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)

News: Bitcoin tops $24,000, Ledger’s gift to SIM swappers, Pornhub only accepts crypto now, FinCEN’s new rule

The price of bitcoin keeps hitting new all-time highs, recently topping $24,000, which means things are getting a little nutty. The coiners want bitcoin to shoot to the moon. And the no-coiners want Tether to get taken down and the nonsense to end, like it should have three years ago after the 2017 bubble.

I’ve now got hundreds of new Twitter followers, most of them bitcoiners repeating the same boilerplate phrases like “have fun staying poor,” “gold is a Ponzi too” (it’s not) and proclaiming me the U.S. dollar is going to collapse, which would be a shame as bitcoin is mainly traded in dollars.

Caught up in the whirlwind, Mike Novogratz, CEO of Galaxy Digital, has gotten a tattoo—a large moon and a rocket with the letter “B” on it. Fortunately, the “B” is relatively small, so he can easily get that part lasered or covered up if bitcoin crashes, which it will, because that is the fate of all Ponzi schemes.

Here is the news:

Ledger creates a target list for SIM swappers

In July 2020, hardware wallet provider Ledger was hacked, with the hackers gaining access to its customer database. The database has been circulating for five months now, and the hacker has just dumped it on RaidForums, a site dedicated to sharing hacked databases, for the whole world to access—at no charge.

“The first confirmed price I saw for this database was 5 BTC,” the hacker wrote. “Today you can get it for free.”  

The database contains the emails, physical addresses, and phone numbers of 272,000 Ledger buyers along with emails of 1 million additional users.

Essentially, Ledger, a company dedicated to security, has given hackers access to a massive target list for SIM swappers and phishing campaigns. Ledger is very, very sorry for the leak. 

Coinbase plans to go public

Coinbase, the most valuable U.S. crypto firm, has filed confidentially for an IPO with the SEC. When the crypto exchange last raised private funding in 2018, it was valued at $8 billion. It is probably worth plenty more now, with investors going mad over tech stocks

The San Francisco company has tapped Goldman Sachs to bring it to market, meaning that that the bank will lead the syndicate of banks underwriting the deal. (Cointelegraph)

Several VCs have invested hundreds of millions of dollars into Coinbase, and it makes sense that at some point they want to realize the returns on their investment, probably before this bubble blows.

According to Nicholas Weaver, a researcher at the International Computer Science Institute in Berkeley, the IPO “is entirely about a16z and the other VCs unloading their ownership-bags, not cryptocurrency bags, before the space implodes because Tether finally gets killed.”

FinCEN to impose new rules on exchanges

The Financial Crimes Enforcement Network has unveiled new rules aimed at closing anti-money laundering loopholes for regulated cryptocurrency transactions. The rules call for additional customer verification and more reporting.

According to the proposed rule, if a user makes a deposit or a withdrawal of over $3,000 involving a non-custodial wallet, exchanges have to record the name and physical location of the wallet owner. Crypto exchanges also have to report to the U.S. Department of Treasury any deposit or withdrawal over $10,000. 

The rule is devastating to regulated crypto exchanges. In a lengthy Twitter thread last month, when he first learned of the new rule coming down the pipes, Coinbase CEO Brian Armstrong publicly attacked the new regulation. He knows serious KYC requirements will kill a lot of his business.

Nouriel Roubini responded by bashing Armstrong as a contemporary Gordon Gekko—a character in the 1987 Oliver Stone movie “Wall Street”—putting his profits ahead of the need to enforce regulations to stop the financial activities of criminals, tax evaders, terrorists, drug dealers and human traffickers.

Coming soon: Mt. Gox bitcoins

Tokyo bitcoin exchange Mt. Gox went bankrupt in early 2014, and its former users are still waiting to get some portion of their funds back. Their long wait may soon be over. Recently, the Mt. Gox trustee submitted a draft plan for the rehabilitation of creditors. 

If the Tokyo District Court gives the plan a thumbs up, that means 140,000 bitcoin may soon flood the market. The price of BTC has gone up substantially since 2014, so no doubt claimants will want to sell as quickly as possible—and that could create a bear market, pushing down the price of BTC. (Coindesk)

Unless there’s enough real cash left in the system—which is unlikely, because if there was, we wouldn’t need 20 billion tethers—Tether will need to issue an additional 2.5 billion tethers to absorb those bitcoin. 

Tether surpasses $20 billion

Tether has now crossed $20 billion worth of tethers in circulation. Paolo Ardoino, Bitfinex and Tether CTO, bragged about it on social media. He tweeted: “#tether $USDt 20 BILLION!”

Patrick McKenzie, the software engineer who last year wrote this brilliant article explaining Tether, says all he wants for Christmas is for “Tether to unwind explosively.”

As Tether keeps issuing more and more tethers to pump bitcoin’s price, remember that the whole point in all this is to lure real dollars into the system. Look, the price keeps going up! You too can get rich! Buy bitcoin!

As David Gerard explained in a recent blog post, bitcoin price pumps are almost always immediately followed by a sell off. If you’re still not convince how the game works, CryptoQuant CEO Ki Young Ju provides proof.

He points out that when bitcoin hit $20,000, it was a coordinated pump fueled by stablecoins—127 different addresses depositing stablecoins to exchanges in one block of transactions on Ethereum minutes before the first price peak. “Price is all about consensus,” he said.

Porn Hub only accepts crypto now

Visa and Mastercard said they will stop processing payments on Pornhub following a report in the NYT about  illegal content on the site uploaded by unverified users. Mastercard has cut off ties completely, while Visa says it has cut off ties pending an investigation. (Decrypt)

According to Vice, Pornhub purged 70% of its content in an attempt to get the card providers back. How else will it stay in business? The site still accepts crypto—and cash via checks and wires—but apparently that’s not enough. There’s no way it can function without the credit card payments. More proof that bitcoin is a failed payments system.

