Crypto collapse: Celsius’s Interim Examiner Report

  • By Amy Castor and David Gerard
  • Our work here is funded via our Patreons — here’s Amy’s, and here’s David’s. Your monthly contributions help greatly with our coffee and ibuprofen budgets!

Shoba Pillay, the examiner in the Celsius bankruptcy, filed her first interim report on Saturday at 11:45 p.m. ET. [Report, PDF]

Appointed by the Office of the US Trustee — an arm of the Department of Justice — Pillay is here to work out precisely what on earth happened here. She is already conducting Rule 2004 investigations, which let her look into almost anything.

This interim report specifically examines Celsius’ crypto holdings, where they were and are stored, and the change from Earn accounts to Custody and Withhold accounts in April 2022, during which time Celsius was feeling the heat. 

Who owns what and under what terms is hugely contentious, with legal briefs flying back and forth: [Debtors’ brief, PDF; Unsecured Creditors’ brief, PDF; Custodial brief, PDF; Withhold brief, PDF]

This investigation revealed that Celsius reacted to the regulatory scrutiny by launching its Custody program without sufficient accounting and operational controls or technical infrastructure … As a result, customers now face uncertainty regarding which assets, if any, belonged to them as of the bankruptcy filing.

This isn’t the bomb under the Celsius bankruptcy that we have been waiting for — it’s just an interim report ordered by Judge Martin Glenn ahead of the Celsius Custody and Withhold hearings on December 7 and 8.

Nevertheless, it’s jam-packed with the sort of hilarity and horrors that you find when anyone looks inside how any crypto firm actually works. All crypto firms are Quadriga. It’s just that some haven’t exploded yet.

The current report is a window into the fraught issue of whose cryptos are in the Custody and Withhold accounts. It will help the court decide whether the depositors will get back 100% of what they put in or whether the cryptos go into the general bankruptcy estate.

The word “Ponzi” does not appear in this report. Whether the Examiner will look into possible Ponzi scheming by Celsius has yet to be determined. The Unsecured Creditors’ Committee — consisting of seven individuals representing the largest Celsius creditors, who are mostly from the crypto industry — wanted to look into this question themselves.

We think the task should be handed to the examiner, a neutral party — and many of the smaller retail investors concur. Also, we’re impressed by what a relentlessly thorough job the examiner did in this interim report.

Celsius hampered the examiner’s investigation as much as they thought they could get away with:

Documents or information responsive to certain requests were not received until days prior to the filing of this Interim Report, and some were not received at all, which may require the Examiner to further supplement the information contained in this Interim Report when she issues her Final Report.

… In addition, Celsius imposed limitations on interviews of its employee witnesses, including by requesting that the Examiner preview any topics to be covered during the interviews and limiting the time of many interviews to two hours. Further, Celsius claimed privilege over communications between Celsius and the regulators, further limiting her ability to obtain the full scope of relevant facts.

On page 19, the examiner cites one of Amy’s 2017 articles for CoinDesk to define what an ERC-20 token is. [CoinDesk]

Custody accounts

Earn was Celsius’ main product. You would deposit cryptos and be paid interest on them.

Regulators in multiple states had been lining up to shut down Celsius’ Earn product through 2021 and early 2022 — they thought it was the unregistered security that it obviously was. New Jersey in particular said that since Celsius was selling the product from their state, the New Jersey cease-and-desist order would take effect for the whole US. The SEC was also subpoenaing information from Celsius. BlockFi had already suffered cease-and-desists for its similar product.

Regulatory heat was a major factor in the creation of Custody and Withhold accounts. Yarden Noy, who headed regulation for Celsius, told Pillay: “Given the regulators, we came up with Custody.”

Celsius was working under the gun — they worried about having a month unable to accept fresh customer deposits — but they had to release Custody before the regulatory deadline or stop accepting any cryptos from retail US customers.

A lack of fresh cryptos coming in from new investors to pay out previous investors would be a serious issue if Celsius happened to be Ponzi-ing.

Celsius was short of developers. Celsius Engineering Director Steven Koprivica characterized the procedure as: “go back to blackboard, do the minimum of all minimums, this may be manual for the start, involve less developers, let’s discuss deadlines.” So everything about the Custody accounts ended up a mess.

Celsius was already tracking the company’s cryptos in the most advanced software known to cryptocurrency: a Google Sheets spreadsheet called the “Freeze Report.” This was an improvement over Celsius’ previous system, which was to just look at each blockchain address and check the balances by hand.

It wasn’t even clear precisely what the “Custody” product was. The accounts certainly weren’t “custody” in the sense that every other crypto custody firm uses the word — storing the keys for a customer’s large crypto holding securely. Different groups in Celsius had different understandings of what the accounts were supposed to do.

Celsius Custody launched on April 15, 2022. Celsius didn’t tell anyone about Custody ahead of its launch — they worried that customers would leave the platform, and they worried that regulators would give them a hard time about the Custody product itself.

Custody was run badly. Celsius didn’t have time to do anything properly. Rather than relying on software, Celsius used manual reconciliation and hoped to add a more robust process later.

Employees were told to tell customers: “Celsius continues to safeguard customer assets.” In fact, Celsius did not safeguard customer assets. Celsius represented each customer’s Custody account as separate — but in practice, they aggregated all of the crypto, lumping everything into one big pile and kept track of the amounts … shoddily.

Celsius had to manually reconcile the amount of crypto listed in each Custody account with the actual cryptos in the aggregate Custody wallet. This was entirely ad-hoc. On 16 dates, there were shortfalls; Celsius topped up the Custody wallet from the Main wallet as needed, and vice versa. (The report details every occasion in Schedule 2, and there’s a graph on page 12. This report is thorough.)

But the key point is that “the Custody wallets ran a substantial deficit relative to Celsius’s Custody liabilities.”

Custody had new terms of service that changed conditions in important ways, such as who owned the cryptos — but customers weren’t necessarily required to click their acceptance, or to read the terms before clicking. This has been a point of serious contention in the bankruptcy — many customers didn’t agree to the terms.

Withhold accounts

Earn customers who were in states where Celsius didn’t feel safe to offer Custody accounts were transferred to a new group, called “Withhold.” This was supposed to just be Celsius holding the coins for customers to then take out later.

Customers didn’t understand this:

Withhold customers expressed confusion about their accounts. For example, one user explained that he “discovered that [he] had a ‘Withhold Account’” only because it “appeared without explanation on the Celsius app.”

Celsius didn’t consider Withhold a product, so it didn’t create a Terms of Use for Withhold.  

But that didn’t stop Celsius from using cryptos in Withhold for revenue generation — loans, rehypothecation, and so on. Also, Celsius didn’t put Withhold funds into separate wallets per customer or even segregate Withhold accounts from their large general pool of cryptos.

The asteroid strikes

The Terra-Luna collapse blew a hole in the Celsius accounts: “In its May 2022 Board Minutes, Celsius reported that its ‘capital sits near zero.’”

Spooked customers withdrew $1.4 billion in crypto between May 9 and May 24, 2022. Cryptos on hand ran so low that Celsius could no longer honor withdrawals — despite CEO Alex Mashinsky’s frequent tweets of reassurance around this time.

Celsius paused all withdrawals on June 12, citing “extreme market conditions” — specifically, that customers wanted their money back.

Custody and Withhold balances increased after withdrawals were cut off — because customers could still deposit, and “customer assets were allocated to Custody when they attempted to withdraw their coins from Earn.”

What happens next?

Pillay’s report outlines the most contentious issues in the bankruptcy in detail — but it doesn’t point to any clear resolutions for them. Judge Glenn is going to have to untangle all of this himself.

The Examiner and the UCC have to resolve who will investigate the “so-called Ponzi schemes” by Celsius. There’s no clear date for this, but the next omnibus hearing is December 5.

The next interim Examiner’s report is due in the first half of December.

Other news in Celsius

Celsius now has an approved bar date. Creditor claims must be in by January 3, 2023. Government claims need to be in by January 10, 2023. [Order, PDF]

Celsius hasn’t put together any plausible business plan as yet. They are asking the court if they can have until March 31, 2023, an extra 141 days to come up with one. [Doc 1317, PDF]

Crypto collapse: J. Pierpont Moneygone — FTX rekt, bought by Binance

  • By Amy Castor and David Gerard
  • Send us money! Our work is funded by our Patreons — here’s Amy’s, and here’s David’s. Your monthly contributions help greatly!

The 2021–2022 crypto bubble made a lot of traders look like geniuses. Then the bubble popped, the tide went out, and the traders turned out to be hugely overleveraged formerly-lucky idiots.

Sociologists know that when a cult prophecy fails, most cultists exit the cult, and the remaining factions turn on each other.

Crypto watchers know that this can also be exceedingly funny.

Imaginary assets, real liabilities

Sam Bankman-Fried’s boosters compare him to the legendary banker J. P. Morgan. He’s spent the crypto collapse bailing out ailing companies to keep the entire market afloat.

Bankman-Fried runs three large crypto enterprises:

  1. Alameda Research, his crypto hedge fund;
  2. FTX, his unregulated offshore crypto casino that doesn’t allow US customers;
  3. FTX US, his exchange for US customers that purports to operate under US law and accepts actual dollars.

