020 — crypto’s version of an economic stimulus package. By early June, the price of bitcoin crossed $10,000. Yet the Tether printer kept printing, pushing the price of bitcoin ever skyward and giving bag holders an opportunity to cash out.
In May, June, and July 2020, Tether issued a combined total of 3 billion tethers. In August, when the price of bitcoin reached $12,000, Tether issued another 2.6 billion tethers. In September, when bitcoin slid below $10,000, Tether infused the markets with another 2.2 billion tethers, although, even that couldn’t lift bitcoin up to $12,000 again. The price just hovered in the $10,000 range.
And then in October — just after US prosecutors charged the founders of BitMEX, a Seychelles-registered, Hong Kong-based bitcoin derivatives exchange, for failing to maintain an adequate anti-money laundering program — the price of BTC started to soar. What happened?
One theory is that Tether just kept issuing tethers, billions and billions of them, and those tethers were used to buy up bitcoin. A high demand drives up the price — even if it’s fake money.
Only unlike in 2017, the effort to drive up bitcoin’s price is requiring a lot more tethers than ever before. (At the end of 2017, before the last bitcoin bubble popped, there were only $1.3 billion worth of tethers in circulation, a fraction of what there are today.)
Nicholas Weaver, a bitcoin skeptic and a researcher at the International Computer Science Institute in Berkeley, is convinced bitcoin’s latest price moves are 100% synthetic.
“The amount of tether flooding into the system is more than enough explanation for the price as it is well more than the amount needed to buy up all the newly minted bitcoin,” he told me. “If it was organic, there would at least be some significant increase in the outstanding amount of non-fraudulent stablecoins.”
What he means is, if real money was behind tether, we’d be seeing a similar demand for regulated stablecoins. But that is not the case. Only one regulated stablecoin has seen substantial growth — Circle’s USDC — but that growth is far overshadowed by Tether, and mainly a result of the growing decentralized finance (DeFi) market — a topic for another time.
Jorge Stolfi, a professor of computer science at the State University of Campinas in Brazil, who in 2016 wrote a letter to the SEC advising about the risks of a bitcoin ETF, which the SEC published, agrees.
“As long as fake money can be used to buy BTC, the price can be pumped to whatever levels to keep the miners happy,” he told me. He went on to explain in a Twitter thread that the higher the bitcoin price, the faster real money flows out of the system — assuming miners sell all their bitcoin for cash. Multiply bitcoin’s current price of $18,600 times 900, and that’s nearly $17 million a day. Investors will never get that money back, he said.
Klyith (not his real name) from Something Awful, a predecessor site to 4Chan, explains Tether this way:
“A bunch of pixies show up and start flooding the parchment market with fairy gold, driving prices to amazing new heights. But when any of the player characters try to spend the fairy gold in other towns or to pay tithes to the king, it turns into worthless rocks.
“If you denounce the pixies to the peasants or start using dispel magic to reveal that fairy gold is rocks, the price of parchments will collapse and the peasants may stop using them altogether. But if you ignore the pixies and keep the parchment economy going, you will end up with more and more worthless rocks instead of gold. The pixies can of course tell the difference between fairy gold and real gold at a glance. So they will quickly drain all the real gold from the whole township if you don’t act. What do you do?”
Still, it is hard to imagine that outside events don’t have some impact on bitcoin’s price. Two other events are being talked about right now as reasons behind bitcoin’s price gains—and they are getting a lot more media attention than Tether.
One of the biggest companies in the world is now promoting crypto, giving retail buyers the impression that bitcoin is a safe investment. After all, if bitcoin were a Ponzi or a scam, why would such a well-known, respectable company embrace it? I should add that MicroStrategy, Square, Fidelity Investment and Mexico’s third-richest person, Ricardo Salinas Pliego, are also currently shilling bitcoin on the internet.
On Oct. 21, PayPal announced a new service for its users to buy and sell crypto for cash. And on Nov. 12, the service became available to U.S. customers, who can now buy and sell bitcoin, bitcoin cash, ether, and litecoin via their PayPal wallet.
If you are a PayPal user, you have already gone through the process of proving you are who you say you are. And that removes the hassle of having to sign up with an crypto exchange, like Coinbase in the U.S., and take selfies of yourself holding up your driver’s license or passport.
Of course, there are limitations. You can’t transfer crypto into or out of your wallet, like you can on a centralized exchange. But you can pay PayPal’s 26 million merchants with crypto — although, not really, because what they receive on their end is cash. And the transaction is subject to high fees, like 2.3% for anything under $100, so what is the point? All you are doing is taking out a bet against PayPal that the price of bitcoin is going to rise.
Stolfi describes PayPal on Twitter as “a meta-casino where you can choose to use special in-house chips with a randomly variable value.”
The broader point is that PayPal makes it easy to buy crypto for people who are less likely to understand how crypto really works or know about Tether and the risk it imposes on the crypto markets. (If authorities were to arrest Tether’s operators and freeze its assets, similar to what happened to Liberty Reserve in 2013, that could lead to a huge plummet in bitcoin’s price.)
If you think Tether doesn’t have that big of an impact on bitcoin’s price, recall that Tether/Bitfinex CFO Giancarlo Devasini (going by “Merlin”) is recorded in the NYAG’s 2019 complaint as having reached out to Crypto Capital to plead for missing funds: “Please understand all this could be extremely dangerous for everybody, the entire crypto community,” said Merlin, indicating what could happen if Tether failed to exist. “BTC could tank to below 1k if we don’t act quickly.”
PayPal this month reached 85% of the volume of Binance.US, the U.S. branch of major crypto exchange Binance. Granted the volume of Binance.US is small in comparison with Binance’s main crypto exchange, but you can see where this is going.