Other news

The Dread Pirate Roberts is sorry, so please let him go. President Trump is weighing granting clemency to Ross Ulbright, the founder of the Silk Road. (Daily Beast)

“If Ulbricht’s supporters really cared about the war on drugs or libertarian ideals, they’d be demanding that the nearly half a million people currently in U.S. jails for drug offenses should be pardoned too.” (Vanity Fair)

A NY judge says Reggie Fowler’s defense team can withdraw from the case. Their client hasn’t paid them in a year. Fowler has 45 days to find a new lawyer who is also willing to risk not getting paid. (My blog)

Binance reportedly puts zero actual effort into keeping U.S. customers out. The info comes by way of a U.S. user who created a BFX account (no VPN), transferred bitcoins to BFX and sent some out from there. (Twitter)

If you want to cash out your USDT on Kraken, the exchange apparently only takes two types: Omni or ERC-20. (Twitter)

Eric Peters, CEO of One River Asset Management, has set up a new company to invest in crypto. His firm will bring its holdings of bitcoin and ether to about $1 billion as of early 2021, he said. (Bloomberg)

Michael Saylor wants to lure Elon Musk into bitcoin. (Decrypt)

News: Michael Saylor buys bitcoin with abandon, Tether reaches $20B, MassMutual jumps on BTC bandwagon

The price of bitcoin is headed back over $19,000 again. What will it take to push it past $20,000—more tethers? More institutional buying? Or maybe, more crypto journalists proclaiming (without evidence) that tethers are fully backed? Here’s the news:

MicroStrategy wants more, more, more

Michael Saylor, the new crazy god of bitcoin institutional buying, continues his bitcoin buying spree. He seems really, really confident the price of BTC will go up.

Saylor’s publicly traded company MicroStrategy currently owns 40,824 bitcoins—because no sense using all that excess cash for buying back a ton of stock or paying a big dividend. Better off to gamble it on crypto.

Now the firm is actually going into debt to buy bitcoin. After completing a $650 million bond offering, MicroStrategy plans to plow all the proceeds into buying more bitcoin. (Microstrategy PR, Cointelegraph)

Citibank isn’t impressed. Analyst Tyler Radke downgraded MicroStrategy (MSTR) from neutral to sell, calling the recent rally—MSTR went up after its first few BTC buying announcements—”overextended” and a possibly “deal-breaker” for software investors. (The Block)

Tether: Ain’t no stopping us now

Tether is now at $20 billion worth of tether—that’s assets, but circulating supply is soon to follow—and there is no evidence whatsoever to conclude that there is $20 billion in real cash behind all those tethers. Why? Because the company has never had a formal audit.  

Still, last month, The Block’s Larry Cermak defended tethers as being “either fully backed or very, very close,” telling folks “everything is in order now.” He based that on conversations he claimed to have had with “third-parties” who told him they had successfully redeemed several hundred million in tethers.  

Cermak is not the only one to buy the Tether line of B.S.

In December 2018, after looking at Tether bank statements, Bloomberg’s Matt Leising also reported that Tether appeared to be fully backed. He was wrong.

Unbeknownst to him at the time, in the previous two months, the DOJ froze five NY bank accounts belonging to Reginald Fowler, who ran a shadow banking service for Tether/Bitfinex’s Panamanian payment processor. And in November, the NYAG, having serious concerns about Tether’s finances, issued subpoenas to Bitfinex and Tether asking for details on their banking. Finally, in April 2019, Tether admitted it was only 74% backed. And that’s before it went off and printed another 17.5 billion tethers. So what’s backing all those?

In a recent blog post, David Gerard explains why Tether is “too big to fail.” Essentially, it’s keeping the entire BTC market afloat. If Tether were to get the Liberty Reserve treatment, the price of bitcoin is unlikely to ever recover.

Thus, “the purpose of the crypto industry, and all its little service sub-industries, is to generate a narrative—so as to maintain and enhance the flow of actual dollars from suckers, and keep the party going,” he said. 

NYAG: Tether documents forthcoming

Meanwhile, there’s been a new document filing in the NYAG Tether probe.

In a letter to the NY supreme court, NYAG says Bitfinex/Tether are cooperating on document production and the parties expect to finalize things “in the coming weeks.” These documents, of course, consist of everything NYAG asked for in its original November 2018 subpoena—information that will shed light on the Tether and Bitfinex’s shadowy dealings since 2015.

A part of me wants to get excited about this news, but another part says, wait a minute. In the past when Tether’s operators said they were going to hand documents over, they simply handed over material that was already public information. They also have a long history of shenanigans, so let’s just wait and see.

How to turn USDT into cash 

Jorge Stolfi, a computer scientist from Brazil, shared on Reddit a “mainstream theory” on what could be happening behind-the-scenes at Tether—specifically, how Tether’s operators could convert USDT into cash for their own personal use. Remember, this is totally unproven. It is just a theory. (The “triad,” by the way, refers to Tether CSO Phil Potter, CEO and man of mystery J.L. van der Velde, and CFO Giancarlo Devasini. They are the same operators behind sister company Bitfinex.)

He writes:

  1. The owners of Tether Inc (which I will call “the Triad”) print billions of USDT without any backing.
  2. The Triad deposits those USDT into Bitfinex (which they own too).
  3. The Triad uses those USDT to buy BTC and other cryptos from other Bitfinex clients, attracted by the better price.
  4. The Triad withdraws the BTC to their private wallets.
  5. The Triad moves all or some of those BTC to other exchanges that handle real currencies, such as USD, EUR, JPY, etc.
  6. The Triad sells those BTC for real money.
  7. The Triad withdraws the real money into their personal bank accounts.

This is a theory. This is not proven. But the point is, when you have no checks and balances in place along with massive loopholes in oversight, anything can happen. We saw this already with QuadrigaCX—the Canadian crypto exchange that went bankrupt after the founder disappeared (aka “died in India”), taking along with him hundreds of millions of dollars in customer funds.

Coinbase loses half critical security team

After NYT reporter Nathaniel Popper reported about discriminatory complaints at Coinbase, new information came out. Among those who recently resigned to protest the exchange’s new internal policies, were four of the seven people on Coinbase’s critical security team—aka the “key management team.”

The key management team is responsible for securing the cryptographic keys to Coinbase’s cold wallets, where the majority of the company’s crypto is held—somewhere in the neighborhood of $30 billion.

“No job is more fundamental to the company’s success,” Popper said.  

Coinbase’s security chief shot back, saying Coinbase’s security team is managed by several teams with redundancy built in. Of course, he wants us to believe everything is fine, but not everyone is convinced.

