Crypto collapse: Terra Luna, 3AC’s Singapore liquidation, Celsius, Voyager 

“Lotta stadiums getting renamed in the next few years”

Ben McKenzie
Daniel Shin and Do Kwon while number was going up. Source: Terraform Labs

TerraUSD

Centralized finance (CeFi) is centralized DeFi — investment firms that played the DeFi markets. CeFi was where a lot of the money in DeFi came from.

CeFi looked like an industry of separate institutions — but it turned out to be a few companies all investing in each other. The chart of who invested in who would look like an inverted pyramid resting on a single point — Terraform Labs’ Anchor protocol.

Anchor offered 20% interest rates on holdings of dollar-equivalent stablecoin Terraform USD (UST), the interest being paid in UST. You could get UST by buying Terraform’s luna token from exchanges like Crypto.com or KuCoin. (Crypto.com Arena used to be Staples Center in Los Angeles.)

All the other CeFi firms just put their money into Anchor at 20%, then offered slightly lower interest to their own investors and skimmed the difference. Terraform made its money by dumping luna on these UST buyers.

UST and luna were both tokens that Terraform made up one day — neither had any reason to be worth anything. Everyone in DeFi knew how rickety UST/luna was for months — they just went along with it while it made them money. A truly fiat currency.

The party ended on May 9, when UST and luna imploded, setting off a cascade of insolvencies across cryptoland. We’re still seeing the fallout.

Crypto hedge fund Three Arrows Capital (3AC) went into liquidation as it was heavily invested in UST and luna. Firms that had big loans to 3AC, such as Voyager, Celsius, and BlockFi, had to file bankruptcy or seek bailouts from other crypto firms. Even crypto exchanges had been playing the CeFi markets with customer funds, and many had to close their doors.

Thousands of South Koreans also lost money when UST and luna collapsed. Terraform Labs founders Daniel Shin and Do Kwon are stuck in South Korea for now, while investigators look into the incident.

On Wednesday, July 20, investigators from the Seoul Southern District Prosecutors Office raided seven crypto exchanges, including Upbit, Bithumb, and Coinone. They’re looking for clues as to whether Terraform intentionally caused the collapse. They also raided some exchange executives’ homes and the home of Daniel Shin. [Yonhap News; Donga News, in Korean]

Elsewhere, South Korean prosecutors have discovered a shell company called “Flexi Corporation” that Kwon allegedly used to launder large sums of money out of Terra and into his own private accounts via over-the-counter trades. How can this be? Kwon said he only took a small salary from Terraform. [KBS, in Korean; Twitter

Three Arrows Capital 

UST and luna went under, and pulled crypto hedge fund Three Arrows Capital down with them.

The Terra collapse completely nuked 3AC. Their exposure was about $600 million. (This is triple what co-founders Su Zhu and Kyle Davies had claimed in mid-June.) [Fortune]

Zhu and Davies are in now hiding. Nobody knows where they are. They told Bloomberg they were headed to Dubai. [Bloomberg, archive]

The pair knew immediately that they were screwed. But on May 11, when investors asked if 3AC had survived the Terra collapse, 3AC told them everything was fine — and kept taking in money! 

3AC had abandoned its Singapore office by late May — they just locked the door and skipped the country — and they finally admitted there were problems only in mid-June.

But Zhu and Davies have been telling the public — especially their creditors — how they lost money too, how they fear for their lives, and how they are so overwhelmed that they can’t turn over banking information just yet, but they’ll get to that soon, for sure.

The two old school buddies say they were shocked by how quickly things unraveled. “What we failed to realize was that luna was capable of falling to effective zero in a matter of days.”

Never mind that the instability of UST/luna was obvious to outside observers, that UST/luna worked exactly the same way as the Titan/Iron pair that collapsed in 2021, and that these guys were supposed to be a crypto hedge fund with alleged competence, and not the drooling crypto degen brainlet rubes they appear to have been trading like.

Zhu and Davies never planned for number go down, and had just been piling leverage on leverage. “We positioned ourselves for a kind of market that didn’t end up happening,” Zhu told Bloomberg. Never mind that a “hedge fund” is named for the act of hedging your speculations, and not just assuming you’re a genius because there’s a bubble going on.

Teneo is the firm handling 3AC’s liquidation, and they are moving quickly. They filed Chapter 15 in the US on July 1. Shortly after, they also filed for recognition of 3AC’s British Virgin Islands liquidation with the Singapore high court. 

Someone leaked Teneo’s 1,157-page Singapore filing earlier this week. The comprehensive document is a gem — it gives us a full update on the bankruptcy proceedings up to July 9. Teneo’s Christopher Farmer and Russell Crumpler left no rock unturned. [Filing, archive]

We recommend reading at least the first 35 pages — it tells the story of Ponzi borrowing, multiple defaults, ghosting creditors and liquidators, and doing deals with some lenders while cutting out others. The rest of the filing is exhibits, other court filings, and affidavits of furious creditors.

3AC’s biggest creditor is Barry Silbert’s Digital Currency Group, the parent company of Genesis Trading, which had a $2.4 billion partially collateralized loan to 3AC. DCG is now stuck with up to $1.1 billion in losses. [The Block]

Other large creditors include Voyager Digital ($687 million), Blockchain.com ($302.6 million, up from the originally claimed $270 million), and Deribit ($80.6 million).  

Kyle Davies’ wife, Chen Kaili Kelly, filed a claim for $65.7 million, and Zhu Su himself submitted a $5 million claim. We have no idea how 3AC was structured to allow an owner and a cofounder to be a listed creditor in a bankruptcy.

Zhu and Davies reportedly made a $50 million down payment on a yacht — with borrowed money, while they defaulted on their lenders. (We’re definitely feeling the Quadriga vibes with this one.) They wanted it to be bigger than any of the yachts owned by Singapore’s billionaires, and ready for pick-up in Italy. Zhu told Bloomberg that the yacht story was a “smear.”

Tai Ping Shan Capital, an over-the-counter desk in the BVI, claimed it operated independently of 3AC, but it turns out to have tight connections. On June 14, 3AC transferred $30.7 million in USDC and $900,000 in USDT to TPS. It’s unclear where those funds subsequently went. [Coindesk]

Good news! In a supplemental Chapter 15 filing, Teneo says it’s recovered $40 million of assets! The bad news is that this is a drop in the bucket. Creditors have so far submitted $2.8 billion in claims, and there’s plenty more coming. [Court filing]

3AC creditors have picked a creditor committee consisting of the largest creditors: Voyager, DCG, CoinList, Blockchain.com, and Matrixport. The committee will work closely with Teneo to “maximize the value of the assets available for distribution.” [The Block

Blockchain.com is struggling to survive in the aftermath. It just laid off 25 percent of staff. [CNBC

In addition to owning CryptoDickButt #1462, 3AC had also started a $100 million NFT fund with pseudonymous NFT trader Vincent Van Dough. They supplied the funding, while Van Dough curated the art. (We mentioned CryptoDickButt last time, and we’re shocked that some of you thought we were just making that up. You should know by now that crypto is always stupider.)