One thought is that PayPal’s move into crypto is a “death sentence” for bitcoin, and that Tether and the exchanges who depend on tethers are working together to pump up the price of bitcoin to lure as much cash into the system as possible while the going is good.
According to news coming out of the country, China’s bitcoin miners may be encountering difficulty selling their bitcoin on over-the counter exchanges.
Since China banned crypto exchanges three years ago, OTC exchanges — where buyers and sellers go to trade directly — have become the most convenient way for the country’s citizens to on-ramp and off-ramp into and out of the crypto world. It’s also the main way bitcoin miners sell their bitcoin for yuan.
Recently, as part of a move to curtail internet gambling and contain capital outflows, Chinese authorities have been targeting OTC desks. If authorities determine that your counterpart (the person on the other end of your trade) is trying to launder illicit funds, you risk getting your bank account frozen. As a result, miners may be having to take more precautions and cash out less frequently, according to The Block (paywalled).
There is some speculation that this is making it harder for bitcoin miners to offload their bitcoins, leading to a liquidity crisis. In other words, fewer bitcoin are available to buyers, thus driving up demand similar to if hoards of bitcoin were being bought up by Tether.
But ICSI’s Weaver cautions there is no way to think rationally about bitcoin’s price. “The market is completely loony,” he said.
In a rational world, he believes shutting down OTC desks would have no effect on the price of bitcoin — if the rest of the markets were efficient and honest. OTC desks are really about miners’ paying power and Chinese who want to evade capital controls by trading cash for bitcoin and moving that bitcoin overseas, he said. He added that he could envision China’s crackdown on OTC desks driving up the price of bitcoin if it resulted in fewer OTC purchasers selling their bitcoin on banked exchanges. “But really, that doesn’t make sense either,” he said. “How many banked exchanges are left?”
Meanwhile, Tether keeps up the good work.
Updated on Nov. 21 to mention that nobody has ever redeemed their tethers, meaning there is no record of anyone having sent their USDT back to Tether and received a bank wire for cash.
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The price of bitcoin (BTC) is organically decided by traders—big ones, and only a few of them.
In the morning of May 17, the price of bitcoin did a nosedive, dropping from around $7,726 to $6,777 in about 20 minutes. The plunge was due to the actions of a single large trader (a “whale”) putting up 5,000 BTC (worth about $40 million) on crypto exchange Bitstamp.
The massive liquidation wiped out $250 million worth of long positions on BitMEX, a bitcoin derivatives exchange based in Hong Kong. (The BTC price it used bottomed at $6,469.15.) This, in turn, caused bitcoin’s price to plummet on other exchanges.
It’s hard not to view this as intentional price manipulation.
BitMEX relies on two exchanges—Bitstamp and Coinbase Pro—equally weighted, for its Bitcoin-US dollar price index. Bitstamp and Coinbase both have low trading volumes, which makes them particularly vulnerable to price manipulations. It is like rolling a bowling ball down an alley and there are only two pins. You just have to aim for one.
Dovey Wan, partner at crypto asset investment fund Primitive Ventures, was the first to spot the dump on Bitstamp. She tweeted, “As NO ONE will simply keep 5000 BTC on exchange, this is deliberately planned dump scheme, aka manipulation imo.”
Despite the hit, the price of bitcoin magically recovered. As of this moment, it is trading at around $7,300. Bitstamp has launched an investigation into the large trade.
Delay, delay, delay
In the wake of such blatant price manipulation, it is tough to imagine that the SEC will ever approve a bitcoin exchange-traded fund (EFT).
On May 14, the US regulator again delayed a decision to approve the Bitwise ETF proposal. The deadline for the SEC’s ruling on the VanEck bitcoin ETF is May 21, but I’m betting that will get pushed out again, too.
The New York Supreme Court has ordered Bitfinex to stop accessing Tether’s reserves for 90 days, except for normal business activities. The judge modified the New York Attorney General’s original order to ensure it does not restrict Tether’s “ordinary business activities.” Bitfinex played up the event as a “Victory! Yay, we won!” sort of thing, but the NYAG’s investigation is ongoing, and the companies still have to hand over documents.
Traders clearly don’t have much confidence in Bitfinex at the moment. Amidst the regulatory drama swirling around Bitfinex and Tether, they are moving a “scary” amount of bitcoin off the exchange.
Meanwhile, Bitfinex is pinning its hopes on its new LEO token. Paolo Ardoino, the company’s CTO, tweeted that Bitfinex raised $1 billion worth of tethers—not actual dollars, mind you, but tethers—in a private sale of its new token LEO. Bitfinex has yet to disclose who actually bought the tokens, but I’m sure they are totally real people.
Bitfinex announced that on Monday, May 20, it will begin trading LEO in pairs with BTC, USD, USDT, EOS, and ETH. It will be interesting to see if traders actually buy the token. US citizens are not allowed to trade LEO.
After freezing deposits and withdrawals for a week following its hack, Binance opened up withdrawals again on May 15. Traders are now free to move their funds off the exchange.
Binance is looking to create utility around its BNB token. The exchange burned all of its Ethereum-based BNB tokens and replaced them with BEP2 tokens—the native token of Binance Chain. The cold wallet address is here.
Cryptopia, Poloniex, Coinbase
New Zealand crypto exchange Cryptopia is undergoing a liquidation after it experienced two security breaches in January, where is lost 9.4% of all its assets. Its customers are understandably pissed and outraged.
After the breach, the exchange was closed from January until March 4, when it relaunched in a read-only format. Ten days later, traders woke up to a message on the exchange’s website that read, “Don’t Panic! We are currently in maintenance. Thank you for your patience, and we apologize for the inconvenience.” Cryptopia closed permanently on May 15. Grant Thornton NZ, the company handling the liquidation, expects the process will take months.