On November 2, Coindesk’s Ian Allison posted an explosive story on a partially leaked balance sheet for Alameda. [CoinDesk]

Of Alameda’s $14.6 billion in claimed assets, $5.8 billion is FTT — FTX’s internal exchange token. You can use FTT for cheaper trading fees and increased commissions. FTT is also traded outside FTX.

Allison also noted that $5.8 billion is actually 180% of the circulating supply of FTT!

Alameda’s liabilities are listed at $8 billion, most of which is $7.4 billion of loans — quite a bit of that from FTX.

Alameda is super cashed-up … if you account for FTX’s own FTT token at mark-to-market, and not what you could actually get for that much of their private illiquid altcoin.

To make matters worse, Dirty Bubble notes that a lot of Alameda’s other assets are crypto tokens from other Sam Bankman-Fried enterprises. [Dirty Bubble Media]

Alameda and FTX seem to have printed FTT, pumped its price using customer assets — FTX was quite open that it was the FTT market maker, and there’s no other real demand — and used the mark-to-market value of their illiquid made-up token as collateral for loans, or as evidence that pension funds should invest in crypto companies.

This works great while number is going up!

Regular readers will know that this sort of flywheel scheme is precisely what Celsius Network tried to run with their CEL token and Nexo with their NEXO token. Celsius is bankrupt, and regulators have noticed that Nexo is only solvent if you allow them this particular tricky bit of accounting.

Alameda CEO Caroline Ellison said the leaked balance sheet Coindesk got a hold of was “incomplete,” and there were $10 billion in assets not listed there. [Twitter, archive

The crypto world spent a few days wondering if Alameda was the next Three Arrows Capital.

CZ pulls the plug

Large flows of FTT were noticed on the blockchain on November 6. Binance CEO Changpeng Zhao confirmed that this was Binance selling off its FTT: [Twitter, archive]

“As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books.”

The remaining FTT that Binance sold was worth $530 million. [Bloomberg]

CZ was also annoyed at Bankman-Fried’s lobbying efforts for crypto regulation in Washington: “We won’t support people who lobby against other industry players behind their backs.” [Twitter, archive]

The crypto market is incredibly shaky. Alameda and FTX operate as separate corporations, but the market seems to think they’re closely entwined. Trouble at Alameda leads to worry about FTX.

So panicked holders, thinking Alameda might be insolvent, started withdrawing funds from FTX as fast as possible — and hardly deposited anything at all.

FTX paused all withdrawals on the Ethereum, Solana, and Tron blockchains around 11:37 a.m. UTC on November 8, according to Steven Zheng at The Block. [The Block]

Finally, just after 4 p.m. UTC, Bankman-Fried and CZ announced that Binance was buying FTX. Specifically, they have a non-binding letter of intent, pending due diligence. [Twitter, archive; Twitter, archive]

Essentially, CZ started a bank run on FTX, then swooped in to buy his competitor after breaking it. CZ did to Bankman-Fried what Bankman-Fried has been accused of doing to a string of others.

At present, this is only a letter of intent, not a done deal — CZ is making Bankman-Fried suffer. He could just let FTX go hang.

How screwed are FTX and Alameda?

CZ said FTX was in a “significant liquidity crunch.” This is the sort of “liquidity crunch” that everyone else calls “insolvency.” If it were just liquidity, FTX could have borrowed against its assets and found another way out of this. [Twitter, archive]

We don’t know for sure that Alameda was trading with FTX customer funds — but this sort of fractional reserve operation is the only not-entirely-fraudulent reason that FTX could have run out of customer funds in this way.

Bankman-Fried claimed on November 7 that “FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries).” This appears not to have been true, and he later deleted the tweet. [Twitter, archive]

If FTX couldn’t get its funds back from Alameda quickly, that would have then led to the liquidity crunch.

What about FTX US?

Bankman-Fried was quick to reassure customers that FTX US was not affected and that it was “fully backed 1:1, and operating normally.” So at least FTX US explicitly claims it isn’t playing the markets with your deposits. [Twitter, archive]  

FTX US is also attempting to buy the remains of the bankrupt Voyager Digital, a deal that we think is likely to go through.

The separation of customer funds and platforms is the whole point of FTX US versus FTX. It’s there to make Sam look good to regulators.

But it’s all Sam Bankman-Fried. It’s Sam’s left pocket versus his right pocket.

We think that if your paycheck goes into FTX US, you probably want to stop doing that immediately.

What happens next? It’s contagion time!

Alameda has likely been borrowing against the FTT it held — the FTT that is now crashing. (Earlier today, FTT was worth $19; as we post this, it’s trading at $4.60.)

Binance might rescue FTX, but it’s sure not going to rescue Alameda.

This means a series of margin calls by everyone who’s lent to Alameda. If Alameda defaults, those lenders will likely end up with worthless FTT.

BlockFi and Genesis have a pile of money in Alameda. BlockFi is or will be owned in some unspecified manner by FTX US, but that doesn’t make the books balance — there’s already a rumor of a 24-hour margin call by BlockFi against Alameda. [Twitter]

Remember that Three Arrows Capital collapsed when their UST turned out to be worthless. This then took out a pile of other crypto trading firms — most notably Celsius Network and Voyager Digital.

We’re left with two questions:

  1. Who is lending to Alameda?
  2. Who’s lending to those lenders — and risks going down in turn?

The crypto market is not happy. Bitcoin has been up and down like a yo-yo today, from $19,500 just before 4 p.m. UTC to a peak of $20,500 and a trough of $17,500.

We predict more market excitement to come — specifically, a possible Alameda collapse, a chain reaction of lender failures, and attempts to cover sudden balance-sheet holes, much as we saw after the Terra-Luna and Three Arrows collapses.

But Caroline Ellison from Alameda insists there’s another $10 billion behind the sofa or something. Maybe it’s all fine!

Image: FT Alphaville

Crypto collapse: 40 states chasing Celsius for possible securities fraud; Texas chasing Voyager and FTX for possible securities fraud

  • By Amy Castor and David Gerard

“Of all the offspring of Time, Error is the most ancient, and is so old and familiar an acquaintance, that Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome.” 

~ Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

Celsius: dodge the cops by diving down the drain

Celsius Network seems to be admitting the company’s dead and it’s not coming back. The debtor companies filed a motion on September 29 to sell off whatever assets remain.

The leading contender is, wait for it, Sam Bankman-Fried of FTX, who was previously noted to be sniffing around the gaping balance sheet hole called Celsius. [Bloomberg]

Here’s the filing to sell off everything, with its marvelous title in full: Debtors’ Motion Seeking Entry of an Order (I) Approving the Bidding Procedures in Connection with the Sale of Substantially All of the Debtors’ Assets, (II) Scheduling Certain Dates with Respect Thereto, (III) Approving the Form and Manner of Notice Thereof, (IV) Approving Contract Assumption and Assignment Procedures, and (V) Granting Related Relief. [Motion, PDF]

The filing asks to start a bidding process, in a conventional manner, for any remaining spare change to be found in the stiff’s pockets. Celsius would like bids to be put in by November 15, with a hearing to approve the winner around November 28. Celsius hopes to sell any remaining assets by December 20. The auction would be advertised in the New York Times and CoinDesk.  

This isn’t actually a bad idea. We’ve said repeatedly that taking Celsius out of everyone’s misery is the right move. Celsius is an ex-parrot. It is bereft of life. There’s no viable business here. In any ordinary bankruptcy, selling off whatever’s left would be the correct thing to do at this point.

But this isn’t an ordinary bankruptcy. Vermont’s filing sets out the issues. There have been shenanigans here, and Vermont doesn’t want those put aside before the examiner can report: [Objection, PDF]

“As of the Petition Date, at least 40 state securities regulators were engaged in a multistate investigation arising from, inter alia, concerns about potential unregistered securities activity, mismanagement, securities fraud, and market manipulation by Celsius and its principals. At least six of those states had taken regulatory enforcement action against Celsius as of the Petition date, and several more states have done so since then.”

Ownership of the “custody” and “withhold” accounts have yet to be resolved. Do the accounts belong in full to the named creditors or are they part of the general pool of assets? (See our list of Celsius account types.) And who owns the stablecoins?

If any of the assets constitute securities, Vermont wants those to be registered as offerings of securities. (Spoiler: many of them are likely to constitute securities, and none are registered.)

Also unresolved: Celsius insiders withdrew nearly $18 million in cryptos in the weeks before Celsius froze withdrawals on June 12.  

Texas, Alabama, Arkansas, California, the District of Columbia, Hawaii, Maine, Missouri, New York, North Dakota, and Oklahoma all concur with Vermont’s objections. The states want to see the examiner’s report before any sale goes forward. They also want to approve the bidders to verify that they are compliant with state regulations, or can become compliant in a timely manner. [Texas objection, PDF; Coordinating states’ objection, PDF]

The US Trustee also objects to the auction. As well as the above objections, the Trustee asks that a privacy ombudsman be appointed, as “customers of these Debtors have significant concerns regarding transparency and irregularities.” [Objection, PDF]

Some individual creditors object on the same grounds — e.g., Daniel Frishberg, who thinks the examiner’s report may show that Celsius was a Ponzi scheme. Immanuel Herrmann has objected on behalf of an unofficial “Steering Committee” of Earn, Loans, and CEL depositors — they don’t object to an asset sale but do feel this current proposal is rushed. [Frishberg objection, PDF; Herrmann objection, PDF]

The forlorn quest for your money

The US Trustee held a 341 creditors’ meeting on October 13. Celsius interim CEO Chris Ferraro responded to questions under oath — and Ferraro knows nothing, nothing! Most of his answers amounted to “I’ll have to follow up on that,” “I don’t know,” and “I need to consult with my lawyers.” [Reddit]

The next Celsius hearing is on October 20 at 10 am ET. There’s an omnibus hearing on November 1 at 11 a.m. ET.  Custody and withhold hearings are scheduled for December 7 and 8 at 9 a.m. ET. [Schedule, PDF]

Celsius has requested to set a “bar date,” the deadline for customers to submit proofs of claims, of December 13, 2022. [Motion, PDF]

If you agree with the schedules of assets and liabilities that Celsius filed earlier, you don’t need to file a claim. Go to page 92 to check your claim. [Schedule, PDF]

If you do need to file a claim, Celsius has submitted a form for approval with the bar date motion. 