The fund, called “Starry Night Capital” planned to launch a physical gallery in a “major city” by the end of 2021. [The Block, 2021]

The Defiant noted on June 17 that the Starry Night portfolio had been aggregated into a single Ethereum address, probably controlled by Zhu, Davies, and Van Dough. Teneo has noticed and is concerned. [The Defiant]

Celsius

Celsius promised 18% returns on your crypto. When too many people tried to pull their money out at once, Celsius paused withdrawals on June 21 and filed for bankruptcy on July 13. We covered the bankruptcy filing and CEO Alex Mashinsky’s declaration in our last post. 

Celsius admits to a $1.2 billion hole in its balance sheet. Others think the assets are fake and the liabilities are very real, which would put the hole at $4 billion to $5 billion.

Mashinsky says that Celsius’ losses include $15.8 million from investments in UST and luna, along with $40.6 million in loans to 3AC. He also said that Celsius lost 35,000 ether tokens in 2021 due to an incident involving a staking provider that “misplaced” the keys to its tokens. Oops!

Celsius held its first bankruptcy hearing on July 18. SDNY Judge Martin Glenn is presiding over the case. Kadhim Shubber from the Financial Times live-tweeted the hearing, which took place over Zoom. Here’s a copy of the presentation Celsius gave to the judge on Monday. [Stretto; Twitter thread]

Celsius’ lawyer Patrick Nash told the judge there won’t be a liquidation. Celsius has a recovery plan: to HODL — and mine bitcoins! That’s right, Celsius wants to mine their way out of bankruptcy. Nash says the plan is to mine 10,000 bitcoins in 2022.

How did Celsius end up in bankruptcy? You might think it had something to do with Celsius making horrible investments and losing everyone’s money, but no! As Nash explained, Celsius was driven to insolvency by unfounded Terra/luna fears, worries about Coinbase’s bankruptcy risk factor disclosure in May, and a bank run that knocked over an otherwise well-run business.

Former Celsius employees tell a different story. Celsius compliance and financial crimes director Timothy Cradle spoke of the company’s “sloppiness and mismanagement.” [Coindesk

Cradle also told CNBC that Celsius execs “were absolutely trading the token [CEL] to manipulate the price.” A former HR employee said she was told not to do a background check on Yarom Shelem, the former Celsius CFO who was arrested in Israel for fraud. [CNBC]

Celsius creditors have been filing claims since July 18. [Twitter] The letters make for some disturbing reading. Molly White has been posting excerpts on Twitter. It’s a reminder that Celsius investors were ordinary people lured in by Mashinsky’s false promises. [Twitter thread]

Québec pension fund CDPQ also has some questions to answer. CDPQ invested $150 million in Celsius in October 2021 as part of a $400 million funding round co-led by WestCap Investment Partners LLC. “We understand that our investment in Celsius raises a number of questions.” [Bloomberg

Celsius’ next bankruptcy hearing is August 10.

Voyager

Crypto broker Voyager said its secret sauce was “low-risk investments.” Yet it loaned out three-quarters of its assets under management to 3AC.

In June, the firm signed an agreement with Sam Bankman-Fried’s Alameda Ventures for a revolving line of credit so it could keep the music playing a bit longer. But on July 1, Voyager Digital filed Chapter 11 bankruptcy.

Coffeezilla points out that Voyager is trying to sell people on this “Chapter 11 bankruptcy reorg,” and hides the fact that under bankruptcy law, a company that describes itself as a broker cannot file Chapter 11. They should be required to liquidate under SIPA. (Securities Investor Protection Act) [Youtube; Twitter]

The CEO of of crypto media outlet Benzinga will be on the unsecured creditor committee in the Voyager bankruptcy. Jason Raznick is among the largest unsecured creditors for Voyager. [Inside Bitcoins]

Voyager’s next bankruptcy hearing is on August 4. It has $350 million of customer money in an omnibus account at Metropolitan, and it keeps reassuring everyone that they’ll get their money soon! It just has to work things out with the judge first. [Voyager blog; archive]

In the meantime, Bankman-Fried proposed a partial bailout. Under his proposal, Voyager customers would have the opportunity to open new accounts at FTX with a cash balance funded by their bankruptcy claim. They would be able to withdraw the cash, or use it to purchase crypto on FTX. [FTX press release; FT, archive]

Other CeFi firms that are definitely robust and doing fine 

Vauld is a Singapore-domiciled crypto lender that serves mainly customers in India. It stopped withdrawals on July 4 and owes $402 million in crypto to its customers. 

After suspending withdrawals and laying off 30% of its staff, Vauld filed for protection against creditors in Singapore on July 8. [WSJ]

A Singaporean moratorium order is similar to Chapter 11 in the US. It allows Vauld to avoid a complete cessation of operations and liquidation of assets, while it tries to get its act together. 

Vauld later disclosed they were short $70 million, partly from exposure to UST/luna. Vauld issued a statement on July 11. Vauld and Nexo are still discussing an acquisition of Vauld. [Vauld blog, archive]

BlockFi released its Q2 2022 transparency report. The report showed it had $1.8 billion in open loans from retail and institutional investors by the end of June and $600 million in “net exposure.” [BlockFi blog, archive; Decrypt]

Crypto collapse: 3AC, Voyager, Celsius, and other DeFi casualties

Crypto contagion

The price of Bitcoin has bobbled along above $20,000 since mid-June. There seems to be serious interest in keeping it above that number!

Sam Bankman-Fried has been playing the J. Pierpont Morgan of crypto, rescuing sinking companies with hundreds of millions of dollars in crypto assets. His companies FTX and Alameda have so far bailed out Voyager Digital and BlockFi. He says he’s got a few billion left to keep other crypto companies from slipping into the dark abyss of liquidation. [Financial Post]  

All Bankman-Fried can do is buy time. The entire cryptosystem is imploding. People are finally realizing that most of the money they thought they had in crypto was imaginary. You didn’t lose money in the crash — you lost your money when you bought crypto.  

We’ve been busy keeping up with the fallout, and mining comedy gold. Who thought staying poor would be this much fun? It was nice of the coiners to suggest it.

The liquidation of Three Arrows Capital

Three Arrows Capital (3AC) went into liquidation as of June 27. Two applications were filed in the British Virgin Islands (BVI) where 3AC is incorporated — one by 3AC themselves, and the other, a provisional liquidation, by 3AC creditor Deribit. [LinkedIn]

In a liquidation, a liquidator is appointed to tally up all the assets of a company and distribute them to creditors. It’s the end of the company. Provisional liquidation is not quite the end yet — it’s like bankruptcy protection, even though you know the company is probably insolvent. Wassielawyer has a great thread explaining all this. [Twitter thread]

Why would 3AC petition to liquidate themselves? CEO Zhu Su has shamelessly listed himself as a creditor in the liquidation!

Teneo is the court-appointed liquidator. They’ll be assessing the assets and the claims against the company and its directors. 

The liquidators are able to convert any crypto assets into US dollars. This could mean a few billion dollars worth of bitcoin getting dumped any day now — or maybe not, if 3AC’s own bitcoin wallets turn out to be empty. 