In the US, regulatory uncertainty continues to plague exchanges. Boston-based Poloniex, which Circle acquired last year, says it will disable US markets for nine tokens (ARDR, BCN, DCR, GAME, GAS, LSK, NXT, OMNI, and REP). “It is not possible to be certain whether US regulators will consider these assets to be securities,” the exchange says.
Meanwhile, Coinbase is using the $300 million it raised in October to gobble up other companies. The San Francisco-based exchange is in talks to buy Hong Kong-based Xapo for $50 million. Xapo’s coveted product is a network of underground bitcoin cold storage vaults. The firm is rumored to have $5.5 billion worth of bitcoin tucked away in bunkers across five continents.
Elsewhere in Cryptoland
John McAfee has disappeared. “He was last seen leaving a prominent crypto person’s home via boat. He is separated from his wife at the moment. Sources are claiming that he is in federal custody,” says The Block founder Mike Dudas.
McAfee’s twitter account is now being operated by staff, who later denied he was in custody, posting pics of McAfee with his wife in their “new” backyard.
Decrypt’s Ben Munster wrote a hysterical piece on Dudas, who has a habit of apologizing post tweet. “He tweets like Elmer Fudd shoots his shotgun; from the hip, and nearly always in the foot.” The story describes Dudas as a real person with human foibles.
Bakkt says it’s moving forward with plans to launch a physically settled bitcoin futures product in July. The company does not have CFTC approval yet—instead, it plans to self-certify, after which time, the CFTC will have 10 days to yea or nay the offering.
Both CME and CBoe self-certified their bitcoin futures products as well. The difference is this: they offer cash equivalents to bitcoin upon a contract’s expiration. Bakkt wants to deliver actual bitcoin, which may give the CFTC pause.
The SEC has fined Alex Tapscott, co-author of the book “Blockchain Revolution,” and his investment firm NextBlock, $25,000 over securities violations. (Here is the order.) And the Ontario Securities Commission fined him $1 million.
In 2017, NextBlock raised $20 million to invest in blockchain and crypto companies. In raising the money, Tapscott falsely touted four blockchain bigwigs as advisors in slide decks. After being called out by then-Forbes writer Laura Shin, the company returned investors’ money. But the damage was done, and the SEC went after them anyway.
Tim Swanson pointed out that the the Stellar network went down for about two hours, and only those who run validator nodes noticed. Apparently, nobody actually cares about or uses the Stellar network.
According to a report by blockchain analysis startup Chainalysis, 376 Individuals own one third of all ether (ETH). Based on a breakdown of the Ethereum initial coin offering, which I wrote for The Block earlier this year, this comes as no surprise.
Robert-Jan den Haan, who has been researching Bitfinex and Tether since way back when, did a podcast interview with The Block on “What the heck is happening with Bitfinex.” If you are Bitfinex-obsessed like I am, it is worth listening to.
Apparently, kicking back at regulators is super costly and something you may want to consider before you launch a token that doesn’t have an actual use case. SEC negotiations have cost Kik $5 million, as the media startup tries to defend its KIN token.
# # #
We made it to the Quadriga hearing alive. That was all I could think of when my friend and I stumbled into the Nova Scotia Supreme Courthouse on March 5, somewhat hungover, but all in one piece.
The insolvency of Quadriga, the biggest crypto exchange in Canada, is a true tale of intrigue. As a journalist, I could not get enough. My distraction was such that good sense and attention to life’s smaller details often went out the window.
A few weeks ago, Kyle Gibson, my equally Quadriga-obsessed comrade, and I thought it a great idea to drive to from our hometown of Boston to Halifax to witness the hearing firsthand. Flights to Halifax are expensive and involve lots of stops. Why not drive?
We talked about it all week—what food to bring in the car, who would be at the trial, and how many days we would stay in Canada.
I had been away all week in Los Angeles. On Sunday, March 3, I flew into Boston on a redeye—because who needs sleep? We set off that afternoon in my 2001 Honda with just enough time to make a quick stop at the liquor store.
Saddled up with beer, wine and a few bags of trail mix, we headed north. That night, we found ourselves winding through the dark backroads of Maine. Other than intermittent signs warning of us of moose, we were surrounded by scant evidence of civilization.
After crossing the border into Canada, we drove on to Saint John, New Brunswick, and stopped at a hotel. We’d made good progress—400 miles down and only 300 miles to go—and we were immensely proud of ourselves. We drank a few beers, got stoned, and promptly fell asleep.
In the morning we awoke to the sound of snow plows. “Kyle, did you check the weather forecast,” I asked, peering sleepily out the window at my snow-covered car in the parking lot below. Snow was blowing and visibility was such that you could barely see across the street.
“I’ll go clean off the car,” Kyle said, putting on his boots and jacket. We were used to rough Boston winters, but had we read the local weather reports, we would have learned that this was a serious winter storm even by Canadian standards.
A documentary filmmaker whom I was supposed to meet in Halifax sent an email. “Are you going to make it?” she wrote. “I saw all the flights in Boston were cancelled.” I wrote her back, “We are diving, so we’re fine. See you at the hearing!”
By mid-afternoon, the storm had eased, and we were on our way again. The roads were not well plowed. And the landscape looked eerily dystopian with snow covered conifers and windmills scattered in white fields of nothingness. As we drove, we noted a few 18-wheelers that had gone off the road. They looked like crippled mastodons. We thought little of it, other then, wonder what happened to them? And kept driving.
A few hours later, I was dozing in the passenger seat when I heard Kyle go, “Uh, oh, uh oh.” The car was slipping from one side of the road to the other. Like hapless observers, we watched as everything happened in slow motion. Eventually, the car went completely off the road and into the median, where it came to a muffled stop in several feet of snow.