An inspector calls

As soon as she was appointed examiner in the Celsius bankruptcy on September 29, Shoba Pillay, previously an assistant US attorney, set to work.

She has already spoken to the debtors. She has outlined the various documents she will be requesting and has set forth a plan on how to avoid duplicating work already done.

Pillay has also filed a “Rule 2004 Motion,” to collect almost anything she might need. This motion will be heard on October 20 and is sure to be granted. [Rule 2004 motion, PDF; Notice motion, PDF]

Federal Rule of Bankruptcy 2004 — that’s a rule number, not a year — allows tremendously broad discovery and deposition. A witness in a 2004 examination is not always entitled to attorney representation or cross-examination and has only a limited right to object to questions. 2004 exams are sometimes referred to as “fishing expeditions” — because they need to be, in order to do their job. [Cullen Dykman; Nolo]

Pillay has proposed a work plan: [Motion, PDF]

  • Interview 15 to 25 witnesses under Rule 2004.
  • Monitor investigations by governmental entities.
  • Hire professionals as needed. She’s already put forth a motion to retain as counsel Jenner & Block, the Chicago law firm where she serves as a partner.
  • Hire Huron Consulting Group as her forensic accounting and financial advisor. 
  • Ascertain if the scope of the investigation needs to be expanded.

Hosting services

Core Scientific provides hosting services to Celsius Mining. Core claims the bankrupt company owes them $5.4 million. They’re tired of subsidizing Celsius’ failing mining business. They want their money, or they want out of their contract before Celsius turns them into a dead parrot too.  

Celsius argues that Core breached their agreement by failing to deploy mining machines on time, and is unjustly trying to pass on power charges. They say Core is in violation of the automatic stay, which stops creditors from trying to collect debts until court bankruptcy proceedings are completed. They have called for a hearing on October 20 to ask the court to enforce the stay. [Filing, PDF; Coindesk; The Block]

Core responded saying that Celsius’ claims were “premised on the incorrect notion that Core Scientific must subsidize the Debtors’ money-losing mining business to the tune of millions of dollars a month.” 

Core says they have deployed all of the mining equipment Celsius gave them and are paying out of pocket to keep the machines running. They are seeking relief from the court to either terminate their contract or to get paid. They want to delay the hearing on October 20 and they are requesting a status conference. [Letter, PDF]

Celsius’s lawyers responded that Core’s request for a status conference is “unwarranted and premature.” We think Celsius is dragging this out for as long as they can run up a tab with Core that will never be paid. [Letter, PDF]

Cold, so cold

There’s a new tool that lets you search the Celsius creditor database with your name and find your coinage! You can use the leaderboard to find the top losers. [Celsiusnetworth; Gizmodo]

US federal prosecutors from the Southern District of New York subpoenaed Celsius days after it blocked withdrawals in June. The subpoena was issued by a grand jury. Federal grand juries are used by Department of Justice prosecutors to conduct criminal investigations and potentially issue indictments. [FT, archive

The SDNY subpoena is disclosed on p. 48 of this October 5 filing. Pages 48-50 list investigations by multiple state regulators. [Filing, PDF]

Celsius has filed its proposal for a key employee retention plan (KERP). They want to divvy up $2.96 million amongst 62 key non-insider employees — so as to keep them working on the dumb “Kelvin” plan to revive this dead parrot. Celsius currently has 275 employees in total. [Motion, PDF]

Alex Mashinsky, who recently stepped down as Celsius CEO, is dumping his CEL tokens for USDC dollar-equivalent stablecoins. [Twitter, Twitter

Celsius cofounder Daniel Leon, who also just stepped down, sold $11.5 million worth of CEL in 2020 and 2021. [FT]

Jason Stone of KeyFi, a.k.a. DeFi whale 0x_b1, used to manage Celsius’ investments. Stone sued Celsius in July, saying they hadn’t paid him and called Celsius a Ponzi scheme. Celsius countersued in August, claiming Stone was an incompetent thief. Anyway, Celsius has just updated their counterclaim. [Complaint, PDF

Voyager Digital, FTX, and Texas

In a Chapter 11 bankruptcy, the debtor has to file a disclosure statement with their bankruptcy plan. The statement needs to provide “adequate information” about the debtor’s financial affairs so creditors can make an informed decision when they go to vote on the bankruptcy plan. 

Voyager filed its first amended disclosure statement related to its second amended joint plan on October 5. The plan involves selling off all of its assets to FTX US. [Statement, PDF]

The US Trustee objected to Voyager’s disclosure statement. The plan doesn’t say it’s a liquidation plan, but the proposal is basically to liquidate Voyager. The plan also shields Voyager CEO Stephen Ehrlich and his assets from third-party claims. The Trustee wants clearer disclosure for creditors of precisely what this statement is. [Objection, PDF]  

The Texas State Securities Board objects to the sale of Voyager to FTX, “because, at this time, the Debtor and FTX are not in compliance with Texas law.” Texas thinks the plan “attempts to limit the Debtors’ liability for unlawful post-petition — but pre-sale closing — conduct for which state-regulatory fines and penalties may apply.” That is, they think the quick sale is an attempt to hide malfeasance. [Objection, PDF]

Specifically, Texas thinks FTX has been offering investment contracts that constitute unregistered securities to Texas residents. The affidavit from Joe Rotunda, Director of the TSSA Enforcement Division, details Texas’ ongoing case against Voyager since April 2022 for unlicensed offerings of securities — and then it gets stuck into FTX.

Rotunda states that the interest-bearing accounts offered by FTX US are likely unregistered securities. FTX US claims to be registered with FinCEN as a money transmitter — but it isn’t registered with Texas as a money transmitter. FTX Capital is registered with Texas as a broker-dealer, so that’s nice. 

The FTX trading app lets US customers use FTX non-US despite FTX Trading’s claims not to serve US customers, and despite Rotunda correctly entering his address as Austin, Texas. Rotunda transferred ether to a wallet on FTX. Rotunda is pretty sure the FTX (US or not) yield program is an investment contract and not a registered one.

Rotunda also confirms that “The Enforcement Division is now investigating FTX Trading, FTX US, and their principals, including Sam Bankman-Fried.” [Affidavit, PDF]

The lawyers want their money 

Bankruptcies are expensive. The professionals operating on behalf of Voyager Digital and Celsius Network have begun submitting their bills. 

Kirkland & Ellis in Voyager: $2,994,615.46 for July 5 to July 31. [Fee statement, PDF]

Kirkland & Ellis in Celsius: $2,570,322.67 for July 13 to July 31 July — yes, that’s only two and a half weeks. [Fee statement, PDF]

Akin Gump in Celsius: $741,898.56 for July 13 to Aug. 31. [Fee statement, PDF]

Alvarez & Marsal in Celsius: $2,961,249.80 for July 14 to Aug. 31. [Fee statement, PDF]

Other good news for crypto finance

South Korean crypto investment firm Blockwater Technologies defaulted on a loan from TrueFi, a decentralized lending protocol. TrueFi issued a “notice of default” to Blockwater on October 6 after Blockwater missed a payment on a loan of 3.4 million BUSD. TrueFi said the debt represents about 2% of its total outstanding value. Blockworks’ loan was “restructured” in August, and they paid back 654,000 BUSD at that time. TrueFi wants “a potential court-supervised administrative proceeding” —i.e., putting Blockwater into something like bankruptcy. [TrueFi blog; Bloomberg; Twitter]

Do Kwon is the founder of Terraform Labs, whose UST “stablecoin” collapsed in May, took the rest of crypto down with it, and started us on writing this newsletter series. Kwon talked to Laura Shin for her Unchained podcast on October 14 from a totally legitimate unknown location where he definitely isn’t on the run. The podcast comes out on October 18. [Twitter; Unchained]

Grayscale runs crypto investment funds, most notably GBTC, which Amy has dissected at length. Grayscale is now creating Grayscale Digital Infrastructure Opportunities, to buy up used bitcoin mining rigs from distressed mining companies. These will be used for mining by Foundry Digital, which is also owned by Grayscale owner Digital Currency Group. This will be made available as a fabulous investment opportunity to “accredited investors such as hedge funds and family offices at a minimum investment of $25,000.” [Bloomberg]

The Department of Justice has issued a new report on crypto crime: “The Role Of Law Enforcement In Detecting, Investigating, And Prosecuting Criminal Activity Related To Digital Assets.” This report was as required by President Biden’s March 2022 executive order on crypto. [DOJ, PDF]

Crypto collapse: Celsius reveals its creditor list, 3AC NFTs, Terra-Luna, Voyager

The latest crypto crash update is up!