MassMutual invests in BTC

Bitcoin has a new institutional investor: MassMutual. The Springfield-Mass insurance firm purchased $100 million worth of BTC for its general investment account, which totals $235 billion. (WSJ)

MassMutual purchased the bitcoin through NYDIG, a New York-based fund management company, which has $2.3 billion worth of crypto under management. MassMutual also acquired a $5 million minority equity stake in NYDIG.

The $100 million cash injection into bitcoin sounds like a lot, but it’s small potatoes. That money will cover the network’s operators—the bitcoin miners—for only six days. Remember, bitcoin miners are selling their 900 newly minted bitcoin per day for $17 million, at current BTC prices. Investors will never see that money again. Bitcoin doesn’t make any real profits on its own—just investor money going in one end, out the other.

Other news

Former Ethereum developer Virgil Griffith moves to dismiss his indictment—again. Attorney Brian Klein argues speech is a protected by the constitution. (Reply memo in support of motion to dismiss.)

Law firm Hogan Lovells is requesting to withdraw their representation of Reggie Fowler in a class-action against Bitfinex and Tether in which Fowler is also named. (Motion to withdraw)

Bryce Weiner has written a nice overview of how Tether works in relation to the crypto industry.

Crypto-friendly CFTC chair Heath Tarbert plans to resign early next year. His term was set to expire in 2024. (The Block)

Bitcoin’s right-libertarian anarcho-capitalism fits right in with far-right extremism. Crypto analyst Tone Vays brags on Twitter about spending a night with the Proud Boys. 

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News: Former Wex CEO arrested, CFTC probes BitMEX, Facebook’s Libra grilled in Washington

Since I’m now the editor of an ATM website, let’s start with bitcoin ATM news. LibertyX is adding 90 machines to its bitcoin ATM network. It now has over 1,000 machines.

Actually, these are not new machines. They are traditional cash ATMs that are bitcoin enabled. A software upgrade on the machines allows users to buy bitcoin with a debit card. The ATMs continue to dispense cash as well. 

According to CoinATM Radar, there are now 5,200 bitcoin ATM machines on this earth. Who the heck is using them? At least one operator, frustrated by a lack of business, has moved his Bitcoin ATM into his mother’s garage. 

In the exchange world —

Criminal in handcuffsDmitri Vasilev, the ex CEO of defunct crypto trading platform Wex, was arrested in Italy. Wex was a rebrand of BTC-e, an exchange that was shut down in 2017 for being a hub of criminal activity. BTC-e was also linked to the stolen bitcoin from Mt. Gox.  

Economist Nouriel Roubini — aka “Dr. Doom” — has stepped up his attack on crypto derivatives exchange BitMEX. In a scathing column in Project Syndicate, Roubini claims sources told him the exchange is being used daily for “money laundering on a massive scale by terrorists and other criminals from Russia, Iran, and elsewhere.” 

Days after Roubini’s column came out, Bloomberg reported that the CFTC was investigating whether BitMEX allowed Americans to trade on the platform. In fact, we know that crypto analyst Tone Vays, a New York resident, was trading on the platform until November 2018 when his account was terminated.

Regulators are cracking down on crypto exchanges. As The Block’s Larry Cermak points out, the situation is getting “quite serious.”

Elsewhere, Bitpoint, the Tokyo-based crypto exchange that was recently hacked, says it will fully refund victims in crypto, not cash. Roughly 50,000 users were impacted when $28 million worth of crypto vanished off the exchange. Two-thirds of the stolen funds belonged to customers of the exchange. 

U.S. crypto exchange Coinbase has killed off its loss-making crypto investment packages. After shutting down its crypto index fund due to a lack of interest, it closed its much ridiculed “Coinbase Bundle.” The product launched eight months ago with the aim of making it easy to purchase a market-weighted basket of cryptocurrencies. 

Malta-based Binance found itself $775,000 richer when it stumbled across nearly 10 million Stellar lumens (XLM). Turns out, the exchange had been accidentally staking (receiving dividends) on its customers lumens for almost a year. It’s planning to give the tokens away in an airdrop and will also add staking support for customers.  

Tether, the stablecoin issued by Bitfinex/Tether, is now running on Algorand, a new blockchain protocol. It’s also running on Omni, Ethereum, Tron and EOS. Presumably, running on a plethora of networks makes tether that much harder to shut down. It’s sort of like whack-a-mole. Try to take it off one network, and tether reappears on another. 

There are now officially more than $4 billion worth of tether sloshing around in the crypto markets. That number almost doubled when Tether inadvertently issued $5 billion unbacked tethers when it was helping Boston-based crypto exchange Poloniex transfer tethers from Omni to Tron. Oops.

Also interesting —

David Gerard is working on a book about the world’s worst initial coin offerings. He recently uncovered another cringe-worthy project. “Synthestech was an ICO to fund research into transmutation of elements, using cold fusion — turning copper into platinum. Literally, an ICO for alchemy. Turning your gold into their gold.” 

Facebook’s Libra had a busy week.

U.S. Secretary of Treasury Steven Mnuchin gave a press briefing on crypto at the White House. (Here’s the transcript.) He is concerned about the speculative nature of bitcoin. He’s also seriously worried Libra will be used for money laundering. He said the project has a long, long way to go, before he feels comfortable with it. 

Unlike bitcoin, which goes wildly up and down in price, Libra would have a stable value, because it would be pegged to a basket of major currencies, like the dollar, euro, and yen. Although, nobody is quite sure how that will work and what currencies it will be pegged to. Tether has a stable value, too, of course.

After his talk, Mnuchin flew off to Paris, where he met with finance ministers from six other powerful countries at the G7 summit. Everyone there agreed they need to push for the highest standards of regulation on Libra. 

Meanwhile, David Marcus, the head of the Libra project, got a grilling in Congress over privacy and trust issues. (You can watch the Senate hearing here and the House Financial Services Committee hearing here.) Nobody believes Facebook will keep its word on anything.

All of this is happening, of course, just after the social media giant got a $5 billion slap on the wrist for privacy violations following the Cambridge Analytica scandal.

