Tag: Coinbase

Coinbase Q1 2024 earnings: number go up, with a bit of juicing

  • By Amy Castor and David Gerard
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Coinbase, the largest crypto exchange that deals in actual US dollars, has published its earnings for the first quarter of 2024 — when the bitcoin price reached its previous peak again. [Shareholder letter, PDF; Earnings call webcast; Earnings call transcript, PDF; Analyst call transcript, PDF; 10-Q]

The numbers look great! “We generated $1.6 billion of total revenue and $1.2 billion of net income. Adjusted EBITDA was $1.0 billion – more than we generated in all of 2023,” said CEO Brian Armstrong in the earnings call on May 2.

But those numbers are considerably juiced in important ways.

Numbers go up! When you change how you count them

Coinbase reported $1.6 billion in total revenue and $1.2 billion in net income in Q1 2024.

Those numbers are better than Q4 2023 — the first quarter Coinbase reported a profit in eight quarters. In that quarter, Coinbase reported $954 million in total revenue and $273 million net income.  

But this quarter’s numbers are up because Coinbase holds crypto as an investment — and when the bitcoin price went from $42,000 to $71,000 in the first three months of the year, Coinbase claimed considerable one-time paper gains. 

This is because GAAP accounting for crypto changed. Previously, you could only list the value of crypto you held at what you paid for it or less. You couldn’t account for the number going up as profits. But starting December 13, 2023, you suddenly could, under new FASB rule ASU 2023-08. [FASB, 2023; ASU 2023-08, PDF]

This did wonders for Coinbase’s next quarter!

Coinbase lists $737 million in mark-to-market crypto gains in Q1 — imaginary dollar gains on way more bitcoins than they could ever sell in those quantities — of which $86 million came from gains on digital assets held for operations and $650 million from unrealized investment gains. All this is only listable because of ASU 2023-08.

The crypto gains are listed on the balance sheet as cash coming in. But these aren’t real dollars until Coinbase sells the bitcoins and pays taxes on the capital gains.

“When a company counts bitcoin as revenue — that’s not cash. You can’t pay people with it, you can’t keep the lights on with it. It’s what we call an ‘accounting treatment’ but it is not cash,” Ted Gavin, managing partner and founder of corporate restructuring firm Gavin/Solmonese, told us in a recent phone conversation.  

Trading volume up — a bit

Trading is the lifeblood of any crypto exchange. It’s where Coinbase has traditionally made their money — on trading fees.

Coinbase was profitable in Q4 2021 when they did $547 billion in trading volume. After that, the company was unprofitable for eight straight quarters and trading volume plummeted.

Retail trade volume is three times what it was last quarter! But it’s still a fraction of what it was in the last bull run. Retail volume was $56 billion in Q1 2024 — compared to $177 billion in Q4 2021.

Retail trading is particularly important — it’s where the scarce actually-existing dollars (not just accounting fictions) find their way into the crypto ecosystem.

Institutional trading was the bulk of Coinbase trading — $256 billion volume in Q1 2024 compared to $371 billion in Q4 2021, the last bull run. That’s not terrible — but institutional fees are lower. 

What does this tell us? It means that when number went up, some retail investors came back to try their luck — but many more remain leery of crypto after the collapses of Terra-Luna and then FTX.

Custody — spot ETFs

The SEC approved 11 bitcoin spot ETFs in January — and eight of those, including the largest, Grayscale’s GBTC, use Coinbase as a custodian. 

Coinbase had hoped to make more money as a custodian to supplement its ailing trading business — but the bitcoin ETFs have not pumped up their revenue. 

Despite nearly $11 billion in ETF inflows in the first quarter, Coinbase custodial fees were only $32 million — or 0.2% of their total revenue — up from $19.7 million in Q4 2023. 

Interest

Coinbase makes money on the reserves backing the USDC stablecoin.

It turns out there’s a lot of money in dollar liabilities that you pay zero interest on but which give you 5% interest on the backing reserves. So Coinbase’s income from USDC interest was $197 million in Q1 2024.

There was also $66.7 million from lending out USDC and crypto for trading.

Long-term debt

Coinbase has $4.2 billion in debt. In the first quarter, they added $1.1 billion in long-term debt in convertible senior notes. The money was to pay off existing debt and for general corporate purposes. The notes mature in 2030. [Axios]

Convertible notes are a popular way for startups to raise capital. The primary purpose is that they convert into equity at some point. The notes are usually senior to common stock — if Coinbase went belly up, the holders of senior convertible notes would have priority over common shareholders

While Coinbase purports to have a lot of cash on hand, they also have a lot of debt. They are still spending a lot of money. 

The searing light of regulatory clarity

“We’re driving regulatory clarity,” said Armstrong in the earnings call.

In practice, regulatory clarity is driving Coinbase. One of the biggest challenges that Coinbase faces is a regulatory crackdown on crypto exchanges.

The SEC and 10 states sued Coinbase in June 2023 for operating an unregistered exchange and selling unregistered securities to retail. If the SEC prevails, there goes Coinbase’s entire business model.

EBITDA, the bodybuilding supplement for your numbers

Coinbase really likes its EBITDA numbers. They even started the earnings and analyst calls directly stating they’d hammer on these non-GAAP numbers. “We generated more Adjusted EBITDA than we did all of last year!” Armstrong proudly announced.

EBITDA (earnings before interest, taxes, depreciation, and amortization) is a measure of profitability that many companies put into their quarterly filings.

EBITDA will often look much better than those tawdry old-fashioned standardized GAAP numbers — because it sweeps the real costs of doing business under the rug.

Berkshire Hathaway’s Charlie Munger famously said that every time you see EBITDA, you should substitute “bullsh-t earnings.” [YouTube]

EBITDA isn’t even calculated consistently across different companies. And then there’s “Adjusted EBITDA,” which is a BS number of a BS number. Coinbase is even fonder of this one.

Coinbase’s “adjusted EBITDA” excludes stock-based compensation, because the numbers look way better if you leave out the bit where you have to pay your employees.

“While Coinbase may be reporting $1.2 billion in adjusted EBITDA, that is not what would be left for creditors. It is going to be some number grossly smaller than that,” Ted Gavin told us.

Coinbase’s 10-Q has a whole section excusing their use of these BS numbers. Don’t spend too much time on EBITDA — treat it as a distraction.

What all this means

The bitcoin price recovered — but the market didn’t really recover. The price going up was mostly driven by trading in dubiously-backed stablecoins on unregulated exchanges — not by people liking bitcoins more.

The price rise did seem to get a bit of volume going this quarter. But bitcoin spot ETFs turned out not to be Coinbase’s or the crypto market’s savior. In the last few weeks, we’ve even been seeing more net outflow from the ETFs.

The COIN stock price is up 42% in the year to date — but that’s mainly because the price of bitcoin has gone up this year. 

Coinbase’s numbers in  Q1 2024 are heavily juiced by unrealized gains on the face value of their crypto holdings. The company is not at all out of the woods. ETFs weren’t the magic trick — they’ll need some new Hail Mary.

Posted on by Amy Castor 0

Bitcoin goes up, so it must come down. What goes into the price of BTC?

  • By Amy Castor and David Gerard

Bitcoin has set yet another new all-time high — $73,835 on Coinbase BTC-USD on March 14. This means bitcoin is good now! All our past objections are resolved. Going forward, we only deal in Finances U Desire.

Sound and fury, signifying nothing

What’s interesting is that while the price is back up, the bitcoin trading market has not recovered. If anyone says “the market is back!” that’s an incorrect claim.

Market volume is one-eighth of what it was in November 2021, the last time the price was this high.

We get that number from Coinbase retail trading fee income, which is 2% of the volume. Coinbase is the largest actual-dollar exchange and it’s not allowed to lie in SEC filings — so for once in crypto, we have numbers we can trust a bit.

The retail trade volume against actual dollars on Coinbase went down in seven of the past eight quarters. Here’s a table from Q4 2021 to Q3 2023. Q4 2023 didn’t show any improvement.

Even as the price went up through 2023, every day people wanted bitcoins less and less. Coinbase gives us the numbers showing this.

Flash boys

Without trading volume, the bitcoin markets are painfully thin. It doesn’t help that market liquidity is horribly fragmented.

(This is why we prefer to just quote the Coinbase price — the skew between exchanges can be hundreds of dollars when anything interesting is happening.)

BTC-USDT on BitMEX flash-crashed from $66,000 to just $8,900 on Monday, March 18. Starting at around 22:40 UTC, someone dumped 1,000 BTC as fast as possible at whatever the market would pay for it. [CoinDesk; Twitter, archive]

By the time the flash crash flowed through to Coinbase, it was a mere $2,000 drop.

BitMEX has much less bitcoin liquidity than Coinbase BTC-USD or Binance BTC-USDT — so we suspect this was a very urgent seller who felt that FinCEN didn’t need his details.

Remember that after Binance got hit with the compliance hammer, traders’ details are no longer safe from US anti-money-laundering agencies.

We’re not sure why our trader didn’t use OKX, HTX (formerly Huobi), or Bitfinex, which would have had more liquidity and thus less price slippage — hence our impression that they were really in a hurry. And now they have to put all that USDT somewhere.

ETFs will save bitcoin!

BlackRock says its spot bitcoin ETF has reached $10 billion in assets. But Grayscale’s GBTC has seen over $11 billion in outflows because nobody wants to pay their 1.5% fee. (Everyone else is around 0.3%.)

Bitcoin ETFs aren’t hitting the institutions they were hoping for — pension funds and so on. (Thankfully.) For all of BlackRock’s helpful ETF marketing advice, financial advisors are being very careful about recommending these things. [WSJ, archive]  

The money flowing into the ETFs seems to be from individual investors. It’s not clear whether these are new investors or just existing holders dumping their bitcoin for ETFs because they’re tired of being their own bank.

This Financial Times article starts with BlackRock talking up its bitcoin ETF and the fabulous future of the blockchain … then details every way in which crypto is utterly incompatible with sane finance and doesn’t work. [FT, archive]  

The hot air crypto bubble

Meanwhile, Tether has printed 11 billion tethers just since the start of 2024. It’s at 103 billion tethers and counting. 

We very much doubt that most of these billions of tethers are being bought with real US dollars. Why would you send real dollars to an unregulated offshore wildcat bank to buy bitcoins when you could just put them into a US-regulated bitcoin ETF?

We suspect the tethers are being printed out of thin air and accounted as loans — the fresh USDT is “backed” by the loan itself.

This supports our theory that the present pump is not real money flooding into bitcoin. It’s stablecoins on Binance — tethers and FDUSD. The volume on Binance completely swamps the volumes on Coinbase or ETF trading.

The bitcoin price chart looks very like someone’s trying to pump the price. You’ll see the price slowly getting walked up, as if someone’s wash-trading it up … then it hits a round number of dollars, someone tries to cash out, and the price drops several thousand.

Fake dollars going up, real dollars going down.

So we’re not in a bubble. We’re in a balloon, one being pumped full of hot air. It’s fun going up — but the trip down can be very quick.  

What do I do with my holdings?

Back in November 2022, when exchanges were suffering urgent unplanned maintenance left, right, and center, we went so far as to say that if you insisted on investing in bitcoins, you should not risk storing your coins on an exchange. Holding private keys is ridiculously fraught and the tech is still unusable trash — but it’s still not as bad as trusting bitcoin exchanges.

If you must hold bitcoins in the hope of getting dollars for them one day, the least-worst option is to buy into an ETF. That way you’re in a regulated market and your only risk is Coinbase Custody getting hacked.

If you’ve bought into crypto, please at least cash out your principal — the cash basis that you paid to buy in. Then everything you make from then on is pure profit. When the price crashes, you won’t have lost anything.

Our real recommendation, of course, is not to touch this garbage.

Back in the snake pit

Bitcoin suffered a year of its media coverage being “Sam Bankman-Fried is a crook.” Crypto pumpers tried to make out that FTX, the second-largest exchange, being a massive fraud was a mere aberration on the part of Bankman-Fried, and everyone else in crypto was a good guy.

Then the first-largest exchange, Binance, got busted too. So price discovery for bitcoin — what determines where the number goes — happens on an exchange that literally admitted a few months ago to being a criminal conspiracy. Binance’s founder and former CEO, Changpeng “CZ” Zhao, is in the US awaiting sentencing. 

We find, over and over, that normal people keep assuming that crypto isn’t just a completely criminal snake pit. Because US dollars are able to touch it in any way, so surely it’s regulated. Right?

Finance and finance journalism seem to have collectively forgotten what a hellhole unregulated markets always were.

The way crypto works is:

  1. Actual dollars flow from retail suckers to a few rich guys;
  2. There’s lots of fancy bafflegab to obscure the very simple flow of actual dollars.

Crypto is an unregulated mob casino and the regulated exchanges are just the cashier’s desk.

You can absolutely make money in crypto — we would never say that you can’t. But you have to be a better shark than all the other sharks who built the shark pool.

Trade carefully.

Media stardom

Billy Bambrough wrote about the bitcoin price for the Sunday Times and spoke to David. In a rare moment for journalistic coverage of the number, Tether was mentioned! [Sunday Times, archive]

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Posted on by Amy Castor 1

Crypto collapse: SEC takes on Terraform and Coinbase, ETF fallout continues, Tether is for crime

Our latest roundup of everything that’s falling over is on David’s site. [David Gerard]

In this edition:

  • SEC wins a lot of their claims against Terraform
  • Coinbase motion to dismiss hearing, with yet more Beanie Babies. (“funding my new startup by selling Stock Babies which are an asset  just like a parcel of land, the value of which may reasonably  fluctuate.” — Andrew Molitor)
  • ETF nonsense: Collateralized Rugpull Obligations
  • Tether is for crime
Posted on by Amy Castor 0

Crypto collapse: Mt Gox payouts, Tether hooks up the feds, SEC says no to Coinbase, crypto media mergers

  • By Amy Castor and David Gerard

It’s not over until withdrawals are temporarily paused due to unusual market activity.

— Jacob Silverman

Tightening Tether’s tethers

Tether’s been under some regulatory heat after the reports of how useful USDT is for financing terrorists and other sanctioned entities. Even Cynthia Lummis, the crypto-pumping senator from Wyoming, loudly declared that Tether had to be dealt with.

The US government isn’t entirely happy with Tether’s financial shenanigans. But they’re really unhappy about sanctions violations, especially with what’s going on now in the Middle East. 

So Tether has announced that it will now be freezing OFAC-sanctioned blockchain addresses — and it’s onboarded the US Secret Service and FBI onto Tether! [Tether, archive; letter, PDF, archive]

Tether doesn’t do anything voluntarily. We expect they were told that they would allow this or an extremely large hammer would come down upon them.

There’s more to Tether’s criminal use case than sanctions violation. The most jaw-dropping chapter in Zeke Faux’s excellent book Number Go Up (US, UK) is when he traced a direct message scammer to a human trafficking operation in Cambodia that favored tethers as its currency. South China Morning Post follows up on this with an in-depth report on how Cambodian organized crime uses tethers. [SCMP]

Credit rating firm S&P Global rated eight stablecoins for risk. Tether and Dai got the lowest marks. S&P notes in particular the lack of information on Tether’s reserves. [press release; S&P; Tether report, PDF]

At least some of the claimed Tether backing in treasuries is held in the US with Cantor Fitzgerald — exposing Tether to US touchability. This has been known since February 2023, and was proudly confirmed in December 2023 by Cantor CEO Howard Lutnick: “I hold their Treasuries, and they have a lot of Treasuries. I’m a big fan of Tethers.” [Ledger Insights; Forbes]

Cointelegraph had a fascinating story on a company called Exved using tethers for cross-border payments from Russia! Then they deleted it, for some reason. Exved was founded by Sergey Mendeleev, who also founded the OFAC-sanctioned crypto exchange Garantex, which was kicked out of Estonia. Exved is working with InDeFi Bank, another Mendeleev venture. We’re not so sure the new OFAC-compliant Tether will be 100% on board with this. [Cointelegraph, archive; Telegram, in Russian; Protos]

SEC answers Coinbase’s prayers: “No.”

In July 2022 — just after crypto crashed — Coinbase wrote to the SEC proposing new regulatory carveouts for crypto.

The SEC took its sweet time responding. Eventually, Coinbase sued in April 2023 with a writ of mandamus, demanding a bureaucratic response. The court told the SEC to get on with it, or at least supply a date by which it would answer.

Finally, the SEC has responded: “the Commission concludes that the requested rulemaking is currently unwarranted and denies the Petition.” The SEC thinks existing securities regulations cover crypto securities just fine, and there’s no reason for special rules for Coinbase. [SEC rejection, PDF; Coinbase letter to court, PDF; Gensler statement]

Coinbase general counsel Paul Grewal welcomed the opportunity to challenge Coinbase’s dumb and bad proposal being turned down. [Twitter, archive]

4 (continued)

Binance founder and former CEO Changpeng Zhao will not be returning home to Dubai anytime soon. US District Judge Richard Jones ordered CZ to remain in the US until his sentencing on February 24. He can travel within the US, but he cannot leave. [Order, PDF] 

After being busted hard, Binance is still behaving weird. At the FT Crypto and Digital Assets Summit in London, the exchange’s new CEO Richard Teng refused to answer even basic questions, like where Binance is headquartered and whether it’s had an audit. “Why do you feel so entitled to those answers?” Teng said when pushed. “Is there a need for us to share all of this information publicly? No.” [FT]

CZ and Binance have been trying to dismiss the SEC charges against them. This is mostly loud table pounding, wherein Binance claims that what the SEC argued were securities are not really securities. [Doc 190, PDF, Doc 191, PDF]

France was the first country in Europe to grant Binance regulatory approval. State-endorsed blockchain courses for the unemployed and NFT diplomas helped push the country’s most vulnerable into crypto. Since the collapse of FTX and Binance’s $4.3 billion fine for money laundering, French President Emmanuel Macron’s relationship with CZ has fallen under scrutiny. [FT, archive]

London law firm Slateford helped to cover up Binance’s crimes and attempted to intimidate media outlet Disruption Banking from writing about Binance’s sloppy compliance hiring practices. (Disruption Banking told Slateford to get knotted and didn’t hear from them again.) [Disruption Banking]

Binance is finally removing all trading pairs against Great British pounds. [Binance, archive]

FTX: The IRS wants its money

FTX filed a reorganization plan in mid-December. The plan is 80 pages and the disclosure statement is 138 pages, but there’s a notable lack of detail on what happens next. None of the talk of starting a new exchange has made it into the current plan — this appears to just be a liquidation.

The plan treats crypto claims as their value in cash at the time of the bankruptcy filing on November 11, 2022, back when bitcoin was at $17,000 — less than half of what it is now.