David Gerard and I discuss:

  • Liquidate Celsius already. There’s no viable business here, and Mashinsky has taken all his money out. Krissy’s got her money, too.
  • Celsius filed its schedule of assets and liabilities, listing the names of every creditor and every transaction they made in the last 90 days.
  • Crypto is horrified. My name’s in a public record, omg!
  • Teneo got its hands on 3AC’s NFT collection. We can’t find our friend CryptoDickButt #1462 though!
  • South Korea is clipping Terraform Labs creator Do Kwon’s wings. No more passport. He says he’s not on the run anyway.
  • Voyager is pissed off at Wave Financial’s interview with CoinTelegraph. They’ve filed a very defensive letter with the court.

The full update is on David’s blog this time. Head on over there and read it! [David Gerard]

Image: They look smug here, yes?

Crypto collapse: States bust Nexo, Terra’s Do Kwon on the run, Celsius CEO resigns, FTX buying Voyager and eyeing Celsius, ETH miners screwed

David Gerard and I just published our latest news roundup and analysis on the ongoing crypto crash.

In this update, we cover:

  • A slew of state regulators drop the hammer on crypto lender Nexo.
  • Terra-Luna: Where in the world is Do Kwon?
  • After a two-week auction, FTX US emerges as the highest bidder for Voyager Digital’s assets. What is SBF buying other than a giant hole in Voyager’s balance sheet?
  • Under pressure from the UCC, Alex Mashinsky steps aside as CEO of Celsius.
  • The US Trustee appoints an examiner to investigate Celsius.
  • Celsius wants to sell off some stablecoins to fund its operations. Texas agencies object! They want the debtor to hold off until the examiner comes out with her report.
  • Crypto miners are unhappy. Good!

Head over to David’s blog to read the full post! [David Gerard]

Image: GPU crypto miners in Vietnam appear to be jet washing their old mining gear before putting the components up for sale.

Crypto collapse: Celsius, Voyager, SkyBridge — the liabilities are real, the assets are fake

“To the crowd there assembled, I was the realization of their dreams….The ‘wizard’ who could turn a pauper into a millionaire overnight!”

~ Charles Ponzi

Celsius Network

For years, Celsius founder Alex Mashinsky told people banks were the enemy, and Celsius was your friend. Now everyone is wondering where their money went. Here’s our summary of the current situation at Celsius:

  • The money is gone. There’s almost nothing left for creditors.
  • The lawyers are stripping the last shreds of meat off the bones. 
  • Celsius’ ludicrous plan to run a bitcoin mining operation to get out of debt is a way for execs to put off liquidation a bit longer while they fill their pockets. 
  • Insiders will keep paying themselves with the remaining funds for as long as they can get away with it.
  • An examiner report could lead to a liquidation, possibly more. Any party can file a motion to convert to a liquidation “for cause.” The sooner that happens, the better, as far as we’re concerned. It’s time to close the curtains on this clown show.
  • We can hope for criminal charges — but those would require something like solid evidence of a deliberate Ponzi scheme, which could well come from the examiner, once appointed. 
  • Both the Trustee and the judge have the power to refer a case to the Department of Justice. If the examiner finds evidence of federal crimes, the case will have already been made. 

Let’s review the four types of Celsius customers:

  • Earn: Celsius promised up to 18% APY if you gave them your crypto to invest in … secret things. Crypto deposited into Earn accounts became the property of Celsius. The Earn product resembled an unregistered securities offering. When you give someone your money and they do stuff with it to make more money, that’s an investment contract — a security.

    Not registering such an investment contract when offering it to the public is why BlockFi had to fork over $100 million to state regulators and the SEC, and why Coinbase ultimately had to abandon its Coinbase Lend product.
  • Borrow: Celsius let you take out loans against your crypto assets. Borrow customers were usually crypto gamblers borrowing USDC (casino chips) to play the DeFi markets. You paid interest monthly, and then paid the principal in one lump sum at the end. Similar to Earn, the crypto you put up as collateral became Celsius property.
  • Custody: Celsius launched a Custody solution on April 15, 2022 — 89 days before it filed for bankruptcy, making all of those funds subject to a 90-day clawback under the bankruptcy code.

    Custody was a response to state regulators casting an acerbic eye upon Celsius’ Earn product. “New transfers made by non-accredited investors in the United States will be held in their new Custody accounts and will not earn rewards,” Celsius said. [Celsius blog post, archive]

    Custody essentially served as storage wallets. In the bankruptcy proceedings, this has led to ongoing discussion on whether Custody account holders are secured creditors who will get their money back right away … or unsecured creditors, whose funds are now part of the bankruptcy estate. Judge Martin Glenn, who is preceding over the bankruptcy, says he hopes to resolve the matter sooner rather than later.
  • Withhold: If you lived in a US state where Celsius became unable to offer serviceable Custody accounts, you had to move your Earn funds to Withhold accounts, where they remained frozen. The Withhold group accounts for $14.5 million of the $12 billion in digital assets stuck on Celsius when it stopped withdrawals in June.

The big question now in the Celsius bankruptcy is how to classify creditors: who’s first in line to get their money back, and who’s last in line? This is why, in addition to the official Unsecured Creditors’ Committee (UCC), there are currently three ad-hoc groups, all vying to get the judge’s attention. 

Celsius believes that funds held in Earn and Borrow accounts are property of the bankruptcy estate, meaning those customers will have to wait until the lawyers finish to see what’s left. But Celsius wants to return money held in specific Custody and Withhold accounts to customers now. [Motion, PDF]

Celsius argues that $50 million of the $120 million in Custody and Withhold accounts should go back to customers, if they meet one of the following criteria: [Twitter]

  • The accounts are pure Custody or pure Withhold with funds that were transferred from an external wallet — not Earn or Borrow programs.
  • In instances where the Custody and Withhold accounts do contain funds transferred from the Earn or Borrow programs, they want customers to have their money back, if the transfers were less than $7,575, a specific legal threshold under the bankruptcy code clawback provision, 11 U.S. Code § 547(c)(9). This is an adjusted amount. [Twitter; LII; LII]

Much of the discussion at the third bankruptcy hearing on Sept. 1 centered around whether custody holders should be able to get their money back. [Coindesk]

During the hearing Judge Martin Glenn also emphasized: “Nobody is getting their money back if they remain anonymous. Let me make that clear.” [Twitter]

According to new financial docs, Celsius seems to have magically found $70 million “from the repayment of USD denominated loans.” Imagine that! The company originally forecasted it would run out of money by October, but now it has more runway. [Docket #674, PDF; Coindesk]  

Last month, the Trustee called for an independent examiner and filed a motion to show cause. [Motion, PDF] Creditors — the UCC and the ad-hoc groups — are worried that an examiner will drain more of their dwindling pool of funds.

David Adler, a lawyer with the firm McCarter & English, representing four Celsius borrowers, says an examiner will cost too much money. The group thinks the job can be done with a Chapter 11 Trustee. [response, PDF]

The Vermont Department of Financial Regulation says Celsius sure looked like a Ponzi scheme and is urging the court to appoint an examiner. Vermont is concerned about Celsius’ offerings of unregistered securities. “At a minimum, Celsius has been operating its business in violation of state securities laws. That improper practice alone warrants investigation by a neutral party.” Vermont also alleges that without Celsius’s holdings of its own native CEL token, the firm has been insolvent since at least February 2019. [FT; court filing, PDF]

Celsius has agreed to the Trustee hiring an examiner — as long as the examiner does not duplicate work already done by the UCC. Celsius says they’ve reached an agreement with the Trustee on this point. [response, PDF]

The next Celsius bankruptcy hearing is set for Sept. 14. There is also a hearing scheduled for Oct. 6 to discuss the custody account holders.

Meanwhile, Celsius has announced a Celsius-themed Monopoly game! It appears to be an unlicensed knockoff — not officially endorsed by Hasbro. This seems to have been in the works since well before the bankruptcy. [Web 3 Is Going Great]

Alex Mashinsky had a favorite slogan: “Unbank Yourself.” His wife Krissy is now selling a new T-shirt: “Unbankrupt Yourself.” [Twitter]

Daniel Leon, one of the founders of Celsius, says his 32,600 shares of Celsius stock are worthless. It looks like he wants to use them as a tax write-off. [Docket 719, PDF

Voyager Digital

On Aug. 30, the US Trustee held the first 341 creditors’ meeting for Voyager, where the Trustee and the creditors got to ask CEO Steven Ehrlich questions about the bankruptcy — under oath. The Trustee is an agent of the federal government. If you lie to the Trustee, it is like lying to the FBI — a federal crime. 

(We wrote about Celsius’ 341 meeting previously.)

Listening to creditors, it’s clear that they’re upset and confused as to why their crypto, including USDC, has become part of the bankruptcy estate. They thought the money was theirs and they could have it back at any time. It didn’t help that Voyager gave users the false impression that their money was FDIC insured.

Ehrlich kept referring the distraught creditors back to the customer agreement, which many had never read, or never fully understood.

Ehrlich noted during the meeting that Voyager is still staking crypto. He said the firm had filed a motion asking the court if it’s okay to stake even more. The court has allowed Voyager to continue staking pursuant to their ordinary business practices. The UCC oversees their staking. [Docket 247, PDF]

Staking is risky!

