Tag: BUSD

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

  • By Amy Castor and David Gerard

“Unless they allow crypto crime, all the innovation in crime is going to go overseas, and we’ll fall behind in crime!”

— Doctor Orrery

Binance: This is fine

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

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

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

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

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

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

Voyager’s Binance deal is on hold

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

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

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

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

Celsius Network

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

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

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

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

Good news for casinos

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

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

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

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

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

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

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

The usual good news for bitcoin 

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

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

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

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

Posted on by Amy Castor 0

Crypto collapse: SEC tightening crypto custody rules, why you can’t cash out your BUSD, Binance and Catherine Coley, SEC charges Terra-Luna

Stuff keeps happening. Make it stop happening. In today’s selection: [David Gerard]

  • The SEC’s proposed new custody rule is another vicious attempt to destroy crypto by suggesting it follow the rules everyone else has to.
  • Whatever happened to Catherine Coley at Binance US?
  • Why you can’t cash your BUSD out
  • SEC charges against Terra-Luna
  • Voyager, FTX, other Good News for bitcoin

Image: Groundskeeper Gensler

Posted on by Amy Castor 0

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

  • By Amy Castor and David Gerard

“somethings are better left unsaid. Recommend no more news like these, for the sake of the people, our industry (and your business)”

— Changpeng Zhao, Binance

Binance USD shuts down — party like it’s 2008

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Celsius and creditors sue the insiders

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

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

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

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

The plaintiffs ask for actual and punitive damages.

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

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

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

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

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

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

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

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

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

FTX examiner denied; Sam’s sportsball shenanigans

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

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

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

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

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

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

Voyager Special Committee [redacted]

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

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

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

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

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

Furthermore, [redacted] [redacted] [redacted]

More good news for bitcoin

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

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

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

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

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

Posted on by Amy Castor 0

Crypto collapse: Binance is not so fine, FTX Delaware vs FTX Bahamas, Celsius, Voyager, Gemini, Tether

due to a mistake in the internal reporting system, it didn’t tell him that he’d taken all the customers’ money and given it to his hedge fund to gamble with

— Qwertycoatl on SomethingAwful

When your auditor quits, that’s bad

Binance is broke. It’s got the same problem as the rest of crypto — the assets are imaginary, but the liabilities are real.

Remember the 2 billion BUSD bailout fund for distressed crypto enterprises that Binance announced in November? Bitfinex’ed suggested it was for a hole in Binance’s accounts — and now we’re seeing that Binance is sure behaving like there’s a huge hole in their books.

But Binance got an audit! Well, not an audit as such. But it was done by accountants who sometimes audit other things!

The “proof of reserves,” issued by Paris-based accounting firm Mazars, specifically disclaims being anything meaningful. But it makes sure to use the word “proof.”

The report didn’t address any of the tricky bits — it didn’t include non-crypto liabilities, it didn’t assess the effectiveness of internal financial controls, and it didn’t actually vouch for the numbers. Michael Burry: “The audit is essentially meaningless.” [Mazars, archive; WSJ; Twitter, archive] 

Mazars has been issuing these “proofs of reserves” for Crypto.com and Kucoin as well. But now Mazars has abruptly halted all work for crypto firms — and scrubbed all mention of such work from its website. This is Mazars running like hell to get as far away from the bomb as possible before it goes off. [Bloomberg]

Meanwhile, users have been taking their cryptos off Binance and going home. Binance outflows hit $6 billion in the week Mazars halted its work for crypto. [FT]

Binance cut off USDC withdrawals again, claiming a “wallet upgrade.” It just looks a bit like a “wallet inspector.” [Twitter] 

CZ went on CNBC Squawk Box to reassure everyone that everything is fine … though he didn’t seem as at ease as he usually does:

CZ: “We are financially okay.”

Rebecca Quick: “Can you have a 2.1 billion withdrawal?”

CZ: “We will let our lawyers handle that.”

CZ was asked why he wouldn’t engage a Big Four auditor to pick up where Mazars left off. CZ said most of these big firms “don’t even know how to audit crypto exchanges.” Andrew Ross Sorkin then pointed out that Coinbase has a Big Four auditor, Deloitte. Quick rolls her eyes at the end of CZ’s stumbling explanation (0:26 in the Twitter link). [YouTube; Twitter]

Why Binance may not have as much money as they want you to think

When FTX bought out Binance’s share in the company, Binance got paid $2.1 billion in funny money. CZ told Squawk Box that “it was all in FTT tokens, which are now worthless.” [Twitter]

70% of Binance’s reserves are in BUSD, Tether, and BNB — the last of which is their internal exchange token, akin to supermarket loyalty card points, in the style of FTX’s FTT.