The dumb tweet of the week award goes to Anthony Pompliano, co-founder of a digital asset fund Morgan Creek Digital, who says dollars aren’t moved digitally, they are moved electronically. For some reason, he has 250,000 followers on Twitter. The historic tweet even made it in FT Alphaville.

Apple co-founder Steve Wozniak has joined an energy-focused blockchain startup in Malta. The Mediterranean island nation is gung-ho about blockchain. It is also a haven for money laundering and the place where a female journalist who tried to expose government corruption was blown up in 2017. 

U.S authorities have charged former Silk Road narcotics vendor Hugh Brian Haney with money laundering. The darknet market was shut down in 2013. Special agents used blockchain analytics to track down Haney and seize $19 million worth of bitcoin. 

This clever young man has made a business out of helping crypto exchanges inflate their volume. 

ConsenSys founder Joseph Lubin is being sued by a former employee for $13 million. The employer is alleging fraud, breach of contract and unpaid profits.

Former bitcoin core developer Peter Todd is being sued for allegedly touching people inappropriately.

And finally, bitcoin ransomware Ryuk is steadily making its way into China.  

 

 

News: LEO getting pumped, Cryptopia scrambles to save its data, Poloniex says it’s stopped ignoring customers

This newsletter is reader supported. If you appreciate my work enough to buy me a beer or cup of coffee once a month, that’s all it costs to become a patron. I’m trying to pick up freelance gigs when I can, but one of the joys of writing for my own blog is I can write whatever I want, when I want. On to the news…

Bitfinex and LEO

Screen Shot 2019-05-29 at 5.43.17 PMUNIS SED LEO, the full name of Bitfinex’s shiny new utility token, is in its second week of trading. The price started at around $1, but it’s already climbed to a high of $1.52, according to CoinGecko. I’m sure the price increase is totally organic—not.

There are 1 billion LEO in circulation—660 million issued on Ethereum and 340 million issued on the EOS blockchain. 

Crypto Rank warns that 99.95% of LEO coins are owned by the top 100 holders. Also, Bitfinex still has not disclosed information about the investors. “We consider that the token can be manipulative,” Crypto Rank tweeted.

Given its $850 million shortfall, Bitfinex needs to pull in more money. It recently entered the initial exchange offering (IEO) business. IEOs are similar to initial coin offerings (ICOs), except that instead of handing you money directly to the token project, you give it to the exchange, which acts as a middleman and handles all of the due diligence.

Tethers

As the price of bitcoin goes up—at this moment, it is around $8,730—the number of tethers in circulation is going up, too. There are now more than $3 billion worth of tethers sloshing around in the crypto markets, pushing up the price of bitcoin.

Whale Alert says $25 million worth of tethers were taken out of the supply and put into the Tether Treasury. Kara Haas tells me, don’t worry, $150 million Ethereum-based tethers were just issued, and they more than make up for the difference.

Omni tethers, Ethereum tethers, Tron tethers. Tethers appear to be constantly coming and going, bouncing from one chain to another. It gets confusing. But maybe that is the point—to keep us confused. And to add to the jumble, tethers are now executing on EOS.

In the next couple of weeks, Tether is also planning to issue tethers on Blockstream’s federated sidechain Liquid. And later this year, the Lightning Network.

I updated my recent tether story to note that if you want to redeem your tethers via Tether, there is a minimum redemption of $100,000 worth—small detail. Also, I still haven’t found anyone who has actually redeemed their tethers.

Cryptopia’s data—held to ransom?

Cryptopia filed for liquidation on May 14. Liquidator Grant Thornton New Zealand is now scrambling to save the exchange’s data, held on servers hosted by PhoenixNAP in Arizona. The tech services wants $1.9 million to hand over the data.

Grant Thornton is worried Phoenix will erase the SQL database containing critical details of who owned what on the exchange. It filed for Chapter 15 and provisional relief in the Bankruptcy Court of the Southern District of New York. (Here is the motion.)

According to the motion, Cryptopia paid Phoenix for services through April. But when it offered to pay for May, Phoenix ended the service contract and “sought to extract” $1.9 million from the exchange. Grant Thornton says only $137,000 was due for the month of May. Phoenix also denied the liquidators access to the data.

On May 24, the court granted motion. (Here is the order.) Phoenix has to preserve the data for now, but Cryptopia has to pay $274,408 for May and June as security in the temporary restraining order. 

Meanwhile, Cryptopia liquidators’ first report is out. The New Zealand exchange owes 69 unsecured creditors $1.37 million (these are just the ones who have put in claims thus far) and secured creditors over $912,000, with an expected deficit of $1.63 million.

Turns out January 14, the day Cryptopia suffered its fatal hack was the exact same day Quadriga announced the death of its CEO Gerald Cotten, who, uh, had been dead since December 9. The two defunct exchanges had a few other things in common, which I outline in my first story for Decrypt.

Poloniex 

Living in Cambridge, I found it strange that nobody in the local blockchain community knew anyone who worked at Poloniex, based in Somerville, the next town over. I was told Polo staff kept a low profile for security reasons. But I also wonder if they were trying to avoid pissed off customers, whose inquiries they ignored for months.

When Circle acquired Polo in February 2018, it inherited 140,000 support tickets. Now, more than a year later, Circle says it’s all caught up. Polo’s customer support has been “completely transformed” and 95% of inquiries are now handled within 12 hours.

Coinbase

Yet another executive has left Coinbase, president and COO Asiff Hirji. This is the third C-level executive to leave the San Francisco crypto exchange this year.

Recently, Coinbase said it was offering a crypto debit card in the UK—a Visa with a direct link to your Coinbase wallet that lets you spend crypto anywhere Visa is accepted. Financial Time’s Izabella Kaminska thinks that could open a back door for dirty money.

Coinbase plans to add margin trading. Leveraged trading lets you supersize your trading power, because you are borrowing from the exchange, but it also supersizes your risk.

It is easy to understand why Coinbase would want to get a piece of the margin trading business. BitMEX has been reeling in the profits with its bitcoin derivative products. The company’s co-founder is now a billionaire who has so much money, he is giving it away.

Binance is also talking about putting margin trading on the menu.  

Elsewhere in cryptoland 

Kik, the messaging app that raised $100 million selling its kin token in 2017, thinks decades old securities laws need revamping. It wants to create a new Howey test.