“I’m sorry. I’m sorry,” Kyle said, shaking his head and hitting his hands against the steering wheel. “We’re fine,” I said, trying to ease his guilt. “Everything is fine.”
We were fortunate in that the roads were mostly empty, which meant there were no cars to hit us while we were swerving. But this was also a problem. Who was going to find us? I thought of the Stephen King novel “Misery,” where the writer goes off the road in a storm and gets rescued by an insane person.
Moments later, a Canadian policeman pulled up out of nowhere, and bounded out of his car. He had a bald head and big white teeth, and a gun slung low around his waist. He cheerfully told us he had been out arresting people all day when he spotted our car poking out of the snow. He wanted to check if we were okay. “Arresting people?” I said. What people was he talking about? There was virtually nothing around us.
With a big smile, he explained that only bad people come out in weather like this. He promptly called a tow truck, and within 30 minutes, we were back on the road again.
Kyle and I laughed at our little mishap, and Kyle insisted on getting behind the wheel again. “Good for you,” I said. “Back in the saddle!” Our progress continued, a little slower this time, but we were totally fine.
Also, we were armed with a new plan. If the car started skidding again, instead of breaking, we would accelerate and steer out of the situation. “That’s what you are supposed to do,” I explained. “Okay,” said Kyle. “That’s what we’ll do then.”
By the time we entered Nova Scotia, temps were warmer and the roads were free of snow. I was behind the wheel going 60 mph. But it was dark, and we had no idea we were driving on black ice.
Just like that, the car spun out of control again, but this time, the road was filled with 18 wheelers. We slid wildly back and forth across the freeway, before a 180-degree spin threw our backend into a snowbank and left us pointing into oncoming traffic. My attempts to accelerate and steer out of the situation had proven absolutely worthless.
“Jesus Christ,” I said, realizing for the first time our lives were in danger. “It’s okay!,” said Kyle, who leapt out of the car and began tossing snow out from around the tires. I jumped out, too, imagining it only a matter of time before another car hit the same patch of black ice and slammed into us. We were going to die.
A woman in a Honda CRV pulled up ahead of us and got out of her car. She was wearing yoga pants. “Are you okay?” she asked with the same cheerfulness as the police officer we had run into earlier. “We’re fine,” I said, explaining to her that we were from Boston.
“Are those winter tires or all-season?,” she asked looking at my car. All season, I told her, which is fine because all season means all seasons—and winter is a season.
She offered to call a tow, but we declined. “He’s going to dig us out,” I said pointing to Kyle who was kicking up snow. “Okay,” she said, getting back into her SUV. “I’m going to pick up my son, but if you’re still here on the way back, I’ll stop again.” As she got ready to leave, she stuck her head out the window and shouted, “Welcome to Canada!”
By then, Kyle had flung most of the snow out from around the tires. We hopped back in the car, and after lurching backward and forward a few times, managed to propel the car back onto the frozen highway and do a quick u-turn (with the front wheels still spinning on the ice) to face the right direction.
Terrified, we drove 25 mph with our hazard lights on the rest of the way to our Airbnb. When we got there, we dragged all our stuff upstairs and proceeded to drink copiously. Before heading to bed, I looked at Kyle, and said, “Welcome to Canada.”
Quadriga was granted a 45-day stay from its creditor protection deadline, and the judge gave a thumbs up, albeit reluctantly, to the appointment of a chief restructuring officer (CRO).
Canada’s largest crypto exchange was granted creditor protection on February 5, after its CEO died, leaving the company belly up. Now, a growing team of professionals are working to to track down the exchange’s fund.
In front of Nova Scotia Supreme Court Justice Michael Wood on Tuesday, sat eight or nine lawyers and representatives of court-appointed monitor Ernst and Young (EY). Some had to fly in from out of town to attend the hearing. Looking at the group, you easily grasp how Quadriga’s Companies’ Creditors Arrangement Act (CCAA) has already gone through $410,000 CAD ($307,000 USD) in professional fees.
Wood asked what would happen if the stay was not extended. “I think you would have a free for all,” said Maurice Chaisson, Quadriga’s lawyer, who is with law firm Stewart Mckelvey. Chaisson described a situation where creditors from different jurisdictions would begin filing lawsuits willy nilly. Ultimately, Wood granted the stay, telling the court, he felt Quadriga was working in good faith.
When it came to appointing a CRO—a person who would relieve Jennifer Robertson, the widow of Quadriga’s dead CEO, of some of her duties—the judge was not so easily swayed. Robertson and her stepfather Tom Beazley are the only two remaining directors of the company, after a third director, Jack Martel stepped down.
“This is another cost, another burden,” Wood said. Chaisson argued that the CRO would bring value to the CCAA process, especially if Quadriga were to be sold down the line or if “the cryptocurrency search turned out to be highly successful.” (The most recent monitor’s report identified six bitcoin cold wallets that had all been emptied.) “I think the CRO, in that circumstance, would have a useful role to play,” he said.
Chaisson was not the only one to mention the possibility of selling the platform in the future. Speaking on behalf of EY, Elizabeth Pillon, a lawyer with Stikeman Elliott, said, “at this stage, We are still in the data recovery, the asset recovery mode. This might move next into the platform monetization.” She was also in support of a CRO.
Lawyers from Miller Thomson and Cox & Palmer, the law firms representing the Quadriga users were concerned with assembling a committee to represent the creditors. “We are in a bit of a bind,” Gavin MacDonald, a partner at Cox & Palmer told the court. The official committee is not yet formed. We do not have a body from whom we can receive instructions.”
Wood emphasized he did not think the term CRO was appropriate. He described the CCAA process as a search for funds, not the restructuring of a company. In a compromise, he agreed to the appointment as long as the CRO would work at the direction of the monitor to ensure there would be no duplication of work and to keep costs to a minimum. (As a note, nobody has yet said what the CRO’s hourly fee is.)