Less than a week later, 3AC filed for Chapter 15 bankruptcy in the US on July 1. 3AC’s assets are (likely) not in BVI, but in the US and Singapore. Chapter 15 allows the BVI court to be recognized in the US — and protects US assets during the liquidation process. [Bloomberg, archive; bankruptcy filing, PDF

According to its bankruptcy filing, 3AC had $3 billion under management in April 2022. Analytics firm Nansen reported the company held $10 billion in assets in March. Money disappears fast in crypto land! [Bloomberg]

Also according to the filing — and we’re sure this is fine! — 3AC’s two founders have gone missing: “Mr. Davies and Mr. Zhu’s current location remains unknown. They are rumored to have left Singapore.” 

The last we heard from Zhu Su on Twitter was a vague tweet on June 14 — “We are in the process of communicating with relevant parties and fully committed to working this out” — a month after the Terra Luna collapse, which set this entire cascade of dominoes falling. [Twitter]

Zhu is currently trying to offload a bungalow in Singapore that he bought in December for SGD$48.8 million (USD$35 million). The house is held in his son’s trust. [Bloomberg]

Fatmanterra (who is pretty on the ball) says he heard Zhu is planning to transfer the funds from the sale of the bungalow to a bank account in Dubai and has no intention of paying creditors with the proceeds. [Twitter]

3AC has other troubles, such as a probe by Singapore’s central bank. The Monetary Authority of Singapore said that 3AC provided them with false information, failed to meet regulatory requirements when moving fund management to the BVI, and ignored limits on assets under management. They weren’t supposed to manage more than SGD$250 million (about $178 million). [MAS press release, PDF; Blockworks]

Oh, look! 3AC’s money has an over-the-counter trading desk: Tai Ping Shan (TPS) Capital. 3AC seems to have a bunch of money sheltered in this entity, and TPS is still trading despite the liquidation order! Sources told Coindesk that TPS was “where the action was” for 3AC,  and where most of 3AC’s treasury is held and traded.

TPS insists it’s completely independent of 3AC, even though Zhu and Davies of 3AC are still part-owners, and the companies have long had multiple links. [CoinDesk; Twitter; CoinDesk]

Peckshield noticed that on 4 July, 3AC transferred $30 million in stablecoins to Kucoin — 10 million USDT and 20 million USDC. This is after the firm was ordered to liquidate. [Twitter]

Rumor has it that 3AC also looked to crypto whales for loans. [Twitter]

3AC also owns a bunch of NFTs — because we all know that NFTs are a great investment and very liquid. [Twitter]

Big plans for Voyager Digital (in bankruptcy)

Less than a week after crypto lender Voyager halted withdrawals, the company filed for Chapter 11 bankruptcy protection in New York on July 5. [Filing; press release; Ehrlich Twitter thread; FT

Voyager says it has $110 million of cash and “owned crypto assets” on hand, plus $1.3 billion in crypto assets on its platform. It owes nearly $1 million to Google and $75 million to Alameda Research — which recently threw Voyager a lifeline of $485 million. The rest of its large unsecured creditors are customers.

Alameda says it’s “happy to return the Voyager loan and get our collateral back whenever works for Voyage” — we’re not even sure what that means. [Tweet]

Voyager holds $350 million of customer money in an omnibus account at Metropolitan Commercial Bank — just an undifferentiated pile of cash, with only Voyager knowing which customers’ money it is. The judge says “That money belongs to those customers and will go to those customers” — but the company will have to sort through who owns what and conduct a “fraud prevention process” (KYC, we presume) first. [Bloomberg, archive]

Voyager sent its customers an email stressing that it’s not going out of business — it has a plan! [Reddit]

“Under this Plan, which is subject to change given ongoing discussions with other parties, and requires Court approval, customers with crypto in their account(s) will receive in exchange a combination of the crypto in their account(s), proceeds from the 3AC recovery, common shares in the newly reorganized Company, and Voyager tokens. The plan contemplates an opportunity for customers to elect the proportion of common equity and crypto they will receive, subject to certain maximum thresholds.”

Instead of getting your crypto back, you’ll get a corn beef hash of magic beans, and we’ll call that money, okay?

The only issues here are that future Voyager tokens, future proceeds from the 3AC recovery, and future equity in the reorganized company will all be close to worthless.

Putting this nonsense through the bankruptcy court will take months, and Voyager customers get to stand back and watch in horror as the value of their crypto plummets to nothing. Look what’s happened to Mt. Gox customers — they are still waiting.

Jim Chanos weighs in on Voyager’s apparently false claims that its money is FDIC insured: “Making false claims to attract depositors/investors is financial fraud, plain and simple. No regulatory jurisdiction tug-of-war need come into play here, if true.” [Twitter]

The FDIC is also looking into Voyager’s FDIC claims. [WSJ]

Patrick McKenzie writes one of his informative blog posts on money transfer systems, this time explaining what a deposit is — and what a deposit isn’t. Unsurprisingly, he rapidly gets to our friends at Voyager Not-A-Bank. [Kalzumeus]

Voyager is just trying to buy time. But given their apparently false claims of FDIC insurance, the odds they can get a judge to let them avoid liquidation this way are zero.

When the accountants get hold of the books and start going through everything, the real story will be shocking. We saw all this happen with QuadrigaCX.

Voyager stock trading was halted on the Toronto Stock Exchange, after the bankruptcy filing. [Newswire

Cornell Law professor Dan Awry writes: “If you thought securities regulation was a jolt to the crypto community, just wait until they learn about bankruptcy law.” [Twitter]

Here’s a Voyager ad preying on artists. Why be a poor artist when you can get rich for free by handing them your crypto? [YouTube]

And here’s a Twitter thread detailing Voyager’s shenanigans in getting a public listing in the first place. They bought a shell company and did a reverse-merger — and then pumped the stock, only to dump it during crypto’s bull run. [Twitter thread]  

It’s worth a closer look at just how much ickiness from Voyager the Metropolitan Commercial Bank risks getting on itself. Dig page 30 of this March 2022 investor presentation, talking up Metropolitan’s foray into crypto customers. The presentation mentions elsewhere how Metropolitan wants to get into crypto. [Investor presentation

Celsius: ‘Ere, he says he’s not dead!

Celsius Network Ltd. has a new board of directors. They’re all bankruptcy attorneys. [Companies House]

But Celsius is not bankrupt yet! As such! In fact, Celsius is still paying debts! If selectively. Though paying down debts is likely a sign that Celsius is getting its books in order before filing for bankruptcy.

Celsius has repaid $150 million worth of DAI to MakerDAO. Celsius still owes MakerDAO about $82 million in DAI. [FXEmpire]

On July 4, Celsius took out 67,000 ETH ($72 million) from Aave (30,000 ETH) and Compound (37,000 ETH). [Etherscan; Peckshield; Tweet]

Celsius has laid off 150 employees. [Ctech]

Let’s keep in mind that Celsius isn’t just about crypto bros wrecking each other. Celsius investors were lied to and stolen from: “Celsius customers losing hope for locked up crypto.” [WSJ]

Celsius’ CEO has a book on Amazon — you know, in case anyone felt they needed the financial wisdom of Alex Mashinsky in their life. What editor at Wiley thought this was a good decision? “This book belongs on the bookshelf of anyone interested in financial independence, cryptocurrencies, bitcoin, blockchain, or the battle between decentralization and centralization.” Also, how to take everyone’s money and lose it playing the DeFi markets. [Amazon]

KeyFi sues Celsius: I’m shocked, shocked to find that Ponziing is going on in here!

