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“Please god let FTX go back into business, take a lot of money from crypto rubes, then collapse and lose everything again. Please let there be people who lost money in two separate FTX collapses.”– Ariong
The Treasury brings good news for DeFi
The US Treasury released its “Illicit Finance Risk Assessment of Decentralized Finance.” The 42-page report examines DeFi from the perspective of anti-money laundering and sanctions laws. [Press release; Report, PDF]
This report is not about consumer protection — it’s about national security, sanctions busting, and terrorist financing. The Treasury is not happy:
“The assessment finds that illicit actors, including ransomware cybercriminals, thieves, scammers, and Democratic People’s Republic of Korea (DPRK) cyber actors, are using DeFi services in the process of transferring and laundering their illicit proceeds.
… In particular, this assessment finds that the most significant current illicit finance risk in this domain is from DeFi services that are not compliant with existing AML/CFT obligations.”
The report makes clear: blockchain analysis is not sufficient for KYC/AML. Calling something “decentralized” or a “DAO” doesn’t absolve you of responsibility. And almost everything in DeFi falls squarely in the ambit of existing regulation.
How’s regulatory clarity for crypto? Just fine, thank you:
“Through public statements, guidance, and enforcement actions, these agencies have made clear that the automation of certain functions through smart contracts or computer code does not affect the obligations of financial institutions offering covered services.”
The report recommends “strengthening U.S. AML/CFT supervision and, when relevant, enforcement of virtual asset activities, including DeFi services, to increase compliance by virtual asset firms with BSA obligations” and “enhancing the U.S. AML/CFT regulatory regime by closing any identified gaps in the BSA to the extent that they allow certain DeFi services to fall outside of the BSA’s definition of financial institution.”
Nicholas Weaver tells us the report “should be thought of as being as serious as a heart attack to the DeFi community, as this represents the US government regulation at its most serious. Indeed, the report can be summarized in a sentence: ‘If you want to continue to OFAC around, you are going to find out.’”
The SEC brings good news for Coinbase and DeFi
SEC chair Gary Gensler is fed up with Coinbase blatantly trading unregistered securities and not registering with the SEC as a proper securities exchange. So he’s going to update the rules.
The SEC has reopened the comment period for a proposal, initially issued in January 2022, that would update the definition of an “exchange” in Rule 3b-16 of the Exchange Act. [SEC press release; Fact sheet, PDF; Gensler statements]
Gensler’s comments are laser-targeted at Coinbase — and also DeFi:
“Make no mistake: many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws.”
He reiterates that “the vast majority of crypto tokens are securities” — the SEC’s position since 2017 — so “most crypto platforms today” meet the definition of a securities exchange. He adds:
“Yet these platforms are acting as if they have a choice to comply with our laws. They don’t. Congress gave the Commission a mandate to protect investors, regardless of the labels or technology used. Investors in the crypto markets must receive the same time-tested protections that the securities laws provide in all other markets.”
A regulatory framework for casino chips
On Saturday, The US House Financial Services Committee published an as-yet-untitled discussion draft bill for regulating stablecoins a few days before a hearing on the topic on Wednesday, April 19. [Discussion draft, PDF; hearing agenda]
The bill refers to stablecoins as “payment stablecoins.” This is utterly hypothetical. Nobody uses stablecoins to buy things. They’re chips for gambling on speculative assets in the crypto casinos.
This bill was a sudden surprise for a lot of people — but it appears to be a version of a draft bill that Senate Banking Committee Ranking Member Pat Toomey (R-PA) was circulating last year. [Stablecoin TRUST Act, 2022]
The bill divides stablecoin issuers into banks and nonbanks. Credit unions and banks that want to issue stablecoins would need approval from the financial regulator they fall under‚ the National Credit Union Administration, the FDIC, or the OCC. Non-bank stablecoin issuers would fall under the Federal Reserve.
For this bill, USDC or Pax Dollars, under the Fed, might pass muster. But Tether would be kicked out of anything touching the US because they wouldn’t be able to meet the transparency or liquidity requirements.
All stablecoins that circulate in the US would need to be backed by highly liquid assets — actual dollars and short-term treasuries — and redeemable within one day. That doesn’t leave much room for the issuers to turn a profit by putting the deposits in longer-term investments.
Custodia is not a bank under the Bank Holding Act, so for this bill, it would also be considered a non-bank. This bill would derail Custodia’s lawsuit against the Federal Reserve and the Federal Reserve Bank of Kansas City to try to force a Fed master account out of them.
The bill also calls for a moratorium on new algorithmic stablecoins until a study can be conducted.
Finally, the bill includes a request for federal regulators to study a central bank digital currency (CBDC) issued by the Fed. As we noted previously, FedNow would make a CBDC completely superfluous.
Hilary Allen, a professor of law at American University Washington College of Law, points out important shortcomings in the stablecoin bill. She argues that the bill is stacked in favor of stablecoins, and notes that the bill’s payment stablecoin definition could be a way of avoiding SEC jurisdiction. And while the bill calls for monthly attestations, it doesn’t say anything about full audits for stablecoin reserves. [Twitter]
FTX’s first interim report reads like Quadriga
John Jay Ray III, FTX’s CEO in bankruptcy, released his first interim report on the control failures at FTX and its businesses. Ray documents a shocking level of negligence, lack of record keeping, and complete disregard for cybersecurity at FTX. [Doc 1242, PDF]
The report confirms what we’ve been saying all along: all crypto exchanges behave as much like Quadriga as they can get away with. A few highlights:
- FTX Group was managed almost exclusively by Sam Bankman-Fried, Nishad Singh, and Gary Wang. The trio had “no experience in risk management or running a business,” and SBF had final say in everything.