Creditors will vote on the plan in 2024. The court must approve the plan before it is implemented. [Bloomberg, archive; Plan, PDF; Disclosure statement, PDF]

The IRS is demanding $24 billion in unpaid taxes from the corpse of FTX. John Jay Ray wants to know how the IRS came up with that ludicrous number — the exchange never earned anything near those amounts. The IRS originally wanted $44 billion, but brought the number down. Judge John Dorsey has told the IRS to show its working. [Doc 4588, PDF; Bloomberg, paywalled]

Three Arrows Capital

Three Arrows Capital was the overleveraged crypto hedge fund that blew up in 2022 and took out everyone else in crypto who hadn’t already been wrecked by Terra-Luna. After months of dodging culpability, co-founder Zhu Su was finally arrested in Singapore in September as he was trying to skip the country. 

Zhu was released from jail and appeared before the Singapore High Court on December 13, where he had to explain to lawyers for the liquidator Teneo what happened when 3AC went broke. The information will be shared with creditors. [Bloomberg, archive]

A British Virgin Islands court froze $1.1 billion in assets of Zhu and his co-founder Kyle Davies and Davies’ wife Kelly Chen. [The Block]

Teneo expects a 46% recovery rate for 3AC creditors on $2.7 billion in claims. [The Block]

Crypto media in the new Ice Age

Crypto news outlet Decrypt has merged with “decentralized media firm” Rug Radio. No, we’d never heard of them either. The two firms will form a new holding company chaired by Josh Quittner. Decrypt had spun out from Consensys in May 2022, just before everything crashed. It’s reportedly been profitable since then — though crypto sites always say that. [Axios; Axios, 2022] 

Forkast News in Hong Kong has merged with NFT data provider CryptoSlam and fired most of its staff. Forkast was founded in 2018 by former Bloomberg News anchor Angie Lau; it shut down editorial operations on November 30. [The Block] 

Crypto news outlets ran seriously low on cash in 2019 and 2020, just before the crypto bubble, and they’re struggling again. We expect more merges and buyouts of top-tier (such as that is in crypto) and mid-tier crypto outlets. We predict news quality will decline further.

Amy recalls the old-style crypto media gravy train and eating in five-star restaurants every night in Scotland and London while embedded with Cardano in 2017. Thanks, Charles! Nocoining doesn’t pay nearly as well, but these days crypto media doesn’t either. There’s probably a book in those Cardano stories that nobody would ever read.

Regulatory clarity

The Financial Stability Oversight Council, which monitors domestic and international regulatory proposals, wants more US legislation to control crypto. FSOC’s 2023 annual report warns of dangers from:

crypto-asset price volatility, the market’s high use of leverage, the level of interconnectedness within the industry, operational risks, and the risk of runs on crypto-asset platforms and stablecoins. Vulnerabilities may also arise from token ownership concentration, cybersecurity risks, and the proliferation of platforms acting outside of or out of compliance with applicable laws and regulations.

Yeah, that about covers it. FSOC recommends (again) that “Congress pass legislation to provide for the regulation of stablecoins and of the spot market for crypto-assets that are not securities.” [Press release; annual report, PDF]

IOSCO, the body of international securities regulators, released its final report on how to regulate DeFi, to go with its November recommendations on crypto markets in general. IOSCO’s nine recommendations for DeFi haven’t changed from the draft version — treat these like the instruments they appear to be, and pay attention to the man behind the curtain. These are recommendations for national regulators, not rules, but look at the DeFi task force — this was led by the US SEC. [IOSCO press release, PDF; IOSCO report, PDF]

London-based neobank Revolut is suspending UK crypto services — you can no longer buy crypto with the app — citing a new raft of FCA regulations, which go into force on January 8. [CityAM; CoinDesk]

Crypto exchange KuCoin has settled with New York. The NY Attorney General charged KuCoin in March for violating securities laws by offering security tokens — including tether — while not registering with NYAG. KuCoin has agreed to pay a $22 million fine — $5.3 million going to the NYAG and $16.77 million to refund New York customers. KuCoin will also leave the state. [Stipulation and consent order, PDF; Twitter, archive] 

Montenegro plans to extradite Terraform Labs cofounder Do Kwon to either the US or South Korea, where he is wanted on charges related to the collapse of Terra’s stablecoin. Kwon was arrested in Montenegro in March. Originally it looked like Montenegro was going to pass him off to the US, but the case has been handed back to the High Court for review. [Bloomberg, archive; Sudovi, in Montenegrin]

Anatoly Legkodymov of the Bitzlato crypto exchange, a favorite of the darknet markets, has pleaded guilty in the US to unlicensed money transmission. Legkodymov was arrested in Miami back in January. He has agreed to shut down the exchange. [Press release]

The SEC posted a new investor alert on crypto securities with a very lengthy section on claims of proof of reserves and how misleading these can be. [Investor.gov; Twitter, archive] 

Santa Tibanne

It’s been nearly ten years, but Mt. Gox creditors are reportedly starting to receive repayments — small amounts in Japanese yen via PayPal. [Cointelegraph; Twitter, archive] 

Some payouts are apparently bitcoin payouts — with the creditors not receiving a proportionate share of the remaining bitcoins, but instead the yen value of the bitcoins when Mt. Gox collapsed in February 2014. This means a 100% recovery for creditors! — but much less actual money.

There are still 140,000 bitcoins from Mt. Gox waiting to be released. If payouts are made in bitcoins and not just yen, we expect that claimants will want to cash out as soon as possible. This could have adverse effects on the bitcoin price.

Trouble down t’ pit

In the Celsius Network bankruptcy, Judge Martin Glenn has approved the plan to start a “MiningCo” bitcoin miner with some of the bankruptcy estate. He says that “the MiningCo Transaction falls squarely within the terms of the confirmed Plan and does not constitute a modification.” [Doc 4171, PDF]

Bitcoin miners are racing to buy up more mining equipment before bitcoin issuance halves in April or May 2024. Here’s to the miners sending each other broke as fast as possible [FT, archive] 

Riot Platforms subsidiary Whinstone sent its private security to Rhodium Enterprise’s plant in Rockdale, Texas, to remove Rhodium employees and shut down their 125MW bitcoin mining facility. The two mining companies have been brawling over an energy agreement they had made before prices went up. [Bitcoin Magazine]

More good news for bitcoin

The UK is setting up a crypto hub! ’Cos that’s definitely what the UK needs, and not a working economy or something. [CoinDesk]

Liquid is a bitcoin sidechain set up by Blockstream at the end of 2018. It was intended for crypto exchange settlement, to work around the blockchain being unusably slow. It sees very little use — “On a typical day, there are more tweets about Liquid than there are transactions on its network.” [Protos] 

A16z, Coinbase, and the Winklevoss twins say they’ve raised $78 million as part of a new push to influence the 2024 elections. [Politico] 

Little-known fact: coiners can donate to the PAC in tethers. All they have to do is send them via an opaque Nevada trust structure to hide the origins of the funds. And this is perfectly legal! [FPPC, PDF, p. 85, “nonmonetary items”]

Ahead of the SEC’s deadline to rule on a bitcoin ETF, Barry Silbert, CEO of Digital Currency, has quietly stepped down from the board of DCG subsidiary and ETF applicant Grayscale and is no longer chairman, according to a recent SEC filing. Silbert will be replaced by Mark Shifke, the current DCG senior vice president of operations. US regulators are suing DCG over the Gemini Earn program co-run by its subsidiary Genesis. [Form 8-K]

Ordinals are an exciting new way to create NFTs on bitcoin! ’Cos who doesn’t want that? The bitcoin blockchain immediately clogged when it was actually used for stuff. Now TON, the blockchain that is totally not Telegram’s, no, no no, has ordinals — and it’s getting clogged too. [The Block]

Image: Mark Karpeles with aggrieved bitcoin trader outside Mt. Gox in Tokyo in 2014.

Posted on by Amy Castor 1

Crypto collapse: Terra judge repudiates Ripple finding, Razzlekhan cops a plea, Binance’s FDUSD stablecoin, CoinDesk sold, smart contracts still stupid

  • By Amy Castor and David Gerard

“EXCLUSIVE: IT’S RUMORED THAT GARY GENSLER HAD A BLT FOR LUNCH TODAY. EXPERTS BELIVE THIS IS BULLISH FOR A POSSIBLE SPOT BITCOIN ETF APPROVAL”

— Sean Tuffy

IMPORTANT: Patreon sponsors, please check your pledges!

Patreon changed its billing for this month from California to Dublin. So a lot of banks rejected the transactions as possible fraud.

This would easily be reversible … except that Patreon’s systems automatically wiped all patron relationships where a transaction bounced! [Twitter thread, archive]

If you sponsor anyone on Patreon, not just us: please check your transactions for August, re-send them if they bounced, and rejoin as a patron if you need to. The “retry” link should be located in your billing history. Your creators will be most grateful!

We also have Ko-Fi links where you can send us casual tips — here’s Amy’s and here’s David’s.

Razzlekhan cops a plea

Bitcoin rapper Heather “Razzlekhan” Morgan and her husband Ilya Lichtenstein were arrested in February 2022 for hacking Bitfinex in 2016. They agreed to a plea deal a couple of weeks ago. [DOJ press release; Reuters]

The plea hearings were today, Thursday, August 3. Morgan pleaded guilty to money-laundering conspiracy and conspiracy to defraud the United States. The BBC says that “Morgan masqueraded as a rapper.” [BBC]

Lichtenstein pleaded guilty to money-laundering conspiracy. He also admitted to being the original perpetrator of the Bitfinex hack!

Lichtenstein stashed some of the hacked funds as buried gold coins. Arrr. [Bloomberg, archive; CNBC]

Curve: smart contracts, stupid humans

“Smart contracts” are small programs that run right there inside a blockchain. In enterprise computing, these would be called “database triggers” or “stored procedures.”

You never use triggers or stored procedures unless you absolutely have to, because they’re very easy to get wrong and a pain in the backside to debug. In the real world, you keep your financial data and the programs working on it separate.

So, of course, crypto uses programs embedded in the database for everything and touts the difficulty in working with them as a feature and not evidence of the idea’s incredible stupidity.

A smart contract full of crypto can reasonably be treated as a piñata, just waiting for you to whack it in the right spot and get the candy.

Today’s piñata is Curve Finance, a DeFi exchange used for trading stablecoins and other tokens. Curve was hacked on July 30 due to a bug in the Vyper language compiler. Smart contracts that were using Vyper versions 0.2.15, 0.2.16, and 0.3.0 were vulnerable. About $70 million in funds was drained from liquidity pools whose smart contracts used these versions. [Twitter, archive; Twitter, archive]

Vyper, which is inspired by Python, was supposed to have been an improvement over the hilariously awful Solidity — a.k.a. “JavaScript with a concussion” — that most Ethereum Virtual Machine smart contracts are written in. Unfortunately, the Vyper compiler had a bug that meant compiled code was exploitable. So you could mathematically prove your smart contract program was correct … and the compiled version could still be exploited. This could hit any Vyper smart contract using vulnerable versions. [Twitter, archive]

Some have suggested that the Vyper exploit and subsequent Curve hack were “state-sponsored” — which is quite possible, given that we already know that North Korea actively seeks to launder money using crypto.

If North Korea is caught cashing out from the Curve hack, then we suspect large DeFi protocols may get a call from OFAC soon for the same reasons that Tornado Cash did.

David wrote an entire book chapter on all the ways that smart contracts were stupid back in 2017. He foolishly thought that this would knock the idea firmly on the head.

CoinDesk on the block

The bankruptcy of Genesis left Genesis owner Digital Currency Group scrambling to sell off the silverware. DCG’s news site CoinDesk was rumored in January to be up for sale. CoinDesk is now being bought for $125 million by an investor group led by Matthew Roszak (Tally Capital) and Peter Vessenes (Capital6). [WSJ]

DCG bought the failing media outlet in 2016 for $500,000. It’s been shoveling money into CoinDesk ever since. DCG wants to keep the CoinDesk conference business, which is the only part of the site that makes any money.

Bitcoin old-timers will remember Vessenes from the Bitcoin Foundation of the early 2010s. He was the CEO of CoinLab, which was functionally a US agent for the Mt Gox exchange. CoinLab and Mt Gox sued each other repeatedly over alleged contractual breaches. After Mt Gox went bankrupt, CoinLab escalated its claims against the dead exchange from $75 million to an amazing and implausible $16 billion. [Bitcoin Magazine, 2013; Cointelegraph, 2019]

We don’t know what Vessenes wants with a media outlet that only loses money, even from a commercial propaganda perspective. We suppose he could alienate the site’s expensive hires of the past couple of years.

A Ripple in the war on Terra

Terraform Labs issued the TerraUSD and Luna coins, which triggered the crypto crash of May 2022, which popped the 2021 bubble.

We were surprised to hear that Terraform is not dead! It has a new CEO, Chris Amani, who was previously the firm’s COO and CFO. Amani’s hot plan is to revive the Terra blockchain. Amani says that Terraform won’t be launching a new stablecoin. Founder Do Kwon, who is in jail in Montenegro, is still Terraform’s majority shareholder. [WSJ]

The SEC’s case against Terraform proceeds. Terraform filed in May to dismiss the SEC’s complaint, using similar arguments as Coinbase and Ripple. Terraform recently filed that the bizarre July finding in the Ripple case supports dismissing the SEC complaint.

The SEC responded to Terraform and confirmed that it’s appealing the Ripple ruling because it’s nuts: “Ripple’s reasoning is impossible to reconcile with all of these fundamental securities laws principles … SEC staff is considering the various available avenues for further review and intends to recommend that the SEC seek such review.” So we can look forward to that appeal in Ripple. [Doc 29, PDF; Doc 47, PDF; Doc 49, PDF; case docket]

Judge Rakoff concurred with the SEC and got quite pointed about the very dumb and bad ruling in Ripple: [Doc 51, PDF]

Howey makes no such distinction between purchasers. And it makes good sense that it did not. That a purchaser bought the coins directly from the defendants or, instead, in a secondary re-sale transaction has no impact on whether a reasonable individual would objectively view the defendants’ actions and statements as evincing a promise of profits based on their efforts.

… Simply put, secondary-market purchasers had every bit as good a reason to believe that the defendants would take their capital contributions and use it to generate profits on their behalf.

We don’t expect the Ripple ruling to stand.

4

Crypto trading is illegal in China — technically, anyway. The Wall Street Journal says that Binance users coming in from China still trade $90 billion a month — it’s “Binance’s biggest market by far,” with over 900,000 users. [WSJ]

The importance of China is “openly discussed internally.” In fact, “the exchange’s investigations team works closely with Chinese law enforcement to detect potential criminal activity.”

Binance denies the reports, with the very specific wording: “The Binance.com website is blocked in China and is not accessible to China-based users.” Good thing nobody in China uses a VPN, hey. The WSJ says that Binance directs its Chinese users to “visit different websites with Chinese domain names before rerouting them to the global exchange.” [Cointelegraph]

Binance CEO Changpeng “CZ” Zhao responded “4” — meaning that it’s all FUD. [Twitter, archive]

Fore!

The US Department of Justice is considering charges against Binance, but worries about causing a run on the exchange — or so says Semafor, which says the DoJ is considering fines or a deferred prosecution agreement instead. We think that any Binance user who hasn’t already priced in yet more US government action against Binance, particularly an indictment, just doesn’t want to be told. [Semafor]

Binance is cutting employee benefits, citing a decline in its profits — which suggests its customers are running away screaming. The non-US employees laid off in June were offered severance of two months’ salary paid in BNB tokens. [WSJ]

If Binance has a drop in profits, it’s likely the large institutional traders — Binance’s “VIPs” — jumping ship while they can. Where can they be going? Is there a good casino left for the VIPs with an ample supply of suckers to milk? Or was Binance the end of the line?

CZ has filed a motion to dismiss the CFTC complaint against him. He holds that Binance just doesn’t do business in the US, so the CFTC doesn’t have jurisdiction. Also, the securities aren’t securities, apparently. [Doc 59, PDF] 

CZ wanted to just shut Binance US earlier this year because of the regulatory heat, two people told The Information. The BAM board voted, but the lone holdout was Binance US CEO Brian Shroder. CZ also considered selling Binance US to Gemini or a sovereign wealth fund. Binance told Cointelegraph that it was “not commenting” on this issue. [The Information, paywalled; Cointelegraph]

In June, the SEC Nigeria ruled that Binance Nigeria had to stop operating in the country. Binance claimed that “Binance Nigeria” had nothing to do with them. SEC Nigeria has now reiterated that they really do mean binance.com. Nigeria has also told all other crypto platforms to desist: “all platform providers, making such solicitations, are hereby directed to immediately stop soliciting Nigerian investors in any form whatsoever.” [SEC Nigeria]

Everybody gets a stablecoin!

On July 26, Binance listed a new coin, FDUSD — a “1:1 USD-backed stablecoin issued by First Digital Labs. Reserves of FDUSD are held by First Digital Trust Limited.” Its trading pairs are BNB, USDT, and BUSD — with zero fees. [Twitter, archive; Binance]

Binance has been going through the stablecoins lately. Binance’s own BUSD has shut down, Binance doesn’t seem to be on such solid terms with Tether, and it tried pumping out a few billion questionably backed TrueUSD after that coin’s main custodian, Prime Trust, had collapsed. First Digital — previously known as Legacy Trust — just happens to be the remaining custodian for TrueUSD.

FDUSD was launched on June 1. Data Finnovation wonders why millions of dollars of deposits to and minting of FDUSD started a week before its supposed launch. “If you believe these are strongly linked to real usd you deserve what you’re gonna get.” [press release; Twitter, archive]

Vincent Chok, CEO of First Digital, has a storied history in business. Before Chok’s move to Hong Kong, he was selling real estate in Canada with Platinum Equities in 2014 — a company that was sanctioned by the Alberta Securities Commission for fraud (though Chok wasn’t named). Chok’s previous company was Intreo Wealth Alliance in Calgary. [press release]

None more stable

Wyoming is trying to do a stablecoin again with their Stable Token Commission! The total budget for the initiative: $500,000. We wrote before about Caitlin Long’s crypto bank Custodia and what a disaster that was. Custodia also hoped to launch a national stablecoin backed by the Fed, but the Fed was having none of it. So good luck, guys. [Wyoming Truth]

Michel de Cryptadamus notices that Tether’s attestations show its actual cash on hand is getting quite low. On December 31, 2022, they claimed to have $5.31 billion in cash. On March 31, 2023, they claimed $481 million. On June 30, 2023, they claimed just $90 million. This is as the issuance of tethers keeps going up. But we’re sure it’s all fine. [Twitter, archive]

The New York Fed wrote about “Runs on Stablecoins” — concerning the Terra-Luna collapse of May 2022. David Rosenthal contextualizes the New York Fed paper: “Note in particular that traders don’t actually believe that USDT is safe, it is just that its size makes it convenient for traders to use USDT unless, like Wile E. Coyote, they look down at it as they did last May.” [NY Fed; blog post]

The White House has told Rep. Patrick McHenry’s stablecoin bill to go away, at least according to McHenry. [The Block] 

Coinbase: not so keen on regulatory clarity

Coinbase wants regulatory clarity. The SEC was happy to give it to them. Brian Armstrong of Coinbase told the Financial Times that prior to the SEC suing Coinbase in June, the commission told them to delist all cryptocurrencies other than bitcoin. [FT, archive]

The SEC told CoinDesk that “SEC staff does not ask companies to delist crypto assets. In the course of an investigation, the staff may share its own view as to what conduct may raise questions for the Commission under the securities laws.” [CoinDesk]

Coinbase told CoinDesk that the FT report “lacks critical context” but was somehow unable to also say what the context was.