The judge also granted an order allowing the monitor to gain access to trading platform data stored in the cloud. Quadriga’s CEO Gerald Cotten kept all of the platform on Amazon Web Servers (AWS), but he kept the AWS account in his name — not the company’s name. The data is important to verifying the claims of the creditors and determining what happened to the business prior to Cotten’s death.
Wood also deferred an order on repaying Robertson the $300,000 CAD ($225,000 USD) that she put up to kick off the CCAA process.
The next hearing is scheduled for April 18 at 9:30 a.m.
Ernst and Young (EY), the court-appointed monitor in Quadriga’s Companies’ Creditor Arrangement Act (CCAA), has filed its third report in Nova Scotia Supreme Court.
The defunct crypto exchange was holding $250 million CAD ($190 million USD) in crypto and fiat at the time it went bust. EY has been trying to track down any recoverable funds—and it’s not finding much.
The majority of the recoverable money will likely come from Quadriga’s third-party payment processors. The monitor has written to 10 known payment processors requesting they hand over any funds they are holding on behalf of Quadriga. (Previously, EY identified nine payment processors. Now it has added one more, though it does not reveal the name.) Here is the grim news: since its last report filed on February 20, EY has only recovered an additional $5,000 CAD ($3,800 USD) from the payment processors.
This is in addition to the $30 million CAD ($23 million USD) EY has already recovered from the two payment processors Billerfy/Costodian and 1009926 B.C. Ltd.
More money is out there, but getting at it may be tough. As I wrote earlier, WB21 is sitting on $12 million CAD ($9 million USD), which it is refusing to relinquish. EY notes that “further relief from the court may be necessary to secure funds and records from certain of the third party processors.”
So negligent was Quadriga in its bookkeeping that it appears to have lost track of some of its money altogether. EY located a Quadriga bank account at the Canadian credit union containing $245,000 CAD ($184,000 USD). The account had been frozen since 2017.
EY also reached out to 14 other crypto exchanges looking for accounts that may have been opened by Quadriga or its dead CEO Gerald Cotten. EY did not name any of the exchanges, but four replied. One of them was holding a small amount of crypto on behalf of Quadriga, which it has handed over to EY.
I don’t know this for sure, but it is possible the exchange that returned the funds may have been Kraken.
[Update: I was wrong. Kraken CEO Jesse Powell says, “Nothing recovered from Kraken. So far, we have not discovered any accounts/funds believed to belong to Quadriga.”]
Two thirds of the customer funds ($180 million CAD or $136 million USD) that Quadriga held at the time of its collapse were said have been in the form of crypto located in cold, or offline, wallets that only the exchange’s dead CEO had access to. However, it is looking more and more like those funds may have never existed.
EY identified six cold wallet addresses that Quadriga used to store bitcoin in the past. Other than the sixth wallet, there have been no deposits into the identified bitcoin cold wallets since April 2018, except for the 104 bitcoin inadvertently transferred to one of them from Quadriga’s hot wallet on February 6, 2019.
Post April 2018, the sixth wallet appears to have been used to receive bitcoin from another crypto exchange account and subsequently transfer the bitcoin to the Quadriga hot wallet. The sixth wallet is currently empty. The last transaction from the sixth wallet was initiated on December 3, 2018, days before Cotten died.
The monitor also identified three other potential Quadriga cold wallet addresses used to store cryptocurrency, but provided no detail.
Quadriga apparently created 14 fake accounts on its own exchange for trading fake funds. Deposits into some of the accounts “may have been artificially created and subsequently used for trading” on the platform, the report said.
A few other items in the monitor’s report caught my attention.
Quadriga’s platform data is stored in the cloud on Amazon Web Services (AWS). But because the account was in Cotten’s personal name and not the company’s, EY is seeking a court order to authorize access. Here is where that gets weird: EY notes that there is possibly another AWS account in the name of Jose Reyes, the principal of Billerfy. Why would a payment processor need access to Quadriga’s transaction data?
Also buried in the monitor’s report are signs EY may be getting frustrated in its dealings with Robertson and her stepfather Tom Beazley. They are the only two directors left at Quadriga. A third director, Jack Martel, resigned last month.
Recall that in her second affidavit, Robertson sought the appointment of a chief restructuring officer (CRO) for Quadriga. EY states that it “continues to see some benefit” of having someone independent of Robertson and Beazley making decisions at Quadriga.
The wording is careful, but the report goes on to say that in order for EY’s investigation “to proceed appropriately, without any conflict or appearance of any conflict,” EY needs to communicate with Quadriga “in an appropriate manner and at an appropriate time.”
Finally, less than one month in, the cost of Quadriga’s CCAA procedures now sits at $410,000 CAD ($309,000 USD).
A “bitcoin friendly” payment processor with a reputation for accepting bank wires and not actually processing them, is allegedly sitting on $12 million CAD ($9 million USD) of Quadriga funds.
WB21 is not showing any sign of wanting to hand over those funds either. That has some Quadriga creditors worried that more of their money has vaporized.
When Quadriga, the largest crypto exchange in Canada, went belly up earlier this year, it owed its customers $250 million CAD ($190 million USD). Two thirds of those funds are in the form of cryptocurrency stuck in cold wallets that only the company’s dead CEO Gerald Cotten held the keys to.
Meanwhile, Ernst & Young, the court-appointed monitor in Quadriga’s Companies’ Creditors Arrangement Act, is trying to round up any funds that remain. EY has contacted nine third-party payment processors that may be holding money on behalf of Quadriga. Two of them, Billerfy/Costodian and 1009926 BC LTD, are in the process of signing over $30 million CAD ($23 million USD) to EY.