Some staking, such as proof-of-stake staking, doesn’t risk losing the coins in that currency. Once Ethereum switches to proof-of-stake and, perhaps several months later provides a way for you to withdraw your stake, there’s little risk when your ETH staking is denominated in ETH.

But most staking activity involves first moving your liquid crypto (such as ETH) into a company’s own crypto (such as CEL or UST), which is basically a self-assembled Ponzi scheme for staking. And a lot of “staking” is just lending to a DeFi structure, which means you’re at risk even when it’s denominated in that staked crypto.

Voyager says it got multiple bids to buy the company. The deadline for bids was Sept. 6 — extended from Aug. 26 — so now it’s headed to auction. The auction will be held on Sept. 13 at 10 a.m. ET in the New York offices of Voyager’s investment bank Moelis & Co. A court hearing to approve the results is scheduled for Sept. 29. [Bloomberg; court filing, PDF]

Sam Bankman-Fried’s FTX and Alameda disclosed a joint bid for Voyager in July. Voyager dismissed this as a lowball bid — but we think SBF is the one who is most interested in Voyager. Maybe they’ll up their offer in the auction?

What is there left to buy anyway? That’s what we want to know. Voyager is in much the same position as Celsius — its liabilities are real, but its assets are fake. What does FTX get if it buys Voyager?

The Georgia Department of Banking and Finance has a limited objection to the sale of Voyager. Voyager is a licensed money transmitter in the state of Georgia. If the auction is a success, the department is asking the court to stay the acquisition unless or until the new buyer is also licensed in the state as a money transmitter. We wonder how harshly that will limit the field of buyers. [limited objection, PDF

Bankruptcies are expensive. Quinn Emanuel, special counsel for Voyager, has submitted their first-month fee statement: $244,080. That’s for 196.7 hours of work. The lead lawyer ​​charges $2,130 an hour for his services. Voyager brought Quinn Emanuel on board in July to look into the possibility of insider trading at 3AC. [Doc 358, PDF; Bloomberg Law]

The next Voyager omnibus meeting is on Sept. 13 at 11 ET. The deadline for filing a proof of claims is Oct. 3. 

SkyBridge

FTX is paying an undisclosed sum for a 30% stake in Anthony Scaramucci’s SkyBridge, and SkyBridge will buy $40 million of crypto to hold “long-term.” Scaramucci is not giving up any of his own share of SkyBridge. [Bloomberg; FT]

SkyBridge used to be a general hedge fund then went hard into crypto. “We will remain a diversified asset management firm, while investing heavily in blockchain,” says Scaramucci.

The weird part of this is that SkyBridge is already an investor in FTX and FTX US. We’re reminded of how FTX “bailed out” Voyager, then it turned out that Voyager owed FTX a bundle.

Other stuff

Three Arrows Capital (3AC) withdrew 20,945 staked ether (worth about $33.3 million) from Curve and $12 million in various assets (wrapped ETH, wrapped bitcoin, and USDT) from Convex Finance. Nobody seems to know why they withdrew the funds. [The Block]

The Algorand Foundation has admitted it had $35 million (in USDC) exposure to collapsed crypto lender Hodlnaut. [Algorand blog]

Another class action has been brought against Terraform Labs. This one was brought by Matthew Albright. He is represented by Daniel Berger of Grant & Eisenhofer. The claim alleges Terraform violated the RICO act by artificially inflating the price of their coins and publishing misleading information following UST and luna’s collapses to cover up for an $80 million money laundering scheme. “UST amounted to a Ponzi scheme that was only sustained by the demand for UST created by Anchor’s excessive yields.” The proposed class is all individuals and entities who purchased UST and luna between May 1, 2019, and June 15, 2022. [Complaint, PDF]

From May: Chancers, the Korean crypto streamer who went to Terraform CEO Do Kwon’s house. [BBC

Crypto collapse: Celsius sues KeyFi, BlockFi’s FTX deal, Scaramucci’s SkyBridge, Voyager suit, 3AC going to jail?

David Gerard and I posted our latest episode of “Everything is going to hell in a handbasket.” This one is on David’s blog! [David Gerard]

In this update:

  • Celsius strikes back — Mashinsky is countersuing Jason Stone and KeyFi. This is what happens when two crypto firms do business on a handshake. (They don’t need a lawyer until they need lots of lawyers!)
  • How FTX saved BlockFi from being as utterly screwed as everyone else.
  • SkyBridge Capital — you can’t withdraw your money, but that’s okay because Anthony Scaramucci is coming out with a new fund!
  • Voyager pays the boys a little less than planned. Its KERP goes through but with smaller bonuses.
  • 3AC accuses Teneo of misleading the High Court of Singapore as to its corporate structure.
  • A bunch of crypto exchanges are treading water and/or closing their doors.
  • The crypto crash is a slow-motion train wreck. We keep writing about it, but what happens next? 

Crypto collapse: 3AC yacht ‘Much Wow’ back on the market, Celsius maybe-Ponzi, Voyager pays off the boys, Hodlnaut

“Crypto sceptics are a bit like the boy who cried wolf, except a villager gets eaten every damn time and the rest of them are still going ‘why did you cry wolf, FUDster?'”

— GunterWatanabe

Toot toot, I’m a boat

Everyone trusted Zhu Su and Kyle Davies at Three Arrows Capital (3AC). They knew what they were doing, right?

Only now, the pair have disappeared — and their fabulous yacht is back on the market. “The unclaimed yacht looms as a slightly ridiculous avatar of the hubris, greed, and recklessness of the firm’s 35-year-old co-founders.” [Intelligencer

Here’s the 3AC yacht in all its glory: the Much Wow. Yes, Zhu was into Dogecoin too. [Much Wow; Boat International, archive]

3AC talked like competent hedge fund guys — which straight away made them look a zillion times smarter than the rest of the crypto bros. But they weren’t good at this at all. They had no clue on how to hedge their bets. The 2021 crypto bubble saved 3AC’s backside — they could keep looking like geniuses a little longer.

3AC used a “spray and pay” strategy: invest in a whole pile of trashy minor altcoins, and hope for a return.

On May 26, 2022 — by which time 3AC had likely already abandoned their Singapore office and skipped the country — Davies tweeted that “it doesn’t matter specifically what a VC invests in, more fiat in the system is good for the industry.” This is correct, if you view crypto as a single unified scam casino. [Twitter]

Articles about the wider crypto collapse talk about 3AC a lot. This gives the impression that 3AC is fundamentally to blame.

3AC deserves a lot of the blame because they were greedy and stupid. But everyone else was also greedy and stupid. 

Terraform’s Anchor protocol paid 20% interest rates — the highest available. 3AC offered the next-highest interest rates available, by putting the money into UST/luna and skimming some off the top.

So everyone else put their money into Anchor and 3AC. Many of these were feeder funds, who skimmed a bit off the top themselves.

You can picture the crypto investment market as an inverted pyramid, where the point is UST/luna — a Ponzi box full of hot air. 3AC was the box above that. Everyone else is in a funnel down to those two. The bottom two Ponzi boxes collapsed, and the whole inverted pyramid came tumbling down with them.

Terraform was running the load-bearing Ponzi box; we put most of the blame on Do Kwon. But we also blame Terraform’s enablers — the rest of the crypto investment firms.

There’s a lot to blame 3AC for — the way that Zhu and Davies just kept going “this is fine” even as they knew it was going to hell. They were greedy fools.

But anyone who put their money into 3AC was also a greedy fool.

Voyage to the bottom of the sea

Voyager Digital’s official unsecured creditors’ committee (UCC) held a town hall on August 11. The meeting was led by UCC counsel Darren Azman and Chuck Gibbs at McDermott Will & Emery. Amy wrote up some notes. [YouTube; presentation]

Azman says: if you want to buy Voyager, hurry! The deadline to submit bids is August 26. Sam Bankman-Fried’s FTX has already submitted a bid. It may have been a low-ball bid, but SBF’s Alameda Research is a borrower from, lender to, and shareholder of Voyager. We expect FTX will want Voyager the most — if anyone really wants it at all. 

Azman and Gibbs say that Voyager is aiming to file a restructuring plan in October — and that creditors might get their money back as soon as November! What money there is, anyway.

This time frame would be welcome, but isn’t plausible — Mt. Gox (2014) and QuadrigaCX (2019) creditors are still waiting for their money years later.

Meanwhile, the boys gotta get paid. Voyager wants $1.9 million to pay bonuses to 38 employees as part of a “Key Employee Retention Plan.” (KERP). In a bankruptcy, KERP is a way to incentivize upper management to keep working throughout the bankruptcy — and not flee the sinking ship.

Voyager is also seeking to file under seal all pertinent information about KERP participants — their names, job titles, supervisors, salary, and proposed bonus. These folks are definitely not insiders, and Voyager can’t give you their names — but trust them.

When your ship is sinking, the last thing you want is people leaving with all your deep, dark secrets. Keep them happy — and quiet. 

The US Trustee objects to the sealing: “The payment of bonuses, let alone bonuses in such a significant sum to such a limited number of individuals under the circumstances that brought Voyager to this Court, should not be countenanced.” 

The UCC also objects — of Voyager’s 350 employees filed, only 12 have resigned so far. Nobody’s leaving. In fact, nobody’s been asked to leave.