This is pretty rich given that it was literally Armstrong who told this to the FT, presumably hoping to gin up the crypto crowd — which he certainly did.

Coinbase concurred that the SEC did not, in fact, formally tell the exchange to delist everything except bitcoin.

We strongly suspect the actual conversation was Coinbase asking “Well how can we absolutely avoid breaking any laws then, smart guy?” and then the SEC fellow suggesting the very safest possible option.

Good news for bitcoin

Kyle Davies from Three Arrows Capital (3AC) has gone sovereign citizen. Davies holds that renouncing his US citizenship in October 2020 means that he can’t be held in contempt of court for not responding to 3AC liquidators Teneo in their US action. Davies’ lawyers also claimed that he hadn’t been properly served, as if he could claim not to know about the proceeding while arguing it in court. [Doc 106, PDF; Doc 107, PDF; case docket]

The SEC suggests that crypto “attestations” that aren’t audits might be a worry … for the accountants. Subheadings in the SEC’s statement on “The Potential Pitfalls of Purported Crypto ‘Assurance’ Work” include “The Accounting Firm’s Potential Liability for Antifraud Violations.” The footnotes mention that “liability for fraud may extend to “attorneys, engineers, and other professionals or experts.” This means that the SEC will look at what the developers were doing. [SEC]

Swift is running a pilot program that lets you make instant payments across different currency zones! So what backend do you need to use for instant remittances across currency zones? It turns out the answer is: a database. [FinExtra]

Kuwait has banned cryptocurrency for payments or investments. The National Committee for Combating Money Laundering and Terrorism Financing says it’s doing this to implement FATF requirements. Crypto mining is also banned. Securities under the Central Bank of Kuwait or Capital Markets Authority regulation are exempt. [Arabian Business; Al Jarida, in Arabic] 

FedNow, the Federal Reserve’s real-time retail settlement system, has gone live, dragging US retail banking kicking and screaming into the 2000s. This puts a Fed CBDC into the trash can, as the White House had already noted. The hard part is getting thousands of banks to sign up. But the Fed has its ways of asking for things. [Federal Reserve]

Media stardom

David told the Moscow Times — who are not fans of Mr. Putin and who are currently banned in Russia — that a CBDC ruble wouldn’t do anything new to help evade sanctions that Russia can’t already do with rubles: “The problem is that nobody wants rubles.” [Moscow Times]

Posted on by Amy Castor 1

Crypto collapse: Alex Mashinsky of Celsius arrested, Ripple’s bizarre XRP win, Gemini sues Genesis, Gisele Bündchen knew nothing!

The latest episode of the crypto collapse is out. This edition is on David’s blog. [David Gerard]

In this episode, we cover:

  • The Mashinsky Method: mycrimes.epub
  • Good, if bizarre, news for XRP
  • Binance hates Binance
  • Coinbase, the battle continues
  • A spot of regulatory clarity
  • Gisele Bündchen: Crypto? What’s a crypto?

Image: Alex Mashinsky shows up for his arraignment after an early morning arrest.

Posted on by Amy Castor 0

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

  • By Amy Castor and David Gerard

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

— crossestman

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tether: Yes! We have no Chinese commercial paper

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

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

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

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

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

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

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

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

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

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

FTX versus the venture capitalists to the stars

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

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

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

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

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

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

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

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

SBF wrote that he was:

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

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

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

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

More news from Chapter 11

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

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

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

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

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

Three Arrows Capital: What Su and Kyle did next

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

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

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

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

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

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

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

Regulatory clarity

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

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

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

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

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

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

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

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

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

The ETF trick will surely work this time

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

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

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

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

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

The good news for bitcoin continues its monotonous patter

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

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

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

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

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

Posted on by Amy Castor 0

The SEC sues Coinbase. It’s on.

Coinbase’s entire business model has been built around avoiding regulation and lobbying Congress for special rules. Well, those days are over. After a year of warning them repeatedly, the SEC has finally taken action against the largest crypto exchange in the US.

It’s David’s turn, so this one is over on his blog.

Image: Brian Armstrong and Paul Grewal on YouTube awkwardly responding to the SEC’s warning in late March that an enforcement action was in the works.

Posted on by Amy Castor 0

Crypto collapse: Coinbase rattles sabres at the SEC, Voyager sale collapses, Terra-Luna, Binance

  • By Amy Castor and David Gerard

“All financial complexity is a footnote to ‘don’t hand all your money to some random guy promising high returns.’”

— Matt Levine on Celsius Network

Coinbase takes on the SEC

Crypto bitterly resents any possible regulation. It’s an industry of proud scofflaws. This presents some difficulties to regulators, who are used to financial firms that listen to them.

Coinbase keeps demanding “regulatory clarity.” What this means is that they want special permission to do things that are presently just illegal.

FTX blew up spectacularly in November, and its CEO and top execs were indicted for fraud. In the wake of FTX’s collapse, the SEC has the political backing it needs to get much more serious about making crypto exchanges comply with rules that have always been there.

In the meantime, the SEC’s lack of jackbooted statist enforcement over the last decade has allowed Coinbase to grow larger and larger — which means that Coinbase has bigger guns to challenge the regulator with.

In July 2022, Coinbase petitioned the SEC to make a clear framework for crypto asset trading. Coinbase handwaved that putting unregistered securities on a blockchain was “a paradigm shift from existing market practices, rendering many of the Commission rules that govern the offer, sale, trading, custody, and clearing of traditional assets both incomplete and unsuitable for securities in this market.” [Petition, 2022, PDF]

The SEC didn’t respond — because this claim is just stupid — and in the time since have stated repeatedly that they think the Howey test of what is a security in the US is just fine.

In March, the SEC sent Coinbase a Wells notice saying that they were going to file an enforcement action. Coinbase promptly filed a petition for a writ of mandamus to try to force the SEC to respond to their July 2022 letter. [CNBC; Writ of Mandamus, PDF]

The petition pounds on the table and cites an extensive range of blog posts as legal authorities. The introduction sets the tone:

“Contrary to the prior actions and statements of the Commission and its officials, the SEC Chair now claims that it is ‘clear’ the securities laws already apply to digital assets and platforms.”

Never mind the DAO Report from 2017, let alone the past century of judicial precedent that securities laws apply to what you do, not what you call the assets you are trading. A security is a security is a security.

And the SEC has been very clear — it’s saying that most crypto tokens are securities. There are rules for trading in those securities, and Coinbase needs to comply — or stop trading in them.

As Gary Gensler’s latest dad joke video puts it: “Many crypto platforms are just pretending that these investment contracts that they offer are more like goldfish … It’s not a lack of regulatory clarity.” [Twitter, video]

Coinbase pivots to video

Coinbase has also put up its response to the SEC’s Wells notice. [Response, PDF]

The exchange claims that the SEC approving the company’s S-1 filing to go public surely constitutes approval of all its possible business lines — a claim that crypto pumpers have been promoting heavily. This theory is, in legal jargon, on crack.

Coinbase also confidently asserts that none of what’s listed on the exchange is a security. None of it! Coinbase’s theory is that a given asset is a security only if and when it’s determined in court to be one — despite extensive legal precedent that something can be a security before it’s registered or has come to the SEC’s attention.

It’s just not possible to run a digital assets exchange trading in securities that follow SEC rules, Coinbase pleads. Apparently, this is a problem for the SEC, not for the violators.

Coinbase has threatened the SEC with a scorched earth legal battle: “if the Commission pursues this matter, it will face a well-resourced adversary that will necessarily be motivated to exhaust all avenues” — much as Ripple has been. We think this is unlikely to get the SEC to back down.

So confident is Coinbase in its legal position in the Wells notice that it’s making videos to reassure its user base that all is well. This just makes Coinbase look desperate and clownish — winners don’t make promotional videos for their legal filings. [YouTube]

Why is Coinbase so insistent on trading unregistered securities? Because Coinbase’s business is in deep trouble. Trading volume on the exchange is through the floor — it’s dropped to $26.8 billion so far in April. March was $49 billion in total. This is the lowest volume on the exchange since the crypto crash. [FT]

The Voyager sinks

Binance US pulled out of its $1 billion purchase of Voyager Digital. On Tuesday, April 25, Binance sent Voyager a letter canceling the sale. [Twitter; Doc 1345, PDF]

Voyager will now proceed to liquidation — as it probably should have when it first declared bankruptcy in July 2022 — and give the creditors whatever’s left.

Voyager’s lawyers said in a Wednesday hearing that they were surprised by the letter — Binance was still talking with them about the deal up to the previous Friday. Likely recoveries for Voyager creditors are in the range of 40% to 65%. [CoinDesk]

Imagine how much creditors’ money Voyager could have saved on expensive bankruptcy professionals if they’d just gone straight for liquidation nine months ago. Recoveries would have been on the order of 70%.

The ongoing good news for Terra-Luna

Terraform Labs has answered the SEC’s February suit, which claims that the collapsed UST stablecoin and its free-floating twin LUNA were offered as securities. The SEC’s case asserts that UST was part of Terraform’s Anchor Protocol investment scheme because you had to first buy UST to get into Anchor.

Terraform wants the suit dismissed on the grounds that digital assets can’t be securities — good luck with that one, guys! — and even if they can, UST was a stablecoin, and therefore can’t be a security. Terraform’s motion appears to be written in crayon. [Notice of motion, PDF; Memorandum, PDF] 

Crypto VC firm Paradigm submitted an amicus brief in support of Terraform’s very stupid theory. Paradigm argues that SEC’s premise for treating stablecoins as securities would “radically and impermissibly” expand the definition of a security. [Amicus, PDF; Docket] 

Terraform Labs co-founder Daniel Shin was finally indicted in South Korea along with nine others. Shin is facing charges that include violating capital markets laws. Do Kwon, the other co-founder of Terra, was arrested in Montenegro last month. [YNA; Bloomberg] 

All the good news for Binance

The legal net around Binance tightens. Last month the CFTC filed a civil suit against them. A long-running criminal investigation is being led by the Justice Department’s Money Laundering and Asset Recovery Section and prosecutors in the US attorney’s office in Seattle. The SEC is conducting a parallel investigation.

Binance and CZ have lawyered up and are in discussion with regulators and the Justice Department: [NYT, archive]

“In February, Patrick Hillmann, its chief strategy officer, revealed the exchange was in talks with regulators about a settlement to resolve the various legal investigations with a fine or some other penalty. He said the company was ‘highly confident and feeling really good’ about the discussions. A month later, the C.F.T.C. filed its lawsuit.”

David Silver thinks Binance is screwed: “The truth will come out,” he said. “And Binance will be held culpable.”

Binance has resumed its support for Russian-issued credit and debit cards after Russian cards were cut off for the past year. Payments go via Qiwi. The withdrawal limit is 200,000 RUB (about $2,486). [Meduza] 

Other good news for bitcoin

The FBI has searched the Washington, DC, home of former FTX executive Ryan Salame on the morning of Thursday, April 27. It’s not clear what they were looking for. Salame was the first FTX insider to turn on Sam Bankman-Fried. [NYT]

Gemini wants to set up a non-US crypto derivatives exchange. Their first product would be BTC-GUSD perpetual futures, with ETH-GUSD to follow. [Bloomberg; Gemini]

The US Justice Department has charged North Korean bank official Sim Hyon Sop for his role in two crypto laundering conspiracies. “The IT workers gained employment at U.S. crypto companies using fake identities and then laundered their ill-gotten gains.” [Press release; Sop indictment, PDF; Sop et al indictment, PDF]

Digital Currency Group subsidiary Genesis is bankrupt. Creditors have noticed that DCG is substantially cashed-up compared to Genesis and are insisting that DCG put more money toward the bankruptcy estate — particularly given how much control DCG clearly exercised over Genesis. So Genesis has filed for mediation over the amount that DCG will need to contribute to the reorganization. [CoinDesk]

Bloomberg writes about Celsius Network creditors and how they’re feeling. Their money is just gone, and it’s not coming back. Mashinsky et al. stole some of it and set the rest on fire through ineptitude. All the creditors have left is hope. Celsius really should have liquidated rather than declared Chapter 11. [Bloomberg]

David Rosenthal has written a marvelous summary of his decades in the world of blockchains: “Crypto: My Part In Its Downfall.” [blog post]

Image: Coinbase CEO Brian Armstrong. Photo by Steve Jennings (Getty Images for TechCrunch) enhanced for (regulatory) clarity.

Posted on by Amy Castor 1

Crypto collapse: Treasury comes after DeFi, SEC comes after crypto exchanges, stablecoin bill, FTX first interim report

  • By Amy Castor and David Gerard

“Please god let FTX go back into business, take a lot of money from crypto rubes, then collapse and lose everything again. Please let there be people who lost money in two separate FTX collapses.”

– Ariong

The Treasury brings good news for DeFi

The US Treasury released its “Illicit Finance Risk Assessment of Decentralized Finance.” The 42-page report examines DeFi from the perspective of anti-money laundering and sanctions laws. [Press release; Report, PDF] 

This report is not about consumer protection — it’s about national security, sanctions busting, and terrorist financing. The Treasury is not happy:

“The assessment finds that illicit actors, including ransomware cybercriminals, thieves, scammers, and Democratic People’s Republic of Korea (DPRK) cyber actors, are using DeFi services in the process of transferring and laundering their illicit proceeds.

… In particular, this assessment finds that the most significant current illicit finance risk in this domain is from DeFi services that are not compliant with existing AML/CFT obligations.”

The report makes clear: blockchain analysis is not sufficient for KYC/AML. Calling something “decentralized” or a “DAO” doesn’t absolve you of responsibility. And almost everything in DeFi falls squarely in the ambit of existing regulation.

How’s regulatory clarity for crypto? Just fine, thank you:

“Through public statements, guidance, and enforcement actions, these agencies have made clear that the automation of certain functions through smart contracts or computer code does not affect the obligations of financial institutions offering covered services.”

The report recommends “strengthening U.S. AML/CFT supervision and, when relevant, enforcement of virtual asset activities, including DeFi services, to increase compliance by virtual asset firms with BSA obligations” and “enhancing the U.S. AML/CFT regulatory regime by closing any identified gaps in the BSA to the extent that they allow certain DeFi services to fall outside of the BSA’s definition of financial institution.”

Nicholas Weaver tells us the report “should be thought of as being as serious as a heart attack to the DeFi community, as this represents the US government regulation at its most serious. Indeed, the report can be summarized in a sentence: ‘If you want to continue to OFAC around, you are going to find out.’”

The SEC brings good news for Coinbase and DeFi

SEC chair Gary Gensler is fed up with Coinbase blatantly trading unregistered securities and not registering with the SEC as a proper securities exchange. So he’s going to update the rules.

The SEC has reopened the comment period for a proposal, initially issued in January 2022, that would update the definition of an “exchange” in Rule 3b-16 of the Exchange Act. [SEC press release; Fact sheet, PDF; Gensler statements]

Gensler’s comments are laser-targeted at Coinbase — and also DeFi:

“Make no mistake: many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws.”

He reiterates that “the vast majority of crypto tokens are securities” — the SEC’s position since 2017 — so “most crypto platforms today” meet the definition of a securities exchange. He adds:  

“Yet these platforms are acting as if they have a choice to comply with our laws. They don’t. Congress gave the Commission a mandate to protect investors, regardless of the labels or technology used. Investors in the crypto markets must receive the same time-tested protections that the securities laws provide in all other markets.”

A regulatory framework for casino chips

On Saturday, The US House Financial Services Committee published an as-yet-untitled discussion draft bill for regulating stablecoins a few days before a hearing on the topic on Wednesday, April 19. [Discussion draft, PDF; hearing agenda]

The bill refers to stablecoins as “payment stablecoins.” This is utterly hypothetical. Nobody uses stablecoins to buy things. They’re chips for gambling on speculative assets in the crypto casinos.

This bill was a sudden surprise for a lot of people — but it appears to be a version of a draft bill that Senate Banking Committee Ranking Member Pat Toomey (R-PA) was circulating last year. [Stablecoin TRUST Act, 2022]

The bill divides stablecoin issuers into banks and nonbanks. Credit unions and banks that want to issue stablecoins would need approval from the financial regulator they fall under‚ the National Credit Union Administration, the FDIC, or the OCC. Non-bank stablecoin issuers would fall under the Federal Reserve.

For this bill, USDC or Pax Dollars, under the Fed, might pass muster. But Tether would be kicked out of anything touching the US because they wouldn’t be able to meet the transparency or liquidity requirements.  

All stablecoins that circulate in the US would need to be backed by highly liquid assets — actual dollars and short-term treasuries — and redeemable within one day. That doesn’t leave much room for the issuers to turn a profit by putting the deposits in longer-term investments.

Custodia is not a bank under the Bank Holding Act, so for this bill, it would also be considered a non-bank. This bill would derail Custodia’s lawsuit against the Federal Reserve and the Federal Reserve Bank of Kansas City to try to force a Fed master account out of them.

The bill also calls for a moratorium on new algorithmic stablecoins until a study can be conducted.

Finally, the bill includes a request for federal regulators to study a central bank digital currency (CBDC) issued by the Fed. As we noted previously, FedNow would make a CBDC completely superfluous.

Hilary Allen, a professor of law at American University Washington College of Law, points out important shortcomings in the stablecoin bill. She argues that the bill is stacked in favor of stablecoins, and notes that the bill’s payment stablecoin definition could be a way of avoiding SEC jurisdiction. And while the bill calls for monthly attestations, it doesn’t say anything about full audits for stablecoin reserves. [Twitter]

FTX’s first interim report reads like Quadriga

John Jay Ray III, FTX’s CEO in bankruptcy, released his first interim report on the control failures at FTX and its businesses. Ray documents a shocking level of negligence, lack of record keeping, and complete disregard for cybersecurity at FTX. [Doc 1242, PDF]

The report confirms what we’ve been saying all along: all crypto exchanges behave as much like Quadriga as they can get away with. A few highlights:

  • FTX Group was managed almost exclusively by Sam Bankman-Fried, Nishad Singh, and Gary Wang. The trio had “no experience in risk management or running a business,” and SBF had final say in everything.
  • SBF openly joked about his company’s reckless accounting. In internal docs, he described Alameda as “hilariously beyond any threshold of any auditor being able to even get partially through an audit,” and how “we sometimes find $50m of assets lying around that we lost track of; such is life.”
  • FTX kept virtually all of its assets in hot wallets, live on the internet, as opposed to offline cold wallets, where they would be safe from hackers. 
  • FTX and Alameda also kept private keys to billions of dollars in crypto-assets sitting in AWS’s cloud computing platform.
  • SBF stifled dissent with an iron fist. Ex-FTX US president Brett Harrison quit after a “protracted argument” with Sam over how FTX US was run. Sam cut Harrison’s bonuses, and when “senior internal counsel instructed him to apologize to Bankman-Fried for raising the concerns,” Harrison refused.