But according to an affidavit filed by Cotten’s widow Jennifer Robertson on January 31, WB21 has another $9 million CAD and $2.4 million USD “but is refusing to to release the funds or respond to communications from Quadriga.”
After this story was published, Amish Patel, WB21’s global head of litigation, told me in an email that the balances stated by Robertson “are not confirmed,” and that the account is “under investigation.” Patel also accused me of defamation and threatened me with legal action if I did not make several updates to this story.
So, who is WB21?
WB21 stands for “web bank 21st century.” Launched in Switzerland in late 2015, the company touts itself as a virtual bank that lets you “streamline” opening up a bank account from 180 countries. But it is really a payment processor with a shady past that Quadriga got involved with—another shady business partner, what are the odds?
In June 2016, WB21 announced that it was accepting bitcoin deposits. Send in your bitcoin, and WB21 will credit your account in fiat—though it relies on payment service BitPay to convert the bitcoin to fiat. “The funds are instantly available on the account and can be sent out by wire transfers or spent with a WB21 debit card,” WB21 says.
The startup went on to launch a PR campaign that consisted of mainly, well, making stuff up. After 10 months of doing business, WB21 claimed it had 1 million customers and that it had sent cross-border payments totaling more than $5.2 billion.
Those number don’t really add up, especially when you consider it took Transferwise, one of the biggest London-based fintech companies, four years to get a comparable $4.5 billion in transfer money. Also, as Gruenderszene points out, in September 2016, WB21’s official app had only 100 downloads on Google’s Play Store.
In defense, WB21 CEO Michael Gastauer told Gruenderszene that WB21 doesn’t rely on its mobile app. A few hours after the conversation, Gruenderszene noted that the app disappeared from the store.
Boasting a $2.2 billion valuation, WB21 also claimed that Gastauer sold Apax Group, a previous payments business, for $480 million, and that WB21 turned down a $50 million funding round after Gastauer invested $24 million of his own money. Kadhim Shubber at the Financial Times did some digging and found no evidence of Apax being sold.
Yet Forbes (wait, did Forbes pull that story? Try this link), The Huffington Post and Business Insider all wrote about WB21’s incredible success. Though to its credit, Business Insider later added it was “unable to independently verify these numbers.”
In late 2017, WB21 even got itself in the Wall Street Journal after announcing that it was moving its European head office from London to Berlin after the Brexit vote.
How did WB21, a company spewing so many questionable facts and figures, manage to get all this media coverage? Like another company that we’ve been hearing about lately, the payment processor leveraged the power of social media. WB21 has a Twitter account with 65,000, mostly fake, followers.
Gastauer, a man in his mid-40s who hails from Germany, also appears in an impressive Youtube video at a hitherto unheard of “Global Banking Award 2018” event in Frankfurt, where he apparently won the award. Dressed in a tux, with a fog machine in the background, he is seen in the video giving a speech on the future of banking. “How do you come up with an idea like this?,” he says in the video speaking of his business successes. “Do you wake up one morning thinking you want to revolutionize an 80 trillion dollar industry?”
But the truth has a way of catching up. In October 2018, the U.S. Securities and Exchange Commission revealed a civil lawsuit accusing Gastauer of aiding and abetting the fraudulent sale of $165 million USD worth of shares in microcap stocks.
“In reality, WB21 Group was not a registered bank, and Gastauer’s ‘solution’ was actually a circumvention of banking regulations designed to disguise his clients’ [ . . .] identities,” the SEC said.
As it turns out, this was not Gastauer’s first run in with authorities. Writing again for the Financial Times, Shubber notes:
“In 2010, [Gastauer] was given an 18-month suspended sentence by a court in Switzerland for commercial fraud and counterfeiting. Around the same time, a British gambling company sued him in London for allegedly taking millions of pounds from it. He had set up a payments processor, the company claimed, but kept the payments.”
Shubber goes on to comment:
“The story of Mr Gastauer is not just about alleged wrongdoing in the financial markets; it shows how an accused fraudster might sell himself and his fantastical story using the modern tools of the internet age.”
A Google search finds the Internet littered with WB21 customers claiming the company stole their money.
In August 2018, “bitcoinjack” wrote of WB21 on Reddit: “They will accept incoming funds and credit your account but you will never be able to get it out. They will lie about outgoing payments until you give up.”
Consumer review website Trustpilot has a long list of people complaining that WB21 has taken their money and gone silent.
Quadriga customers began having trouble with WB21 about a year ago. Several complained on Reddit that their bank wires were either not coming through or delayed. In response, Quadriga covered for WB21, blaming the delays on a bank in Poland that it was using:
“We used WB21 for about a week, but the vast majority of delays related to wires comes from the fact that the intermediary bank that handled CAD wires for the Polish bank cut them off due to the association with Bitcoin. We had to reissue all of these from other payment processors, all manually, which has caused delays.”
(This story was updated on March 5, 2019, to include a statement from WB21.)
The 104 bitcoin (worth $468,675 CAD) that Canadian crypto exchange QuadrigaCX “inadvertently” sent to its dead CEO’s cold wallets on February 6—a day after the company filed for creditor protection—was due to a “platform setting error.”
That and other news was included in Ernst & Young’s (EY’s) second report, released on February 20. EY is the court-appointed monitor in Quadriga’s Companies’ Creditors Arrangement Act (CCAA). At least now we know that the bitcoin wasn’t sent by somebody clumsily pushing a wrong button. Still, that single automation wiped out more than half of Quadriga’s hot wallet funds.
The rest of the hot wallet funds, worth $434,068 CAD, are now safe from Quadriga. On February 14, EY transferred the coins into cold wallets that it controls. The funds include 51 bitcoin, 33 bitcoin cash, 2,032 bitcoin gold, 822 litecoin, and 951 ether. But all of this is a mere drop in the bucket compared to the $250 million CAD owed to Quadriga’s 115,000 creditors—most of which is presumably lost forever.