The BNB token has crashed in the past week, from $290 to $240, according to Coingecko. 

Keep in mind that BUSD on Binance is internal magic beans, and absolutely not the same as Paxos dollar-backed BUSD. If Binance thinks it could get away with cashing in the bridged BUSD at Paxos, that’s $2 billion of actual US dollars Binance could secure for itself.

BUSD on Binance is on their own BNB blockchain, formerly known as Binance Smart Chain — a very hacked-up fork of the Geth software for Ethereum. The idea is to have a platform that runs the Ethereum Virtual Machine, lets you rug pull, and so on. This “blockchain” features transactions that seem to parachute assets into the system from space with no verifiable history. Data Finnovation digs into the weird bits. “It’s probably not fair to call this a ‘blockchain’ anymore.” [Twitter, archive]

And there’s still no verifiable evidence that tethers can actually be cashed in for dollars — even if you’re Binance.

Sounding smart doesn’t mean you are smart

Confidence men are called that because they can say the most outlandish things and not bat an eye. CZ has mostly come across in media as fundamentally being on the ball.

But remember that Sam Bankman-Fried projected being smart as well — until we got a look inside FTX, and saw how incredibly stupid every single smart guy in FTX really was. 

After Reuters published multiple reports of money laundering at Binance — including Binance letting Iran cash out bitcoins in violation of international sanctions — the U.S. Justice Department is “split” over charging Binance with money laundering. The split seems to be whether to charge them now or later: “Some of the at least half dozen federal prosecutors involved in the case believe the evidence already gathered justifies moving aggressively against the exchange and filing criminal charges against individual executives including founder Changpeng Zhao, said two sources.” The DoJ has discussed various plea deals with Binance’s lawyers. The investigation has been going on since 2018. [Reuters]

Binance was also slashing staff in late November. [Twitter, archive]

It’s only a matter of time before Binance starts freezing withdrawals — just like FTX, Voyager, Celsius, and so many other crypto exchanges in the last seven months.

Who can bail out Binance? Only Tether is left. Perhaps some new crypto exchange will pop up and achieve improbable volumes in a remarkably short time. There should be some Jane Street wunderkind on hand to front the operation.

Strange things in the Bahamas 

The FTX liquidation proceedings in the Bahamas are distinctly odd and in direct conflict with FTX’s Chapter 11 proceedings in the U.S. [Bloomberg]

FTX froze withdrawals on November 8. The Bahamas government placed FTX Digital Markets, FTX’s Bahamas subsidiary, into liquidation on November 10. And John Jay Ray III, who took over as CEO of FTX Trading, filed for Chapter 11 in the US on November 11.

The joint provisional liquidators (JPLs), the three men in charge of liquidating FTX Digital Market’s assets, now want dynamic access to FTX systems — they don’t want just lists of specific data, they want to be able to go fishing through the system themselves.

Ray, who cut the JPLs off from the system on November 12, is saying “no way.” He and his team are pissed because of all the pillaging of FTX that occurred after FTX froze withdrawals.

FTX objected to the Bahamas motion saying there was no urgency and the other side was being utterly uncooperative: [Objection, PDF]

“Debtors have made repeated overtures to JPLs and Commission to meet and those overtures were met with avoidance and obfuscation. The JPLs and the Commission have refused to provide responses to Debtors’ questions about the assets ‘secured’ by the Commission. Instead, the JPLs file baseless motions seeking extraordinary relief on an unnecessarily truncated timeframe.”

Ray thinks FTX cofounders Bankman-Fried and Gary Wang, the JPLs, and the Bahamas Securities Commission are all in cahoots. He told Congress: [Twitter, archive]

“The process in the Bahamian islands is not a transparent process. We have opened up the ability to share everything we have with the Bahamian government, similar to how we share with other liquidators around the world not only in this case but in other cases. It’s meant to be a very cooperative situation. The pushback that we’ve gotten is sort of extraordinary in the context of bankruptcy. It raises questions, it seems irregular to me, there are lots of questions on our part, and obviously, we’re investigating.”