Ray and his team have so far recovered $1.4 billion in digital assets and have identified an additional $1.7 billion they are in the process of recovering. (We’re still waiting for him to ask for money back from The Block, but maybe that’s coming.)

In other FTX news, Voyager and FTX and their respective Unsecured Creditors’ Committees have reached an agreement on the money FTX paid to Voyager before FTX filed bankruptcy that FTX wants to claw back now — $445 million in cash will go into escrow while things are sorted out. [Doc 1266, PDF]

Terraform Labs did nothing* wrong

South Korean prosecutors have seized 414.5 billion won ($312 million) in illegal assets linked to nine Terraform Labs execs. None of the assets tied to Do Kwon have been recovered. Kwon converted everything to BTC and moved the funds — worth an estimated 91.4 billion won ($69 million) — to offshore exchanges. [KBS, Korean]  

Who crashed UST in May 2022? Terraform Labs seems to have played no small part. In the three weeks leading up to the collapse, Terraform dumped over 450 million UST on the open market. [Cointelegraph]

Crypto mining: the free lunch is over

A bill limiting benefits and tax incentives for crypto miners in Texas unanimously passed a Senate committee vote and now it’s in the chamber. The bill was sponsored by three Republican state senators. Even they’re sick of the bitcoin miners. [SB 1751, PDF; CoinDesk; Fastdemocracy]

Bitcoin mining doesn’t create jobs — so Sweden has ended the 98% tax relief it gave data centers, including crypto miners. Crypto is outraged. [CoinDesk]

More good news for exchanges

The downfall of peer-to-peer bitcoin exchange Paxful is a comedy goldmine. Paxful cofounders Ray Youssef and Artur Schaback originally blamed Paxful’s closure on staff departures and regulatory challenges — but now they’re turning against each other in court.

As an example of their good judgment, in 2016, the pair drew police attention when they were spotted in Miami aiming an A15 rifle off their penthouse balcony for photo purposes. Former employees allege “favoritism, erratic dismissals, lavish spending on travel and reports of routine cannabis usage on the job by Youssef himself.”

Paxful’s business model was based on price-gouging fees on gift cards, according to one former employee. You want 10 euros worth of bitcoin? That’ll be 20 euros worth of gift cards. Coincidentally, money launderers are usually quite happy to pay fees on the order of 50%. Schaback thinks Paxful is still a viable enterprise. [CBS, 2016; CoinDesk]

As you might expect, OPNX, the new exchange for tokenized crypto debt run by the founders of the failed Three Arrows Capital and CoinFLEX, has gotten off to a feeble start. Trading volume in the first 24 hours was $13.64. [The Block]

The Winklevoss twins made a $100 million loan to Gemini. The move came after Gemini had informally sought funding from outside investors in recent months without coming to any agreements. We can’t find if the loan was in actual dollars or in crypto — or if it was just an IOU. [Bloomberg] 

Binance relinquished the financial services license for its Australian derivatives business, Oztures Trading, after the Australian Securities and Investments Commission said they were likely to suspend it. Customers have until April 21 to close their accounts. [ASIC] 

Who were the unnamed “VIP” traders on Binance mentioned in the CFTC suit? Jane Street, Tower, and Radix. [Bloomberg] 

The Mt. Gox payout window has opened! Slowly. [Mt Gox, PDF; The Block]

Cryptadamus thinks that Crypto.com’s Canadian bank accounts are frozen. [Mastodon]  

Good news for bitcoin

The Ethereum Shanghai upgrade went through on April 12. You can now withdraw your staked ether! As we predicted, there wasn’t a rush for the exits. [CoinDesk]

Bitfinex money mule Reggie Fowler will be sentenced on April 20. His lawyer wrote a lengthy letter to the judge asking for clemency — no jail time — because Fowler lived a hard life and never did anything wrong before. Nothing he was busted in court for, anyway. [Letter, PDF]

Michael Saylor’s MicroStrategy has bought yet more bitcoin, digging itself ever deeper. The company purchased an additional 1,045 BTC for $23.9 million, or an average price of $28,016, between March 23 and April 4. [8-K filing]

Tether got its tendrils into the US dollar system via Signet — former Signature Bank’s real-time payments system. Tether instructed crypto firms to send dollars to its Bahamas-based banking partner Capital Union Bank via Signet. We’re not clear on whether this violated the New York settlement — though if they lied about who they were, it broke banking law. [Bloomberg] 

Cross River Bank, the banking partner of Coinbase and Circle, built its business on buy-now-pay-later (BNPL) and pandemic loans. What could go wrong? [Dirty Bubble] 

With its firm commitment to quality cryptocurrency journalism, CoinDesk is hot on getting into generating its hopium space-filler using AI text generators. [CoinDesk] 

Media stardom

“Ukraine wants to fund its post-war future with crypto” — with quotes from David. [Techmonitor]

“A lot of ordinary people who got into crypto just lost everything in various ways or lost chunks of it,” Gerard said. “And this is a lot of  why I think retail investors should just keep the hell away from crypto.” [Business Insider]  

Posted on by Amy Castor 0

Do Kwon arrested, White House hates crypto, Coinbase Wells notice, SEC charges Justin Sun, Signature sold, FTX Bahamas party fund returns

  • By Amy Castor and David Gerard

“hello I am Don’t Kwoff, yes I may look like Do Kwon with a fake moustache and wig but rest assured I am a completely separate person.”

— Boxturret

Deploying more capital — steady, lads

Do Kwon, co-founder of Terraform Labs and creator of the failed UST/luna cryptocurrency pair that took down the rest of crypto when it collapsed, was arrested in Montenegro on March 23. Kwon was detained at Podgorica Airport with falsified documents. [Twitter; CoinDesk; YNA, in Korean]

Also arrested was Han Chang-Joon, Terraform’s former chief financial officer. The two were sitting in a private plane bound for Dubai when authorities nabbed them. They used forged travel documents from Costa Rica and also had documents from Belgium and South Korea on them. Three laptops and five mobile phones were also seized. [Pobjeda, in Montenegrin; DLNews]

Kwon was wanted by South Korea for violating capital market rules (by stealing everyone’s money). South Korea had also issued a “red notice” via Interpol, asking global law enforcement for help finding him. Kwon has been tweeting, talking to reporters, and insisting he was not on the run since September.

After South Korea stripped him of his passport, Kwon was suspected of being in Serbia. He was likely trying to flee the region before authorities caught up to him. [YNA, 2022, in Korean]

Here’s a video of Kwon and Chang-Joon leaving the Montenegrin court in handcuffs. [Twitter, video]

In February, the SEC charged Kwon with securities fraud over the UST/luna/Anchor Protocol scam.

Following Kwon’s arrest in Montenegro, the US Department of Justice also charged him with conspiracy to defraud, commodities fraud, securities fraud, wire fraud, and conspiracy to engage in market manipulation. [Complaint, PDF] 

Dark Brandon has had it with your blockchain malarkey

The 2023 Economic Report of the President is out, with Chapter 8 devoted exclusively to digital assets: “This chapter primarily examines crypto assets, whose proponents have been relearning the lessons from previous financial crises the hard way.” [White House, PDF, pp 237-272]

This chapter lays out the Biden administration’s policy toward crypto. It is strident, as you’d expect just after a huge disaster like FTX. This is the no-coiner view coming from the highest levels of power.

Crypto bros and their pet politicians have long claimed that if you overregulate crypto, you’ll kill innovation. The White House is saying that, for all the promises and hot air, there is no innovation here — so the path is clear to regulate the hell out of you. 

The chapter begins with crypto’s promises. Crypto assets could be investment vehicles. Crypto could offer money-like functions. Crypto could enable fast digital payments. Crypto could increase financial inclusion. Crypto assets could improve the US’s current financial structure.

“Could” is a word that means “doesn’t.” The report contrasts crypto’s claims with “the reality of crypto assets” — in which crypto falls flat in every instance.

Crypto is mostly used for speculative trading, the report states. The reason tokens are volatile is that many “do not have a fundamental value.” Bitcoin was supposed to be a hedge against inflation — but “as inflation increased globally in the second half of 2021 and in 2022, the prices of crypto assets collapsed, proving them to be, at best, an ineffective inflation hedge.” 

The report also goes through bitcoin’s failure as money — in part because you can’t have something both serve as a speculative asset and as money: “the riskier an asset is, the less likely it can effectively serve as money.”

Crypto’s main role in finance is to create new and ever-riskier derivatives with poor regulation. That’s where the “innovation” is. This carries a tremendous risk of economic contagion. The other innovative financial use cases are ransomware and money laundering.

Stablecoins are subject to run risk — just like a bank run — which could “lead to disruptions in the markets for the reserve assets and reduce the market value of the issuer’s remaining reserves because the sales of the reserve assets put further downward pressure on the prices of remaining reserves.” 

The report doesn’t miss the horrors of crypto mining either: massive energy waste, e-waste, and noise pollution. “Evidence suggests that cryptomining has substantial costs for local communities and has few, if any, attendant benefits.”

Blockchain, or digital ledger technology (DLT), isn’t magic either. It’s stupendously inefficient for supply chains — if the blockchain bit even does anything. Helium, the fraudulent wireless network project, was an a16z-funded token pump-and-dump.

DLTs are at best experimental. They could be of economic value in the future! Which means they aren’t at all in the present. A private, centralized blockchain is just a clunky, slow database.

One bit of actual news from the report: FedNow, the Fed’s new instant payment service due in July, shoots the idea of a US CBDC through the head, despite all of CBDC’s ill-specified hypothetical potential — “the benefits of circulating digital money after FedNow is launched may be minimal.”

Crypto could be all manner of fabulous things. It just isn’t actually any of those things in practice.

Crypto cannot be allowed to break laws in the pursuit of hypothetical tech-magic benefits — “regulators must apply the lessons that civilization has learned, and thus rely on economic principles, in regulating crypto assets.”

Coinbase guesses wrong about Earn

The SEC has sent Coinbase a Wells notice — a threat that action is imminent. This notice is about the current version of the exchange’s Earn product — the one that Coinbase said in its 10-K earnings call was definitely not a security, probably.

Coinbase’s previous Earn product got a Wells notice before launch, in September 2021. Coinbase didn’t post the notice itself that time — they blustered, then folded. But they posted the notice this time. [blog post; Wells Notice, PDF; 8-K]

Rarely do companies receiving a Wells notice make those notices public. The last crypto firm to disclose a Wells notice was Canadian chat app Kik in 2018, as it geared to do battle with the SEC over whether its KIN token was a security. The SEC sued. Kik went to court, and the judge ultimately ruled against Kik.

Paul Grewal, Coinbase’s chief legal officer, complains that Coinbase spoke to the SEC more than thirty times. Sure — but it turns out that if you sit down with a cop and tell him all the bad things you’re doing, he might be taking notes, and then he might tell you to stop doing the bad things.

Matt Levine thinks the SEC wants Coinbase to stop trading in securities at all, and possibly just go away: [Bloomberg]

If Bernie Madoff came to the SEC and said “if you want a higher class of more trustworthy Ponzi schemes, you will need to write a few new rules adapting the disclosure regime to Ponzi schemes,” the SEC would have said “no we absolutely do not want that, we want much less Ponzi scheming, and we certainly do not want to give our approval to Ponzi schemes by writing rules for them.” One gets the sense the attitude to crypto is similar.

… If you run a crypto exchange and you want to set up a meeting with regulators to talk about how to write regulations to prevent a repeat of the recent crypto collapses, they will not trust you, because that is what FTX was saying too. There is not much goodwill left.

John Reed Stark goes through Coinbase’s public response and why it’s nonsense. “Not only are Coinbase’s argument weak, misguided, and more akin to public relations than legal positions, but Coinbase’s arguments are also proven failures of crypto-mumbo-jumbo and ludicrous jaundiced rhetoric.” [LinkedIn] 

Dirty Bubble is shorting $COIN because it’s “a cash-burning regulatory nightmare with limited upside.” [Substack] 

Regulatory clarity

In a class action against the Uphold exchange, Judge Denise Cote in the Southern District of New York has found that the Electronic Funds Transfer Act applies to crypto, specifically Reg E of the act. This is a finding that this complaint in the class action can go ahead — but the order is very clear, and if this order isn’t used in later cases we’ll be amazed. Reg E provides consumer protections over unauthorized transactions, error resolution, and provision of receipts and periodic statements. Crypto exchanges are not at all set up for dealing with any of this — so they might want to get onto it. [Credit Slips; Order, PDF; Consumer Finance] 

In a letter calling Binance a “hotbed” of illegal activity, Senator Elizabeth Warren (D-MA) along with two other Senators had asked Binance to provide balance sheets, data on the number of US users, internal policies relating to AML, as well as written policies regarding the relationship between Binance and Binance US. Binance responded with a 14-page letter describing its compliance history — and saying it has a team of 750 compliance staffers! — without addressing financials. [Bloomberg] 

Crypto advertising in Belgium will need to be submitted to the Financial Services and Markets Authority ten days in advance for approval, from May 17. [FSMA]

The SEC has issued a new alert to investors: “Those offering crypto asset investments or services may not be complying with applicable law, including federal securities laws.” [SEC]

Fun in the Sun

The SEC’s really going for it lately. It’s charged Justin Sun of Tron with issuing unregistered securities  — the TRX and BTT tokens — and wash-trading those securities.

Eight celebrities have also been charged, including YouTuber Jake Paul and actress Lindsay Lohan, for illegally touting TRX and BTT without making the proper disclosures. You have to say what you’re being paid to tout for securities, as Kim Kardashian found out previously. [SEC press release; complaint, PDF]

Paul, Lohan, and four of the other celebrities agreed to pay a total of $400,000 to settle the charges. Sun did not settle. Instead, he tweeted that the charges lack merit. So, he’s going to fight this? [Twitter, archive]

Selling Signature for its organs

Signature Bank has been sold! Well, mostly. Flagstar Bank has acquired most of Signature’s deposits and some of its loans. Flagstar did not acquire $4 billion of deposits from Signature’s crypto operations — those are being left with the FDIC. The Signet inter-crypto-exchange network is also being left behind. [FDIC; Bloomberg]

The FDIC anticipates losses on its insurance fund of up to $2.5 billion. Approximately $60 billion in likely-bad loans will remain in the receivership for later disposition by the FDIC.

Senator Warren wrote another one of her letters to bankers, this time to Joseph DePaolo, the former CEO of Signature, on March 15. Warren asks DePaolo to describe the full scope of his lobbying efforts to roll back Dodd-Frank. She also wants to know details of executive bonuses, including if DePaolo received bonuses related to his efforts to limit the regulation of Signature. [Warren, PDF]

In 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act, scaling back Dodd-Frank regulations. The Act exempted mid-size banks with under $250 billion in assets from strict regulatory scrutiny. By the time Signature collapsed, it was over the old threshold of $50 billion, but under the new one. Warren sees this as the main cause of Signature’s failure.

Patrick McHenry is chair of the House Financial Services Committee, which is investigating the collapse of Signature and SVB. Signature threw a fundraiser for McHenry 10 days before it collapsed. McHenry’s campaign has said it won’t process any of the donations from the event. [Bloomberg]

The Wall Street Journal tells the story of the last days of Signature. “On Sunday afternoon, March 12, the Fed told Signature that it wouldn’t lend it any more money.” [WSJ]

Why was Signature shuttered? Maybe it was insolvent, but insolvency isn’t the only reason regulators take over a bank. Dirty Bubble suspects the takeover relates to misuse of Signature’s Signet payment network. As well as FTX, the bank “collected a laundry list of other bad actors in the crypto space despite their allegedly strict KYC practices.” [Dirty Bubble] 

Freeing crypto from the legacy fiat system

After the demise of Silvergate and Signature, US crypto firms lament that they can’t find new banking partners. CoinDesk asked several banks about crypto — and those that bothered replying said they didn’t want crypto customers. [Bloomberg; CoinDesk] 

The Kraken crypto exchange will no longer support ACH transfers following the implosion of Silvergate. “Beginning March 27th, you’ll no longer see a deposit option via Plaid or withdrawal option via ACH Silvergate.” [Twitter; Reddit; CoinDesk]

The Australian Prudential Regulation Authority has told banks to improve their reporting on crypto assets and provide APRA with daily updates. [AFR]

The Federal Reserve has just published its full order denying Custodia Bank’s application for an account at the Fed. We’ll detail this more next time, but we’d summarize it as: “no way are we letting you bozos near the financial system.” [Federal Reserve, PDF] (Update, April 9: Our Custodia report is finally out!)

Return of the FTX Bahamas party fund

FTX US says that FTX Digital Markets (FTX DM) — FTX’s Bahamas entity, whose main practical role was to fund Sam Bankman-Fried’s partying — is a legal and economic “nullity,” and that its bankruptcy should just be folded into the US proceeding in Delaware.

The joint provisional liquidators (JPLs) in the Bahamas have apparently been threatening avoidance actions over payments made by the entities in US bankruptcy. The JPLs also applied in the Bahamas for a ruling that FTX US does not own “core assets.”

FTX US is asking Judge Michael Dorsey for declaratory judgments that FTX DM has no ownership interest in FTX’s cryptos, money, intellectual property, or customer information. In an adversarial preceding, FTX wants the court to assert that the assets lodged under the Bahamas unit were “fraudulent transfers,” and are therefore rightfully owned by FTX US. [Complaint, PDF]

We covered the tale of FTX’s very dodgy Bahamas entity previously. FTX US had reached an agreement with the JPLs, but that agreement appears to have failed. 

The US Trustee is appealing Judge Dorsey’s refusal to appoint an examiner in FTX. The bankruptcy appellate panel — three bankruptcy judges from another district within the circuit — will hear that appeal. [Doc 1123, PDF]

The FTX bankruptcy estate is set to get back $404 million from Modulo Capital, a hitherto-unknown Bahamas hedge fund that received $475 million in seed capital from Sam Bankman-Fried in 2022. The court needs to approve the deal. [Bloomberg]

Crypto is really a large derivatives market propped up by an ever-shrinking spot market. Traders want leverage. We predicted in December that a new crypto futures exchange would spring up to replace FTX. A new one hasn’t sprung up yet — but a number of existing exchanges are thinking of buying FTX-owned LedgerX to do this job for them. [Bloomberg]

Image: Dont Kwoff

Posted on by Amy Castor 1

Crypto collapse: Signature Bank blows up, US crypto frantically looks for banking

  • By Amy Castor and David Gerard

“In five years a number of banks will not be around because of blockchain technology.”

~ Joseph DePaolo, CEO, Signature Bank, 2018

All my banks gone

Crypto gets its wish — freedom from the corrupt and filthy fiat currency system! Silvergate and Signature, the two main crypto banks in the US, are gone.

