News: Bitmarket CEO turns up dead, Bitfinex to NYAG: ‘Yeah but no but,’ more weirdness from Tron

human-figure-outline-imprinted-on-grass-picture-id177395889It’s no fun when the money’s all gone. Two weeks after Polish crypto exchange Bitmarket shut down due to “lack of liquidity,” the lifeless body of its CEO, Tobiasz Niemir, turned up in the woods. It’s not clear if he fell in with shady characters or he put that bullet in his head all by himself.  

Here is an interview with Niemer done shortly before his death.

You remember BTC-e, the crypto exchange that was shut down in mid-2017? The U.S. is now suing the exchange and its operator Alexander Vinnik to recover penalties of $100 million imposed by FinCEN for allegedly violating the Bank Secrecy Act. Vinnik, a Russian national, is facing extradition requests from both the U.S. and Russia. (Here are the court docs.) 

Binance has been shilling its centralized BNB token. The crypto exchange regularly burns (destroys) large numbers of the token to increase the value of whatever is left. The BNB burn is “meaningless nonsense to fool suckers,” writes David Gerard. “Anyone taking Binance posts about BNB seriously as any sort of trading signal is dumb enough to trade literally any shitcoin they see, and probably deserves to.”

The hearing for Reggie Fowler, the AAF investor tied to Bitfinex’s missing $850 million, has been moved to December. (Here are the court docs.) Also, recall that he was released on $5 million bail secured by several pieces of cheap real estate and two financially responsible people. Who were his wealthy friends? A source tells me it was his ex-wife Lori Fowler and Molly Stark, the director of Spiral Volleyball, a company he owned. It pays to stay on good terms with your exes.

Bitfinex and Tether filed court docs arguing once again that they are not doing any business in New York and tether is not a security. (Here is Bitfinex counsel Stuart Hoegner’s affidavit and an accompanying memorandum of law submitted by the company’s outside counsel). It all boils down to “yeah, but, no, but yeah.” We’ll hear from the judge on Monday, July 29 as to what he thinks. 

Big whoops: Swedish crypto exchange Quickbit says it has leaked the data of 300,000 customers. According to the exchange, a third-party contractor left the data unprotected while upgrading on the exchange’s servers. 

Elsewere in cryptoland 

After bidding an astounding $4.5 million in a charity auction for the privilege to have lunch with billionaire Warren Buffet, Tron CEO Justin Sun cancelled last minute, claiming a bad case of kidney stones. But come to find out Sun’s been on the lam from China since November 2018. He is living in San Francisco now, which was where the lunch was supposed to have taken place. 

Sun was, however, feeling well enough to attend the Tron after-party on July 25, even though nothing actually happened before the party, since lunch was cancelled.

According to Chia founder Bram Cohen, Sun also forgot to make a scheduled payment as part of Tron’s mid-2018 acquisition of file sharing service BitTorrent. Someone needs to explain to Bram that kidney stones can take a lot out of a person.

In other news, the IRS is sending out scary letters to bitcoin holders, reminding them that they need to report any gains in crypto trading and pay their taxes. “Taxpayers should take these letters very seriously, IRS Commissioner Chuck Rettig said. 

How did the IRS get all this info? Previously, a court ordered Coinbase to hand over the personal identifying information of customers who had transactions of $20,000 or more on the exchange between 2013 to 2015.

An MIT fellow thinks the structure of Facebook’s Libra was lifted verbatim from a paper that he and two other scholars published last year. What say you, Facebook? Are you stealing people’s ideas? It’s not like you’ve done anything like that in the past.

On the subject of Libra, one of the big selling points of the project was that it had 27 partners backing the project. But the CEO of Visa reminds us, no companies have officially joined yet. They’ve only signed non-binding letters of intent. 

Telegram is under the gun. The popular messaging service has sold $1.7 billion worth of its Gram tokens to investors. Now it needs to build a Gram wallet into Messenger by October or give all the money back — and we’re sure it doesn’t want to do that.  

Finally, Sergey Ivancheglo (aka “Come from Beyond”), the founder of IOTA and one of the project’s core developers, quit the IOTA Foundation. The two remaining directors are non-developers, but we’re sure they’ll handle everything just fine on their own. Nice bunch of people, really. 