The Canadian startup launched DefendCrypto.org, a crowdfunding effort to fight the SEC. It’s contributed $5 million in crypto, including its own kin token, toward the effort.

Ted Livingston, Kik’s CEO says there was no promise kin would go up in value, like a stock. But that is not what at all what he implied during a presale pitch.

Craig Wright, the self-proclaimed inventor of bitcoin, created a hoopla when he filed registrations for the bitcoin code and Satoshi white paper. Disagreements over the significance of the registration have spilled out into his Wikipedia page. Drive-by editors even tried to change Wright’s name to “Craig Steven Fart face.”

Taotao, a new crypto exchange is launching in Japan. It is fully licensed by the Financial Services Agency, the country’s financial watchdog, and it is 40% owned by Yahoo Japan.

As long as the price of bitcoin keeps going up, that is all that matters to bitcoiners. David Gerard delves into the origin of the phrase “Number go up.”

Geoff Goldberg, well-known for his battles against the relentless XRP armies, has been mass reported for calling out the bots that run rampant on twitter. No good deed goes unpunished, apparently. Twitter has effectively silenced him for seven days.

Finally, the Associated Press has a new entry on crypto—sorry, cryptocurrency.

# # #

Related stories:
Social media startup Kik is kicking back—at the SEC
Turns out, you can make money on horse manure, and tethers are worth just that
“QuadrigaCX traders lost money on Cryptopia on the same day in January”—my first story for Decrypt

 

 

News: 51-foot yacht for sale, Bitfinex enables margin trading with Tether, Craig Wright threatens legal action

Spring is in the air! What are your summer plans? If you are considering buying a boat—or maybe even an “almost new” 51-foot Jeanneau with “very, very few hours” for half a million USD—now would be the time!

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The yacht belonged to Quadriga’s now-deceased CEO Gerald Cotten. Here is a video of him putting Canada’s plastic money into a microwave. Here he is tossing Winnie the Pooh into a bonfire. And this is him playing with Pokémon cards.

The latest on QuadrigaCX

I wrote about how Michael Patryn and Cotten appear to have been working together at Midas Gold, a Liberty Reserve exchanger, prior to founding Quadriga. David Z. Morris at Breakermag covered the topic as well. (He credited me, so I’m real pleased about that.)

At a court hearing on April 8, Quadriga was given the go-ahead to shift into bankruptcy. The move will save costs and give Ernst & Young (EY) more power as a trustee. 

“The trustee can also sell QuadrigaCX’s assets and start lawsuits to recover property or damages,” Evan Thomas of Osler, Hoskin & Harcourt told Bitcoin Magazine. “The trustee will collect whatever it can recover for eventual distribution to creditors.”

An “Asset Preservation Order” for Jennifer Robertson, Cotten’s widow, was filed on April 11. Law firm Stewart McKelvey is setting up three separate trusts to “collect and preserve” any surplus funds from estate assets, personal assets and corporate assets. Depreciable assets, such as Cotten’s yacht, will be sold.

Per the order, Robertson will continue to receive her drawings from her business Robertson Nova Property Management “in accordance with current levels, for the purposes of satisfying ordinary living expenses.” She will also have access to cash from the “personal assets” account to maintain her properties and to cover legal expenses.

Robertson has 10 days from the court order to provide EY with a list of all her assets—including cash on hand.

A cap on pay for Miller Thomson LLP and Cox & Palmer has been raised from CA$250,000 to CA$400,000. The team will continue to represent Quadriga’s creditors in the bankruptcy.

Quadriga’s third-party payment processors now have 10 business days (as opposed to five previously) from when they receive this court order to deliver the following to EY:

  • VoPay—CA$116,262.17.
  • Alto Bureau de Change—assets and property.
  • 1009926 BC—all records and transaction-related information.
  • POSConnect—access to Quadriga’s online account to George Kinsman, who is a partner at EY.
  • WB21 (now Black Banx)—all records and account statements related to its Quadriga dealings.

The next hearing to discuss issues remaining from the Companies’ Creditor Arrangement Act, including those tied to third-party payments processors, is scheduled for April 18.

Other crypto exchanges

Popular US-based crypto exchange Coinbase suspended trading of BTC-USD pairs for two hours on April 11 due to a “technical issue” with its order book. BTC-USD is a critical trading pair due to its volume and its impact on bitcoin price measures.

It appears that somebody dumped a load of BTC into the exchange’s buy orders causing liquidity to dry up. Coinbase doesn’t want that to happen, so likely that is why it wiped the books, cancelling any outstanding buy or sell orders.

Coinbase Pro, Coinbase’s professional exchange, is continuing to expand its altcoin reach. The exchange is listing three more altcoins: EOS (EOS), Augur (REP), and Maker (MKR). Coinbase first committed to listing MKR in December, but according to The Block’s Larry Cermak, due to low volume, Coinbase decided to hold off listing MKR.

Crypto credit cards are back in vogue. Coinbase has launched a Visa debit card. The “Coinbase Card” will allow customers in the U.K. and EU to spend their crypto “as effortlessly as the money in their bank.” The exchange says it will “instantly” convert crypto to fiat when customers complete a transaction using the debit card. PaySafe, a U.K. payment processor, is the issuer of the card. In the past, these crypto Visa cards have been known to suddenly lose access to the Visa network, so fingers crossed.  

Another executive is leaving Coinbase. The firm’s institutional head Dan Romero has announced he is leaving after five years. This is the third executive to depart Coinbase in six months. Director of institutional sales Christine Sandler left last month, and ex-vice president and general manager Adam White quit in October.

Switzerland-based crypto exchange Bitfinex has lifted its $10,000 minimum equity requirement to start trading. This will undoubtedly bring more cash into the exchange. “We simply could not ignore the increasing level of requests for access to trade on Bitfinex from a wider cohort than our traditional customer base,” CEO Jean-Louis van der Velde said in a blog post (archive).

Meanwhile, Bitfinex customers are complaining (here and here) that they are unable to get cash out of the exchange. Now some are saying they are having trouble getting their crypto out of Bitfinex as well. 

