Tag: Cameron Winklevoss

Crypto collapse: Venture capital goes home, Coinbase, Tether backing, FTX sues Hollywood VCs, 3AC on the beach

  • By Amy Castor and David Gerard

“My survey of three card monte tables suggests they’ve always got at least one patron but you won’t see anyone playing at the big casinos which just shows the system is rigged.”

— crossestman

Crypto’s not dead! Look, it’s still twitching

Crypto venture capital investments have gone full crypto collapse, from $21.6 billion in 2022 to just $0.5 billion so far in 2023. This Fortune article includes the funniest graph of the week: [Fortune, archive]

Investors are leaving the crypto sector without any plans to return. [Bloomberg] 

Crypto trading is at its lowest level since October 2020. The Block puts the volume for May 2023 at $424 billion. For comparison, May 2021 was $4.25 trillion and May 2022 was $1.4 trillion. [The Block]

Volume numbers are considerably less if you take into account that unregulated crypto exchanges are known for faking their volumes. Crypto trading is all but dead. We know this because exchanges run by normal finance guys don’t see any trading. [Bloomberg]

Traditional finance groups want to start their own crypto exchanges run in a non-clown-shoes manner. A nice ambition — but that was Gemini’s pitch and even they still had to resort to risky garbage. [FT] 

The Winklevoss twins marketed Gemini as an exchange that played by the rules — one that serious money people could trust. But after the failure of FTX and the Genesis bankruptcy — in which Gemini is the largest creditor — they lost that trust. Maybe they could pivot to AI? [Bloomberg] 

Crypto.com halted services for institutional traders in the US on June 21. The exchange cited “limited demand” as the reason. [news.bitcoin.com]

The rest of crypto is also desperate. Reddit founder Alexis Ohanian is still pushing play-to-earn games and touts Axie Infinity as a huge success. Gamers hate play-to-earn and think it’s vacuous horse hockey. [Twitter, archive]

Universe.xyz is the latest NFT market to shut down, taking all the images on the site with it. As more NFT markets shut down, your apes are in danger of going blank forever. [Twitter, archive]

TechMonitor asks: “Is crypto finally dead?” We should be so lucky. With quotes from David. [TechMonitor] 

Coinbase: We didn’t do it, nobody saw us, and it wasn’t even a thing

Coinbase has responded to the SEC’s complaint with 177 pages of chaff. [Doc 22, PDF]

Paragraph 2 makes the claim that in approving Coinbase’s original S-1, the SEC approved Coinbase’s business. Let’s quote again this line from the S-1, signed off by Brian Armstrong: [SEC]

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

Coinbase argues that Congress is looking into cryptos, therefore existing laws don’t matter. Paul Grewal, Coinbase’s general counsel, has told Bloomberg how Coinbase’s big hope is that new laws will save their backsides. This is correct — Rep McHenry’s new crypto markets bill is indeed Coinbase’s only hope. [Bloomberg]

Coinbase claims that with this complaint, the SEC is working well outside its remit and that its ideas about whether crypto tokens are securities are entirely novel. Never mind the SEC’s repeated wins in court whenever a crypto issuer is dumb enough to take the matter that far. [Doc 23, PDF; CoinDesk]

Earlier, Coinbase filed a writ of mandamus demanding that the SEC consider its proposal for new crypto regulations. The SEC says it’ll have something to report within 120 days. Judge Cheryl Ann Krause expects a decision on Coinbase’s proposal from the regulator by October 11. [Doc 30, PDF; Doc 32, PDF]  

Tether: Yes! We have no Chinese commercial paper

CoinDesk finally got access to documents from the New York Attorney General related to Tether’s reserves from March 31, 2021. [CoinDesk; CoinDesk, PDF; CoinDesk, PDF; CoinDesk, PDF; CoinDesk, PDF; Bloomberg]  

The NYAG claimed that Tether had been lying about its reserves — which it had been. Tether and Bitfinex settled with New York for $18.5 million in February 2021.

The settlement required Tether to publish a breakdown of its reserves quarterly for two years. But what the public got to see in May 2021 were two skimpy pie charts, showing where Tether had parked its alleged $41 billion in backing reserves at the time. [Tether, archive]

CoinDesk then filed a Freedom of Information request for the fully detailed version of Tether’s report to the NYAG on its reserves.

Tether fought the release of the documents for two years. In February, they lost in court and decided not to go ahead with an appeal. So the NYAG sent Coindesk the documents on June 15. New York also sent the same documents to Bloomberg and Decrypt.

In June and July 2022, Tether vigorously denied that it held money in Chinese commercial paper — loans to Chinese companies which most money market funds avoid. It also said in September 2021 that it had no debt or securities linked to Evergrande, a cash-strapped Chinese real estate company. [Tether, 2022; Tether, 2022; CoinDesk, 2021]

Bloomberg called out Tether’s wider claims of no involvement in Chinese commercial paper as nonsense. [Bloomberg, 2021]

It turns out that Tether did hold Chinese commercial paper in 2021, and quite a lot of it. It held securities issued from banks around the world — but mainly China, including debt issued by the Industrial & Commercial Bank of China, China Construction Bank, and Agricultural Bank of China. ChainArgos took a close look at the funds and put together a spreadsheet. [Google Docs]

The Tether press releases on the FOIed docs are a hoot. Lots of table pounding. [Tether, archive; Tether, archive]

We give CoinDesk a bit of stick from time to time. But we also read the site every day and follow the livewire feed. They get all the credit for doggedly pursuing this one.