James Bromley, one of FTX’s attorneys in the bankruptcy, has filed a declaration with rancorous correspondence between FTX and the Bahamas liquidators attached as exhibits. [Declaration, PDF]

Judge Michael Dorsey, who is presiding over the Chapter 11 proceedings in Delaware, told lawyers for the JPLs and Ray to try to find a middle ground. (His job is to be a referee, after all.) If they can’t work things out, they’ll be facing off in an evidentiary hearing tentatively scheduled for January 6, 2023. [Doc 197, PDF; Doc 203, PDF] 

So that you can understand FTX’s concerns, here’s a rundown of all the questionable stuff that’s happened so far:

On November 9, the day after FTX froze withdrawals, SBF told Bahamas attorney general Ryan Pinder that he would open withdrawals for Bahamian customers. Pinder previously worked at Deltec Bank — Tether’s banker since 2018 — but we’re sure that hasn’t influenced his decision-making, probably. [Doc 203, PDF]

From November 10 to 11, roughly 1,500 individuals, who claimed to be Bahamian residents, withdrew $100 million in crypto from FTX. Every other FTX customer in the world remained locked out of the system.

SBF said the Bahamas Securities Commission had told him to let the local customers in. The BSC denied this. [Twitter, archive]

SBF later told Tiffany Fong that he let the locals get their cryptos out because “you do not want to be in a country with a lot of angry people in it.” Could he have had in mind, not a mob, but particular individuals who might have had very robust opinions about not getting their cryptos back? [YouTube]

Separately from these withdrawals, at least two actors accessed FTX systems and withdrew another $477 million — hours after Ray filed for Chapter 11 on November 11. They also minted new FTT tokens. [Elliptic]

Ray and his lawyers say that SBF and Wang, who, acting on orders from the Bahamas Security Commission, minted FTT and transferred funds to a cold wallet under the control of the Commission. Ray still hasn’t figured out who the other actor was, but he’s working on it.

The JPLs have been tight-lipped as to what assets the Commission seized or how the assets were transferred.

There’s also the issue of the $256 million that FTX spent on 35 properties in the Bahamas — including land for a massive headquarters that never got built. The Bahamas regulators want to claim the properties back and they want the sale of the properties administered locally. Ray is likely to push back on this as well. [CNBC]

It’s hard to say for sure what’s going on here. We are beginning to suspect that FTX was a money-laundering chop shop, with some crypto businesses on the side. This would further suggest possible bribery of some local authorities. But the dots aren’t yet joined up.

Rats turn on each other

After four days, SBF has decided that Bahamas prisons aren’t so great, and he would rather be in a nice U.S. jail instead. [Reuters] 

Ryan Salame, co-chief executive of FTX Digital Markets, is the first FTX insider on record as spilling the beans on SBF. He told the Bahamas Security Commission on November 9 that FTX customer funds had been used to cover losses at Alameda Research. [Doc 225, PDF, page 34; FT, archive]

In 2021, Salame was a budding megadonor to U.S. Republican Party candidates — in step with SBF donating to Democratic candidates. Salame took out a $55 million loan from FTX, paid cash for a $4 million home in Maryland, and was buying up restaurants in Lenox, a town in Western Massachusetts. [NYT]

We’re not saying that’s what he used it for — but restaurants are notorious as a vehicle for laundering dubious cash.

Total donations by FTX to US politicians seem to be about $89 million when you trace all the darkish money as best as possible. [Institute for New Economic Thinking] 

$73 million of those political donations are at risk of being clawed back in the bankruptcy proceedings. [Bloomberg]

The correct regulator for crypto is the Department of Justice

Molly White live-tooted the Senate hearing on FTX and summarized it in her newsletter. [Mastodon; Substack] 

Here are all of the written testimonies. [Senate Housing Committee, PDFs] 

John Jay Ray III wants to sell FTX subsidiaries, starting with LedgerX, FTX Japan, and FTX Europe AG. [Doc 233, PDF]

FTX now has an official creditors’ committee of nine firms or individual investors, including crypto trading firm Wintermute. They still need to pick counsel, which should happen any day now. One of the first matters they will be weighing in on is a proposal to redact personal information rather than publishing a full list of creditors. [Doc 231, PDF]