After Silicon Valley Bank collapsed on Friday, March 10, US regulators worried about Signature’s concentration of large deposits that exceeded the FDIC insurance limit. Signature’s customers noticed too. They pulled billions of dollars in deposits from Signature later that same day. 

(Morning Brew has a good video explaining the process.) [Twitter, video]

New York regulators shut down Signature on Sunday, March 12. Shareholders are wiped out — but all depositors, even those with deposits above the FDIC $250,000 threshold, will be made whole. [Federal Reserve; NYDFS; FDIC]

The New York Department of Financial Services took control of Signature Bank pursuant to Section 606 of the New York Banking Law. Frances Coppola suspects the NYDFS acted under clauses (b), (c), and (d): the bank was conducting its business in an unauthorized or unsafe manner, it was in an unsound or unsafe condition to transact its business, and it could not with safety and expediency continue business. [FindLaw; Twitter]

Signature had 40 branches, total assets of $110.36 billion, and total deposits of $88.59 billion as of the end of 2022 — making this the third-largest bank collapse in US history.

Leading up to the announcement, President Biden met on Sunday afternoon with Treasury Secretary Janet Yellen, Federal Reserve Vice Chair Lael Brainard, and White House economist Jared Bernstein. Biden directed them to act, and the measures were announced just after 6 pm. [FT]

The closure came as a surprise even to the bank’s management — who only found out just before the public announcement. They were all fired. [Bloomberg] 

USDC can buy that for a dollar

After a weekend pause, Coinbase began allowing USDC redemptions again on Monday, and USDC has recovered its dollar peg. [Twitter]

Circle says no USDC reserves were held at Signature — but the company was dependent on Signature’s real-time payment rail, Signet. This left Circle scrambling at the last moment to set up new banking. Now Circle will be relying on BNY Mellon and a new partner: Cross River Bank. [Twitter, archive; Twitter, archive]

Cross River, based in Fort Lee, NJ, is another “crypto first” bank. We’re sure this will work out great. [Techcrunch, 2022]

Both Silvergate and Signature ran inter-exchange settlement systems specifically for crypto exchanges — SEN at Silvergate and Signet at Signature. These allowed exchanges to move money between each other at any time of day or night.

One guy told CoinDesk that Signet was still up and running in some capacity on Monday. Though Circle tried it and couldn’t use it. [CoinDesk]

Coinbase had about $240 million in corporate cash in Signature, but it expects to recover the funds fully. [Twitter, archive]

Paxos said it held $250 million of its stablecoin backing reserves at Silvergate, and that it “holds private deposit insurance well in excess of our cash balance and FDIC per-account limits.”[Twitter]

Freed from the lead weight of the legacy bankster system

With the closure of Silvergate and now Signature, crypto has been effectively shut out of the US banking system.

Exchanges, stablecoin issuers, and crypto hedge funds are all frantically hunting around for new banking — even looking outside the US. [Bloomberg]

Crypto companies are eyeing up other banks and payment processors, including Mercury, Brex, MVB, Western Alliance, Synapse, and Customers Bank — the last of which presently holds some of the reserves for the USDC and Paxos stablecoins. Or maybe JPMorgan Chase will take their calls. [The Block]

What happens next

These FDIC interventions are a warning cannonball shot to every other bank in the US. Straighten up your books and don’t specialize in bad customer bases — or the FDIC will swoop in, shoot you through the head, and sell your organs.

Crypto is one such customer base. Crypto customers were already strongly correlated with money laundering and crime — and now crypto correlates with hot money that flows in and out by billions a day. That’s a hazardous kind of customer for any bank to specialize in.

This is terrible news for crypto. Losing your banking rails is the worst thing that can happen to a crypto firm. Unless the crypto industry can find reliable US dollar payment rails that regulators will put up with, crypto in the US is dead as a financial product.

A few small banks will step in to pick up where Silvergate and Signature left off. But we greatly doubt the US is going to let these banks replace Silvergate and Signature.

Good thing crypto is uncensorable and unstoppable and doesn’t need banking.

More good news for bitcoin

It isn’t just a liquidity problem — Coinbase has removed all Binance USD trading pairs. The only place you can turn BUSD into dollars is now Paxos itself, BUSD’s issuer. This requires you to pass KYC and AML to US standards. Quite a lot of Binance traders can’t do that — so they’re buying BTC on Binance and moving that off instead. This makes number go up, so it’s definitely good news for bitcoin. [CoinDesk]

Paysafe, Binance’s UK payments processor, has cut them off, effective May 22 this year. “We have concluded that the UK regulatory environment in relation to crypto is too challenging to offer this service at this time and so this is a prudent decision on our part taken in an abundance of caution.” Ya don’t say. [Bloomberg]

HMRC in the UK has required Coinbase to provide information on all users who received a payout of more than £5,000 in the 2021 tax year. HMRC required the same of Coinbase in 2020. If you made money on Coinbase in the UK in the bubble, you may want to double-check if you need to correct your 2021–2022 tax return. These statist jackboots aren’t going to pay for themselves. [circumstances.run; Twitter, 2020]

The US Department of Justice is probing the collapse of Terra-Luna. [WSJ]

Kyle Davies from Three Arrows Capital has a very particular understanding of 3AC’s part in the crypto collapse. “If you think about, why are people angry? It has nothing to do with me actually. They’re angry that the market went down. In terms of us, we have no regulatory action anywhere, no lawsuits at all. There’s just nothing, so I know they’re clearly not mad at anything. They’re mad because the supercycle didn’t happen maybe, I don’t know. Something like that,” Davies said from his new desk in a non-extradition country. [CoinDesk]

Posted on by Amy Castor 0

Crypto collapse: New Sam Bankman-Fried charges, New York targets CoinEx, Coinbase losses, Voyager, Celsius

  • By Amy Castor and David Gerard

“Sam Bankman-Fried walks into the courtroom. his pants split with a sound like thunder and guns and cocaine spill out all over the floor. he spins around and punches a security officer hard in the face sending him flying. he turns, sits down calmly on his chair and says, to thunderous applause from the fans gathered to hear his famous catchphrase, ‘OK your honour, here’s what I think happened’”

— Hammerite

Mycrimes.txt (2) (FINAL) (USE THIS ONE).docx.pdf

The criminal indictment against Sam Bankman-Fried has been updated, with a superseding indictment on February 23. [Superseding indictment, PDF]

The new charges are clearly informed by the cooperation of Sam’s former co-conspirators — and by his crime confession tours in the press and on Twitter.

The Federal Election Commission is now listed as a victim of Sam’s fraud, with allegations that SBF tried to buy influence over crypto regulation in Washington. 

The indictment details all the tricks that Sam (allegedly) pulled to influence both Democrats and Republicans, in concert with other FTX executives — and how he tried to conceal his influence.

Other new allegations include bank fraud. The act of misleading a bank in the course of business is a crime all by itself — such as when you accept money in the name of one entity (Alameda) for another entity (FTX), or when you set up a shell corporation (North Dimension) and lie to your bank (Silvergate) about what that shell does.

Sam also used Alameda to fill a $45 million hole in FTX US. He gave Alameda a $65 billion credit line, which allowed it unlimited access to customer funds on FTX. Customer and company funds were thoroughly commingled. 

The indictment doesn’t specify the cause of the hole in FTX US, but Sam has repeatedly claimed that FTX US was solvent. 

Sam ultimately controlled both FTX and Alameda, even after claiming to have stepped away from Alameda.

The indictment also lists billions of dollars worth of assets that have been forfeited, including multiple SBF accounts at Binance.

FTX and its subsidiaries was never a legitimate business. It was Sam’s piggy bank. 

New York goes after CoinEx

The New York Attorney General’s office is suing the CoinEx crypto exchange. The NYAG alleges that CoinEx sold securities and/or commodities, did not register with the CFTC or SEC, and misrepresented itself as registered. [Press release; Complaint, PDF; Affidavit of OAG Detective Brian Metz, PDF]

CoinEx, which is based in Hong Kong, has responded by barring all US citizens. You have until April 24 to get your cryptos off the exchange. [Twitter]

New York alleges that CoinEx offered to New York customers various cryptos that are securities — AMP, LUNA, RLY, and LBC  — while the exchange was not registered to deal in securities.

AMP is the token of Flexa, who want to use it to sell burritos. LBC is the token of video site LBRY, which the SEC recently had a slam-dunk win against in court, finding that it was absolutely the security it clearly was. Luna is the twin coin of TerraUSD, which crashed all of crypto last May.

New York says these tokens are all securities under New York’s Waldstein test: “any form of instrument used for the purpose of financing and promoting enterprises, and which is designed for investment, is a security.” They say the tokens are also securities under the federal Howey test — as LBC was recently shown to be.

It happens to be a violation of New York commercial law to call yourself an “exchange” if you offer trading in securities or commodities and you’re not registered with the CFTC or SEC.

CoinEx also failed to respond in any way to a previous NYAG subpoena — and, per General Business Law §353(1), failure to comply with a subpoena is prima facie proof that the subpoenaed entity “is or has been engaged in fraudulent practice.” 

New York wants CoinEx to block New York from its website, pay restitution, disgorgement, and costs, “and provide New York investors with the option to rescind their transactions.”

New York is bringing a “special proceeding” — it wants the court to rule on its filing. “A special proceeding goes right to the merits. The Court is required to make a summary determination upon all the pleadings, papers, and admissions to the extent that no triable issues of fact are raised.”

Why did New York go after CoinEx in particular? This complaint is detailed, but it also looks like a template. We suspect this may be the first of many such complaints against crypto platforms. CoinEx ignoring the subpoena probably annoyed New York a lot too.

The SEC previously called out each of the tokens on CoinEx that the NYAG names as securities:

  • In a July 2022 insider trading complaint against Coinbase, the SEC said AMP and RLY were securities. [Complaint, pdf] 
  • In Feb 2023, the SEC said LUNA was a security [Complaint, pdf]
  • In November 2022, the SEC won in court against LBRY on whether its LBC token was an unregistered security offering. [SEC]

Binance US has delisted AMP. But Coinbase still lists AMP and RLY. Gary Gensler has been saying for a while that he thinks nearly all crypto tokens are securities and that Coinbase should register with the SEC.

Coinbase posts another loss

Coinbase’s Q4 earnings report is out, as part of its 10-K annual report for the year ending December 31, 2022. Trading volumes are down even further, and they’re still losing money. [10-K]

As a public company, Coinbase has to put on a happy face for investors — but they’ve been bleeding money for a year now. Net loss for 2022 was $2.625 billion, per GAAP. The COIN stock price has gone down 70% in the past 12 months.

Coinbase would prefer you to look at non-GAAP “adjusted EBITDA,” which comes out to a loss of only $371.4 million. Their “adjusted EBITDA” excludes stock-based compensation expenses in particular. Yes, we’re sure your numbers look better if you exclude the bit where you have to pay your employees.

Coinbase makes its money from (1) BTC and ETH trading, and (2) their share of the interest on the USDC reserve. Also, the majority of their volume comes from a few large customers. So Coinbase would extremely much like to diversify.

CFO Alesia Haas said in the investor earnings call: “Our fourth quarter net revenue increased 5% quarter-over-quarter to $605 million. This was driven by strong growth in our subscription and services revenue.” She means that Q4 revenue was only up because of interest on USDC. [Coinbase, PDF]

Coinbase wants to list every token going — even as many of the hottest tokens are blitheringly obviously securities under the Howey test. Coinbase has spent the past several years helping their very good venture capital friends such as a16z dump their bags on retail.

Coinbase goes on at length about the amazing ambiguity in what constitutes a security under US law. Who can even know what might be deemed a security tomorrow? It is a mystery.

Sure, the Howey test is simple and broad, and sure the SEC has won every case it’s ever brought where it claimed a given crypto was a security. But do you feel lucky?

The 10-K even includes a list of tokens Coinbase trades that the SEC has already said are securities! Coinbase questions whether these tokens are really securities, and confidently asserts that “Despite the SEC being the principal federal securities law regulator in the United States, whether or not an asset is a security under federal securities laws is ultimately determined by a federal court.”

This is true. But it’s also true that the SEC has won every single time. And the consent orders in these cases — because almost nobody was stupid enough to take their case to trial — note that the tokens in question were always offerings of securities. It wasn’t a court finding that made the token a security.

But Coinbase is desperate to diversify and makes it clear that they really want to risk their backsides on this business line of maybe-securities that don’t even make them a lot of money.

The SEC shut down Coinbase’s Earn staking product in 2022 before it could be launched. Haas explained in the analyst call why Coinbase thinks its staking product isn’t a security: “we are passing on rewards directly from the protocol. We are not establishing an APY, we are not establishing the reward rate. That is established at the protocol level. And then we are passing that through and collecting a fixed commission on that amount.” We guess we’ll see if the SEC concurs. [Coinbase, PDF]

Coinbase literally lists Satoshi Nakamoto as a risk factor for its business:

“the identification of Satoshi Nakamoto, the pseudonymous person or persons who developed Bitcoin, or the transfer of Satoshi’s Bitcoins”

The FTX fallout continues

FTX Japan K.K. users are getting back 100% of their cryptos. Users in other jurisdictions are likely to get cents on the dollar, if that. This is because the US crypto lobby viciously fought any sensible regulation for years — but Japan locked crypto down hard after Mt. Gox exploded in 2014. Taste the freedom! [Bloomberg]

Galois Capital, a real-money hedge fund that thought they’d get into some crypto, shuts its doors after losing $40 million, half its assets, in the collapse of FTX. Whoops! [Twitter, FT, archive]

The Bank for International Settlements — the central bank for central banks — reports that the fall of FTX didn’t have much impact on the rest of the financial world: [BIS bulletin, PDF, Coindesk] 

“Nevertheless, despite crypto’s large user base and the substantial losses to many investors, the market turmoil in 2022 had little discernible impact on broader financial conditions outside the crypto universe, underlining the largely self-referential nature of crypto as an asset class.”

Regulatory clarity

Caitlin Long’s Custodia Bank was refused an account at the Kansas Fed. Custodia appealed the decision. The Federal Reserve Board has looked at Custodia’s appeal and told them to go away. [Federal Reserve]

We’ve mentioned previously that the Canadian Securities Administrators (CSA) is introducing new rules for crypto exchange registration in the wake of the collapse of FTX. The new regulations, which will apply in all provinces, have been released:

  • Customer cryptos will need to be segregated into an address per customer.
  • Exchanges cannot pledge or rehypothecate customer cryptos. Margin trading is forbidden.
  • Proprietary tokens — in-house supermarket loyalty card points, in the manner of FTT or BNB — require prior written consent and can’t be counted as an asset in your accounts.
  • No stablecoin dealing without prior written consent.

These apply to any exchange with Canadian customers, including non-Canadian exchanges. [Press release; OSC, PDF]

The Financial Action Task Force, the multi-country advisory group set up to combat money laundering, is not happy that its rules on crypto traceability, such as the travel rule, have not been implemented sufficiently widely. At the FATF Plenary on February 22-24, “delegates further agreed on an action plan to drive timely global implementation of FATF standards relating to virtual assets.” [FATF]

The International Monetary Fund has put out a paper, “Elements of Effective Policies for Crypto Assets,” with guidelines that any country that ever might want to hit up the IMF for a loan would be well advised to follow — “amid the failure of various exchanges and other actors within the crypto ecosystem, as well as the collapse of certain crypto assets. Doing nothing is untenable as crypto assets may continue to evolve despite the current downturn.” [Press release; paper, PDF]

Hong Kong’s Securities and Futures Commission is consulting on licensing requirements for crypto exchanges to be allowed to sell to retail customers. Hong Kong wants safe custody of customer cryptos — they’re not demanding third-party custodians, an arms-length subsidiary will be sufficient — KYC, cybersecurity, accounting and auditing, risk management, AML, and prevention of market misconduct. So, the very basic requirements of being a financial institution. Responses should be in by March 31. [SFC; SFC, PDF]

In the US, the SEC got a lot of stick for not going after crypto harder in the bubble. Then it came out that the Blockchain Eight group of representatives had written to Gary Gensler telling him to back off. Now the legislature has demanded action, and Gensler is delivering. Here’s how the Blockchain Eight got the opposite of what they wanted. [The American Prospect]

“Gensler also made clear that he has been grappling with the same question as many of the rest of us: What, exactly, is the point of crypto?” [Intelligencer]

John Naughton on the latest UK Treasury crypto consultation paper. “The second lesson is that permissionless blockchains can never be allowed within the financial services sector.” [Guardian]

Voyager Digital

97% of Voyager creditors have voted for Binance to buy Voyager Digital! We think it’s unlikely that regulators will let the deal go through, and Binance US doesn’t have the money to cover all those liabilities to Voyager customers — but hey, who knows? [CoinDesk]

FTX in Chapter 11 is suing Voyager Digital in Chapter 11 for the return of a loan that Alameda paid back to Voyager just before it went into bankruptcy protection. FTX, Voyager and both companies’ Unsecured Creditors’ Committees have come to a settlement! An ad-hoc group of Voyager creditors objects to the deal. [Doc 1048, PDF; Doc 1084, PDF]

The Voyager UCC has subpoenaed the ex-top brass of FTX for depositions — Caroline Ellison, Gary Wang, Sam Bankman-Fried, Sam Trabucco, and Daniel Friedberg. The notices to the court don’t detail what the UCC wants to ask — just that they are asking. Voyager’s link to FTX is the huge pile of FTT that the company counted as part of its assets. [e.g., Doc 1018, PDF]

SBF’s lawyers have already moved that the subpoena was deficient because it was handed to Sam’s mom Barbara Fried and not into Sam’s own hands personally. [Doc, PDF]

Celsius Network and your pension

Caisse de Dépôt et Placement du Québec (CDPQ) was the pension fund that invested USD$150 million into equity in Celsius Network. Executive vice-president and CTO Alexandre Synnett, who was the executive involved in the Celsius investment, “left the organization on his own volition about two weeks ago,” said CEO Charles Emond in the 2022 earnings call. CDPQ will not be touching crypto going forward. [BetaKit; The Logic, paywalled]

Other good news for bitcoin

Bitcoin miners are diversifying because mining is sucking as a business. Riot Blockchain has changed its name to Riot Platforms. [Coindesk]

Crypto firm Phoenix Community Capital and its founder Luke Sullivan, with links to various UK parliamentary groups, appears to have vanished. Some of the firm’s assets and its name appear to have been sold to a new company run by an individual called “Dan,” who has told investors it has no obligation towards them. [Guardian]

Data Finnovation, who took out BUSD, now looks into weird bridging on Tether. [Medium] 

Image: Coinbase CEO Brian Armstrong is being patted down with a makeup sponge as a big green screen looms behind him. Fortune

Posted on by Amy Castor 0

Crypto.com’s bad weekend — crypto exchanges are shaky

  • By Amy Castor and David Gerard

“i have a lot more respect for the binance guy, having seen a competitor stumble and taken the opportunity to very publicly shank them five or six times while they’re on the ground, under the guise of trying to help”

— infernal machines, SomethingAwful

We’re exhausted keeping up with all the good news for bitcoin.