Also in the report: Recall that Quadriga elected a new board following the death of its CEO Gerald Cotten on December 9. The new directors included Cotten’s widow Jennifer Robertson, her stepfather Thomas Beazley and a man named Jack Martel, who nobody knew too much about. Apparently, Martel stepped down on February 11.
And more money is needed to fund Quadriga’s CCAA process. EY and Quadriga’s law firm Stewart McKelvey have already burned through the nearly $300,000 CAD Robertson put up to initiate the process in January.
Additional money for the CCAA process—and ultimately for Quadriga’s creditors—will come from Quadriga’s payment processors, once they hand the money over to EY in the form of bank drafts. EY also has to get a bank to agree to accept the bank drafts, which is not an easy thing to do. Most banks want nothing to do with Quadriga’s money.
Costodian, a company created by payment processor Billerfy specifically to manage Quadriga’s funds, is holding $26 million CAD in bank drafts. After the Canadian Imperial Bank of Commerce froze those funds in January 2018, the Ontario Superior Court of Justice took control of that money, and in December, released the funds back to Costodian in the form of bank drafts issued by the Bank of Montreal (BOM).
According to EY, Costodian has so far handed over four BOM bank drafts totaling $20 million CAD. But it is waiting for a court order before releasing two more bank drafts.
One of those is for roughly $70,000 USD. These are personal funds belonging to Costodian’s principal Jose Reyes. EY has determined that those funds do indeed belong to Reyes, but he still needs to sign the check over to EY for disbursement.
The other BOM bank draft in question is for $5 million CAD. Of that amount, Custodian claims that $61,000 CAD also represent Reyes’ personal funds, and that $778,000 CAD is due to Custodian for unpaid processing fees.
Quadriga creditors don’t agree that Costodian should be paid these fees. To resolve the issue, EY notes that “a separate dispute resolution mechanism will be required during the course of these CCAA proceedings.”
In addition, Stewart McKelvey is holding 1,004 in bulk drafts totaling $6 million. These drafts were issued to 1009926 BC LTD, a payment processor run by a former Quadriga contractor. The problem is 1009926 BC LTD was dissolved in January 2018 for failure to file an annual report, so EY is looking to potentially restore the company.
EY is currently negotiating with the Royal Bank of Canada (RBC), where it hopes to deposit most of these checks. RBC is proceeding with caution, however.
According to EY, “a stranger to the CCAA proceedings, RBC has expressed hesitation to accept and disburse the BMO drafts, bulk drafts and future amounts, without direction and relief from the court.”
A hearing is scheduled for February 22 to give direction to the banks and to the third-party payment processors, so the funds can be freed up.
After that, another hearing to extend the stay of the CCAA proceedings is scheduled for March 5 in Halifax, where angry Quadriga creditors are looking to stage a protest. The protesters are urging the court to discontinue the CCAA proceedings and launch a criminal probe into Quadriga.
Update (February 21, 12:30 ET): I made some changes to clarify the amount of personal funds that Custodian principal Jose Reyes claims belong to him in two BOM bank drafts.
QuadrigaCX creditors now have a legal team to represent them in the crypto exchange’s Companies’ Creditors Arrangement Act (CCAA) proceedings.
Nova Scotia Supreme Court Judge Michael Wood appointed law firms Miller Thomson and Cox & Palmer to represent the more than 115,000 Quadriga creditors, who are owed a total of $250 million CAD. Most of that money— $180.5 million CAD—is stuck in cold wallets after the company’s CEO died in India. He was the only one who held the keys.
To offer some background, a CCAA is a federal law in Canada that gives insolvent companies, such as Quadriga, time to restructure themselves and come up with a so-called plan of arrangement. It is not quite like a bankruptcy. A company can still operate and pay its employees during the proceedings.
When Quadriga was granted creditor protection on February 5, the judge issued a 30-day stay, to keep any lawsuits at bay. The court also appointed Ernst & Young as a monitor to oversee Quadriga’s business and help Quadriga put together its plan of arrangement.
If that plan is accepted by the court and the creditors, Quadriga users will likely be able to recoup some of their losses more expediently. If the plan is rejected, the stay will be lifted, and creditors can forge ahead with their lawsuits.
In the case of Quadriga, because there are so many creditors, the court felt it appropriate to find them legal representation. Three teams of lawyer vied for that position on February 12. Justice Wood reviewed their credentials and made his final decision today.
In his ruling, he explained that he chose Miller Thompson/Cox & Palmer because both firms have extensive insolvency experience. In the coming weeks, Cox and Palmer, which has an office in Halifax, will take the lead on the civil procedure and court appearances, while Miller Thompson, which is headquartered in Toronto, will handle “project management, communication and cryptocurrencies.”
The judge noted in his ruling that the firms’ proposal was “thought out carefully with a view to minimizing costs.” The team proposed an initial $250,000 cap on fees. They also said that they would communicate with creditors via social media, and that they would advocate for user privacy, something Quadriga users indicated was important to them.
Appointing a representative counsel and a stakeholder representative committee in complex CCAA proceedings is not unusual, the judge said. Such measures are usually undertaken when the group of stakeholders is large and without representation, many of them would struggle to effectively participate in the CCAA proceedings.
He also agreed with Quadriga’s lawyer Maurice Chiasson and others that assembling a committee of users to represent the broader group of creditors was something that needed to happen quickly.
“The anecdotal evidence at the hearing is that many people are extremely upset, angry and concerned about dishonest and fraudulent activity,” he wrote. “There are reports of death threats being made to people associated with the applicants. All parties agree that this user group needs representation as soon as possible.”
Quadriga’s stay of proceedings expires on March 7. A hearing is planned for March 5 to update the court on what progress Quadriga and its monitor Ernst & Young have made.