When the Ontario Teachers’ Pension Plan invested in FTX, it asked the company a slew of questions related to their financial affairs — but received answers only to a few of them. OTPP put in $95 million anyway. [Globe and Mail, archive] 

How a crypto exchange can inveigle itself into the banking system — and how FTX seems to have done this with its Farmington equity purchase. Buy a bank, convert to a Federal Reserve member bank, notify the Fed that you’re going into digital assets and you’ve determined it’ll all be fine and you’re totally going to set up risk management. “If you’re lucky, your bank won’t be examined for a year or two. By then, you might have cranked up quite a dumpster fire.” [American Banker; Wall Street on Parade]

Canada has tightened crypto regulation even further in the wake of FTX. Client cryptos must be stored with a custodian and have no margin or leverage for Canadian customers. Non-Canadian platforms with Canadian customers will also be required to follow these rules. The Ontario Securities Commission had already refused FTX permission to operate in the province, but other provinces didn’t — and many Canadian FTX customers got caught up in the bankruptcy. [Leader Post]

Eliezer Yudkowsky, the AI risk guy who named “Effective Altruism,” advises his fellow Effective Altruists to take the FTX money and run. For the sake of charity, you understand. Others mention that clawbacks in bankruptcy exist — but ehh, it’ll probably be fine, right? [Effective Altruism forum, archive]

David spoke on CBC on Tuesday about FTX. It went pretty well. “TWO AND TWO MAKES FOUR! GRAVITY WORKS! MAGIC DOESN’T HAPPEN!” [Twitter; Yahoo News]

Celsius and Voyager

There’s no interesting news in the Celsius Network or Voyager Digital bankruptcies. Looking through the filings, it’s all procedural sports ball and not matters of real import. Everyone’s on holiday and nothing is going to happen until January. Perhaps Celsius won’t have run out of cash by then.

The next report of the examiner on Celsius was supposed to be out in December — but the court still hasn’t resolved the question of who investigates whether Celsius was Ponziing, which is the big bomb here.

Voyager is just sitting around and giving money to expensive bankruptcy professionals. Binance was talking about buying Voyager’s assets — but frankly, that’s a deal we suggest the creditors not take. They only just escaped being caught up in FTX’s bankruptcy.

Celsius has filed a motion to commence a $7.7 million clawback action against Voyager, as well as an extension of time to file a claim against Voyager’s estate. The Voyager Unsecured Creditors’ Committee is reviewing Celsius’ motion with the intention to object. [Twitter, archive]

Bankruptcy professionals will cost Celsius $115 million in the three months leading up to mid-February. [Doc 1676, PDF] 

Gemini

Crypto broker Genesis owes the Gemini exchange $900 million. Gemini has now formed a creditors’ committee to recoup the funds from Genesis and its parent DCG. [FT]

Did you know that 80% of the current market cap (613 million) of Gemini’s dollar stablecoin GUSD was printed in the weeks before the FTX collapse? Even odder, one unlabeled wallet appears to have minted 460 million GUSD. [Twitter, archive] 

On September 30, 2022, Gemini sought to incentivize GUSD adoption by increasing GUSD deposits to MakerDAO’s PSM (peg stability mechanism). MakerDAO was unimpressed. [The Defiant] 

Tether

Tether’s accountant, BDO Italia, is reconsidering whether it wants to do crypto attestations. “In common with several other professional service firms, we are currently evaluating our approach to this sector and the work we undertake for our clients.” Tether only hired them in August. [WSJ, paywalled]

In the lead-up to FTX going down, CZ from Binance was very upset that SBF appeared to be destabilizing Tether’s peg with … a mere $250,000 trade. We know this because there’s a secret chat group for the exchanges to conspire, er, sort out issues. SBF also put screenshots from these chats into the Congressional Record in his bizarre written testimony before the hearing, which he didn’t manage to attend. [WSJ; Forbes]

The secret ingredient is still crime. Police in China have arrested a gang who laundered $1.7 billion via crypto, including Tether — even after Beijing’s crackdown on crypto. [CNBC]

Other crypto firms who are fine

Three Arrows Capital (3AC)’s liquidator Teneo estimates 3AC’s assets at $1 billion as of July. That’s $37 million of actual money, $238 million in cryptos, $22 million in NFTs, and $502 million in venture and other investments. A lot of those “assets” are obviously imaginary. 3AC’s liabilities, which are extremely real, are over $3 billion. [The Block]