FTX versus the venture capitalists to the stars

John Jay Ray’s team at FTX seems to have found some more truly fascinating documents. FTX is suing venture capital firm K5 Global, its managers, Michael Kives and Bryan Baum, and various related entities to recover the $700 million that Sam Bankman-Fried put into the firm.

Kives worked at Creative Artists Agency from 2003 to 2018 as a Hollywood talent agent. He left in 2018 to found K5.

In February 2022, SBF attended a dinner party at Kives’ house, with A-list celebrities, billionaires, and politicians. He was deeply impressed with Kives’ “infinite connections” and even contemplated that Kives could work with FTX on “electoral politics.”

Less than three weeks later, SBF signed a “term sheet” agreeing to give Kives and Baum $125 million each personally and to invest billions of dollars into K5 over three years: 

The Term Sheet was little more than a cursory list of investment ideas, and repeatedly stated that the actual “mechanics” of these very substantial investments would be later worked out “in the long form documents.” 

SBF wired $300 million to K5 the next day. No due diligence was done on any of the deals — including $214.5 million for a 38% stake in MBK Capital LP Series T, whose gross asset value was just $2.94 million as of March 2022.

K5 were very close advisors. Kives and Baum joined FTX’s internal Slack chat. SBF reserved a room for them in his Bahamas luxury apartment. In May, Alameda transferred another $200 million to K5.

Sam didn’t worry too much about the fine details. In an August 2022 internal document, he wrote that “Bryan is ~100% aligned with FTX,” that “FTX is aligned with Bryan too,” and that “if there are significant artificial up-downs between FTX and K5 as entities, I’m happy to just true it up with cash estimates.”

SBF wrote that he was:

… aligned with Bryan and K5, and treats $1 to it as $1 to FTX even though we only own 33%, because whatever, we can always true up cash if needed, but also, who cares … There are logistical, PR, regulatory, etc reasons to not just merge K5 100% into FTX but I and Bryan will both act how we would if they were merged.

… Is Bryan an FTX employee, or a random 3rd party? The answer, really, is neither. The answer is that it’s sorta complicated and liminal and unclear. Bryan lives in the uncanny valley.

FTX and Alameda employees flagged K5’s “pretty bizarre” expenses at the time, such as “over $777k in design expenses” that had been billed to Alameda.

FTX wants the $700 million back as having been avoidable transfers. It may want even more money, as Ray’s team suspects that more interesting details will come out in discovery. FTX also wants K5’s claims in the bankruptcy disallowed until this matter is resolved. [Adversary Case, PDF]

More news from Chapter 11

Cameron Winklevoss tweeted yet another open letter to Barry Silbert of Digital Currency Group on July 4, demanding back Gemini Earn customers’ money. Winklevoss accuses DCG of “fraudulent behavior” and wants them to do the “right thing” and hand over $1.465 billion of dollars, bitcoin, and ether. If Silbert doesn’t pay up, Winklevoss threatens to sue on Friday, July 7. CoinDesk, which is owned by DCG, couldn’t get a comment from their own proprietor on the story. [Twitter, archive; CoinDesk]

After the deal for Binance.US to buy Voyager Digital fell through, Voyager gave up trying to sell itself and is liquidating. Here’s the liquidation notice. [Doc 1459, PDF]  

Celsius is finally converting its altcoins to BTC and ETH as it pursues its plan to relaunch with the auction-winning consortium Fahrenheit. [CoinDesk]  

If you have vastly too much time on your hands, here’s the full Celsius Network auction transcript — all 256 pages of it. [Doc 2748, PDF]

Customers of the bankrupt US branch of the Bittrex crypto exchange — which is being sued by the SEC — can withdraw those holdings that are clearly theirs … whatever that means. [CoinDesk]  

Three Arrows Capital: What Su and Kyle did next

Crypto was taken out in 2022 by a one-two punch of Terra-Luna collapsing in May and then crypto hedge fund Three Arrows Capital collapsing in June.

Other crypto firms had invested in Terra-Luna and 3AC because they paid the highest interest rates! Now, you might think that investment firms would know that high interest means high risk.

3AC’s two founders, Su Zhu and Kyle Davies, just shut their office door in Singapore in late May 2022 and skipped the country, leaving their staff to tell investors the bad news.

What did Zhu and Davies do next? They spent the summer traveling around Asia, went surfing, and played video games. Davies is currently in Dubai and Zhu is back living in Singapore. [NYT]

Zhu and Davies insist they must have done nothing wrong because no government has filed charges yet. Uh huh.