- SBF openly joked about his company’s reckless accounting. In internal docs, he described Alameda as “hilariously beyond any threshold of any auditor being able to even get partially through an audit,” and how “we sometimes find $50m of assets lying around that we lost track of; such is life.”
- FTX kept virtually all of its assets in hot wallets, live on the internet, as opposed to offline cold wallets, where they would be safe from hackers.
- FTX and Alameda also kept private keys to billions of dollars in crypto-assets sitting in AWS’s cloud computing platform.
- SBF stifled dissent with an iron fist. Ex-FTX US president Brett Harrison quit after a “protracted argument” with Sam over how FTX US was run. Sam cut Harrison’s bonuses, and when “senior internal counsel instructed him to apologize to Bankman-Fried for raising the concerns,” Harrison refused.
Ray and his team have so far recovered $1.4 billion in digital assets and have identified an additional $1.7 billion they are in the process of recovering. (We’re still waiting for him to ask for money back from The Block, but maybe that’s coming.)
In other FTX news, Voyager and FTX and their respective Unsecured Creditors’ Committees have reached an agreement on the money FTX paid to Voyager before FTX filed bankruptcy that FTX wants to claw back now — $445 million in cash will go into escrow while things are sorted out. [Doc 1266, PDF]
Terraform Labs did nothing* wrong
South Korean prosecutors have seized 414.5 billion won ($312 million) in illegal assets linked to nine Terraform Labs execs. None of the assets tied to Do Kwon have been recovered. Kwon converted everything to BTC and moved the funds — worth an estimated 91.4 billion won ($69 million) — to offshore exchanges. [KBS, Korean]
Who crashed UST in May 2022? Terraform Labs seems to have played no small part. In the three weeks leading up to the collapse, Terraform dumped over 450 million UST on the open market. [Cointelegraph]
Crypto mining: the free lunch is over
A bill limiting benefits and tax incentives for crypto miners in Texas unanimously passed a Senate committee vote and now it’s in the chamber. The bill was sponsored by three Republican state senators. Even they’re sick of the bitcoin miners. [SB 1751, PDF; CoinDesk; Fastdemocracy]
Bitcoin mining doesn’t create jobs — so Sweden has ended the 98% tax relief it gave data centers, including crypto miners. Crypto is outraged. [CoinDesk]
More good news for exchanges
The downfall of peer-to-peer bitcoin exchange Paxful is a comedy goldmine. Paxful cofounders Ray Youssef and Artur Schaback originally blamed Paxful’s closure on staff departures and regulatory challenges — but now they’re turning against each other in court.
As an example of their good judgment, in 2016, the pair drew police attention when they were spotted in Miami aiming an A15 rifle off their penthouse balcony for photo purposes. Former employees allege “favoritism, erratic dismissals, lavish spending on travel and reports of routine cannabis usage on the job by Youssef himself.”
Paxful’s business model was based on price-gouging fees on gift cards, according to one former employee. You want 10 euros worth of bitcoin? That’ll be 20 euros worth of gift cards. Coincidentally, money launderers are usually quite happy to pay fees on the order of 50%. Schaback thinks Paxful is still a viable enterprise. [CBS, 2016; CoinDesk]
As you might expect, OPNX, the new exchange for tokenized crypto debt run by the founders of the failed Three Arrows Capital and CoinFLEX, has gotten off to a feeble start. Trading volume in the first 24 hours was $13.64. [The Block]
The Winklevoss twins made a $100 million loan to Gemini. The move came after Gemini had informally sought funding from outside investors in recent months without coming to any agreements. We can’t find if the loan was in actual dollars or in crypto — or if it was just an IOU. [Bloomberg]
Binance relinquished the financial services license for its Australian derivatives business, Oztures Trading, after the Australian Securities and Investments Commission said they were likely to suspend it. Customers have until April 21 to close their accounts. [ASIC]
Who were the unnamed “VIP” traders on Binance mentioned in the CFTC suit? Jane Street, Tower, and Radix. [Bloomberg]
The Mt. Gox payout window has opened! Slowly. [Mt Gox, PDF; The Block]
Cryptadamus thinks that Crypto.com’s Canadian bank accounts are frozen. [Mastodon]
Good news for bitcoin
The Ethereum Shanghai upgrade went through on April 12. You can now withdraw your staked ether! As we predicted, there wasn’t a rush for the exits. [CoinDesk]
Bitfinex money mule Reggie Fowler will be sentenced on April 20. His lawyer wrote a lengthy letter to the judge asking for clemency — no jail time — because Fowler lived a hard life and never did anything wrong before. Nothing he was busted in court for, anyway. [Letter, PDF]
Michael Saylor’s MicroStrategy has bought yet more bitcoin, digging itself ever deeper. The company purchased an additional 1,045 BTC for $23.9 million, or an average price of $28,016, between March 23 and April 4. [8-K filing]
Tether got its tendrils into the US dollar system via Signet — former Signature Bank’s real-time payments system. Tether instructed crypto firms to send dollars to its Bahamas-based banking partner Capital Union Bank via Signet. We’re not clear on whether this violated the New York settlement — though if they lied about who they were, it broke banking law. [Bloomberg]
Cross River Bank, the banking partner of Coinbase and Circle, built its business on buy-now-pay-later (BNPL) and pandemic loans. What could go wrong? [Dirty Bubble]
With its firm commitment to quality cryptocurrency journalism, CoinDesk is hot on getting into generating its hopium space-filler using AI text generators. [CoinDesk]
“Ukraine wants to fund its post-war future with crypto” — with quotes from David. [Techmonitor]
“A lot of ordinary people who got into crypto just lost everything in various ways or lost chunks of it,” Gerard said. “And this is a lot of why I think retail investors should just keep the hell away from crypto.” [Business Insider]