 

News: NYAG calls Bitfinex out, Bitfunder founder off to jail, Roubini pissed at Bitmex

A few people asked me where I’ve been lately. I’ve been working! I recently started a full time job. I’m the editor of a website about ATM machines. I recently wrote Spanish authorities: bitcoin ATMs expose hole in AML laws” and Bitcoin ATMs: Why Vancouver doesn’t want them.” (By the way, if you are curious how criminals use bitcoin ATMs to clean money, this moneylaunder.com article does a nice job of explaining the process.) 

I also write a newsletter on money. You should sign up for it

On to the news — 

Much ado about exchanges

Crypto exchange Bitfinex is doing a lot more business in New York than it’s led us all to believe. The NYAG’s recent court filings — a Memorandum of Law and an affirmation from assistant Attorney General Brian Whitehurst, along with 28 pieces of evidence — reveal a full picture of the company’s dealings in the state.  

Why does it matter? Because his means NYAG has jurisdiction to push ahead with its investigation into Bitfinex and Tether’s ongoing shenanigans. Decrypt’s Ben Munster also points out that Bitfinex “loaned tethers to a New York trading firm.” There’s an open question as to whether the funds were ever paid back.  

Also, Bennet Tomlin had a good thread on the NYAG’s filing.

By the way, there are now nearly $3.9 billion tether sloshing around in the markets, pushing up the price of bitcoin, which briefly crested $13,000 on July 10. 

I nearly missed this bit of news from a few weeks ago: Ireland-based cryptocurrency exchange Bitsane went poof!, leaving its 246,000 users high and dry. Users began having issues withdrawing crypto from the exchange in May. And on June 17, the exchange’s website along with its twitter and facebook accounts vanished.  

Bitmarket, the second largest Polish crypto exchange, has shut down citing a loss of liquidity. Approximately 1,300 bitcoin are stuck on the exchange, and users are rightfully pissed off. They have formed a Facebook group and are planning a class-action lawsuit. The exchange was acting goofy before the shutdown. Reddit user u/OdoBanks says users were asked to change passwords and provide additional KYC for withdrawals.

Founder of bitcoin stock exchange Bitfunder will be spending 14 months behind bars for lying to the SEC about a hack that cost clients 6,000 BTC. Instead of telling his customers the truth in 2013, operator Jon Montroll misappropriated funds to hide the losses.  

Cryptocurrency exchange hacks don’t happen too often — only once every few weeks. Japan’s Bitpoint is the latest to make headlines. The exchange’s hot wallets were hacked to the tune of $32 million worth of crypto, most of which were customer funds. On Monday, the exchange found another $2.3 million missing on exchanges “that use the trading system provided by Bitpoint Japan,” according to Japan Today

(Update, July 15, 11:30 a.m. EST — previously, I indicated Bitpoint located $2.3 of the missing funds, but actually the exchange found more money missing.)

Speaking of Japan, the country’s top regulator says 110 crypto exchanges are waiting for licenses right now. Under Japanese law, crypto exchanges need to register with the Financial Services Agency to operate in the country. As of now, there are only 19 licensed exchanges in Japan. The FSA has been slow to license after the Coincheck hack

Binance burned 808,888 of its native BNB tokens — about $24 million worth. This is the eighth burn of BNB coins, which are totally not a security. The price of the remaining BNB goes up every time there is a burn. Keep in mind, until any crypto is converted to fiat, its value is completely theoretical. 

Screen Shot 2019-07-14 at 11.26.10 PMBitMEX, the Hong Kong-based bitcoin derivatives exchange, has finally released the tapes (round 1 and 2) from its “Tangle In Taipei,” a July 3 debate between Bitmex CEO Arthur Hayes and NYU professor Nouriel Roubini. The two have been going at it online.

A man is suing Gemini — the NY exchange operated by the Winklevoss twins — after $240,000 was stolen from his money market account and wired to Gemini, where it was used to to purchase crypto on the exchange.  