3AC’s creditors think Zhu and Davies have done one or two things wrong. Teneo, the liquidator trying to clean up the 3AC mess, wants the pair fined $10,000 a day for contempt, saying that Davies has failed to respond to a subpoena. [CoinDesk]

The pair are suing Mike Dudas, the original founder of crypto media outlet The Block, for defamation. In the US, LOL. They allege Dudas said nasty things about their new crypto venture OPNX, though the suit doesn’t say what allegedly defamatory claims Dudas made. We expect the 3AC boys to have some trouble demonstrating they have a reputation to malign. Stephen Palley is representing Dudas. [CoinDesk]

Regulatory clarity

In the UK, the Financial Services and Markets Bill has passed. One part of this gives the Treasury greater powers to regulate crypto, likely via the Financial Conduct Authority. We should expect more detailed regulations within a year. [CoinDesk]

This comes not before time. UK losses to crypto fraud increased more than 40% to surpass £300 million (USD$373 million), according to Action Fraud, the national reporting center for fraud and cybercrime. [FT] 

Europe’s MiCA is now law from the end of June 2023. It goes into application in one year for stablecoins and in 18 months for general crypto assets and virtual asset service providers. [EUR-Lex]  

The European Central Bank keeps talking about doing a CBDC. This is good news for crypto! Or maybe it isn’t: [ECB]

Policymakers should be wary of supporting an industry that has so far produced no societal benefits and is increasingly trying to integrate into the traditional financial system, both to acquire legitimacy as part of that system and to piggyback on it.

The CFTC Division of Clearing and Risk sent out a staff advisory to registered derivatives clearing organizations on May 30, reminding them of the risks associated with expanding the scope of their activities. It specifically addressed crypto. [CFTC]

When the CFTC points out that market shenanigans are illegal in crypto just like they are in regular commodities, keep in mind that Avi Eisenberg is finally going to trial for allegedly committing those precise market shenanigans in DeFi. These are real go-to-jail crimes. [Bloomberg; Schedule, PDF; Case docket]  

The Thailand SEC has banned crypto lending that pays returns to investors. It now also requires crypto trading firms to post the following warning: “Cryptocurrencies are high risk. Please study and understand the risks of cryptocurrencies thoroughly. because you may lose the entire amount invested.” [SEC Thailand, in Thai]

New York has settled with CoinEx after suing them in February for failing to register as a securities exchange. The company has to stop operating in the US — not just New York — return $1.1 million to investors, and pay $600,000 in penalties. [NYAG; Stipulation and consent, PDF]

The ETF trick will surely work this time

Guys, guys, the Blackrock and Fidelity bitcoin ETFs will change everything! They’re going to get surveillance of trading and market data from somewhere! This will surely answer all of the SEC’s previous objections to bitcoin ETFs! The market will be delighted!

… oh. The SEC has found these applications inadequate. [WSJ]  

Blackrock and Fidelity are going to try again with Coinbase as the exchange supplying market surveillance. [CoinDesk]  

But the trouble with monitoring at Coinbase is that Coinbase isn’t where the market is — the bitcoin market is at Binance. That’s where price discovery happens.

We expect these ETF applications to go no further than all the previous bitcoin ETF applications.

The good news for bitcoin continues its monotonous patter

Binance senior staff have been jumping ship. General counsel Han Ng, chief strategy officer Patrick Hillmann, and SVP for compliance Steven Christie all resigned this week. They specifically left over CZ’s response to the ongoing Department of Justice investigation. [Fortune]

Binance.US’s market share has dropped to 1%, down from a record 27% in April. Is Binance giving up on its US exchange? The market share nose-dived after the SEC sued Binance in June. [WSJ]  

Fortune favors the internal trading desk: Crypto.com has been caught trading directly against its own customers. Dirty Bubble spotted the job ads for a proprietary trading desk at the firm in November 2022, of course. [FT, archive; Twitter, archive]  

Russia is giving up on the idea of a unified state-run crypto exchange. Instead, it’s focusing on regulation for multiple exchanges. Russia is continuing to promote crypto as a way to evade sanctions for making international payments. When you’ve devastated your economy by embarking upon a very stupid war, that’s … a strategy? [Izvestia, Russian]

In crypto collapse news from the distant past, something’s happened in Quadriga! The government of British Columbia is seeking forfeiture of $600,000 in cash, gold bars, and Rolex watches that QuadrigaCX cofounder Michael Patryn has in a safe deposit box. The RCMP alleges the items are the proceeds of unlawful activity. [Vancouver Sun]

Posted on by Amy Castor 0

Crypto collapse: Genesis bankrupt, CoinDesk for sale, Bankman-Fried attacks FTX lawyers, Bitzlato busted

  • By Amy Castor and David Gerard

I think we made some tremendous progress in the six months before I left.

— Jeffrey Skilling, Enron

Media stardom

Amy’s first piece for Foreign Policy is out now! “The Crypto Dominoes Are Still Falling: The bankruptcy of Genesis shows the need for regulators to have teeth.” She advises that regulators be given the power to act much more quickly against obvious nonsense. [Foreign Policy, paywalled]

Genesis goes down — DCG is fine, fine

The lending arm of Genesis finally filed for chapter 11 in the Southern District of New York on January 19. This has been expected for months, as they froze withdrawals in November. [Amended Petition, PDF; docket on Kroll; press release; Bloomberg; Michael Lito declaration, PDF]

The corporate entities that filed were Global Holdco and its lending subsidiaries Genesis Global Capital and Genesis Asia Pacific, which managed Genesis lending for Three Arrows Capital. Genesis’ derivatives, spot trading, broker-dealer, and custody businesses were not part of the bankruptcy.