0x_b1 was a crypto whale, active on Twitter, who traded vast sums of crypto in the DeFi markets. He was the third-largest DeFi user at one point, with only Alameda Research and Justin Sun doing larger volumes. 0x_b1 was highly respected, yet nobody knew who he was or where he got his wealth from — until now.

0x_b1 turns out to be Jason Stone, the CEO of trading firm KeyFi, a.k.a. Battlestar Capital, who says that KeyFi managed Celsius’ DeFi portfolio from 2020 to 2021. The cryptos that 0x_b1 traded were hundreds of millions of dollars (in crypto) of Celsius customer funds.

As Battlestar Capital, Stone first hooked up with Celsius in March 2019. Battlestar said that customers could earn an astonishing “up to 30 percent” annually from staking their cryptos. [CoinDesk, 2019]

Jason Stone and KeyFi are now suing Celsius, saying they never got paid. A case was filed 7 July by Stone’s attorney, Kyle Roche of Roche Freedman. The complaint is incendiary. [complaint, PDF]

Celsius saw DeFi take off in 2020. Celsius figured they could use customer funds to play the markets and make some yield, so they hired KeyFi to trade for them, with a handshake agreement to share the “hundreds of millions of dollars in profits” —  rather than anything so trad-fi as, e.g., a written contract. (They did finally write up contracts after KeyFi had been working for Celsius for six months.)

Celsius invested cryptos, and its liabilities to customers were denominated in cryptos — but Celsius accounted for everything in US dollars. So if an asset appreciated, Celsius and KeyFi might show a dollar profit — but Celsius might not be able to repurchase the ETH or whatever, to return it to the customer who lent it to them, without losing money to do so.

KeyFi says it would have been trivial to hedge against such an event by purchasing call options at the spot price it originally paid. KeyFi says that Celsius didn’t do this — but told KeyFi it had. It’s not clear why KeyFi didn’t just do something similar themselves.

Celsius gave customers a higher yield for accepting payment in their own CEL tokens. The yield was calculated in dollars. Stone alleges that Celsius used customer bitcoins to pump the price of CEL through 2020, meaning they paid out less CEL for a given dollar yield.

Alex Mashinksy also sold $45 million of his personal CEL holding during this time.

“The Celsius Ponzi Scheme” starts on page 23 of the complaint. Celsius had liabilities to customers denominated in ETH — but bitcoin and ether prices started going up dizzyingly in January 2021:

“87. As customers sought to withdraw their ether deposits, Celsius was forced to buy ether in the open market at historically high prices, suffering heavy losses. Faced with a liquidity crisis, Celsius began to offer double-digit interest rates in order to lure new depositors, whose funds were used to repay earlier depositors and creditors. Thus, while Celsius continued to market itself as a transparent and well capitalized business, in reality, it had become a Ponzi scheme.”

Jason Stone and KeyFi quit in March 2021. 

In September 2021, Roche wrote demanding a full accounting from Celsius, and all the money that Celsius hadn’t paid KeyFi. This was the start of the present action, and this is what KeyFi is suing over.

This suit is important because it sets out a clear claim that Celsius operated as a Ponzi scheme. If the courts find that Celsius was in fact a Ponzi, then any money or cryptos that Celsius paid out to customers or some creditors could be clawed back in bankruptcy.

Stone is seeking damages for an amount “to be determined at trial.”

It’s not clear that Stone was as great a trader as he paints himself. A report from Arkham details how Stone racked up $350 million in losses. [Arkham, PDF]

CoinFLEX

We’ve been watching online interviews with Mark Lamb of CoinFLEX, which stopped withdrawals after $47 million of bitcoin cash (BCH) went missing.

Lamb, who appears alone in the interviews, keeps saying “we” and referring to his “team.” His wife is the chief marketing officer of CoinFLEX and Sudhu Arumugam is listed as a cofounder, but where’s the rest of the team?

How Lamb’s business really works: [Twitter]

  1. Create fictitious dollars (FlexUSD).
  2. Lock them up in a lending scheme.
  3. Offer unsustainably high yields to attract retail deposits. 

CoinFLEX had a special deal with CoinFLEX investor Roger Ver, where it would not liquidate Ver’s account in the event of a margin call — a highly risky proposition for Coinflex.

Ver had taken a large long position in BCH, which was losing value. [Twitter] Lamb claims Ver needed to deposit $47 million to meet a margin call.

But it looks like Lamb liquidated Ver’s BCH anyway by selling it on Binance, even though he’s claimed to know nothing of this. CoinFLEX claims that Ver owes them $47 million, while Ver considers that Lamb broke their agreement.

Lamb lent one-third of all CoinFLEX’s customer money to one guy. Now, with the “significant loss in liquidating his significant FLEX coin positions,” the deficit for Ver’s account is $84 million. CoinFLEX says that they’ve brought an arbitration against Ver in Hong Kong. It will take 12 months to get a judgment. [blog post]

Meanwhile, CoinFLEX are … issuing a new coin (rvUSD), out of thin air, to pay back their existing customers.

Lamb explained his incredible plan to rescue CoinFLEX in an interview with Ash Bennington on Real Vision. Lamb refused to reveal how big the hole in his books actually is. “I can’t comment on those specific figures at this time.” [Twitter]

But creditors will be made whole and transparency will come — in the fabulous future, along with an audit! 

Lamb’s plan includes issuing rvUSD, a debt token. You get 20% returns — also to be paid in rvUSD. Lamb says the returns will be funded by Ver paying the money, which Ver still maintains he doesn’t owe.

Lamb has clearly thought all of this through carefully with his “team.” Their hard work is apparent — the rvUSD whitepaper is three pages long. [Whitepaper, PDF]

Who would want to buy rvUSD? Lamb told Bennington he has lots of “big” investors lined up. CoinFLEX says it will resume 10% of withdrawals in a week and everyone will get their money as soon as these big investors come through. 

There are 197 million FlexUSD tokens in the wild, according to Coingecko. Even if Ver owes $47 million, there should still be a difference of $150 million in collateral there — if FlexUSD is indeed fully backed by USDC, as Lamb claims it is. Additionally, CoinFLEX still has $10 million of BCH held for its bridge to its SmartBCH chain. And there are user deposits on the exchange.

So what percentage of assets does CoinFLEX still have? Why won’t they release assets and liabilities?