Grayscale wanted to turn GBTC into an exchange-traded bitcoin fund. The SEC said “LOL, no.” Grayscale sued claiming unequal treatment compared to the bitcoin futures ETFs, and even questioning whether the SEC had the right to decide against its ETF proposal. Now the SEC has written a 73-page response to Grayscale’s dumb lawsuit. [SEC, PDF]

Argo Blockchain Plc, a UK-incorporated bitcoin miner, has had trading in its shares suspended by the Financial Conduct Authority. The company is planning to file for bankruptcy. [Twitter; Bloomberg]

MicroStrategy is still going down the toilet. Bitcoin prices fell well below the “low watermark” for carrying value in Q3 2022. The company will likely face a new record digital-asset impairment charge in Q4. [Marketwatch] 

Dump on retail managed: Coinbase founder Brian Armstrong no longer holds any Coinbase stock. But he’s very bullish on crypto, he wants to make clear! [Protos] 

Image: Robyn Damianos for the Wall Street Journal

Posted on by Amy Castor 7

Crypto collapse: BlockFi even deader, crypto miners going broke, Sam will not shut up, Binance and Tether are fine

the wonderful thing about bitcoin is that ‘sorry i was too dumb to do things properly so it all collapsed’ is not only a feasible explanation but historically likely

— Boxturret on SomethingAwful

Shut up, Sam

If you may be in legal trouble, any lawyer has one piece of advice: stop talking. If you’ve just filed a high-profile bankruptcy with maybe billions of dollars missing: stop talking. If you’ve got prosecutors sniffing around your activities: stop talking.

Sam Bankman-Fried never got the memo, or he did and threw it in the trash. In reference to his lawyers, he told Tiffany Fong: “they know what they’re talking about in an extremely narrow domain of litigation. They don’t understand the broader context of the world.” [YouTube; Twitter]

Despite producing reams of potential “evidence” that could one day be used against him, SBF will talk to any reporter, anywhere, any time of day. On Wednesday, November 29 he spoke on an NYT DealBook panel. On Thursday, November 30, he spoke to Good Morning America.

He loves the camera. But he still can’t tell you where the money went.

In the DealBook interview with Andrew Ross Sorkin, SBF said he “never tried to commit fraud,” and he didn’t knowingly commingle $10 billion in customer funds. He frames the whole matter as he seemingly lent Alameda customer funds from FTX as a risk management problem that got out of hand. Well, it sure did that. [Video; Transcript] 

George Stephanopoulos from Good Morning America, who actually flew to the Bahamas to talk to SBF, was a lot tougher on him. SBF again denied “improper use of customer funds,” saying he failed at oversight. “You said one of your great talents in a podcast was managing risk.” “That’s right.” “Well, it’s obviously wrong.” [GMA; Twitter]

As Lying for Money author Dan Davies points out, prosecutors just have to show that SBF intentionally deceived clients as to what was happening to their money. When you tell people their money is segregated and it’s not, that’s fraud. “The offence was committed the minute it went in the wrong account.” [Twitter]

If you ignore your lawyer because you’re smarter than everyone, no lawyer is going to work with you. Martin Flumenbaum at Paul Weiss already dumped SBF. We’re hearing unconfirmed rumors that David Mills, his father’s colleague at Stanford, who was advising SBF, is also refusing to work with him further. [Semafor; Twitter]

A lot of FTX employees bailed after the company filed for bankruptcy. But a few have soldiered on — likely so they can nail SBF, who screwed them over about as much as he screwed over all of his customers and investors. While SBF is telling his side of the story to reporters, FTX employees are leaking emails. NYT wrote about the absolute chaos that FTX lawyers and execs endured in wresting power away from the deluded SBF in the wee hours of November 11. [NYT]

If Sam’s lawyer had jumped in front of the camera and ripped Sam’s larynx out with his bare hands, he could reasonably bill it as extremely valuable and important legal services to his client.

Extremely predictably, there goes BlockFi 

In January, there were three big crypto lenders — Celsius, Voyager, and BlockFi. Now all three are bankrupt, and our emails are clogged with new bankruptcy filings.