Genesis owes its top 50 creditors — mostly unnamed on the petition — over $3.4 billion. Gemini Earn clients are collectively owed $765.9 million. Other big claims include a $78 million loan payable from Donut (a “high-yield” DeFi platform — “high yield” is a euphemism for “Ponzi”) and a VanEck fund with a $53.1 million loan payable. [Reuters]

But fear not! Genesis has a plan to exit the bankruptcy by May 19. It will try to sell its assets at auction within three months. [Chapter 11 Plan, PDF]

The settlement proposal is written in a confusing and opaque manner — but DCG controls the bankrupt entities utterly. DCG is trying to declare its left hand solvent and its right hand bankrupt, and stick the creditors with the losses.

Page 50 of the chapter 11 plan (page 54 of the PDF) sets out the street corner shell game. Claims are shuffled between the bankrupt Genesis entities and the non-bankrupt DCG entities such that heads DCG wins, and tails the creditors lose. Any Gemini Earn creditor who accepts this settlement relinquishes all claims against DCG, Gemini, and the Winklevoss twins personally.

We think DCG screwed up by covering for Genesis in July 2022, when it took on the claim to 3AC and issued Genesis a $1.1 billion promissory note in return. It’s clear that nobody at Genesis could refuse the offer — that this was entirely in the control of DCG. Also, the 3AC loan was secured in part by shares of GBTC, as issued by DCG’s Grayscale. Genesis should have declared bankruptcy then.

In addition to the $1.1 billion note, DCG owes Genesis another $575 million, in cash and cryptos. The Genesis bankruptcy is all about shielding DCG from liability.

“This SHOULD be criminal,” Nicholas Weaver said. “You sell a billion dollars worth of unregistered investments (it is called ‘securities fraud’), they go sour, your victims should be able to go after you. But this is all designed to basically be a perfect crime: a billion dollar theft, in plain sight, and with legal protection.” He advises the unsecured creditors’ committee to reject the offer. [Mastodon]

Gemini Earn claims against Genesis are part of the bankruptcy. It’s unlikely the customers will get all their money back in chapter 11. The question is: will Gemini make Earn depositors whole, or will the Winklevosses argue that Earn depositors are creditors of Genesis?

Cameron Winklevoss is still fighting to get Genesis to pay up. He threatened to sue DCG over the bankruptcy: “Unless Barry and DCG come to their senses and make a fair offer to creditors, we will be filing a lawsuit against Barry and DCG imminently.” [Twitter]

As we noted previously, the SEC case against Gemini Earn makes Gemini and Genesis jointly and severally liable to pay back customers in full, should the SEC win or the defendants settle. And Gemini has the funds and isn’t bankrupt. So Cameron really wants DCG to pay.

Who wants to buy CoinDesk?

DCG’s crypto news site CoinDesk is exploring a partial or full sale. CEO Kevin Worth says that CoinDesk has received multiple unsolicited offers of over $200 million. We raised an eyebrow at this claim, but hey. We doubt the offers were in actual cash dollars, though. [WSJ] 

CoinDesk claims it received $50 million in revenue in 2022. It’s unclear where from. Its main income source was events — which are not so huge in the crypto winter. There are a few ads on the site. Staff expansions in the past year, particularly at CoinDesk TV, won’t have been cheap.

CoinDesk has been propped up by DCG since 2016 when Barry Silbert bought the site for $500,000. We understand that CoinDesk was about to go broke when Silbert dived in and rescued it. CoinDesk was still a small crypto blog then, but Silbert took it into the big time just in time for the 2017 bubble.

CoinDesk’s job is to be a PR machine for Silbert’s empire — often quite explicitly. [CoinDesk memo, archive] The only reason to buy CoinDesk would be to make it your PR machine.

3AC and CoinFLEX — a remarkable team

Three Arrows Capital founders Zhu Su and Kyle Davies are looking to raise $25 million for a new crypto claims exchange. That is, an exchange for claims against bankrupt crypto companies. 3AC are, of course, experts in going bankrupt in a really big way.

Zhu and Davies were going to name their new thing GTX — a take on FTX because G comes after F. They claimed this was just a temporary name after everyone made fun of them.

The pair are working alongside CoinFLEX founders Mark Lamb and Sudhu Arumugam. CoinFLEX filed for restructuring in the Seychelles in June after it suffered $84 million in losses from a large individual customer — Roger Ver. 

GTX will run on CoinFLEX’s software and a legal team will oversee the onboarding of claims for all the recent crypto bankruptcies —including Celsius, Voyager, FTX, and Mt. Gox. Creditors who transfer their claims to GTX will receive credit in a token called USDG. [The Block]  

In its pitch deck, GTX estimated there was a $20 billion market for crypto claims, based on the notional value of those claims. “We can dominate the crypto claims market within 2-3 months of go-live.” [WSJ, paywalled; FT, paywalled; pitch deck, archive, PDF]

The pitch deck ends with a splash detailing 3AC and CoinFLEX’s extensive crypto market successes. This fails to mention that both companies went broke — and that 3AC went broke so hard they took out much of crypto all by themselves.

GTX gets full points for audacity, and here’s to Zhu and Davies going to jail.