Reddit user “dovawiin” says, “Ive been trying repeated attempts for 2 weeks to withdraw funs and it always says processing. Ive submitted multiple tickets with delayed answers. Ive cancelled and attempted again a few time after waiting 48Hours with no results. Im currently trying again and nothing for over 24 hrs. This is ridiculous.”

Bitfinex also enabled margin trading on Tether. Margin pairs include BTC/USDT and ETH/USDT. Tether has already admitted to operating a fractional reserve, so this is basically adding more leverage to what’s already been leveraged. I’m sure it’s fine though—nothing to worry about here.  

Johnathan Silverman, a former employee of Kraken, is suing the crypto platform for allegedly failing to pay him for work he did. Kraken says it got out of New York in 2015. Silverman says the exchange still maintained an over-the-counter trading desk in the state, which requires licensing for crypto businesses. Kraken told Bloomberg, Silverman “is both lying and in breach of his confidentiality agreement.”

Finally, Malta-based Binance, one of the largest crypto exchanges by volume, is partnering with blockchain analytics firm CipherTrace to boost its AML procedures.

Other interesting stuff

All hell broke lose on Twitter Friday when news got out that Craig Wright is making legal threats against Twitter user “Hodlonaut,” who has been publicly calling Wright a “fraudster” and a “fake Satoshi.” Wright has never been able to prove that he is Satoshi.  

In a letter shared with Bitcoin Magazine, SCA ONTIER LLP, writing on behalf of Wright, demands that Hodlonaut retract his statements and apologize, or else Wright will sue him for libel. The letter even includes this bizarre prescribed apology:

“I was wrong to allege Craig Wright fraudulently claimed to be Satoshi. I accept he is Satoshi. I am sorry Dr. Wright. I will not repeat this libel.”

Hodlonaut deleted his Twitter account upon receiving the news. And the crypto community formed a giant backlash against Wright. Preston Byrne is assisting Hodlonaut pro-bono, Peter McCormack is selling T-shirts that say, “Craig Wright is a Fraud,” and Changpeng Zhao, the CEO of crypto exchange Binance threatened to delist Bitcoin SV—the token spearheaded by Wright and billionaire backer Calvin Ayre.

Ayre is also demanding apologies related to some photos of him circulating on Twitter with extremely young-looking women. Coin Rivet writes, “We have agreed to pay Mr Ayre substantial damages for libel. We have also agreed to join in a statement to the English High Court in settlement of Mr Ayre’s complaint.”

China’s National Development and Reform Commission (NDRC) released guidance that includes shutting down Bitcoin mining. “The risk to Bitcoin in the longer term is other governments taking their cue from China—and taking proof of work more seriously as a problem that needs to be dealt with,” writes David Gerard.

Another Bitcoin mining company has gone belly upBcause llc filed for Chapter 11 in Illinois. (Steven Palley uploaded the docs on Scribd.) The company is based in Chicago, but its mining rigs are in Virginia Beach. In January 2018, Virginia Beach Development Authority gave the firm a $500,000 grant to build the $65 million facility. Bcause promised to create 100 full-time jobs, with average salaries of $60,000 a year. 

But by January, the price of Bitcoin was already on its way down—so much for all those jobs. At least the neighbors won’t have to suffer the noise anymore.

Last summer, Virginia Beach resident Tommy Byrns, told Wavy News:

“The issue is the noise, the relentless noise … it’s kind of created an atmosphere where we can’t talk to each other in the backyard. You have to go in the house to talk … this was pushed through without any warning into anybody … and now look what we have.” 

Crypto, the movie, is out. Gerard wrote a full review for DeCrypt on his new battery-powered AlphaSmart Neo 2 keyboard—a 1990s flashback that keeps him from shit posting on Twitter. The film was mediocre—but it stars KURT RUSSELL.

 

 

News: EY goes after Quadriga’s payment processors, more exchange hacks, the SEC tells us what we already know

I had to take my website offline for a few hours Tuesday, so if you were searching for one of my stories and got a weird message, my apologies. I asked WordPress to downgrade my site from a business plan to a premium plan, and when they did, a bunch of my content disappeared, so I had to put Humpty-Dumpty back together again.

Big thanks to my now 18 patrons, who are making it easier for me to focus on writing about crypto. If you like my work, please consider supporting me on Patreon, so I can keep doing what I am doing.  

Now onto the news, starting with Quadriga, the defunct Canadian crypto exchange that I won’t shut up about. (Read my timeline to get up to speed.)

Ernst & Young (EY), the court-appointed monitor charged with tracking down Quadriga’s lost funds, released its fourth monitor report, which reveals more money going out then coming in. The closing cash balance for March was CA$23,268,411. Incoming cash for the month was CA$4,232, and total disbursements was CA$1,463,860—most of which was paid to professionals. A full half of that (CA$721,579) went to EY and its legal team.

EY is trying to chase down money held by Quadriga’s payment processors. It has drafted a “Third Party Payment Processor Order” for the court to approve on Monday. If that goes through as is, several payment processors, including WB21, will have five business days to handover funds and/or Quadriga documents and transaction data. If they don’t comply, they will be in contempt of court. A shift from CCAA to bankruptcy proceedings will also give EY more power to go after funds as a trustee

Christine Duhaime, a financial crimes lawyer who worked for Quadriga for six months in 2015 to early 2016, wrote “From Law to Lawlessness: Bits of the Untold QuadrigaCX” for CoinDesk, where she talks about how Quadriga went off the rails following its failed efforts to become a public company.

In the article, Duhaime—who in February called for a government bailout of Quadriga’s creditors (archive)—openly admits to having lost CA$100,000 in funds on the exchange. She claims her involvement with the exchange stopped in early 2016. “I’m glad we were let go by QuadrigaCX for being one of the ‘law and order’ folks,” she said.  

I have been corrected on detail here:

She does not mention this in her article, but in 2015, she also owned 20,000 shares of Quadriga stock. It is possible she has since sold the holdings.

Preston Byrne, an attorney at Byrne & Storm, PC, tweeted, “No offense to @ahcastor but this claim that @cduhaime may have owned shares in Quadriga looks to be incorrect. She’s listed as the principal contact for an SPV, and the SPV is the named purchaser. A retraction is in order.”