After weeks of frozen withdrawals, BlockFi filed for voluntary Chapter 11 on November 28 in New Jersey. [Petition, PDF; bankruptcy docket on Kroll; CNBC; press release]

BlockFi was already a dead firm walking. They were dead after Three Arrows blew up in May. FTX kept BlockFi’s head above water with a $400 million credit facility — but then FTX imploded. [Twitter] 

The New Jersey firm doesn’t just have more liabilities than assets — a lot of the assets are missing too. All of BlockFi’s cryptos were in FTX. They were using FTX as their crypto bank.

BlockFi has over 100,000 creditors. Assets and liabilities range between $1 billion and $10 billion. There’s $1.3 billion in unsecured loans outstanding and $250 million in customer funds locked on the platform.

BlockFi has $256.5 million cash on hand — after selling their customers’ crypto:

In preparation for these chapter 11 cases, BlockFi took steps to liquidate certain of its owned cryptocurrency to bolster available cash to fund its business and administrative costs. Through the process, BlockFi was able to raise $238.6 million of additional cash, for a total unencumbered cash position as of the Petition date of $256.5 million.

Ankura Trust is BlockFi’s largest unsecured creditor to which it owes $729 million. Ankura is typically brought in to represent the interest of others in bankruptcy. If so, who are those creditors? We’d love to know.

FTX US is BlockFi’s second-largest unsecured creditor, with a $275 million stablecoin loan. This is the credit facility that SBF “bailed out” BlockFi with in June.

BlockFi’s fourth-largest unsecured creditor is the SEC — BlockFi still owes $30 million of its $50 million in penalties from February. The total settlement was $100 million, with half owed to the SEC and half owed to state regulators. [SEC; Twitter]

All the other creditors’ names are redacted. Very crypto.

BlockFi is entangled in FTX in multiple ways. BlockFi had a $680 million loan to SBF’s Alameda Research. This was collateralized by SBF’s personal shareholding in popular day-trading broker Robinhood — just days before FTX filed for bankruptcy. BlockFi is suing SBF for his stake in Robinhood. It doesn’t help that SBF was shopping his Robinhood shares around as collateral after he’d pledged them to the BlockFi loan. [Filing, PDF; Complaint, PDF; Bloomberg] 

Crypto miners — we told you so

We set out in detail in August this year how publicly traded bitcoin mining companies were always going to leave their lenders and investors as the bag holders.

We predicted that the miners would default on billions of dollars in loans, leaving the lenders with worthless mining rigs and unsaleable piles of bitcoins. They would then go bankrupt — with all the paperwork in order.

The miners depreciated their mining rigs over five years — and not the 15 months they should have — to make their companies look like better investments.

And miners are now defaulting on their rig-backed loans. Lenders — New York Digital Investment Group, Celsius, BlockFi, Galaxy Digital, NYDIG, and DCG’s Foundry — are getting stuck with worthless e-waste. [Bloomberg]

Iris Energy (IREN) faced a default claim from its lender NYDIG on $103 million “worth” of mining equipment. The company’s miners aren’t making enough money to service their debt. So Iris defaulted! And NYDIG now owns some obsolete mining rigs. [SEC filing, Global Newswire; Coindesk; CoinTelegraph]

Shares in Argo Blockchain (ARBK) dropped 40% after the firm announced that its plans to raise $27 million by selling shares were no longer happening. [Twitter; Decrypt]

Core Scientific hired law firm Weil, Gotshal & Manges and financial advisors PJT Partners to help figure out ways to stave off bankruptcy. The options include exchanging existing debt for equity or additional debt, asset sales, equity, or debt financing. They’re gonna go bankrupt — because that was always the exit strategy. [The Block]

Binance goes shopping

In the financial crisis of 2008, when banks were dropping like flies, some big banks would buy smaller banks that had healthy books — so they could patch the holes in their own books. Bigger and bigger shells to hide the Ponzi under. 