FTX: Judge says Sullivan & Cromwell can stay

Amy and Molly White live-tweeted the FTX hearing on Friday, January 20. It was about FTX’s applications to retain various bankruptcy professionals, mainly Sullivan & Cromwell. [Twitter; Twitter, Agenda, PDF]

Judge John Dorsey ruled FTX could continue using Sullivan & Cromwell, despite claims the law firm was too conflicted. [Order, PDF; Motion, PDF]

The US Trustee and the UCC had originally objected to S&C on the grounds the firm failed to make relevant disclosures regarding its prior dealings with FTX. But leading up to the hearing, the parties worked things out, and now the UST and UCC are on board. The only remaining objections came from FTX creditor Warren Winter, with a joinder from FTX creditor Richard Brummond. [Objection, PDF; Joinder, PDF]

In support of Winter’s objection, former FTX (and Ultimate Poker!) lawyer Daniel Friedberg filed a hilariously terrible declaration. Friedberg describes how shocked he was to learn that $8 billion of FTX customer money was missing. After reviewing his “ethical obligations” — a bodily organ hitherto unknown to Mr. Friedberg — he resigned. He tries to imply that S&C took FTX into bankruptcy so they could loot the corpse, helped from the inside by S&C’s former law partner, Ryne Miller. [Declaration, PDF]

Because Friedman filed his declaration late, White followed with an emergency motion to adjourn the hearing, so the court would have more time to chew on it. [Motion, PDF]

S&C’s James Bromely said Sam Bankman-Fried was behind all of this troublemaking. Friedberg’s declaration came hot on the heels of social media posts by SBF attacking the law firm. SBF is living in his parent’s home with an ankle bracelet and Friedberg has been questioned by the FBI. The pair were part of the inner circle that brought down FTX, said Bromely:

“If you are Mr. Bankman Fried or Mr. Friedberg, there is a concern about what is going on and what could happen to them. They can’t throw stones at the US attorney’s office. But they can throw stones at the Debtor’s counsel who are providing information to the prosecutors and the regulators, which is exactly what is happening.” 

As far as Friedberg goes, Bromely added: “He’s got a checkered past. It takes a lot of guts for him to put something in writing that says, ‘I was the chief compliance officer at FTX.’”  

Judge Dorsey dismissed everything in the Friedberg declaration saying, “It’s full of hearsay, innuendo, speculation, and rumor… certainly not something I would allow to be introduced into evidence in any event.”

FTX CEO John Jay Ray III said in his declaration S&C are not the villains. The villains are being pursued by criminal authorities. [Ray declaration, PDF]

We concur that S&C may be conflicted. But they’re competent to do the job, they’ve already spent 70 days on the case, which new counsel would have to do over, and it’s not like someone else would be cheaper.

The Trustee also wants to appoint an examiner in the case. The examiner motion will be heard on February 6. 

FTX: mycrimes.blog

A new mycrimes.blog just dropped, with more drafts from Sam’s forthcoming book* If Caroline and CZ and John Ray and Sullivan & Cromwell Did It. SBF claims that FTX US was solvent when he passed it off to the lawyers, Sullivan & Cromwell. John Jay Ray III responds: “This is the problem, he thinks everything is one big honey pot.” [Substack; WSJ]  

FTX secretly channeled a $50 million loan to Deltec Bank in the Bahamas, in a deal struck with Deltec chair Jean Chalopin. “Deltec is emerging as a central figure in the scrum of lawyers, banks and unwitting associates FTX pulled into its orbit.” Our regular readers will recognize Deltec as the known banker for Tether, who have occasionally claimed to hold more dollars for Tether than are documented in the entire Bahamas banking system. [Forbes, paywall]

It was obvious to executives and software developers at FTX that financial arrangements between FTX and Alameda were somewhat odd as early as 2020. FTX employees have been leaking documents to the New York Times. [NYT]

CFTC commissioner Christy Goldsmith Romero gave a speech on FTX’s failure and the nature of public trust in crypto firms. She goes in hard, particularly after the professional gatekeepers: “lawyers, accountants, auditors, compliance professionals and other gatekeepers for crypto firms failed customers in their essential duties.” Venture capitalists and pension funds too. She wants Congress to give the CFTC more power over crypto exchanges. [CFTC]

Romero also went after FTX’s venture capital backers on Bloomberg TV: “What kind of due diligence did they conduct? Why did they turn a blind eye to what should have been really flashing red lights?” [Bloomberg]

* c’mon, you know he will

Bitzlato: Ladies and gentlemen, we got ’em

Everyone heard about the huge Fed announcement of an international cryptocurrency bust and went … who the hell is Bitzlato? Some tiny Hong Kong exchange run by some Russian living in Shenzhen? [Press release; order, PDF; affidavit, PDF]

Bitzlato, formerly called ChangeBot, was a small exchange with a peer-to-peer service, similar to LocalBitcoins. Its user base was Russian crooks doing crooked things with fake accounts. Users with valid Know-Your-Customer info would create “drop” accounts which they would then sell to crooks. So Bitzlato could say it had KYC, even if it didn’t do anything.

Bitzlato was not systemic to the crypto economy. But it was important to the Russia-based ransomware economy, and it was the exchange of choice for users of the Hydra darknet market that was busted in April 2022.