Other legitimate trading firms that are definitely stable going concerns

BlockFi: BlockFi and FTX reached a deal on 1 July, where FTX will buy BlockFi for a “variable price of up to $240 million based on performance triggers” that will provide Blockfi with a $400 million credit facility.  [BlockFi; Twitter thread]

Babel: Orthogonal Trading issued a default to defunct DeFi lender Babel regarding a $10 million loan. [Twitter]

Genesis: Genesis is one of the largest cryptocurrency brokerages for institutional investors. The company confirmed speculation that it had exposure to 3AC. Genesis is part of Digital Currency Group, who put in some cash to prop them up. [Bloomberg; Twitter]  

Blockchain.com: another crypto exchange that thought playing the DeFi markets with customer funds was a good and cool idea. They lost $270 million in loans to 3AC. They told shareholders: “Three Arrows is rapidly becoming insolvent and the default impact is approximately $270 million worth of cryptocurrency and U.S. dollar loans from Blockchain.com.” [CoinDesk]

Uprise: Korean crypto startup Uprise lost $20 million shorting luna in May. They were right about luna — but their short was wiped out anyway, by a sudden spike in the price. [The Block]

CoinLoan: Crypto lender CoinLoan restricted withdrawal limits on 4 July — from $500,000 per day down to only $5,000 per day. They are calling this a “temporary change” to withdrawal limits. Presumably, it’s “temporary” because it will soon be $0. [Tweet; Bitfinex Tweet

They directly say this is because of “a spike in withdrawals of assets from CoinLoan.” How dare you try to get your funds out! [blog, archive]

Nexo: has signed a term sheet to acquire 100% of defunct Indian crypto exchange Vauld. It’s not clear what’s left in Vauld, or if Nexo thinks they can pillage the corpse but pretend Vauld’s considerable liabilities to customers don’t exist. [Coindesk]

Our friend Michel does the numbers. He estimates $300 million was lost by Vauld in the UST/luna collapse. [Twitter]

Bitcoin Core ETP: this is an exchange-traded product, a bit like a bitcoin ETF, but based in Switzerland. How does the ETP plan to make money? By lending out the bitcoins on the DeFi markets! That will definitely work out fine, probably. [FT, paywalled]

Crypto collapse latest: the DeFi dead and dying list

David and I just finished an update on the spreading DeFi contagion. David posted it on his blog, so head on over there and read it.

We recap the latest on Three Arrows Capital (3AC), Voyager Digital, Celsius, BlockFi, and more.

In 2012, Trendon Shavers (Pirateat40) ran a Ponzi scheme on the BitcoinTalk boards called Bitcoin Savings and Trust. At one point, BTCST held 7% of all bitcoins.

Pirate’s Ponzi had a pile of pass-through funds — which invested only in BTCST. There were even funds insuring against the collapse of BTCST … who put the insurance premiums into BTCST.

History repeats, but only the stupid stuff. 

Image: Night of the Living Dead, 1968

The Latecomer’s Guide to Crypto Crashing — a quick map of where we are and what’s ahead

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.

Recent disasters

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.

UnTethering

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.

Sentiment

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?

Crypto hedge funds and DeFi

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]

Large holdings ready for release

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.

Don’t forget to subscribe to our Patreon accounts. Amy’s is here and David’s is here. We need your support for stories like this!

Welcome to Grayscale’s Hotel California 

If you happen to be taking Amtrak and pass through Penn Station or Union Station, you will notice something unusual: every available ad space has been taken up by Grayscale. 

“We care about crypto investors,” the crypto asset manager says in its ads. Grayscale is urging the public to write to the Securities and Exchange Commission and convince them to approve the first spot bitcoin ETF in the U.S.

Grayscale wants to convert its Grayscale Bitcoin Trust (GBTC) into a bitcoin ETF after flooding the market with shares. GBTC is trading 25% below its net asset value, and investors are rightfully pissed off. Grayscale wants them to be upset with the SEC, but the regulator isn’t really to blame. If anything, the SEC should have warned the public about GBTC years ago. 

Over the last eight years, Grayscale has been telling investors to buy shares of GBTC, advertising the fund as a way to get exposure to bitcoin without having to buy bitcoin.  

Accredited investors plowed dollars (or maybe bitcoins) into the fund all through 2020, looking to take advantage of an arbitrage opportunity. They could buy in at NAV, and after a 6 to 12-month lockup, sell on the open market for a premium. All through 2020, that premium was around 18%, on average.

Everybody was happy until February 2021, when the Purpose bitcoin ETF launched in Canada. Unlike GBTC, which trades over-the-counter, Purpose trades on the Toronto Stock Exchange, close to NAV. At 1%, its management fees are half that of GBTC. Within a month of trading, Purpose quickly absorbed more than $1 billion worth of assets. 

Demand for GBTC dropped off and its premium evaporated. Currently, 653,919 bitcoins (worth a face value of $26 billion) are stuck in an illiquid vehicle. Welcome to Grayscale’s Hotel California. 

The plan all along, Grayscale claims, has been to convert GBTC into a bitcoin ETF. On October 19, 2021, NYSE Arca filed Form 19b-4 with the SEC. The regulator has until early July to respond. 

In all probability, the SEC will reject the application, just as it has every single spot bitcoin ETF application put before it to date. 

Bitcoin’s price is largely determined by wash-trades, whales controlling the market, and manipulation with tethers. SEC Chair Gary Gensler knows this. He taught a course in blockchain and money at MIT Sloan before his appointment by the Biden administration. 

This is Grayscale’s second time around. It applied for a bitcoin ETF in 2016, but withdrew the application during the 2017 bitcoin bubble because “the regulatory environment for digital assets had not advanced to the point where such a product could successfully be brought to market.” Meanwhile, the trust’s assets under management grew as did Grayscale’s profits.

Closed-end fund

“Inflation is rising, we need to diversify!” a panicked woman tells her son over the phone in the middle of the night. “I’m buying crypto!” She hangs up. Her son rolls over in bed. The scene is from a series of TV commercials Grayscale ran in 2020 to convince the public that GBTC was a sound investment.  

Digital Currency Group is the parent company of Grayscale. Both firms were founded by Barry Silbert. DCG is invested in hundreds of crypto firms. It owns crypto outlet CoinDesk, which essentially functions as a PR machine for the entire crypto industry. 

Initially called the “Bitcoin Investment Trust,” GBTC launched in September 2013. It was promoted as an investment vehicle that would allow hedge funds and institutional investors to gain exposure to bitcoin, without having to deal with custody. Coinbase has been the custodian of the fund since 2019 when it bought Xapo, the previous custodian. 

Legally, GBTC is a grantor trust, meaning it functions like a closed-end fund. Unlike a typical ETF, there is no mechanism to redeem the underlying asset. The SEC specifically stopped Grayscale from doing this in 2016. Grayscale can create new shares, but it can’t destroy shares to adjust for demand. Grayscale only takes bitcoin out to pay its whopping 2% annual fees, which currently amount to $200 million per year.

​​In contrast, an ETF trades like a stock on a national securities exchange, like NYSE Arca or Nasdaq. An ETF has a built-in creation and redemption mechanism that allows the shares to trade at NAV via arbitrage. Authorized participants (essentially, broker-dealers, like banks and trading firms) issue new shares when the ETF trades at a premium and redeem shares when they trade at a discount, making a profit on the spread. 

How it all works 

Grayscale periodically invites rich investors to pledge money into the fund in private placements at its discretion. The minimum investment is $50,000. Grayscale uses the cash to buy bitcoin and issues shares of GBTC in kind. 