Crypto is doing the same. FTX was buying up, and planning to buy up, small bankrupt crypto firms to try to hide the hole in its own books. And Binance, the largest crypto exchange, just bought Sakuro Exchange BitCoin (SEBC), a Japanese exchange that is already licensed with the country’s Financial Services Agency. [Binance; Bloomberg]

Japan learned its lesson early. Tokyo-based Mt. Gox, one of the first big bitcoin exchanges, blew up in 2014. Japan went on to become one of the first countries to regulate crypto exchanges with a licensing system. Crypto exchanges in Japan are required to keep customer assets separate, maintain proper bookkeeping, undergo annual audits, file business reports, and comply with strict KYC/AML rules. They are treated almost like banks! [Bitcoin Magazine]

Binance tried to set up operations in Japan in 2018, after getting kicked out of China — but Japan’s FSA told Binance they needed to play by the rules and apply for a license or pack their bags. [Bitcoin Magazine]

Binance’s bogus bailout fund 

Binance announced a $2 billion “industry recovery fund” to prop up all of the other flailing crypto firms that have been struggling since FTX blew up. They claim that 150 crypto firms have applied for a bailout. [Bloomberg] 

Binance has its own stablecoin, BUSD, that it claims is run by Paxos and Binance, “and is one of the few stablecoins that are compliant with the strict regulatory standards of NYDFS.” The crypto bailout fund is $2 billion in BUSD.

BUSD is a Paxos-administered dollar stablecoin. Each BUSD is backed by an alleged actual dollar in Silvergate Bank, and attested by auditors. (If not actually audited as such).

That’s true of BUSD on the Ethereum blockchain. It’s not true of BUSD on Binance.

BUSD on Binance is on their internal BNB (formerly BSC) blockchain, bridged from Ethereum. It’s a stablecoin of a stablecoin. Binance makes a point of noting that Binance-BUSD is not subject to the legal controls that Paxos BUSD is under. We’re sure it’ll all be fine if there are any issues, which there totally won’t be. [Binance] 

Treating FTX’s claims about other crypto firms as confessions would have given you pretty detailed correct answers — it was all projection. FTX was accusing others of what they were doing themselves. You should look at what Binance has been saying the same way.

We’re going to go so far as to assert that Binance is a hollow shell too, and the bailout fund is most likely for a hole in its own books.

Every one of the crypto companies accounts for their value in dollars by calculating their mark-to-market value. “We have a billion dollars of $CONFETTI!” Even if they couldn’t get $10,000 in actual money for it.

All of crypto is bankrupt if you account for the crypto assets at realizable value rather than mark-to-market. Realizable value depends on the inflow of actual dollars into crypto — and that inflow has plummeted because the retail suckers went home. 

All crypto companies are Quadriga. Pull back the curtain and you’ll see Celsius/FTX-style non-accounting, a Google spreadsheet if you’re lucky, and incompetence. Such utter blithering didn’t-understand-the-question incompetence. It’s been this way since 2011.

Tether is fine, you FUDster

Tether has been issuing tethers by lending out its USDT stablecoin, rather than exchanging the USDT one-to-one for dollars (LOL).

As of Tether’s attestation for September 30, 2022, 9% of USDT are loans to Tether customers. Tether claims these are collateralized — but they won’t say who the borrowers are or what the collateral is. [Tether; WSJ, paywalled]

In their long-winded response to the WSJ writeup, Tether blames …. the media. [Tether]

We know from the CFTC settlement in October 2021 that Tether was issuing USDT to its big customers with a kiss and a handshake. Now they’re admitting it publicly.

Other crypto exchanges/firms in trouble

CoinDesk’s report on the hole in Alameda’s balance sheet and Alameda’s close ties to FTX did so much damage to the crypto industry — and to Coindesk’s parent company Digital Currency Group — that the news site has attracted take-over interest. [Semafor] 

CoinDesk did not blow apart the crypto industry. This was an unexploded bomb that was set up in May.

It was all going to explode eventually as soon as someone looked inside the box. As CZ told The Block’s Larry Cermak in 2019: “some things are better left unsaid.” [Twitter] 

Japanese social media company Line is shutting down Bitfront, a US-based crypto exchange that it launched in 2020. They said the closure was unrelated to “certain exchanges that have been accused of misconduct.” [Announcement; Bloomberg]

AAX exit scam completed. Hong Kong-based exchange AAX froze withdrawals on November 13, and its executives quietly slipped away as opposed to filing bankruptcy — social media pages removed, LinkedIn profiles deleted. Sources tell us that employees have been laid off and the founders are nowhere to be found. [Hacker News; AAX]

John Reed Stark: Since the FTX debacle, Big Crypto’s SEC hit pieces and talking points calling for “regulatory clarity” are pure pretense and subterfuge, intended to distract and dissemble the truth — that the crypto-emperor has no clothes. [Duke FinReg Blog] 

Image: Sam talking on GMA

Posted on by Amy Castor 3