The Feds basically enacted Nicholas Weaver and Bruce Schneier’s 2021 plan to take out ransomware: hit the very few exchanges willing to touch such tainted coins. [Slate, 2021]

The fun part of the FBI affidavit is the tales of Bitzlato’s criminal customer service, page 10 onwards:

•‌ On or about December 27, 2017, a user with the username “Dude Weed” wrote to Bitzlato’s customer service portal, stating: “I have a bitcoin wallet in my account on the Hydra site. I also have a wallet here … How do I recharge a Hydra wallet”? The user also provided transaction details. Based on my training and experience, this query reflects the user’s desire to send funds from Bitzlato to Hydra. A Bitzlato representative responded: “Hello dude weed,” apologized for the delay in the transaction, and stated that “The transaction successfully went online.” The Bitzlato representative provided a link to an online blockchain explorer, reflecting a completed Bitcoin transaction whose total amount was then equivalent to approximately $14,600.

•‌ On December 17, 2020, a Bitzlato representative asked a user to provide his identity documents. The user protested, writing, “I don’t quite understand why you need a photo of this card? It’s not mine[.]” In further conversations, the user clarified that “everyone on the site trades with other people’s cards … they often discuss so-called ‘drops.’” The user commented that he had been told to create an account using credentials supplied by an online cryptocurrency training course that he had found on Instagram. The Bitzlato representative asked the user to provide his true identity documents and, rather than terminate that user, said the user could keep trading on Bitzlato.

Image: Cameron Winklevoss on Instagram

Posted on by Amy Castor 1

Crypto collapse: DCG’s problem is Grayscale, FTX Bahamas agreement, DeFi trading arrest, Silvergate Bank, Huobi, Binance

  • By Amy Castor and David Gerard

Oh, what a tangled web we weave, when first we practice to deceive!

— Sir Walter Scott, 1808

DCG: Congratulations, you played yourself

The Department of Justice’s Eastern District of New York and the SEC are looking into money flows between Barry Silbert’s Digital Currency Group and its lending subsidiary Genesis, and what investors were told about the transfers. [Bloomberg]

DCG has been playing all the same games as the rest of crypto — trying to create the illusion of money where there is no money, to keep the party going a little bit longer.

Genesis should have declared insolvency in June when Three Arrows Capital (3AC) blew a $2.4 billion hole in its accounts — but DCG purchased 3AC’s defaulted loan from Genesis and financed the purchase with a promissory note of $1.1 billion, to be paid back over 10 years.

That is: DCG and Genesis counted an internal IOU as money, to claim Genesis was still solvent.

The catch with the promissory note is that if the 10-year loan is “callable” — meaning DCG would have to pay Genesis the full amount immediately in the event of a liquidation or bankruptcy — then it could give Genesis creditors a claim on DCG itself, and take all of DCG down with it.

“The Promissory Note is like a noose wrapped tight around the neck of DCG. If Genesis goes over the cliff, it drags DCG with it,” said Ram Ahluwalia, the co-founder of Lumida, an investment advisory firm that focuses on crypto. [Twitter]

In a letter to shareholders in November, Silbert disclosed that DCG borrowed another $575 million from Genesis — due in May 2023. The funds were used for “investment opportunities” and buying back shares of DCG stock from outside investors. [Twitter]

A creditor committee that includes crypto exchange Gemini presented Genesis and DCG with a plan to recover the assets. Silbert had until January 8 to respond. Cameron Winklevoss threatened that “time is running out.” [Twitter; Twitter]

We think Gemini will try to force Genesis into involuntary chapter 11 — they just need three creditors to file a petition with the bankruptcy court. The judge then holds a hearing and decides if the matter will go through. [11 U.S. Code, section 303]

Gemini Earn, Genesis, GBTC, and 3AC

As is usual in crypto, DCG screwed itself by greed. DCG also owns Grayscale, which operates the Grayscale Bitcoin Trust (GBTC) — DCG’s cash cow. Grayscale collects a whopping 2% annual fee on its assets under management — currently, 633,000 BTC.

GBTC traded above the face value of the bitcoins in the fund up to early 2021 — then it dropped below net asset value (NAV).

Genesis took the crypto it got from Gemini Earn customers and lent those funds out to institutional investors and crypto hedge funds — such as Three Arrows Capital.

3AC was one of the biggest investors in GBTC, taking advantage of a lucrative arbitrage opportunity. They would borrow bitcoins from Genesis and swap those for GBTC shares at NAV from Grayscale. After a six-month lockup, 3AC could dump the shares on retail for a handsome profit. Rinse and repeat, and when GBTC was trading at 20% above NAV, they could make a 40% profit a year that way

This GBTC arb played a big role in keeping the price of bitcoin above water in 2020, setting the stage for the 2021 bitcoin bubble.

At the end of 2020, 3AC was the largest holder of GBTC with a position worth $1 billion at the time. After February 2021, the GBTC premium dried up, and GBTC began trading on secondary markets at a steep discount to NAV. 