Creditors are pissed that Voyager hasn’t bothered to reduce employee headcount at all, given the platform has been frozen since July 1. What are the employees doing, other than collecting paychecks? [motion, PDF; objection, PDF; objection, PDF; Coindesk]

Just days before Bernie Madoff was formally charged by the SEC, he wanted to distribute hundreds of millions of dollars in early bonuses to employees. We’re sure he was just being nice to them too. [National Post, 2008]

Celsius: When you’re in a hole, keep mining

Celsius submitted their Budget and Coin Report, reflecting the funds they were holding as of July 29. (They filed for bankruptcy on July 13.) The company plans to file similar reporting on a monthly basis throughout their bankruptcy. [Notice of filing and coin report, PDF

The report shows just how much money Celsius wants to set on fire. Over a three-month period from August through October, Celsius is allocating $14 million to payroll, $57.3 million to mining, and $33 million to restructuring costs. By the end of October, they’ll be operating hugely in the red.

Those negative numbers were the elephant in the room during Celsius’ second-day hearing on August 16. Amy summarized this hearing previously. Here’s the slide deck that Celsius lawyers from Kirkland & Ellis presented. [presentation, PDF]

Celsius has this mad idea that they can crypto-mine their way out of bankruptcy. First, they plowed customers’ money into stunningly risky investments. [Twitter thread] Now they want to feed the remaining customer funds into their money-gobbling bitcoin mining operation.

Celsius sought approval from the court to sell their mined bitcoin — so they could use the proceeds to fund Capex for their Texas mining operation. 

The US Trustee’s attorney, Shara Cornell, objected on the grounds that Celsius wasn’t being transparent about what bitcoin it planned to sell, or how much the mining business was expected to generate.

Despite those objections, Judge Martin Glenn approved the motion — though he had reservations: “At bottom, this is a business judgment decision that may turn out to be very wrong, but we will see.”

We think he should have had stronger reservations. Celsius says its mining will be profitable in January, but the numbers don’t add up. 

Celsius expects to generate 10,118 BTC this year and 15,000 BTC next year. Last year, they only mined 3,114 BTC, according to filings. The company has paid for 120,000 rigs, of which 49,000 are in operation.

Even if Celsius mines and sells 1,000 BTC per month, that’s only $2 million when their hosting costs are $19 million per month, with only half the rigs operational. This business simply isn’t viable. It’s just an attempt by Celsius CEO Alex Mashinsky to postpone his company’s liquidation.

Well, that was a huge arithmetic error. Sorry about that. We blame the intern. (i.e.,ourselves.)

A question of trust

Celsius also wanted to sell some de minimis assets. These turned out to be notes/bonds and equity in other crypto companies — but Celsius hadn’t bothered to mention that bit.

Cornell from the US Trustee said, “The motion makes it sound like the debtor is selling office furniture.” Judge Glenn said he had “no inkling the debtor was proposing to sell millions of dollars of equity or notes/investments in other crypto businesses.” He did not approve the motion.

US Trustee William Harrington has had enough of Mashinsky messing around. Days after the hearing, Harrington filed a motion requesting the court appoint an examiner to investigate what’s really going on inside Celsius and present their findings to the court. [motion, PDF

As grounds for hiring an examiner, the Trustee lists allegations of incompetence or gross mismanagement — including the offering of unregistered securities — significant transparency issues, and widespread mistrust in the debtors. 

Under US bankruptcy laws, an examiner can be appointed in any bankruptcy case if someone requests it and the court finds the company’s debts exceed $5 million. We have no doubt Judge Glenn will approve the request.

The language in the motion suggests that Mashinsky can’t be trusted. (We concur.) Among other things, it points out that Celsius owes $20 million in back taxes. Unpaid taxes are senior debt. The IRS gets first dibs on the remaining assets before the unsecured creditors.

The Celsius UCC is “concerned” about the Trustee hiring an examiner because “It will run up millions in costs.” [Twitter

We know for sure that it’ll be costly — the examiner in Lehman Brothers’ 2008 bankruptcy cost $100 million, up from a projected cost of only $23 million. The examiner for Enron was $90 million. So our guess is the examiner will probably cost creditors $25 million, if not more. 

The seven-member UCC feels it can conduct its own investigation and doesn’t need an examiner. The problem there is that the UCC is selected from a list of the largest Celsius creditors. These people represent companies that have a vested interest in the crypto space succeeding. They are not in any way neutral.

The P-word

A “341 meeting” was held on August 19 — a creditors’ meeting, named after section 341 of the Bankruptcy Code, where the debtor answers questions about their financial status under oath.[LII]

At the 341 meeting, Celsius CFO Chris Ferraro admitted that Celsius was paying old investors rather more money in rewards than they were actually getting in yield.

“In hindsight, we did not generate enough yield to support the return,” says Ferraro. He confirms Celsius was paying “over 100%” at times — 120% to 130% of the actual yield. There’s no transcript, but Kadhim Shubber from the Financial Times and Thomas Braziel from 507 Capital live-tweeted the call. [Twitter; Twitter]

If Celsius was paying this excess yield from incoming investor money … then that’s literally a Ponzi scheme. (A lawsuit filed against Celsius on July 7, also claimed Celsius was operated as a Ponzi.)

Ferraro said, “I don’t think it was that connected” — but he didn’t answer where else the money could have been coming from. It was just “hyper-growth mode,” see. [Twitter; Twitter]

A question of competence

Mashinsky is a good salesman — but he’s not so great at any other part of the job. In January, Mashinsky ordered Celsius’ in-house investment team to sell bitcoin worth hundreds of millions of dollars. A day later, Celsius had to repurchase it all at a loss. “He was ordering the traders to massively trade the book off of bad information,” said one of the traders. “He was slugging around huge chunks of bitcoin.” [FT, archive

Mashinsky is selling his $2.5 million home in Austin, Texas. He bought it only a year ago. [Twitter]

Canadian pension fund CDPQ has written off its CA $200 million investment in Celsius. “We arrived too soon in a sector which was in transition.” Whoever authorized the investment definitely wasn’t a foolish and greedy investor in a bubble, who didn’t look into the already-insolvent company at all. [La Presse, in French]

Elsewhere amongst the wreckage 

Last week, we talked about Coinbase’s horrific $1.2 billion Q2 loss. Frances Coppola took a deeper dive into the company’s 10-Q. She explains why Coinbase’s balance sheet has massively inflated. [Coppola Comment]

Genesis Trading CEO Michael Moro has quit, effective immediately — definitely a thing that happens all the time in healthy companies where things are going well. Moro “will continue to advise the company through the transition.” Genesis is also laying off 20% of its staff. The company had lent $2.36 billion to 3AC, and Genesis’ parent company DCG has made a claim against 3AC for $1.2 billion. [press release; The Block]

BlueBenx, a Brazilian crypto lending platform, has bitten the dust following a $32 million hack — or, its users think, a “hack.” Withdrawals have been halted, and employees have been laid off. [CoinTelegraph]

Hodlnaut has applied for creditor protection in Singapore. This is the equivalent of Chapter 11 in the US. They’re insolvent. [Hodlnaut announcement, archive; CoinDesk

In court filings, Hodlnaut formally admitted that they had lost money in the Terra-Luna crash via their Hong Kong entity. Hodlnaut had previously told customers they had no Anchor exposure. We knew they had, and wrote about it in our previous update. [Twitter; CryptoBriefing]

All deposits are part of the bankruptcy estate. If Hodlnaut is liquidated, even stablecoin depositors will only get a fraction of what they had on account at the company.

Hodlnaut is now facing a probe from the Attorney-General’s Chambers and the Singapore Police Force — “pending proceedings,” though they didn’t give any other details. About 40 out of the 50 employees the company had have been laid off. [Straits Times

Celsius second bankruptcy hearing — court approves setting more customer funds on fire

On August 14, Celsius filed a Budget and Coin Report, which put into full view the ongoing train wreck. The company is burning through piles of “cash,” while creditors watch in horror as their remaining hopes of recovering lost money go up in smoke before their eyes. [Docket 447

To generate 18% returns on its Earn product, Celsius dived head-first into some stunningly risky “investments” and lost $1.2 billion in customer funds, at least. The company filed for Chapter 11 on July 13. 

Now, Celsius founder Alex Mashinsky wants creditors to put their faith into another reckless gamble. The company is shifting its entire business model from crypto lending to bitcoin mining — with ludicrous plans to mine its way out of bankruptcy. 

Over a three-month period from August through October, Celsius is allocating $14 million to payroll, $57.3 million to mining,* and $33 million to restructuring costs. By the end of October, Celsius will be operating hugely in the red.

Bitcoin mining is a money-losing proposition, as David Gerard and I detailed in an earlier report. Celsius’ mining business, headquartered in Texas, is currently burning through $19 million of customer money per month. In July, they only mined 432 BTC, worth $8.6 million!

Celsius argues this is because its facilities aren’t fully operational yet — but the facilities will be fully operational if the court will allow them to keep throwing more money into the flames.

All Celsius and its lawyers need to do is to convince creditors — and the judge — that the business will be profitable one day in the fabulous future.    

On August 16, two days after filing its budget report, Celsius had its second-day bankruptcy hearing. The judge ultimately signed off on a motion allowing Celsius to sell mined bitcoin to fund its mining operations but withheld approving a motion authorizing the debtor to sell stocks and shares due to Celsius obfuscating what they were really selling. 