Update: According to an email Ernst & Young sent to creditors, Quadriga will, in fact, seek to extend the stay of proceedings. The monitor writes that “the stay of proceedings may be extended for any period that the Court deems appropriate. There is no standard timeframe for the completion of proceedings under the CCAA.”
The news keeps getting worse for QuadrigaCX creditors. The Canadian crypto exchange has apparently jettisoned another $468,675 CAD worth of bitcoin into deep space.
On Feb. 6, literally, one day after Quadriga applied for creditor protection, the exchange “inadvertently” sent 104 BTC to its dead CEO’s cold wallet, according to an initial report released by court-appointed monitor Ernst & Young.
When Quadriga CEO Gerald Cotten died in India on Dec. 9, he carried into the afterlife with him the keys to the exchange’s cold wallets, where $180 million CAD—now $180.5 million CAD—worth of crypto is stored. Unless Cotten springs from the grave, any crypto in those wallets is as good as gone.
You have to scratch your head till it bleeds on that one. Why was anyone at Quadriga allowed to touch those coins after the company applied for creditor protection? EY is now moving to safeguard the remaining crypto, a stash now down to 51 bitcoin, 33 bitcoin cash, 2,032 bitcoin gold, 822 litecoin, and 951 ether, worth a current value of $434,068 CAD. Basically, more than half the money in the hot wallets is now gone.
(To get the full details on the history of the exchange, read my article How the hell did we get here? A timeline of Quadriga events.)
EY is also working to retrieve about $30 million worth of cash from nine Quadriga payment processors. So far, EY has yet to collect a dime, and one of the processors is stubbornly insisting that “it has the right to continue to hold funds in its possession pursuant to the terms of its agreement with the Applicants.”
Which payment processor would that be then? How about WB21? According to Robertson’s affidavit filed on Jan. 31, WB21 is holding roughly $9 million CAD and $2.4 million USD of the exchange’s money. Even before EY took over, WB21 was “refusing to release the funds or respond to communications from Quadriga.”
A quick Google search reveals that WB21 has long been plagued by accusations that it is a scam. A year ago, Quadriga customers were complaining on Reddit that they were having trouble getting their wires from WB21. And it also turns out, the U.S. Securities and Exchange Commission is suing WB21’s CEO for fraud. (You can find the full SEC complaint here.)
Quadriga’s 115,000 creditors need proper representation. On Feb. 14, three legal teams appeared in court to vie for the position of representative counsel. Nova Scotia Supreme Court Judge Michael Wood said he plans to have a final decision next week.
All this legal stuff is getting expensive. So far, Robertson has put up $250,000 CAD of the $300,000 CAD she promised in her affidavit to fund the CCAA process. And the funds are being gobbled up quick. Quadriga’s lawyer Maurice Chiasson said the money will run out in two weeks, if not sooner.
After that, where will the money come from? Likely, out of whatever funds EY pulls from those nine payment processors.
Meanwhile, more funny business is starting to surface. In her sworn affidavit, Cotten’s widow stated that she had no dealings with Quadriga prior to Cotten’s death. Yet, three Quadriga creditors (archive) claim they received wires from Robertson’s real estate company, Robertson Nova Property Inc.
The wire transactions occurred in 2016 and 2017. This is interesting, given Jennifer only changed her name to Robertson in April 2017.
Did you know that if you wanted to cash out of Quadriga, you could opt to have actual boxes of cash dropped off at your door? That was an actual service Quadriga offered its customers. A few have suggested that the money may have come from bitcoin ATM machines that Quadriga operated.
Remember, Quadriga had no corporate banking. That is why, when you sold bitcoin for cash on the exchange or wired in money via one of Quadriga’s payment processors, your online wallet was credited with QuadrigaCX Bucks—not real bucks.
But who knew? I’ve been speaking to Quadriga creditors and some of them had no clue that the “CAD” they saw in their online wallets was basically Quad Bucks.
“Everyone knows CAD equals Quad bucks now, but I didn’t know that until after the implosion,” one creditor who preferred to remain anonymous told me. “I guess it was in the terms [and conditions], but it wasn’t marked Quad bucks.”
Some traders also told me that bitcoin sold for a premium on Quadriga. That meant, you could buy bitcoin on another exchange, such as Kraken, and then sell it for a profit on Quadriga. As an added incentive to move your crypto onto the exchange, Quadriga also offered free cash withdrawals, as long as you did not mind waiting two weeks or so for the money to hit your bank account. You had to pay a fee for express withdrawals.
Finally, the Globe and Mail sent its investigative reporters to India, where Cotten and his wife celebrated their honeymoon just before Cotten died. People are still wondering if his death was staged. “That Mr. Cotten did indeed die is a certainty among police and medical professionals in India, and The Globe reviewed hotel, hospital and embalming records that give no suggestion of anything abnormal,” the Globe writes.
But why was Cotten’s body taken from the hospital where he died back to the hotel where he had been staying? (According to Cotten’s death certificate, Fortis Escorts Hospital was the place of death.) Partly because of this, Simmi Mehra, who works at Mahatma Gandhi Medical College & Hospital, refused to embalm the body.
She told The Globe: “That guy [a representative from the hotel] told me the body will come from the hotel. I said: ‘Why the hotel? I’m not taking any body from the hotel, it should come from Fortis.”
The Globe and Mail report also reveals tragic details of the oft-overlooked Angel House orphanage that Cotten and Robertson sponsored. Apparently, the money they donated only paid for building materials. Several doors are still missing from the structure, including one to the toilet. And the operator of the orphanage is sinking into debt.
The orphanage appears to be yet another example of the wake of destruction that Cotten, who otherwise lived as though money were no object, carelessly left in his passing.