3AC had hoped the discount would be reversed when the SEC approved Grayscale converting its bitcoin trust to an ETF. But the SEC rejected the application, and the GBTC discount continued to widen. [Bloomberg]

When 3AC defaulted on its $2.4 billion loan to Genesis, Genesis seized the collateral backing the loan, including 17.4 million shares of GBTC, and filed a $1.1 billion claim against 3AC — a claim that is now on DCG’s books. [Coindesk; Affidavit Russell Crumpler, PDF]

Class action against Gemini Earn

Gemini partnered with Genesis for their Earn program. After Genesis lost $175 million in FTX in November, it froze withdrawals. Gemini Earn froze withdrawals in turn. Now Gemini Earn customers are out $900 million.

In an effort to get those funds back, three Gemini Earn customers are seeking class arbitration against Genesis and DCG.  

Gemini and Genesis had a “master digital asset loan agreement,” which Gemini Earn customers entered into — when you became an Earn customer, you agreed you were lending money to Genesis.

The complaint alleges that Genesis breached this agreement by hiding its insolvency through a “sham transaction,” whereby DCG “bought” the right to collect a $2.3 billion debt owed to Genesis by 3AC with the aforementioned $1.1 billion promissory note. The plaintiffs also claim that the Genesis loan agreement created an unregistered sale of securities. [Press release; Complaint, PDF; Master Digital Asset Loan Agreement]

The master loan agreement states that: “Each Party represents and warrants that it is not insolvent and is not subject to any bankruptcy or insolvency proceedings under any applicable laws.”

This is why Silbert keeps insisting that Genesis has a liquidity issue and not a solvency issue — even as those are functionally identical in crypto. If Genesis was found to be insolvent and took customer funds in, it would be in violation of that contract. (As well as promptly calling that promissory note from DCG.)

Amidst all of this, Larry Summers, the former US Treasury Secretary and World Bank Chief Economist, has quietly left DCG — going so far as to remove all mention of DCG from his own website. Summers joined DCG as a senior advisor in 2016, a year after the company’s founding. [Protos]

Silvergate Bank

Moody’s has downgraded Silvergate Bank’s long-term deposit rating to Ba1 from Baa2 after the crypto bank announced that its customers — who are almost entirely crypto firms now — withdrew $8 billion in deposits in Q4 2022: [Moody’s] 

The negative outlook reflects Moody’s view that the bank’s profitability over the near term will be weak along with the risk of further declines in deposits from crypto currency centric firms further pressuring profitability. In addition, the negative outlook reflects the increasing regulatory and legal risks that the firm is currently facing.

Silvergate’s other customers are worried about the bank’s solvency and about the regulatory heat coming its way. Silvergate was key to FTX/Alameda having access to actual money — they helped funnel money to FTX from accounts in the name of Alameda and of Alameda’s dubious subsidiary, North Dimensions. 

If Silvergate are found to be complicit in FTX’s fraud, they will be fined. But if there was money laundering and sanctions busting, they could be shut down. They will at the very least be fined. We would guess some individuals will also get a bar from being bankers. Here’s a list of enforcement actions on Federal Reserve member banks. [Federal Reserve]

Silvergate’s 8-K SEC filings this year are full of bad news. We noted Silvergate’s layoffs and writing off its Diem investment last time. [SEC 8-K; SEC 8-K; SEC 10-Q]

FTX

After a series of knock-down-drag-out filings — and the hilarious revelations of how FTX Digital Markets (FTX DM) was functionally Sam Bankman-Fried’s Bahamas partying fund — the US and Bahamas bankruptcies are working together now. John Jay Ray III and his team met in Miami with the joint provisional liquidators (JPLs) handling the FTX DM liquidation, and they’ve reached an agreement. [press release; agreement, PDF]

The Bahamas JPLs will handle everything to do with FTX DM, and the US administrators will handle everything to do with all the other FTX companies. The JPLs will handle the Bahamas real estate and the cryptos being held by the Securities Commission of the Bahamas. (This doesn’t mean that the Bahamas will handle the disbursement of the crypto they have under their control — only that FTX is fine with them holding the funds for now.) The parties will share information. FTX DM’s chapter 15 foreign entity bankruptcy in the SDNY will continue.

We suspect it was clear the US side would win in court, and the Bahamas liquidators realized they weren’t being paid enough to damage their reputations this way. The agreement is subject to approval by the courts in the US and the Bahamas, but it would be surprising for them not to allow it.

The Department of Justice has put out a call for victims of “Samuel Bankman-Fried, a/k/a ‘SBF.’” That’s his rapper name now. [Justice]  

Huobi’s real-time meltdown

Huobi has always been a dodgy crypto exchange — even before it was run by Justin Sun from Tron. Huobi has $2.6 billion in reserves, and 40% of that is its own HT token. If you don’t count its own internal supermarket loyalty card points, Huobi is insolvent. [Twitter]

Huobi is desperately searching its pockets for spare change. On December 30, Wu Blockchain reported that Huobi was canceling year-end bonuses and planning to slash half its staff of 1,200 people and cut the salaries of senior employees. Sun denied the rumors. [Twitter; South China Morning Post; Twitter] 

Other unofficial reports from small accounts on Twitter said that Huobi was offering to pay its employees in stablecoins — USDC and tethers — instead of actual-money yuan. If they objected, they would lose their jobs. [Twitter] 

Employees revolted at being paid in magic beans — so Sun cut off internal communications. On January 4, Bitrun said that “all communication and feedback channels with employees” had been blocked. [Twitter] 