Due to heightened oversight on online crypto exchanges, users are increasingly asked to fork over their IDs and addresses. The shift is giving peer-to-peer exchanges, which typically don’t impose such KYC checks, a boost, according to Bloomberg

Other interesting stuff

Founders of the Tezos crypto platform object to sharing emails between them regarding the Tezos “fundraiser” because they are married. Steven Palley has the full story

New York City’s Monroe College was hit with a ransomware attack that shutdown the college’s computer systems. The attackers want the college to fork over $2 million worth of bitcoin to free up the computers.  

President Trump blasted bitcoin on Twitter. He is no fan of Facebook’s Libra either. There’s only room in this country for one currency, and that’s the almighty dollar.

The Federal Trade Commission has fined Facebook a gobsmacking $5 billion for privacy violations. It’s the biggest fine in FTC’s history. Surprise, surprise, Facebook’s stock went up on the news. 

An angry mob burned down the home of a man behind bitcoin ponzi scheme in South Africa after he admitted all the money was gone. 

Finally, police in China cracked down on a cartel of illicit bitcoin miners who stole nearly $3 million worth of electricity. A local power company tipped off authorities after they noticed a peculiar surge in power use.  

News: LEO getting pumped, Cryptopia scrambles to save its data, Poloniex says it’s stopped ignoring customers

This newsletter is reader supported. If you appreciate my work enough to buy me a beer or cup of coffee once a month, that’s all it costs to become a patron. I’m trying to pick up freelance gigs when I can, but one of the joys of writing for my own blog is I can write whatever I want, when I want. On to the news…

Bitfinex and LEO

Screen Shot 2019-05-29 at 5.43.17 PMUNIS SED LEO, the full name of Bitfinex’s shiny new utility token, is in its second week of trading. The price started at around $1, but it’s already climbed to a high of $1.52, according to CoinGecko. I’m sure the price increase is totally organic—not.

There are 1 billion LEO in circulation—660 million issued on Ethereum and 340 million issued on the EOS blockchain. 

Crypto Rank warns that 99.95% of LEO coins are owned by the top 100 holders. Also, Bitfinex still has not disclosed information about the investors. “We consider that the token can be manipulative,” Crypto Rank tweeted.

Given its $850 million shortfall, Bitfinex needs to pull in more money. It recently entered the initial exchange offering (IEO) business. IEOs are similar to initial coin offerings (ICOs), except that instead of handing you money directly to the token project, you give it to the exchange, which acts as a middleman and handles all of the due diligence.

Tethers

As the price of bitcoin goes up—at this moment, it is around $8,730—the number of tethers in circulation is going up, too. There are now more than $3 billion worth of tethers sloshing around in the crypto markets, pushing up the price of bitcoin.

Whale Alert says $25 million worth of tethers were taken out of the supply and put into the Tether Treasury. Kara Haas tells me, don’t worry, $150 million Ethereum-based tethers were just issued, and they more than make up for the difference.

Omni tethers, Ethereum tethers, Tron tethers. Tethers appear to be constantly coming and going, bouncing from one chain to another. It gets confusing. But maybe that is the point—to keep us confused. And to add to the jumble, tethers are now executing on EOS.

In the next couple of weeks, Tether is also planning to issue tethers on Blockstream’s federated sidechain Liquid. And later this year, the Lightning Network.

I updated my recent tether story to note that if you want to redeem your tethers via Tether, there is a minimum redemption of $100,000 worth—small detail. Also, I still haven’t found anyone who has actually redeemed their tethers.

Cryptopia’s data—held to ransom?

Cryptopia filed for liquidation on May 14. Liquidator Grant Thornton New Zealand is now scrambling to save the exchange’s data, held on servers hosted by PhoenixNAP in Arizona. The tech services wants $1.9 million to hand over the data.

Grant Thornton is worried Phoenix will erase the SQL database containing critical details of who owned what on the exchange. It filed for Chapter 15 and provisional relief in the Bankruptcy Court of the Southern District of New York. (Here is the motion.)

According to the motion, Cryptopia paid Phoenix for services through April. But when it offered to pay for May, Phoenix ended the service contract and “sought to extract” $1.9 million from the exchange. Grant Thornton says only $137,000 was due for the month of May. Phoenix also denied the liquidators access to the data.