Crypto.com didn’t have the greatest weekend. As we write this, withdrawals are clogged, but some are reported to be coming through okay.

The test an exchange faces is: can it stand a run on the bank?

The test bitcoin as a whole faces is: how will the price hold when lots of people are dumping for cash?

Number go down

After the bitcoin price had been floating at around $20,000 for several months, FTX crashed. On the day Binance reneged on its offer to buy FTX’s remains, BTC dropped below $16,000. It’s a bit above that now.

The actual dollars have gone home, and the wider crypto casino is having to pretend harder and harder that the alleged mark-to-market value of illiquid trash means anything.

Real dollars continue to disappear from crypto. Retail trading at Coinbase was down 43% in the third quarter of 2022, compared to Q2.

Reddit /r/buttcoin has a new header image

A slight case of the runs

Crypto.com is not having a great time.

The crypto markets are jittery. After the dramatic collapse of FTX, crypto holders are left shell-shocked and traumatized. They don’t trust any centralized exchange now at all.

It doesn’t take much to set the markets off. 

Despite claiming to have near-zero exposure to the fallout of FTX, over the last year, Crypto.com sent multiple very large stablecoin transfers to FTX, totaling approximately $1 billion. [Reddit, Australian Financial Review]

On November 12, crypto Twitter caught wind of the fact that Singapore-based Crypto.com and China-based Gate.io were passing funds back and forth to post stronger-looking proof of reserve statements, suggesting they didn’t have the funds they purported to have.   

Crypto.com CEO Kris Marszalek waved it off as just a whoopsie, saying they accidentally sent $400 million of their ETH to Gate.io on October 21, instead of their cold wallets, but that Gate.io had sent the money back. Everything was fine. [Twitter, archive; WSJ]

The crypto market wasn’t buying it. Instead, the news set off an FTX-style bank run, as panicked users raced to get their funds off Crypto.com. Within hours, more than 89,000 transactions pulled customer funds out of Crypto.com wallets. You could watch it in real time on Etherscan. [Chainsaw, Twitter]

Picture old-timey cartoons of guys in a stock exchange, hats popping off their heads and cigars falling out of their mouths in shock, shouting, “SELL! SELL! SELL!” Crypto.com was like that but in basements around the world.

By Monday, the run had made mainstream international news —  Sky, AFP, and Reuters, as well as financial outlets such as Bloomberg. [SkyNews]

Crypto.com should have collapsed right then, but it didn’t. Binance bailed Crypto.com out with infusions of ETH and USDC from their “recovery fund.” Cryptocurrency just reinvented the idea of a central bank as a lender of last resort. [Twitter; Twitter; Twitter]

Of course, given what he had just done to FTX, is it really a smart idea to let CZ know you have liquidity problems?

The following day, Marszalek did an Ask-Me-Anything to reassure everyone that the funds were safe. “At no point were the funds at risk of being sent somewhere they could not be retrieved,” he said. “It had nothing to do with any of the craziness from FTX.” [YouTube] 

Binance also held an AMA to tell everyone that everything is fine. [Twitter; Verge]

The life and times of Kris Marszalek 

Kris Marszalek co-founded Crypto.com in 2016. It was initially called Monaco but bought the “crypto.com” domain from cryptographer Matt Blaze in 2018.

Based in Singapore, the firm has spent huge money on ad campaigns, including a $700 million deal to put its name on LA’s sports arena (formerly Staples Center) and a “Fortune Favors the Brave” Super Bowl commercial featuring Matt Damon. [GQ]

The company makes money by charging fees for trades on its smartphone app. It promises Ponzi-like yields — up to 14.5% annually, paid out in stablecoins. 

To access the higher stake yield, you have to buy Cronos (CRO), the platform’s native trader token, whose price floats freely. CRO tanked over the weekend over concerns about Crypto.com’s reserves. [BeinCrypto]  

Marszalek, 42, is a Polish-born serial entrepreneur who lives in Hong Kong. He dropped out of college and started his career selling computer equipment. He doesn’t appear to have any trading experience at all prior to Crypto.com.

You’ll be delighted to hear that Marszalek has the sort of background you want in a crypto CEO. Specifically, running a voucher sales company that collapsed in 2016 and stiffed everyone.

Founded in 2010 in Singapore, Ensogo offered Groupon-style “daily deals” and so forth. After going through multiple name changes and acquisitions, Ensogo was listed as a standalone company on the Australian Securities Exchange. It pivoted to an “open marketplace platform” in late 2015. [ASX, PDF]

By April 2016, Ensogo had closed its Malaysian office and had stopped paying merchants. The company’s first-quarter report to the ASX showed an AUD$5 million deficit, despite firing half its staff in the first quarter of 2016. It had already lost AUD$67 million in 2015. Ensogo finally stopped operations in June — leaving merchants and consumers in the lurch. One Hong Kong merchant lost HK$20,000. [Tech in Asia; Tech in Asia; Tech in Asia]

Other exchanges 

In the third quarter of 2022, US exchange Coinbase suffered “another tough quarter.” Institutional trading was down 22% and retail volume was down 43%, compared to the previous quarter. Net revenue in Q3 was $576 million, down from $803 million in Q2, and $1.2 billion the year before. The company lost $545 million in Q3, compared to a net profit of $406 million in the same period last year. [FT, archive; Shareholder letter, PDF]

In Hong Kong, AAX has suspended withdrawals. The crypto exchange had just blogged that it had no exposure to FTX and that user funds were never exposed to counterparty risk. [AAX; AAX; Coindesk]

What’s a user to do?

The FTX collapse has taken out a variety of firms across crypto, including other exchanges and crypto hedge funds. Many projects used FTX like it was a bank. So many projects are now wrecked because they treated FTX like it was a safe place to store their cryptos.

Expect more trouble and possible bankruptcies to come. People keep treating crypto exchanges as banks. They are not banks.

The hard part is: what do you do instead?  

Loud and weird crypto nerds, particularly bitcoin maxis, are saying “not your keys not your coins” again a lot.

Back in the real world, approximately 100% of crypto users are in it for the money. And that’s only achievable with the coins on an exchange, where they can actively buy and trade them.

More importantly, almost all crypto users have flat zero technical knowledge. They have no idea how any of it works. They trusted the newspaper headlines. They just about get “number go up.” They won’t be self-custodying en masse.

DeFi traders will tell you that self-custodying is the only way to do anything, but they also get rekt a whole lot.

We concur that users should treat centralized exchanges as risky places to store cryptos. The trouble is, what else to do with them? If you don’t want to do the sensible thing — i.e., dump your coins and get the heck out of crypto — you’re going to have to learn way more about how the technology works than you ever wanted to.

It’s going to suck because — despite the user-friendly Super Bowl ads — crypto is not a product. It’s a pile of wires on a lab bench. Get out your soldering iron, you’re gonna be your own bank.

Posted on by Amy Castor 3

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.

Posted on by Amy Castor 0

Scam Economy podcast: Crypto Jenga: Celsius and the Latest Crypto Crash 

Earlier this week, David Gerard and I did a podcast together for Matt Binder’s Scam Economy. It just went up this evening. [Youtube; Apple Podcast; Google Podcast, Spotify]

The interview is based on a popular story that David and I recently co-wrote: “The Latecomer’s Guide to Crypto Crashing,” which has now been translated into German and French, and soon, possibly Italian.

It’s as if the entire crypto space has been held together by a giant lynchpin, someone pulled out the lynchpin, and now everything is tumbling to the ground.

UST crashed, Celsius followed, and more recently, Three Arrows Capital has failed to meet lender margin calls. Small crypto funds are next to fall, as David spelled in his recent story on yield farm platform Finblox.

The network effects that brought bitcoin to its heights from 2020 to 2021 are now working in reverse.

Posted on by Amy Castor 0

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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Posted on by Amy Castor 2

Coinbase freezes hiring, rescinds job offers: ‘Coinbase ghosted me’

Coinbase is losing money. Its stock is in the toilet. Now, the largest crypto exchange in the US says it’s extending its hiring freeze and rescinding job offers.

L.J. Brock, Coinbase’s chief people officer, shared the grim news in a blog post on Thursday. It’s been only two weeks since the San Francisco firm initially announced plans to pause hiring. Yesterday’s blog post signals just how dire things have become:

“In response to the current market conditions and ongoing business prioritization efforts, we will extend our hiring pause for both new and backfill roles for the foreseeable future and rescind a number of accepted offers.”

The announcement comes on the same day Gemini said it would be trimming 10% of its staff. In a blog post, co-founders Cameron and Tyler Winklevoss attributed the layoffs to “turbulent market conditions that are likely to persist for some time.” 

Coincidently, a CFTC lawsuit also dropped on Thursday claiming Gemini misled regulators to gain approval for a bitcoin futures product it was pursuing in 2017.

Coinbase is struggling to turn a profit. Last month, it posted a $430 million loss for Q1 2022 after missing analysts’ predictions on both profit and revenue for the quarter. The exchange said it was bleeding users. 

The company’s stock price (Nasdaq: COIN) is down more than 70% since the beginning of the year and is currently trading at $74 per share. It’s hard to imagine that COIN was as high as $343 in November 2021. 

The tumble in Coinbase’s stock price coincides with the crypto markets. Bitcoin has barely been able to keep its head above $30,000, after losing 60% of its value since its November record. The stock market is also suffering. The tech-heavy Nasdaq composite is down 22% since January.  

‘Coinbase ghosted me’

Leading up to 2022, Coinbase planned to triple its workforce. The firm hired 1,200 people in the first quarter and had 3,730 employees at the end of last year, according to its latest earnings report. Now, it’s not even calling some people back after extending job offers. 

I spoke with one person, whose name I won’t reveal, who said Coinbase offered him a job as a security engineer in January. The man, who is in his 30s and has a decade of experience at FAANG companies, told me he had a verbal offer from Coinbase after an interview panel. But then he was ghosted and never heard from them again. 

“I honestly was only interested in getting a competitive offer to better my negotiation at other places I was interviewing,” he told me in a private message. “So grateful Coinbase ghosted me.”

Otherwise, had he gotten the offer in writing, he might have seriously considered taking the job, even as a no-coiner. The comp in the verbal offer was tempting. 

Coinbase offered him a $280,000 base salary plus a 15% bonus and $600,000 annual equity, for total compensation of $920,000, he said.

“We don’t do a four-year program where you vest 25% each year. We don’t have a cliff either, so you start vesting immediately on a quarterly basis,” Coinbase told him.

The company has performance multipliers and suggested that potentially, he could make $1.5 million annually. 

Coinbase has a 2% 401(k) matching program. As an employee, he would get one month off per year along with unlimited paid time off. That’s in addition to four companywide weeks off.

In January, Coinbase proudly announced that the entire company would shut down for one week at the end of each quarter so employees could “recharge.” 

Oh, and there’s a $500 monthly wellness stipend, in case you want to join a gym or take yoga.

After the interview, the would-be employee got an email from the recruiter saying that things went great and they wanted to extend an offer. The recruiter asked if comp would be okay before they put the contract together.

And then, nothing. 

It was just as well, he told me. “Because the equity would have cut in half, and the company will look far worse after the coming collapse.”

Other would-be employees aren’t so relieved. On Blind, an anonymous app for the workforce, someone wrote: “I was supposed to start jun 6th. My offer has been rescinded. This feels like a nightmare that I can’t wait to wake up from.” 

“Dodged a bullet,” a Coinbase employee replied. 

Why rescinding job offers is bad

Rescinding job offers at the last minute is a nasty thing to do to people, especially if they’ve already submitted notice at their current job, told their landlord they are moving, or put their home up for sale. 

It can also blacken the offering company’s reputation. Word gets out, and you’ll have a much harder time convincing people to work for you in the future. It also makes Coinbase’s financial health look worse like they’ve somehow managed to run out of cash running a casino.

Meanwhile, Coinbase execs aren’t doing too bad for themselves. In 2020, including stock options and bonuses, CEO Brian Armstrong made $59 million, Chief Product Officer Surojit Chatterjee made $16 million, and Chief Legal Officer Paul Grewal made $18 million, according to SEC filings. 

Hacker News is outraged. Coinbase did in any hope of hiring competent non-hodlers.

Here’s what Blotto_Otter on Something Awful wrote: 

“When I read stuff like this, all I can think about is when I started in public accounting right in the middle of the 2007/2008 crash, and out of all the unpleasant stuff most accounting firms did during that time — layoffs, hiring freezes, salary freezes and cuts, benefit cuts — the one thing they did not do was revoke job offers from people who had already accepted offers. They did everything but that because they understood that that is the one thing that will make your name mud when it comes to recruiting new hires in the future.”

Also, Coinbase could potentially get sued for reneging on job offers, if it extended a no-caveat offer and the would-be employee can prove they suffered losses. National Law Review wrote about this in 2019.

In its blog post, Coinbase said it was extending its severance policy to individuals it offered jobs and would notify them by email. Blind posted a copy of the rescind email, along with another email Coinbase sent to new hires two weeks ago telling them it would not rescind job offers. What’s next? Layoffs?

It’s just a shame Coinbase doesn’t put its job offers on the blockchain.  

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Posted on by Amy Castor 1

News: Yuga Labs goes APE, Meebits insider trading, ConsenSys raises another $450M to focus on Web3 buzzword

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BAYC: Money for nothing

Yuga Labs finally launched its Apecoin — oops, sorry, not Yuga, but the Apecoin DAO launched APE. On March 17, the same day the coin launched, it was listed on all the major crypto exchanges in the U.S., including Coinbase, Kraken, and Gemini. (My blog post)

Apecoin has a fixed supply of 1 billion. So far, about 130 million Apecoins have entered circulation, according to CoinGecko. Today, Apecoin is up to $11, and 40% of the volume is on Binance trading against two stablecoins with dubious backing — USDT (35%) and BUSD (5%).

Soon after Apecoin launched, Bored Ape Yacht Club NFT holders took to Twitter, proclaiming how rich they had become overnight. Each bored ape holder got ~10,094 APE tokens, valued anywhere between $80,000 to $200,000.

It’s the same Ponzi promotion story we have heard since bitcoin launched in 2009 — buy this token and you will get rich for free. Everyone who holds Apecoin now wants you to buy APE, so the value goes up, and they can cash out. That value right now is being artificially pumped by tethers.

Hundreds of millions of dollars worth of Apecoin also went to Yuga Labs founders, Yuga Labs itself, contributors to the project, and to the newly formed Ape DAO. Just like that, everyone is rich.

What about Andreessen Horowitz (a16z)? How many Apecoins were they allotted? We may never be privy to the details.

“A spokesperson for Yuga said Andreessen received coins in exchange for assisting with ‘overall DAO governance design’……Yuga and Andreessen both declined to comment on the potential financing.” (FT)

Apecoin serves as a governance token, giving holders voting rights in the newly formed Ape DAO. Big holders, like Yuga Labs and a16z, have a greater say in the future of BAYC. This is the problem with the Ape DAO — it’s centralized decision-making. (Bloomberg)

Someone figured out a clever way to make $1.1 million by “borrowing” another person’s bored apes just long enough to claim Apecoin. (The block; Web3 is going just great)

Benji Bananas, the play-to-earn game that Yuga Labs is using via Animoca Brands to give Apecoin some utility so the SEC doesn’t sue its issuers, was bad and exploitative from the get-go. (Twitter)

The Block got a hold of Yuga Labs’ pitch deck. According to the deck, Yuga Labs hopes to make $455 million in 2022 through virtual land sales. It’s aiming to build a gaming metaverse called MetaRPG, compatible with a host of NFTs, powered by Apecoin. (The Block; Pitch Deck)

Yes, that’s right. Yuga’s next project is selling make-believe land. You can buy the land with APE.

Bored Ape Yacht Club NFTs along with Apecoin are inherently worthless. The BAYC project doesn’t offer a service; it doesn’t manufacture a product. Its business model is based on filling a balloon with hot air and getting high-profile celebs to shill its product on prime-time TV.

Sure, holding a bored ape NFT will gain you entrance into a warehouse party — but they don’t even work properly for that. NFTs literally, don’t work for anything they are intended to do.  

Insiders acquire Meebits

​​On March 11, Yuga Labs announced it acquired the IP for CryptoPunks and Meebits collections from Larva Labs. It’s giving the NFT holders the IP, so they can create derivative products, like hoodies, T-shirts, and other merch. (Press release; Techcrunch) 

Yuga also got 423 Punks and 1,711 Meebits in the deal. The terms were undisclosed, so we don’t know how much they paid Larva Labs.

The floor price of Meebits doubled after the announcement, climbing to 6.134 ETH ($15,800).

Insiders took the opportunity to buy Meebits in advance and make some easy money.

Lesley Silverman, the head of digital assets at United Talent Agency, formally representing Larva Labs, is one of those people. She bought two Meebits in the days prior to the announcement. (Twitter)

All told, 14 Ethereum addresses, with no previous history of mainstream NFT collection purchases, quietly acquired 159 Meebits between March 5 and March 11. The top address purchased 24 Meebits at once on March 5. (Bloomberg)

Insider trading in the securities business is illegal and comes with harsh consequences, but NFTs are not regulated, so people get away with this stuff, literally, all of the time.

Smile for the camera

Yuga Labs and its partner Animoca Brands want bored ape holders to submit a government-issued ID and have their photos taken to confirm their real identities, so they can register for a mystery project. Bored ape holders are pissed off, some thinking they were going to be turned over to the IRS. (Cointelegraph)

The irony is that this all happened only a month after Yuga Lab’s founders made a big to-do about Buzzfeed revealing their true identities. They responded by directing an onslaught of anger and harassment from the crypto community toward Buzzfeed reporter Katie Notopoulos.

Coinbase class-action

Apecoin resembles a security, like a stock or bond, but that didn’t stop Coinbase from listing it asap.

​​SEC Chair Gary Gensler has already stated that Coinbase lists dozens of tokens that may be securities. According to securities laws, exchanges that list securities must register with the SEC as a securities exchange or a broker-dealer. Coinbase has not registered as either.

A recent class-action against Coinbase alleges that 79 tokens the exchange lists meet the definition of securities, but plaintiffs were not warned of the risks. The claim, filed by three Coinbase users, asks for monetary relief and an injunction enjoining Coinbase from offering the tokens without having to register with the SEC. (Complaint; Cointelegraph)

I think you should leave

Time magazine wrote a lengthy profile on Ethereum founder Vitalik Buterin, calling him the “prince of crypto.” Buterin is concerned about what Ethereum has morphed into.

“Buterin worries about the dangers to overeager investors, the soaring transaction fees, and the shameless displays of wealth that have come to dominate public perception of crypto.” (Time)

It’s funny Buterin should have these feelings.

Ethereum was literally designed for all of these things. It fueled the ICO bubble of 2017. Most ICO tokens live on the Ethereum blockchain, just as most NFT tokens today are bought and sold on Ethereum. And Ethereum’s proof-of-work consumes the energy of a small country.

Buterin is the guy in the hotdog suit in a sketch from the comedy series “I think you should leave.”