Investors can also pledge bitcoin directly — a great advantage if you happen to be a large holder who wants to unload your BTC without crashing the market. (More on this later.)

After a lockup period, investors can sell their GBTC on the open markets. Anyone can buy and sell GBTC on OTC Markets Group, the main over-the-counter marketplace, or via a brokerage account, like Schwab or Fidelity.  

Up until early last year, GBTC has typically always traded at a premium on the open market. That premium occasionally soared to over 100%. During the 2017 bitcoin bubble, GBTC traded as high as 130% above NAV.

Why would anyone pay the premium? Many institutional investors can’t buy bitcoin directly for compliance reasons. And there are a lot of individuals who don’t want the headache of figuring out how to set up a bitcoin wallet. GBTC was initially the only option for getting exposure to BTC, without having to buy BTC, at least until bitcoin futures came along. However, bitcoin futures contracts came with their own risks, costs, and headaches. GBTC was easier.  

In early 2020, GBTC became an SEC reporting company. This allowed investors who purchased shares in the trust’s private placement to sell their shares in 6 months instead of the previous 12 months. You could now make more money faster!

Unsurprisingly, the trust went into overdrive in 2020. Starting in January 2020 up to Feb. 23, 2021, Grayscale filed 35 reports with the SEC indicating that it sold additional shares to accredited investors, according to Morning Star’s Bobby Blue.  

The trust’s holdings doubled from roughly 261,000 BTC in January 2020 to 544,000 BTC by mid-December 2020, per Arcane Research.

Red flags

Harris Kupperman, who operates a hedge fund, explained in a November 2020 blog post how GBTC’s arbitrage opportunity created a “reflexive Ponzi,” responsible for sending the price of bitcoin hyperbolic.

There were several versions of the arb. You could borrow money through a prime broker. You could use futures to hedge your bet. You could recycle your capital twice a year. 

Every version involved Grayscale purchasing more bitcoin, thus increasing demand, widening the spread in the premium, and pushing the price of bitcoin ever higher. Between January 2020 and February 19, 2021, the price of BTC climbed from $7,000 to $56,000. 

“When the spread is 26% wide and liquid to the tune of hundreds of millions per week, you can bet the biggest guys in finance are all over it,” Kupperman said. “As you can imagine, everyone big is putting on some version of this trade.” 

Kupperman wasn’t the only person to raise alerts about the fund, which mainly benefited wealthy investors. As soon as GBTC launched, skeptics voiced their concerns. 

“You can put a nice wrapper around a turd, and present it in a very well-manicured product to investors that you say is safe,” Barry Ritholtz, a wealth manager and founder of The Big Picture blog, told Verge. “But at the end of the day, it’s still crap.”

In September 2017, Citron Research called GBTC “the widow maker” and “the most dangerous way to own bitcoin.” Citron’s Andrew Left accurately predicted GBTC’s collapse:

“Citron believes that as new methods become available for investors to gain exposure to bitcoin — including traditional ETFs — that money will move to these regulated instruments and out of the uncertain waters of GBTC, which we believe can fall by 50% easily.”

Who holds GBTC?

The press has repeatedly credited Grayscale as a massive buyer of bitcoins, and evidence of institutional money entering the cryptoverse. This may not be the case.

Even though Grayscale states its holdings in dollars, it accepts deposits of bitcoins. A whale, or a good friend of Grayscale, can trade in their BTC for shares of GBTC, which they can flip six months later at well above the actual price of bitcoin.  

The last time Grayscale broke out the numbers in Q3 2019, they said that the majority of deposited value into their family of trusts was in crypto, not dollars: 

“Nearly 80% of inflows in 3Q19 were associated with contributions of digital assets into the Grayscale family of products ‘in-kind’ in exchange for shares, an acceleration of the recent trend, up from 71% in 2Q19.”

Grayscale stopped breaking out the percentage of crypto deposits into its trusts after 2019, and just stated everything in dollars. They may want to break out the numbers again, as this is something the SEC might be interested in. 

Crypto lender BlockFi’s reliance on the GBTC arbitrage is well known as the source of their high bitcoin interest offering. Customers loan BlockFi their bitcoin, and BlockFi invests it into Grayscale’s trust. By the end of October 2020, a filing with the SEC revealed BlockFi had a 5% stake in all GBTC shares.  

Here’s the problem: Now that GBTC prices are below the price of bitcoin, BlockFi won’t have enough cash to buy back the bitcoins that customers lent to them. BlockFi already had to pay a $100 million fine for allegedly selling unregistered securities in 2021. 

As of September 2021, 47 mutual funds and SMAs held GBTC, according to Morning Star. Cathie Wood’s ArkInvest is one of the largest holders of GBTC. Along with Morgan Stanley, which held more than 13 million shares at the end of 2021.

Such a lovely place

Grayscale was happy to take investor money during the bitcoin bull runs of 2017 and 2020-21 and saturate the market with shares of GBTC. Anyone sitting on GBTC now is forced to take their losses, or hold out in the hopes Grayscale will do something to fix this. 

Investors, many of whom are regular folks with GBTC in their IRAs, have every reason to be upset. Meanwhile, Grayscale is pointing the finger at the SEC as the reason we can’t have nice things.

Michael Sonnenshein, Grayscale’s chief executive, told Bloomberg he would even consider suing the regulator if Grayscale’s application to convert GBTC into a bitcoin ETF is denied. 

Sonnenshein argues that because the SEC has approved bitcoin futures ETFs, it should also approve a bitcoin spot ETF.  

This makes absolutely no sense. The two investment vehicles are totally different animals. 

A bitcoin futures ETF indexes a bitcoin futures contract on the CME. It is a bet in dollars, paid in dollars. Nobody touches an actual bitcoin at any point. In contrast, Grayscale’s spot bitcoin ETF application represents an investment that is backed by bitcoins — not derivatives tied to it.

A spot bitcoin ETF is good for bitcoin, because it means more actual cash flowing into the cryptoverse. Crypto promoters are pushing hard for this. Bitcoin is a negative-sum game that relies on new supplies of fresh cash to keep it going.  

But what happens if the SEC doesn’t approve Grayscale’s application?  

Grayscale can issue more buybacks. In the fall of 2021, DCG began buying back over $1 billion worth of GBTC. In March 2022, it announced another $250 million in buybacks for Grayscale trusts. The effort had little impact. GBTC continued to trade well below the price of bitcoin.

As Morning Star points out, Grayscale has the power to make this right. It can redeem shares at NAV and simply return investors their cash or bitcoin. That is, if Grayscale really does care about crypto investors.

Grayscale offered a redemption program before 2016. However, the SEC issued a cease and desist order because the repurchases took place at the same time the trust was issuing new shares, in violation of Regulation M.

The situation is different now. Grayscale stopped issuing new shares in March 2021. That leaves the door open for it to pursue a redemption program and bring GBTC closer inline with the price of bitcoin.

I doubt this will ever happen. Grayscale is sitting on a cash cow. As long as it can redirect investor anger at the SEC, why change?