SPV stands for special purpose vehicle, typically used by firms to isolate them from financial risk. I’ve reworded the paragraph as follows:

This 2015 British Columbia Report of Exempt Distribution, a document of Quadriga Financial Solutions’ ownership, lists Duhaime as the contact for 1207649 B.C. Ltd, which owns—or owned—20,000 shares of Quadriga. I was unable to find the corporate files for 1207649 B.C. The address in the report matches that of Duhaime’s office.  

Update (April 9): I found the corporate files. The actual company name appears to be 1027649 B.C. Ltd.—with the numbers “2” and “0” transposed. The company was founded on February 16, 2015 and dissolved on August 1, 2017. The sole director is “Anne Ellis,” and the registered office is Duhaime Law.

According to court documents, Cotten and Quadriga co-founder Michael Patryn had been seeking to buy back shareholdings after Quadriga’s public listing failed, so it is possible one of them may have bought back those shares as well. I reached out to Duhaime for comment a few times, but she has not responded. 

Duhaime may have left Quadriga behind, but she continued to have business dealings with Patryn, who we now know is convicted felon Omar Dhanani

She and Patryn co-founded Fintech Ventures Group, which calls itself “an investment bank focused on digital currency, blockchain, and AI-focused technology.” According to a January 2016 archive of the company’s site, Duhaime was Fintech Venture’s “Digital Finance Maven & Co-Founder.” (Interestingly, former Quadriga director Anthony Milewski worked there, too, as the company’s “Investment Relations Extraordinaire.”) 

Duhaime and Patryn were also both advisors at Canadian crypto exchange Taurus Crypto Services, according to this June 2016 archive. (Milewski shows up here again, this time as an advisor.) The exchange was founded in 2014 and shut down in January 2017, when the business shifted to over-the-counter trades.  

Like Duhaime, Patryn also claims his involvement with Quadriga ended in early 2016. Although the Globe and Mail said that in October 2018, “it received an e-mail pitch from an ‘executive concierge’ company called the Windsor Group offering up Mr. Patryn for interviews to discuss virtual currencies and describing him as a Quadriga director.” Patryn told the Globe he did not know what the Windsor Group was, nor had he authorized anyone to pitch him as a Quadriga director, as he never served on the board.

Patryn had a personal website michaelpatryn.com, but it got taken down. Here is a 2011 archive and here is a 2014 archive. From 2016 on, the archives point to his LinkedIn profile, where he now goes by “Michael P.” having dropped all but the first initial of his last name. According to his LinkedIn, he has been an advisor for numerous cryptocurrency platforms going back to November 1999. I guess that means his work at Shadowcrew in 2004 and the 18 months he spent in jail for conspiracy to commit credit and bank card fraud and ID document fraud qualifies as advisory services.

Patryn appears to enjoy the limelight. Several reporters told me they had no trouble reaching him. At one point, Patryn even went into the “Quadriga Uncovered” Telegram group—basically, the lion’s den, where hundreds of pissed off Quadriga creditors sat waiting on their haunches —where I am told he calmly deflected accusations.

Meanwhile, I’ve been practicing my authoritative stare and baritone.

Other exchanges

Elsewhere in cryptoland, there have been a number of exchanges hacks. Singapore-based exchange DragonEx was hacked on March 24 for an undisclosed amount of crypto.

Blockchain data firm Elementus suspects that Coinbene, another Singapore exchange, was also hacked. On March 25, Elementus noted that $105 million worth of crypto was on the move out of the exchange. Coinbene totally denies it’s been hacked, claiming that delays in deposits and withdrawals are due to maintenance issues. 

A third exchange, Bithumb was hacked on March 30. The South Korean crypto exchange lost 3.07 million EOS and 20.2 million XRP, worth around $19 million. Bithumb thinks it was an insider job.

Helsinki-based LocalBitcoins, a once go-to for anonymous bitcoin transactions, has added know-your-customer (KYC) identity checks to comply with new laws in Finland. The change goes into effect in November. Per the company’s announcement, this is actually good news for bitcoin, because it will create a “legal status for crypto assets, which should improve significantly Bitcoin’s standing as a viable and legit financial network.”  

A study by reg-tech startup Coinfirm found that 69 percent of crypto exchanges don’t have “complete and transparent” KYC procedures. And only 26 percent of exchanges had a “high” level of anti-money-laundering procedures.

With crypto markets in the dumps, exchanges are looking for new ways to attract volume. To that end, San Francisco-based Coinbase is launching a staking service to lure in institutional investors. The service, which starts with Tezos (XTZ), will pay investors to park their money in XTZ. The coins are kept in offline cold wallets. The catch is that the interest will be paid XTZ, and of course, crypto is highly volatile. 

The price of XTZ went up 70 percent on the news.

Cryptocurrency exchange Binance is launching a new fiat-to-crypto exchange in Singapore later this month. (It’s been launching these crypto onramps all over the word.)

Binance also says it’s planning to launch its decentralized exchange (DEX) later this month. The DEX is built on a public blockchain, Binance Chain. Basically, Binance is looking to create an economy for binance coin (BNB), which is totally not a security.

Other interesting news bits 

Screen Shot 2019-04-05 at 11.03.29 AMThe the U.S. Securities and Exchange Commission issued a “Framework for ‘Investment Contract’ Analysis of Digital Assets.” There is not a lot new to see here. A footnote in the document makes clear this is “not a rule, regulation, or statement of the Commission,” just some thoughts from the SEC’s staff about how they interpret existing securities laws. 

Stephen Palley, partner at law firm Anderson Kill, appeared on Bloomberg sporting a beard to explain the framework—definitely worth five minutes of your time to listen to.

Justin Sun, the founder of blockchain project Tron, bungled a Tesla promotional giveaway. After a widespread cry of foul play, he decided to make it up to everyone by giving away—two Teslas. This wasn’t the first time a Tron promotion raised eyebrows.

Nocoiner David Gerard wrote a Foreign Policy piece on “How Neo-Nazis Bet Big on Bitcoin (and Lost)” that was translated for Newsweek Japan.

The ever outspoken Jackson Palmer did a good interview with Epicenter Blockchain Podcast on the history of Dogecoin and the state of cryptocurrency in 2019.