On May 24, the court granted motion. (Here is the order.) Phoenix has to preserve the data for now, but Cryptopia has to pay $274,408 for May and June as security in the temporary restraining order. 

Meanwhile, Cryptopia liquidators’ first report is out. The New Zealand exchange owes 69 unsecured creditors $1.37 million (these are just the ones who have put in claims thus far) and secured creditors over $912,000, with an expected deficit of $1.63 million.

Turns out January 14, the day Cryptopia suffered its fatal hack was the exact same day Quadriga announced the death of its CEO Gerald Cotten, who, uh, had been dead since December 9. The two defunct exchanges had a few other things in common, which I outline in my first story for Decrypt.

Poloniex 

Living in Cambridge, I found it strange that nobody in the local blockchain community knew anyone who worked at Poloniex, based in Somerville, the next town over. I was told Polo staff kept a low profile for security reasons. But I also wonder if they were trying to avoid pissed off customers, whose inquiries they ignored for months.

When Circle acquired Polo in February 2018, it inherited 140,000 support tickets. Now, more than a year later, Circle says it’s all caught up. Polo’s customer support has been “completely transformed” and 95% of inquiries are now handled within 12 hours.

Coinbase

Yet another executive has left Coinbase, president and COO Asiff Hirji. This is the third C-level executive to leave the San Francisco crypto exchange this year.

Recently, Coinbase said it was offering a crypto debit card in the UK—a Visa with a direct link to your Coinbase wallet that lets you spend crypto anywhere Visa is accepted. Financial Time’s Izabella Kaminska thinks that could open a back door for dirty money.

Coinbase plans to add margin trading. Leveraged trading lets you supersize your trading power, because you are borrowing from the exchange, but it also supersizes your risk.

It is easy to understand why Coinbase would want to get a piece of the margin trading business. BitMEX has been reeling in the profits with its bitcoin derivative products. The company’s co-founder is now a billionaire who has so much money, he is giving it away.

Binance is also talking about putting margin trading on the menu.  

Elsewhere in cryptoland 

Kik, the messaging app that raised $100 million selling its kin token in 2017, thinks decades old securities laws need revamping. It wants to create a new Howey test.

The Canadian startup launched DefendCrypto.org, a crowdfunding effort to fight the SEC. It’s contributed $5 million in crypto, including its own kin token, toward the effort.

Ted Livingston, Kik’s CEO says there was no promise kin would go up in value, like a stock. But that is not what at all what he implied during a presale pitch.

Craig Wright, the self-proclaimed inventor of bitcoin, created a hoopla when he filed registrations for the bitcoin code and Satoshi white paper. Disagreements over the significance of the registration have spilled out into his Wikipedia page. Drive-by editors even tried to change Wright’s name to “Craig Steven Fart face.”

Taotao, a new crypto exchange is launching in Japan. It is fully licensed by the Financial Services Agency, the country’s financial watchdog, and it is 40% owned by Yahoo Japan.

As long as the price of bitcoin keeps going up, that is all that matters to bitcoiners. David Gerard delves into the origin of the phrase “Number go up.”

Geoff Goldberg, well-known for his battles against the relentless XRP armies, has been mass reported for calling out the bots that run rampant on twitter. No good deed goes unpunished, apparently. Twitter has effectively silenced him for seven days.

Finally, the Associated Press has a new entry on crypto—sorry, cryptocurrency.

# # #

Related stories:
Social media startup Kik is kicking back—at the SEC
Turns out, you can make money on horse manure, and tethers are worth just that
“QuadrigaCX traders lost money on Cryptopia on the same day in January”—my first story for Decrypt

 

 

News: Kraken sets out to raise millions, Circle is cutting staff, Bitfinex scores another tiny victory in court

Crypto exchanges are struggling. Revenue growth is not what it was during the bubble of 2017, and regulators are cracking down. You can’t just list any old coin anymore without considering, “Is the SEC going to deem this a security?” And the cost of hiring lawyers, responding to subpoenas, and staying compliant is cutting into profits. So what are exchanges doing? They are laying off staff and/or trying to raise more money, while they hold out hope for the big institutional money that will come any day now.

