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!