Here’s the unofficial details on how Huobi is treating its employees. Those who quit because they’re getting paid in tethers get no severance pay either. This is what a doomed company does. [Twitter]  

After initially denying Huobi was cutting staff, Sun finally admitted that Huobi was indeed laying off 20% of its employees in the first quarter of 2023 — after rumors swirled that half of all employees would be let go. [FT]

Huobi users rushed to get their funds off of the exchange. Blockchain analytics platform Nansen noted a wave of withdrawals on January 5 and 6. Following the withdrawals, Peckshield reported a wallet associated with Tron moved $100 million in stablecoins — USDC and tethers — into Huobi. [Twitter, Twitter]

In a lengthy Twitter thread, Sun assures you that your funds are totally safe. We fully expect the exchange to blow up at any moment. [Twitter]

Binance

US prosecutors for the Western District of Washington in Seattle are sending subpoenas to hedge funds for records of their dealings with Binance. John Ghose, formerly a Justice Department prosecutor who specialized in crypto and now a lawyer at compliance vendor VeraSafe, thinks this is about money laundering. [Washington Post]

We noted previously that “BUSD” on Binance is not the BUSD issued by Paxos, which claims to be backed by actual dollars in Silvergate Bank. Binance “BUSD” is a stablecoin-of-a stablecoin, maintained internally. This is the sort of arrangement that’s fine until it isn’t.

It turns out that Binance has been issuing uncollateralised “BUSD” on its own BNB blockchain. Data Finnovation looked at the Ethereum and BNB blockchains and saw that Binance has a history of minting fake “BUSD” internally on BNB. At some points in 2021, there were $500 million to $1 billion of fake dollars circulating on BNB. They’re caught up now, though — so that’s all fine, right? [Medium]

Dirty Bubble thinks Binance US isn’t meaningfully separate from Binance.com, if you look at how the cryptos flow. But that shouldn’t be news to anyone here. [Dirty Bubble]

Reuters is still on the Binance beat. Here’s a special report on Binance’s accounts, as far as can be told. Reuters calls Binance’s books a “black box.” Private companies don’t have to disclose their financials, especially if they’re operating outside all effective regulation — but even Binance’s former CFO, Wei Zhou, didn’t have full access to the company’s accounting records in the three years he was there. We’ve noted previously how regulators have a heck of a time getting the most basic information out of Binance. [Reuters] 

John Hyatt from Forbes notes how Binance is spending tens or hundreds of thousands of dollars sponsoring Politico’s Playbook newsletter to reach politicians and bureaucrats. Worked great for FTX! [Twitter thread]

DeFi: Go directly to jail

Discussions of crime on the blockchain hardly ever point out that almost all of what goes on in DeFi was always just straight-up illegal under US law.

Pretty much every token was always an unregistered security. The sort of market manipulations that are standard practice in the DeFi trash fire have been illegal under Dodd-Frank since 2010. And that’s before we get to the rugpulls, hacks, and “hacks.”

The authorities are finally moving in. Every DeFi trader should consider themselves on notice.

Hotshot DeFi trader Avraham “Avi” Eisenberg was arrested in Puerto Rico on December 27 on a Department of Justice (Southern District of New York) indictment for commodities fraud and commodities manipulation in the $110 million trade that took out Mango Markets. [indictment, PDF; case docket]

Mango Markets is a decentralized exchange that runs on Solana. Users can lend, borrow, swap, and trade on margin. The exchange is overseen by a DAO, made up of people who hold MNGO — the native token of the exchange.

On October 11, someone drained the project of $110 million by manipulating the platform’s price oracle. After others had traced it to him, Avi Eisenberg came forward and explained the trade.

Eisenberg sold MNGO perpetual futures from one account he controlled to another account also under his control. He then bought large amounts of MNGO, which had the effect of increasing the value of his large holding of MNGO perpetuals. He then borrowed against these holdings and withdrew $110 million in assorted cryptocurrencies. 

This also rendered the Mango platform insolvent. Eisenberg himself explained that the insurance fund in place was “insufficient to cover all liquidations.” He gave back some of his trading profits. [Twitter; Bloomberg]

Eisenberg tweeted: [Twitter, archive]

I believe all of our actions were legal open market actions, using the protocol as designed, even if the development team did not fully anticipate all the consequences of setting parameters the way they are.

Eisenberg’s lawyer will likely explain his client’s erroneous legal reasoning to him.

Eisenberg wasn’t just arrested, he was denied bail as a flight risk — he has significant ties outside the US, he already left the US for two months just after the alleged offense, he likely has crypto stashed away somewhere, the charge carries a heavy penalty, and his background could not be checked. (Compare Sam Bankman-Fried’s release on bail.) [Order of detention pending trial, PDF]

It’s not clear why prosecutors went after Eisenberg in particular. We’d guess the CFTC and DoJ were looking for someone to make an example of. The bit where Eisenberg tweeted a complete confession probably helped, much as SBF’s confession tour of the press helped get him indicted.

What Eisenberg did to Mango was not remarkable at all. DeFi traders pull this nonsense all the time. Perhaps you don’t think DeFi trading shenanigans should be crimes, and that’s nice for you that you think that.

As Avi tweeted on October 19: “What are you gonna do, arrest me?” [Twitter, archive]

Posted on by Amy Castor 1