In the sketch, a hot-dog-shaped car has crashed through the window of a menswear shop. Everyone is looking around to see who is responsible. Suddenly a man in a hot-dog costume appears out of nowhere and says, “Yeah, whoever did this, just confess. We promise we won’t be mad!”

Never forget, Vitalik created Ethereum because World of Warcraft nerfed his favorite warlock. 

VCs shovel more millions into ConsenSys

Joe Lubin’s ConsenSys got another $450 million round of funding with a $7 billion valuation. This comes just four months after its Series C that raised $200 million and valued it at $3 billion.

The company has more than doubled in value, thanks to the venture capitalists.

Lubin is one of the cofounders of Ethereum who struck it rich in Ethereum’s early crowdfunding sale.

ConsenSys invested in ICO projects throughout 2017 — mostly hilariously bad ideas like Civil. When none of these projects had any hope of making it, and some like Airfox and Paragon, had to pay hefty fees to the SEC for securities violations, ConsenSys went through a “strategic transformation.” It cut staff and converted its failing portfolio business into a separate company called ConsenSys Mesh, effectively pushing the ugly mess off into the corner.

Nowadays, Lubin is busy hyping software like Infrura and Metamask to build Web3.

Stephen Dhiel explains why Web3 is “bullshit.”

The latest round will “accelerate the global adoption” of Infura and ConsenSys’s efforts to “drive NFT adoption for artists, content creators, brands, intellectual property owners, game publishers, and sports leagues.” (ConsenSys blog; Decrypt)

Anyone who thinks NFTs are going to crash soon has little understanding of how much money VCs are shoveling into this space. This money will keep the space propped up long enough for investors and insiders to cash out, just like they did with ICO tokens.

Elsewhere in cryptoland

Vice did a story on nocoiners — bitcoin skeptics, as we call ourselves. It has some good content, but also a misleading flaw: it makes it seem that nocoiners are insignificant because the “nocoiner industry” moves a tiny amount of money compared to the crypto industry. (Vice)

NYT reporter Kevin Roose wrote a lengthy story explaining crypto to the masses. Don’t be fooled. This is a piece of crypto boosterism, where Roose continually tries to convince the reader that he is a “crypto moderate.” The story is especially pernicious because of its “reasonable” tone. (New York Times)

Vice reporter Edward Ongweso went to the first SXSW post-covid, only to find out it was overtaken by crypto-mania and NFT nonsense, like 3D anthropomorphic rabbits plastered everywhere, “which I gathered were somehow related to crypto though it wasn’t clear how.” (Vice)

Mark Zuckerberg says that in the coming months you’ll be able to mint NFTs within Instagram. “I would hope that, you know, the clothing that your avatar is wearing in the metaverse, you know, can be basically minted as an NFT and you can take it between your different places,” he said. (Engadget)

There is no actual metaverse. Zuckerberg is lying. Metaverse is a meaningless marketing term used by companies in an effort to separate people from their money.

“Zuckerberg created this conversation to distract from his problems and made fertile ground for truly evil people to profit,” Ed Zitron wrote in a blog post last month.

Jorge Stolfi, a computer science professor in Brazil, says Web3 is nothing more than a new way to frame cypherpunk’s utopia: “The cypherpunks are a bunch of ‘socially challenged’ nerds who dream of building a society on the internet that is totally beyond the reach of governments. That the cops cannot monitor, regulate, or control.” (Reddit: here and here)

The CFTC is looking into Binance to see if the exchange permitted U.S. residents to buy and sell derivatives traded on its platform. (Bloomberg)

Also, Binance has stopped serving residents of Ontario, this time for real. (Binance Letter of Undertaking and Acknowledgment; OSC press release)

Münecat just came out with a brilliant video (100 minutes) explaining Web 3.0. Picture this: The year is 2063, and the global currency is Moosecoin. (Youtube)

Wikipedia editor and software engineer Molly White did a podcast with “Scam Economy” talking about her “Web3 is going just great” project. (Youtube)

If you haven’t read it yet, this Verge article on Tron CEO Justin Sun is an amazing piece of reporting. Sun has a huge tolerance for risk. The story also explains what happened with Poloniex, the crypto exchange that Circle bought in early 2018 for $400 million and spun out for a $156 million loss. (Verge)

Me in the news

I recently wrote a story on BAYC for Artnet News, and one on Ethereum’s move to POS for MIT Tech Review. I did a podcast for Artist’s Well and made some minor updates to my “Bitcoin Widow” review.

Posted on by Amy Castor 1

News: Tether surpasses 50B, Coinbase lists USDT, reported $2B crypto scam in Turkey

Bitcoin is sitting at around $54,000, and Tether has hit a new milestone: 50 billion tethers in circulation, something it’s quite proud of. “Will we reach $100B before 2022?”

So far, in April, Tether has issued 9 billion tethers—and the month isn’t even over yet. Tether has been minting 2 billion tethers at a time—the largest single batches we’ve seen to date.

Per the NY AG settlement agreement, Tether is supposed to provide a breakdown of its reserves in May. And they are already whining about how unfair and unjust this is.  

Stuart Hoegner, Tether’s general counsel, complained on Twitter: “The second-biggest stablecoin issuer [USDC] doesn’t give a breakdown of their reserves, either. Observers should ask why our detractors are pushing one rule for them and another for us.”

Oh, I don’t know, Maybe because USDC wasn’t caught hiding the fact it lost access to $850 million?

(USDC—a stablecoin bootstrapped by Coinbase and Circle—has issued 13.5 billion USDC to date, not quite the level of Tether, but it’s working its way up there.)

Coinbase debuts on Wall Street, then lists USDT

Coinbase, the largest crypto exchange in the U.S., debuted on Wall Street on April 14. Trading opened at $381 a share—a 52% increase over a $250 reference price set by Nasdaq. COIN swung as high as $429 that first day. (Though, now it is at $291.)

It was the moment Coinbase execs and its VC backers had all been waiting for. They didn’t waste any time dumping their shares on retailers, according to data from Capital Market Laboratories. 

Insiders sold off $4.6 billion in COIN on the first day of trading, and Coinbase CEO Brian Armstrong sold shares worth $292 million. (SEC filing) (Cointelegraph)

Less than two weeks later, Coinbase—being the respected operation that it is—dropped the bomb that it is listing tether on Coinbase Pro.

Ecstatic bitcoiners claim the move legitimizes Tether. Actually, the move delegitimizes Coinbase.

Listing tether makes Coinbase look shady, like they’ll do anything to boost profits and keep share prices up so insiders can continue their sell-off. (My blog post)

Tether is a wildcat bank, operating with no oversight. It has been largely responsible for boosting the price of bitcoin because it allows unregulated crypto exchanges to thrive and funnels them a steady stream of dubiously backed tethers.

Thanks to Tether, Coinbase had a hugely profitable Q1. And thanks to Tether, Brian Armstrong is a wealthy man indeed. 

Was it a coincidence that BTC tapped a new all-time high of $63,275 the day before Coinbase went public? Or was that simply irrational exuberance?

When Tether gets taken down, liquidity will evaporate and crypto markets will crash. Those who get hurt will be naive retailers, who didn’t understand the system was rigged from the get-go. 

Bernie—gone but not forgotten

Bernie Madoff died in jail on the same day that Coinbase went public. He ran the biggest Ponzi scheme in history, and it went on for 25 years. Paper losses totaled $64.8 billion. Madoff took billions from investors and simply stole the money instead of investing. 

Why didn’t the SEC catch Madoff sooner? Why didn’t they step in and do something to protect investors? They were tipped off eight years before, and yet they failed to act.

Here we are watching a similar drama unfold with Tether. All the red flags are waving. And no regulator or authority has stepped in to take strong action. 

If you are wondering how fraudsters live with themselves—they rationalize and minimize. 

David Sheehan, a trustee who worked to recover money stolen from investors, met with Madoff a dozen times. He told WSJ: “[Madoff] didn’t think he was harming anybody. He actually thought his scheme would work, that it just got out of hand and he couldn’t control it.”

$2 billion crypto scam in Turkey?

When Thodex, one of the largest crypto exchanges in Turkey, suspended trading on April 18 for five days of “maintenance,” users began to complain they couldn’t access their funds. 

Now a manhunt is underway for the exchange’s 27-year-old founder, Faruk Fatih Özer, who has reportedly fled to the capital of Albania with $2 billion in investors’ money. 

Turk authorities have detained 62 people and issued detention warrants for 16 more.

Meanwhile, Özer is claiming that Thodex is the target of a “smear campaign.” He says he was on a jaunt to meet with foreign investors, nothing more.

We’ve seen this film before. It’s called “Crypto exchange operates as a Ponzi scheme.” Last time, the protagonist was Gerald Cotten, the founder of Canada’s QuadrigaCX. And instead of going to meet with “foreign investors,” he went to India and died under suspicious circumstances. 

Now another Turkish crypto exchange—Vebitcoin—has shut down amid accusations of fraud. Turkish authorities have blocked its bank accounts and detained four people. (Reuters)

These stories come at a rotten time for crypto users in Turkey. Starting April 30, the country’s central bank will ban the use of crypto for payments and prevent payment providers from providing fiat onramps to crypto exchanges. (CBRT press release)

Bitcoin promotes green energy!

Bitcoin mining is destroying the planet. Lately, the world’s most popular cryptocurrency is getting a lot of bad press on its massive carbon footprint—like this article in the New Yorker. 

Yet, despite hard evidence to the contrary, people with big bets on bitcoin will stare you right in the face and tell you it ain’t so. Bitcoin is green!

Jack Dorsey’s Square and Cathie Wood’s ARK Invest published a delusional white paper titled “Bitcoin is Key to an Abundant Clean Energy Future.” They want you to believe bitcoin mining encourages the use of wind farms, solar energy, and other such nonsense. (Bloomberg)

ARK has investments in Square and Coinbase shares. And Square invested $50 million in bitcoin last year. Square’s Cash App also lets users buy and sell bitcoin. Dorsey is a bitcoin bro at heart.

Companies who care about the planet, don’t invest in bitcoin.

FT Alphaville countered Dorsey and Wood’s claims in a post titled: “The destructive green fantasy of the bitcoin fanatics.” 

Bitcoin skeptic Kyle Gibson responded with a satirical “Bitcoin Is Green Energy” commercial, where we learn that “solar panels can’t work without bitcoin,” and “this baby penguin’s first word was ‘bitcoin’.” 

Other newsworthy stuff

On April 22, the negative premium of GBTC reached -18.92%, a record low. It’s since rebounded to -10%, according to Ycharts, but the arbitrage opp for big investors is a distant memory.

No doubt many funds who entered the “risk-free” trade are feeling the squeeze. Despite that, Grayscale has added $283 million in assets to GBTC. (The Block)

Tougher AML laws in South Korea are forcing crypto exchanges to shutter. Turns out, several were using shell bank accounts. “…they are having difficulties to get real-name accounts from local banks.” Sounds like the Bitfinex/Tether model. (Korean Herald)

The NFT bubble is bursting. Trading volume on OpenSea is down 22% in the past month. CryptoPunks volume is down 26%, NBA Top Shot is down 61%. (Decrypt)

Edward Snowden can’t make money on books and speeches anymore, so he sold an NFT for $5.4 million. He is donating the funds to the Freedom of the Press Foundation. (He sits on the nonprofit’s board of directors.) (Coindesk)

Artists and celebrities continue to pile into NFTs, because it’s the thing to do. Eminem partnered with Gemini’s Nifty Gateway to launch his first series of NFTs. (Decrypt)

A hacker-artist figured out how to make “crypto-verified” fakes of most art-connected NFTs. It’s called “sleepminting” and he used Beeple’s “Everydays” as a test case. (Artnet) 

Quote from “Black Swan” author Nassim Taleb: “If you want a hedge against inflation, buy a piece of land, grow—I don’t know—olives on it. You’ll have olive oil if the price collapses. With bitcoin, there’s no connection.” (Decrypt) 

The SEC is officially reviewing a bitcoin ETF application from Kryptoin Investment Advisors. It’s one of three bitcoin exchange-traded fund proposals now under review—WisdomTree and VanEck are the other two. (SEC filing notice) (Decrypt)

The overlap between the bitcoin bros and Musk fanboys is strong. Nicholas Weaver wrote up a Twitter thread on why Musk sucks—i.e., his environmental credentials are bullshit; “Go to mars because we are going to destroy the earth” is lunacy; His cars are crap, etc.

The IRS knows you’re out there. It’s launched “Operation Hidden Treasure” to find taxpayers with unreported income from bitcoin transactions. (Accounting Today)

Stablecoins are reminiscent of the dollar substitutes that triggered the 2008 crisis. Déjà vu? (New Money Review)

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Coinbase lists tether, the world’s dodgiest stablecoin

Coinbase, the largest crypto exchange in the U.S., just announced it is listing tether (USDT), the world’s dodgiest stablecoin. 

Tethers, for the uninitiated, are a stand-in for real dollars, used mainly on offshore crypto exchanges that can’t get proper banking. Now tethers can be found on Coinbase, a banked exchange—overseen by the SEC.

The timing of this is incredible, only a week after Coinbase debuted on Wall Street. 

Nobody knows for sure what is backing the nearly 50 billion tethers sloshing around in the bitcoin markets—maybe cash, maybe third-party loans, maybe hot air. But the price of Coinbase shares (COIN) is slipping, and so is the price of bitcoin. Desperate times call for desperate measures, so what can Coinbase do?

Why not list tether? That way, Tether (the company that issues tethers) looks legit, and more people can pile into bitcoin without worry. When BTC goes up, demand for $COIN follows. Problem solved!

Starting immediately, you can now send your dubiously backed tethers to Coinbase Pro—Coinbase’s online platform for professional traders. (Coinbase has a separate platform for casual traders called simply “Coinbase,” but tether is limited to Coinbase Pro for now.)

You will be allowed to trade tethers in every jurisdiction that Coinbase supports except for New York state, which Tether was recently hoisted out of by the NY attorney general.  

Coinbase only supports ERC-20 USDT, a reference to the nearly 24 billion tethers that live on the Ethereum blockchain. (Another 26 billion are on Tron, with a smattering on Omni, Algorand, EOS, Liquid, SLP, and Solana.)

Trading begins on April 26 at 6 p.m. Pacific Time—if liquidity conditions are met, meaning if someone is on-hand and willing to sell their bitcoin or ether to you for tethers, as opposed to real money. [Update: Coinbase has delayed USDT trading twice, first to April 27, now to May 3.]

Coinbase Pro will list the following trading pairs: 

  • BTC/USDT
  • ETH/USDT
  • USDT/EUR
  • USDT/GBP
  • USDT/USD
  • USDT/USDC

At the moment, you can only transfer USDT onto Coinbase Pro; you cannot move tethers off the exchange—although there is some expectation that could change once trading is established. 

What does this mean?

This is a terrible, dumb, bad move for Coinbase. 

The exchange clearly wants to rake in as much business as possible before the regulators step in and throttle its trading. (Regulatory ambiguity is written into the company’s S1 risk factors.) And right now, business is slipping.

Coinbase started selling its shares on Nasdaq on April 14. Its stock has since taken a dip, going from $381 at opening (and as high as $429 in the first few minutes of trading) to $293 when markets closed on April 22. 

At the same time, BTC has also taken a hit. Just ahead of Coinbase’s direct listing, BTC reached an all-time high of $63,700. Now it’s below $50,000. 

Tether has been trying to lift up the price of BTC with larger and larger issuances of tethers—prints of 2 billion at a time, bigger than anything we’ve seen before—but nothing seems to be working.  

At some point, it won’t matter how much USDT Tether prints. It won’t be enough to make up for all the real money that is exiting the bitcoin ecosystem on a daily basis. (The real money that investors put into the system, goes to pay the bitcoin miners who are selling 900 newly minted BTC per day for cash.)

Legitimizing Tether?

Bitcoiners are ecstatic over Coinbase’s listing of USDT. They say the move legitimizes Tether.

This is absolute madness. How do you legitimize a company that has been full of shenanigans since day one? The reverse is true: Tether is delegitimizing Coinbase.

Here is the irony: Coinbase—an exchange that has a BitLicense (issued by the New York Department of Financial Services) to operate in the state of New York—is listing a token sanctioned by the New York attorney general. 

The NYAG began investigating Tether for fraud in late 2018, claiming that Tether and its sister company Bitfinex, a crypto exchange, lied to customers in saying that tethers were fully backed, when in fact, they were not. 

“Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” the NYAG said.

The companies settled with the NYAG in February. Under the terms of the settlement, starting in May, Tether has to publish the categories of assets backing tethers. It also has to specify the percentages of each category, and spell out whether a category constitutes a loan or receivable.

This is a level of transparency that Tether has never lived up to before, and it could spell disaster for the BVI-registered company, if it’s revealed that Tether is simply printing money out of thin air.

If the Department of Justice decides to shut down Tether like it did Liberty Reserve in May 2013—which is what several nocoiner luminaries predicted will happen this year—what does that say about Coinbase listing this coin?

Three other U.S. crypto exchanges—Kraken, Binance.US, and Bittrex*—also list tether, but Coinbase’s public listing means the SEC is watching a lot more closely. Coinbase CEO Brian Armstrong is well aware of this.

“We’re going to increasingly be having scrutiny about what we’re doing,” he told CNBC. 

Based on that reasoning alone, Coinbase’s listing of tether seems shortsighted at best, but maybe that’s the plan? If COIN crashes, Armstrong—along with Coinbase backers like Andreessen Horowitz, Union Square, and Ribbit Capital—will have made their riches, while retailers will be stuck holding the bag.

(*Updated to include Bittrex as another US exchange that lists USDT.)

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News: Coinbase Q1 earnings, Signal integrates MobileCoin, GBTC premium in the toilet, Reggie Fowler’s new lawyer  

Bitcoin rose above $60,000 again. It only took 6 billion tethers to make that happen since the last time it hit $60,000 in March—less than a month ago. We now have 44.5 billion tethers in circulation. 

Coinbase set to debut on Nasdaq

Everything looks rosy for Coinbase’s debut on Nasdaq on April 14. The company is worth $91.5 billion, securities filings show. It reached that valuation even before releasing Q1 results of $1.8 billion—9x that of a year ago. (WSJ)

All that glitters is not gold, however. If Coinbase’s regulatory status were to change (and regulatory ambiguity is clocked in the company’s S1 risk factors), the company could be forced to drop many of its hugely profitable activities or be forced to operate at a much higher capital cost. (FT)

Signal, a good thing going bad

Signal is one of the best apps we’ve got for secure communication. But that could all change, as the encrypted app moves into payments with the integration of MobileCoin.

Techies are upset because they associate cryptocurrency with frauds and scams. They don’t want to see Signal become a sketchy money transmitter business. 

A beta version of Signal Payments is now available to UK customers. It’s not available in the U.S., probably because MOB looks like an unregistered security. MobileCoin says it hasn’t worked out all the regulatory stuff yet.  