Kraken and Bnk to the Future

Screen Shot 2019-05-24 at 12.12.57 AM

Recently, customers of Kraken got an interesting email offering a “rare, but limited opportunity.” Some folks thought the email was spam, but it was real.

Turns out, the San Francisco-based trading platform is partnering with Bnk to the Future as a way to raise funds by selling preferred shares of its stock. You can own a piece of Kraken for as little as $1,000. (In the US, you need to be an accredited investor, though.) 

The exchange hopes to rustle up $15.45 million. (Originally, it wanted to raise $10.2 million, but lifted the goal.) As of this writing, Kraken has raised $6.2 million from 942 investors. The crowdfund runs until June 20.

In December, Kraken tried to raise money at a $4 billion valuation, and it reportedly raised $100 million early this year, which it used to buy Crypto Facilities, a regulated London-based crypto derivatives exchange.  

In 2016, Bitfinex also used Bnk to the Future when it encouraged its customers to exchange their BFX tokens to shares in iFinex, the parent company of Bitfinex and Tether. BFX was the token that Bitfinex gave to its customers in compensation for funds they lost when the exchange was hacked. The exchange sold $57.39 million worth of iFinex shares in this manner, basically converting stolen funds to shares.

Bitfinex customers didn’t have much of an option. BFX tokens were dropping in value, and they wanted to get their money back.

Bitfinex/Tether and the NYAG law suit

Bitfinex joyously declared another small legal victory on May 22, when New York Supreme Court judge Joel M. Cohen granted a motion limiting the scope of the documents Bitfinex and Tether have to hand over to the New York Attorney General’s office.

The day prior, the companies had filed a motion to dismiss the case outright with three new court docs: proposed order to show cause, a memorandum in support of the motion to dismiss, and an affidavit by their general counsel Stuart Hoegner.

Lawyers for the companies argued the Bitfinex platform does not allow New Yorkers to trade (putting it outside of the NYAG’s jurisdiction), the Martin Act doesn’t apply to them (because tether is not a security or commodity, they said), and the document requests were too onerous. The NYAG has seven days to respond, and the judge scheduled a hearing for the motion to dismiss on June 29. 

According to Hoegner’s affidavit, which I read late one evening, you can’t actually redeem tethers 1:1 unless you bought them directly from Tether, which means if you got them on an exchange somewhere, too bad. You won’t be too surprised to learn then, that I can’t find a single person who claims to have either bought or redeemed tethers via Tether Ltd.

The Block got hold of a court transcript from the Bitfinex court hearing on May 16. “Tether actually did invest in instruments beyond cash and cash equivalents, including bitcoin,” a lawyer for Bitfinex told the court.

Wait, what? Bitcoin? Tether invested in bitcoin?

The entire purpose of tether is to be a stable asset that traders can use to escape market volatility. Yet, Tether is taking its reserves—money that it was supposed to keep an eye on, so that tethers always remained fully backed—and investing it in a highly volatile asset. What if bitcoin crashes? What then of the stablecoin? 

We learn something new about Tether everyday, it seems. According to CoinMarketCap, every 24 hours, the entire $3 billion supply of tethers changes hands 7.5 times, but not really, because most of that volume is fake.

The Block analyst Larry Cermak posted a graph of exchanges that trade tether, and some of the ones with the highest volume are obscure platforms nobody has heard of. “If I were to make an educated guess, at any given time, only a maximum of 15% of the total Tether volume is real,” he tweeted. In other words, it is all wash trading, i.e., trading bots simultaneously buying and selling tether to create the appearance of frenetic activity.

As far as I can tell, tether’s actual value is on par with horse manure—giving true meaning to the word “stablecoin”—just not as good for the roses. 

Circle and Poloniex

Circle, the Boston-based company that bought crypto trading platform Poloniex in February 2018, is laying off 30 people—10 percent of its workforce. The company blames the layoffs on an “increasingly restrictive regulatory climate.”