“There is no obligation to convert to an ETF,” David Fauchier, a fund manager at London’s Nickel Digital Asset, told me in a tweet. “If things stay as they are, they will print money into perpetuity basically, it’s a FANTASTIC business if BTC doesn’t zero.”

Fed by stimulus money, tethers, and a new grift in the form of NFTs, the price of bitcoin reached a record of nearly $69,000 in November 2021. Bitcoiners rah-rahed the moment.

However, the same network effects that brought BTC to its heights are working in reverse and can just as easily bring it back down again. At its current price of $40,000, amidst 8.5% inflation, bitcoin is not proving itself to be the inflation hedge Grayscale hyped it up to be. 

It’s worth noting, that Barry Silbert left Grayscale in August 2021. Incidentally, Jeff Skilling jumped ship at Enron in August 2001, shortly before disaster hit, for some reason.  

Submit your comments!

I encourage anyone reading this to submit your comments to the SEC regarding Grayscale’s application for a spot bitcoin ETF. Jorge Stolfi, a computer scientist in Brazil, has provided an excellent example, and so has David Rosenthal, also a computer scientist. You can submit your own comments here.  

Did you enjoy this story? Consider supporting my work by subscribing to my Patreon account for as little as $5 a month. It’s the cost of a cup of coffee! Or, if you’re feeling generous, you can buy me a pound of coffee beans.

News: DoJ locates Bitfinex’s stolen BTC, BlockFi fined $100M, Forbes sells out to Binance

The DOJ found 119,754 bitcoins stolen from crypto exchange Bitfinex in a hack in 2016. Federal officials were able to seize 94,643.29 BTC ($3.6 billion). The rest is still out there. (Washington Post)

On Jan. 31, those funds were spotted moving out of the hacker’s wallet, but nobody realized at the time it was the feds moving the funds. Most people assumed it was the hackers themselves!

Heather Morgan, 31, and Ilya Lichtenstein, 34, were charged with trying to launder the bitcoins. They were arrested in NYC, where they live. (DoJ press release, Complaint, Statement of facts)

Lichtenstein is Russian-American. Morgan is a U.S. citizen, who grew up in California. We don’t know if the pair were behind the actual theft, but they probably were given the majority of the coins were in the same wallet as when they left Bitfinex.  

David Gerard describes the 2016 hack in Chapter 8 of his book “Attack of the 50-foot Blockchain,” as told to him by Phil Potter. He summarized it on Twitter

Morgan is a rapper with loads of embarrassing videos online. (Vice)

She had an active TikTok account featuring her rap moves.

@realrazzlekhan

How a #nyc $PACE Pımp starts their #holographic day in #manhattan 🧞‍♀️ #grwm #winterfit

♬ Island In The Sun – Weezer

Morgan was also a prolific Forbes contributor, which should surprise nobody. (Forbes)

And she gave a talk at NYC Salon on how to social engineer your way into anything. (Youtube)

The couple sat on those coins from August 2016 to January 2017, before trying to launder some of them. Almost all of the BTC they moved went through AlphaBay, which they used as a mixer. The feds were able to spot this because they seized AlphaBay in July 2017. 

This arrest underscores how difficult it is to actually launder bitcoin. All of the transactions are traceable. Even when you are sitting on piles of BTC, as these two allegedly were, it is really difficult to cash out.  

A judge ruled the pair could be released on bonds — $5 million for Lichtenstein; $3 million for Morgan. But the government, which originally asked for a $100 million bond, ordered a review of the detention order, saying the couple have the means to flee — $330 million in BTC have yet to be found. Also, Russia has no extradition treaty with the U.S. (Stay of release)

It’s not clear what will happen to the recovered funds at this point, but likely they will be held up by the U.S. government for a long time to come. (Decrypt)

Bitfinex is absolutely convinced it will receive the recovered funds. It wants to use 80% of them to “burn” one of its shitcoins — LEO. (Bitfinex blog)

Naturally, LEO saw a surge in value after the announcement. (Defiant)

Bitfinex is the sister company of Tether. The 2016 hack set off a string of calamities for the two firms. Rather than claim insolvency, Bitfinex gave its customers a 36% haircut, repaid them in BFX tokens, and then lost its banking. Thus began a prolific printing of tethers, telling lies and other nonsense that has continued to this day. Also, it was Bitfinex’s reliance on third-party payment processors after it lost its banking that led to all the problems with Crypto Capital, some missing $850 million in funds, and the NYAG telling Tether to take its business out of New York. I detail most of this in my timeline.

Bitfinex never really paid its customers back for the 36% haircut. Ultimately, all of those customers were paid back in tethers, so why should Bitfinex get that money?

BlockFi to pay $100M

Crypto lender BlockFi is paying $50 million to the SEC and $50 million to various state regulators to settle claims that it illegally offered high-yielding crypto lending products, say sources. (Bloomberg)

It’s clear as mud how BlockFi is able to offer the rates it does. “Executives at BlockFi have said they are able to pay such high yields to customers because institutional investors will pay them even more to borrow the deposits. But the companies don’t provide a detailed accounting of how the funds are used or in what circumstances investors could lose their cryptocurrency,” writes Bloomberg.

Crypto lending programs are obviously securities subject to SEC regulation. BlockFi was funding its crypto lending operations and proprietary trading through the sale of unregistered securities. The SEC similarly warned Coinbase against launching “Lend.” And the regulator is currently looking into Celsius, Voyager Digital, and Gemini Trust regarding crypto yield products.

I didn’t realize this earlier, but apparently BlockFi is one of the largest holders of GBTC, buying it for the premium. GBTC is now trading at -24% of NAV, according to Ycharts.

BlockFi says funds are SAFU. (Tweet)

Forbes is taking Binance money 

Forbes, the publication that featured alleged bitcoin money launderer Heather Morgan as a contributor, is now taking $200 million from Binance, the crypto exchange that has been thus far kicked out of every corner of the world for blatantly ignoring laws and regulations. ​​(CNBC)

The funds will help Forbes follow through on its plan to merge with a special purpose acquisition company (SPAC) in the first quarter. Forbes is owned mainly by Chinese Firm Integrated Whale Media, which bought a controlling stake from the Forbes family in 2014.

This will make Binance one of the biggest owners of Forbes after its listing. Binance will also have two director positions on Forbes’ board of executives. Binance tried to sue Forbes in 2020 for defamation, but the suit was quietly dropped.

If you are looking for an unbiased crypto news source in the future, you probably want to look elsewhere. 

More ‘Bitcoin Widow’ Reviews

The Toronoto Star has a review of Jennifer Robertson’s “Bitcoin Widow.” This one is worth reading:

“Does she have regrets? I kept waiting to hear them and she comes closest in the final few pages (after chapters of what does seem like a Kafkaesque nightmare in both legal and emotional terms). ‘I regret every moment of every day of the terrible year that followed Gerry’s death,’ is what she confesses. A weaselly mea culpa that reminded me of when people, often on reality shows, apologize by saying, ‘I am sorry you feel that way.’”

The Sun also has a review of the book. It’s mostly just… a review of the book. Nice photos of Jen and Gerry though. 