What follows are my notes and comments on the hearing. 

Second-Day Hearing

Judge Martin Glenn began the two-hour hearing by noting that the court has received hundreds of letters from Celsius customers. The letters are all being filed in the docket. “Some have raised important issues that will have to be addressed in this case,” he said.

Molly White has been pulling out excerpts of these letters, and they are indeed heart-wrenching. These are real people, some of whom have lost their life savings because they believed the promises of Celsius founder Alex Mashinsky. [Molly White]

Celsius’s lead lawyer at Kirkland & Ellis, Josh Sussberg, was the first to present at the hearing. Before delving into a nine-page PowerPoint, he took a moment to rant about the “relentless” and “inaccurate” media coverage surrounding the bankruptcy. Sussberg said he’s told Celsius “to take the repeated punches,” and not respond. [Celsius presentation]

Sussberg has clearly been in close talks with Mashinsky, who has a pattern of deflecting blame. When Celsius initially filed for bankruptcy, Mashinsky pinned his company’s failure on “misinformation” in the media and on social media for encouraging customers to withdraw $1 billion in funds over five days in May. Mashinsky’s new message is that the banks are lying, the media is lying, but you can trust me with your money, even though I just lost it all.  

Sussberg noted the elephant in the room: everyone knows that Celsius will run out of money by the end of October. He said that Celsius is working to expedite a restructuring plan that will lead to the company being liquid.  

Celsius is also trying to sell its business and its digital assets to a third party. “We have multiple offers outstanding with several more coming in,” said Sussberg. 

In addition to the official unsecured creditors’ committee, two ad-hoc creditors’ groups have formed. One is for custodial holders, represented by Togut, Segal & Segal. They have $180 million in claims. The other, represented by Troutman Pepper, is for withhold account holders. These were customers in states where Celsius was not licensed. When they tried to withdraw funds, the money went into holding accounts. They represent $14.5 million in claims. Kirkland has been in talks with both groups, Sussberg said. 

Celsius is not seeking to dollarize claims on the petition date. Instead, it wants to return crypto. In other words, Celsius is counting on the markets to rebound — i.e., bitcoin will moon again and everyone’s problems will be solved.  

Interestingly, the creditors also do not want to dollarize claims. Greg Pesce at White & Case, the lead lawyer for the creditors’ committee, said that they too want an in-kind recovery of coins. 

Pesce said the committee has begun its own investigation into Celsius in the hopes of recovering more money for creditors, as they believe they are the only ones able to fight for the customers’ interests. Their search will take them “across the globe, across the country, and across the blockchain.”  

In addition to the possibility of identifying potential insider trading, Pesce seems to be alluding to the Tether loan. Tether loaned Celsius $840 million in USDT backed by bitcoin, and then sold the bitcoin Celsius loaned as collateral just before Celsius filed for bankruptcy. Any attempts to retrieve that bitcoin will be a sideshow in and of itself.

Judge Glenn notes that Celsius’ Earn product attracted lots of government investigations into whether Celsius was selling unregistered securities. The Securities and Exchange Commission has been looking into Celsius since January. Celsius had already been thrown out of Alabama, New Jersey, Texas, and Kentucky for unregistered offerings of securities.

“Since the debtor business model was so heavily dependent on the so-called Earn accounts, and given the number of securities regulator investigations as to whether the debtors were engaged in the sale of unregistered securities, what is the business model going forward?” 

“That’s the $64,000 question,” Pesce responded.

Celsius had 1.7 million customers at the time it filed its petition. About 58,000 held crypto in Celsius’ custody accounts — they might get their crypto back first depending on whether they are deemed secured or unsecured creditors. 

Judge Glenn wants to resolve the custodial accounts sooner rather than later. But Celsius didn’t set up its custodial business until April 2022, and he wants to make sure custodial accounts weren’t a vehicle for insider trading: 

“I am certainly going to want to know whether there are insiders and employees with custodial accounts and whether any of them were able to transfer crypto assets from other accounts into the custodial accounts — and what did they know at the time they made the transfer? Were they contemplating that the business was trending negative and the best way for them to individually protect the value of their accounts was to try and transfer assets into custodial accounts?”

Judge Glenn previously ordered all versions of Celsius’ terms of service going back to 2018. He wanted to trace through all of the changes made over time to determine what is and what isn’t the property of the bankruptcy estate. “Little did I know there were going to be 1,100 pages of them,” he said.   

Bitcoin sell motion

After the presentations, the hearing moved on to the motions.  

Celsius wants to sell bitcoin generated by its mining business and use the cash to fund its mining operations. “We are still in the capital-intensive part of the business and also, importantly, we don’t have all of the mining rigs,” said Sussberg.  

US Trustee attorney Shara Cornell said the Trustee needs more information to form an opinion on the matter: “As of today, we still do not know what expenses are being paid or what bitcoin is being sold,” she said. “We know what the debtors expect to generate but we have no idea what it is going to cost to generate any of that.” 

Cornell said that the Trustee is considering hiring an examiner to address Celsius’ rampant transparency issues. She noted that Celsius said it planned to file a long-term mining plan. “Maybe what we need to do is put this motion on hold until we have more information.”

(Update: Just after I published this story, the Trustee entered a motion for the appointment of an examiner. This is a big deal!)

Surprisingly, Pesce said the creditors’ committee has not made a decision on the mining. Frankly. I was sort of expecting the creditors to push for a liquidation.  

Not all Celsius customers support the idea. 

If they raised a virtual hand during the Zoom hearing, creditors were allowed to speak. One creditor said: “We didn’t sign up to be part of the mining business. We signed up to be part of an exchange. As a fellow miner, I don’t see it being very profitable in the long run.” 

Judge Glenn approved a motion to allow Celsius to sell bitcoin generated from its mining business, but he clearly had reservations: “At bottom, this is a business judgment decision that may turn out to be very wrong, but we will see.” [Order 187]

Not so ‘de minimis’ after all

Celsius wants to sell assets that they claim are “de minimis” and “non-core” to the business to bring in more cash for operating expenses. It turns out these are notes/bonds and equity in other crypto companies, but Celsius never bothered to tell anyone. 

De minimus means too small to be taken into consideration. Debtors can sell assets free and clear of liens. But sales of bankruptcy estate property must be approved by the bankruptcy court.  

Prior to the hearing, the Trustee had objected to the motion, saying the debtor hadn’t provided enough information for the Trustee to evaluate the motion. [Docket 400]

Trustee attorney Shara Cornell told Judge Glenn: “The motion makes it sound like the debtor is selling office furniture or similar hard-type assets that they no longer need. One of our questions in objection had to do with whether or not that might be mining equipment. But what they are actually looking to sell are equities and stocks. And that, in our opinion, is not a de minimis.” 

Judge: “Did you find out what stock they were talking about?” Cornell: “No.” 

Judge Glenn declined to approve the de minimis sales motion and told Celsius to work it out further with the Trustee. Even he was surprised. 

“Certainly I had no inkling the debtor was proposing to sell millions of dollars of equity or notes/investments in other crypto businesses. Those were not what I would normally consider to be de minimis assets, so I want some better definition.”  

Celsius’ business model going forward is all predicated on number go up and making sure the boys get paid. I’m not sure how long this will drag on before the “restructuring” turns into a liquidation, and Celsius management is booted. Likely not before Celsius burns through the rest of their customers’ funds, pays as many of their friends as possible, and the bankruptcy attorneys make their millions. 

The next Celsius hearing is September 1. 

*Celsius calls running mining rigs “hosting.” 

If you like my work, consider supporting my writing by subscribing to my Patreon for $1, $5, $20, $50, or even $100 a month. 

​​

Crypto collapse: Coinbase’s billion-dollar bloodbath, Hodlnaut goes down, Celsius, Voyager, 3AC

It’s time for another episode of “all the money’s gone.” David and I are taking turns posting. This one is on his blog. [David Gerard]

In this episode, we cover:

  • Coinbase’s disastrous Q2 financials.  
  • Hodlnaut’s brave attempt to stay afloat before going under. 
  • More legal wrangling in the Celsius and Voyager bankruptcies.
  • Tether — a secured or unsecured Celsius creditor?
  • Other innocent victims of the CeFi fallout.

If you like our work, please do sign up for our Patreons — here’s Amy’s and here’s David’s.

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

“Lotta stadiums getting renamed in the next few years”

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

TerraUSD

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

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

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

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

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

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

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

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

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

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

Three Arrows Capital 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Celsius

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

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

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

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

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

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

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

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

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

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

Celsius’ next bankruptcy hearing is August 10.

Voyager

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

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

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

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

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

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

Other CeFi firms that are definitely robust and doing fine 

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

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

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

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

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

Crypto collapse: Celsius’ real liabilities and fake assets, Voyager still bankrupt, 3AC owns CryptoDickButt #1462

David Gerard and I just posted another update on the crypto crash. This one is on his blog, so head on over there and check it out!

If you like our work, please do sign up for our Patreons — here’s mine, and here’s David’s.

In our latest episode of the CeFi/DeFi apocalypse, Celsius filed for Chapter 11 bankruptcy. In the filings presented, the firm has a $1.2 billion hole in its balance sheet. Celsius’ liabilities are real — but its assets are fake. 

Meanwhile, Celsius founders have already made a fortune selling their CEL tokens.