Last week, I mentioned that Poloniex geofenced nine altcoins, meaning people in the US will no longer be able to trade those coins on the exchange after May 29. Circle said  recent guidance from the SEC was a trigger for the move. I took another look and realized that one of the coins was Decred—a fork of bitcoin. Why Decred?

It’s possible the project’s premine and governance structure look a little to shareholdery, and Circle, which is backed by Goldman Sachs, is not in a position to risk listing any coins on Poloniex that might be construed as securities.

QuadrigaCX

I finally got around to writing up QuadrigaCX Trustee’s Preliminary Report. Ernst & Young basically says the money is all gone. Also, it adds that Quadriga’s financial affairs were a complete mess, and they’ll probably never sort everything out properly.

Remember the photo of 1,004 checks sitting on a stovetop? EY finally deposited those into a disbursement account on April 18. What a surprise for this trader to learn the money was freshly sucked out of his bank account two years later!

Also interesting, Black Banx (formerly WB21), the third-party payment processor allegedly holding $CA12 million in Quadriga funds is now issuing Visa cards without Visa’s consent. Antony Peyton, the finance journalist who had a thug show up on his doorstep last time he wrote about them, has been researching the company.

Cryptopia

New Zealand crypto exchange Cryptopia went belly up on May 14. Turns out, for the last nine months—since before the January hack that put it out of business—Adam Clark, the exchange’s former founder and programmer, has been building a new crypto exchange. According to his LinkedIn profile, he’s been working on Assetylene since September 2018. So, if you lost your money on Cryptopia, you can try again on Assetylene. I’m sure they’ve got their security issues sorted out by now.

Meanwhile, the funds that were stolen from Cryptopia are on the move. Whale Alert, who has been keeping on eye on the transfers, says funds from Cryptopia recently went to Huobi, where they were likely traded for other coins. Whale Alert also noted 500 ETH going to decentralized exchange EtherDelta.

Elsewhere in cryptoland

Facebook is getting ready to launch its GlobalCoin cryptocurrency payments system in 2020. They probably want to do something like PayPal combined with social media. David Gerard asks: “Why are on earth are they doing this as a cryptocurrency?” As he explains, nothing about putting this on a blockchain makes any sense whatsoever.

Bestmixer.io, one of the largest crypto mixers and tumblers, was shut down by Dutch authorities with the help of Europol and Luxembourg law enforcement. According to Europol’s press release, it was responsible for $200 million in money laundering.

Well, this is a shocker. The SEC has again delayed the VanEck bitcoin ETF proposal. Here is the order. The new deadline for the SEC to make a decision is August 19, and it can delay one more time for a final deadline of October 18, Jake Chervinsky tweeted. It’s been eight years, and the SEC has yet to approve any bitcoin ETFs in the US.  

Bitcoin is set to overtake the existing financial system—or maybe not. In a recent report, the European Central Bank says crypto poses no threat to financial stability in the euro zone. A “very low” number of merchants currently allow buying of goods and services with bitcoin, and there is no “tangible impact on the real economy.”

The IRS is planning to publish new tax guidance for crypto holders and traders. The last time it issued guidance was November 2014, back when it said crypto would be treated as property and you had to report earnings as capital gains.

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Turns out, you can make money on horse manure, and tethers are worth just that

Screen Shot 2019-05-23 at 9.22.35 AM

Did you know, there is an actual business for horse manure?  

“It’s wild,” one horse farmer told Stable Management. “You can take this stuff that nobody wants and turn it into something of value.”  

You can do something similar in the crypto word. Shitexpress was a service that delivered horse poop anywhere in the world for bitcoin. Now, instead of sending actually poop, you can send tethers, a stablecoin issued by a company of the same name, Tether Limited.  

Tethers are a major source of liquidity in crypto markets. In lieu of the US dollar, you can use them to enter and exit positions in times of volatility. As such, tethers are responsible for the health and wellness of dozens of crypto exchanges, including Binance, Huobi, Bittrex, OKEx, Poloniex and others, that don’t have direct banking.

Inner workings

When Tether first entered the world in 2015, tethers were promised as an I.O.U. For years, Tether assured us that every tether was worth $1—as in, one actual US dollar that Tether had on hand that you could redeem your tethers for.  