Nicholas Weaver, who gave the “Burn it with Fire” talk at Enigma, spoke to Breaker about why cryptocurrencies don’t really work as currencies.

Finally, Dream Market, the last standing marketplace from the once infamous “big four” sites that dominated dark web trading in the mid-2010s, announced plans to shut down.

 

 

News: I’m speaking in Vancouver, Kraken’s obsession with Quadriga, and Patryn may have been trading on BitMEX

Hello new readers! If you enjoy my crypto meanderings and paywall-free Quadriga resources, please subscribe to my Patreon account. I’m an independent writer, and I need your support. You can subscribe for as little as $2 a month.  

I will be giving a presentation on Quadriga at MPWR Crypto Mining Summit in Vancouver, B.C. on March 12 at 4:15 p.m. local time. If you lost money on Quadriga, you can get into the event for free. Simply send an email to community@biresearch.ca.  

I’m obviously insane to have driven to the Quadriga hearing in Halifax on March 5, given the weather conditions. I went with fellow crypto-skeptic Kyle Gibson. We spun off the road twice. It was horrifying. Apparently, my car was burning oil the entire way.  

On the upside, seeing the hearing live at the Nova Scotia Supreme Court was really cool. Also, while in Halifax, I interviewed with Sheona McDonald, who is working on a Quadriga documentary. I hope to see her again in Vancouver, where she is based. 

As far as the hearing goes, the big news is that Quadriga was granted a 45-day stay and the judge gave a thumbs up to the appointment of Peter Wedlake, a senior vice president and partner with Grant Thornton, as a chief restructuring officer (CRO) for the firm.

I was struck by the number of paid professionals sitting before the judge—somewhere between eight and nine, and a few others in the back of the room. What is the hourly rate for a lawyer? And some of them had to fly in, too. 

And now, one more mouth to feed: the CRO. According to court documents, Quadriga needs a CRO for “ongoing direction” related to its affairs during its Companies’ Creditor Arrangement Act (CCAA) and in the event of an “anticipated sales process.”  

This talk of selling Quadriga is a recurring theme, so watch for it to come up again. The biggest value in the sell would likely be Quadriga’s user base. A similar effort is being made to revive Mt. Gox, the Tokyo-based crypto exchange that went bust in 2014.

The law firms for Quadriga’s affected users have so far heard from 800 creditors—not a lot, when you consider there are 115,000 affected users. But keep in mind there is no formal claims process at the moment.   

How will customer claims be evaluated? Court-appointed monitor Ernst and Young (EY) is working to gain access to the exchange’s platform data in AWS, where all the customer trades are located. (EY had to get a court order at the hearing to do so.) It will be interesting to see what the monitor finds when it cracks that egg—maybe nothing. Other trails have already been wiped clean. Quadriga has no books and six identified bitcoin cold wallets were found empty, except for an inadvertent transfer reported earlier. 

I recently wrote about WB21, the shady third-party payment processor that is holding $12 million CAD ($9 million USD) in Quadriga funds, according to court documents submitted in January. After I published the story, WB21, threatened me with legal action. I responded by posting the documents they sent. Since then, I’ve been getting anonymous threats via social media and email, telling me to stop talking about Quadriga.  

Kyle Torpey wrote how bitcoin users in Canada are being targeted with audits by the Canada Revenue Agency (CDA). It is possible this could deter some affected Quadriga users from registering their claims, particularly if they are worried about anyone finding out about their crypto investments. 

Elsewhere in the news, Kraken is offering a reward for any info leading to the finding of Quadriga’s lost coins. The US-based crypto exchange writes:  

“It is up to our sole discretion which tips warrant a reward, if any. The total of all rewards will not exceed $100,000 USD. Kraken may end this reward program at any point in time. All leads collected by Kraken will be provided to the FBI, RCMP or other law enforcement authorities, who have an active interest in this case.”

Screen Shot 2019-03-10 at 4.11.20 PM.pngKraken’s CEO Jesse Powell has done two podcasts talking about Quadriga. Why is he so interested? If you recall, Kraken acquired Canadian crypto exchange Cavirtex in January 2016, so it has some Canadian customers. A few people I spoke with speculated that Kraken may have an interest in acquiring Quadriga’s user base. Otherwise, $100,000 USD seems like a lot of money to throw around for an exchange that let go of 57 people in September.

After this post went live, Powell sent me a few comments via email. He assured me the only purpose of Kraken’s reward was to help locate more assets for the Quadriga creditors and uncover any potential foul play. I reminded him that EY is already doing its own investigation into the lost funds. As of yet, Quadriga is not a criminal case.

As for acquiring the Quadriga platform and its user base, Powell thinks the platform is worthless and the user base probably significantly overlaps with Kraken’s already. “We would be open to acquiring the client list, but it wouldn’t be for much,” he said.

He also pointed out that “a lot of money” is relative and unrelated to his firm’s earlier layoffs. “Kraken increased its profitability in September,” he said. “Would you think $100,000 USD was a lot for Amazon, who let go a few hundred people last February?”

Lest there be any lingering doubt, Globe and Mail posted convincing evidence linking Quadriga cofounder Michael Patryn to convicted felon Omar Dhanani. The two appear to be one and the same. I think we can lay that one to rest now. 

Meanwhile, The Block wrote about Patryn allegedly trading large positions on BitMEX, an unregulated exchange that lets you bet on whether the price of bitcoin will go up or down. You place all your bets in bitcoin, and you can leverage up to 100x. It’s a great way to risk losing all of your money. (I wrote about BitMEX for The Block last year.) There’s been speculation as to whether Patryn was gambling with Quadriga’s customer funds.

Earlier, Coinbase also brought up the possibility that Quadriga was operating a fractional reserve after the exchange suffered multimillion dollar losses in June 2017 due to a smart contract bug.

Bottom line: anything is possible. Nobody knew what was going on inside Quadriga — and they still don’t. The exchange had no official oversight and as of early-2016, only one person was in charge of that platform and all the money it held, and that was Gerald Cotten, the exchange’s now deceased CEO.  

More information will come out as EY continues with its work. I can only imagine the private conversations occurring between the accountants (and lawyers) as more details in the CCAA process emerge. Welcome to crypto!

Read “How the hell did we get here: a timeline of Quadriga events” for the full story.