Turns out, Signal’s creator Moxie Marlinspike has deep ties to MobileCoin. I wrote about the money flows, and David Gerard followed with a story explaining the tech. (My blog) (David Gerard) 

In a blog post titled “Et tu, Signal?,” Stephen Diehl reminds us that we’ve seen this film a few times before.

Telegram tried the same thing in an ICO that imploded when the SEC shut them down. Facebook tried and failed to monetize WhatsApp. And when encryption app Keybase did an airdrop of Stellar lumens, crypto spammers invaded the app, ruining the user experience.

“This association weakens the entire core value proposition of the Signal app for no reason other than making a few insiders richer,” he said.

Grayscale wants to convert GBTC into an ETF

GBTC once enjoyed a healthy premium but is now trading at 9.72% below NAV. Virtually nobody is buying GBTC on secondary markets. 

Can shareholders redeem their GBTC for bitcoin? No, they cannot. Once bitcoin gets locked up in the trust, it is in there for good. (GBTC has ~649,130 BTC locked up to date, roughly 3% of all BTC.) 

In March, Grayscale announced it was going to shore up the discount to GBTC’s NAV with a $250 million buyback. Now, it plans to convert GBTC into an ETF. The conversion would mean GBTC shareholders no longer have to pay a hefty 2% annual management fee. 

For some reason, Grayscale is confident the SEC will approve an ETF, even though the regulator had rejected every single Bitcoin ETF proposal put before it to date. I’m not sure why Grayscale is any different. (Coindesk) (GBTC announcement)

Currently, the SEC is reviewing two active bitcoin ETF applications: the VanEck bitcoin ETF and WisdomTree’s bitcoin ETF.

Fowler has a new lawyer

Reggie Fowler has finally found himself a new lawyer after his previous defense team withdrew from the case because he failed to pay them. His new lawyer is Ed Sapone of Sapone & Petrillo in New York.

Fowler is the Arizona businessman tied to hundreds of millions of dollars in missing Tether/Bitfinex money. He was indicted in April 2019, along with Israeli woman Ravid Yosef, who is still at large. 

Judge Andrew Carter has yet to set a new trial date. He is giving Sapone three months to get up to speed on the case first. And he warned Sapone: “You are going into this with your eyes wide open.” Meaning if Fowler doesn’t pay him, Sapone will not be allowed to withdraw from the case.

Other newsworthy items

Christie’s is grabbing the NFT bull by the horns. The prestigious auction house is selling NFTs of nine rare CryptoPunks by Larva Labs alongside work by Andy Warhol and Jean-Michel Basquiat in a marquee auction.

The single lot—estimated to fetch between $7 million to $9 million—will be sold at Christie’s 21st Century Evening Sale on May 13 in New York. (Artnet) (Christie’s)

Former BitMEX CEO Arthur Hayes has surrendered to authorities. He flew to Honolulu to appear before a judge on April 6. Pursuant to an earlier agreement, he was released on a $10 million bond, secured by $1.5 million in cash, pending future proceedings in New York. 

Six months ago federal prosecutors in New York accused Hayes and his BitMEX co-founders of violating anti-money laundering rules. Hayes is a US resident. Previously, he was living in Hong Kong, but he has been living in Singapore with his Singaporean wife since January 2020. (Bloomberg) (Lawyers’ proposal) (Bail conditions)

The New York Excelsior Pass is a COVID-19 vaccine passport system. It proudly proclaims its use of secure technologies, like blockchain and encryption but it’s doing the wrong thing and badly. (David Gerard)

If you are tracking central bank digital currencies, John Kiff updated his CBDC “explorers” table with new developments out of Russia, Sweden and Trinidad & Tobago. (John Kiff)

Who needs a bitcoin ETF anyway? MicroStrategy just purchased another 253 BTC for $15 million in cash at an average price of $59,339. Saylor’s firm now holds 91,579 bitcoins acquired for $2.2 billion at an average price of $24,311 per bitcoin. (Press release)

HSBC will no longer allow customers to buy Microstrategy stock due to its newly changed policy on virtual currencies. (Tweet)

The rising tide of bitcoin is good for everyone. Following in the footsteps of Coinbase, Kraken is considering going public in 2022, after record trading volumes in the first quarter (CNBC)

BitClout, the decentralized social network that tokenizes Twitter accounts, uploads your keys to their server on every API request. Any employee with access to that server can steal all the money on the platform at any time. Like I said earlier, this project appears to be one bad idea piled on top of another. (Tweet)

Phillips, another London auction house, smaller and slightly younger than Christie’s, is getting into NFTs with the sale of an artwork called REPLICATOR.

The NFT market has been a bust for Mike Winkelmann in so many ways. Now he is coming out with a book on Amazon.

Sleep with Kate. Drive with Kate. Walk with Kate. Model Kate Moss is featuring her own series of NFTs on Foundation. Proceeds go to charity. (Vogue)

Super Bowl champion Tom Brady is launching his own NFT platform called Autograph. (CNBC)

This tweet of a nothing sandwich from the Fyre Festival will be sold as an NFT. The original tweeter will use the money to help pay for a kidney transplant. The sale on OpenSeas ends on April 24. If any NFT deserves your money, this one does. (Verge) (GoFundMe)

Feature image: Beeple everyday posted on Twitter

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News: Coinbase set to go public, Tether releases meaningless attestation, are NFT sales slipping? 

Happy Easter! NFTs of this disturbing Easter bunny series are available on OpenSea. I was looking for more NFT bunnies but couldn’t find too many. Maybe I wasn’t looking hard enough.

In any case, Bitcoin is now at $58,000 and Tether has more than 42 billion tethers in circulation. Here’s the news:

Coinbase set to go public

Coinbase, the largest crypto exchange in the U.S., will start selling shares on Nasdaq on April 14. The company will trade under the ticker symbol “COIN” and offer 114.9 million shares as part of its direct listing. Share price will be determined by orders coming into the stock exchange. 

Currently valued at $100 billion, Coinbase is going public during the biggest Bitcoin bubble yet. The event will make Coinbase CEO Brian Armstrong—who owns 39.6 million of the company’s shares—a very wealthy man indeed. And the VCs backing the company will realize huge profits, as they all dump their shares on retailers.

On April 6, the exchange is expected to reveal its first quarter financial results and full year outlook. (CNBC) (Coinbase statement)

Tether’s meaningless attestation

In its latest PR move, Tether published an attestation verifying that it had $35 billion in assets backing a similar amount of tether for a blink in time on Feb. 28. The attestation was produced by accounting firm Moore Cayman, based in the Cayman Islands.

Bitcoiners are head over heels about this, but the report is meaningless. The document explicitly states that this does not mean tethers were fully backed at any other time—or are now. And the report doesn’t fit what the NYAG required Tether to publish by mid-May, because it doesn’t break out each category of backing asset by percentage. What’s backing tethers could be mainly bitcoin and toxic assets, for all we know. (David Gerard)

Days after Tether produced the attestation, it printed 1.2 billion tethers—one of its largest issuances ever. What’s a few billion more when bitcoiners think you are legit?

The wonderful world of NFTs

Are NFT sales slipping? Average prices for NFTs have fallen almost 70% from a peak in February to about $1,400, according to Nonfungilble.com, which tracks NFT marketplaces.

The NFT bubble hit its all-time high around the time Metakovan bought Beeple’s “Everydays—The first 5000 days” for $63.9 million on Christie’s. (Bloomberg) 

Cointelegraph also reports that the NFT market is experiencing a silent crash. While we can always see what the price of bitcoin is up to, tracking the movements of illiquid markets is trickier. When it comes to NFTs, buyers simply evaporate and sellers fail to move their wares. 

What is causing the drop in prices? “I suspect it is because the secondary sales have evaporated, so the dream of ‘greater sucker’ has gone away in about the same timeframe as the Crypto Kitties NFT bubble,” Nicholas Weaver said.

Meanwhile, Shares of Funko, a toymaker in Washington, are rising after the company acquired a majority stake in TokenWave, a developer of TokenHead, a mobile app for showing NFT holdings. Funko plans to launch its own NFT offerings this summer. (CNBC)

Other companies are jumping into the space. NFT platform Recur announced a $5 million seed round led by the DeFi Alliance, Delphi Digital, Ethereum co-founder Joe Lubin, and Gemini, among others. (Cointelegraph)

Justin Sun, the CEO of Tron, is now buying serious high art. He bought a Picasso for $20 million at Christie’s in London on March 23, where he also picked up an Andy Warhol for $2 million.

Sun, if you recall, was the second highest bidder for the Beeple “Everydays—the first 5,000 days” piece, driving up the price for Metakovan. Apparently, the Christie’s team in Asia reached out to Sun after the NFT sale to talk him into buying real physical art with all his spare change. (ArtNews)

How does OpenSea, an online market for NFTs, deal with copyright violations? They pocket the buyer’s money and tell them they should have done their own research. Buyer beware! (Vice)

John Cleese’s auction for an NFT of a speedily drawn Brooklyn Bridge ended on April fools’ day. The proud owner is now JeffBezosForeskin who paid $35,000 in ETH for it on Mintable.  

SNL is selling an NFT to their NFT skit an OpenSea. The top bidder gets two tickets to a live taping of the show. This gimmick just does more to promote NFTs, imho. (Decrypt)

Other newsy bits

A DOJ investigation into Representative Matt Gaetz and Joel Greenberg—the former tax collector in Seminole County, Florida—is focused on the pair recruiting women for sex. Greenberg is a bitcoiner. At one time, he wanted to start his own blockchain company, but was accused of dipping into public funds to do so. (The Daily Beast)

Greenberg has made a lot of headlines in recent years.

Terror-linked groups in Syria’s war-torn Idlib are changing their crypto tactics to avoid detection by Western law enforcement. (Wired)

Me, quoted in the news

After I wrote my story revealing the mystery Beeple art buyer, I got a lot of calls from the media asking me for comments about NFTs. 

I am featured in Voice of America: “Cryptocurrency Fuels Digital Art-Buying Frenzy”

Ben Munster quoted me in an article for The Art Newspaper: “NFT art bubble? 2017 crypto bust could spell out the future of current boom”

Kenny Schachter quoted me in an opinion piece for Artnet: “Professor Kenny Schachter Is Here to Teach You More About NFTs (and Put the Crypto Critics in Detention).” David Gerard is quoted in the same story. Kenny refers to us as “curmudgeons.” 

I was also interviewed by the Verge: “NFT mania is here, and so are the scammers.”

(Updated April 4 to add info about Recur.)

Feature image: Scary bunny on OpenSea

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News: NY gives Tether the boot, Tether leaks, Coinbase financials, MoneyGram dumps Ripple

February is coming to an end. I’m waiting to get vaccinated, so I can travel without worry again. Maybe I’ll go to some crypto conferences later this year? I still have fond memories of Coindesk’s Consensus in May 2018—when you could hear the rumble of lambos coming through midtown Manhattan—and sitting in a coatroom with scant Wifi and a broken water cooler. (It was a big coatroom, but a coatroom nonetheless, and that’s where non-Coindesk journalists were put.)

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So, what’s new? Tether now has close to 35 billion tethers in circulation—the last print was on Feb. 21 and nothing since. Also, the price of bitcoin is $46,300. That’s down 18% from last week. I’m not sure we will ever see bitcoin reach $57,000 again. The nonsense could ebb and flow for a while, but I do think the end is nigh for Tether.

NY shuns Bitfinex/Tether

Last week I said likely nothing earthmoving would happen in the NY attorney general’s probe of Bitfinex and Tether this month, other than maybe a status update, according to what Bitfinex said in its January letter to the court. I was wrong.

In an unexpected turn of events, Tether and Bitfinex reached a settlement with the NY AG.

According to the terms of the settlement, the sister companies agreed to a penalty of $18.5 million—without admitting guilt. They are also banned from doing business in New York, and they have agreed to an impossible level of transparency.

I wrote two stories on this—an overall story covering the details of the agreement and deeper observations. You should read both and also the settlement agreement, which is very readable. 

The bitcoiners are jumping for joy over the settlement because they interpret this to mean that Tether is liberated and we’re back to business as usual. This could not be further from the truth.  

The NY AG has given Tether enough rope to hang itself—with Tether agreeing to publish quarterly updates on what’s backing tethers. I mean, how crazy is this: Bitfinex and Tether are also supposed to reveal who their payment processors are. These payment processors are called shadow banks for a reason.

But the real punishment is not the fine imposed on Tether. The real punishment is that Tether and Bitfinex are banned from doing business in New York—the beating heart of finance and banking in the U.S.

They are prohibited from serving any person or entity in the state—defined as “any person known or believed to reside in or regularly conduct trading activity from New York,” and any business “that is incorporated in, has its headquarters in, regularly conducts trading activity in, or is directed or controlled from, New York.”

If the CFTC and the DoJ follow up—and you can bet they will—then Tether could soon be banned from the entire U.S.—a penalty much more significant than an $18.5 million fine.

In the meantime, the Tether printer has mysteriously paused. The settlement agreement was signed on Feb. 18, and the last Tether print was on Feb. 21 for 800 million USDT.

Why has Tether stopped printing? It may be that providing the transparency reports is proving more onerous than they expected. If they pop out another billion tethers, they have to show what is behind those—cash, a loan, crypto, or whatnot. 

But this is a problem. Tethers are the main source of liquidity on unbanked exchanges where the price of BTC is largely determined. If Tether stops printing tethers—or otherwise ceases to function—the price of bitcoin could take a serious dive.

Tether Leaks

Recently, a Twitter profile called @deltecleaks emerged and posted what looked like evidence of a database dump from Deltec, the Bahamian bank that Bitfinex and Tether have been using since 2018. That Twitter account was quickly suspended.

Then @LeaksTether appeared and posted several presumably leaked emails—conversations between Deltec and Tether execs.

These leaks are unverified. I am not completely convinced they are real, but I am also not convinced they are fake either.

Some of the alleged emails look interesting. Trolly wrote up a thread on one—in an email (archive) from Tether to Deltec, dated May 28, 2020, Tether asks for help in “presenting their reserves in the best possible light.” Their reserves, according to the email, are crypto and stakes in other crypto companies. Trolly calls this email a “crucial piece of the puzzle.”

Around the same time that the email was sent, crypto exchange Binance—one of Tether’s biggest customers—switched from BTC to USDT as collateral for leveraged trading. In return, Trolly believes Tether got a stake in Binance.

This could explain why USDT’s 1:1 peg never falters. Tether is in cahoots with the exchanges, who are in charge of maintaining the peg, Trolly believes.

In another allegedly leaked email, Tether talked about allowing the exchanges to “ignore the peg and move the price upwards.” If this is real, it means Tether is getting ever desperate to find ways to make money out of thin air.

Oddly, Deltec has removed the bios from their About Us page. (This is silly, because we have the archive.) And Tether has released its official word on the leaks, calling the leaks “bogus” and implying it is an extortion attempt.

Tether adds that “those seeking to harm Tether are getting increasingly desperate.” This is typical of Tether and Bitfinex. They blame “Tether FUDers” for all their problems—as opposed to being upfront and honest about their dealings.

David Gerard wrote a blog post, going into detail on the alleged leaks.

Coinbase releases financials

Coinbase is going public via a direct listing on Nasdaq under the symbol COIN. The San Francisco-based company published its  S-1 filing on Thursday, after confidentially submitting the filing to the SEC in December.

The filing lays out Coinbase’s finances, including a profitable 2020 driven by a huge surge in the price of bitcoin. Coinbase brought in $1.2 billion in revenue in FY2020 for a profit of $322 million—the first time it has turned an annual profit.

In 2019, Coinbase incurred a net loss of $30 million.  

Brian Armstrong, Coinbase CEO, also did well last year, taking home $60 million in salary, stock options and “all other compensation.” He also received $1.78 million to cover “costs related to personal security measures.”

There is no doubt that the skyrocketing price of bitcoin—boosted by 17 billion tethers issued in 2020 alone—helped Coinbase’s profits. But there are many unknowns ahead.

If the price of BTC continues to drop, if Tether gets taken out by the DoJ, or if the SEC cracks down on some of the coins Coinbase lists—many of which appear like they may not pass the Howey test—Coinbase profits could take a hit.

No doubt, Coinbase is timing its listing carefully. The exchange has received more than $500 million in funding, with backers including Andreessen Horowitz, Y Combinator and Greylock Partners. And the VCs will want to dump their Coinbase shares on retail suckers before the bitcoin market collapses.

MoneyGram dumps Ripple

MoneyGram was supposed to have been a big success story for Ripple. Now, it’s just another sign of Ripple’s failures.

Ripple agreed to invest up to $50 million in the money transfers business. In return, MoneyGram was shilling Ripple by saying it would use the startup’s XRP currency and platform in its back office for moving funds across borders.

MoneyGram was essential because it gave XRP a supposed use case, so Ripple execs could argue their business was legit and not simply a way for them to line their own personal pockets with $600 million.

Last year, MoneyGram received $38 million from Ripple, representing about 15% of its adjusted earnings. But after the SEC announced it was suing Ripple, charging that XRP was an unlawful securities offering, MoneyGram stepped back, saying it faced logistical challenges in using the platform—as well as legal risks.

Now MoneyGram is putting its Ripple partnership on hold. That means MoneyGram, which saw declining revenues from 2015 to 2018, is losing a key income stream. (WSJ, MoneyGram PR)

Other newsy bits

After stiffing his previous defense team, Reginald Fowler still appears to have no defense team. He was given until Feb. 25 to line up a new law firm, but so far, no attorney has filed a notice of appearance with the court. (Court filing)

A rumor is afoot that the SEC is investigating Elon Musk for his dogecoin tweets that helped pump the market. Musk says a probe would be “awesome.” More lulz for Musk. (Teslarati)

Fedwire, the system that allows banks to send money back and forth, went down for several hours on Wednesday. Bitcoiners thought this was marvelous, because bitcoin is decentralized, see? How quickly they forget bitcoin is valued in USD. (CNBC)

Grayscale’s GBTC premium went negative for the first time in years. (It was close to 40% at one point in December.) When the premium is down, the arbitrage opportunity for institutions in buying bitcoin dries up—and that means less real money flowing into the system. (Hedge funder Harris Kupperman wrote a blog post last year explaining how the arb works.) (Decrypt)

FT poked fun of Anthony Pompliano, cofounder of Morgan Creek. Pomp is forever shilling bitcoin but his tweets have been inconsistent. At one time he called Tether “the biggest racket ever.” Now he has changed his tune. Apparently, he’ll say whatever to make “number go up.” (FT)

Treasury Secretary Janet Yellen is warning people about bitcoin. She doesn’t think it’s used widely as a payment system. “To the extent it is used, I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.” (CNBC)

Jack Dorsey’s Square purchased another 3,318 bitcoins for $170 million. This adds to Square’s October purchase of 4,709 bitcoins. The company has already lost $10 million on its latest investment. (Coindesk, Square press release)

The Securities and Exchange Board of India tells company owners: before you IPO, sell your crypto. (Economic Times India)

Kraken is reportedly in talks to raise new capital. (Coindesk)

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