Tether and its sister company Bitfinex, one of the largest crypto trading platforms by volume, are now being sued by the New York Attorney General. As court documents reveal more of the companies’ inner workings, people are asking: What are tethers worth? Is one tether worth a dollar? Less than a dollar? What can I get for my tethers?

For a while, the thinking was, well, maybe one tether is worth 74 cents, because in his first affidavit, filed on April 30, Stuart Hoegner, Bitfinex and Tether’s general counsel, said tethers were only 74% backed. In other words, Tether was operating a fractional reserve, kind of like a bank, but sans regulatory oversight or deposit insurance.

Tether updated its terms of service on February 26, to let you know tethers weren’t fully backed, but if you weren’t paying close attention—i.e., checking the Tether website every single day—you may have missed it. Tether says it can amend, change, or update its terms of service “at any time and without prior notice to you.”

Now, it’s looking like one tether is worth whatever someone gives you for it. If someone gives you bitcoin for a pile of tethers, hurray for you, that is the value of your tethers. If the person who got your tethers can pass them off to someone else for bitcoin, or another crypto of value, then yay for them! It’s called the greater fool theory, and, so far, it seems to be working—Tether is still trading on par with the dollar.   

But if you take those tethers to Tether, the company that, so far, has shoveled $3 billion worth of them onto the markets, and say, “Hey, can I redeem these for dollars, like you have been promising me all these years?,” they will most certainly tell you, “Sorry, no.”

Are you verified?

You can only redeem tethers under certain conditions, such as you bought loads of them directly from Tether—and you are not a US citizen.

In Hoegner’s recent affirmation, filed on May 21, he says you have to be a “verified” Tether customer to redeem tethers. 

“Only verified Tether customers are entitled to redeem tether from Tether for fiat on a 1:1 basis. There is no right of redemption from Tether on a 1:1 basis for any holders of tether who obtained the tokens on a secondary market platform and who are not verified Tether customers; on the contrary, such holders of tether have no relationship with Tether and are expressly precluded from redeeming tether on a 1:1 basis for Tether.”

In that paragraph, Hoegner reminds us three times—just to make sure we understand his point—that whoever you are and however you ended up with your tethers, the company is under no obligation to give you cash back for those tethers.

Per Tether’s terms of service, only those who bought tethers directly from Tether Limited—aka “validated users”—can redeem tethers. Anyone who got tethers on the “secondary market,” meaning, an exchange, is not able to redeem those tethers.

As court docs reveal, from November 2017 to December 2018, you could only buy tethers for cash directly from Bitfinex. Per Tether’s website, as of November 27, 2018, you could once again buy tethers directly from Tether. However, you have to buy a minimum of $100,0000 worth. According to Tether’s definition, Bitfinex is a secondary market.

Also, if you want to redeem tethers on Tether, you have to redeem a minimum of $100,000 worth at a time, and you can’t redeem more than once a week.

Further, if you live in the US, you have zero chance of ever redeeming your tethers for cash. Hoegner says that as of November 23, 2017, Tether ceased servicing customers in the US, and at this time, “no longer provides issues or redemption to any US customers.”

To summarize, if you are a US citizen holding a bag of tethers, Tether will give you nothing for them. If you acquired tether on Bitfinex or some other exchange, Tether owes you nothing. And if you don’t like that, too bad, because Tether also says in its terms that when you buy tethers, you waive any rights to “trial by jury or proceeding of any kind whatsoever.”

Wait, this doesn’t look like a dollar!

If you are one of the lucky few who purchased $100,000 or more worth of tethers via Tether’s website—and you are not a US citizen—and would like to redeem 100,000 or more of them, you may or may not get actual dollars back any time soon.

In its terms of service, Tether says it “reserves the right to delay redemption or withdrawal” of tether in the event of illiquidity—meaning, if they don’t happen to have cash on hand today. The company also says that it reserves the right to pay you “in-kind redemption of securities and other assets” held in its reserves.

Screen Shot 2019-05-27 at 12.06.21 PMBasically, that equates to, you could get shares of iFinex (Bitfinex and Tether’s parent company) or LEO tokens (a new token Bitfinex recently created) or whatever is in the soup bowl that day. And you may end up with something that has as much real world value as horse manure—just not as good for the roses.