If you missed my review earlier, it’s here

Another day, another blockchain bridge hack 

On Feb. 5, a loophole in the Meter Passport smart contract allowed an attacker to siphon 1,391 ETH ($4.2 million) and 2.74 wrapped Bitcoin ($83,000) from the Meter Passport blockchain bridge. 

Blockchain bridges allow you to conveniently spend crypto from one blockchain — such as ETH or, in this case, BTC — on another blockchain. 

@ishwinder explains the hack in layman’s terms. (Twitter)

This is one of three recent hacks on blockchain bridges lately! On Feb. 3, we had the Wormhole exploit, with $320 million in funds stolen. And on Jan. 17, Qubit was hacked for $80 million in crypto. 

What does this tell you about blockchain bridges? 

Meter urged its users not to trade any meterBNB, which are currently unbacked, and said that they were “working on compensating funds to all affected users.” (Twitter)

What’s new in crypto regulations?

The U.S. Department of Treasury released a report: “Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art.” The report was mandated by Congress in the AML Act of 2020. It specifically mentions NFTs. (Press release, Study, Blockchain Law Center)

According to the report, NFTs are vulnerable to money laundering because “NFT platforms range in structure, ownership, and operation, and no single platform operates the same way or has the same standards or due diligence protocols.”

The report specified that NFTs used for payment or investment may fall under the virtual asset definition, and some NFT platforms may qualify as virtual asset service providers (VASPs), depending on the characteristics of the NFTs that they offer.

The report makes it clear that the Treasury department is carefully monitoring digital art assets, including NFTs, and the online marketplaces where they are traded. (JDSupra)

Grayscale wants to turn its Grayscale Bitcoin Trust (GBTC) into an exchange-traded fund. The SEC is seeking advice from the public about whether ETFs tied to Bitcoin’s spot price could be a vehicle for fraud. The SEC has denied six similar applications since November, including those from VanEck, WisdomTree and SkyBridge Capital. (SEC notice, Coindesk)

Only licensed banks should be allowed to issue stablecoins, according to Jean Nellie Liang, the under secretary for domestic finance at the Department of the Treasury. She appeared before the House of Representatives Committee on Financial Services to reaffirm the PWG’s November report on stablecoins. (Liang’s written testimony, Bloomberg)

Time is running out for crypto firms to be approved for the UK’s anti-money laundering register before the end of March. Ninety-six applicants are still waiting for a decision on their application. Without approval before a March 31 deadline, the future of these crypto firms’ UK operations — including exchanges, wallets and other businesses — hangs on a limb. (The Block)

Crypto shilling at the Super Bowl, and other NFT news

It’s Super Bowl weekend. Expect to see a massive amount of marketing dollars go toward shilling crypto and NFTs. Crypto.com, FTX, and Binance are among the major advertisers. (Hollywood Reporter) (NYT)

Bored Apes are also rumored to appear at the Super Bowl, in some shape or form. (Bloomberg)

Twitter accounts that have been speaking out against NFTs are being reported by bots, their accounts suspended and/or locked. This happened to @NFTEthics and @interlunations. (Twitter)

Sotheby’s is planning to auction off a set of 104 CryptoPunks on Feb. 23. The set is expected to bring $20 million to $30 million in crypto. The original buyer was 0x650d, who scooped them all up in July 2021. Here is the Etherscan confirming his purchase. (Artnet News

He bought them for $7 million because he “chose wealth.” (Twitter)

Following the news of the Sotheby’s auction, the celebrity shilling begins. German-American model Heidi Klum just announced on Twitter she owns a Punk. (Tweet)

Who paid for her Punk? That’s not exactly clear. Mike Burgersburg (not his real name, obviously) has tracked down links between Bitclout investor Reade Seiff and Klum’s Punk. (Dirty Bubble)

Burgersburg also says whoever is funding Reese Witherspoon’s NFT purchases probably has a financial interest in promoting the WOW project. (Dirty Bubble)

In addition to proper FTC disclosure requirements, fans and retail buyers deserve more transparency about how these deals are made and who’s providing the money to pump up these assets. 

John Reed Stark was chief of the SEC office of internet enforcement for 11 years. He has a few things to say about NFTs: Market manipulation of NFTs appears not only rampant and tolerated, but also encouraged. Fraud not only rewarded, but also taught. (Linkedin)

The counterfeit NFT problem is getting worse. Bots are scraping artists’ online galleries, or even keyword searches on Google Images, and then creating collections with auto-generated texts. Those listings have proliferated on OpenSea. (Verge)

Sotheby’s made headlines last year when it sold Kevin McCoy’s Quantum NFT (2014) for $1.47 million. Now, that sale is in the headlines once more, this time for a lawsuit being filed against McCoy and the auction house by a holdings company whose owner claims he owns Quantum. (Artnews)

Indie game platform itch.io has come out strongly against NFTs: “NFTs are a scam. If you think they are legitimately useful for anything other than the exploitation of creators, financial scams, and the destruction of the planet the we ask that [you] please reevaluate your life choices.”(Twitter, PC Gamer)

YouTube is launching new creator tools to expand monetization, including allowing creators to sell content as NFTs so fans can “own” videos. (NBC News)

The Alfa Romeo Tonale SUV is the “first car on the market” to come with an NFT digital certificate that the automaker says will increase the car’s residual value. How? Technical details are thin. (Verge)

A group supporting WikiLeaks founder Julian Assange raised $50 million in ETH by selling an NFT of a clock to a DAO (called AssangeDAO) set up to support his legal bills. The NFT, titled “Clock,” is a joint creation by Assange and digital artist Pak. AssangeDAO contributors receive $JUSTICE. (Wired)

Other newsworthy bits

David Rosenthal’s talk at Stanford is a summary of everything that is wrong with crypto and blockchain technology. This is a great read. (DSHR blog)

Vice interviewed Dan Olsen, whose Youtube video on NFTs went viral. “I’ve been keeping my thumb on what’s going on in crypto. By and large, it’s been the story of the evolution of fraud.” (Vice)

The BBC published and then took unpublished a story about a “self-made crypto millionaire giving back” without mentioning his scam coin. (archive)(missing story)

“City Coins — free, magical money for your city! Maybe” (David Gerard)

Fais Khan’s part II of his work explaining how VCs cash out on tokens: “The Unstoppable Grift: How Coinbase and Binance Helped Turned Web3 into Venture3.” (Fais Khan)

The U.S. government’s system for spotting money laundering has received a surge of suspicious activity reports from a set of San Francisco financial companies that includes some of the world’s leading crypto exchanges. (FT, Dynamics Securities Analytics report)

Mark Zuckerberg is lying about the Metaverse. The CEO of one of the most valuable companies in the world is shoving $10 billion into a concept he cannot describe. (Ed Zitron)

The Russian government will treat bitcoin and digital assets as currency. The proposal includes subjecting crypto transactions (not just within exchanges) to AML/KYC rules, which, being technically impossible to execute, should be equivalent to a ban…(Blockworks)

If you like my work, please consider supporting my writing by subscribing to my Patreon account for $5 or $20 (or even more!) a month. Every little bit helps.