We’re sure it’s all fine though. They probably just need to issue a new token to fix the problem. 

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

Crypto contagion

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

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

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

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

The liquidation of Three Arrows Capital

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Big plans for Voyager Digital (in bankruptcy)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Celsius: ‘Ere, he says he’s not dead!

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

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

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

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

Celsius has laid off 150 employees. [Ctech]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Jason Stone and KeyFi quit in March 2021. 

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

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

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

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

CoinFLEX

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

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

How Lamb’s business really works: [Twitter]

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

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

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

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

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

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

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

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

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

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

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

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

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

Other legitimate trading firms that are definitely stable going concerns

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

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

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

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

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

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

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

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

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

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

Crypto collapse latest: the DeFi dead and dying list

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

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

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

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

History repeats, but only the stupid stuff. 

Image: Night of the Living Dead, 1968

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

Since November 2021, when Bitcoin hit its all-time high of $69,000, the original cryptocurrency has lost 70 percent of its face value. And when Bitcoin falters, it takes everything else in crypto down with it. 

The entire crypto space has been a Jenga stack of interconnected time bombs for months now, getting ever more interdependent as the companies find new ways to prop each other up.

Which company blew out first was more a question of minor detail than the fact that a blow-out was obviously going to happen. The other blocks in the Jenga stack will have a hard time not following suit. 

Here’s a quick handy guide to the crypto crash — the systemic risks in play as of June 2022. When Bitcoin slips below $20,000, we’ll officially call that the end of the 2021 bubble.

Recent disasters

TerraUSD collapse — Since stablecoins — substitutes for dollars — are unregulated, we don’t know what’s backing them. In the case of TerraUSD (UST), which was supposed to represent $18 billion … nothing was backing it. UST crashed, and it brought down a cascade of other stuff. [David Gerard; Foreign Policy; Chainalysis Report]

Celsius crumbles — Celsius was the largest crypto lender in the space, promising ridiculously high yields from implausible sources. It was only a matter of time before this Ponzi collapsed. We wrote up the inevitable implosion of Celsius yesterday. [David Gerard]

Exchange layoffs — Coinbase, Gemini, Crypto.com, and BlockFi have all announced staff layoffs. Crypto exchanges make money from trades. In a bear market, fewer people are trading, so profits go downhill. Coinbase in particular had been living high on the hog, as if there would never be a tomorrow. Reality is a tough pill. [Bloomberg; Gemini; The Verge]

Stock prices down — Coinbase $COIN, now trading at $50 a share, has lost 80% of its value since the firm went public in June 2021. The company was overhyped and overvalued.

US crypto mining stocks are all down — Bitfarms ($BITF), Hut 8 Mining ($HUT), Bit Digital ($BTBT), Canaan ($CAN), and Riot Blockchain ($RIOT). Miners have been borrowing cash as fast as possible and are finding the loans hard to pay back because Bitcoin has gone down.

UnTethering

Crypto trading needs a dollar substitute — hence the rise of UST, even as its claims of algorithmic backing literally didn’t make sense. What are the other options?

Tether — We’ve been watching Tether, the most popular and widely used stablecoin, closely since 2017. Problems at Tether could bring down the entire crypto market house of cards.

Tether went into 2020 with an issuance of 4 billion USDT, and now there are 72 billion USDT sloshing around in the crypto markets. As of May 11, Tether claimed its reserve held $83 billion, but this has dropped by several billion alleged “dollars” in the past month. There’s no evidence that $10.5 billion in actual dollars was sent anywhere, or even “$10.5 billion” of cryptos.

Tether is deeply entwined with the entire crypto casino. Tether invests in many other crypto ventures — the company was a Celsius investor, for example. Tether also helped Sam Bankman-Fried’s FTX exchange launch, and FTX is a major tether customer.

Tether’s big problem is the acerbic glare of regulators and possible legal action from the Department of Justice. We keep expecting Tether will face the same fate as Liberty Reserve did. But we were saying that in 2017. Nate Anderson of Hindenburg Research said he fully expects Tether execs to end the year in handcuffs. 

Other stablecoins — Jeremy Allaire and Circle’s USDC (54 billion) claims to be backed by some actual dollars and US treasuries, and just a bit of mystery meat. Paxos’ USDP (1 billion) claims cash and treasuries. Paxos and Binance’s BUSD (18 billion) claims cash, treasuries, and money market funds.

None of these reserves have ever been audited — the companies publish snapshot attestations, but nobody looks into the provenance of the reserve. The holding companies try very hard to imply that the reserves have been audited in depth. Circle claims that Circle being audited counts as an audit of the USDC reserve. Of course, it doesn’t.

All of these stablecoins have a history of redemptions, which helps boost market confidence and gives the impression that these things are as good as dollars. They are not. 

Runs on the reserves could still cause issues — and regulators are leaning toward full bank-like regulation.

Sentiment

There’s no fundamental reason for any crypto to trade at any particular price. Investor sentiment is everything. When the market’s spooked, new problems enter the picture, such as: 

Loss of market confidence — Sentiment was visibly shaken by the Terra crash, and there’s no reason for it to return. It would take something remarkable to give the market fresh confidence that everything is going to work out just fine.

Regulation — The US Treasury and the Federal Reserve were keenly aware of the spectacular collapse of UST. Rumour has it that they’ve been calling around US banks, telling them to inspect anything touching crypto extra-closely. What keeps regulators awake at night is the fear of another 2008 financial crisis, and they’re absolutely not going to tolerate the crypto bozos causing such an event.

GBTC — Not enough has been said about Grayscale’s Bitcoin Trust, and how it has contributed to the rise and now the fall in the price of bitcoin. GBTC holds roughly 3.4 percent of the world’s bitcoin.  

All through 2020 and into 2021, shares in GBTC traded at a premium to bitcoin on secondary markets. This facilitated an arbitrage that drew billions of dollars worth of bitcoin into the trust. GBTC is now trading below NAV, and that arbitrage is gone. What pushed bitcoin up in price is now working in reverse.

Grayscale wants to convert GBTC into a bitcoin ETF. GBTC holders and all of crypto, really, are holding out hope for the SEC to approve a bitcoin ETF, which would bring desperately needed fresh cash into the crypto space. But the chances of this happening are slim to none.

The bitcoins are stuck in GBTC unless the fund is dissolved. Grayscale wouldn’t like to do this — but they might end up being pressured into it. [Amy Castor]

Whales breaking ranks — Monday’s price collapse looks very like one crypto whale decided to get out while there was any chance of getting some of the ever-dwindling actual dollars out from the cryptosystem. Expect the knives to be out. Who’s jumping next?

Crypto hedge funds and DeFi

Celsius operated as if it was a crypto hedge fund that was heavily into DeFi. The company had insinuated itself into everything — so its collapse caused major waves in crypto. What other companies are time bombs?

Three Arrows Capital — There’s some weird stuff happening at 3AC from blockchain evidence, and the company’s principals have stopped communicating on social media. 3AC is quite a large crypto holder, but it’s not clear how systemically intertwined they are with the rest of crypto. Perhaps they’ll be back tomorrow and it’ll all be fine. [Update: things aren’t looking good. 3AC fails to meet lender margin calls.] [Defiant; Coindesk; FT]

BlockFi — Another crypto lender promising hilariously high returns. 

Nexo — And another. Nexo offered to buy out Celsius’ loan book. But Nexo offers Ponzi-like interest rates with FOMO marketing as well, and no transparency as to how their interest rates are supposed to work out.

Swissborg — This crypto “wealth management company” has assets under management in the hundreds of millions of dollars (or “dollars”), according to Dirty Bubble Media. [Twitter thread]

Large holdings ready for release

Crypto holders have no chill whatsoever. When they need to dump their holding, they dump.

MicroStrategy — Michael Saylor’s software company has bet the farm on Bitcoin — and that bet is coming due. “Bitcoin needs to cut in half for around $21,000 before we’d have a margin call,” Phong Le, MicroStrategy’s president, said in early May. MicroStrategy’s Bitcoin stash is now worth $2.9 billion, translating to an unrealized loss of more than $1 billion. [Bloomberg]

Silvergate Bank — MicroStrategy has a $205 million loan with Silvergate Bank, collateralized with Bitcoin. Silvergate is the banker to the US crypto industry — nobody else will touch crypto. Silvergate is heavily invested in propping up the game of musical chairs. If Silvergate ever has to pull the plug, almost all of US crypto is screwed. [David Gerard]

Bitcoin miners — Electricity costs more, and Bitcoin is worth less. As the price of Bitcoin drops, miners find it harder to pay business expenses. Miners have been holding on to their coins because the market is too thin to sell the coins, and borrowing from their fellow crypto bros to pay the bills since July 2021. But some miners started selling in February 2022, and more are following. [Wired]

Mt. Gox — at some point, likely in 2022, the 140,000 bitcoins that remained in the Mt. Gox crypto exchange when it failed in 2014 are going to be distributed to creditors. Those bitcoins are going to hit the market immediately, bringing down the price of bitcoin even further.

Feature image by James Meickle, with apologies to XKCD and Karl Marx.

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Celsius goes Fahrenheit 451, and number goes down

David Gerard and I have been having fun staying poor. 

I just helped him write a post about how the gig is finally up for Celsius, the largest crypto lender, along with the impact that is having on the price of bitcoin and the crypto space at large. 

We posted it on his website, so head on over there and take a look. 

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