Update (May 27): This story has been updated to reflect that if you buy or redeem tethers from Tether, you have to buy or redeem a minimum of $100,000 worth.

 

 

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News: $250 million longs wiped out by bitcoin whale, Binance reopens withdrawals, Bitfinex set to trade LEO

Screen Shot 2019-05-18 at 5.17.10 PMThe 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.  

Bitfinex

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. 

Binance

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.

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New York Supreme Court: Bitfinex may not touch Tether’s reserves for 90 days

Screen Shot 2019-05-16 at 8.30.44 PMBitfinex will not be able to dip into Tether’s reserves for 90 days, except to maintain normal business activities, according to a New York judge. The crypto exchange must also “promptly” hand over documents to the New York Attorney General (NYAG).

On May 16, New York Supreme court judge Joel M. Cohen granted Bitfinex’s motion to modify a preliminary injunction obtained by the NYAG. The judge called the original ruling vague, over broad, and not preliminary, meaning it lacked a specified time limit. He also held that the Martin Act—New York’s powerful anti-fraud law—“does not provide a roving mandate to regulate commercial activity.”

Decision and order

NYAG’s original petition consisted of two parts: a directive to Bitfinex and Tether to “produce evidence,” and a preliminary injunction to ensure that the respondents maintain a status quo while the NYAG’s investigation is ongoing.

In his 18-page decision and order, the judge granted the directive—Bitfinex and Tether still have to surrender documents—and agreed to modify the preliminary injunction, so as not to restrict the companies’ “ordinary business activities” any more than necessary.

The modified injunction spells out the following:

Tether cannot loan, extend credit or transfer assets—outside of its ordinary course of business—that would result in Bitfinex having claims on its reserves.  

(In an earlier letter to the court, iFinex, the parent company of Bitfinex and Tether, claims that Tether’s business model depends on it “making investments and asset purchases with the proceeds it derives from selling tethers.” Presumably, since this is an ordinary part of the company’s business, Tether can continue to invest its reserves, though it is not clear how it is investing the funds.)

Tether and Bitfinex cannot distribute or dividend any funds from Tether’s reserves to executives, employees, or agents of Bitfinex—except for payroll and normal payments to contractors and vendors.  

The companies are barred from destroying or altering any documents and communications, including material called for by the NYAG’s 2018 investigative subpoenas.  

If the NYAG wants to extend the 90-day injunction, two weeks before the injunction expires, it must submit a letter to the court. Bitfinex will then have seven days to submit a response. Based on that, the judge will decide whether to hold a hearing.

Victory, for now…

In a post on its website, Bitfinex revels in its victory. The exchange claims the NYAG sought the April 24 order “in bad faith” and vows to “vigorously defend” against the agency’s actions. Bitfinex adds that it remains committed to protecting its customers, its business, and its community against the NYAG’s “meritless claims.”

Most tether holders (the NYAG calls them “investors”) entered into their contracts under the assumption that tethers were fully backed. Each tether was supposedly worth $1—until late February, when Tether changed its terms without actually telling anyone.

Around the same time, Tether made a questionable loan to Bitfinex for $900 million. (Both companies are run by the same individuals, and the same people signed the agreement on either side.) Bitfinex has already dissipated $750 million of those funds. The remaining $150 million appear to be safe—at least for now.

To note, the investigation into whether Bitfinex violated the Martin Act is still ongoing. As a result of today’s ruling, Bitfinex still has to hand over documents and communications about its “business operations, relationships, customers, tax filings, and more.” The NYAG has been requesting those documents since November.

A transcript of the hearing is available here, courtesy of The Block. 

Update (May 19): I updated this story to clarify that there were two parts to NYAG’s original order. Additionally, I noted that Tether can still invest its reserves.

Update (May 21): I added a link to the full transcript of the hearing.

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Related stories:
Bitfinex to NYAG: You have no authority! We did nothing wrong!
NYAG: Bitfinex needs to submit docs and stop dipping into Tether’s reserves
The curious case of Tether: a complete timeline of events